International

Financial
Management
Avnish Vijay
IFM
• It
is concerned with IB – related financial
functions.
What’s Special about International
Finance?
• Foreign exchange and political risks.
• Market imperfections.
• Expanded opportunity set.
International Business Modes
• International Trade
• Contractual entry modes e.g. licensing,
franchising, management contracts and
turn-key projects
• FDI
International Trade
• Import
• Export
FDI
• Greenfield Investment
• M&A
• Brownfield investment
Greenfield Investment
• Opening of branch in a host country
Equity capital (Financial Collaboration)
 Wholly owned subsidiary
 Subsidiary
 Affiliate
M&A
• Merger and Acquisition
Brownfield Investment
• Combination of M&A and Greenfield
Investment.
MNC
• Multi National Company
Operations in more than 6 countries
 Goal of the MNC
• The
commonly accepted goal of an MNC is
to maximize shareholder wealth.
Conflicts Against the MNC Goal
• For corporations with shareholders who differ
from their managers, a conflict of goals can
exist - the agency problem.
• Agency costs are normally larger for MNCs
than for purely domestic firms.
 The sheer size of the MNC.
 The scattering of distant subsidiaries.
 The culture of foreign managers.
 Subsidiary value versus overall MNC value.
Impact of Management Control
• Themagnitude of agency costs can vary
with the management style of the MNC.
•A centralized management style reduces
agency costs. However, a decentralized
style gives more control to those managers
who are closer to the subsidiary’s
operations and environment.
Impact of Management Control
• SomeMNCs attempt to strike a balance -
they allow subsidiary managers to make
the key decisions for their respective
operations, but the decisions are monitored
by the parent’s management.
Impact of Management Control
• Electronic
networks make it easier for the
parent to monitor the actions and
performance of foreign subsidiaries.
• For
example, corporate intranet or internet
email facilitates communication. Financial
reports and other documents can be sent
electronically too.
Impact of Corporate Control
• Variousforms of corporate control can
reduce agency costs.
Stock compensation for board members and
executives.
The threat of a hostile takeover.
Monitoring and intervention by large
shareholders.
Constraints
Interfering with the MNC’s Goal
• As MNC managers attempt to maximize
their firm’s value, they may be confronted
with various constraints.
Environmental constraints.
Regulatory constraints.
Ethical constraints.
Theories of International
Business
Why are firms motivated to expand their
business internationally?
• Theory of Comparative Advantage
Specialization by countries can increase
production efficiency.
• Imperfect Markets Theory
The markets for the various resources used in
production are “imperfect.”
Theories of International
Business
• Product Cycle Theory
As a firm matures, it may recognize additional
opportunities outside its home country.
International PLC
International Financial Functions
showing the scope of IFM
• Foreign exchange market
• Exchange rate determination
• Exchange rate exposure
• International monetary system (IMF)
• FDI and FPI
International Financial Functions
showing the scope of IFM
• International Financial Markets
• Assessment and management of Interest rate
risk
• MNC’s Working Capital Management
• International Accounting and taxation strategy
• Balance of payment analysis
• International indebtedness and its
management
Factors leading to fast strides in
International Financial Functions
• Growthin IB related financial functions is
attributed mainly to
Growth in International trade
Growth in foreign investment
Structural changes in the International
financial market
Adoption of floating exchange rate regime, and
Fast development in information technology
The Emerging Challenges
• Five
key categories of emerging challenges
can be identified
To keep up-to-date with significant
environmental changes and analyze their
implications for the firm
To understand and analyze the complex
interrelationships between relevant
environmental variables and corporate
responses
The Emerging Challenges
(contd.)
To be able to adapt the finance function to
significant changes in the firm's own strategic
posture
To take in stride past failures and mistakes to
minimize their adverse impact
To design and implement effective solutions to
take advantage of the opportunities offered by
the markets and advances in financial theory
Recent Challenges in Global
Financial Markets
• Theoutstanding feature of the changes
during the eighties was integration
• Both the potential borrower and the
potential investor have a wide range of
choice of markets
• Deregulation within the financial systems
of the major industrial nations
• Assets
denominated in various currencies
became more nearly substitutable
• Deregulation involved action on two fronts
Eliminating the segmentation of the markets
for financial services
permitting foreign financial institutions to
enter the national markets and compete on an
equal footing with the domestic institutions.