Financial Management in Global Context

ARE YOU AFFECTED BY FOREIGN EXCHANGE FLUCTUATIONS ???

As an MNC

As an importer or exporter As competitor of importer As common man

Concept
Home country - India Earlier Rs/$ = 50.00 Now Rs/$ = 45.00 This is known as depreciation of $ against Re. Also known as appreciation of Re against $. Thus its relative !!! Who gains Exporter or Importer ? The ans is ..

Concept

Exporter sold goods worth 1000 $

Earlier he was supposed to get 1000$ * 50 = Rs. 50000 Now he would get 1000$ * 45 = Rs.45000

Importer bought goods worth 1000 $

Earlier he was supposed to pay 1000$ * 50 = Rs. 50000 Now he would pay 1000$ * 45 = Rs.45000

Concept
Autarky However no nation produces all the goods and services that its residents require in the desired quantities Hence Foreign Trade Hence International Payment System Hence International Finance

Reasons of International Trade

Unequal distribution of natural resources oil in gulf countries Difference in technology Different preferences Cost Advantages

Reasons of importance of International Finance

Specialisation of nations and trade Opening of economies Globalisation of firms New forms of business organisations Growth of world trade Need of the development of the nation

Infrastructural development Savings investment gap

Specialisation of nations and trade

Adam Smiths theory of Absolute Advantage Ricardian theory of Comparative Advantage Heckscher Ohlin factor endowment theory Demand - Imitation gap theory Product life-cycle theory

Opening of economies
The above theories advocate free international trade. They explained how both the importing and exporting countries gained by trade. The developing countries also needed to open up to develop. At times they were forced to open up e.g. India by IMF.

Globalisation of firms

Why should a firm globalise?

Theory of comparative advantage Theory of imperfect markets Product life cycle theory

A firm may globalise as

A raw material seeker A technology seeker To obtain competitive edge over its domestic counterparts.

New forms of business organisations

MNCs Licensing Franchising Joint ventures Acquisition of existing operations

Growth of world trade

Trade has grown either as a result of increased productive capacities of nations or as a result of necessities of nations. For each transaction of trade there is a corresponding currency transaction which forms a part of the international network of payments. All these activities concerning international payments payment for transaction of goods or services, or transfer payments, or international borrowing or lending, form part of the study of international finance.

Meaning of MNC
There is a general consensus that if a firm generates 25 30 % of its revenues from international operations, then it can be termed as MNC. Crucial to survival A firm which exports even 10% of its output may be considered as MNC, if it is crucial to its survival. E.g. Govt. regulations. A firm is not an MNC if its degree of involvement in foreign operations does not influence its decision making process.

Issues involved in foreign trade

Increased challenges Increased opportunities Restriction on flow of goods and flow of factors of production Multiplicity of currencies currencies become a type of commodity. Multiplicity of social, cultural, economic, political, legal, regulatory systems.

Challenges
Foreign Exchange risk Political risk e.g. risk of expropriation Multiplicity of currency currency becomes a product. Multiplicity and complexity of taxation system multiple accounting stds have to followed. Socio cultural diversity Regulatory requirements repatriation of profits Conflicts with the parent company

Opportunities
Multiplicity of tax systems transfer pricing Extended variety of financing products Currency diversity - $ or Euro Varied capital markets helps to obtain capital at min. costs and softer conditions of credit larger options are available. Diversity of physical forces climate, human resources, landscape.

Finance functions of a global finance manager

Treasury functions :
Mobilization of funds. Investment of funds Capital budgeting Tax analysis and planning Credit management Investors relations Cash management Risk management Commercial banking Investment banking

Finance functions of a global finance manager

Accounting and control functions

External reporting Financial, cost & management a/cing Tax management Budgetary control MIS Accounts receivable Preparing forecasts

What he needs to understand ?

The intricacies of the foreign exchange market The economic movements The impact of political movements on the performance of the firm How to improvise in response to the above changes How to protect or in fact gain from the situations in the international financial markets.

Risks Involved
Market risk Interest rate risk Inflation risk Business risk Financial risk Liquidity risk Foreign exchange risk Country risk Political risk Socio cultural risk

Any Domestic Co.

Additional

Risks Involved Assumptions

Risk averse return asked by the investors will be higher as compared to domestic companies Risk averse investors do not worry about unsystematic risk

Peculiar Feature

One peculiar feature of MNC is its ability to move funds and profits among its affiliates through internal transfer mechanism. These mechanisms include, transfer pricing of goods and services traded internally, inter company loans, dividend payments and fees and royalty charges

Flexibilities of an MNC
Flexibility in the modes of transfer Flexibility in the timing of transfer Flexibility to manage tax

Conflicts and Constraints

Parent may not be aware of the ground realities of the subsidiary co. Decision of expansion to show growth in turnover (it may be ve NPV project) May be tempted to make decisions which maximizes the value of their respective subsidiaries. Environmental Laws disposal of waste, pollution control etc.. Regulatory constraints currency convertibility, remittance restrictions etc.

Indian Economy and International Finance

Growth of Trade Opening of the economy Globalization of firms Development needs of the economy