introduction of international financial management by [email protected]

8/7/2019 introduction of international financial management by [email protected]

1/24

International Financial ManagementInternational Financial Management


2/24

International Financial

Management

y It is the managerial activity which isconcerned with the planning and controllingof the firms financial resources.

y International Financial Management came

into existence when the countries of theworld started opening their door for eachother.

2


3/24

yMNCs are companies that manufacture andmarketed the product or services in several

country and have single managerial authorityto control.

y

Basic goal of MNCs are maximize shareholder wealth.

The Multinational Corporation

3


4/24

The rise of the multinational

corporation

Massive deregulation

Collapse of communism

Privatizations of state-owned industries

Revolution in information technology

4


5/24

1. More raw materials (Raw material seeker)

Ex.- Oil company, Mineral company2. New markets (Market seeker)

Ex.- Coca-cola, Unilever

3. Minimize costs of production (Cost minimizers)

Ex.- General Electric

Evolution of the MNCs

5


6/24

MNC and India

1st MNC in India was East India Company.

1st MNC of india was Patni Computers System.

After 1991 india got more FDI in comparison of

before 1991 because of dilution of strict rulesregarding FDI.

MNCs account 37% of turnover of top 20 firmsoperating in india in 2010

India is ranked as the 4th most attractive foreigndirect investment (FDI) destination in 2010.

6


7/24

Objective of the MNC

International financial system

Official part

Private part

The Foreign Exchange market

The host countrys environment

7


8/24

For corporations with shareholders who differ fromtheir managers, a conflict of goals can exist - theAgency Problem.

Agency costs are normally larger for MNCs than forpurely domestic firms.

The sheer size of the MNC.

The scattering of distant subsidiaries. The culture of foreign managers.

Subsidiary value versus overall MNC value.

Agency Problem

8


9/24

Objective of the firm and risk

management Profit maximisation

Maximisation of share holders wealth

Where:

W = NPV of a project

IO = Initial investment or cost of the project

A1,A2 = Cash flows expected to occur every year if the project is adopted

k = Discount rate used by the project for finding the present value of thecash flow

9


10/24

Cont

Stakeholders consideration

Management consideration

Societal consideration

10


11/24

The factors that distinguish

multinational from domestic financial

management

1. Different currency denominations.

2. Economic and legal ramifications.

3. Language differences.

4. Cultural differences.

5. Role of governments.

6. Political risk.

11


12/24

International Business Activities Globalization is the new buzzword in industry circles

today and is making economies to be more open andadaptable to foreign investment. The inflow of foreigninvestment is very important for the economicdevelopment of a country. The inflows of foreign

investment can be divided into two categories:

Foreign Direct Investments (FDI) are investmentsmade for the purpose of actively controlling property

assets or companies located in host countries.

Foreign Portfolio Investments are purchases of foreignfinancial assets for a purpose other than control.

12


13/24

FDI is one of the most important sources of

capital market and links the host economy with theglobal markets and fosters economic growth. The

potential of FDI is determined by seven factors-

A

ccess to resource, Low production costs,

Access to export markets,

Cultural cum-geographic proximity, Competitor presence and

A host of government incentives.

13


14/24

FDI is an important means of promoting and encouraging capitalto flow where it is most valuable,

FDI facilitates the production of goods and services in locationsthat have a comparative advantage for such production.

FDI is also imperative to economic development of a country. Itgenerates increased employment opportunities and also enhanceslabor productivity. In fact, attracting foreign capital is one way anational government can improve the living standards of itspeople.

In addition, FDI also brings with it new technology andmanagement techniques that pave the way to judiciously utilizethe resource and improve efficiency of the national economy.

It also helps in raising the level of competition in the nationaleconomy to the benefit of consumers, providing new or improvedquality products at lower prices thereby increasing productivity

The economic benefits of FDI are

many from a global perspective.

14


15/24

Foreign Direct Investment in India is permitted under thefollowing forms of investments:

Through financial collaborations. Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

FDI is not permitted in the following industrial sectors:

Arms and Ammunition

Atomic Energy.

Railway

Transport.

Coal and Lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold,diamonds, copper, zinc.

15


16/24

COMPOSITION OF INDIAS FDI FLOWS

Ranks Sector 2008-09(April-March)

2009-10(April-March)

2010-11( April-

Jan.)

CumulativeInflows

(April 00 -Jan. 11)

% age to totalInflows

(In terms ofUS$)

1. SERVICES SECTOR(financial & non-financial)

28,516(6,138)

20,776(4,353)

13,652(2,987)

118,923(26,597)

21 %

2. COMPUTER SOFTWARE &HARDWARE

7,329(1,677)

4,351(919)

3,225(708)

47,340(10,644)

8 %

3. TELECOMMUNICATIONS(radio paging, cellular mobile, basic

telephone services)

11,727(2,558)

12,338(2,554)

6,041(1,332)

46,746(10,262)

8 %

4. HOUSING & REAL ESTATE 12,621(2,801)

13,586(2,844)

4,791(1,048)

42,163(9,405)

7 %

5. CONSTRUCTION ACTIVITIES(including roads & highways)

8,792(2,028)

13,516(2,862)

4,540(1,006)

40,233(9,059)

7 %

6. AUTOMOBILE INDUSTRY 5,212(1,152)

5,754(1,208)

5,375(1,191)

26,198(5,788)

5 %

7. POWER 4,382

(985)

6,908

(1,437)

4,711

(1,033)

25,715

(5,680)

4 %

8. METALLURGICAL INDUSTRIES 4,157(961)

1,935(407)

4,632(1,011)

18,073(4,141)

3 %

9. PETROLEUM & NATURAL GAS 1,931(412)

1,328(272)

2,471(541)

13,585(3,120)

2 %

10. CHEMICALS

(other than fertilizers)

3,427

(749)

1,707

(362)

1,739

(382)

13,007

(2,876)

2 %

16


17/24

Country-wise Distribution of Foreign Investments

Top 10 Investing (FDI Equity) Countries (in Rs. Cr)

Sl

No.

Country 2008-09

(April-March)

2009-10

(April-March)

2010-11

( April-Jan.)

Cumulative

Inflows(April 00 -Jan. 11)

%age to total

Inflows(in terms of US $)

1. MAURITIUS 50,899

(11,229)

49,633

(10,376)

27,970

(6,129)

238,876

(53,369)

42 %

2. SINGAPORE 15,727

(3,454)

11,295

(2,379)

6,817

(1,504)

51,964

(11,694)

9 %

3. U.S.A. 8,002

(1,802)

9,230

(1,943)

5,001

(1,092)

42,190

(9,371)

7 %

4. U.K. 3,840

(864)

3,094

(657)

2,300

(503)

28,298

(6,387)

5 %

5. NETHERLANDS 3,922

(883)

4,283

(899)

4,752

(1,048)

24,877

(5,535)

4 %

6. JAPAN 1,889

(405)

5,670

(1,183)

6,180

(1,367)

23,075

(5,082)

4 %

7. CYPRUS 5,983

(1,287)

7,728

(1,627)

3,458

(755)

21,235

(4,655)

4 %

8. GERMANY 2,750

(629)

2,980

(626)

545

(119)

13,013

(2,918)

2 %

9 FRANCE 2,098

(467)

1,437

(303)

3,149

(690)

10,068

(2,220)

2 %

10. U.A.E. 1,133

(257)

3,017

(629)

1,503

(326)

8,526

(1,875)

1 %

TOTAL FDI INFLOWS

*

123,025

(27,331)

123,120

(25,834)

77,902

(17,080)

570,105

(127,369)

-

17


18/24

International Business Methods

There are several methods by which firms can

conduct international business.

International trade is a relatively conservativeapproach involving exporting and/or importing.

The internet facilitates international trade by

enabling firms to advertise and manage ordersthrough their websites.

18


19/24

Licensingallows a firm to provide itstechnology in exchange for fees or some other

benefits.

Franchisingobligates a firm to provide aspecialized sales or service strategy, support

assistance, and possibly an initial investment inthe franchise in exchange for periodic fees.

19


20/24

Firms may also penetrate foreign markets byengaging in ajoint venture (joint ownership and

operation) with firms that reside in those

markets.

Acquisitions of existing operations in foreign

countries allow firms to quickly gain control

over foreign operations as well as a share of theforeign market.

20


21/24

Firms can also penetrate foreign markets

byestablishing new foreign subsidiaries.

In general, any method of conducting

business that requires a direct investmentin foreign operations is referred to as a

direct foreign investment (DFI).

The optimal international businessmethod may depend on the characteristics

of the MNC.

21


22/24

International Opportunities

Investment opportunities - The marginalreturn on projects for an MNC is above thatof a purely domestic firm because of the

expanded opportunity set of possible projectsfrom which to select.

Financing opportunities -

An MNC is alsoable to obtain capital funding at a lower cost

due to its larger opportunity set of fundingsources around the world.

22


23/24

Marginal

Return onProjects

PurelyDomesticFirm

MNC

Asset Level

of Firm

InvestmentOpportunities

Cost-benefit Evaluation forPurely Domestic Firms versus MNCs

AppropriateSize for PurelyDomestic Firm

AppropriateSize for MNC

X Y

MarginalCost of

Capital

PurelyDomesticFirm MNC

FinancingOpportunities

23


24/24

BIBLIOGRAPHY

VIJ, MADHU, International FinancialManagement, Excel Books, third Edition,

2010.

SHAPIRO, ALAN C, MultinationalFinancial Management, Prentice Hall

International Inc.,eight Edition, 2010.

www.business.mapofindia.com

24

Date post:	08-Apr-2018
Category:	Documents
Upload:	praveen-rai
View:	221 times
Download:	0 times

introduction of international financial management by [email protected]

Documents