INTRODUCTION
INTRODUCTION IFM – a recently developed discipline.But, of late, developing rather too fast.There are many reasons for this:
Increased international trade at a greater pace Entry of more players into international trade The momentum gained by the process of
Economic reforms and Globalization
INTRODUCTION (Contd.,)
The change in political system in Eastern Europe towards greater participation in the global economy
Emphasis on Privatisation by World Bank and IMF
Willingness on the part of the developing countries to open up for competition.
INDIAN SCENARIO Till recently, no much international trade activity.So, no much scope for IFMOnly after Current Account Convertibility and opening up of the economy, an opportunity has opened up for financial managers to expose to international trade.Therefore, it is imperative for today’s FMs to grasp the concepts of IFMIFM – opportunities open up for greater innovation – but more complexities.
The complexities of IF arises from its link with different disciplines such as,
International Economics
International Trade
Taxation
Accounting
Management Control, etc.
It draws on various concepts of Macto-Economics and Micro-Economics
Macro Economic Concepts are,
Balance of Payments Political Economy Exchange Markets Financial Markets Monetary Policy, etc.
Micro Economic Concepts include,
Investment Choices
Financing Policies
Dividend Polices, etc.
WHO ARE CONCERNED WITH IFM?
MNCs having subsidiaries
PSUs dealing with foreign companies
SMEs
Banks and Financial Institutions
DEFINITIONIFM may be defined as the
“Management of the financial operations relating to international activities of business organizations”
Such activities include,
Decision of setting up a plant abroad;Expansion of existing business abroadInvestment in another countryJoint Ventures
Export – ImportFinancing of subsidiaries abroadDistribution of dividend
NATURE AND SCOPE OF IFMThough there are some similarities with domestic FM, yet IFM differs widely from DFM in its scope.
The distinguishing features of IFM are, Greater variety of means of financing Higher Risk Greater constraints in operations
All these demand greater innovation and faster adaptation on the part of managers.
FACTORS CONSTRAINING MNCs’ EFFORTS TO MAXIMISE RETURNS
Environmental Constraints
Regulatory Constraints
Ethical Constraints
DIFFERENCES BETWEEN DFM AND IFM
Domestic Financial Management International Financial Management
Normal Returns are expected Higher ROI expected
Enjoys Relative Freedom Faced with several Constraints
Impact is country-specific Historical, cultural & Institutional Environment in each host country impact the financial decisions and its implementation
Free from Abnormal Risks IFM requires an understanding of unique Risks
UNIQUE DIMENSIONS OF INTERNATIONAL FINANCE
Though almost all finance must be viewed at the international level, there are some special problems that arise from financial and trading relations between nations.
Many of these problems are due to different currencies used in different countries and the consequent need to exchange them.
Movements in exchange rates between currencies can have profound effects on Costs, Sales, Profits, Asset and Liability Values and Individual Well-being.
Other unique IF problems arise from the fact that there are Political Divisions and Currency Divisions between countries.
Thus we see that the managers of international finance face the problems of currency and country divisions and their associated opportunities and risks.
BENEFITS OF STUDYING IFKnowledge of IF can help a finance manager decide how international events will affect a firm and what steps can be taken to exploit positive developments and insulate the firm from harmful ones.
Events like, Change in Exchange Rates, Interest Rates,
Inflation Rates and Asset Values – will affect the firms.
These different changes themselves are related.
IF is not just finance with an extra cause of uncertainty.
It is a legitimate subject of its own, with its own risks and ways of managing them.
Because of integration of financial markets, events happening in distant countries – change in oil and gold prices or election results or outbreak of war or stock market crash or change in interest rates, etc. – will have effects that instantly reverberate around the globe.
Thus, financial markets have become increasingly integrated and inter-dependent financial environment
ENVIRONMENT OF IFM
IFM