International Financial Management - PDF Notes

BBAF 31013: INTERNATIONAL FINANCIAL MANAGEMENT Introduction to International Financial Management Ms. Kasthury Umanakenan Lecturer Department of Financial Management University of Jaffna  International Finance International finance, al...

BBAF 31013: INTERNATIONAL FINANCIAL MANAGEMENT Introduction to International Financial Management Ms. Kasthury Umanakenan Lecturer Department of Financial Management University of Jaffna  International Finance International finance, also referred to as international macroeconomics, is the study of monetary exchanges between two or more nations. It emphasises on factors like world money flows, foreign direct investment, and exchange rates of currencies. International finance covers a broad spectrum of essential subjects for companies, legislators, and investors working worldwide. International Finance Important Domains of International Finance Foreign Direct Investment (FDI) Currency Exchange Rates Global Capital Markets Balance of Payments Important Domains of International Finance Foreign Direct Investment (FDI) The foundation of international finance is foreign direct investment. It includes firms or people making investments in assets or enterprises abroad. FDI might manifest itself as joint ventures, new operations, or acquisition of existing businesses. Economic development depends on this kind of investment as it gives host nations wealth, knowledge, and technologies. Currency Exchange Rates A basic feature of international finance is exchange rates. They generally affect commerce, investment, and economic growth and define the value of one currency to another. Businesses involved in international commerce and investors looking for prospects in overseas markets both depend on an awareness of exchange rate swings. Important Domains of International Finance Global Capital Markets The study of worldwide financial markets, including stock exchanges, bond markets, and derivative markets, constitutes international finance. These marketplaces allow investors to diversify their portfolios and help money flow across borders. Balance of Payment In international finance, a fundamental idea is the balance of payments. It is a record of a nation’s commerce in products and services as well as income flows and financial transactions concerning the rest of the globe. Policymakers and economists can better grasp a nation’s economic situation and global economic position by analysing the balance of payments.  International Financial Management the strategic management of financial activities across national borders. It entails overseeing global financial operations such as investing, financing, and risk management. The primary actors : multinational corporations, governments, and financial institutions. These organizations must navigate complex financial systems that differ by country, such as tax laws, regulations, and currency exchange rates. International finance management entails analyzing and interpreting these systems and developing and implementing financial strategies to improve performance in various markets.  International Financial Management reflects economic relationship between countries, businesses and the global economy as a whole. combination of two fields of international finance and financial management. the process of making financial decisions pertaining to the foreign business in such a way as to maximize the value of the firm. deals with the acquisition, management, and use of funds for cross-national trade, investment, and other commercial activities. It involves with conducting transactions in various currencies, operating in environments characterized by significant risk, capital flow restrictions, and varying accounting and tax systems, seeking and accessing funds from banks, bond markets, stock exchanges, venture capital firms, and intra-corporate sources, located worldwide. International Financial Management International Financial Management involves ❑the study of exchange rate and currency market ❑theory and practice of estimating future exchange rate ❑various risks such as political/ country risk, exchange rate risk and interest rate risk ❑various risk management techniques ❑cost of capital and capital budgeting in international context ❑working capital management ❑balance of payment ❑international financial institutions etc. International Finance Management Vs Finance Management Finance management the primary focus is managing financial resources within the organization, like budgeting, investing, and cash flow management. It ensures the organization’s financial stability and growth while minimizing financial risks. International finance management entails managing financial activities in a global context. This includes managing foreign exchange risks, investing in foreign markets, and adhering to international financial regulations. The emphasis is on improving financial performance across countries and regions.  Saturation of Domestic Markets Opportunities in Foreign Markets Availability of Low Cost Labor Reasons for Competitive Reasons growth in Increased Demands international Diversification business Reduction of Trade Barriers Development of communications and Technology Consumer Pressure Global Competition Reasons for growth in international business 1. Saturation of Domestic Markets In most of the countries due to continuous production of similar products over the years has led to the saturation of domestic markets. For example in Japan, 95% of people have all types of electronic appliances and there is no growth of organization there, as a result they have to look out for new markets overseas. 2. Opportunities in Foreign Markets As domestic markets in some countries have saturated, there are many developing countries where these markets are blooming. Organizations have great opportunities to boost their sales and profits by selling their products in these markets. Also countries that are attaining economic growth are demanding new goods and services at unprecedented levels. Reasons for growth in international business 3. Availability of Low Cost Labor When comparing labor cost in developed countries with respect to developing countries they are very high. As a result, organizations find it cheaper to shift production in these countries. This leads to lower production cost for the organization and increased profits. 4. Competitive Reasons Either to stem the increased presence of foreign companies in their own domestic markets or to counter the expansion of their domestic markets, more and more organizations are expanding their operations abroad. International companies are using overseas market entry as a counter measure to increase competition.  Reasons for growth in international business 5. Increased Demands Consumers in countries that did not have the purchasing power to acquire high-quality products are now purchasing them due to improved economic conditions 6. Diversification To counter cyclical patterns of business in different parts of the world, most of the companies expand and diversify their business, to attain profitability and uncover new markets. This is one of the reasons why international business is developing at a rapid pace. Reasons for growth in international business 7. Reduction of Trade Barriers Most of the developing economics are now relaxing their trade barriers and opening doors to foreign multinationals and allowing their companies to set-up their organizations abroad. This has stimulated cross border trade between countries and opened markets that were previously unavailable for international companies. 8. Development of communications and technology Over last few years there has been a tremendous development in communication and technology, which has enabled everyone to know about demands, products and services offered in other part of the world. Adding to this is the reducing cost of transport and improved efficiency has also led to expansion of business. Reasons for growth in international business 9. Consumer Pressure Innovations in transport and communication has led to development of more aware consumer. This has led to consumers demanding new and better goods and services. The pressure has led to companies researching, merging or entering into new zones. 10. Global Competition More companies operate internationally because new products quickly become known globally, companies can produce in different countries and domestic companies, competitors, suppliers have become international.  Goals of International Financial Management Basic goals Wealth Maximization of Shareholders Profit Maximization Secondary Goals To achieve optimum Rate of Interest for borrowing funds to manage foreign exchange rate risk timely and effectively To manage the political risk to make the best possible use of opportunities that arise from investing in different countries to promote tax planning in the best possible way to maximize shareholder value by ensuring the maximum possible dividend payout.  Goals of International Financial Management Wealth Maximization of Shareholders *It is a long-term goal. *This can be achieved by an organization through ✓ an excellent overall performance consistently year on year. ✓ the managers should manage the funds such that it is always adequate as per the requirement of the company. ✓ Separate budgets for separate functions within the organization need to be made and implemented. ✓ Working capital management should be effective ✓ Production and other allied activities should go on uninterrupted ✓ Employee welfare should also be a priority.  Goals of International Financial Management Profit Maximization International financial management aims to maximize the profits of the organization by making correct investment decisions. It promotes investments that are safe and will generate good returns. Also, the utilization of funds should be such that the activities of the company go on without interruption. This will result in an increase in turnover and, thus profits.  Goals of International Financial Management To achieve optimum Rate of Interest for borrowing funds International financial management aims to achieve an optimum rate of interest on the funds that a company borrows. The managers should check and compare all the possible options of finance that a company has. They should choose the source that is reliable, safe, and with the least possible rate of interest. Lower interest or lower financing costs will boost the profits in turn.  Goals of International Financial Management To manage foreign exchange rate risk timely and effectively Exchange rates are volatile and unpredictable. They can result in gains as well as heavy losses in case they are not favorable for the company. Hence, the managers should adequately consider, cover, and hedge against foreign exchange risk while doing international trade.  Goals of International Financial Management To manage the political risk Changes in laws and policies of the government or a change in the government itself can create trouble for any company. They may face cancellations of projects or hindrances, red-tapism, and delays that may cause significant monetary losses to the company. Hence, the managers should always take political risk into consideration while investing in any project, especially if it is for the long term.  Goals of International Financial Management to make the best possible use of opportunities that arise from investing in different countries Interest rates and the cost of capital can be very low in some countries. Labor can be inexpensive in some other country. Some foreign markets may have the extra potential for a particular line of product. The managers should be dynamic and flexible in this fast-changing business environment. They should immediately make use of any of such opportunities that may arise and result in monetary benefits for the company.  Goals of International Financial Management To promote tax planning in the best possible way. Different countries have different tax slabs, liabilities, and exemptions. Managers should be efficient enough to study in detail the taxation policies of all of the countries wherever they operate. The management should avoid any wastage of resources on account of inefficient tax planning. Maximum possible reduction in tax liabilities needs to be done by making use of government tax exemptions, rebates, or any other benefits that are available.  Goals of International Financial Management To maximize shareholder value by ensuring the maximum possible dividend payout. This can happen by ensuring that the company performs well. The managers have to manage the company’s finances in the most effective and efficient manner to increase the company’s net profits.  IFM is IFM is an concerned with extension of financial corporate Nature of the decisions taken finance at International in international international business. level. Financial Management IFM set the standard for IFM includes international tax management of planning and exchange rate international risk. accounting  Scope of International Financial Management Foreign exchange markets, international accounting, exchange rate risk management etc. It also includes management of finance functions of international business. IFM sorts out the issues relating to FDI and foreign portfolio investment. It manages various risks such as inflation risk, interest rate risks, credit risk and exchange rate risk. It manages the changes in the foreign exchange market. It deals with balance of payments in global transactions of nations. Investment and financing across the nations widen the scope of IFM to international accounting standards. It widens the scope of tax laws and taxation strategy of both parent country and host country. International Financial Management & Domestic Financial Management Types of International Businesses Exporting Licensing Franchising Foreign Direct Investment  Types of International Businesses 1. Exporting: Selling goods and services produced in the home country to other markets. Can be direct (to target customers) or indirect (via foreign agents/distributors). Often the first step in international business expansion.  Types of International Businesses 2. Licensing: An agreement where a licensor grants a foreign firm the right to use intellectual property for a specific period. Includes patents, copyrights, trade names, and manufacturing processes. Typically involves royalty payments.  Types of International Businesses Franchising: The parent company (franchiser) grants another firm (franchisee) the right to do business in a prescribed manner. Franchisees must adhere to stricter operational guidelines than licensing. Popular among service firms like restaurants, hotels, and rental services.  Types of International Businesses Foreign Direct Investment (FDI): Involves a company making a substantial investment in production facilities in a foreign country. Aimed at benefiting from cheaper labor, tax exemptions, and other local advantages. Enables full control over operations in the foreign market.  Types of International Businesses Joint Venture: A partnership where two or more parties create a new entity by contributing equity. Participants share revenues, expenses, and control of the enterprise. Involves shared investment of money, time, and effort to execute a project.  Foreign Exchange Rates Importance of Inflation Rates International Financial Management Global Economic Conditions Investment in foreign markets Eco-political landscape  Importance of International Financial Management Foreign Exchange Rates Foreign exchange is the price of one currency expressed in terms of the units of another currency. Understanding the concept of Foreign Exchange is the first step towards doing any sort of cross-border or international business. This, in turn, helps businesses take important trade or business decisions. Inflation Rates Inflation rates help understand the value of goods and services in different countries and economies. Businesses understand the export and import potential concerning a particular economy by observing and studying inflation rates. Businesses can also time their exports and imports based on inflation rates, taking advantage of the existing conditions.  Importance of International Financial Management Global Economic Conditions International Financial Management covers major aspects of global economies and their prevailing conditions. It also allows to study, analyse and ascertain the economic conditions of various countries which in turn provide relevant perspectives on the dynamics of each economy. Investment in Foreign Markets Why, how, and when to invest in foreign markets is dealt with in the study of international financial management. Global companies and investment firms study economic, market, and political conditions in foreign markets before taking a call on investments  Importance of International Financial Management Eco-political landscape This is of utmost importance because political conditions have a direct and huge impact on the economy of a nation. The extent of political stability in a country, among other important factors, will determine its economic progress.  Government controls Challenges in International Different environment Financial Management Different tax laws Financing function  Challenges in International Financial Management 1. Government controls With the help of different controlling procedures, government tries to control international financial flows like maintaining the multiple exchange rates, taxes on international flows and constructs on outflow of funds. These slower the pace of international/foreign investment flows. 2. Different environment The international financial system, which consists of two segments: the official part represented by the accepted code of behavior by governments comprising the international monetary system, and the private part, which consists of international banks and other multinational financial institutions that participate in the international money and capital markets. Challenges in International Financial Management 3. Different tax laws Capital gains, interest income, dividend and other financial transactions reduce the post-tax returns and thus restrict the scope of international portfolio investment. 4. Financing function Due to the multiplicity of sources of funds or avenues of investment available to the financial manager. The manager has to worry about the foreign exchange and political risks in positioning funds and in mobilizing cash resources. Thank You