Page 15 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes Self Assessment

Fill in the blanks:
8. …………………… are investments made for the purpose of actively controlling property
assets or companies located in host countries.

9. FDI facilitates the production of goods and services in locations that have a
…………………… advantage for such production.
10. An understanding of foreign exchange …………………… is essential for managers and
investors in the modern day environment of unforeseen changes in foreign exchange
rates.
1.4 International Business Methods

The rapid growth of international business in the last two decades has been a challenge for the
managers. Managers of multinational enterprises have to establish their presence in foreign
locations by entering into some form of contract with an independent enterprise, by creating or
acquiring a local enterprise, or by various hybrid combinations. There are various forms of
organisation, but keeping in view the generally accepted format, five methods by which firms
conduct international business activity can be identified. These are Licensing, Franchising, Joint
Ventures, Management Contracts and Establishing New Foreign Subsidiaries. These five methods
are described as follows:

Licensing: A firm in one country licenses the use of some or all of its intellectual property
(patents, trademarks, copyrights, brand names) to a firm of some other country in exchange
for fees or some royalty payment. Licensing enables a firm to use its technology in foreign
markets without a substantial investment in foreign countries.

Franchising: A firm in one country authorising a firm in another country to utilise its
brand names, logos etc. in return for royalty payment.
Joint Ventures: A corporate entity or partnership that is jointly owned and operated by
two or more firms is known as a joint venture. Joint ventures allow two firms to apply
their respective comparative advantage in a given project.

Establishing New Foreign Subsidiaries: A firm can also penetrate foreign markets by
establishing new operations in foreign countries to produce and sell their products. The
advantage here is that the working and operation of the firm can be tailored exactly to the
firms needs. However, a large amount of investment is required in this method.
Management Contracts: A firms in one country agrees to operate facilities or provide
other management services to a firm in another country for an agreed upon fee.
The above mentioned methods which help multinational enterprises establish their presence in
foreign locations must attempt to answer two basic question:

Will the expected benefits to be derived from any of these arrangement exceed its costs?
If yes, which arrangement will provide the largest net benefit?
The most frequently used method to compare the net benefits from any given arrangement is to
compare a stream of future costs with a stream of future benefits by discounting them to their
present value. The adjustment associated with the risk and uncertainty of the projection should
also be taken into account here.

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