Page 17 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes 1.5 Field of International Business

Several developments have encouraged Globalisation of world trade through international
business. Global integration of goods and services improves the overall efficiency of resources
and also tends to increase competition forcing firms to be more efficient.
Another significant reason for Globalisation of business is the increasing standardisation of
products and services across countries. This helps firms to sell their products across countries. To
pursue any of its international objectives, a company must establish international operations
that may be different from those used domestically. Another important aspect to be taken into
account is the environment in which the firm has to operate. The environmental conditions also
affect the means of carrying out business functions such as finance, marketing, production, etc.
Figure 1.1: Operations and Influences of International Business

OPERATIONS INFLUENCES
Objectives Influences
Sale expansion External environment
Resource acquisition Geographic
Diversification Historical

Political

Legal
Economic
Cultural
MEANS
Operational Functional Competitive Environment
Import Production
Export Marketing Speed of product changes
Transport Accounting Optimum production size
Licensing Finance Number of customers
Franchising Personnel Amount bought by each customer
Management contract Homogeneity of customers
Turnkey Local versus international competitors
Direct investment Cost of moving products
Portfolio investment Unique capabilities of competitors

Source: International Business Environments and Operations by John D Daniels and Lee H Radebaugh, Sixth
Edition, p. 8, Adison Wesley Publishing Company.

1.5.1 Motivation for International Business

There are three primary motivations for firms to pursue international business – to expand
sales, to acquire resources and to diversify sources of sales and supplies. So the growth potential
becomes much greater for companies that seek out foreign markets.
Figure 1.2 illustrates the cost-benefit evaluation for purely domestic firms versus MNCs. The
marginal return on projects for both the MNC and purely domestic firm are shown with the help
of horizontal steps. Each horizontal step represents a specific project. The horizontal steps differ
in length since project sizes differ. It is also assumed that these projects are independent of each
other and their expected returns have been adjusted for the risk factor. The marginal return on
projects for the MNC is above that of the purely domestic firm because of the expanded
opportunity set of projects available to the MNC.

The marginal cost of capital curves for the MNC and purely domestic firm are also shown in the
diagram. The cost of capital shows an increasing trend with asset size for both the MNC and
domestic firm. This is based on the assumption that as the firm grows, the creditors and

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