Page 7 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management
Notes
2 LOVELY PROFESSIONAL UNIVERSITY
international business are expansion of sales, acquiring resources, minimizing competitive risk
and diversification of sources of sales and supplies. Besides these there are other few factors like
economic factors, cultural factors, technological factors, and social factors which have influence
to a greater extent.
The emergence and activities of transnational and multinational enterprises have impacted to a
huge extent on the concept of globalization, and multinationals have played an important role.
Given their international reach and mobility, prospective countries, and sometimes regions
within countries, must compete with each other. To compete, countries and regional political
districts offer incentives to MNCs such as tax breaks, pledges of governmental assistance or
improved infrastructure, or Lax environmental and labor standards. This process helps to make
the MNC more attractive to foreign investment and gives them the required flexibility in
marketing and distribution.
When the financial manager of an international corporation operates in more than one country,
he encounters new opportunities as well as new costs and risks. The main risk facing MNC is the
differences among the countries, the people of the world, foreign exchange risks and the special
business risks of operating in unfamiliar environments. In addition, there is the spectre of
political risk-the risk that sovereign governments may interfere with operations or terminate
them altogether.
1.1 Scope of International Finance
MNCs typically have subsidiaries or joint-ventures in each national market. How these companies
are organized, how they operate, and their lines of business are heavily influenced by
socio-cultural, political, global, economic and legal environments of each country a firm does
business in. The management of the parent company typically must incorporate all the legal
restrictions of the home company into the management of companies in based in very different
legal and cultural frameworks. International treaties, such as the Basel Accords, the World Trade
Organization, and the Kyoto Protocol often seek to provide a uniform framework for how
business should be influenced between signatory states.
International business by its nature is a primary determinant of international trade. One of the
results on the increasing success of international business ventures is globalization. Trade helps
to prevent conflict. International business essentially is about trade, and when people trade they
are in contact with one another. As a result, there is less isolation and when countries begin to
interact through trade, they are less likely to fight. This is also linked to the theory that democratic
states are less likely to go to war with one another because they are interconnected and dependent
on each others success.
As a Multinational Corporation (MNC) is involved in producing and selling goods and services
in more than one country, it usually consists of a parent company located in its home country
with numerous foreign subsidiaries. As business expands, the awareness of opportunities in
foreign markets also increases. This, ultimately, evolves into some of them becoming MNCs so
that they can enjoy the benefits of international business opportunities.
Notes A knowledge of International Finance is crucial for MNCs in two important ways.
First, it helps the companies and financial managers to decide how international events
will affect the firm and what steps can be taken to gain from positive developments and
insulate from harmful ones. Second, it helps the companies to recognise how the firm will
be affected by movements in exchange rates, interest rates, inflation rates and asset values.