Page 8 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 1: Financial Management in Global Context

The consequences of events affecting the stock markets and interest rates of one country Notes
immediately show up around the world. This is due to the integrated and interdependent
financial environment which exists around the world. Also, their have been close links between
money and capital markets. All this makes it necessary for every MNC and aspiring manager to
take a close look at the ever changing and dynamic field of International Finance.

1.1.1 Global Links

Globalisation increases the ability of firms to do business across national boundaries. The
barriers to crossing those boundaries are coming down gradually. What once took days now
takes hours and what once took hours now takes minutes, or even seconds. All this is opening
new opportunities for everyone everywhere; but Globalisation is not really risk-free.
Globalisation is a phenomenon that no development agenda can afford to ignore. National
governments generally face frustrations in dealing with globalisation and these frustrations are
magnified for small developing countries. But such countries stand to gain more from
international trade and finance than their large counterparts since they face tighter resource and
market size constraints.

Global Links and World Economic Situation and Prospects
The world economy is mired in the severest financial crisis since the Great Depression. Growth
in World Gross Product (WGP) is expected to slow to 1.0 per cent in 2009, a sharp deceleration
from the rate of 2.5 per cent estimated for 2008 and well below the more robust pace in previous
years. While most developed economies are expected to be in a deep recession, a vast majority
of developing countries is experiencing a sharp reversal in the robust growth registered in the
period of 2002–2007, indicating a significant setback in the progress made in poverty reduction
for many developing countries over the past few years. The prospects for the Least Developed
Countries (LDCs), which did so well on average over the past years, are also deteriorating
rapidly. Income per capita for the world as whole is expected to decline in 2009.

World growth is projected to fall to half percent in 2009, its lowest rate since World War II.
Despite wide-ranging policy actions, financial strains remain acute, pulling down the real
economy. A sustained economic recovery will not be possible until the financial sector’s
functionality is restored and credit markets are unclogged. For this purpose, new policy initiatives
are needed to produce credible loan loss recognition; sort financial companies according to their
medium-run viability; and provide public support to viable institutions by injecting capital and
carving out bad assets. Monetary and fiscal policies need to become even more supportive of
aggregate demand and sustain this stance over the foreseeable future, while developing strategies
to ensure long-term fiscal sustainability. Moreover, international cooperation will be critical in
designing and implementing these policies.

Self Assessment

State whether the following statements are true or false:

1. International business by its nature is a primary determinant of international trade.
2. A knowledge of International Finance is not crucial for MNCs as it does not helps the
companies and financial managers to decide how international events will affect the firm.

3. Globalisation decreases the ability of firms to do business across national boundaries.

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