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International Financial ManagementInternational Financial Management
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International Financial
Management
y It is the managerial activity which isconcerned with the planning and controllingof the firms financial resources.
y International Financial Management came
into existence when the countries of theworld started opening their door for eachother.
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yMNCs are companies that manufacture andmarketed the product or services in several
country and have single managerial authorityto control.
y
Basic goal of MNCs are maximize shareholder wealth.
The Multinational Corporation
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The rise of the multinational
corporation
Massive deregulation
Collapse of communism
Privatizations of state-owned industries
Revolution in information technology
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1. More raw materials (Raw material seeker)
Ex.- Oil company, Mineral company2. New markets (Market seeker)
Ex.- Coca-cola, Unilever
3. Minimize costs of production (Cost minimizers)
Ex.- General Electric
Evolution of the MNCs
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MNC and India
1st MNC in India was East India Company.
1st MNC of india was Patni Computers System.
After 1991 india got more FDI in comparison of
before 1991 because of dilution of strict rulesregarding FDI.
MNCs account 37% of turnover of top 20 firmsoperating in india in 2010
India is ranked as the 4th most attractive foreigndirect investment (FDI) destination in 2010.
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Objective of the MNC
International financial system
Official part
Private part
The Foreign Exchange market
The host countrys environment
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For corporations with shareholders who differ fromtheir managers, a conflict of goals can exist - theAgency Problem.
Agency costs are normally larger for MNCs than forpurely domestic firms.
The sheer size of the MNC.
The scattering of distant subsidiaries. The culture of foreign managers.
Subsidiary value versus overall MNC value.
Agency Problem
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Objective of the firm and risk
management Profit maximisation
Maximisation of share holders wealth
Where:
W = NPV of a project
IO = Initial investment or cost of the project
A1,A2 = Cash flows expected to occur every year if the project is adopted
k = Discount rate used by the project for finding the present value of thecash flow
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Cont
Stakeholders consideration
Management consideration
Societal consideration
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The factors that distinguish
multinational from domestic financial
management
1. Different currency denominations.
2. Economic and legal ramifications.
3. Language differences.
4. Cultural differences.
5. Role of governments.
6. Political risk.
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International Business Activities Globalization is the new buzzword in industry circles
today and is making economies to be more open andadaptable to foreign investment. The inflow of foreigninvestment is very important for the economicdevelopment of a country. The inflows of foreign
investment can be divided into two categories:
Foreign Direct Investments (FDI) are investmentsmade for the purpose of actively controlling property
assets or companies located in host countries.
Foreign Portfolio Investments are purchases of foreignfinancial assets for a purpose other than control.
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FDI is one of the most important sources of
capital market and links the host economy with theglobal markets and fosters economic growth. The
potential of FDI is determined by seven factors-
A
ccess to resource, Low production costs,
Access to export markets,
Cultural cum-geographic proximity, Competitor presence and
A host of government incentives.
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FDI is an important means of promoting and encouraging capitalto flow where it is most valuable,
FDI facilitates the production of goods and services in locationsthat have a comparative advantage for such production.
FDI is also imperative to economic development of a country. Itgenerates increased employment opportunities and also enhanceslabor productivity. In fact, attracting foreign capital is one way anational government can improve the living standards of itspeople.
In addition, FDI also brings with it new technology andmanagement techniques that pave the way to judiciously utilizethe resource and improve efficiency of the national economy.
It also helps in raising the level of competition in the nationaleconomy to the benefit of consumers, providing new or improvedquality products at lower prices thereby increasing productivity
The economic benefits of FDI are
many from a global perspective.
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Foreign Direct Investment in India is permitted under thefollowing forms of investments:
Through financial collaborations. Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
FDI is not permitted in the following industrial sectors:
Arms and Ammunition
Atomic Energy.
Railway
Transport.
Coal and Lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold,diamonds, copper, zinc.
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COMPOSITION OF INDIAS FDI FLOWS
Ranks Sector 2008-09(April-March)
2009-10(April-March)
2010-11( April-
Jan.)
CumulativeInflows
(April 00 -Jan. 11)
% age to totalInflows
(In terms ofUS$)
1. SERVICES SECTOR(financial & non-financial)
28,516(6,138)
20,776(4,353)
13,652(2,987)
118,923(26,597)
21 %
2. COMPUTER SOFTWARE &HARDWARE
7,329(1,677)
4,351(919)
3,225(708)
47,340(10,644)
8 %
3. TELECOMMUNICATIONS(radio paging, cellular mobile, basic
telephone services)
11,727(2,558)
12,338(2,554)
6,041(1,332)
46,746(10,262)
8 %
4. HOUSING & REAL ESTATE 12,621(2,801)
13,586(2,844)
4,791(1,048)
42,163(9,405)
7 %
5. CONSTRUCTION ACTIVITIES(including roads & highways)
8,792(2,028)
13,516(2,862)
4,540(1,006)
40,233(9,059)
7 %
6. AUTOMOBILE INDUSTRY 5,212(1,152)
5,754(1,208)
5,375(1,191)
26,198(5,788)
5 %
7. POWER 4,382
(985)
6,908
(1,437)
4,711
(1,033)
25,715
(5,680)
4 %
8. METALLURGICAL INDUSTRIES 4,157(961)
1,935(407)
4,632(1,011)
18,073(4,141)
3 %
9. PETROLEUM & NATURAL GAS 1,931(412)
1,328(272)
2,471(541)
13,585(3,120)
2 %
10. CHEMICALS
(other than fertilizers)
3,427
(749)
1,707
(362)
1,739
(382)
13,007
(2,876)
2 %
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Country-wise Distribution of Foreign Investments
Top 10 Investing (FDI Equity) Countries (in Rs. Cr)
Sl
No.
Country 2008-09
(April-March)
2009-10
(April-March)
2010-11
( April-Jan.)
Cumulative
Inflows(April 00 -Jan. 11)
%age to total
Inflows(in terms of US $)
1. MAURITIUS 50,899
(11,229)
49,633
(10,376)
27,970
(6,129)
238,876
(53,369)
42 %
2. SINGAPORE 15,727
(3,454)
11,295
(2,379)
6,817
(1,504)
51,964
(11,694)
9 %
3. U.S.A. 8,002
(1,802)
9,230
(1,943)
5,001
(1,092)
42,190
(9,371)
7 %
4. U.K. 3,840
(864)
3,094
(657)
2,300
(503)
28,298
(6,387)
5 %
5. NETHERLANDS 3,922
(883)
4,283
(899)
4,752
(1,048)
24,877
(5,535)
4 %
6. JAPAN 1,889
(405)
5,670
(1,183)
6,180
(1,367)
23,075
(5,082)
4 %
7. CYPRUS 5,983
(1,287)
7,728
(1,627)
3,458
(755)
21,235
(4,655)
4 %
8. GERMANY 2,750
(629)
2,980
(626)
545
(119)
13,013
(2,918)
2 %
9 FRANCE 2,098
(467)
1,437
(303)
3,149
(690)
10,068
(2,220)
2 %
10. U.A.E. 1,133
(257)
3,017
(629)
1,503
(326)
8,526
(1,875)
1 %
TOTAL FDI INFLOWS
*
123,025
(27,331)
123,120
(25,834)
77,902
(17,080)
570,105
(127,369)
-
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International Business Methods
There are several methods by which firms can
conduct international business.
International trade is a relatively conservativeapproach involving exporting and/or importing.
The internet facilitates international trade by
enabling firms to advertise and manage ordersthrough their websites.
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Licensingallows a firm to provide itstechnology in exchange for fees or some other
benefits.
Franchisingobligates a firm to provide aspecialized sales or service strategy, support
assistance, and possibly an initial investment inthe franchise in exchange for periodic fees.
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Firms may also penetrate foreign markets byengaging in ajoint venture (joint ownership and
operation) with firms that reside in those
markets.
Acquisitions of existing operations in foreign
countries allow firms to quickly gain control
over foreign operations as well as a share of theforeign market.
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Firms can also penetrate foreign markets
byestablishing new foreign subsidiaries.
In general, any method of conducting
business that requires a direct investmentin foreign operations is referred to as a
direct foreign investment (DFI).
The optimal international businessmethod may depend on the characteristics
of the MNC.
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International Opportunities
Investment opportunities - The marginalreturn on projects for an MNC is above thatof a purely domestic firm because of the
expanded opportunity set of possible projectsfrom which to select.
Financing opportunities -
An MNC is alsoable to obtain capital funding at a lower cost
due to its larger opportunity set of fundingsources around the world.
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Marginal
Return onProjects
PurelyDomesticFirm
MNC
Asset Level
of Firm
InvestmentOpportunities
Cost-benefit Evaluation forPurely Domestic Firms versus MNCs
AppropriateSize for PurelyDomestic Firm
AppropriateSize for MNC
X Y
MarginalCost of
Capital
PurelyDomesticFirm MNC
FinancingOpportunities
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BIBLIOGRAPHY
VIJ, MADHU, International FinancialManagement, Excel Books, third Edition,
2010.
SHAPIRO, ALAN C, MultinationalFinancial Management, Prentice Hall
International Inc.,eight Edition, 2010.
www.business.mapofindia.com
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