Like any finance function, international
finance, the finance function of a multinational firm has two
functions namely, treasury and control. The treasurer is
responsible for financial planning analysis, fund acquisition,
investment financing, cash management, investment decision and risk
management. On the other hand, controller deals with the functions
related to external reporting, tax planning and management,
management information system, financial and management accounting,
budget planning and control, and accounts receivables etc. For
maximising the returns from investment and to minimise the cost of
finance, the firms has to take portfolio decision based on
analytical skills required for this purpose. Since the firm has to
raise funds from different financial markets of the world, which
needs to actively exploit market imperfections and the firm’s
superior forecasting ability to generate purely financial gains.
The complex nature of managing international finance is due to the
fact that a wide variety of financial instruments, products,
funding options and investment vehicles are available for both
reactive and proactive management of corporate finance.
Multinational finance is multidisciplinary in
nature, while an understanding of economic theories and principles
is necessary to estimate and model financial decisions, financial
accounting and management accounting help in decision making in
financial management at multinational level. 5 Because of changing
nature of environment at international level, the knowledge of
latest changes in forex rates, volatility in capital market,
interest rate fluctuations, macro level charges, micro level
economic indicators, savings, consumption pattern, interest
preference, investment behaviour of investors, export and import
trends, competition, banking sector performance, inflationary
trends, demand and supply conditions etc. is required by the
practitioners of international financial management.
Distinguishing features of international
finance International Finance is a distinct field of study and
certain features set it apart from other fields. The important
distinguishing features of international finance from domestic
financial management are discussed below:
1. Foreign exchange risk : An understanding of
foreign exchange risk is essential for managers and investors in
the modern day environment of unforeseen changes in foreign
exchange rates. In a domestic economy this risk is generally
ignored because a single national currency serves as the main
medium of exchange within a country. When different national
currencies are exchanged for each other, there is a definite risk
of volatility in foreign exchange rates. The present International
Monetary System set up is characterised by a mix of floating and
managed exchange rate policies adopted by each nation keeping in
view its interests. In fact, this variability of exchange rates is
widely regarded as the most serious international financial problem
facing corporate managers and policy makers. At present, the
exchange rates among some major currencies such as the US dollar,
British pound, Japanese yen and the euro fluctuate in a totally 6
unpredictable manner. Exchange rates have fluctuated since the
1970s after the fixed exchange rates were abandoned. Exchange rate
variation affect the profitability of firms and all firms must
understand foreign exchange risks in order to anticipate increased
competition from imports or to value increased opportunities for
exports.
2. Political risk: Another risk that firms may
encounter in international finance is political risk. Political
risk ranges from the risk of loss (or gain) from unforeseen
government actions or other events of a political character such as
acts of terrorism to outright expropriation of assets held by
foreigners. MNCs must assess the political risk not only in
countries where it is currently doing business but also where it
expects to establish subsidiaries. The extreme form of political
risk is when the sovereign country changes the ‘rules of the game’
and the affected parties have no alternatives open to them. For
example, in 1992, Enron Development Corporation, a subsidiary of a
Houston based energy company, signed a contract to build India’s
longest power plant. Unfortunately, the project got cancelled in
1995 by the politicians in Maharashtra who argued that India did
not require the power plant. The company had spent nearly $ 300
million on the project. The Enron episode highlights the problems
involved in enforcing contracts in foreign countries. Thus, episode
highlights the problems involved in enforcing contracts in foreign
countries. Thus, political risk associated with international
operations is generally greater than that associated with domestic
operations and is generally more complicated.
3. Expanded opportunity sets: When firms go
global, they also tend to benefit from expanded opportunities which
are available now. They can raise funds in capital 7 markets where
cost of capital is the lowest. In addition, firms can also gain
from greater economies of scale when they operate on a global
basis.
4. Market imperfections: The final feature of
international finance that distinguishes it from domestic finance
is that world markets today are highly imperfect. There are
profound differences among nations’ laws, tax systems, business
practices and general cultural environments. Imperfections in the
world financial markets tend to restrict the extent to which
investors can diversify their portfolio. Though there are risks and
costs in coping with these market imperfections, they also offer
managers of international firms abundant opportunities.
1.3 GOALS FOR INTERNATIONAL FINANCIAL
MANAGEMENT
The foregoing discussion implies that
understanding and managing foreign exchange and political risks and
coping with market imperfections have become important parts of the
financial manager’s job. International Financial Management is
designed to provide today’s financial managers with an
understanding of the fundamental concepts and the tools necessary
to be effective global managers. Throughout, the text emphasizes
how to deal with exchange risk and market imperfections, using the
various instruments and tools that are available, while at the same
time maximizing the benefits from an expanded global opportunity
set. Effective financial management, however, is more than the
application of the newest business techniques or operating more
efficiently. There must be an underlying goal. International
Financial Management is written from the perspective that the
fundamental goal of sound financial management is shareholder
wealth maximization. Shareholder wealth 8 maximization means that
the firm makes all business decisions and investments with an eye
toward making the owners of the firm– the shareholders– better off
financially, or more wealthy, than they were before. Whereas
shareholder wealth maximization is generally accepted as the
ultimate goal of financial management in ‘Anglo-Saxon’ countries,
such as Australia, Canada, the United Kingdom, and especially the
United States, it is not as widely embraced a goal in other parts
of the world. In countries like France and Germany, for example,
shareholders are generally viewed as one of the ‘stakeholders’ of
the firm, others being employees, customers, suppliers, banks, and
so forth. European managers tend to consider the promotion of the
firm’s stakeholders’ overall welfare as the most important
corporate goal. In Japan, on the other hand, many companies form a
small number of interlocking business groups called keiretsu, such
as Mitsubishi, Mitsui, and Sumitomo, which arose from consolidation
of family- owned business empires. Japanese managers tend to regard
the prosperity and growth of their keiretsu as the critical goal;
for instance, they tend to strive to maximize market share, rather
than shareholder wealth. Obviously, the firm could pursue other
goals. This does not mean, however, that the goal of shareholder
wealth maximization is merely an alternative, or that the firm
should enter into a debate as to its appropriate fundamental goal.
Quite the contrary. If the firm seeks to maximize shareholder
wealth, it will most likely simultaneously be accomplishing other
legitimate goals that are perceived as worthwhile. Share-holder
wealth maximization is a long-run goal. A firm cannot stay in
business to maximize shareholder wealth if it treats employees
poorly, produces shoddy merchandise, wastes raw materials and
Natural Resources, operates inefficiently, or fails to satisfy
customers. Only a well managed business firm that profitably
produces what is demanded in an 9 efficient manner can expect to
stay in business in the long run and thereby provide employment
opportunities. Shareholders are the owners of the business; it is
their capital that is at risk. It is only equitable that they
receive a fair return on their investment. Private capital may not
have been forthcoming for the business firm if it had intended to
accomplish any other objective.
Copyright © 2026 eLLeNow.com All Rights Reserved.
