Subject code: FM-406/IB-416 Author:v Dr.v Sanjayv Tiwari
Lesson: 1 Vetter:v Dr.v B.S.v Bodla
MULTINATIONAL FINANCIAL MANAGEMENT:
v v
AN OVERVIEW
v
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Naturevandvscopevofvinternationalvfinancialvmanagement
1.3 Evolutionv ofv MNCs
1.4 Theoryv andv practicev ofv internationalv financialv management
1.5 Summary
1.6 Keywords
1.7 Selfv assessmentv questions
1.8 References/Suggestedv readings
1.0 OBJECTIVES
Afterv readingv thisv lesson,v youv shouldv bev ablev to-
• Understandv thev factorsv responsiblev forv emergencev ofv globalizedvfi
nancialvmarkets.
• Understandv meaning,v naturev andv scopev ofv internationalv financialv
management.
• Describevgoalsvforvinternationalvfinancialvmanagement.
1.1 INTRODUCTION
Financialvmanagementvisvmainlyvconcernedvwithvhowvtovoptimallyvmakevv
ariousvcorporatevfinancialvdecisions,vsuchvasvthosevpertainingvtovinvestme
nt,vcapitalvstructure,vdividendvpolicy,vandvworkingvcapitalvmanagement,vwi
thvavviewvtovachievingvavsetvofvgivenvcorporatevobjectives.
,Invanglo-
Americanvcountriesvasvwellvasvinvmanyvadvancedvcountriesvwithvwell-
developedv capitalv markets,v maximizingv shareholderv wealthv isvgenerallyvco
nsideredvthevmostvimportantvcorporatevobjective.
Whyv dov wev needv tov studyv “international”v financialv management?v Thevans
wervtovthisvquestionvisvstraightforward:vWevarevnowvlivingvinvavhighlyvglobali
zedvandvintegratedvworldveconomy.vAmericanvconsumers,vforvexample,v ro
utinelyv purchasev oilv importedv fromv Saudiv Arabiav andv Nigeria,vTVv setsv andv
camcordersv fromv Japan,v Italy,v andv winev fromv France.vForeigners,vinvturn,vp
urchasevAmerican-
madevaircraft,vsoftware,vmovies,vjeans,v wheat,v andv otherv products.v Contin
uedv liberalizationv ofvinternationalvtradevisvcertainvtovfurthervinternationaliz
evconsumptionvpatternsvaroundvthevworld.
Recently,vfinancialvmarketsvhavevalsovbecomevhighlyvintegrated.vThisvdeve
lopmentvallowsvinvestorsvtovdiversifyvtheirvinvestmentvportfoliosvinternati
onally.vInvthevwordsvofvavrecentvWallvStreetvJournalvarticle,v“Overvthevpastvd
ecade,vUSvinvestorsvhavevpouredvbucketsvofvmoneyvintovoverseasvmarkets,
v invthevformvofvinternationalvmutualvfunds.vAtvthevsamevtime,vJapanesevinve
storsvarevinvestingvheavilyvinvUSvandvothervforeignvfinancialvmarketsvinveff
ortsvtovrecyclevtheirveconomousvtradevsurpluses.v Invaddition,vmanyvmajorv
corporationsvofvthevworld,vsuchvasvIBM,vDaimler-
v Benzv(now,vDaimlervChrysler),vandvSony,vhavevtheirvsharesvcross-
listedvonvforeignvstockvexchanges,vtherebyvrenderingvtheirvsharesvinternat
ionallyvtradablevandvgainingvaccessvtovforeignvcapitalvasvwell.vConsequentl
y,vDaimler-
Benz’sv venture,v say,v inv Chinav canv bev financedv partlyv byvAmericanvinvest
orsvwhovpurchasevDaimler-
BenzvsharesvtradedvonvthevNewvYorkvStockvExchange.
Duringvlastvfewvdecadesvavrapidvinternationalizationvofvbusinessvhasvoccurred
.v Withv thev increasev inv demandv ofv goodsv andv servicesv duev tovopeningv ofv bo
rdersv ofv countriesv aroundv world,v thev requirementv ofv capital,
,machineryvandvtechnologicalvknow-
howvhasvreachedvtovthevtopmostvlevel.vNowvnovsinglevcountryvcanvboastvofv
self-
sufficiencyvbecausevinvavglobalvvillagevavvastvpopulationvofvmultidimension
alvtastes,vpreferencesvandvdemandvexists.
Undoubtedly,vwevarevnowvlivingvinvavworldvwherevallvthevmajorveconomicvf
unctions-vconsumption,vproduction,vandvinvestment–
v arevhighlyvglobalized.vItvisvthusvessentialvforvfinancialvmanagersvtovfullyvun
derstandvvitalvinternationalvdimensionsvofvfinancialvmanagement.
Inv orderv tov caterv tov needs/demandv ofv hugev worldv population,v av countryvc
anvengagevitselfvinvmultivtradingvactivitiesvamongvvariousvnations.vInvthev post
v WTOv regimev (afterv 1999v onwards),v itv hasv becamev pertinentv tov notevthatv
MNCsv(Multinationalvcorporations)vwithvtheirvworld-
widevproductionvandvdistributionvactivitiesvhavevgainedvmomentum.vAnvunde
rstandingvofvinternationalvfinancialvmanagementvisvquitevimportantvinvthevlig
htvofv changesvinvinternationalvenvironment,vinnovativevinstrumentsvandvinsti
tutionsv tov facilitatev thev internationalv tradingv activities.
Classicalvtheoryvofvtradevassumesvthatvcountriesvdiffervenoughvfromvonevanot
hervinvtermsvofvresourcesvendowmentsvandveconomicvskillsvforvthesevdifferen
cesv tov bev atv thev centrev ofv anyv analysisv ofv corporatevcompetitiveness.v Nowv
therev isv freev mobilityv ofv funds,v resources,vknowledgevandvtechnologyvwhich
v hasvmadevinternationalvtradevmorevdynamicvandvcomplex.vCapitalvmovesvaro
undvthevworldvinvhugevamount;vcorporationsv arev freev tov accessv differentv ma
rketsv forv raisingv finance.v Therev existsv anv internationalv competitivenessv inv
differentv areasv ofv tradevandvcommerce.vThevenormousvopportunitiesvofvinve
stments,vsavings,vconsumptionvandvmarketvaccessibilityvhavevgivenvrisevtovbig
v institutions,vfinancialv instrumentsv andv financialv markets.v Nowv av daysv anv i
nvestorv invUSAvwouldvlikevtovtakevinvestmentvopportunityvinvoffshorevmarket
s.vThevtradev offv betweenv riskv ofv investingv inv globalv marketsv andv return
v from
, thesevinvestmentsvisvfocussedvtovachievevwealthvmaximisationvofvthevstake
holders.vItvisvimportantvtovnotevthatvinvinternationalvfinancialvmanagement
,vstakeholdersvarevspreadvallvovervthevworld.
1.2 NATURE AND SCOPE OF INTERNATIONAL FINANCIAL
v v v v v v
MANAGEMENT
Likevanyvfinancevfunction,vinternationalvfinance,vthevfinancevfunctionvofvav
multinationalvfirmvhasvtwovfunctionsvnamely,vtreasuryvandvcontrol.vThevtr
easurervisvresponsiblevforvfinancialvplanningvanalysis,vfundvacquisition,vinv
estmentvfinancing,vcashvmanagement,vinvestmentvdecisionvandvriskvmana
gement.vOnvthevothervhand,vcontrollervdealsvwithvthevfunctionsvrelatedvtove
xternalvreporting,vtaxvplanningvandvmanagement,v managementvinformati
onvsystem,vfinancialvandvmanagementvaccounting,vbudgetvplanningvandvco
ntrol,vandvaccountsvreceivablesvetc.
Forvmaximisingvthevreturnsvfromvinvestmentvandvtovminimisevthevcostvofvfina
nce,vthevfirmsvhasvtovtakevportfoliovdecisionvbasedvonvanalyticalvskillsvrequire
dvforvthisvpurpose.vSincevthevfirmvhasvtovraisevfundsvfromvdifferentvfinancialvm
arketsvofvthevworld,vwhichvneedsvtovactivelyvexploitvmarketvimperfectionsv an
dv thev firm’sv superiorv forecastingv abilityv tov generatevpurelyvfinancialvgains.v
Thevcomplexvnaturevofvmanagingvinternationalv financevisvduevtovthevfactvthatv
avwidevvarietyvofvfinancialvinstruments,vproducts,vfundingvoptionsvandvinvest
mentvvehiclesvarevavailablevforvbothvreactivev andv proactivev managementv ofv
corporatev finance.
Multinationalvfinancevisvmultidisciplinaryvinvnature,vwhilevanvunderstandi
ngvofveconomicvtheoriesvandvprinciplesvisvnecessaryvtovestimatevandvmode
lvfinancialvdecisions,vfinancialvaccountingvandvmanagementvaccountingvhel
pvinvdecisionvmakingvinvfinancialv managementvatvmultinationalvlevel.
Lesson: 1 Vetter:v Dr.v B.S.v Bodla
MULTINATIONAL FINANCIAL MANAGEMENT:
v v
AN OVERVIEW
v
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Naturevandvscopevofvinternationalvfinancialvmanagement
1.3 Evolutionv ofv MNCs
1.4 Theoryv andv practicev ofv internationalv financialv management
1.5 Summary
1.6 Keywords
1.7 Selfv assessmentv questions
1.8 References/Suggestedv readings
1.0 OBJECTIVES
Afterv readingv thisv lesson,v youv shouldv bev ablev to-
• Understandv thev factorsv responsiblev forv emergencev ofv globalizedvfi
nancialvmarkets.
• Understandv meaning,v naturev andv scopev ofv internationalv financialv
management.
• Describevgoalsvforvinternationalvfinancialvmanagement.
1.1 INTRODUCTION
Financialvmanagementvisvmainlyvconcernedvwithvhowvtovoptimallyvmakevv
ariousvcorporatevfinancialvdecisions,vsuchvasvthosevpertainingvtovinvestme
nt,vcapitalvstructure,vdividendvpolicy,vandvworkingvcapitalvmanagement,vwi
thvavviewvtovachievingvavsetvofvgivenvcorporatevobjectives.
,Invanglo-
Americanvcountriesvasvwellvasvinvmanyvadvancedvcountriesvwithvwell-
developedv capitalv markets,v maximizingv shareholderv wealthv isvgenerallyvco
nsideredvthevmostvimportantvcorporatevobjective.
Whyv dov wev needv tov studyv “international”v financialv management?v Thevans
wervtovthisvquestionvisvstraightforward:vWevarevnowvlivingvinvavhighlyvglobali
zedvandvintegratedvworldveconomy.vAmericanvconsumers,vforvexample,v ro
utinelyv purchasev oilv importedv fromv Saudiv Arabiav andv Nigeria,vTVv setsv andv
camcordersv fromv Japan,v Italy,v andv winev fromv France.vForeigners,vinvturn,vp
urchasevAmerican-
madevaircraft,vsoftware,vmovies,vjeans,v wheat,v andv otherv products.v Contin
uedv liberalizationv ofvinternationalvtradevisvcertainvtovfurthervinternationaliz
evconsumptionvpatternsvaroundvthevworld.
Recently,vfinancialvmarketsvhavevalsovbecomevhighlyvintegrated.vThisvdeve
lopmentvallowsvinvestorsvtovdiversifyvtheirvinvestmentvportfoliosvinternati
onally.vInvthevwordsvofvavrecentvWallvStreetvJournalvarticle,v“Overvthevpastvd
ecade,vUSvinvestorsvhavevpouredvbucketsvofvmoneyvintovoverseasvmarkets,
v invthevformvofvinternationalvmutualvfunds.vAtvthevsamevtime,vJapanesevinve
storsvarevinvestingvheavilyvinvUSvandvothervforeignvfinancialvmarketsvinveff
ortsvtovrecyclevtheirveconomousvtradevsurpluses.v Invaddition,vmanyvmajorv
corporationsvofvthevworld,vsuchvasvIBM,vDaimler-
v Benzv(now,vDaimlervChrysler),vandvSony,vhavevtheirvsharesvcross-
listedvonvforeignvstockvexchanges,vtherebyvrenderingvtheirvsharesvinternat
ionallyvtradablevandvgainingvaccessvtovforeignvcapitalvasvwell.vConsequentl
y,vDaimler-
Benz’sv venture,v say,v inv Chinav canv bev financedv partlyv byvAmericanvinvest
orsvwhovpurchasevDaimler-
BenzvsharesvtradedvonvthevNewvYorkvStockvExchange.
Duringvlastvfewvdecadesvavrapidvinternationalizationvofvbusinessvhasvoccurred
.v Withv thev increasev inv demandv ofv goodsv andv servicesv duev tovopeningv ofv bo
rdersv ofv countriesv aroundv world,v thev requirementv ofv capital,
,machineryvandvtechnologicalvknow-
howvhasvreachedvtovthevtopmostvlevel.vNowvnovsinglevcountryvcanvboastvofv
self-
sufficiencyvbecausevinvavglobalvvillagevavvastvpopulationvofvmultidimension
alvtastes,vpreferencesvandvdemandvexists.
Undoubtedly,vwevarevnowvlivingvinvavworldvwherevallvthevmajorveconomicvf
unctions-vconsumption,vproduction,vandvinvestment–
v arevhighlyvglobalized.vItvisvthusvessentialvforvfinancialvmanagersvtovfullyvun
derstandvvitalvinternationalvdimensionsvofvfinancialvmanagement.
Inv orderv tov caterv tov needs/demandv ofv hugev worldv population,v av countryvc
anvengagevitselfvinvmultivtradingvactivitiesvamongvvariousvnations.vInvthev post
v WTOv regimev (afterv 1999v onwards),v itv hasv becamev pertinentv tov notevthatv
MNCsv(Multinationalvcorporations)vwithvtheirvworld-
widevproductionvandvdistributionvactivitiesvhavevgainedvmomentum.vAnvunde
rstandingvofvinternationalvfinancialvmanagementvisvquitevimportantvinvthevlig
htvofv changesvinvinternationalvenvironment,vinnovativevinstrumentsvandvinsti
tutionsv tov facilitatev thev internationalv tradingv activities.
Classicalvtheoryvofvtradevassumesvthatvcountriesvdiffervenoughvfromvonevanot
hervinvtermsvofvresourcesvendowmentsvandveconomicvskillsvforvthesevdifferen
cesv tov bev atv thev centrev ofv anyv analysisv ofv corporatevcompetitiveness.v Nowv
therev isv freev mobilityv ofv funds,v resources,vknowledgevandvtechnologyvwhich
v hasvmadevinternationalvtradevmorevdynamicvandvcomplex.vCapitalvmovesvaro
undvthevworldvinvhugevamount;vcorporationsv arev freev tov accessv differentv ma
rketsv forv raisingv finance.v Therev existsv anv internationalv competitivenessv inv
differentv areasv ofv tradevandvcommerce.vThevenormousvopportunitiesvofvinve
stments,vsavings,vconsumptionvandvmarketvaccessibilityvhavevgivenvrisevtovbig
v institutions,vfinancialv instrumentsv andv financialv markets.v Nowv av daysv anv i
nvestorv invUSAvwouldvlikevtovtakevinvestmentvopportunityvinvoffshorevmarket
s.vThevtradev offv betweenv riskv ofv investingv inv globalv marketsv andv return
v from
, thesevinvestmentsvisvfocussedvtovachievevwealthvmaximisationvofvthevstake
holders.vItvisvimportantvtovnotevthatvinvinternationalvfinancialvmanagement
,vstakeholdersvarevspreadvallvovervthevworld.
1.2 NATURE AND SCOPE OF INTERNATIONAL FINANCIAL
v v v v v v
MANAGEMENT
Likevanyvfinancevfunction,vinternationalvfinance,vthevfinancevfunctionvofvav
multinationalvfirmvhasvtwovfunctionsvnamely,vtreasuryvandvcontrol.vThevtr
easurervisvresponsiblevforvfinancialvplanningvanalysis,vfundvacquisition,vinv
estmentvfinancing,vcashvmanagement,vinvestmentvdecisionvandvriskvmana
gement.vOnvthevothervhand,vcontrollervdealsvwithvthevfunctionsvrelatedvtove
xternalvreporting,vtaxvplanningvandvmanagement,v managementvinformati
onvsystem,vfinancialvandvmanagementvaccounting,vbudgetvplanningvandvco
ntrol,vandvaccountsvreceivablesvetc.
Forvmaximisingvthevreturnsvfromvinvestmentvandvtovminimisevthevcostvofvfina
nce,vthevfirmsvhasvtovtakevportfoliovdecisionvbasedvonvanalyticalvskillsvrequire
dvforvthisvpurpose.vSincevthevfirmvhasvtovraisevfundsvfromvdifferentvfinancialvm
arketsvofvthevworld,vwhichvneedsvtovactivelyvexploitvmarketvimperfectionsv an
dv thev firm’sv superiorv forecastingv abilityv tov generatevpurelyvfinancialvgains.v
Thevcomplexvnaturevofvmanagingvinternationalv financevisvduevtovthevfactvthatv
avwidevvarietyvofvfinancialvinstruments,vproducts,vfundingvoptionsvandvinvest
mentvvehiclesvarevavailablevforvbothvreactivev andv proactivev managementv ofv
corporatev finance.
Multinationalvfinancevisvmultidisciplinaryvinvnature,vwhilevanvunderstandi
ngvofveconomicvtheoriesvandvprinciplesvisvnecessaryvtovestimatevandvmode
lvfinancialvdecisions,vfinancialvaccountingvandvmanagementvaccountingvhel
pvinvdecisionvmakingvinvfinancialv managementvatvmultinationalvlevel.
