Subject code: FM-406/IB-416 Author:m Dr.m Sanjay m Tiwari
Lesson: 1 Vetter:m Dr.m B.S. m Bodla
MULTINATIONAL FINANCIAL MANAGEMENT:
m m
AN OVERVIEW
m
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Nature mandmscope mof minternational mfinancialm management
1.3 Evolutionm of m MNCs
1.4 Theorym andm practice m of m internationalm financialm management
1.5 Summary
1.6 Keywords
1.7 Self m assessmentm questions
1.8 References/Suggested m readings
1.0 OBJECTIVES
After m reading m this m lesson,m youm shouldm bem able m to-
• Understand m them factors m responsible m form emergencem ofm globalized
m financialmmarkets.
• Understand m meaning, m nature m andm scope m of m internationalm financi
almmanagement.
• Describe mgoals mfor minternationalmf inancialm management.
1.1 INTRODUCTION
Financialm managementm ism mainly mconcernedm with mho wmto moptimallym mak
emvarious mcorporate mfinancialmdecisio ns, msuchmas mthose mpertaining m to m inv
estment,mcapitalmstructure,m dividendmpo licy, mand m working mcapitalm manage
ment,mwithmam viewm to machieving ma msetmof mgivenmcorporate mobjectives.
,Inmanglo-
Americanmcountries masmwellmasminm manymadvancedmcountries mwithmwell-
developed m capitalm markets,m maximizingm shareholder m wealthm ismgenerallym
consideredmthemmostmimportantmcorporate mobjective.
Whym dom wem needm to m studym “international” m financialm management? m Thema
nswer mto mthis mquestionmismstraightforward:mWemaremnowmlivingm inmamhighlymg
lobalized mand mintegrated mworld meconomy.mAmericanmconsumers,mfor mexa
mple,m routinelym purchase m oilm importedm fromm Saudim Arabia m andm Nigeria,m
TVm setsm andm camcorders m fromm Japan,m Italy,m andm winem fromm France.mForei
gners,minmturn,mpurchase mAmerican-
mademaircraft,msoftware,mmovies,mjeans,m wheat,m andm other m products.m Cont
inuedm liberalizationm of minternationalmtrade mismcertainmto mfurther minternatio
nalize mconsumptionmpatterns maroundmthemworld.
Recently,mf inancialm markets mhave malso mbeco me mhighlym integrated. mThis m d
evelopmentmallo ws m investors mto mdiversifymtheir m investmentm portfolios m int
ernationally. mInm them words mof mamrecent mWallmStreet mJournalmarticle,m“Over m
thempast mdecade,m US m investors mhave mpouredmbuckets mof m moneym into mover
seas mmar kets,m in mthe mformmof m internationalm mutualmfunds. mAt mthe msame mti
me,mJapanese m investors mare minvesting mheavilym in m USmandmother mforeignmf i
nancialm mar kets m inmefforts mto mrecycle mtheir mecono mous mtrade msurpluses.
m Inmaddition,m many m major mcorporations mof mthe m wor ld,msuch masmIBM,mDai
mler-m Benz m(no w,mDaimler mChrysler), mand mSony,mhave mtheir mshares mcross-
listed monmforeignmstockmexchanges, mtherebymrender ing mtheir mshares m inter
nationallym tradable mand mgainingmaccess m to mforeign mcapitalmasm well.m Conse
quently,mDaimler-
Benz’s m venture,m say,m inm China m canm bem f inancedm partlym by mAmericanm in
vestors mwho mpurchase mDaimler-
Benzmshares mtradedmonmthemNewm YorkmStockm Exchange.
Duringmlastmfewmdecades mamrapidminternationalization mof mbusiness mhas moccur
red.m Withm them increase m inm demandm ofm goods m andm services m duem to mopenin
gm of m borders m of m countries m aroundm world,m them requirementm of m capital,
,machinerymandmtechnologicalm kno w-
howmhas mreachedmto mthemtopmostm level.m No wm no msingle mcountrymcanmboas
tmof mself-
sufficiency mbecause m inmamglobalmvillage ma mvast mpopulation mof m multidimens
ionalmtastes,mpreferences mandmdemand mexists.
Undoubtedly,m wemaremno w m living m in mam wor ldm where mallmthe m major mecono
micmfunctions- mconsumption,mproduction, mand m investment–
m aremhighly mglobalized.mIt m ism thus messentialmfor mfinancialm managers mto mfull
ymunderstand mvitalm internationalmdimensions mof mf inancialm management.
Inm orderm tom caterm tom needs/demandm of m hugem worldm population,m am countr
ymcanmengage mitself minmmultimtradingmactivities mamongmvarious mnations.mInmth
em postm WTOm regimem (afterm 1999m onwards),m itm has m became m pertinentm to m
note mthatmMNCsm(Multinationalmcorporations) mwithmtheir mworld-
widemproductionmandmdistributionmactivities mhave mgainedmmomentum.mAnmun
derstanding mof minternationalmfinancialmmanagementmismquite mimportantminmt
hemlightmof m changes minminternationalmenvironment,minnovative minstruments m
andminstitutions m to m facilitate m them internationalm tradingm activities.
Classicalmtheorymof mtrade massumes mthatmcountries mdiffer menoughmfrommonema
nother minmtermsmof mresources mendowments mandmeconomicmskills mfor mthesemd
ifferences m to m bem atm them centre m of m anym analysis m of m corporate mcompetitiven
ess.m Nowm therem ism free m mobilitym of m funds,m resources,mknowledge mandmtech
nologymwhichmhas mmade minternationalmtrade mmoremdynamicmandmcomplex.mC
apitalmmoves maroundmthemworldminmhuge mamount;mcorporations m arem free m to
m accessm differentm marketsm for m raisingm finance.m Therem exists m anm internatio
nalm competitiveness m inm differentm areasm ofm trade mandmcommerce.mThemenor
mousmopportunities mof minvestments,msavings,mconsumptionmandmmarketmacce
ssibilitymhave mgivenmrisemto mbigminstitutions,mfinancialm instruments m andm fina
ncialm markets.m Nowm am days m anm investor m inmUSAmwouldmlike mto mtake minvest
mentmopportunityminmoffshore mmarkets.mThemtrade m off m betweenm riskm of m in
vestingm inm globalm markets m andm returnm from
, these m investments m ismfocussedmto machieve m wealthm maximisation mof mthemst
akeho lders.mItm ism important mto mnote mthat m inm international mfinancialm mana
gement,mstakeholders maremspreadmallmo ver mthem world.
1.2 NATURE AND SCOPE OF INTERNATIONAL FINANCIA
m m m m m
L MANAGEMENT
m
Like manymf inance mfunction,m international mfinance,mthe mfinance mfunctionmof
m am multinational mfir mmhas mtwo mfunctions m namely,m treasurymandm control.m
The mtreasurer mismresponsible mfor mfinancialmplanning manalysis,mfund macqui
sition, m investment mfinancing,m cashm management, m investment mdecisionman
dmriskm management. m On mthemother m hand,mcontroller mdeals m with mthemfuncti
ons mrelated mto mexternalmreporting, mtax mplanning mand m management,m mana
gementm information msystem,mf inancialmandm managementmaccounting,mbud
getmplanning mandmcontrol,mandmaccounts mreceivables metc.
For mmaximisingmthemreturns mfromminvestmentmandmto mminimise mthemcostmof mf
inance,mthemfirms mhasmto mtake mportfolio mdecisionmbasedmonmanalyticalmskills mr
equiredmfor mthis mpurpose.mSince mthemfirmmhas mto mraise mfunds mfrommdifferentmf
inancialm markets mof mthemworld,mwhichmneeds mto mactivelymexploitmmarketmimp
erfections m andm them firm’s m superior m forecasting m abilitym to m generate mpurely
m financialmgains.mThe mcomplex mnature mof mmanaging minternationalm finance mism
due mto mthemfactmthatmamwidemvarietymof mfinancialminstruments,mproducts,mfund
ingmoptions mandminvestmentmvehicles maremavailable mfor mbothmreactive m andm p
roactive m managementm of m corporate m finance.
Multinational mfinance m is m multidisciplinary m in mnature,m while manm understan
dingmof mecono mic mtheor ies mand mpr inciples m ismnecessarym to mestimate mand m
modelmfinancialm decisions,mf inancialmaccounting mandm managementmaccou
ntingm helpm inmdecision m making m inmf inancialm management matm multinationa
lmlevel.
Lesson: 1 Vetter:m Dr.m B.S. m Bodla
MULTINATIONAL FINANCIAL MANAGEMENT:
m m
AN OVERVIEW
m
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Nature mandmscope mof minternational mfinancialm management
1.3 Evolutionm of m MNCs
1.4 Theorym andm practice m of m internationalm financialm management
1.5 Summary
1.6 Keywords
1.7 Self m assessmentm questions
1.8 References/Suggested m readings
1.0 OBJECTIVES
After m reading m this m lesson,m youm shouldm bem able m to-
• Understand m them factors m responsible m form emergencem ofm globalized
m financialmmarkets.
• Understand m meaning, m nature m andm scope m of m internationalm financi
almmanagement.
• Describe mgoals mfor minternationalmf inancialm management.
1.1 INTRODUCTION
Financialm managementm ism mainly mconcernedm with mho wmto moptimallym mak
emvarious mcorporate mfinancialmdecisio ns, msuchmas mthose mpertaining m to m inv
estment,mcapitalmstructure,m dividendmpo licy, mand m working mcapitalm manage
ment,mwithmam viewm to machieving ma msetmof mgivenmcorporate mobjectives.
,Inmanglo-
Americanmcountries masmwellmasminm manymadvancedmcountries mwithmwell-
developed m capitalm markets,m maximizingm shareholder m wealthm ismgenerallym
consideredmthemmostmimportantmcorporate mobjective.
Whym dom wem needm to m studym “international” m financialm management? m Thema
nswer mto mthis mquestionmismstraightforward:mWemaremnowmlivingm inmamhighlymg
lobalized mand mintegrated mworld meconomy.mAmericanmconsumers,mfor mexa
mple,m routinelym purchase m oilm importedm fromm Saudim Arabia m andm Nigeria,m
TVm setsm andm camcorders m fromm Japan,m Italy,m andm winem fromm France.mForei
gners,minmturn,mpurchase mAmerican-
mademaircraft,msoftware,mmovies,mjeans,m wheat,m andm other m products.m Cont
inuedm liberalizationm of minternationalmtrade mismcertainmto mfurther minternatio
nalize mconsumptionmpatterns maroundmthemworld.
Recently,mf inancialm markets mhave malso mbeco me mhighlym integrated. mThis m d
evelopmentmallo ws m investors mto mdiversifymtheir m investmentm portfolios m int
ernationally. mInm them words mof mamrecent mWallmStreet mJournalmarticle,m“Over m
thempast mdecade,m US m investors mhave mpouredmbuckets mof m moneym into mover
seas mmar kets,m in mthe mformmof m internationalm mutualmfunds. mAt mthe msame mti
me,mJapanese m investors mare minvesting mheavilym in m USmandmother mforeignmf i
nancialm mar kets m inmefforts mto mrecycle mtheir mecono mous mtrade msurpluses.
m Inmaddition,m many m major mcorporations mof mthe m wor ld,msuch masmIBM,mDai
mler-m Benz m(no w,mDaimler mChrysler), mand mSony,mhave mtheir mshares mcross-
listed monmforeignmstockmexchanges, mtherebymrender ing mtheir mshares m inter
nationallym tradable mand mgainingmaccess m to mforeign mcapitalmasm well.m Conse
quently,mDaimler-
Benz’s m venture,m say,m inm China m canm bem f inancedm partlym by mAmericanm in
vestors mwho mpurchase mDaimler-
Benzmshares mtradedmonmthemNewm YorkmStockm Exchange.
Duringmlastmfewmdecades mamrapidminternationalization mof mbusiness mhas moccur
red.m Withm them increase m inm demandm ofm goods m andm services m duem to mopenin
gm of m borders m of m countries m aroundm world,m them requirementm of m capital,
,machinerymandmtechnologicalm kno w-
howmhas mreachedmto mthemtopmostm level.m No wm no msingle mcountrymcanmboas
tmof mself-
sufficiency mbecause m inmamglobalmvillage ma mvast mpopulation mof m multidimens
ionalmtastes,mpreferences mandmdemand mexists.
Undoubtedly,m wemaremno w m living m in mam wor ldm where mallmthe m major mecono
micmfunctions- mconsumption,mproduction, mand m investment–
m aremhighly mglobalized.mIt m ism thus messentialmfor mfinancialm managers mto mfull
ymunderstand mvitalm internationalmdimensions mof mf inancialm management.
Inm orderm tom caterm tom needs/demandm of m hugem worldm population,m am countr
ymcanmengage mitself minmmultimtradingmactivities mamongmvarious mnations.mInmth
em postm WTOm regimem (afterm 1999m onwards),m itm has m became m pertinentm to m
note mthatmMNCsm(Multinationalmcorporations) mwithmtheir mworld-
widemproductionmandmdistributionmactivities mhave mgainedmmomentum.mAnmun
derstanding mof minternationalmfinancialmmanagementmismquite mimportantminmt
hemlightmof m changes minminternationalmenvironment,minnovative minstruments m
andminstitutions m to m facilitate m them internationalm tradingm activities.
Classicalmtheorymof mtrade massumes mthatmcountries mdiffer menoughmfrommonema
nother minmtermsmof mresources mendowments mandmeconomicmskills mfor mthesemd
ifferences m to m bem atm them centre m of m anym analysis m of m corporate mcompetitiven
ess.m Nowm therem ism free m mobilitym of m funds,m resources,mknowledge mandmtech
nologymwhichmhas mmade minternationalmtrade mmoremdynamicmandmcomplex.mC
apitalmmoves maroundmthemworldminmhuge mamount;mcorporations m arem free m to
m accessm differentm marketsm for m raisingm finance.m Therem exists m anm internatio
nalm competitiveness m inm differentm areasm ofm trade mandmcommerce.mThemenor
mousmopportunities mof minvestments,msavings,mconsumptionmandmmarketmacce
ssibilitymhave mgivenmrisemto mbigminstitutions,mfinancialm instruments m andm fina
ncialm markets.m Nowm am days m anm investor m inmUSAmwouldmlike mto mtake minvest
mentmopportunityminmoffshore mmarkets.mThemtrade m off m betweenm riskm of m in
vestingm inm globalm markets m andm returnm from
, these m investments m ismfocussedmto machieve m wealthm maximisation mof mthemst
akeho lders.mItm ism important mto mnote mthat m inm international mfinancialm mana
gement,mstakeholders maremspreadmallmo ver mthem world.
1.2 NATURE AND SCOPE OF INTERNATIONAL FINANCIA
m m m m m
L MANAGEMENT
m
Like manymf inance mfunction,m international mfinance,mthe mfinance mfunctionmof
m am multinational mfir mmhas mtwo mfunctions m namely,m treasurymandm control.m
The mtreasurer mismresponsible mfor mfinancialmplanning manalysis,mfund macqui
sition, m investment mfinancing,m cashm management, m investment mdecisionman
dmriskm management. m On mthemother m hand,mcontroller mdeals m with mthemfuncti
ons mrelated mto mexternalmreporting, mtax mplanning mand m management,m mana
gementm information msystem,mf inancialmandm managementmaccounting,mbud
getmplanning mandmcontrol,mandmaccounts mreceivables metc.
For mmaximisingmthemreturns mfromminvestmentmandmto mminimise mthemcostmof mf
inance,mthemfirms mhasmto mtake mportfolio mdecisionmbasedmonmanalyticalmskills mr
equiredmfor mthis mpurpose.mSince mthemfirmmhas mto mraise mfunds mfrommdifferentmf
inancialm markets mof mthemworld,mwhichmneeds mto mactivelymexploitmmarketmimp
erfections m andm them firm’s m superior m forecasting m abilitym to m generate mpurely
m financialmgains.mThe mcomplex mnature mof mmanaging minternationalm finance mism
due mto mthemfactmthatmamwidemvarietymof mfinancialminstruments,mproducts,mfund
ingmoptions mandminvestmentmvehicles maremavailable mfor mbothmreactive m andm p
roactive m managementm of m corporate m finance.
Multinational mfinance m is m multidisciplinary m in mnature,m while manm understan
dingmof mecono mic mtheor ies mand mpr inciples m ismnecessarym to mestimate mand m
modelmfinancialm decisions,mf inancialmaccounting mandm managementmaccou
ntingm helpm inmdecision m making m inmf inancialm management matm multinationa
lmlevel.
