International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation environment. International financial management involves into a lot of currency derivatives whereas such derivatives are very less used in domestic financial management. The term „International Finance‟ has not come from Mars. It is similar to the domestic finance in many of the
aspects. If we talk on a macro level, the most important difference between international finance and domestic finance is of foreign currency or to be more precise the exchange rates. In domestic financial management, we aim at minimizing the cost of capital while raising funds and try optimizing the returns from investments to create wealth for shareholders. We do not do any different in international finance. So, the objective of financial management remains same for both domestic and international finance i.e. wealth maximization of shareholders. Still, the analytics of international finance is different from domestic finance. Following are the major differences: Exposure to Foreign Exchange: The most significant difference is of foreign currency exposure. Currency exposure impacts almost all the areas of an international business starting from your purchase from suppliers, selling to customers, investing in plant and machinery, fund raising etc. Wherever you need money, currency exposure will come into play and as we know it well that there is no business transaction without money. Macro Business Environment: An international business is exposed to altogether a different economic and political environment. All trade policies are different in different countries. Financial manager has to critically analyze the policies to make out the feasibility and profitability of their business propositions. One country may have business friendly policies and other may not. Legal and Tax Environment: The other important aspect to look at is the legal and tax front of a country. Tax impacts directly to your product costs or net profits i.e. „the bottom line‟ for which the whole story is written.
International finance manager will look at the taxation structure to find out whether the business which is feasible in his home country is workable in the foreign country or not. Different group of Stakeholders: It is not only the money which along matters, there are other things which carry greater importance viz. the group of suppliers, customers, lenders, shareholders etc. Why these group of people matter? It is because they carry altogether a different culture, a different set of values and most importantly the language also may be different. When you are dealing with those stakeholders, you have no clue about their likes and dislikes. A business is driven by these stakeholders and keeping them happy is all you need. Foreign Exchange Derivatives: Since, it is inevitable to expose to the risk of foreign exchange in a multinational business. Knowledge of forwards, futures, options and swaps is invariably required. A financial manager has to be strong enough to calculate the cost impact of hedging the risk with the help of different derivative instruments while taking any financial decisions. Different Standards of Reporting: If the business has presence in say US and India, the books of accounts need to be maintained in US GAAP and IGAAP. It is not surprising to know that the booking of assets has a different treatment in one country compared to other. Managing the reporting task is another big difference. The financial manager or his team needs to be familiar with accounting standards of different countries. Capital Management: In an MNC, the financial managers have ample options of raising the capital. More number of options creates more challenge with respect to selection of right source of capital to ensure the lowest possible cost of capital.
There may be such more points of difference between international and domestic financial management. Mentioned above are list of major differences. We need to consider each of them before taking any decision involving multinational financial environment.
…………………………………………………………….. International Financial Management is a well known term in today‟s world and it is also known as international finance. It means financial management in an international business environment. It is different because of different currency of different countries, dissimilar political situations, imperfect markets, diversified opportunity sets. International Financial Management came into being when the countries of the world started opening their doors for each other. This phenomenon is well known with the name of “liberalization”. Due to the open environment
and freedom to conduct business in any corner of the world, entrepreneurs started looking for opportunities even outside their country-boundaries. The spark of liberalization was further aired by swift progression in telecommunications and transportation technologies that too with increased accessibility and daily dropping prices. Apart from everything else, we cannot forget the contribution of financial innovations such as currency derivatives; cross border stock listings, multi-currency bonds and international mutual funds. The resultant of liberalization and technology advancement is today‟s dynamic international business
environment. Financial management for a domestic business and an international business is as dramatically different as the opportunities in the two. The meaning and objective of financial management does not change in international financial management but the dimensions and dynamics changes drastically. Difference between International and Domestic Financial Management: Four major facets which differentiate international financial management from domestic financial management are introduction of foreign currency, political risk and market imperfections and e nhanced opportunity set. Foreign Exchange: It‟s an additional risk w hich a finance manager is required to cater to under an International Financial Management setting. Foreign exchange risk refers to the risk of fluctuating prices of currency which has the potential to convert a profitable deal into a loss making one. Political Risks: Political risk may include any change in the economic environment of the country viz. Taxation Rules, Contract Act etc. It is pertaining to the government of a country which can anytime change the rules of the game in an unexpected manner. Market Imperfection: Having done a lot of integration in the world economy, it has got a lot of differences across the countries in terms of transportation cost, different tax rates, etc. Imperfect markets force a finance manager to strive for best opportunities across the countries. Enhanced Opportunity Set: By doing business in other than native countries, a business expands its chances of reaping fruits of different taste. Not only does it enhances the opportunity for the business but also diversifies the overall risk of a business. Just like domestic financial management, the goal of International Finance is also to maximize the shareholder‟s wealth. The goal is not only is limited to the „Shareholders‟ but extends to all „Stakeholders‟ viz. employees,
suppliers, customers etc. No goal can be achieved without achieving welfare of shareholders. In other words, maximizing shareholder‟s wealth would mean maximizing the price of the share. Here again comes a question,
whether in which currency should the value of the share be maximized? This is an important decision to be taken by the management of the organization.
International level initiatives like General Agreement on Trade and Tariffs (GATT), The North American Free Trade Agreement (NAFTA), World Trade Organization (WHO) etc has give promoted international trade and given it a shape. All because of liberalization and those international agreements, we have a buzz word called “MNC” i.e. Multinational Corporations. MNCs enjoy an edge over other normal compani es because of its
international setting and best opportunities. International Finance has become an important wing for all big MNCs. Without the expertise in International Financial Management, it can be difficult to sustain in the market because international financial markets have a total different shape and analytics compared to the domestic financial markets. A sound management of international finances can help an organization achieve same efficiency and effectiveness in all markets.
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Discuss the different issues financial managers face in multinational financial management versus domestic financial management. How do these issues impact multinational company's decisions? Post your response in the discussion area, and review and respond to at least two other learners' postings
Brigham and Houston (2004) list six major factors that distinguish domestic markets from firms that operate globally. 1. Currency must be normalized 2.
Legal codes and economic systems must be matched
3. Languages interpreted and translated 4. Cultural differences must be understood 5. Governments must be consulted 6. Politics on the ground might increase risk Most of these things seem easy enough on the surface. Unfortunately underneath there is a need for great compromise and discussion when operating in global markets. We must as a nation demand the same moral and ethical standards from our companies that operate in other nations that we enforce here. Often that will put us at a disadvantage with competing with companies from other nations that do not have the need for such standards but what we loose as a nation is far greater then the need for stockholder value. We must not fall into practices of ethical relativism. This practice would allow us to abandon all moral high ground in the pursuit of profits. We must reason that what is right here is right there. If it is illegal to sell drugs in this nation is it ri ght to cause opium wars in another nation (Hooker, 1996)? If we can not market or sell cigarettes to children here why would it be ok to do so in Africa or Asia(Ball & Taha, 1982)? To allow an American company to act unethically and r eap the benefits of the profits here means we still have not grasped the fact that this is one earth and one people living on it. There are those that contend that business should only care for the stockholder profits. Such persons ignore the needs or other stakeholders in society (Beauchamp & Bowie, 2004). Others think we should bend a little to get a little. This could lead to one employee handbooks that allow the manager to practice bribery in one country and claim it is illegal in another.
(2006)
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Andre, Meyer, Shanks, and Velasquez
Ethical relativism reminds us that different societies have different moral
beliefs and that our beliefs are deeply influenced by culture. It also encourages us to explore the reasons underlying beliefs that differ from our own, while challenging us to examine our reasons for the beliefs and values we hold.”
My undergraduate degree is in foreign affairs. I refused to work for the Reagan administration’s state department to stay out of Latin America. We do many things to
affect the politics of many countries. We also use our huge wealth to influence our goals and call it democracy. But if the people vote governments into power that we do not agree should have power we redefine the process that election from one-person-one vote to uninformed voter mistake. This is why we are often accessed of being an enemy to peace. The culture we represent thru our business practices is seen as an extension or our governmental practices. As our freedoms are eroded by this war on terror we must remember just what the terrorist are fighting for. They also call it freedom. Andre et al. (2006) But even if the theory of ethical relativism is rejected, it must be acknowledged that the concept raises important issues. Ethical relativism reminds us that different societies have different moral beliefs and that our beliefs are deeply influenced by culture. It also encourages us to explore the reasons underlying beliefs that differ from our own, while challenging us to examine our reasons for the beliefs and values we hold.
Currency must be normalized, legal codes and economic systems must be matched, Languages interpreted and translated, Cultural differences must be understood, Governments must be consulted, and Politics on the ground might increase risk but the way we do these things affect people. If someone hates you enough to strap on a bomb it is a good idea to ask yourself WHY.
