INTRODUCTION TO INTERNATIONAL FINANCE MANAGEMENT (IFM)
अंतरराष्ट्रीय वित्तीय प्रबंधन : परिचय
AN OVERVIEW OF INTERNATIONAL FINANCE MANAGEMENT (IFM)
International financial management is also known as “international finance”.
International finance is the set of relations for the creation and using of funds (assets), needed for foreign economic activity of international companies and countries. Assets in the financial aspect are considered not just as money, but money as the capital, i.e., the value that brings added value (profit). Capital is the movement, the constant change of forms in the cycle that passes through three stages: the monetary, the productive, and the commodity. So, finance is the monetary capital, money flow, serving the circulation of capital. If money is the universal equivalent, whereby primarily labor costs are measured, finance is the economic tool.
The definition of international finance is the combination of monetary relations that develop in process of economic agreements – trade, foreign exchange, investment – between residents of the country and residents of foreign countries.
अंतर्राष्ट्रीय व्यापार, विनिमय अथवा विनियोग जो कि एक निवासी देश और अन्य भिन्न देश के बिच संपन्न होता है से सम्बंधित मौद्रिक मामलातों के समूह को अंतर्राष्ट्रीय वित्त के नाम से जाना जा सकता है |
Financial management is mainly concerned with how to optimally make various corporate financial decisions, such as those pertaining to investment, capital structure, dividend policy, and working capital management, with a view to achieving a set of given corporate objectives.
When a firm operates in the domestic market, both for procuring inputs as well as selling its output, it needs to deal only in the domestic currency. When companies try to increase their international trade and establish operations in foreign countries, they start dealing with people and firms in various nations. On this regards, as different nations have different currencies, dealing with the currencies becomes a problem-variability in exchange rates have a profound effect on the cost, sales and profits of the firm.
Globalization of the financial markets results in increased opportunities and risks on account of overseas borrowing and investments by the firm.
It is determination of exchange price when different business units within a firm exchange the products and services
Transfer pricing is
- the process of setting transfer prices between associated enterprises or related parties where at least one of the related parties is a non-resident.
- the price at which an enterprise transfers goods and services, intangible and intangible assets, services or lending/ borrowing money to associated enterprises.
- generally decided prior to entering the transaction and they are audited/ reviewed by the auditor after the year finalization.
Methods of Transfer Pricing
- Variable Cost Method Transfer price = variable cost of selling unit + markup
- Full Cost Method Transfer price = Variable Cost + allocated fixed cost
- Market Price Method Transfer price = current price for the selling unit ‘s in the market Negotiated Price Method
Strategic Factors of Transfer Pricing
- International Transfer Pricing Consideration
- Tax Rate- minimize taxes locally as well internationally
- Exchange Rate
- Custom Charges Risk of expropriation
- Currency Restriction
- Strategic relationship
- Assist bayside division to grow
- Gain entrance in the new country
- Supplier ‘s quality or name
Reason for growth in international business
International business has growth dramatically in recent years because of strategic imperatives and environmental changes.
- १. Saturation of Domestic Markets घरेलू बाजारों का पूर्णता को छुना
- २. Opportunities in Foreign Markets विदेशी बाजार में अवसर मिलना
- ३. Availability of Low-Cost Labor कम लागत के श्रम कि उपलब्धता
- ४. Competitive Reasons प्रतियोगी कारण
- ५. Increased Demands मांग का बढ़ना
- ६. Diversification विभेद करण
- ७. Reduction of Trade Barriers व्यापारिक प्रतिबंधों क कम होना
- ८. Development of communications and Technology संचार एवं तकनीक में विकास
- ९. Consumer Pressure उपभोक्ता का दबाव
- १०. Global Competition वैश्विक प्रतियोगिता
Importance of IFM (अंतरराष्ट्रीय वित्तीय प्रबंधन: परिचय)
All the major economic functions-consumption, production and investment-are highly globalized. Hence it is essential for financial managers to fully understand vital international dimensions of financial management. Proper management of international finances can help the organization in achieving same efficiency and effectiveness in all markets. Hence without IFM, sustaining in the market can be difficult.
Six aspects provide importance to IFM
- Specialization of some goods and services कुछ वस्तुओं और सेवाओं कि अपनी विशिष्टता
- Opening of new economies नयी अर्थव्यवस्थाओं का खुलना
- Globalization of firms फर्मो का वैश्विकरण
- Emergence of new form of business व्यापार के नवीन आयामों का आगाज
- Growth of world trade वैश्विक व्यापार का विकास
- Development process of Nations राष्ट्रीय प्रक्रियाओं का विकास
Nature and Scope of International Financial Management
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.
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 changes, micro level economic indicators, savings, consumption pattern, interest preference, investment behavior 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.
Nature of the financial Management
- IFM is concerned with financial decisions taken in international business.
- IFM is an extension of corporate finance at international level.
- IFM set the standard for international tax planning and international accounting
- IFM includes management of exchange rate risk.
- IFM includes working capital management of multinational enterprises.
Scope of the financial Management:
Scope of IFM includes
- Foreign exchange markets, international accounting, exchange rate risk management etc.
- It also includes management of finance functions of international business.
- IFM sorts out the issues relating to FDI and foreign portfolio investment.
- It manages various risks such as inflation risk, interest rate risks, credit risk and exchange rate risk.
- It manages the changes in the foreign exchange market.
- It deals with balance of payments in global transactions of nations.
- Investment and financing across the nations widen the scope of IFM to international accounting standards.
- It widens the scope of tax laws and taxation strategy of both parent country and host country.
- It helps in taking decisions related to international business.
International Financial Management Different from Financial Management at Domestic Level The important distinguishing features of international finance from domestic financial management are discussed below:
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. Thus, changes in the exchange rates of foreign currencies results in foreign exchange risks.
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.
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 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.
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.
Tax and Legal system
Tax and legal system vary from one country to another country and this leads to complexity in their financial implications and hence give rise to tax and legal risks.
Inflation rate differs from country to country. Higher inflation rates in few countries denote inflation risks.
Major Turmoil Influencing International Financial Market
Frictions on International financial market can be in the form of
With the help of different controlling procedures, government tries to control international financial flows like maintaining the multiple exchange rates, taxes on international flows and constructs on outflow of funds. These slower the pace of international/foreign investment flows
Different tax laws
Capital gains, interest income, dividend and other financial transactions reduce the post tax returns and thus restrict the scope of international portfolio investment.
Implicit and explicit transaction costs
Trading fees/commission, bid ark speared is a form of Implicit and explicit transaction which affects the International financial market. The transactions costs is less in developed countries compared to newly market economies/countries. Transactions costs per unit decreases when the size of transaction is large. However, small investors are not benefited from this strategy.