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Multinational Financial Management

Comparison beween Multinational Financial Management and Domestic Financial Management?

Discuss evolution and International Financial Management System?

Write Special features of foreign exchange?

Describe the country risk Analysis in International Business?

Short notes on:
(i) Franchise system
(ii) Short term assets and liabilities
(iii) Foreign direct investment

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Multinational Financial Management

  1. 1. INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH (IPER), BHOPAL Submitted to- Prof. Anil Tandon Submitted By- Sandeep patel MBA- IIIrd Sem. Section- I
  2. 2. INDEX S.NO. QUESTIONS 1 Compare Multinational Financial Management and Domestic Financial Management? 2 Discuss evolution and International Financial Management System? 3 Write Special features of foreign exchange? 4 Describe the country risk Analysis in International Business? 5 Write short notes on: (i) Franchise system (ii) Short term assets and liabilities (iii) Foreign direct investment
  3. 3. Ans. Multinational Financial Management  A corporation that operates in two or more countries.  Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in. Domestic Financial Management  Domestic financial management can include financial operations in a home country for a corporation.  In the sense of handling financial matters for a corporation, domestic financial management focuses on issues within home borders.  This can include topics like budgeting, determining sources of revenues, and regulatory compliance with financial issues. For corporations, domestic financial management keeps the company viable in its home nation and creates a firm base for operations. A company with poor domestic finances may have trouble abroad as a result of its financial disorganization. Q.1 Compare Multinational Financial Management and Domestic Financial Management?
  4. 4.  Different currency denominations.  Economic and legal ramifications.  Language differences.  Cultural differences.  Role of governments.  Political risk.  To seek new markets.  To seek raw materials.  To seek new technology.  To seek production efficiency.  To avoid political and regulatory hurdles.  To diversify. What factors distinguish multinational financial management from domestic financial management? Why do firms expand into other countries?
  5. 5. The 1980s and 90s saw a rapid integration of international capital and financial markets. The impetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets. For example, in 1980 Japan deregulated its foreign exchange market, and in 1985 the Tokyo Stock Exchange admitted as members a limited number of foreign brokerage firms. Additionally, the London Stock Exchange (LSE) began admitting foreign firms as full members in February, 1986. Perhaps the most celebrated deregulation, however, occurred in London on October 27, 1986, and is known as the “Big Bang.” On that date, as on “May Day” in 1975 in the United States, the London Stock Exchange eliminated fixed brokerage commissions. Additionally, the regulation separating the order-taking function from the market-making function was eliminated. In Europe, financial institutions are allowed to perform both investment-banking and commercial-banking; functions. Hence, the London affiliates of foreign commercial banks were eligible for member-ship on the LSE. These changes were designed to give London the most open and competitive capital markets in the world. It has worked, and today the competition in London is especially fierce among the world's major financial centers. The United States recently repealed the Glass-Steagall Act, which restricted commercial banks from 10 investment banking activities (such as underwriting corporate securities), fur-ther promoting competition among financial institutions. Even developing countries such as Chile, Mexico, and Korea began to liberalize by allowing foreigners to directly invest in their financial markets. Deregulated financial markets and heightened competition in financial services provided a natural environment for financial innovations that resulted in the introduction of various instruments. Q.2 Discuss evolution and Q.2 Discuss International Evolution Financial and International Management System? Financial System?
  6. 6. The sale proceeds are often used to pay down sovereign debt that has weighed heavily on the economy. Additionally, privatization is often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as 20 per cent. There is no one single way to privatize state-owned operations. The objectives of the country seem to be the prevailing guide. For the Czech Republic, speed was the overriding factor. To accomplish privatization en masse, the Czech government essentially gave away its businesses to the Czech people. For a nominal fee, vouchers were sold that allowed Czech citizens to bid on businesses as they went on the auction block. From 1991 to 1995, more than 1,700 companies were turned over to private hands. Moreover, three-quarters of the Czech citizens became stockholders in these newly privatized firms. In Russia, there has been an ‘irreversible’ shift to private ownership, according to the World Bank. More than 80 per cent of the country’s non- 11farm workers are now employed in the private sector. Eleven million apartment units have been privatized, as have half of the country’s 240,000 other business firms. Additionally, via a Czech-style voucher system, 40 million Russians now own stock in over 15,000 medium- to large-size corporations that recently became privatized through mass auctions of state-owned enterprises. Examples of this innovative instrument include, Currency futures and options, Multicurrency bonds, International mutual funds, Country funds, and Foreign stock index futures and options. International financial management is related to managing finance of MNCs. There are five methods by which firms conduct international business activities– Licensing, Franchising, Joint ventures, Management contracts and establishing new foreign subsidiaries.
  7. 7. A case of an MNC having two subsidiaries
  8. 8. A foreign exchange rate is the price of one currency expressed in terms of another currency. A foreign exchange quotation (or quote) is a statement of willingness to buy or sell at an announced rate. Ans. Features of Foreign Exchange Market The foreign exchange market is the mechanism by which participants: 1. Transfer purchasing power between countries; 2. Obtain or provide credit for international trade transactions, 3. Minimize exposure to the risks of exchange rate changes. 4. Largest of all financial markets with average daily turnover of over $2 trillion! 5. 66% of all foreign exchange transactions involve cross border counterparties. 6. Only 11% of daily spot transactions involve non-financial customers. 7. London is the largest FX market. 8. US dollar involved in 87% of all transactions. Foreign Exchange Rates & Quotations Q.3 Write Special features of foreign exchange? Market Activity – 24hrs
  9. 9. Increasing Turnover Daily Foreign Exchange Market Turnover in billions of US dollars (Bank for International Settlement Triennial Central Bank Survey 2004) Important Currencies
  10. 10. Country Risk Analysis – Defined – “Study of business environment in different countries with an objective of predicting the likelihood of various kinds of risks that businesses operating in those countries may face. The term ‘business environment’ is defined by a certain set of predetermined and observable social, political and economic variables. ” Time and Purpose Country Risk Rating is (i) time and (ii) purpose specific. The time dimension would mean that the concerned Country has been analyzed at a specific point of time and the rating is based on the situation prevailing at the particular point of time. Further, different sets of users would look at different aspects of a country depending on their respective needs. Eg. – (i) An investor in stock market portfolio of country A (ii) A manufacturer exporting his products to country A (iii) An MNC having its production facilities in country A Each of the above users would be interested in knowing different aspects of a country’s social, political and economic performance. Factors affecting Country Risk may be classified as – (i) Economic (ii) Political (iii) Social Q.4 Describe the country risk Analysis in International Business? Factors Affecting Country Risk
  11. 11. Certain specific economic parameters are analyzed while evaluating Country Risks. Here the basic issue is to examine the (i) ability of a country to honor its external obligations and (ii) the possible strain it would put on the exchange rate. It is important to note here that both the above issues would directly depend on the external sector situation. However, external sector of any country cannot be examined in isolation. It is equally important to understand the domestic economy by means of various GDP, Fiscal Policy and Monetary policy related parameters. Again depending upon the time horizon that one is looking at it is important to focus not only on the immediate values of these parameters but also on long term trends as also on the long term sustainability of these trends. The internal economic situation as reflected by the GDP, Fiscal and Monetary variable becomes more important if one is considering a long term involvement by way of FDI in the country. These can be grouped as – (a) GDP related parameters (b) Fiscal sector parameters (c) Monetary policy parameters (d) External sector parameters (1) GDP in nominal and real terms (2) GDP growth rate and its trend over long term (3) Per Capita GDP (4) Sectoral distribution of GDP – Contribution of Primary, Secondary and Tertiary sectors (5) Saving / GDP ratio (6) Investment / GDP ratio (7) Investment / Saving ratio (8) Investment/GDP growth ratio (9) Unemployment EEccoonnoommiicc FFaaccttoorrss Economic Factors (a)GDP related Parameters related Parameters
  12. 12. (1) Deficits – Fiscal, Revenue, Monetized (2) Deficits as % of GDP (3) Tax collection as % of GDP (4) Tax buoyancy (5) Internal Debt / GDP ratio (6) Debt maturity profile (1) Inflation (2) Interest rate (3) All other monetary policy tools such as CRR, SLR, Bank rate – different countries would have different monetary policy tools. (1) Balance of Trade (2) Balance of Payments (3) Composition of Exports and Imports (4) Trends in import and export growth (5) Terms of Trade (6) BOP Deficit /GDP ratio (7) Forex reserves (8) Forex Reserves / imports (9) External Debt – quantum and maturity profile (10) External Debt / GDP (11) Debt Servicing / export earnings (12) Capital flows (13) Exchange rate stability A change in political situation of a country is likely to change the business environment. Some of the important political factors to be looked into would include – (a) System of government – democratic, authoritarian, etc. (b) Major political parties and their ideologies (b) Fiscal Sector Parameter (c)Monetary Policy Parameter External Sector Parameter Political Factors
  13. 13. (c) Party in power, it vision, succession plan, etc. (d) Leading opposition parties and their ideologies and visions (e) Maturity of political institutions (a) Culture and history (b) Values (c) Educational levels (d) Major fault-lines / dividing lines in the society (e) Attitudes towards foreigners, change, technology, profits, etc Apart from the above factors one would also look at conjectural factors such as – (a) Economic and Financial Institutional Set-up (b) Law and order situation (c) Social stability (d) Performance on Human Development Index (e) World opinion about the country (f) Possibilities of war, external and internal aggression, etc. (g) Vulnerability to natural disasters such as floods, earthquakes, etc Social Factors Other Factors
  14. 14. What is a franchise? A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location. Some examples of today's popular franchises are McDonald's, Subway, Domino's Pizza, and the UPS Store. There are many different types of franchises. Many people associate only fast food businesses with franchising. In fact, there are over 120 different types of franchise businesses available today, including automotive, cleaning & maintenance, health & fitness, financial services, and pet-related franchises, just to name a few. If we are thinking about buying into a franchise system, it is important that we understand exactly how franchising works, what fees are involved, etc. An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace. In most states you cannot drive three blocks without seeing a nationally recognized franchise company. Franchising began back in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of Q.5 Write short notes on (i) Franchise system (ii) Short term assets and liabilities (iii) Foreign Direct Investment How Franchising Work
  15. 15. his geographical area, and also provide training to customers, Singer began selling licenses to entrepreneurs in different parts of the country. In 1955 Ray Kroc took over a small chain of food franchises and built it into today's most successful fast food franchise in the world, now known as McDonald's. McDonald's currently has the most franchise units worldwide of any franchise system. Today, franchising is helping thousands of individuals be their own boss and own and operate their own business. Franchising allows entrepreneurs to be in business for themselves, but not by themselves. There is usually a much higher likelihood of success when an individual opens a franchise as opposed to a mom and pop business, since a proven business formula is in place. The products, services, and business operations have already been established. There are many advantages to buying a franchise. Some of these advantages are:  Corporate image - The corporate image and brand awareness of the company is already established. Consumers are always more comfortable purchasing items from a familiar name or company they trust.  Training - The franchisor usually provides extensive training and support to the franchise owner.  Savings in time - Since the franchise company already has the business model in place you can focus on running a successful business. Q.History 5 Write of short Franchising notes on (i) Franchise system (ii) Short term assets and liabilities (iii) Foreign Direct Investment How Franchising Work Advantages of Buying a Franchise History of Franchising
  16. 16. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. 1. Cash available with company 2. Bank balance of the company 3. Debtors of the company after deducting provision for bad debts. 4. Bills receivables or accounts receivables 5. Short term investments of the company 6. Prepaid expenses paid by the company 7. Stock of goods available with the company (which are expected to be sold within a year). A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet. 1. Trade and other payables 2. Short-term borrowings 3. Current tax liabilities 4. Provisions Current assets Current liabilities
  17. 17. Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just to building new facilities. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Foreign Direct Investment Definitions Types
  18. 18. 1. By incorporating a wholly owned subsidiary or company anywhere 2. By acquiring shares in an associated enterprise 3. Through a merger or an acquisition of an unrelated enterprise 4. Participating in an equity joint venture with another investor or enterprise. Methods
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Comparison beween Multinational Financial Management and Domestic Financial Management? Discuss evolution and International Financial Management System? Write Special features of foreign exchange? Describe the country risk Analysis in International Business? Short notes on: (i) Franchise system (ii) Short term assets and liabilities (iii) Foreign direct investment

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