IFM ASSIGNMENT

1. Article Review: Finance Function in a Global Corporation 2. Case study Blades Inc.: Decision to Expand Internationally

SUBMITTED BY: KANUPRIYA KOHLI 2010090

REVIEW OF FINANCE FUNCTION IN A GLOBAL CORPORATION _By MIHIR A. DESAI_

As corporations go global, capital markets open up within them, giving companies a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to build an advantage, CFOs must balance the opportunities with the challenges of operating in multiple environments. By exploiting their internal capital markets, CFOs can create value in three functions: Financing: A CFO can reduce a group's tax bill by, for example, borrowing in countries with high tax rates and lending to operations in countries with lower rates. But the global CFO needs to be aware of the downsides of strategic financing. Saddling the managers of subsidiaries with debt, for instance, can cloud their profit performance. Risk management: Instead of managing currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations. Doing so, however, can obscure the performance of local units, making it harder for headquarters to assess local managers and easier for financial managers to take purely speculative positions. Capital budgeting: CFOs can add value by getting smarter about valuing investment opportunities. But adopting an overly formal approach may tempt managers to game the system and can lead to an outcome at odds with the company's objectives.

CFOs can help their global finance operations make the most of their opportunities by inventorying their capabilities and ensuring their adaptation to institutional variation and their alignment with organizational goals. To achieve this, a global finance function must

locate decision making at a geographic level where other strategic decisions are made, rotate finance professionals through various institutional environments, and codify practices that can be adjusted to suit local conditions. Thus, with the globalization of corporations and capital markets, companies are gaining a potent means for managing their internal markets so as to achieve arbitrage across national financial markets. In pursuing advantage in this way, CFOs need carefully to balance the opportunities with the challenges of operating in multiple institutional environmentseach of which brings its own legal regime and political risks. CFOs can exploit their internal capital markets to create value in the three areas of financing, risk management, and capital budgeting.

Blades Inc. Case

1. What are the advantages Blades could gain from importing from and or exporting to a foreign country such as Thailand? Ans: The major advantage from importing from countries like, Thailand, which are emerging markets is the supply of materials would be cheaper and the foreign exchange problem could be mitigated. As they have an emerging economy their foreign exchange when compared to US dollar would be less, which can give a firm importing from Thailand an economic advantage and also the economies of scale would be in favour of the importing country. The host government would also encourage these transactions as it would help them to earn foreign currency and also create jobs which would help in boosting their economy. Exporting would have an opposite impact at this stage, as the economy is still at its nascent stage the demand for the companys product would not be large enough to benefit the company. There might be also political risk involved as the local government may initiate protectionist policies to discourage foreign exports and also support local companies. There would also be other cost involved like transportation cost, custom duties and other local taxes which might prevent the company to be competitive in the local market.

2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run? Ans: The disadvantage a company might face is mainly the foreign exchange risk in the short run. As the economy of Thailand is growing, the major area of concern would be the volatility of the foreign exchange. This can impact the cost involved for the company which in turn might affect the profitability. In the long run the disadvantage the company might face would be of increase in the raw material cost which would increase the prices the roller blades. The impact can be felt in the form of reduction in sales and loss in the market share. 3. Which theories of international business described in this chapter apply to Blades, Inc., in the short run and in the long run? Ans: In the short run we can apply Imperfect Market theory as one country has cheap labour and raw material and the other country has technical supremacy. In the long run we can apply product life cycle theory as the US market would saturate after some time and the company has to look for new markets to maintain its sales. Initially Blades Inc might just export and later due to stiff competition might have to open a subsidiary and introduce new offerings to remain in the competition. 4. What long-range plans other than establishment of a subsidiary in Thailand are an open option for Blades and may be more suitable for the company? Ans: The Company may choose to License their product to the local manufacturer or have Franchise in the local market. These two strategies would save company from initial high investment and also from the political and foreign economy risk associated as their exposure to the economy would be less.