International Financial

Management
WHOLLY OWNED SUBSIDIARY
DEFINITION Subsidiary company whose parent
company owns 100% of the company’s
outstanding common stock.
HOW IT WORKS 1. The parent company owns all the
shares of the company and there
are no minority shareholders.
2. Subsidiary continues to operate with
the permission of the parent
company.
3. Parent company may or may not
have direct input into the subsidiary
management and operations.
4. A company may continue the
operation of a wholly owned
subsidiary rather than merge their
operations.
WHY IT MATTERS? 1. Enable holding companies to
maintain operations, create an
important hedge against changes in the
market, geographic and trade changes
and declines in industry sectors.
Introduction

 The main objective of international financial management is to maximize

shareholder wealth.

 It implies doing of trade and making money through the exchange of

foreign currency.

 Help the organizations to connect with overseas business partners,

customers, suppliers, lenders.

 It also used by government organization and non-profit institutions.

BASIC FUNCTIONS

 Acquisition of funds (financing decision)

 This function involves generating funds from internal as well as external sources.
 The effort is to get funds at the lowest cost possible.

 Investment Decision
 It is concerned with deployment of the acquired funds in a manner so as to
maximize shareholder wealth.
 Other decisions relate to dividend payment, working capital and capital
structure etc.
 In addition, risk management involves both financing and investment decision.
 NATURE AND SCOPE
 Finance function of a multinational firm has two functions namely, control and
treasury:

 Controller deals with the functions related to

 External reporting
 Tax planning and management
 Management Information system
 Financial and management accounting
 Budget planning and control, and
 Account Receivables etc.

 The treasurer is responsible for:

 Financial planning analysis
 Fund acquisition
 Investment financing
 Cash management
 Investment Decision and;
 Risk Management
FACTORS AFFECTING INTERNATIONAL
FINANCIAL MANAGEMENT
 The uncertainty of future exchange rate movements. ($ price)
 Differences in legal systems and tax codes.
 While English is the business language, it is not, however, the world’s
social language.
 Cultural views also shape business.
 As economic system determines how a country mobilizes its resources
to produce goods and services needed by society, as well as how the
production is distributed.
 Country risk refers to political uncertainty associated with particular
country.
 At the extreme, a country’s gov’t. may even expropriate business’s assets within
the country.
 Other actions include; change in tax laws; restrictive labor laws, local ownership,
tariffs and quotas, disallow any cash from subsidiary to parent.
 These types of actions clearly can affect a firm’s cash flow.
IMPORTANCE OF INTERNATIONAL
BUSINESS
 NATIONAL ECONOMY
 To meet imports of industrial needs
 Debt Servicing
 Rapid economic growth
 Profitable use of natural resources
 To face competition successfully better than quality goods production having lower or
moderate prices.
 Increase in employment opportunities.
 Increase national income
 Increase in standard of living of the people

 IMPORTANCE TO EXPORTING FIRM

 Insufficiency of Domestic Demand
 Utilize Installed Capacities
  Legal Restrictions
 Relative Profitability
 Less Business Risk
 Increased Productivity
 Social Responsibility
 Technological Improvements
 Product Obsolescence

 IMPORTANCE FROM OTHER POINTS OF VIEW

 International Collaboration
 International Business Brings Various Countries Closer
 Helps in Maintaining Good Political Relations
MULTINATIONAL CORPORATION

 Usually a large corporation incorporated in one country which produces or

sell goods or services in various countries.

 Is a corporate organization that owns or controls production of goods or

services in one or more countries other than their home country.
MULTINATIONAL CORPORATION
LICENSURE
 It does not require any capital expenditure
 It is not risky
 Payment= a fixed % of sales

 PROBLEM: The mother firm cannot exercise any managerial control over the
licensee (it is independent)

The license may transfer industrial secrets to another

independent firm, thereby creating a rival.
 MULTINATIONAL CORPORATION JOINT
VENTURES
WHAT IS JOINT VENTURE?
THREE FORMS OF JOINT VENTURES
WHY FORM JOINT VENTURE?
Business organization established by
two or more companies that
combines their skills and assets.
1. Is formed by two businesses that
conduct business in a third
country.
2. Joint Venture with a local firm.
3. Joint venture includes local
government.
1. Large capital costs – costs are
too high for a single company.
2. Protection – LDC governments
close their borders to foreign
companies. Joint Ventures
bypasses protectionism.
 PROBLEM Control is divided. The ventures
serves “two masters”
WELFARE EFFECTS 1. The new venture increases
production, lowers price to
consumers.
2. The new business is able to
enter the market that neither
parent could have entered
singly.
3. Cost reductions
4. Increased manpower => not
necessarily good for consumers.
 INTERNATIONAL ENVIRONMENT VS DOMESTIC ENVIRONMENT
 INTERNATIONAL ENVIRONMENT
Refers to marketing and
advertising in another country beyond
the one in which the company was
founded.
They have a profound impact on
company advertising with their
industry.
 DOMESTIC ENVIRONMENT
Includes the climate, the business
policies. Business facilities, business
regulations and rules, logistics, political
setups, style of governance, culture,
tradition, belief system, economy of
the country business operates in.
FOREIGN EXCHANGE RATES

 It is the rate between two currencies at which one

currency will be exchanged for another.
 It is also regarded as the value of one country’s currency
in relation to another currency.
Factors Influencing
Exchange Rates
Inflation:
 A parity between the purchasing power of two currencies establishes the rate of
exchange between the two currencies
 Example: it takes $1.00 to buy one apple in New York and 1.25 euros to buy
apple in Germany. Then the rate of exchange between the USD and the Euro is
€1.25/$1.00 or $.80/euro.

Purchasing power parity theory states that:

 Currency exchange rates vary inversely with their respective purchasing powers.
 Exchange rates between two countries adjust to inflation differential between
two countries.
 Factors Influencing
Exchange Rates (cont’d)
 Interest rates:
 Short-term capital movements from low-yield to high-yield markets.
 Interest rate parity theory:
 The interplay between interest rate differentials and exchange rates
 Interest rates and exchange rates adjust until the foreign exchange market and the
money market reach equilibrium
 Balance of payments:
 A system of government accounts that catalog flow of economic transactions between
the residents of one country and that of others
 Trade surplus or deficit determines strength of currency
Factors Influencing
Exchange Rates (cont’d)
 Government policies:
 Direct or indirect intervention in the foreign exchange market
 For maintenance of the undervalued currency
 Currency values set by government
 Restriction on inflow and outflow of funds
 Monetary and fiscal policies
 Result in inflation and change in value of currency
 Expansionary monetary policies
 Excessive government spending
Spot Rates and Forward Rates

 Spot rate
 Exchange rate at which the currency is traded for immediate delivery
 Forward rates
 Trading of currencies for future delivery
 Reflects the expectations regarding the future value of a currency
 Forward Discount or premium:
 Expressed as an annualized percentage deviation from the spot rate
Foreign Investment Decisions

 Factors encouraging foreign affiliates:

 Avoid trade barriers
 Lower production costs overseas
 Superior technology enabled easy access to resources in developing countries
 Tax advantage
 Motivated by strategic considerations in an oligopolistic industry
 Diversification of risks internationally
 WHY DO THEY FOREIGN INVESTORS
EXPAND THEIR INVESTMENT?
Economist John Dunning has identified 4 Reasons for corporate foreign
investments.

 Market Seeking

 Resource Seeking

 Strategic Asset Seeking

 Efficiency Seeking
Political Risk in Foreign Investment

 Government interference by imposition of unfriendly foreign

exchange restrictions
 Limitation of foreign ownership to a small percentage
 Blocking repatriation of a subsidiary’s profit to the parent firm
 Expropriation of foreign subsidiary’s assets by the host government
Financing International Business
Operations
 Credit sales are influenced by:
 Relationship of the parties involved
 Political stability of countries involved
 Letter of credit issued by importer’s bank reduces risk of
nonpayment
 Credit risk to exporter is absorbed by the importer’s bank
 Importer’s bank in a good position to evaluate the creditworthiness of the
importing firm
Financing International Business
Operations (cont’d)
 Alternatives to avoid risk of loss of business:
 Obtaining export credit insurance
 The Foreign Credit Insurance Association (FCIA) provides this kind of insurance

The insurance provided protects the

purchaser from both commercial risk and
political risk. The Export-Import bank
deals primarily with political risk while
FCIA covers commercial risk.
Funding of Transactions

 Ex-Imbank (Export-Import Bank)

 Direct loan program
 Discount program
 Loans from parent company or sister affiliate
 Parallel loans
 Fronting loans
 Eurodollar loans
 US dollars deposited in foreign banks
 Lending rates based on London Interbank Offer Rate (LIBOR)
Funding of Transactions (cont’d)

 Eurobond market
 Issues are sold in several national capital markets
 Widely used currency – U.S. dollar
 International equity markets
 Companies are listed on major stock exchanges
 Issue American Depository Receipts (ADRs)
 The International Finance Corporation (IFC)
 Approached by companies facing issues with raising equity capital in a foreign
country
Some Unsettled Issues
in International Finance
 Nature of financial decisions for an MNC are complex:

Access to more sources of financing than a purely

domestic corporation
Decision regarding level of leverage in the foreign affiliate
Dividend policy decisions influenced by foreign government
regulations
Differences in interest rates and market conditions
between domestic and foreign markets
Differences in corporate financial practices
 -FIN-

REPORTERS:
Marianne Oclos
Mel Marion Indac
Charmaine Cadag
Florey May Delos Reyes