This document provides an overview of international financial management. It discusses key topics like the balance of payments, determinants of entry modes for international business like exports and counter trade, differences between international and domestic finance, events that increased global trade volumes, and trade agreements. International flow of funds is examined, specifically India's balance of trade. Outsourcing is also discussed as having impacted international trade through increased cross-border purchasing.

1. International Financial
Management
PROF. PARVEEN SULTANA

2. Unit-1
International Financial Management
Overview, Nature & scope of IFM, factors leading to fast strides in
international financial functions, MNC-the key participant in
International financial functions, International business &its modes,
IFM and domestic financial management. International flow of
funds: - Balance of payments - structure of BOP, equilibrium,
Disequilibrium and Adjustment

3. Introduction
The main objective of international financial management is
to maximise shareholder wealth.
• Adam Smith wrote in his famous title, “Wealth of Nations”
that if a foreign country can supply us with a commodity
Cheaper than we ourselves can make it, better buy it of
them with some part of the produce of our own in which we
have some advantage

21. International business &its modes
Determinants of entry mode:
A firm adopts various modes for its entry into business transaction across borders, which mode
a firm should adopt depends at least upon four factors. The are
1. Subservience of corporate objectives.
2. Corporate capability
3. Host country environment.
4. Perceived risk(firm would prefer to expand internationally only if the benefits surpass the
anticipated risks)

22. TYPES OF ENTRY MODE
TRADE MODES CONTRACTUAL ENTRY MODE
EXPORTS:
1. DIRECT EXPORTS
2. INDIRECT EXPORTS
COUNTER TRADE:
1. COMMERCIAL
COUNTER TRADE
2. INDUSTRAIAL
COUNTER TRADE

23. Exports
Exports deals with the physical movement of goods and services from one place to another through a custom
port, following the rules of both the country of origin and the destination country.
Depending upon the involvement of exporter, exports are two types:
Direct export:- Direct exporters export their goods and services in their own names and buyer directly remits
proceeds in a proper manner i.e. remittances is made through the banking channels in the currency quoted in
the invoice and through a proper channels i.e. the goods are legally exported through a customs port.
Indirect export:- it supply goods to direct exporters. A lack of expertise, international contacts and manpower
causes them to depend on direct exporters.
Ex:- farmers rarely export grains artisans cannot develop international contacts to clinch business deal. So the
products are exported to other countries but not in their name. export management companies, trading
companies and trade facilitators.

24. Exports: classification of exporters
Depending on the size of
business
Depending on their legal
status
Depending on the destination
of their exports
Depending on the frequency
of the exports
Depending on the product
line exported
• Small exporters
• Large exporters
• Proprietary
• Partnership
• Private ltd
• Public ltd
• Single destination exports
• Multi destination exports such as multi
product, strategic, dimensional ,
operations
• Occasional exporters
• Dynamic exporters
Single line products
Multiple line products

25. Counter trade
Counter trade came into existence in the absence of foreign exchange reserves
in a country. Some times the country is nor willing to pay even though it has
foreign Exchange reserves such an unwillingness will lead to the non-repatriation
of payment . The ultimate solution is to enter in counter trade
practices . Counter trade is classified into 3 types,
1. Pure barter (commercial counter trade). It means product to product
exchange.
2. Buy back (industrial counter trade) it means to buy end product form the host
partner.’
3. Counter purchase. Exchange of goods in various counter until foreign
exchange is found.

26. Counter trade – Pure Barter
Ex: Russia supplied news print and crude oil to India for
decades and in turn India supplied tea, garments, medicines
and tobacco products to Russia at a comparatively low
price, so both the countries enjoyed advantage.

27. Counter trade: Buy back agreements
It is a form of industrial counter trade . A buy back is an arrangement by which the home
country representative sets up a project in the host country, which has sufficient foreign
exchange reserves to fully pay the supplier for the project . Normally the counter period is for
long term varying form 10 to 20 years.
The project amount is paid partially in foreign exchange and the remaining amount is paid in
kind. Usually the home country purchases the end product of the same project at a
comparatively low price. This can be sold in the home country or could be diverted to a third
country in order to maximum the profit margin.
ex: BHEL sets up projects in other countries. It gets partial payments in foreign exchange and for
the balance amount it takes back tankers from the host country and market them in any other
country as well a sell in India at higher prices.

28. Counter trade: purchase agreement
This is a method where in company A from country A supplies product X to country B .
Country B which has a surplus of product Y compensates by supplying it to company A which
finds a market for product Y in the country C.
Country C sells the product Z to country D which has sufficient foreign exchange to pay for it.
Country D can then pay country C and finally country A collects payment routed through
companies B & C.
Thus purchasing takes place against supply until a country with foreign exchange reserves is
found for transactions.
Many MNC use this system to make large amount of money at every stage
of the process.

29. Counter trade: Develop for import arrange
Develop for import arrangements are also a type of
buy back arrangements where the exporters of plant
and machinery participate in the capital of importing
firm & takes the share in the profit . The role of
exporter is much more than in general buy back
agreements.

30. Counter trade: Frame work agreement
Frame work agreements are the long term protocol or
bilateral clearing agreement normally concluded between
Govt. trade is balanced after along period of time as
mentioned in the agreement.
If the trade is not equal in value the debtor sells the agreed
upon commodity in the international market and the
creditor is paid off.
Ex: Mexico sold Cocoa to the USA to pay off its excess
import from Malaysia

31. Merits of counter trade
Bilateral or counter trade has various advantages:
1. A good option for meeting import requirements
2. Helps stabilize the export earnings because it predetermines the size of export and import.
3. Helps stabilize the term of trade
4. Due above two it encourages stability in the development process.
5. helps in trade diversification.
6. It augments the flow of technology to the flow of technology to the developing countries.
7. It is long term in nature so provides other facility also.

32. Demerits of counter trade
1. It is against multilateral trade.
2. Can no control distortion completely.
3. Difficult to sell products are some times traded.
4. Balancing of trade poses serious problems.

33. CONTRACTUAL ENTRY MODE

40. International Finance vs. Domestic Finance
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 share holders. We do not do any different in international fiancé. So the
objective of financial mgmt. remains same for both domestic and international
fiancé i.e. wealth maximization of share holders . Still the analytics of
international fiancé is different from domestic finance.

41. Following are the major differences
1. Exposure to foreign exchange
2. Macro business environment
3. Legal & tax environment
4. Different group of stake holders
5. Foreign exchange derivatives
6. Different standards of reporting
7. Capital management

42. Exposure to foreign exchange
Exchange 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 from customers, investing in plant& 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.

43. Macro business environment
Macro business environment: an international business is
exposure to altogether a different economic and political
environment. All trade policies are different in different
countries. Financial manager has to critically analyse the
policies to make out the feasibility and profitability of their
business propositions. One country may have business
friendly policies and other may not

44. Legal & 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 where story
is written. International finance manger 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.

45. Different group of stake holders
It is not only the money which along matters, there are other thing
which carry greater importance viz. the group of suppliers,
customers, lenders, shareholders etc. why theses group of people
matter? .
It because they carry altogether a different culture , a different set of
values and most importantly the language also may able different.
When you are dealing with those stake holders , you have no clue
about their likes and dislikes . A business is driven by these
stakeholders and keeping them happy is all you need.

46. 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 manger has to be strong enough to calculate the
cost impact of hedging the risk with the help of different
derivatives instruments while taking any financial decisions.

47. Different standards of reporting:
If the business has presence in say US & India , the books of accounts
need to be maintained in US GAAP & 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 another big different . The financial manger or his team
needs to be familiar with accounting standards of different countries.

48. Capital management
In an MNC, the financial managers have ample options of
raising the capital . More number of options creates more
challenges with respect to selection of right source of
capital to ensure the lowest possible cost of capital.

49. INTERNATIONAL FLOW OF FUNDS

50. Balance of payments
The balance of payments is a measurement of all transactions
between domestic and foreign residents over a specified period of
time.
Each transaction is recorded as both a credit and a debit, i.e. double-entry
bookkeeping.
The transactions are presented in three groups –
1. current account,
2. capital account,
3. financial account.

52. Current account
The current account summarizes the flow of funds between one specified country
and all other countries due to the purchases of goods or services, the provision of
income on financial assets, or unilateral current transfers (e.g. government grants
and pensions, private remittances).
A current account deficit suggests a greater outflow of funds from the specified
country for its current transactions.
The current account is commonly used to assess the balance of trade, which is
simply the difference between merchandise exports and merchandise imports.

53. Current account
1. Payments for merchandise and services
Merchandise exports and imports represent tangible products that are transported
between countries. Service exports and imports represent tourism and other
services. The difference between total exports and imports is referred to as the
balance of trade.
2. Factor income payments
Represents income (interest and dividend payments) received by investors on foreign
investments in financial assets (securities).
3. Transfer payments
Represent aid, grants, and gifts from one country to another.

54. Capital account
The new capital account (as defined in the 1993 System of National
Accounts and the fifth edition of IMF’s Balance of Payments Manual)
is adopted by the U.S. in 1999.
It includes unilateral current transfers that are really shifts in assets,
not current income. E.g. debt forgiveness, transfers by immigrants,
the sale or purchase of rights to natural resources or patents

55. Financial account
The financial account (which was called the capital account
previously) summarizes the flow of funds resulting from the sale of
assets between one specified country and all other countries.
Assets include official reserves, other government assets, direct
foreign investments, investments in securities, etc.

56. Capital and financial account
1. Direct foreign investment
Investments in fixed assets in foreign countries
2. Portfolio investment
Transactions involving long term financial assets (such as stocks and bonds)
between countries that do not affect the transfer of control.
3. Other capital investment
Transactions involving short-term financial assets (such as money market
securities) between countries.
4. Errors and omissions
Measurement errors can occur when attempting to measure the value of
funds transferred into or out of a country.

57. International flow of fund
Different countries rely on trade to different extents.
The trade volume of European countries is typically between 30 – 40% of their respective
GDP, while the trade volume of U.S. and Japan is typically between 10 – 20% of their
respective GDP.
Nevertheless, the volume of trade has grown over time for most countries.
In 1975, the U.S. exported $107.1 billions in goods, and imported $98.2 billions. Since then,
international trade has grown, with U.S. exports and imports of goods valued at $773.3 and
$1,222.8 billions respectively for the year of 2000.
Since 1976, the value of U.S. imports has exceeded the value of U.S. exports, causing a
balance of trade deficit

58. INDIA’S FOREIGN TRADE (SERVICES): JUNE, 2014
(As per the RBI Press Release dated 14th August, 2014)
A. EXPORTS (Receipts)
Exports during June, 2014 were valued at US $ 12972 Million (Rs. 77482.66
Crore).
B. IMPORTS (Payments)
Imports during June, 2014 were valued at US $ 7194 Million (Rs. 42970.27
Crore).
C. TRADE BALANCE
The trade balance in Services (i.e. net exports of Services) for June, 2014 was
estimated at US $ 5778 Million.

59. Event that Changes in Trade volumes
◦ In 1998, a 1989 free trade pact between U.S. and Canada was fully phased in.
◦ Passed in 1993, the North American Free Trade Agreement (NAFTA) removes numerous
trade restrictions among Canada, Mexico, and the U.S.
◦ In 2001, trade negotiations were initiated for a free trade area of the Americas. 34
countries are involved.
◦ The Single European Act of 1987 was implemented to remove explicit and implicit trade
barriers among European countries.
◦ Consumers in Eastern Europe now have more freedom to purchase imported goods.
◦ The single currency system implemented in 1999 eliminated the need to convert
currencies among participating countries

60. Events that increased the trade volume
1. Removal of the Berlin Wall: Led to reductions in trade barriers in Eastern Europe.
2. Single European Act of 1987: Improved access to supplies from firms in other
European countries.
3. North American Free Trade Agreement (NAFTA): Allowed U.S. firms to
penetrate product and labor markets that previously had not been accessible.
4. General Agreement on Tariffs and Trade (GATT): Called for the reduction
or elimination of trade restrictions on specified imported goods over a 10-year period across
117 countries.

61. Events that increased the trade volume
5. Inception of the Euro: Reduced costs and risks associated with converting one
currency to another.
6. Expansion of the European Union: reduced restrictions on trade with Western
Europe.
7. Other Trade Agreements: The United States has established trade agreements with
many other countries.

62. Trade Agreements Around the World
◦ In 1993, a General Agreement on Tariffs and Trade (GATT) accord
calling for lower tariffs was made among 117 countries.
Other trade agreements include:
◦ Association of Southeast Asian Nations
◦ European Community
◦ Central American Common Market
◦ North American Free Trade Agreement

63. Friction Surrounding Trade Agreements
◦ Trade agreements are sometimes broken when one country is
harmed by another country’s actions.
◦Dumping refers to the exporting of products by one country to
other countries at prices below cost.
◦ Another situation that can break a trade agreement is copyright
piracy.

64. Impact on outsourcing on trade
1. Definition of Outsourcing: The process of subcontracting to a third
party in another country to provide supplies or services that were
previously produced internally.
2. Impact of outsourcing:
1. Increased international trade activity because MNCs now purchase
products or services from another country.
2. Lower cost of operations and job creation in countries with low wages.
3. Criticism of outsourcing:
1. Outsourcing may reduce jobs in the United States.

65. Managerial decision on outsourcing
1. Managers of a U.S.–based MNC may argue that they create jobs for U.S.
workers.
2. Shareholders may suggest that the managers are not maximizing the MNC’s
value as a result of their commitment to creating U.S. jobs.
3. Managers should consider the potential savings that could occur as a result of
outsourcing.
4. Managers must also consider the possible bad publicity or bad morale that
could occur among the U.S. workers.

66. Trade volumes among the countries
1. The annual international trade volume of the United States is
between 10 and 20 percent of its annual GDP.
2. Trade volume between the United States and Other Countries:
1. About 20 percent of all U.S. exports are to Canada, while 13 percent
are to Mexico.
2. Canada, China, Mexico, and Japan are the key exporters to the United
States. Together, they are responsible for more than half of the value
of all U.S. imports.

67. Factors Affecting International Trade Flows
Inflation
◦ A relative increase in a country’s inflation rate will decrease its current account, as imports
increase and exports decrease.
National Income
◦ A relative increase in a country’s income level will decrease its current account, as imports
increase.
Government Restrictions
◦ A government may reduce its country’s imports by imposing tariffs on imported goods, or
by enforcing a quota. Note that other countries may retaliate by imposing their own trade
restrictions.
◦ Sometimes though, trade restrictions may be imposed on certain products for health and
safety reasons.

68. Factors affecting the international trade
Exchange Rates
◦ If a country’s currency begins to rise in value, its current account balance will
decrease as imports increase and exports decrease.
Cost of Labor:
Firms in countries where labor costs are low commonly have an advantage
when competing globally, especially in labor intensive industries
Note that the factors are interactive, such that their simultaneous influence on
the balance of trade is a complex one.

69. Correcting
A Balance of Trade Deficit
However, a weak home currency may not necessarily improve a
trade deficit.
◦ Foreign companies may lower their prices to maintain their
competitiveness.
◦ Some other currencies may weaken too.
◦ Many trade transactions are prearranged and cannot be adjusted
immediately. This is known as the J-curve effect.
◦ The impact of exchange rate movements on intra-company trade is
limited.

70. J- Effect

71. International capital flow
Capital flows usually represent portfolio investment or direct foreign
investment.
The DFI positions inside and outside the U.S. have risen substantially
over time, indicating increasing globalization.
In particular, both DFI positions increased during periods of strong
economic growth

72. Factors Affecting Direct Foreign Investment
Changes in Restrictions
◦ New opportunities may arise from the removal of government barriers.
Privatization
◦ DFI has also been stimulated by the selling of government operations.
Potential Economic Growth
◦ Countries with higher potential economic growth are more likely to attract DFI
Tax Rates
◦ Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI.
Exchange Rates
◦ Firms will typically prefer to invest their funds in a country when that country’s currency is expected to
strengthen.

73. Factors Affecting
International Portfolio Investment
Tax Rates on Interest or Dividends
◦ Investors will normally prefer countries where the tax rates are relatively low.
Interest Rates
◦ Money tends to flow to countries with high interest rates.
Exchange Rates
◦ Foreign investors may be attracted if the local currency is expected to
strengthen

74. Impact on Govt. policies
1. Restrictions on Imports: Taxes (tariffs) on imported goods increase prices and
limit consumption. Quotas limit the volume of imports.
2. Subsidies for Exporters: Government subsidies help firms produce at a lower
cost than their global competitors.
3. Restrictions on Piracy: A government can affect international trade flows by its
lack of restrictions on piracy.
4. Environmental Restrictions: Environmental restrictions impose higher costs on
local firms, placing them at a global disadvantage compared to firms in other
countries that are not subject to the same restrictions.

75. Impact on Govt. policies
5. Labor Laws: countries with more restrictive laws will incur higher expenses
for labor, other factors being equal.
6. Business Laws: Firms in countries with more restrictive bribery laws may not
be able to compete globally in some situations.
7. Tax Breaks: Though not necessarily a subsidy, but still a form of government
financial support that might benefit many firms that export products.
8. Country Security Laws: Governments may impose certain restrictions when
national security is a concern, which can affect on trade

76. Impact of Balance of trade
How exchange rates may correct a balance of trade deficit:
When a home currency is exchanged for a foreign currency to buy
foreign goods, then the home currency faces downward pressure,
leading to increased foreign demand for the country’s products.
Why exchange rates may not correct a balance of trade deficit:
Exchange rates will not automatically correct any international
trade balances when other forces are at work.

77. Limitation of weak home currency solution
1. Competition: foreign companies may lower their prices to remain competitive.
2. Impact of other currencies: a country that has balance of trade deficit with
many countries is not likely to solve all deficits simultaneously.
3. Prearranged international trade transactions: international transactions
cannot be adjusted immediately. The lag is estimated to be 18 months or
longer, leading to a J-curve effect.
4. Intra-company trade: Many firms purchase products that are produced by
their subsidiaries. These transactions are not necessarily affected by currency
fluctuations.

78. Agencies that Facilitate International Flows

79. International Monetary Fund (IMF)
The IMF is an organization of 183 member countries. Established in 1946, it aims
◦ to promote international monetary cooperation and exchange stability;
◦ to foster economic growth and high levels of employment; and
◦ to provide temporary financial assistance to help ease imbalances of
payments.
◦ Its operations involve surveillance, and financial and technical assistance.
◦ In particular, its compensatory financing facility attempts to reduce the impact
of export instability on country economies.
◦ The IMF uses a quota system, and its unit of account is the SDR (special drawing
right).

80. The weights assigned to the currencies in the SDR basket are as follows:
IMF
Currency 2001 Revision 1996 Revision
U.S. dollar 45 39
Euro 29
Deutsche mark 21
French franc 11
Japanese yen 15 18
Pound sterling 11 11

81. World Bank Group
World Bank Group
Established in 1944, the Group assists development with the primary
focus of helping the poorest people and the poorest countries.
It has 183 member countries, and is composed of five organizations -
IBRD, IDA, IFC, MIGA and ICSID

82. IBRD: International Bank for Reconstruction and Development
Better known as the World Bank, the IBRD provides loans and development
assistance to middle-income countries and creditworthy poorer countries.
In particular, its structural adjustment loans are intended to enhance a
country’s long-term economic growth.
The IBRD is not a profit-maximizing organization. Nevertheless, it has earned a
net income every year since 1948.
It may spread its funds by entering into co-financing agreements with official
aid agencies, export credit agencies, as well as commercial banks

83. IDA: International Development Association
IDA was set up in 1960 as an agency that lends to the very poor developing
nations on highly concessional terms.
IDA lends only to those countries that lack the financial ability to borrow from
IBRD.
IBRD and IDA are run on the same lines, sharing the same staff, headquarters
and project evaluation standards.

84. IFC: International Finance Corporation
The IFC was set up in 1956 to promote sustainable private
sector investment in developing countries, by
◦ financing private sector projects;
◦helping to mobilize financing in the international financial
markets; and
◦providing advice and technical assistance to businesses
and governments.

85. M IGA: Multilateral Investment Guarantee Agency
The MIGA was created in 1988 to promote FDI in emerging
economies, by
◦ offering political risk insurance to investors and lenders; and
◦ helping developing countries attract and retain private investment.

86. ICSID: International Centre for Settlement of Investment Disputes
The ICSID was created in 1966 to facilitate the settlement of
investment disputes between governments and foreign
investors, thereby helping to promote increased flows of
international investment.

87. World Trade Organization (WTO)
Created in 1995, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT).
It deals with the global rules of trade between nations to ensure that trade flows smoothly, predictably and
freely.
At the heart of the WTO's multilateral trading system are its trade agreements.
Its functions include:
◦ administering WTO trade agreements;
◦ serving as a forum for trade negotiations;
◦ handling trade disputes;
◦ monitoring national trading policies;
◦ providing technical assistance and training for developing countries; and
◦ cooperating with other international groups

88. Bank for International Settlements (BIS)
Set up in 1930, the BIS is an international organization that fosters cooperation
among central banks and other agencies in pursuit of monetary and financial
stability.
It is the “central banks’ central bank” and “lender of last resort.
The BIS functions as:
◦ a forum for international monetary and financial cooperation;
◦ a bank for central banks;
◦ a center for monetary and economic research; and
◦ an agent or trustee in connection with international financial operations

89. Regional Development Agencies
Agencies with more regional objectives relating to economic
development include
◦ the Inter-American Development Bank;
◦ the Asian Development Bank;
◦ the African Development Bank; and
◦ the European Bank for Reconstruction and Development.

90. THE END