Dr. NICHOLAS WATSON

International Aspect of Financial Management

 

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.

 

•  Licensing: A firm in one country licenses the use of some or all of its intellectual property (patents, trademarks, copyrights, brand names) to a firm of some other country in exchange for fees or some royalty payment. Licensing enables a firm to use its technology in foreign markets without a substantial investment in foreign countries.

 

• Franchising: A firm in one country authorising a firm in another country to utilise its brand names, logos etc. in return for royalty payment.

 

• Joint ventures: A corporate entity or partnership that is jointly owned and operated by two or more firms is known as a joint venture. Joint ventures allow two firms to apply their respective comparative advantage in a given project.

 

• Establishing new foreign subsidiaries: A firm can also penetrate foreign markets by establishing new operations in foreign countries to produce and sell their products. The advantage here is that the working and operation of the firm can be tailored exactly to the firms needs. However, a large amount of investment is required in this method.

 

• Management contracts: A firms in one country agrees to operate facilities or provide other management services to a firm in another country for an agreed upon fee.

 

NATURE AND SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT

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Like any finance function, international finance, the finance function of a multinational firm has two functions namely, treasury and control. The treasurer is responsible for financial planning analysis, fund acquisition, investment financing, cash management, investment decision and risk management. On the other hand, 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 accounts receivables etc.

 

For maximising the returns from investment and to minimise the cost of finance, the firms has to take portfolio decision based on analytical skills required for this purpose. Since the firm has to raise funds from different financial markets of the world, which needs to actively exploit market imperfections and the firm’s superior forecasting ability to generate purely financial gains. The complex nature of managing international finance is due to the fact that a wide variety of financial instruments, products, funding options and investment vehicles are available for both reactive and proactive management of corporate finance.

 

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.

 

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