MIRPUR UNIVERSITY OF SCIENCE AND TECHNOLOGY (MUST), MUST Business

School
 INTERNATIONAL FINANCE
MC-639

LECTURE 1: INTRODUCTION TO INTERNATIONAL FINANCE COURSE OUTLINE

AND Multinational Financial
Management: An Overview

Nadia Murtaza
(Lecturer)

Date: April 23, 2020

 COURSE DESCRIPTION
This course of International Finance has following purpose:

The course aims at providing a solid understanding of international finance within a complex capital markets context. Topics in financial

management, viewed primarily from the perspective of managers doing business overseas, include the management of foreign
exchange exposure, foreign direct investment decisions, and multinational capital budgeting. Other topics covered include
trends in international banking, the balance of payments, the determination of exchange rates, International Financial Crisis, and
the Asian meltdown. We will also examine the challenges and problems faced by firms planning on doing business in Pakistan.
• The main questions addressed:

Explain the organisation and institutional details of foreign exchange and international money markets.
How to apply orthodox theories of exchange rates.
Analyse the causes of historical exchange rate movements, and some of the contributory factors to a variety of financial crises,
with reference to the models covered.
How does international Arbitrage function?
How exchange rate is determined? How is it estimated?

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 COURSE OBJECTIVES

Objective of this course is Active Learning:

Learning should be an active experience. Students who passively listen to lectures, copy
someone else’s notes, and limit their readings to the bare minimum are unlikely to
develop their critical thinking potential and expand their personal knowledge system.

For this course, it is strongly recommended to keep yourself up to date through

newspapers such as the Financial Times, and weekly magazines, such as the Economist.

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 COURSE SCHEDULE
Till Mid Term
•Multinational Financial Management: An Overview
•International Flow of Funds
•International Financial Markets
•Exchange Rate Determination
•Currency Derivatives
•Government Influence on Exchange Rates
After Mid Term
•International Arbitrage and Interest Rate Parity
•Relationships among Inflation, Interest Rates, and Exchange Rates
•Forecasting Exchange Rates
•Managing Transaction Exposure
•Managing Economic Exposure and Translation Exposure
•Multinational Capital Budgeting

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 COURSE TEXTBOOKS

• International Financial Management (ninth edition)

By Jeff Madura
• International Financial Management
By Thummuluri Siddaiah

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 GRADING POLICY

Mid Term: 30%

Quizzes: 10%

Assignments: 10%

Final Exam: 50%

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 HOMEWORK & ASSIGNMENT POLICY

Assignment policy will be assessment-based activities and home tasks.

Assignment 1:Make list of Pakistani firms doing business internationally (all
modes), Summarize the article “The political economy of International
Finance Corporation lending” by F.Lang, Katharina & Richert
Assignment 2: Detailed analysis of economic survey of Pakistan,
Analysis of Slow Trade: Structural and Cyclical Factors in Global Trade
Slowdown by Jouchi Nakajima, Kosuke Takatomi, Tomoko Mori &
Shinsuke Ohyama

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 Multinational Financial
Management: An Overview
The specific objectives of this chapter are to:
■ identify the management goal and organizational structure of the
MNC,
■ describe the key theories that justify international business,
■ explain the common methods used to conduct international
business, and
■ provide a model for valuing the MNC.

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 Multinational Financial
Management: An Overview

Multinational Corporation (MNC)

Foreign Exchange Markets

Exporting & Dividend Remittance & Investing

Importing Financing & Financing

International
Product Subsidiaries Financial
Markets
Markets

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Managing the MNC
• The commonly accepted goal of an MNC is to maximize shareholder wealth.
• Facing Agency Problems
Managers of an MNC may make decisions that conflict with the fi rm’s goal to
maximize shareholder wealth. This conflict of goals between a fi rm’s managers and
shareholders is often referred to as the agency problem. The costs of ensuring that
managers maximize shareholder wealth (referred to as agency costs) are normally
larger for MNCs than for purely domestic fi rms for several reasons.
First, MNCs with subsidiaries scattered around the world may experience larger
agency problems because monitoring managers of distant subsidiaries in foreign
countries is more difficult. Second, foreign subsidiary managers raised in different
cultures may not follow uniform goals. Third, the sheer size of the larger MNCs can
also create large agency problems.

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How SOX Improved Corporate
Governance of MNCs?
Enacted in 2002, the Sarbanes-Oxley Act (SOX) ensures a more transparent process for
managers to report on the productivity and financial condition of their firm. It requires
firms to implement an internal reporting process that can be easily monitored by executives
and the board of directors. Some of the common methods used by MNCs to improve their
internal control process are:
• Establishing a centralized database of information
• Ensuring that all data are reported consistently among subsidiaries
• Implementing a system that automatically checks data for unusual discrepancies relative
to norms
• Speeding the process by which all departments and all subsidiaries have access to the
data that they need
• Making executives more accountable for financial statements by personally verifying their
accuracy
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Why Firms Pursue International
Business
• The commonly held theories as to why fi rms become motivated to
expand their business internationally are
(1) the theory of comparative advantage,
(2) the imperfect markets theory, and
(3) the product cycle theory

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Theory of Comparative Advantage
• Multinational business has generally increased over time. Part of this growth is due to the heightened
realization that specialization by countries can increase production efficiency. Some countries, such as
Japan and the United States, have a technology advantage, while other countries, such as Jamaica,
Mexico, and South Korea, have an advantage in the cost of basic labor. Since these advantages cannot be
easily transported, countries tend to use their advantages to specialize in the production of goods that
can be produced with relative efficiency. This explains why countries such as Japan and the United States
are large producers of computer components, while countries such as Jamaica and Mexico are large
producers of agricultural and handmade goods. MNCs such as Oracle, Intel, and IBM have grown
substantially in foreign countries because of their technology advantage.
• When a country specializes in some products, it may not produce other products, so trade between
countries is essential. This is the argument made by the classical theory of comparative advantage.
Comparative advantages allow fi rms to penetrate foreign markets. Many of the Virgin Islands, for
example, specialize in tourism and rely completely on international trade for most products. Although
these islands could produce some goods, it is more efficient for them to specialize in tourism. That is, the
islands are better off using some revenues earned from tourism to import products rather than
attempting to produce all the products that they need.

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Imperfect Markets Theory
If each country’s markets were closed from all other countries, there would be no
international business. At the other extreme, if markets were perfect, so that the
factors of production (such as labor) were easily transferable, then labor and other
resources would flow wherever they were in demand. The unrestricted mobility of
factors would create equality in costs and returns and remove the comparative cost
advantage, the rationale for international trade and investment.
However, the real world suffers from imperfect market conditions where factors of
production are somewhat immobile. There are costs and often restrictions related
to the transfer of labor and other resources used for production. There may also be
restrictions on transferring funds and other resources among countries. Because
markets for the various resources used in production are “imperfect,” MNCs such as
the Gap and Nike often capitalize on a foreign country’s resources. Imperfect
markets provide an incentive for firms to seek out foreign opportunities.

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Product Cycle Theory
One of the more popular explanations as to why fi rms evolve into MNCs is the
product cycle theory. According to this theory, fi rms become established in the
home market as a result of some perceived advantage over existing
competitors, such as a need by the market for at least one more supplier of the
product. Because information about markets and competition is more readily
available at home, a fi rm is likely to establish itself fi rst in its home country.
Foreign demand for the fi rm’s product will initially be accommodated by
exporting. As time passes, the fi rm may feel the only way to retain its
advantage over competition in foreign countries is to produce the product in
foreign markets, thereby reducing its transportation costs. The competition in
the foreign markets may increase as other producers become more familiar
with the firm’s product. The fi rm may develop strategies to prolong the foreign
demand for its product. A common approach is to attempt to differentiate the
product so that other competitors cannot offer exactly the same product.

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