CH-1

Introduction: International Finance(MNEs)

INTRODUCTION
• What is International finance?

• International finance can be defined in simple terms as the business taking place
between two or more than two countries.
• The concept has gained significance following the opening up of economies the
world over. There has been a consistent increase in international trade over the
years due to increase in population and the ever-extending and diverse needs of
people. The concept of globalization assumes significance in this regard.
OBJECTIVES

After going through this unit, you will be able to:

• Describe the significance of international trade
• Evaluate the finance functions in multinational companies

• Explain balance of payment

IMPORTANCE OF INTERNATIONAL FINANCE

• The international business activities include both trading of goods and services as
well as the international production of goods and services.
• International finance relates to the transaction of different types of currencies
which takes place between different countries as a part of the overall business
transactions. These currencies may belong to different countries, and their values
of exchange may vary from country-to-country and place-to-place. In many
instances, the value or exchange rate may vary between two different banks in
the same place.
Exchange Rate

• What is the exchange rate ?

• What are the reasons that lead to fluctuations in

the exchange rates between two different places?
Exchange rate: The rate at which one unit of domestic
currency can be exchanged for another foreign currency.
Reasons for the existence of global financial environment

• The multinational financial environment comprises of certain factors which have

led to its growth and development. These factors are :
• (a) Specialization of national trade,
• (b) Opening up of economies,
• (c) Globalization of firms,
• (d) Emergence of new forms of business organizations,
• (e) Growth of world trade,
• (f) Need for a process to develop nations.
Specialization of national and international trade

• The possibility of trade between two or more countries that they

specialize in the production of a particular product
Opening up of economies

• The promotion not only of exports but also of imports of required

items was required, so that economies could gain from each other. No
country could specialize in the production of all goods and services
because of the limited availability of resources, and therefore could
enjoy the consumption of even those goods and services which were
not or could not be produced in the country only through trade.
Globalization of firms

• The growth in movement across borders as people, ideas, products,

services, and capital become interconnected
• EX. McDonald’s
Emergence of new forms of business organizations

• There may be several forms of organization such as international

trade, joint ventures, subsidiaries, etc. All these forms of business
organization have made the entry of companies into new and existing
foreign markets much faster
Growth of world trade

• This has led to increased international financial activities because the

production capacities of different countries have increased with the
growth of companies and firms along with the needs of the increasing
population. International trade has grown enormously and is still
growing at a high rate.
Need for a process to develop nations

• The nation depends totally on internal resources and internal

research and development for facilitating growth and development in
the economy. These resources may lead to the development of new
technology or technically superior processes which may be
externalized by specialized nations and exported to less developed
nations or even other developed nations
INTERNATIONAL TRADE

• The trade between different regions of the economy

• Compared to inter-regional trade, international trade refers to trade—
the export and import of goods and services—between the residents
of any two nations
BALANCE OF PAYMENTS

• BOP is an accounting system that measures all economic transactions

between residents (including government) of one country and residents
of all other countries.
• A record of all funds going in and out of a country
• Economic transactions include exports and imports of goods and
services, capital inflows and outflows, gifts and other transfer payments
and changes in a country’s international reserves. It has been well
defined by Kindleberger as ‘a systematic record of all economic
transactions between the residents of the reporting country and
residents of foreign countries during a given period of time.