International Finance and Development (B 645) D.K. Malhotra

Introduction to International Finance Meaning of International Finance Multinational Firm Why study International Finance? Why Companies go Global? Modes of International Business

Meaning of International Finance What is International Finance? A study of the institutions, policies, and practices that govern global financial management and/or financial aspects of global business A firm that is engaged in cross-border business is defined as Multinational Corporation

Why Study International Finance? International business distinguishes itself from domestic business due to Exchange Rate Cross-border Barriers Economic barriers Cultural barriers Political and Legal barriers Ethical Issues Financing Opportunities in Global Market

Exchange Rate Risk Changing value of U.S. dollar versus other currencies since 1973 Declining dollar good for U.S. exporters, but bad for imports Rising dollar good for U.S. imports/outsourcing, but bad for exports

Economic Barriers Tariffs, Import Duties, Quota Restrictions Restrictions on remittance of profits and repatriation of capital Restrictions on foreign equity participation Trading blocks

Cultural Barriers Language Examples of Language Barriers “Please leave your values at the desk” (France) “The manager has personally passed all the water served here” (Mexico; to assure safety of drinking water at the hotel) “You are invited to take advantage of the chambermaid” (Japan) “Ladies are requested not to have children in the bar” (Norway) “Because of the impropriety of entertaining guests of the opposite sex in the bedroom, it is suggested that the lobby be used for this purpose” (Switzerland) “We will execute customers in strict rotation.” (Greece)

Cultural Barriers Contd… Hand Gestures Religion Hinduism Islam Judaism Christianity Buddhism Significance of Religion and Values Customs/Traditions

Political/Legal Barriers Political Ideology Opinions of Political Leadership Civil disorder External relations Attitude towards foreign capital Legal System

Ethical Barriers Definition of “Ethics” in your country versus definition of “Ethics” in a foreign country Ethics and the society Firm’s role in education Firm’s role in health care Ethics and the environment

Who should study international finance? A company that engages in global business A pure domestic company

Why companies go global? To seek raw material To seek new markets To minimize cost Overall goal, shareholder wealth maximization

Modes of International Business Exporting Licensing Franchising Joint Ventures Direct Foreign Investment