Multinational companies and the importance of international financial management
The amazing development of the transportation system and the internet has enabled an increase of cross-country flow of goods, services, and funds. Companies nowadays can do business beyond domestic boarders. Cross-border exchange of goods, services, and fund has become more and more complex due to the involvement of diverse currencies in international transactions.
Our paper writing will define what a multinational company is, how international finance is different from domestic finance, and why international financial management is important in doing business in the global market.
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But how does the international finance differ from purely domestic finance? According to Resnick in International Financial Management, “three major dimensions set international finance apart from domestic finance: foreign exchange and political risks, market imperfections, and opportunity set” (Resnick, 2012). These major dimensions of international finance are the result of the sovereignty of every independent nation or group of nations to issue its own currency, set up its own economic policies, impose taxes, and regulate the flow of goods and capital across its boarders. Cross-border transactions involve at least two different currencies of different values. Economic transactions between different countries with different currencies demand currency conversion. For example, to purchase goods and services produced by a U.S company, a Mexican buyer needs to convert peso, Mexican currency, into dollar according to a certain rate that is to be determined.
The conversion of one currency into another is done by what is called foreign exchange market. It is the market in which participants are able to buy, sell, exchange, and speculate on currencies. They are the largest financial market in the world made up of banks, commercial companies, central banks, investment management firms, hedge funds, and forex retail brokers and investors (Investopedia.com: Foreign Exchange Market). It is vital for companies that deal with international transactions to have good knowledge of the foreign exchange market and how it functions in order to be able to make an effective scanning of risks of the market.
Another issue that multinational companies may encounter in an international setting in the process of their business operations is political risks. Political risks arise when there is a change in a sovereign nation’s laws or a change of regime that could negatively affect foreign companies doing business in that nation. It could be unexpected changes in tax rules, monetary policies, or goods and services inflow or outflow. Political risks can also arise due to the fact that not every nation believes in a free trade; even though, Dani Rodrik his book, The Globalization Paradox, believes, “free trade benefits all sides; it’s not a zero-sum” (Rodrik, 2011). Two examples illustrate some kinds of political risks. In 1962, a U.S Houston-based energy company, the Enron Development Corporation, signed a contract to build in India a power plant that was supposed to be the largest in India. In 1995, the project was canceled, after Enron had spent nearly $300 million, by nationalist politicians who argued that India did not need the power plant. This constitutes a huge loss for Enron Development Corporation. The second example of political risk to mention is the meltdown of Yukos, the largest Russian oil company by the Russian authorities. The company was charged with tax evasion that amounted to US$27 billion, and forced into bankruptcy in 2004, thus inflicted...