Challenges of International Financial Management

Financial management of a company is a complex process, involving its own methods and procedures. It is made even more complex because of the globalization taking place, which is making the world’s financial and commodity markets more and more integrated. The integration is both across countries as well as markets. Not only the markets, but even the companies are becoming international in their operations and approach.

Managers of international firms have to understand the environment in which they function if they are to achieve their objective in maximizing the value of their firms, or the rate of return from foreign operations. The environment consists of:

1. The international financial system, which consists of two segments: the official part represented by the accepted code of behavior by governments comprising the international monetary system, and the private part, which consists of international banks and other multinational financial institutions that participate in the international money and capital markets.

2. The foreign exchange market, which consists of multinational banks, foreign exchange dealers, and organized exchanges where currency futures are regularly traded.

3. The foreign country’s environment, consisting of such aspects as the political and socioeconomic systems, and people’s cultural values and aspirations. Understanding of the host country’s environment is crucial for successful operation and essential for the assessment of the political risk.

The multinational financial manager has to realize that the presence of his firm in a number of countries and the diversity of its operations present challenges as well as opportunities. The challenges are the unique risks and variables the manager has to contend with which his or her domestic counterpart does not have to worry about. One of these challenges, for example, is the multiplicity and complexity of the taxation systems, which impact the MNC’s operations and profitability. But this same challenge presents the manager with opportunities to reduce the firm’s overall tax burden, through transfer of funds from high- to low-tax affiliates and by using tax havens.

The financing function is another such challenge, due to the multiplicity of sources of funds or avenues of investment available to the financial manager. The manager has to worry about the foreign exchange and political risks in positioning funds and in mobilizing cash resources. This diversity of financial sources enables the MNC at the same time to reduce its cost of capital and maximize the return on its excess cash resources, compared to firms that raise and invest funds in one capital market.

In a real sense MNCs are particularly situated to make the geographic, currency, and institutional diversity work for them. This diversity, if properly managed, helps to reduce fluctuations in their earnings and cash flows, which would translate into higher stock market values for their shares. This observation is especially valid for the well-diversified MNCs.

This is not to suggest that the job of the manager of an MNC is easier, or less demanding, than if he or she were to operate within the confines of one country. The challenges and the risks are greater, but so are the rewards accruing to intelligent, flexible, and forward-looking management. The key to such a management is to make the diversity and complexity of the environment work for the benefit of the firm and to lessen the adverse impact of conflicts on its progress.

Source: Docstoc.com

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