MS-45

1. MS-45 International business management

2. SESSION UNIT 1 TO 3 | | <document classification>

3. UNIT 1 INTERNATIONAL FINANCIALMANAGEMENT: AN Introduction (MNC) • Beginning in 1980s and accelerating from 1990s onwards, the world has witnessed some fundamental evolution on technological, regulatory and economic policy fronts. Some of the elements of this evolution are: (i) a large scale deregulation, cutting down the system of licenses and permits; (ii) substantial reduction in public sector enterprises and increase in privatization; (iii) increased development and use of information technology: | | <document classification>

4. (iv) a large numbers of mergers, takeovers and buyouts of corporate entities to have better structure and control; and (v) an increasing and more visible adoption of free-market policies in the developing countries etc. This process has brought about competition in all sorts of activities-be they manufacturing selling or providing services | | <document classification>

5. STEPS IN INTERNATIONALIZATION • Starting the internationalization process from exports has certain advantages. Capital needed is low, risk is low and profits are immediate. This phase provides an opportunity to the exporting firm to learn about demand conditions, competitors, financial system abroad and payment and hedging techniques etc. As the learning process matures. Companies expand their marketing and start dealing with foreign distributors leading to setting up of new service facilities and warehouses. | | <document classification>

6. Advantages of MNC • The advantage of creating manufacturing base abroad is that the MNC will be able to realize full sales potential of its product. This enables the firm to keep abreast with newer developments in the market demand, to meet the customer needs faster, to provide better after-sales service and to keep track of the competition which can be outwitted with innovation and R&D efforts. Most firms selling in foreign markets eventually start manufacturing abroad. Foreign production may cover a wide variety of activities such as packaging, finishing, assembling or full manufacture. | | <document classification>

7. FINANCIAL MANAGEMENTINTERNATIONAL The main objective of international financial management is to maximize shareholder wealth. This would require making sound investment and financing decisions that would result in adding value to the firm. One of the main reasons for focusing on shareholder wealth is that the companies who do not do so may be taken over by others. If the shareholder wealth is maximized or, in other words, if share price is made to go up hostile takeover becomes difficult and costly. | | <document classification>

8. Study of international F M • International financial management will involve the study of (a) exchange rate and currency markets, (b) theory and practice of estimating future exchange rate, (c) various risks such as political/country risk, exchange rate risk and interest rate risk(d) various risk management techniques, (e) cost of capital and capital budgeting in international context, (t) working capital management, (g) balance of payment, and (h) international financial institutions etc. | | <document classification>

9. Also, it becomes easier for a company to attract additional capital from the investors if it cares for increasing shareholder wealth. Companies which create more value will have more money to distribute to all stakeholders not only shareholders-be they employees, managers or other beneficiaries in the society. It has been argued, and very rightly so, that maximizing shareholder wealth is not the best way but the only way to benefit all stakeholders. | | <document classification>

10. Theories of product differentiation • The main message is that The third major formulation in the neo-technology school may be countries which innovate and introduce product diversification and product differentiation early would have the comparative advantages in exporting these new products, while the countries who lag behind are able to export only standardized products. In seventies, trade theorists also analyses the important role that the government intervention and the policies played in the determination of production | | <document classification>

11. International trade theories • There are six main theories of international trade which are as follows: • MERCANTILIST’S VIEW • ABSOLUTE ADVANTAGE THEORY • COMPARATIVE ADVANTAGE THEORY • COMPARATIVE COST THEORY • STANDARD THEORY • MODERN THEORY | | <document classification>

12. ECONOMIC INTEGRATION • Economic integration is an agreement among nations to decrease or eliminate trade barriers. Depending upon the terms and intensity of the agreement the economic integration can be classified as a preferential trade arrangement, a free trade area, a custom union, a common market or an economic union,and trade patterns. Indeed, the literature on distortions in the product market and the factor market and the consequent optimum policy responses to make corrections to these distortions have recognised that the trade flows in reality are governed by a complex set of factors which are not fully conceived in classical neoclassical theories of trade. | | <document classification>

13. Indeed, the literature on distortions in the product market and the factor market and the consequent optimum policy responses to make corrections to these distortions have recognized that the trade flows in reality are governed by a complex set of factors which are not fully conceived in classical neoclassical theories of trade | | <document classification>

14. between participating nations to lower trade barriers among themselves. A free trade agreement the participating nations remove the trade Preferential trade arrangement is an arrangement barriers among themselves and each participating nation has autonomy to define its own barriers on trade with non members. | | <document classification>

15. In a custom union each members country lowers as abolish the trade barriers prevailing among member countries and the member countries also adopt a unified system of tariffs while dealing with non members. A more advanced form of economic integration is creation of common market in which the barriers against movement of labour and capital of the member countries in also eliminated. | | <document classification>

16. TARIFF AND NON TARIFF BARRIERS TO TRADE • Tariff are most commonly used as a fool for trade restraint. A tariff is a custom duty • as a tax imposed on imports or exports. Tariff on imports are more common than • exports as most nations would like to increase exports and decrease or restrict import. • Depending on the purpose of the tariff they are classified as a) Protective b) Revenue tariff. | | <document classification>

17. The protective tariffs are imposed from foreign competitors whereas • the objective of revenue tariff is to generate tax revenue for the government. The • protective tariff is mostly used by advanced or developed countries where as revenue • tariff' is used by developing countries. The net effect of tariff is that it makes the • imported goods costlier as compared to domestically produced goods thus giving a • competitive advantage to domestic producers in terms of price. | | <document classification>

18. compound tariff • A compound tariff as a combination of specific and ad valorem tariff. • The multilateral trade negotiations have forced nations across the globe to case trade • barriers specially forcing the nations to lower the tariff rates. These are many • different ways in which the government can restrict trade without using tariffs. | | <document classification>

19. Quotas: • A quota to the limitation set on number of units of a commodity that crosses national boundaries. Depending upon whether a good is imported or exported, the quota is referred to as an import quota or export quota. Import quota imposes a restriction on supply of foreign product, thereby causing its price to rise which in turn make domestic product cheaper. An unilateral quota is a quota imposed by importing country without consultation with the exporting | | <document classification>

20. INTERNATIONAL MONETARYSYSTEM unit-3 international monetary system, refers to the institutions, norms and the entire environment that facilitate the settlement of international payments. Whenever one currency is exchanged for the other, a basic question arises as to how many units of a currency would be foregone to fetch one unit of the other currency. This is the question of the relationship between value of two currencies exchanged.In common terminology, it is known as the exchange rate. | | <document classification>

21. Evolution of finance • Gold standard • Breton wood system • Currency exchange regime Gold standard Gold standard had three forms; One was the gold specie standard in which coins were minted of gold. The paper currency could be converted into gold on demand. The price of gold was fixed under law. | | <document classification>

22. The second form was the gold bullion standard with no compulsion to mint gold coins, Paper currency was not convertible into gold on demand; rather gold bars could be bought from the central bank at fixed rates. The third was the gold exchange standard with no compulsion to mint gold coins, nor the exchange of paper currency into gold either on demand or through purchase of gold bars. | | <document classification>

23. The broad rules of the gold standard were manifest in automatic mechanism for; • 1. Fixed exchange rates • 2. Adjustment in the balance of payments • 3. Domestic price stability | | <document classification>

24. Suspension and Subsequent Abandonment • Gold standard was not tenable during the War. It is because the War needed greater amount of money, but the printing of currency was not possible in view of 100 percent backing of gold behind the currency. So it was suspended. | | <document classification>

25. IMF and the Fixed Parity System • after the abandonment of the gold standard, the exchange rate fluctuated widely. That, in turn, affected the global trade. It is true that the currency areas were created in 1930s. The intro-area exchange rate was fixed, but there was no control on the inter-currency area exchange rate. | | <document classification>

26. Thus in order to bring the situation under control, it was resolved at the Bretton Woods Conference of 1944 to create an international monetary institution that could design the exchange rate system based on then international economic scenario and could have surveillance over it. The IMF carne into being as a Bretton Woods child. | | <document classification>

27. Features of fixed rate parity • In the fixed parity system, each member country was to set a fixed value-called the par value -of its currency in terms of gold or US dollar. It was the par value that determined the rate of exchange between two currencies. Minor fluctuations in the exchange rate within a narrow band of one per cent above and below the established parities could not be ruled out. They were to be corrected through active intervention of the monetary authorities of that country. | | <document classification>

28. It may, however, be mentioned that the fixed parity under the Bretton Woods system was not like that of gold standard of 1880-1914. It was a fixed parity with currency. Or, in other words, could devalue its currency in case of "fundamental disequilibrium" in the balance of payments. Changes up to five per cent did not require prior approval of the IMF. | | <document classification>

29. The purpose of the adjustable peg system was, therefore, to establish a balance between the objectives of stable exchange rates and the macro-economic goals of the countries going for such adjustments as also to help avoid any use of exchange control and trade-restrictive measures. In other words, it brought flexibility in the fixed exchange rate system for the purpose of attaining equilibrium in the balance of payments. | | <document classification>

30. Suspended of Breton wood system • The central bank in many countries held the dollar denominated securities as reserves. But when the US balance of payments began experiencing growing deficits on account of widening trade deficit and outflow of dollar, the real value of dollar turned lower compared to its nominal value. It shook confidence in dollar and the central banks began converting the US dollar denominated securities into gold. | | <document classification>

31. It led to the outflow of gold from the USA that in turn slashed further the real value of dollar. A vicious circle emerged between falling real value of dollar, loss of confidence in dollar, conversion of US dollar denominated securities into gold and the outflow of gold from the USA. The outflow of gold was so huge in August 1971 that the then President Nixon suspended the convertibility of US dollar into gold. This decision threatened the very fundamentals of the fixed parity system. | | <document classification>

32. Types of exchange rate regime • Broadly speaking there are two types of exchange rate. • 1-fixed rate exchange regime • 2- fluctuating exchange rate regime | | <document classification>

33. Types of fixed rate exchange regime • a) Pegging to a single currency • b) Pegging to a basket of currency • c) Pegging to SDRs • d) Currency board arrangement | | <document classification>

34. Types Floating exchange rate • a) Independent floating • b) Managed floating • C) Crawling peg • D) Target – Zone Arrangement | | <document classification>

35. Fixed Exchange Rate • In a fixed exchange rate system, the government of a country can peg its currency the currency of another country. It is normally done in a case where the other currency accounts for a sizeable trade with that country. | | <document classification>

36. A currency can be pegged to a basket of currencies.A few currencies were pegged to SDRs when the latter was more stable. But now no currency is pegged to SDRs. The currency board pegs the domestic currency to another nation's currency and buys and sells foreign currency reserves in order to maintain the parity value. | | <document classification>

37. Floating Exchange Rate • Floating exchange rate is determined by the market forces of supply and demand. A particular currency is subject to fluctuations depending upon the changes in the demand and supply positions. | | <document classification>

38. Floating rate system may be either independent or it may be managed. Theoretically speaking, there is no intervention by the central bank of a country in case of the independent floating. On the contrary, it does occur in a managed floating rate system. | | <document classification>

39. it does occur in a managed floating rate system. But the experiences show that intervention is a common phenomenon irrespective of the system being independent or managed. It is because of this fact that the IMF gives a clarification. If the purpose of intervention is to moderate exchange rate and to check undue fluctuation, it will be an independent floating. But if the central bank intervenes to establish a level for the exchange rate, this will be a case of managed floating. | | <document classification>

40. Crawling Peg • Crawling peg is a compromise between fixed rate and floating rate regimes. The government maintains a fixed rate regime but devalues/re-values the currency periodically in order to keep the exchange rate abreast with the floating rate. With such adjustments, any difference between the real and nominal exchange rates does not last longer. | | <document classification>

41. Target-zone Arrangement Target-zone arrangement is found in case of countries forming some kind of regional monetary union. The intra-union exchange rate is fixed through the help of a common currency, although the member countries do have their own currency. This was the case with the EMU prior to 1999 when the European Currency Unit was the common currency. | | <document classification>

42. But the target-zone arrangement may take another shape when a single currency is in circulation throughout the union substituting the member countries currency. In fact, this is now the case with the EMU. | | <document classification>

43. IMF It is a organization which had established in 1946 under Breton wood system the governments have been caring for liquidity in order to sustain international payments. This might be one of the reasons why mercantilists had advocated for maintaining trade surplus. But it is only since the establishment of the IMF that the issue of international liquidity is being given attention to. The IMF's role in this context needs some explanation in order to have a grasp of the international monetary system. | | <document classification>

44. Reserves with the IMF • The Articles of the Agreement of the IMF provided for the creation of a pool of reserves that was to be financed by the contribution of the member countries. A member country was to contribute to the pool equivalent to its quota that was determined on the basis of the member country's national income, foreign trade, etc. | | <document classification>

45. It meant that the size of the quota in respect of a developed member country was larger than that in case of a developing country. One-fourth of the quota was paid Initially in form of gold and the rest was to be contributed in form of the member's International Monetary own currency, normally in form of non-interest bearing note. | | <document classification>

46. International Monetary This way the pool was created out of which the member countries could borrow to meet their balance of payment deficits, especially when such deficits were beyond their control.System For about first two decades, the funds flowed out of the pool in a big way to support the member countries' balance of payments. But then it was realized that the requirements of the member countries, especially the developing countries were too large to be met by the then size of the resources with the pool. | | <document classification>

47. EXCHANGE RATE ARRANGEMENT International Monetary exchange of commodities under a specific arrangement, known as commodity specie standard, It was followed by gold standard that was a more sophisticated version of the exchange rate arrangement and that had set rules. It enjoyed merits, but at the same time, there were some limitations to that system that led to its suspension System. | | <document classification>

48. Measures of IMF • 1. Creation of an international reserves assets, known as the Special Drawing Rights (SDRs) by amending the Articles of Agreement in 1969. The SD Reserved the purpose of international money but its role was limited to unit of account. • 2. Borrowing from the industrialized countries under the scheme, General Arrangements to Borrow (GAB) that was initiated in 1962. Again, in the wake of the Mexican crisis, the IMF initiated similar scheme, known as the New Arrangements to Borrow (NAB) in 1997. | | <document classification>

49. 3. Again in order to make the system of international liquidity more viable, the IMF decided to reduce the role of gold in the international monetary system. It took concrete shape with the second amendment to the Articles of Agreement that came into force from April 1978. SDRs came to be the principal reserve asset of the world monetary system. The role of gold as a common denominator of the par value of currencies ended in favor of tile SDRs. | | <document classification>

50. 4.SDRs came to be the principal reserve asset of the world monetary system. The role of gold as a common denominator of the par value of currencies ended in favour of tile SDRs. The obligation to use gold in transaction with the IMF came to an end. SDRs replaced gold as a means of payment by the members to the IMF. This means that they were to pay 25 per cent of their quota to the reserves pool not in form of gold but in form of SDRs. The IMF sold 25 million ounces of gold and used the proceeds for the benefit of the poorer developing countries. Similaramount of gold was restituted to the members | | <document classification>