international financial management chapter 3 - international financial market
International Financial Management
Transcript of International Financial Management
The Islamian Business Executives 1
The Islamian Business Executives 2
Group Introduction
“The Islamian Business Executives”
• M.Khalid Aslam 16
• Shahid Amin 38
• Hassan Raza 10
• Tariq Aziz 44
The Islamian Business Executives 3
International financial management
• International business operations very complex .• The financial decision in one locale can affect
operation of subsidiaries in other locale.• Subsidiaries are faced with number of financial
decision wether to, lower price, increase or decrease imports the inventory, speed up or slow down A/R collection.
• So we need to know how MNE’s make financial strategies and techniques to mange their business world wide.
The Islamian Business Executives 4
Key Elements of IFM
• Management of global cash flows
• Foreign exchange risk management
• Capital expenditure analysis
• Capital budgeting
The Islamian Business Executives 5
Objectives of IFM
• Provide assistance to all geographic operations
• Limit financial losses through the use of cash flow guidelines
• Timely execution of FERM strategies
• Prudent capital expenditure
• Careful capital budgeting
The Islamian Business Executives 6
Decision making in MNE’s
• Types of decision– Day to day (operational)– Strategic (long term)
The Islamian Business Executives 7
Who will make decisions?
The Islamian Business Executives 8
Parent-Subsidiary Relationships
• Important area of operations
Finance• Parent company-planning and control
authority
• Subsidiary –Planning and control authority
• Central control to co-ordinate overall operations
The Islamian Business Executives 9
PSR Approaches
• Polycentric
• Ethnocentric
• Geocentric
The Islamian Business Executives 10
Polycentric Approach
• Treating the MNE as a holding company and decentralizing decision making to subsidiary level– Financial statements preparation– Performance evaluation
• Example…..
The Islamian Business Executives 11
Polycentric Approach• Advantages
– On spot decisions– Flexibility– Motivation– Efficiency– Competitiveness
• Disadvantages– Reduces home office authority– Lower overall profit
The Islamian Business Executives 12
Ethnocentric Approach
• Treating all foreign operations as if they were extensions of domestic operations– Integrated planning and control on each units
• Example.....
The Islamian Business Executives 13
Ethnocentric Approach
• Advantages– Co-ordination– Cash management
• Disadvantages– Problems for individual subsidiary
The Islamian Business Executives 14
Geocentric Approach
• Handling financial planning and controlling decisions on a global basis.
• Decisions are influenced by:– Nature and location of subsidiary– Gains
• Examples….
The Islamian Business Executives 15
Geocentric Approach
• Advantages:– Maximum profit – Efficiency
• Disadvantages:
The Islamian Business Executives 16
Managing Global Cash Flows
• Techniques to managing the global cash flows:– Internal funds flows– Funds positioning– Multilateral netting
The Islamian Business Executives 17
Internal funds flows
• MNE’s need funds to expand operations
• Internal sources of funds– Working capital– Borrowing
• Local banks• Parent company• Other subsidiary
– Equity capital investment
The Islamian Business Executives 18
Unilever
Unilever Pakistan
Unilever India
Loan
Interest Payments
Loan
Interest Payments
Dividends, royalties, and fees
Equity capital Investments
The Islamian Business Executives 19
Which method is most likely to be used?
• It depends upon government regulations regarding – Intercompany lending– Licensing or royalty fee
The Islamian Business Executives 20
Funds positioning techniques
• Strategies used to move funds from one multinational operation to another.
• Most common approaches:– Transfer pricing– Tax havens– Fronting loans
The Islamian Business Executives 21
Transfer Pricing
• An internal price set by a company in intrafirm trade– Objective is to maximize profits in low tax rate
country and minimize them in high tax rate country
The Islamian Business Executives 22
Shifting profits by transfer pricing
Arm's length price Transfer price
Country A Country B Country A Country B
Sales $10,000 $12,000 $12,000 $12,000
Cost of Sales 8000 10000 8000 12000
Profit 2000 2000 4000 Nil
Tax rate 800 1000 1600 Nil
Net Profit 1200 1000 2400 Nil
The Islamian Business Executives 23
Transfer Pricing
• Benefits:– Allows to reduce taxes– Allow to concentrate cash in specific locale
• Problems– Inaccurate reflection of subsidiary
performance– Strategy does not encourage efficient
performance by the seller
The Islamian Business Executives 24
Tax havens• Low-tax countries that are hospitable to
business• Characteristics:
– No or nominal taxes– Does not exchange information regarding tax
payers to other countries– Lacks transparency– Does not require substantial productive
operations
The Islamian Business Executives 25
Transfer pricing through tax havens
Country ACountry B (tax
haven)Country C
Sales $8,000 $12,000 $12,000
Cost of Sales 8,000 8,000 12000
Profit ---- ---- ----
Tax rate ---- ---- ----
Net Profit 0 4000 0
The Islamian Business Executives 26
Fronting Loans
• A funds positioning strategy that involves having a third party manage loan.
• Benefits:– Protection of investment from political and
legal roadblocks
The Islamian Business Executives 27
Multilateral Netting
• An internally operated netting process that controls the flow of funds and ensure that bills are paid promptly.
• Clearing account manger is responsible for seeing that this process occurs quickly and correctly.
The Islamian Business Executives 28
German Subsidiary Chilean Subsidiary
Mexican SubsidiaryJapanese Subsidiary
$100,000
$100,000
$100,000
$25,000
$25,000
$25,000
$50,000
$50,000
$150,000
$125,000
$50,000
$50,000
The Islamian Business Executives 29
Net Cash Positions of Subsidiaries
Subsidiary Receivables Payables Net Positions
German $300,000 $225,000 $75,000
Chilean $125,000 $150,000 ($25,000)
Japanese $200,000 $275,000 ($75,000)
Mexican $225,000 $50,000 $25,000
The Islamian Business Executives 30
German Subsidiary Chilean Subsidiary
Japanese Subsidiary Mexican Subsidiary
Central Clearing
Account
$75,000
$75,000
$25,000
$25,000
The Islamian Business Executives 31
Multilateral Netting
• Advantages:– Quick financial interactions b/w the units– Units owed money have faster access to their
funds– Effective cash management– Cost of converting foreign exchange is
minimize
The Islamian Business Executives 32
Multilateral Netting
• Disadvantages:– Government restriction
• Only for trade transactions • Payment delayed until customs clearance
– Less co-operation on the part of manger whose cash outflows are larger than inflows
Besides of these problems, netting process ensures
that inter-subsidiary accounts are balanced.
The Islamian Business Executives 33
Real Case Study
• Motorola’s Global Cash management System
The Islamian Business Executives 34
Q & A