Ifm importance pptx

importance of ifm

1. INTERNATIONAL FINANCIAL MANAGEMENT IMPORTANCE OF IFM by V S SARMA ,PROF, MBA VIDYA JYOTHI INSTITUTE OF TECHNOLOGY 1

2. - IFM is having a direct bearing on international trade - Movement of goods correspond to currency transaction - International Trade is the backbone of IFM - Reasons for International Trade: - Resource abundance - Increased Population - High technology – High Production - New form of business INTERNATIONAL FINANCIAL MANAGEMENT 2

3. - Six aspects provide importance to IFM 1) Specialization of some goods and services 2) Opening of new economies 3) Globalization of firms 4) Emergence of new form of business 5) Growth of world trade 6) Development process of Nations INTERNATIONAL FINANCIAL MANAGEMENT 3

4. 1) Specialization of some goods and services - There are several theories of international business which favor international trade. Relevant are discussed hereunder : a) Theory of absolute advantage b) Theory of comparative advantage c) Factor proportion theory d) New trade theory – High fixed costs – increase out put to achieve economies of scale and export INTERNATIONAL FINANCIAL MANAGEMENT 4

5. 1) Specialization of some goods and services (contd..) a) Theory of absolute advantage ( Adem Smith) - If a country is capable of producing goods with lower amount of inputs compared to other countries – produce such goods and export surplus - Import such goods if the country is not efficient to produce ( labour cost of production in hours) - USA :Export cotton, import wine - France : export wine – import cotton - both get benefitted INTERNATIONAL FINANCIAL MANAGEMENT Country I unit of cotton 1 unit of wine USA 10 20 France 20 10 5

6. 1) Specialization of some goods and services (contd..) b) Theory of comparative advantage (David Recardo ) - Comparative Advantage refers to the ability of a country to produce a particular good at a lower marginal cost/ opportunity cost over others - Even if one country is absolute advantage in the production of all goods still gain by trading with others as long as they have relative advantage INTERNATIONAL FINANCIAL MANAGEMENT 6

7. 1) Specialization of some goods and services (contd..) b) Theory of comparative advantage (contd.) Example (units of labour cost for one unit) - Britain: Exports one unit of cloth against one unit of wine. Thus Britain got wine for 100 against 110 to be incurred - Portugal: Exports wine against for one unit of cloth. Thus Portugal got one unit of cloth for 80 against 90 to be incurred Thus both the countries got benefitted in spite of Portugal having absolute advantage INTERNATIONAL FINANCIAL MANAGEMENT country cloth wine Britain 100 110 Portugal 90 80 7

8. 1) Specialization of some goods and services (contd..) c) Factor proportion theory ( Heckscher ) - Export goods that require large amount of production factors that are abundantly available - Import goods that require large amount of their scarce production factors - considers two factors production only INTERNATIONAL FINANCIAL MANAGEMENT 8

9. 1) Specialization of some goods and services (contd..) d) New trade theory - High fixed costs – Economies of scale - Industries with high fixed costs should produce more by specialization (learning curve) - Reap the benefit of economies scale(cost reduction) - Export surplus, exploit world market INTERNATIONAL FINANCIAL MANAGEMENT 9

10. 2) OPENING OF NEW ECONOMIES - Developing countries globalize due to economic pressure being generated by deficient resources - in these countries always there is gap between savings and investments (exports and imports) - Acute BOP problems prompt the countries to promote exports. INTERNATIONAL FINANCIAL MANAGEMENT 10

11. 3) Globalization of firms ` Trade occurs between nations through firms - Exports and FDIs are the means of international trade - Why the firms globalize? a) Theory of competitive advantage b) Theory of imperfect markets c) Product life cycle theory INTERNATIONAL FINANCIAL MANAGEMENT 11

12. INTERNATIONAL FINANCIAL MANAGEMENT 3) Globalization of firms (contd..) THEORY OF COMPETITIVE ADVANTAGE Competitive advantage means owning certain attributes by a firm that allow it to outperform its competitors Attributes - R & D - Innovation in production - Specialization in management styles - Location of the firm Firms having competitive advantage try to expand business 12

13. INTERNATIONAL FINANCIAL MANAGEMENT 3) Globalization of firms (contd..) b) MARKET IMPERFECTIONS If markets are perfect resources move freely Perfect markets: free flow information free mobility of goods & services World markets are highly imperfect because factors of production are not freely mobile Hence firms are encouraged to exploit these resources 13

14. INTERNATIONAL FINANCIAL MANAGEMENT 3 ) Globalization of firms (contd..) c) PRODUCT LIFE CYCLE THEORY Firms evolve into MNCs because of product life cycle theory As the product attain the maturity stage firms resort to ; - exports at first instance and then - open subsidiaries (FDIs) in other countries for manufacture of these products there these goods are repatriated to their own country latter on 14

15. INTERNATIONAL FINANCIAL MANAGEMENT 4 ) EMERGENCE OF NEW FORMS OF BUSINESS Over period of time the forms of business organizations have changed and felicitated the access of firms to foreign markets example: Licensing Franchising Joint ventures Acquisitions Subsidiaries 15

16. INTERNATIONAL FINANCIAL MANAGEMENT 5 ) Growth of world trade Foreign Trade has grown as a result of : Increased production capacities of Nations necessity of Nations Developed countries achieved more production and hence they export They in turn import such goods which enhance the standards of population For developing countries there is a need to import goods, equipment, technology to increase growth 16

17. INTERNATIONAL FINANCIAL MANAGEMENT 6 ) DEVELOPMENT PROCESS OF NATIONS Development process can be through: Internalization : totally depend on internal sources say internal R&D Externalization : pay for external R & D /technology All the above methods help growth But internal R & D takes time External R & D ( technology) is readily available Hence countries resort to purchase new technologies form other countries 17