Challenges in IFM

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:

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.

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

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 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.

Recent changes in IFM

Emergence of Euro market in 1960‘s the major cause for development and growth of IFM. This market resulted in

  • A series of parallel money markets free from regulations
  • led to internationalization of banking business and
  • Emergence of innovative funding techniques and

International financial markets have undergone rapid and extensive changes in the recent past.

  • Dramatic events in global financial markets, including the Asian crisis, the Russian crisis, and the near-collapse of Long Term Capital Management (LTCM), in 2008, in US and other European countries which was a highly leveraged hedge fund with enormous trading
  • Remarkable developments in stock prices around the world, and in particular in stocks in the telecommunications and internet sectors. Many of these so-called "tech. stocks", which experienced sharp price increases in late 1999 and early
  • After 1980‘s the pace of change has become too This period saw emergence of new financial instruments, securities, methods of settlement and persons involved in the market. Development of information and communication technology furthered the change process

Emergence of Euro market

 In 1960‘s this is the major cause for development and growth of IFM This market resulted in

  • A series of parallel money markets free from regulations.
  • led to internationalization of banking business and
  • emergence of innovative funding techniques and securities

Introduction of Floating Exchange Rate

Introduced in 1973, another important change, which resulted in volatility. This increased risk in exchange rates to both borrowers and lenders. To manage risk new institutions and products emerged like futures, swaps, options etc. Reduction in the traditional income of banks like interest, commission brokerage etc. compelled them to introduce new products and services, which often the banks themselves cannot understood.

Integration among the different financial markets

Is another remarkable change taken place in 1980‘s is the integration among the different financial markets in different countries. Integration resulted in

  • Reducing the gap between local, regional, national and offshore financial markets led to the creation of a unified, globalised financial markets
  • Increasing the rate of growth of financial systems than that of production
  • Establishment of branches of banks and financial institutions of developed and industrial countries in other countries
  • Establishment of branch banks in different countries and permission to tap the national financial markets
  • Integration among the financial markets of industrialized countries like US, Japan and Europe
  • Resulted in reducing the gap between the financial markets of different advanced countries

Functional unification

Different kinds of financial institutions serve different kinds of financial services. Financial institutions were divided as commercial banks, investment banks, EXIM banks etc.

Recently these functional specializations became unimportant and financial institutions started to render wide range of services instead of specializing one or two tasks.

Thus recently, there is a spatial and functional integration

Major reasons for these changes are

  • Liberalization in cross boarder financial transaction
  • Deregulation within the financial system of the major industrialized nations

Major liberalization steps include:

  • Lifting exchange controls in UK, France and Japan (other nations like US, Germany, Switzerland etc, which were already liberalized)
  • Removal of tax on interest paid for non-resident
  • Opening up of domestic financial markets to foreign borrowers
  • Allowing domestic borrowers to borrow from foreign markets

Liberalization and Deregulation

This helped portfolio investors to invest their funds in a wide range of assets over different parts of the world, on their own risk, on their own estimates.

This helped the borrower in borrowing funds economically from different parts of the world at competitive level, minimizing all costs.

Competition in international financial markets resulted in efficient and effective operations.

Emergence of international financial markets stock markets etc., resulted reducing the importance of national markets. Another remarkable change was in the field of securitization and disintermediation.

Competition resulted financial service industry also.

Borrowers began to borrow directly by issuing new variety of securities like depository receipt etc. The importance of intermediaries reduced and resulted in disintermediation.

Underwriting commission, brokerage etc reduced and the hegemony of US financial institutions also reduced.

One aspect of this securitization process has been the increase in corporate bond issue, which has also coincided with a diminishing supply of government bonds in many countries, particularly in the United States.

Emergence and development derivative markets

Is another interesting development. Rapid advances in technology, financial engineering, and risk management are major reasons.

These helped to enhance both the supply of and the demand for more complex and sophisticated derivatives products.

Increased use of derivatives to adjust exposure to risk in financial markets has also contributed to the rise in speculation in securities.

The leveraged nature of derivative instruments increased risks to individual investors.

Derivatives also provide scope for a more efficient allocation of risks in the economy, which is beneficial for the functioning of financial markets, and hence enhances the conditions for economic growth.

Launch of Euro

Euro launched in 1st January 1999 was a historic event. 11 national currencies were converted into one single currency overnight. This marked the start of a period of profound change in Europe's financial settings. The successful launch of the euro, resulted in the creation of a stable, prosperous and peaceful Europe, and boosted the integration of financial markets in the euro area. This process of integration in European financial markets coincided with the trend towards globalization

Matters of Concern

Liberalization and globalization still continue imposing more and more changes and creating more and more challenges

Still some countries and governments indirectly control the flow capital through taxes and other kinds of regulations

Excessive speculation, hoarding and profiteering in the international financial market is rampant Greedy nature of operations have resulted in the collapse several well-known financial institutions and several such institutions have to be rescued by the government


Unprecedented development in international financial markets

Due to the liberalization of markets, rapid technological progress and major advances in telecommunications

This has opened new vistas for investment and financing opportunities for businesses and people around the world, and easier access to global financial markets for individuals and corporations

This has led to a more efficient allocation of capital, paving way to economic growth and prosperity.