Managerial Finance

Department of Management Sciences
COMSATS University Islamabad

Abbottabad Campus
SUBJECT:
Managerial Finance
Assignment # 04
Submitted by:
Abdul Latif SP21-RMB-012
Submitted to:
Dr. Faiza Sajjad
Dated:
24/10/2022
Explain differences between Multinational versus Domestic Financial Management
Multinational corporations operate in two or more countries while domestic companies restrict
their operations to a single country. The reasons companies expand to other countries vary. Some
companies do it to seek new markets, others to find resources, yet others to reduce costs. All
multinational companies learn to handle the special challenges of multinational financial
management. Eugene F. Brigham and Phillip R. Davies suggest, in their advanced corporate
finance textbook Intermediate Financial Management, there are six main differences that set apart
multinational financial management from domestic financial management.
different economic and legal structure
Companies that expand to other countries must take to heart the medieval saying: when in Rome
do as the Romans. Different countries have different legal structures, financial methods and
customs, and a multinational corporation must learn how to adapt to these differences. For
instance, a company in the United States might use the Securities Exchange Commission generally
accepted accounting principles, GAAP, but may have to change to the international financial
reporting standards when it has subsidiaries in other countries.
different currency denominations
Multinational corporations must do business with different currencies depending on where their
subsidiaries are located. This involves dealing with the cost and inconvenience of exchanging
currencies when transferring funds between countries.
different languages
Multinational companies must generally deal with several languages through their everyday
operations. For instance, a company with a subsidiary in Spain may have to carry out business in
Spanish, Catalan, Galician or in the Basque language depending on where in Spain its offices are
located. This generates extra costs and paperwork because you have to translate company policies,
forms and even telephone conversations to two or more languages.
cultural differences
Successful multinational companies must be flexible enough to adapt to local culture and
preferences. The cultural differences may vary how a product is marketed; for instance, changing
a slogan that is unsavory or ineffective when translated, or by changing the product itself. For
example, McDonald's will vary its menu to adapt to differences in the local palate: in Italy
McDonald's serves pasta and in Nicaragua rice and beans.
role of governments
Not all governments deal with multinational companies in the same way. Some place burdensome
tariffs on foreign corporations, while others welcome them with open arms and provide financial
incentives in exchange for the new jobs the corporation generates. Governments also vary in their
respective levels of corruption, efficiency and bureaucracy.
political risk
Multinational corporations must also assess the stability of a country's government before it
decides to do business in it -- especially if the corporation must pay expensive licenses and
"incentives" to oil the gears of bureaucracy. Countries where valuable natural resources are
controlled by the government and licensed to foreign companies are a source of both great
opportunity and risk to multinationals. For instance, while a license to extract raw materials at a
low price is priceless for a multinational looking for a reliable line of supply, a change in
government could mean financial ruin for a subsidiary with economic agreements with the
previous administration.
The term ‘International Finance’ has not come from Mars. It is like domestic
finance in many aspects. If we talk on a macro level, the most significant difference between
international finance and domestic finance is a foreign currency or, to be more precise, the
exchange rates.
In domestic financial management, we aim to minimize the cost of capital

while raising funds and optimize the returns from investments to create wealth for shareholders.
We do not do anything different in international finance. So, the objective of financial
management remains the same for both domestic and international finance, i.e., wealth
maximization of shareholders. Still, the analytics of international finance is different from
domestic finance.
International vs Domestic Finance

Let’s check out the significant differences between international vs Domestic Finance:
Exposure to Foreign Exchange
The most significant difference between international and domestic finance is foreign currency
exposure. Currency exposure impacts almost all the areas of an international business, starting
from your purchases from suppliers, selling to customers, investing in plant and machinery,
fundraising, etc. Wherever you need money, currency exposure will come into play. And as we
know well that there is no business transaction without cash.
Macro Business Environment
An international business is exposed altogether to a different economic and political

environment. All trade policies are different in different countries. The financial manager has to
critically analyze the policies to determine the feasibility and profitability of their business
propositions. One country may have business-friendly policies, and others may not.
Legal and Tax Environment
The other important aspect to look at is the legal and tax front of a country. Taxes directly impact
your product costs or net profits, i.e., ‘the bottom line’ for which the whole story is written. The
international finance manager will look at the taxation structure to determine whether the
business that is feasible in his home country is workable in the foreign country.
Different Group of Stakeholders
It is not only the money that matters but there are also other things that carry greater importance,
viz., the group of suppliers, customers, lenders, shareholders, etc. Why do these groups of people
matter? It is because they carry altogether different cultures, a different set of values, and most
importantly, the language also turns different. When dealing with those stakeholders, you have
no clue about their likes and dislikes. These stakeholders run a business, and keeping them happy
is all you need.
Foreign Exchange Derivatives
Since it is inevitable to expose foreign exchange risk in a multinational business, knowledge of

forwards, futures, options, and swaps are required. A financial manager has to be strong enough
to calculate the cost impact of hedging the risk with the help of different derivative instruments
while making any financial decisions.
Different Standards of Reporting
If the business has a presence in, say, US and India, it maintains the books of accounts in US
GAAP and IGAAP.
It is not surprising that the booking of assets has a different treatment in one country compared to
another. Managing the reporting task is another big difference. The financial manager or his team
needs to be familiar with the accounting standards of different countries.
Capital Management
In an MNC, the financial managers have ample options for raising capital. Several options create
more challenges concerning selecting the right source of capital to ensure the lowest possible
cost of capital.

Managerial Finance

Uploaded by

Copyright:

Available Formats

Managerial Finance

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Managerial Finance

Uploaded by

Copyright:

Available Formats

Department of Management Sciences

COMSATS University Islamabad

different economic and legal structure

different currency denominations

In domestic financial management, we aim to minimize the cost of capital

International vs Domestic Finance

Exposure to Foreign Exchange

Macro Business Environment

An international business is exposed altogether to a different economic and political

Legal and Tax Environment

Foreign Exchange Derivatives

Since it is inevitable to expose foreign exchange risk in a multinational business, knowledge of

Different Standards of Reporting

You might also like