Paper discussed how operating of financial management in different nations impacts investment decisions with multinational enterprise. Paper describes financial options available to the foreign subsidiary of the multiple enterprises and shows how money management in international business can be used to minimize cash balances, and taxation and introduce us to basic methods of money management.
This project is focusing on financial management in the international business, discussing three sets financial decisions such as: •
Investing decisions, decisions about what activities to finance. •
Financing decisions, decisions about how to finance those activities. •
Money management decisions, decisions about how to manage firm are financial recourses most efficiently. Different currencies, tax regimes, regulation concerning cash flow through the countries, norms regarding financial activities, economical and political risks can complicate financial decisions and money management. Financial managers must keep in mind all these factors when deciding which activities to finance, what is the best way to finance them and how to protect company from future political and economical risks including foreign exchange risks. Investment decisions are the most concern about capital budgeting. Capital budgeting is method to evaluate potential foreign projects, discussions that are made between cash flows to the project and cash flows to the parent company, costs and risks of future investment. Most of international cash out flows are negative at first, because the firms are investing heavily in production facilities. After curtain period of time, cash flows will became positive and investment cost decline and revenues grow. Other problems that may complicate the process, for example, distinction must be made between cash flows into the project and out to the parent, political and economic risks, including foreign exchange risks can affect as well. Can flows to the project and to the parent company can be complicated because of host country regulations. For example, host country can require reinvesting certain percentage of revenues within host country and charge unfavorable tax rate. When companies use capital budgeting technique they need to consider political and economic risks that may arise in foreign location. These risks can be incorporated into capital budgeting by using a higher discount rate or by forecasting lower cash flows for such projects. Political risks and stability of the country must be taken under consideration, for example, economical collapse in Yugoslavia, when unstable political situation lead to bloody break-up in a country what caused taxes rates and government price control increase. Magazine “Euromoney” publishes annual “country risk rating”, but all predictions are only guesses and in many cases they are wrong. Economic risk must be taken into count as well, inflation within country may cause drop the value of country currency on foreign exchange market. There are two most common ways how firms handle risks. First way is when firms are treat all risk as a single problem by increasing the discount rates applicable to foreign projects in a countries where political and economic risks consider to be high. Second way is adjusting discount rates to reflect location riskiness. In financing international business parent company must consider two factors, such as source of the financing and financial structure. If firm will seek for external financing it must consider borrowing funds from the lowest cost source of capital available. However some host countries must require foreign manufactories to finance its projects though local debt financing or local sales of equity. Although, initial cost of borrowing locally can be higher in some cases, sometimes it can have some wise effects in a long run because if host country has high inflation rate and currency will depreciate the initial cost will be lower....
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