Globalization of the World Economy, Goals of International Finance, The Emerging Challenges in International Finance

Globalization of the World Economy

Economic globalization is one of the three main dimensions of globalization commonly found in academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization. Economic globalization refers to the widespread international movement of goods, capital, services, technology and information. It is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital. Economic globalization primarily comprises the globalization of production, finance, markets, technology, organizational regimes, institutions, corporations, and people.

While economic globalization has been expanding since the emergence of trans-national trade, it has grown at an increased rate due to improvements in the efficiency of long-distance transportation, advances in telecommunication, the importance of information rather than physical capital in the modern economy, and by developments in science and technology. The rate of globalization has also increased under the framework of the General Agreement on Tariffs and Trade and the World Trade Organization, in which countries gradually cut down trade barriers and opened up their current accounts and capital accounts. This recent boom has been largely supported by developed economies integrating with developing countries through foreign direct investment, lowering costs of doing business, the reduction of trade barriers, and in many cases cross-border migration.

Global actors

International governmental organizations

An intergovernmental organization or international governmental organization (IGO) refers to an entity created by treaty, involving two or more nations, to work in good faith, on issues of common interest. IGO’s strive for peace, security and deal with economic and social questions. Examples include: The United Nations, The World Bank and on a regional level The North Atlantic Treaty Organization among others.

International non-governmental organizations (NGOs)

International non-governmental organizations include charities, non-profit advocacy groups, business associations, and cultural associations. International charitable activities increased after World War II and on the whole NGOs provide more economic aid to developing countries than developed country governments.

Businesses

Since the 1970s, multinational businesses have increasingly relied on outsourcing and subcontracting across vast geographical spaces, as supply chains are global and intermediate products are produced. Firms also engage in inter-firm alliances and rely on foreign research and development. This in contrast to past periods where firms kept production internalized or within a localized geography. Innovations in communications and transportation technology, as well as greater economic openness and less government intervention have made a shift away from internalization more feasible. Additionally, businesses going global learn the tools to effectively interact in a culturally agile way with people of many diverse cultural backgrounds.

Migrants

International migrants transfer significant amounts of money through remittances to lower-income relatives. Communities of migrants in the destination country often provide new arrivals with information and ideas about how to earn money. In some cases, this has resulted in disproportionately high representation of some ethnic groups in certain industries, especially if economy success encourages more people to move from the source country. Movement of people also spreads technology and aspects of business culture, and moves accumulated financial assets.

Goals of International Finance

Profit Maximization

International financial management aims to maximize the profits of the organization by making correct investment decisions. It promotes investments that are safe and will generate good returns. Also, the utilization of funds should be such that the activities of the company go on without interruption. This will result in an increase in turnover and thus, profits.

Wealth Maximization of Shareholders

Wealth maximization of shareholders is one of the most important goals of international financial management. It is a long-term goal that a company cannot achieve just in a few days or even months. A company can achieve this objective by an excellent overall performance consistently year on year. By this, we mean that the managers should manage the funds such that it is always adequate as per the requirement of the company. Separate budgets for separate functions within the organization need to be made and implemented. Working capital management should be effective, production and other allied activities should go on uninterrupted and employee welfare should also be a priority.

Maximization of Shareholder Value

International financial management aims to maximize shareholder value by ensuring the maximum possible dividend payout. This can happen by ensuring that the company performs well. The managers have to manage the company’s finances in the most effective and efficient manner so as to increase the net profits of the company.

Effective Inflation Risk Management

Another goal of international financial management is to effectively manage the inflation risk that may arise in different countries at different times. Inflation or the continuous rise in prices of inputs can cause a major financial strain on any company. The output price or the selling price may not increase immediately due to market constraints, resulting in lower profits or even losses.

Foreign Exchange Risk Management

As we all know foreign exchange risk is an essential and important part of international trade. Hence, managers have no choice but to manage foreign exchange rate risk timely and effectively. Exchange rates are volatile and unpredictable. They can result in gains as well as heavy losses in case they are not favorable for the company.

Proper Tax Planning

International financial management aims to promote tax planning in the best possible way. Different countries have different tax slabs, liabilities, and exemptions. Managers should be efficient enough to study in detail the taxation policies of all of the countries wherever they operate.

Effectively Use Expanded Sets of Opportunities

International financial management aims to make the best possible use of opportunities that arise from investing in different countries. Interest rates and the cost of capital can be very low in some countries. Or labor can be inexpensive in some other country. Some foreign markets may have the extra potential for a particular line of product. The managers should be dynamic and flexible in this fast-changing business environment.

Political Risk Management

Effective political risk management is one of the important goals of international financial management. The management should take into account cases of political unrest or instability in countries before they invest there. Political risk can arise in the domestic market too, and hence they should be cautious about it.

Optimum Rate of Interest

International financial management aims to achieve an optimum rate of interest on the funds that a company borrows. The managers should check and compare all the possible options of finance that a company has. They should choose the source that is reliable, safe, and with the least possible rate of interest. Lower interest or lower financing costs will boost the profits in turn.

The Emerging Challenges in International Finance

Banking Regulations

Unlike financial management in a single country, global financial management must deal with many other banking institutions that have problems of their own. Some multilateral development banks, such as the International Monetary Fund and World Bank, have been set up to regulate international economic affairs in emerging economies and typically give conditions to various countries and their banks. This can be a challenge when doing business in a country where these institutions have influence, since they advise banks in such countries to avoid testing waters in the riskier markets in its structural adjustment programs.

Culture

International finance has also challenge of culture of each country. India is veg. country. So, McDonnell and other non-veg. country should ban to produce the non-veg. in India.

Risk Management Challenges

Risk management is a major challenge of global financial management. For example, if you’re buying supplies or selling products overseas, your business may face the risk of high prices caused by inflation in emerging economies. Although vulnerability to financial crises in many emerging markets has been reduced significantly due to stronger balance sheets, better fiscal policies and more flexible exchange rate regimes, other factors still pose risks. Potential threats to energy supplies, imbalances in the world economy and other fiscal sustainability issues call for prudent financial planning and management of those risks that most affect your particular business.

Challenge of Protection of Natural Resources

When there is more international finance, its growth will affect the natural resources. For example, after increasing the number of banks in India, ACs are used at large scale due to this, there is increasing the temperature of India. Who is responsible for this? Surely international banks are responsible who are opening the branches in India. Every increase in the number of bank branch means, 4 new installations of ACs which increases open environmental temperature. So, this is big challenge of international finance. It has to reduce by planting the tree and not to use ACs in office.

Diverse Economic Environment

Operating in a globalized environment means being answerable to different countries with different political environments and cultural norms, as well as trade procedures and tax conditions to comply with. In addition, the credit conditions may be totally different from what they are domestically. Anticipate day-to-day financial management challenges when operating internationally and devise ways to maintain healthy equilibrium within this economic framework to ensure your business’s continued growth and survival.

Dynamic Foreign Exchange Rates

In a globalized economy, the cash that goes in and out of the various countries is subject to fluctuations in exchange rates. This creates uncertainty for financial managers when it comes to the value of the home currency in relation to foreign currencies. Continuous fluctuations in the foreign exchange market could mean slow business for global organizations. If you need part of your financing for projects in emerging economies where you conduct your business, fluctuating exchange rates can subject you to higher interest rates. You have to monitor the foreign exchange market closely for suitable rates that benefit your organization.