What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?
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Explanation
Corporations go global with the desire to explore the opportunities existing in the foreign markets. However, the management of finances is different in foreign countries as compared to the domestic country. Following are the various aspects of such differences in the normal operations.
Cash flows of transactions occurring in the foreign country would be in the foreign currency, thus understanding of exchange rate fluctuations is important for managing foreign cash flows effectively. As the reporting of entity operations will be done with exchange rate fluctuations.
Secondly, the differences in the economic system of domestic and foreign countries play a vital role in framing financial policies of corporations. Some countries are free markets, which supports capitalism, whereas other countries might be planned economies, where there might be restrictions on movement of capital.
The next important aspect is the differential legal system. One company may follow common law where it encourages investors and businessmen for diversified investment. Whereas, other countries might follow civil law in order to implement stricter control over the business operations and movement of funds.
Corporate taxation is also a substantial factor when it comes to managing finances of the same business in multiple companies. Differences in tax structures may lead to variances in the final profit, which is available for distribution to the shareholders and for reinvestment in business.
The extent of government interventions in the business matters also impact the strategic formulation of trade policies and terms of competition. Sometimes, certain business policies are to be framed by the consent of government bodies. Also there might be some legal, social and environmental compliances which are mandated by the government.
Political risk is another factor, where poor political relations between domestic and host countries may not allow for free flow of the resources and smooth conduct of business operations.
Apart from these six factors, there are also certain aspects like different languages, culture differences, terrorism and crime which affects the financial management of business in foreign countries.
Verified Answer
The six major factors that differentiate foreign financial management from domestic financial management are exchange rate fluctuations, different economic systems, different legal framework, varied taxation system, government intervention and political risks.
