International Finance

Business today crosses national borders. Firms buy raw materials abroad, sell in foreign markets, and set up operations in several countries. When money moves between countries it changes from one currency to another, and this brings new opportunities and new risks that a purely domestic firm never faces. International finance studies how firms manage money across borders, and this chapter introduces multinational enterprises, the way their financial management differs from domestic practice, exchange rates, and the calculation of cross rates.

Multinational enterprises (MNEs)

A multinational enterprise (MNE), also called a multinational corporation, is a firm that owns or controls production or service facilities in more than one country. It has its headquarters in one country, called the home or parent country, and carries on operations through branches or subsidiaries in other countries, called host countries.

The chief features of an MNE are:

• Operations in many countries: it produces and sells across several national markets rather than one.
• Large size and resources: MNEs are usually very large, with heavy capital, advanced technology and skilled management.
• Central control: although spread across countries, the enterprise is directed by a single central management that coordinates the whole group.
• Worldwide objective: it plans its production, sourcing and marketing on a global basis to earn the highest overall return, shifting activities to wherever they are most efficient.
• Dealing in many currencies: because it earns and spends in different currencies, it is constantly exposed to exchange rate movements.

Well-known examples include global firms in oil, technology, food and manufacturing that operate in dozens of countries at once.