Financial functions in multinational firms

Finance is the Life Blood of the Business and so the case of MNCs also. The only difference in finance of domestic companies and MNCs is that the finance in domestic companies is in domestic currency where as in case of the MNCs the finance is in multi currencies. But whatever be the conditions, with out finance, no company can exist. Finance is required for many purposes like purchase of raw material, purchase of machinery, purchases of the related items, payment of salaries, meeting the operational expenses, etc., so the finance is required for all these purposes. To know about the activities of multinational firms will help for finance assignments.  The activities of providing finance to the MNCs are known as Financing MNCs. Short – Term Financing is financing the working capital requirements of multinational companies‘ foreign affiliate’s poses a complex decision problem.

This complexity stems from the large number of financing options available to the subsidiary of an MNC. Subsidiaries have access to funds from sister affiliates and the parent, as well as external sources. The following are the financing which is long term particularly for the capital equipments and other big items given to the MNCs who are actively engaged in the Foreign Trade. 1. Export Financing 2.Export Credit Subsidies and 3.Export Credit Insurance.  Items that need long repayment arrangements, most government of developed countries have attempted to provide their domestic exporters with competitive edge in the form low-cost export financing and concessionary rates on political and economic risk insurance. Nearly every development nation has its own export-import agency for trade financing and development.

Raising of funds on favourable terms is an important aspect of financial management.  This also holds good for procurement of funds in the international market, in any currency.  Multinational funds may be raised either through internal or external sources.  Internal funds comprise share capital, loans from patent company, and retained earnings.  Funds from external sources can be raised from:

Commercial Banks – Commercial Banks all over the world provide foreign currency loans for international operations as they do for domestic operations.  These banks also provided facility to overdraw, over and above the loan amount.

Discounting of Trade Bills – This method is used as a short-term financing method.  It is widely used in Europe and Asia to finance both domestic and international trade. 

Euro-currency Market – When the currency is deposited outside the country of origin.  It is termed as Eurocurrency. 

Euro-bond Markets – Like euro-currency market, euro-bond market has emerged as another significant source of capital.  Euro-bonds are also primarily sold in countries other than that of the country in whose currency the bond is denominated.  Thus, bonds denominated in yen but sold in US, Britain etc., are known as euro-bonds.

Development Banks – Many countries have development banks which offer long and medium-term loans.  Many agencies at the national level offer incentives for firms to invest within their country or to finance exports. 

International Agencies – Many international agencies have come into being for financing specific category of projects. 

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Source by Benny