In international vs domestic finance, the term international finance is different from domestic finance in many aspects. And the first and the most significant of them is foreign currency exposure. Other aspects include the different political, cultural, legal, economic, and taxation environment. International financial management involves a lot of currency derivatives, whereas such derivatives are very less used in domestic financial management.
The term ‘International Finance’ has not come from Mars. It is similar to domestic finance in many aspects. If we talk on a macro level, the most significant difference between international finance and domestic finance is a foreign currency or, to be more precise, the exchange rates.
In domestic financial management, we aim to minimize the cost of capital while raising funds and optimize the returns from investments to create wealth for shareholders. We do not do anything different in international finance. So, the objective of financial management remains the same for both domestic and international finance, i.e., wealth maximization of shareholders. Still, the analytics of international finance is different from domestic finance.
International vs Domestic Finance
Let’s check out the significant differences between International vs Domestic Finance:
Exposure to Foreign Exchange
The most significant difference between international and domestic finance is foreign currency exposure. Currency exposure impacts almost all the areas of an international business, starting from your purchases from suppliers, selling to customers, investing in plant and machinery, fundraising, etc. Wherever you need money, currency exposure will come into play. And as we know well that there is no business transaction without cash.
Macro Business Environment
An international business is exposed altogether to a different economic and political environment. All trade policies are different in different countries. The financial manager has to critically analyze the policies to determine the feasibility and profitability of their business propositions. One country may have business-friendly policies, and others may not.
Legal and Tax Environment
The other important aspect to look at is the legal and tax front of a country. Taxes directly impact your product costs or net profits, i.e., ‘the bottom line’ for which the whole story is written. The international finance manager will look at the taxation structure to determine whether the business that is feasible in his home country is workable in the foreign country.
Different Group of Stakeholders
It is not only the money that matters but there are also other things that carry greater importance, viz., the group of suppliers, customers, lenders, shareholders, etc. Why do these groups of people matter? It is because they carry altogether different cultures, a different set of values, and most importantly, the language also turns different. When dealing with those stakeholders, you have no clue about their likes and dislikes. These stakeholders run a business, and keeping them happy is all you need.
Foreign Exchange Derivatives
Since it is inevitable to expose foreign exchange risk in a multinational business, knowledge of forwards, futures, options, and swaps are required. A financial manager has to be strong enough to calculate the cost impact of hedging the risk with the help of different derivative instruments while making any financial decisions.
Different Standards of Reporting
If the business has a presence in, say, US and India, it maintains the books of accounts in US GAAP and IGAAP.
It is not surprising that the booking of assets has a different treatment in one country compared to another. Managing the reporting task is another big difference. The financial manager or his team needs to be familiar with the accounting standards of different countries.
In an MNC, the financial managers have ample options for raising capital. Several options create more challenges concerning selecting the right source of capital to ensure the lowest possible cost of capital.
There may be much more points of difference between international and domestic financial management. Mentioned above is a list of major differences. We need to consider each of them before deciding to involve a multinational financial environment.
Quiz on International Vs Domestic Finance
This quiz will help you to take a quick test of what you have read here.