International Business

Firms face many challenges when making a decision to internationalize. Due to the increased number of challenges, it is imperative that the goals of the organization are well established and the appropriate strategic measures are taken. Firms must focus on ideal methods of measuring corporate operations and management of business functions. Once there is clarity on the strategic direction - the firm, its stakeholders and employees will be able to work together to achieve the ultimate goal of maximizing wealth.

Most United States and United Kingdom firms have a primary goal of maximizing stockholders wealth by working to push up share prices and to having continually growing dividends. The goal of most Continental European and Japanese organizations seems to be the maximization of corporate wealth.

Even though the idea of creating stockholder wealth is much simpler, the abuse of this practice has complicated its acceptance. An example of recent abuse of this practice comes from the Enron scandal. This scandal has contributed to a new focus on ethics and accountability.

.There are three primary financial objectives that most firms focus on: maximization of consolidated, after tax income; minimization of the firm’s effective global tax burden; correct positioning of the firm’s income, cash flows, and available funds. There are some instances where the pursuit of one of these objectives may not cause an unanticipated outcome for the others. To deal with this situation, managers must decide on the proper trade-offs based on future goals.

Since international business transactions are normally between parties who are not familiar with one another, some degree of financial trust must exist. This trust is the guarantee that the buyer will pay for the product or service received. Some trade financing is done through a letter of credit (L/C). A letter of credit is received from the financial institution of the buyer verifying its financial stability. The exporter bank collects payment from the importer’s bank. The following is a graphical example of trade financing with a letter of credit.

If an investment has a positive net present value (NPV) then it is financially justified. A capital budget assists in determining if a potential investment is a good one. A capital budget is a financial evaluation that projects net operating cash flows of a proposed investment. It is composed of three primary cash flow components.

The initial expense and capital outlays are the largest net cash outflows over the life of the investment. The operating cash flows are the net cash flows that are expected with production. These activities include purchasing supplies and selling of the final product. The terminal cash flows include the balances remaining after the project is completed. This includes salvage and resale values.

A parent company and its subsidiary have a cash flow relationship that is operational and financial. A decision that must be made by managers involves the price at which a firm will sell a product to its subsidiaries. This is known as transfer prices. The transfer price is equivalent to the price a product would sell for on the open market.