The Finance Function of a Global Corporation

The Finance Function of a Global Corporation

In Desai’s view finance functions of both large U.S. and European firms usually focus on cost control with activities build around operating budgets management and internal auditing functions. With the growth of these corporates where they go global, a new world of finance comes up representing a good number of opportunities and challenges in equal measure. Apart from just simply making aggregate capital structure and dividend decisions, they also have to deal with the capital structure and profit repatriation policies of their companies’ subsidiaries. This is true since Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Corporations must, therefore, come up with Incentive systems to measure and reward managers operating in various economic and financial settings of their operations

In fact, in managing a firm’s internal markets to create a competitive advantage over other players, a firm’s finance executives must balance the financial opportunities within the market with the strategic opportunities and challenges that arise from operations in multiple institutional environments having different legal regimes and political risks. There is also a critical managerial component in which what appears to be a good managerial decision or action can turn out to kill an individual’s motivation or a firm’s motivation. Many financial opportunities available to global organizations are also affected by institutional and managerial forces in critical functions of financing, risk management, and capital budgeting.

For internal markets, different operations in different institutions allow a wide range for creating value through wise financing decisions. For CFOs, being that interest is typically deductible, the group’s overall tax bill can be reduced by borrowing in different percentages from countries having high tax rates and lending the excess cash to operations in countries with lower rates. Thy can also take advantage of such tax differences by carefully timing and sizing the flows of profits from branches to the main firm. Borrowing costs are also affected by different creditors’ rights in different countries in the world. Based on this, most global firms borrow in certain foreign markets or domestically and then lend the same to their subsidiaries.

A global CFO must be aware of the downside of getting strategic about financing in these ways.Overburdening the managers of subsidiaries with debt capital can negatively affect their profit performance and affects how they are viewed within larger organizations and in the process, limit their professional opportunities. For companies in thee US, tax incentives dictate lumpy and irregular profit transfers to the parent organization. However, many firms still choose to maintain smooth flows of profits from subsidiaries to the larger firm because the requirement to disgorge cash makes it difficult for managers to exaggerate their performance through dishonest accounting. Finally, overreliance of managers on an easy source of financing on easy financing from home strangles their independence and enterprising ability.

The existence of an internal capital market broadens a firm’s risk-management options. For example, instead of managing all currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations. Such an exposure is managed partially by offsetting exposures elsewhere in the group.

A Part from taking advantage of the de facto internal financing market to act as a link between their operations and external financial markets, CFOs add great value by prudent valuing of investment opportunities. A CFO must ensure that their global finance operations take maximum advantage of the opportunities at their disposal. They can do this by mandatory inventory of their financial capabilities and also ensure that they adapt to the institutional variation and align thee operations with organizational goals. For this to be achieved, a firm’s global function must establish the appropriate geographic locus of decision making, Codify priorities and practices that can be adapted to local conditions and Create a professional finance staff that rotates globally.

References

Braunerhjelm, Pontus & Desai, Sameeksha&Eklund, Johan E., 2015.Regulation, Firm Desai,

Dynamics and Entrepreneurship.Working Paper Series In Economics And Institutions Of Innovation 405, Royal Institute of Technology, CESIS- Centre Of Excellence for Science and Innovation Studies.

Mihir A. The Finance Function in a Global Corporation.HBS Centennial Issue Harvard

Business Review 86, nos. 7/8 (July–August 2008).

Desai, sameeksha,(2009). Measuring entrepreneurship in developing countries.working paper

series UNU-WIDER Research Paper, World Institutee for Deveeloping Economic Research(UNU-WIDER)