What is the difference between international finance and domestic finance ? (2024)

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abhilash p What is the difference between international finance and domestic finance ? (1)

abhilash p

Campus Representative at SmartSteps Consulting Pvt Ltd

Published Dec 1, 2018

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International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, 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 the domestic finance in many of the aspects. If we talk on a macro level, the most important difference between international finance and domestic finance is of foreign currency or to be more precise the exchange rates.

In domestic financial management, we aim at minimizing the cost of capital while raising funds and try optimizing the returns from investments to create wealth for shareholders. We do not do any different in international finance. So, the objective of financial management remains same for both domestic and international finance i.e. wealth maximization of shareholders. Still, the analytics of international finance is different from domestic finance.

Following are the major differences:

  1. EXPOSURE TO FOREIGN EXCHANGE: The most significant difference is of foreign currency exposure. Currency exposure impacts almost all the areas of an international business starting from your purchase from suppliers, selling to customers, investing in plant and machinery, fund raising etc.
  2. MACRO BUSINESS ENVIRONMENT: An international business is exposed to altogether a different economic and political environment. All trade policies are different in different countries.
  3. LEGAL AND TAX ENVIRONMENT: The other important aspect to look at is the legal and tax front of a country. T International finance manager will look at the taxation structure to find out whether the business which is feasible in his home country is workable in the foreign country or not.
  4. THE DIFFERENT GROUP OF STAKEHOLDERS:It is not only the money which along matters, there are other things which carry greater importance viz. the group of suppliers, customers, lenders, shareholders etc.A business is driven by these stakeholders and keeping them happy is all you need.
  5. FOREIGN EXCHANGE DERIVATIVES:Since, it is inevitable to expose to the risk of foreign exchange in a multinational business. Knowledge of forwards, futures, options and swaps is invariably required.
  6. DIFFERENT STANDARDS OF REPORTING:If the business has a presence in say US and India, the books of accounts need to be maintained in US GAAP and IGAAP.
  7. CAPITAL MANAGEMENT:In an MNC, the financial managers have ample

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What is the difference between international finance and domestic finance ? (2024)

FAQs

What is the difference between international finance and domestic finance ? ›

Domestic financial management refers to financial operations within a single country. Meanwhile, international financial management

international financial management
International financial management, also known as international finance, is the management of finance in an international business environment; that is, trading and making money through the exchange of foreign currency.
https://en.wikipedia.org › International_financial_management
refers to financial operations across multiple countries and currencies.

What is a factor that differentiates international finance from domestic finance? ›

Answer and Explanation:

It is primarily focused on foreign direct investments and issues affecting it such as political risk and exposure to foreign currency particularly due to the fluctuations in the market. Domestic finance is limited to the countries' boundaries.

What is the domestic finance? ›

Domestic Finance works to support equitable and sustainable economic growth and financial stability through policies to increase the resilience of financial institutions and markets, and to increase access to credit for small businesses and low-to-moderate income communities.

How imperfections makes international finance different from domestic finance? ›

International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation environment.

What do you mean by international finance? ›

International finance deals with the economic interactions between multiple countries, rather than narrowly focusing on individual markets. International finance research is conducted by large institutions such as the International Finance Corp. (IFC), and the National Bureau of Economic Research (NBER).

What is an example of international finance? ›

Examples of international finance include regional currencies, such as the Euro, or foreign direct investment, which is the investment by a company in another country.

What are the benefits of international finance? ›

Benefits of International Finance
  • Access to new markets: By participating in international finance, companies and countries can gain access to new markets.
  • Diversification: International finance can help to diversify a company's or country's portfolio of assets.
Feb 20, 2023

What are the advantages of domestic finance? ›

Lower interest rates: Typically, domestic borrowing comes with lower interest rates compared to international borrowing. Currency stability: Borrowing in the domestic currency reduces exposure to exchange rate fluctuations.

What are the three types of finance? ›

Finance can be divided broadly into three distinct categories: public finance, corporate finance, and personal finance. More recent subcategories of finance include social finance and behavioral finance.

What are the two types of financial? ›

There are two types of financing: equity financing and debt financing. The main advantage of equity financing is that there is no obligation to repay the money acquired through it.

What is international finance and difference? ›

International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation environment.

What are the three concepts differentiating international from domestic financial management? ›

Difference between International and Domestic Financial Management: Four major facets which differentiate international financial management from domestic financial management are introduction of foreign currency, political risk and market imperfections and enhanced opportunity set.

Why does international business differ from domestic business? ›

Domestic business involves those economic transactions that take place within the geographical boundaries of a country. International business involves those economic transactions that take place outside the geographical boundaries of a country.

What are the disadvantages of international finance? ›

Disadvantages of international finance

Political turmoil in one country which is a stakeholder of international trade can affect the other stakeholder of the same trade-in another country. Depending on other country's exchange rate is always risky given that all the currencies have significant volatility.

What is the main function of international finance? ›

International Finance deals with the management of finances in a global business. It explains how to trade in international markets and how to exchange foreign currency, and earn profit through such activities. In fact, international Finance is an important part of financial economics.

What are the risks of international finance? ›

The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk. These challenges may sometimes make it difficult for companies to maintain constant and reliable revenue.

What is the difference between international finance and finance? ›

International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation environment.

What is the difference between international trade and finance? ›

What is the difference between international trade and international finance? Basically international trade is the exchange of real goods and services among countries. International finance involves the movement of money among countries like for example portfolio investments or direct investments in a foreign country.

What is the difference between international finance and international economics? ›

International finance studies the flow of capital across international financial markets, and the effects of these movements on exchange rates. International monetary economics and international macroeconomics study flows of money across countries and the resulting effects on their economies as a whole.

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