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

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