Importance of International Finance

India and other developing countries feel the need for increasing their
share in international exchange of goods, services, capital and
technology. Some of the important steps taken over during the last 25
years can be summarised as below:

Establishment of unified market determined exchange-rate.

Iintroduction of current account convertibility and introduction of

capital account convertibility in a phased or later period.

Reduction in import duties.

Liberalisation of portfolio and FDI.

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Goals of International Finance

Following are the goals of international finance:

1. To achieve higher rate of profits

(https://investortonight.com/blog/international-finance/#to-achieve-
higher-rate-of-profits)
2. Expansion of production capacities
(https://investortonight.com/blog/international-finance/#expansion-
of-production-capacities)
3. Severe competition in the home country
(https://investortonight.com/blog/international-finance/#severe- 
competition-in-the-home-country)
 4. Limited home market
(https://investortonight.com/blog/international-finance/#limited-
home-market)
5. Political stability vs political instability
(https://investortonight.com/blog/international-finance/#political-
stability-vs-political-instability)
6. Availability of technology and skilled human resources
(https://investortonight.com/blog/international-finance/#availability-
of-technology-and-skilled-human-resources)
7. High cost of transportation
(https://investortonight.com/blog/international-finance/#high-cost-
of-transportation)
8. Nearness to raw materials
(https://investortonight.com/blog/international-finance/#nearness-
to-raw-materials)
9. Availability of quality human resources
(https://investortonight.com/blog/international-finance/#availability-
of-quality-human-resources)
10. Liberalisation and globalisation
(https://investortonight.com/blog/international-
finance/#liberalisation-and-globalisation)
11. Increased market share
(https://investortonight.com/blog/international-finance/#increased-
market-share)
12. To achieve higher rate of economic development
(https://investortonight.com/blog/international-finance/#to-achieve-
higher-rate-of-economic-development)
13. Tariffs and import quotas
(https://investortonight.com/blog/international-finance/#tariffs-and-
import-quotas)

To achieve higher rate of profits

International companies search for foreign markets that hold promise

for higher rates of profits. Thus, the objective of profit affects and
motivates the business to expand its operations to foreign countries.

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 ···

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For example, Hewlett-Packard in the US earned 86.2% of its profits from

foreign markets, compared to that of domestic markets, in 2007. Apple
earned US $ 730 million as net profit from the foreign markets and only
US $ 620 mn. as net profit, from its domestic market, in 2007.

Expansion of production capacities

Some of the domestic companies expanded their production capacities

more than the demand for the product in the domestic countries. These
companies in such cases, are forced to sell their excess production in
foreign developed countries. Toyota of Japan is an example.


Severe competition in the home country

The weak companies which could not meet the competition of the
strong companies in the domestic country started entering the markets
of the developing countries.

Limited home market

When the size of the home market is limited due to the smaller size of
the population or due to lower purchasing power of the people or both,
the companies internalize their operations.

For example, most of the Japanese automobile and electronic firms

entered the U.S., Europe and even African markets due to the smaller
size of the home market. I.T.C. entered the European market due to the
lower purchasing power of Indians with regard to high-quality
cigarettes.

Political stability vs political instability

Political stability does not simply mean that continuation of the same
party in power, but it does not mean the continuation of the same
policies of the Government for a quieter longer period. It is viewed that
the U.S.A. is a politically stable country.

Similarly, UK, France, Germany, Italy and Japan are also politically stable
countries. International companies prefer, to enter politically stable
countries and are restrained from locating their business operations in
politically unstable countries. In fact, business companies shift their
operations from politically unstable countries to politically stable
countries.

Availability of technology and skilled human

resources

Availability of advanced technology and competent human resources, in

some countries act as PULLING FACTORS for international companies.

The developed countries due to these reasons attract companies from

the developing world American and European companies, depended on
Indian companies for software products and services through their
BPOs.

The cost of professionals in India is 10 to 15 times less compared to US
and European markets. These factors helped Indian software industry to
grow at a faster rate with world class standards. Added to this, satellite
communications help Indian companies to serve the global business
without going globally.

High cost of transportation

The major factor in lower profit margins to international companies, is

the cost of transportation of the products. Under such conditions, the
foreign companies are inclined to increase their profit margin by
locating their manufacturing facilities in foreign countries, where there
is enough demand either in one country or in a group of neighbouring
countries.

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For example, Mobil, which was supplying the petroleum products to

Ethiopia, Kenya, Eritrea, Sudan, etc. from its refineries, in Saudi Arabia,
established its refinery facility in Eritrea, in order to reduce the cost of
transportation.

Nearness to raw materials

The source of highly qualitative raw materials and bulk raw materials is
a major factor for attracting companies from various foreign countries.
Most of the US-based and European-based companies located their
manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Iran, etc. due to
the availability of petroleum.

Availability of quality human resources

This is a major factor for software, high technology, and

telecommunication companies to locate their operations in India. India
is a major source for high-quality and low-cost human resources.

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Liberalisation and globalisation

Most of the countries in the world liberalized their economies and

opened their countries to the rest of the world.

Increased market share

Some of the large scale international companies like to enhance their

market share in the world market by expanding and intensifying their
operations in various foreign countries.


For example, Ball Corporation, the third-largest beverage cans
manufacturer in the USA, bought the European Packaging operations of
a continental can company. Then it expanded its operations in Europe
and met the Europe demand, which is 200 percent more than that of the
USA. Thus, it increased its global market share of soft drink cans.

To achieve higher rate of economic development

International companies help the governments to achieve higher growth

rate of the economy, increase the total and per capita GDP, industrial
growth, employment and income levels.

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Tariffs and import quotas

It was quite common before globalization that governments imposed

tariffs or duty on imports to protect domestic companies.

Sometimes government also fixes import quotas to reduce the

competition to the domestic companies from competent foreign
companies. To avoid high tariffs and quotas companies prefer direct
investments to go globally. For example, companies like Sony, Honda,
and Toyota preferred direct f

Challenges in International Finance

The following are the important challenges in international finance:

1. Varied Economic Systems
(https://investortonight.com/blog/international-finance/#varied-
economic-systems)
2. Tariff and non-tariff trade barriers
(https://investortonight.com/blog/international-finance/#tariff-and-
non-tariff-trade-barriers)
3. Political Risks (https://investortonight.com/blog/international-
finance/#political-risks)

4. Environmental safeguards
(https://investortonight.com/blog/international-
finance/#environmental-safeguards)
5. Dumping (https://investortonight.com/blog/international-
finance/#dumping)
6. Cultural differences (https://investortonight.com/blog/international-
finance/#cultural-differences)
7. Language differences
(https://investortonight.com/blog/international-finance/#language-
differences)
8. Intellectual property rights
(https://investortonight.com/blog/international-finance/#intellectual-
property-rights)

 9. Cyber crimes (https://investortonight.com/blog/international-
finance/#cyber-crimes)
10. Transfer Pricing (https://investortonight.com/blog/international-
finance/#transfer-pricing)
11. International Taxation
(https://investortonight.com/blog/international-
finance/#international-taxation)
12. Economic and Currency Crisis
(https://investortonight.com/blog/international-finance/#economic-
and-currency-crisis)
13. Interest Rates Charging
(https://investortonight.com/blog/international-finance/#interest-
rates-charging)
14. Foreign Exchange Risk
(https://investortonight.com/blog/international-finance/#foreign-
exchange-risk-2)
15. Cold war between countries
(https://investortonight.com/blog/international-finance/#cold-war-
between-countries)
16. International business cycle
(https://investortonight.com/blog/international-
finance/#international-business-cycle)
17. Operational risks (https://investortonight.com/blog/international-
finance/#operational-risks)
18. International terrorism
(https://investortonight.com/blog/international-
finance/#international-terrorism)

Now Playing

Understand…

Understanding International Finance: Ex…


Varied Economic Systems

An economic system refers to the kind of governance of a country. It

may be on the basis of the principles of communism, capitalism,
socialism, and mixed economy, rules, and ideologies. International
companies have to navigate with country-specific economic systems.

American companies are looked at with scepticism by Japan, European

and Gulf countries and vice versa. The economic system issue is not
possible to address but MNCs may harness it for their economic gains.

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Tariff and non-tariff trade barriers

The progress of world trade is dependent on FREE TRADE POLICY.

Many countries distorted the free trade among themselves and this
trade restriction is called a trade barrier. The opposite of free trade is a
trade barrier. These barriers are of two kinds:

Tariff
Non-tariff

Political Risks

The instability in the governance by a political system in different

countries is a major setback for international companies. The draconian
rules and policies of some countries restrict market access.


Environmental safeguards

One of the major challenges today in the world is global warming. The
carbon dioxide emissions by different countries and the greenhouse
effect therein resulted in the depletion of the ozone layer.

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The relentless use of natural resources is the route cause for

environmental delay. International trade and environmental protection
should go hand in hand in the interest of the future generation.

Dumping

It refers to selling a product at a high price in the home currency and

relatively at a LOW PRICE in the host country by an international
company. This practice ruins industries and employment opportunities
in the host country especially micro and small scale industries.

For example, the Chinese goods like goods sold in Dipawali, Holi and
other festivals are sold, at very low prices in India.


Cultural differences

Every country has a unique cultural heritage that shapes values and
influences the conduct of business. Even within geographic regions that
are considered relatively homogeneous, different sub-cultures are
prevailing. International companies have to cope with these differences
and adopt to the culture and sub-culture of the countries, where they
operate.

MNCs find that matters such as defining the appropriate goals of the
company, attitudes toward risk, dealing with employees, and the ability
to curtail and profitable operations vary dramatically from one country
to the next.

Language differences

The ability to communicate is critical in all business, including

international transactions. The Indian and US. citizens are often at a
disadvantage because they are generally fluent in English, while
European and German people are usually fluent in several languages
including English.

Intellectual property rights

The trinity of intellectual properties is patents (for inventions)

trademarks (for a brand name, image etc.) and copyright (for author,
musicians, lyrics, filmmakers). The invention of new things requires
world-class Research and Development set up by foreign firms.

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
The problem of privacy is haunting several leading companies and
brands. India, after a great fight with USA has registered patent
protection for Basmati rice, turmeric and tomato. In the case of pharma
products, a large number of patent infringements is happening around
the world especially the life saving drugs. This is a vital issue in
international business and finance.

Cyber crimes

Cybercrime is a crime committed with the use of computer and internet.

Today, all around the world e-commerce and e-business, e-governance,
are flourishing. The flip side of e-commerce is cyber crimestantalising
international finance.

The privacy is interrupted, money in some other accounts are

withdrawn, manipulated and transferred. The cybercrimes if unabated
will pose a great danger to world business. The WTO has asked all the
member countries to have in place a proper and comprehensive cyber
law in place to check the maladies and anomalies of cybercrimes.

Transfer Pricing

In any international business there are normally a large number of

transfers of goods, services, technology and other resources between
the parent company and foreign subsidiaries. The price at which goods,
services and others are transferred between affiliates within the
company is called transfer price.

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 ···

Transfer price also affects an international company’s ability to monitor

the performance of individual corporate subsidiaries and to reward or
punish managers responsible for their performance.

International Taxation

Taxes have a significant impact on areas, as diverse as making foreign

investment decisions, managing exchange risks, planning capital
structures, determining financing costs, and managing inter-affiliate
funds flows.

For the international business with activities in many countries, the

various treaties have important implications for how the international
company should structure its internal payments system among the
foreign subsidiaries and the parent company.

Economic and Currency Crisis

The Asian crisis, Malaysian crisis, Pacific-Rim country crisis are in

relation to economic crisis wherein they have experienced. RECESSION
and ADVERSE, BALANCE OF PAYMENTS position.

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
The same countries along with Japan experienced a currency crisis in
that the value of currencies was either depreciated or devalued and
further they were exposed to a shortage of foreign exchange reserves.

Interest Rates Charging

The rate of interest charged by the World Bank on its loans disbursed is
7.5 percent p.a. and Asian Development Bank’s concessional interest
rate is 4 percent p.a. The equity cost of capital is less when compared
to debt funds in the global capital market.

The increasing interest rate raises the cost of capital and the
profitability of the company is lessened interest rate is a parameter in
global finance which plays a dominant role in production and
operational risks of global corporates.

Foreign Exchange Risk

Exchange Rate refers to the price of one currency against another

currency. The exchange of currency happens in two ways — fixed
exchange rate and floating exchange rate. The exchange rate risk is
more pronounced under flexible or floating exchange rate.

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
This is because the floating exchange rate is based on market forces of
DEMAND for and SUPPLY of foreign currencies, at a particular time
Trade surplus/deficit vis-a-vis the currencies of the countries, a host of
economic factors like GNP, Fiscal Deficit, balance of payments position.
Industrial production data, and employment data, inflation rate
differentials, and interest rate differentials.

Cold war between countries

The enmity, animosity, difference of opinion between and among

countries be routed out at the surface level. Hatred is external while
jealousy is internal. The cold war among nations is because of the twin
pests — hatred and jealousy between the countries in the world.

International business cycle

Countries are subject to times of good trade and bad trade. Goal trade
is characterized by increased economic activities, production,
profitability and revenue. The opposites are low economic activities,
production and other parameters representing the bad trade.

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
Business or trade cycle is international in character, recurring in nature
and time period of each stage of the cycle such as inflation, deflation,
revival and recession are uncertain.

Operational risks

The operational risk encompasses commercial risks, foreign exchange

risk, political risks and country-specific risks. Different currencies,
payments and receipts socioeconomic systems, laws, habits, tasks
preferences, and environmental aspects lead to higher risks in the form
of credit, market access, currency and exchange risks.

International terrorism

The growing menance of international terrorism is ruining international

business. Terrorism obstructs the smooth flow of economic activities. It
pushes the economy into bankruptcy and insolvency. It worsens import
and export trade. The countries which want to have cordial business
relations with other countries will rethink and hesitate to have
relationship with terror hit countries. The free flow of foreign investment
is affected due to terrorism.

(https://imp.i384100.net/B0xeYB)