Foreign Capital Movements

International economics and international affairs is in two parts – the international trade and international capital. international capital (or international finance) examines the flow of capital across global financial markets and the effects of these movements in exchange rates. international capital plays a crucial role in an open economy. In this era of liberalization and globalization, international capital flows (including intellectual capital) are enormous and vary by country. Finance and technology (eg Internet) have won more mobile factors of production, particularly through multinational enterprises (MNEs). Foreign investment is increasingly important for emerging economies like India. This is consistent with the trend of international economic integration. A Peter Drucker rightly said, “Investing more and more in the world that global trade will handle the international economy.” Therefore, a study of international capital flows is much more rewarding, both theoretical and practical.

Meaning of Capital International
international capital flows are the financial aspects of international trade. Gross flows of international capital, international flows of international capital = + credit cards and debit cards. It is the purchase or sale of assets, financial or estate, across international borders measured in the balance of payments financial account.

Types of International Operations
International capital flows through direct and indirect channels. The main types of international capital are: (1) Foreign Direct Investment (2) foreign portfolio investment (3) public capital flows, and (4) Commercial Loans. They are explained below.

Foreign Direct Investment
Foreign direct investment (FDI) refers to investments made by foreign (s) in another country where the investor retains control of investment, namely, the investor obtains a lasting interest in an enterprise in a other countries. Specifically, you can take the form of buying or building a factory in a foreign country or adding improvements to the facility in the form of property or equipment. Thus, FDI can take the form of a subsidiary or purchase shares of a foreign company or setting up a joint venture abroad. The main feature of FDI is “investment” and “management” go together. One of the earnings of investors in direct investment abroad in the form of benefits such as dividends, retained earnings, management fees and royalties.

According to the United Nations Conference on Trade and Development (UNCTAD), the global expansion of FDI is motivated by more than 64,000 TNCs with over 800,000 foreign affiliates, generating 53 million jobs.

There are several factors that determine FDI – rate of return on foreign capital, risk, market size, economies of scale, product cycle, the level of competition, the mechanism of exchange rate / controls ( For example, restrictions on repatriation), tax and investment policies, trade policies and barriers (if any) and so on.

The benefits of FDI are as follows.
1. Supplementing the limited domestic capital available for investment and help create productive enterprises.
2. Create employment opportunities in various industries.
3. It stimulates domestic production, and usually comes in a package – money, technology, etc.
4. Increased global production.
5. Ensures rapid industrialization and modernization, particularly through R & D.
6. Opens the way for the internationalization of markets with international standards and ensure quality and performance budgeting.
7. Meeting productive resources – money, manpower, technology.
8. It creates an infrastructure of more new ones.
9. For the country of origin is a good way to create a climate conducive to foreign investment (eg, low taxes).
10. By the host country of FDI is a good way to improve the position of the balance of payments.

Some of the challenges of FDI flows are: the problem of currency convertibility, fiscal problems and conflicts with the host government, poor infrastructure, political point, the unbalanced growth and political instability in the country through reception and placement on the market (investment only in the result of non-priority areas or high), more dependence on foreign technology, capital flight from the host country, the excessive flow of production factors; problem Balance of payments, and adverse effects on the host culture and consumption.

Foreign Portfolio Investment
Investment REIT (CIS) or annuitant is a category of investment vehicles is not a majority stake in a company. These include investments through equity instruments (stocks) or debt (bonds) of foreign companies that do not necessarily represent a long-term interest. REITs comes from many sources, such as a small company pension or through investment funds (eg, global funds) held by individuals. The yield an investor acquires REIT often takes the form of interest payments or dividends. REITs may be even less than one year (portfolio flows in the short term).

The difference between FDI and FPI can sometimes be difficult to identify because they may overlap, especially as regards investment in stocks. The threshold for FDI is owned by “10 percent or more of ordinary shares or voting rights” of a business entity.

The determinants of foreign portfolio investment are complex and varied – the national rate of economic growth, stability of exchange rates, the overall macroeconomic stability, levels of foreign reserves held by the central bank, the health of the banking system Abroad, the liquidity of the stock market and bond interest rates, easy repatriation of dividends and capital gains taxes on capital, the regulation of stock and bond markets, the quality of systems of internal accounting information, speed and reliability of the dispute, the degree of protection of investor rights, etc.

FPI has grown with the deregulation of financial markets, higher standard operating procedures for the participation of foreign capital, the largest pool of liquidity and trade on line, etc. The background of foreign portfolio investment are follows.
1. Ensures the productive use of resources through a combination of domestic capital and foreign capital in productive enterprises
2. Avoid unnecessary discrimination between foreign and indigenous.
3. It can achieve economies of scale, putting money and foreign and local experts.

The disadvantages of foreign portfolio investment flows tend to be more difficult to calculate at the end, because they are very different instruments, and also because the reports are often poor threatens the “indigenization” of industry, and without commitment to the promotion of exports.

In international affairs the “official flows” means the public sector (government) capital. Typically this includes foreign aid. The government of a country can get help or assistance in the form of bilateral loans (eg, intergovernmental flows) and multilateral (eg through global partnerships to help India Club Club of Pakistan’s help, etc., and loans from international organizations like the International Monetary Fund, the bank of words, etc.).

External support refers to “public development aid, or official development assistance (ODA), including official grants and concessional loans in cash (currency) and type (for example, the Food aid, military aid) from the donor (for example, a developed country) to the donee or beneficiary (eg, a developing country), is based on “development” or “sharing.”

Instead of the word of support for the war has become an important form of foreign capital reconstruction activities and development. Emerging economies like India have greatly benefited from foreign aid used in the economic plans.

There are two main types of external assistance, ie tied aid and untied aid. Tied aid is aid that the obligations of the transferee or supplier contracts wise, namely, the purchase or use rational, ie, specific projects or two (double attached!). Untied aid is aid which is not related at all.

The merits of foreign aid are the following.
1. Promote employment, investment and industrial activities in the host country.
2. Aid to poor countries to obtain sufficient foreign exchange to pay for essential imports.
3. Aid for nature to deal with the food crisis, lack of technology, machinery and sophisticated tools, including defense equipment.
4. Aid donors helps to make the best use of surplus funds, how to make friends and political allies military, humanitarian goals and egalitarian, etc.

Foreign aid has the following demerits.
1. Tied aid reduces the options for the host country of the capital in the development process and programs.
2. Too much help leads to the problem of absorption of aid.
3. The aid has inherent problems of “dependency”, “deviation”, “amortization”, etc.
4. Support for political reasons is not only political but also lower bad economy.
5. Help is always uncertain.
It is sad to note that aid has become a trap (debt) in most cases. Aid must be more than trade. Fortunately, ODA is declining in importance from year to year.

Commercial Loans
Until the 1980s, commercial loans were the main source of foreign investment in developing countries. However, since then, levels of lending by commercial loans has remained relatively constant, while levels of global flows of FDI and foreign portfolio investment has increased dramatically.

Commercial loans are also called external commercial loans (ECB). These include commercial bank loans, credit, suppliers, buyers credit, negotiable instruments, floating rate and fixed rate securitized bonds, etc., credit from government agencies and export credit loans business from the private sector window of multilateral financial institutions like the International Finance Corporation (IFC), Asian Development Bank (ADB), a joint-venture partners in India etc., companies are allowed to make the ECB under the political orientations of the Government of India / RBI, consistent with prudent management of debt. RBI ECB may approve up to $ 10 million with a maturity of 3-5 years. ECB can not be used for stock market investment or speculation in real estate.
ECB have allowed many units – including small and medium – acquisition in raising capital for the establishment, asset, development and modernization.

Infrastructure and key sectors such as energy, oil exploration, road and bridges, industrial parks, urban infrastructure and telecommunications were the main beneficiaries (about 50% of authorized funds.) Other benefits are: (i) which provides foreign currency funds are not available in India, (ii) the cost of funds is sometimes cheaper cost of funds rupee, and iii) the availability of funds in the market International is huge compared to the internal market and companies can increase the amount of funds based on risk perception in the international market, (iv) leverage or multiplier effect of investment (v) platform is easier to raise capital, such as swaps and futures can be used to manage interest rate risk, and (vi) is a way to raise capital without giving owners control debt and non-voting, etc.

The limits of the ECB are: (i) risks of default risk facing bankruptcy, and the market, (ii) a large amount of interest rate increases the real cost of borrowing and the burden of the debt and, possibly, reduce the odds of the company, which automatically increases the cost of credit, improving the liquidity crisis and the risk of bankruptcy, (iii) the effect on revenues due to payments of interest costs. Public enterprises seek to maximize profits.

Private companies are designed to minimize taxes, so the tax shield of debt is less important for SOEs because incomes are even lower.

Factors affecting international capital flows
A number of factors which influence or determine the flow of international capital. Explained below.

1. Interest rates
Those who save interest income are often induced. As Keynes rightly said, “interest is the reward for the start of liquidity.” All things remaining the same movements, the capital of a country where the interest rate is low for a country where the rate of interest is high.

2. Speculation
Speculation is one of the reasons for holding cash or liquidity, particularly in the short period of time. Speculation includes expectations regarding changes in interest rates and exchange rates. If a country’s rate of interest should fall in the future, the current entry of the capital increase. Conversely, if interest rates should rise in future, the current input of capital will fall.

3. Production costs
If the cost of production is lower in the host country, cost the country of origin, foreign investment in the country will increase. For example, lower wages in a foreign country tends to shift production and factors (including capital) to sources of low-cost regions.

4. Profitability
Profitability refers to the rate of return on investment. Depends on the marginal efficiency of capital, cost of capital and risks. Higher returns attracts more capital, especially in the long term. Therefore, international capital move more rapidly in areas with high yield

5. Discount rate
Bank rate is the rate applied by the central bank to ease payment paid to member banks in the banking system as a whole. When the Fed increases the base rate in the economy, domestic credit will hurry. National Capital and investment are reduced. So to answer the demand for capital, foreign capital will come quickly.

6. Business conditions
Terms of business knowledge. stages of an economic cycle affect international capital flows. enterprises (eg, recovery and boom) will attract more foreign capital, while the plains of the company (for example, recession and depression) to discourage or drive out foreign capital.

7. The trade and economic policies
Commercial or political concerns of the commercial import and export policy for products, services and capital within a country. A country can have a free trade policy or a policy restricted (for protection). In the case of trade barriers such as the former tariffs, quotas, licenses, etc. are dismantled. In the latter case that trade barriers are raised or kept. A policy of free trade and liberal – as in modern times – is up to the free movement of capital around the world. Restricted trade policies prohibiting or restricting the movement of capital, by the time / source / target.

Economic policies on production (eg, multinationals and joint ventures), industrialization (eg policy SEZs), banking (eg, the new generation / foreign banks) and finance investments (For example, FDI policy), taxes (eg tax holiday for EOUs) etc., also affect the international transfer of capital. For example, liberalization and privatization increase in industrial activity and investment.

8. General economic conditions and political
In addition to its overall business environment and industrial policies, economic and political in a country also affects international capital flows. the country’s economic environment refers to internal factors such as market size, demographics, growth and accessibility of infrastructure, human resources and technology, the rate of economic growth, sustainable development and etc. political stability of good governance. A healthy environment and economic policy promotes good movement of international capital.

Role of Foreign Capital
1. The internationalization of world economy
2. Facelift for the back country – Labour markets
3. transfers of high technology
4. Rapid Transit
5. High profits for companies / governments
6. A new meaning to the consumer sovereignty – the choice and standardization (superioirites)
7. Accelerated economic growth in developing countries
8. The problems of recession, the production of non-priority, the cultural dilemmas, etc.

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Thursday, February 3rd, 2011 International Business

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