Question

QUESTION 6 Explain the role of international finance in international investment, providing examples.

Answer 1

International Finance is an important part of financial economics. It mainly discusses the issues related with monetary interactions of at least two or more countries. International finance is concerned with subjects such as exchange rates of currencies, monetary systems of the world, foreign direct investment (FDI), and other important issues associated with international financial management. Like international trade and business, international finance exists due to the fact that economic activities of businesses, governments, and organizations get affected by the existence of nations. It is a known fact that countries often borrow and lend from each other. In such trades, many countries use their own currencies. Therefore, we must understand how the currencies compare with each other. Moreover, we should also have a good understanding of how these goods are paid for and what is the determining factor of the prices that the currencies trade at.

International trade is one of the most important factors of growth and prosperity of participating economies. Its importance has got magnified many times due to globalization. Moreover, the resurgence of the US from being the biggest international creditor to become the largest international debtor is an important issue. These issues are a part of international macroeconomics, which is popularly known as international finance.

Importance of International Finance:

1. International finance is an important tool to find the exchange rates, compare inflation rates, get an idea about investing in international debt securities, ascertain the economic status of other countries and judge the foreign markets.

2. Various economic factors help in making international investment decisions. Economic factors of economies help in determining whether or not investors’ money is safe with foreign debt securities.

3. IFRS system, which is a part of international finance, also helps in saving money by following the rules of reporting on a single accounting standard.

4. Exchange rates are very important in international finance, as they let us determine the relative values of currencies. International finance helps in calculating these rates.

5. Utilizing IFRS is an important factor for many stages of international finance. Financial statements made by the countries that have adopted IFRS are similar. It helps many countries to follow similar reporting systems.

6. International finance organizations, such as IMF, the World Bank, etc., provide a mediators’ role in managing international finance disputes.

7. An international finance system maintains peace among the nations. Without a solid finance measure, all nations would work for their self-interest. International finance helps in keeping that issue at bay.

Driving Forces of Financial Globalization:

1. Advancement in information and communication technologies

2. Globalization of national economies

3. Liberalization of national financial and capital markets

4. Competition among intermediary services providers

Example of International Institutions of International Finance:

The Bretton Woods system, which was introduced in the late 1940s, after World War II, established a fixed exchange rate system, having been agreed upon at the Bretton Woods conference by the more than 40 countries that participated. The system was developed to give structure to international monetary exchanges and policies and to maintain stability in all international financial transactions and interactions.The Bretton Woods conference acted as a catalyst for the formation of essential international institutions that play a foundational role in the global economy. These institutions—the IMF and the International Bank for Reconstruction and Development (which became known as the World Bank)—continue to play pivotal roles in the area of international finance.

International Investments are those investments that are made outside the domestic markets and offer portfolio diversification and opportunities for risk minimization. An investor can make international investments thereby broadening his portfolio and expanding his horizon of returns. International investments also serve as a means of adding different financial instruments to the list when domestic markets are confined and limited by their variety.Investors in one part of the world may find a variety of combinations of equity and debt instruments being traded in some other part of the world. International investments aim to assure investors of two probabilities; the counter of domestic market risks and the opportunities in foreign markets.

Types of Financial Instruments for International investments:

1. American Depository Receipts

2. Global Depository Receipts

3. Foreign Currency Convertible Bonds

Examples of International Investments:

1. Indian economy saw a tremendous influx of foreign direct investment in recent years.

2. FDIs grew from US$ 17 billion in 2013-14 to US$ 36 billion in 2017-18. This was mostly attributed to greater ease of doing business coupled with strengthening the Indian equity market.

3. FDIs from Asia have reduced during the period 2015 to 2017. This was large because of the tax-related treaty between the Mauritius and Indian governments. The decline was a remarkable 30% during this period.