Discuss about factors influencing international trade and capital flows.

Define Foreign Exchange market. Explain its functions and structure.

Discuss about different methods of International business.
Write about different agencies that facilitate international trade. 
Define MNC. Discuss about goals of MNC.
Write about history of international monetary system and overview of IMF
Write about International bond,International equity market,ADRs and GDRs.
Discuss about cross listing of shares, Global registered shares and exposure to
international risk.
) Impact of Inflation:
ADVERTISEMENTS:

If a country’s inflation rate increases relative to the countries with

which it trades, its current account will be expected to decrease, other
things being equal. Consumers and corporations in that country will
most likely purchases more goods overseas (due to high local
inflations), while the country’s exports to other countries will decline.

2) Impact of National Income:

If a country’s income level (national income) increases by a higher
percentage than those of other countries, its current account is
expected to decrease, other things being equal. As the real income
level (adjusted for inflation) rises, so does consumption of goods. A
percentage of that increase in consumption will most likely reflect an
increased demand for foreign goods.

3) Impact of Government Policies:

A country’s government can have a major effect on its balance of trade
due to its policies on subsidizing exporters, restrictions on imports, or
lack of enforcement on piracy.

4) Subsidies for Exporters:

ADVERTISEMENTS:

Some governments offer subsidies to their domestic firms, so that

those firms can produce products at a lower cost than their global
competitors. Thus, the demand for the exports produced by those
firms is higher as a result of subsidies.
Many firms in China commonly receive free loans or free land from
the government. These firms incur a lower cost of operations and are
able to price their products lower as a result, which enables them to
capture a larger share of the global market.

5) Restrictions on Imports:
If a country’s government imposes a tax on imported goods (often
referred to as a tariff), the prices of foreign goods to consumers are
effectively increased. Tariffs imposed by the U.S. government are on
average lower than those imposed by other governments. Some
industries, however, are more highly protected by tariffs than others.
American apparel products and farm products have historically
received more protection against foreign competition through high
tariffs on related imports.

In addition to tariffs, a government can reduce its country’s imports by

enforcing a quota, or a maximum limit that can be imported. Quotas
have been commonly applied to a variety of goods imported by the
United States and other countries.

6) Lack of Restrictions on Piracy:

ADVERTISEMENTS:

In some cases, a government can affect international trade flows by its

lack of restrictions on piracy. In China, piracy is very common;
individuals (called pirates) manufacture CDs and DVDs that look
almost exactly like the original product produced in the United States
and other countries. They sell the CDs and DVDs on the street at a
price that is lower than the original product. They even sell the CDs
and DVDs to retail stores. It has been estimated that U.S. producers of
film, music, and software lose $2 billion in sales per year due to piracy
in China.

As a result of piracy, China’s demand for imports is lower. Piracy is

one reason why the United States has a large balance-of-trade deficit
with China. However, even if piracy were eliminated, the U.S. trade
deficit with China would still be large.

7) Impact of Exchange Rates:

Each country’s currency is valued in terms of other currencies through
the use of exchange rates, so that currencies can be exchanged to
facilitate international transactions

Meaning:
Foreign exchange market is the market in which foreign currencies are
bought and sold. The buyers and sellers include individuals, firms,
foreign exchange brokers, commercial banks and the central bank.

Functions of Foreign Exchange Market:

Foreign exchange market performs the following three
functions:
1. Transfer Function:
It transfers purchasing power between the countries involved in the
transaction. This function is performed through credit instruments
like bills of foreign exchange, bank drafts and telephonic transfers.

ADVERTISEMENTS:

2. Credit Function:
It provides credit for foreign trade. Bills of exchange, with maturity
period of three months, are generally used for international payments.
Credit is required for this period in order to enable the importer to
take possession of goods, sell them and obtain money to pay off the
bill.

3. Hedging Function:
When exporters and importers enter into an agreement to sell and buy
goods on some future date at the current prices and exchange rate, it is
called hedging. The purpose of hedging is to avoid losses that might be
caused due to exchange rate variations in the future.
1. Importing & exporting
Imports: a good or service brought into one country from another.
Exports: a good or service produced in one country then get marketed
to other country.
Import-export is the most fundamental and the largest international
business activity, and it is often the first choice when the businesses
decide to expand abroad as it is the easiest way to enter the market
with a small outlay of capital.

2. Licensing
Licensing is one of other ways to expand the business internationally.
Licensing is the arrangement between a firm, called licensor, allows
another one to use its intellectual property such as brand name, copy
right, patent, technology, trademark and so on for a specific period of
time. The licensor gets benefits in term of the royalty. The company
may choose to sell the products under the licensing when the
domestic production costs are too high, strict government regulations,
or the company wants to sell and produce standardized products
everywhere.
 3. Franchising
Franchising is closely related to licensing. Franchising is  a parent
company (franchiser) gives right to another company (franchisee) to
do business using the franchiser’s name and products in a prescribed
manner. Franchising is different from the licensing in terms of the
franchisees have to follow much stricter guidelines. Moreover,
licensing is more about the manufacturers while franchising is more
popular with restaurants, hotels, and rental services. For example,
McDonald, KFC, Pizza Hut and so on.

4. strategic partnetships & Joint venture

A strategic partnership or alliance is a positive aspect of the
cooperation of two or more companies in different countries are
joined together for mutual gain. A joint venture is a special type of
strategic alliance, where the partners across globe collectively found a
company to product goods and services. The cooperation between the
companies allow them to share the production cost, technologies,
development, and sales networks. The resources will be pooled to
mutual advantages and put the companies in win-win situations. For
example, Motorola and Toshiba joined a strategic partnership to
develop manufacturing processes for microprocessors.

5. foreign direct investment (fdi)

Foreign direct investment is a company’s physical investment such as
into the building and facilities in the foreign country, and acts as a
domestic business with a full scale of activity. Companies practice FDI
to get benefits from cheaper labor costs, tax exemptions, and other
privileges in that foreign country. The host country will get benefits
by the introduction of new products, services, technologies and
managerial skills.  
What Is a Multinational Corporation (MNC)?
A multinational corporation (MNC) has facilities and other assets in at least one
country other than its home country. A multinational company generally has
offices and/or factories in different countries and a centralized head office where
they coordinate global management. 

 Increase penetration
 Enhance Market share
 Double the Profit every year by selling more and more every year
 Reduce the cost
 By achieving all of above, multiply share holders value i.e., share price, which
is the ultimate goal of creating wealth for the promoters ..
There can be few exceptions like Tata Group, which focus on giving back to Nation by
creating more employment opportunities as Secondary Objective as well.
Over the past one-hundred years, some very important events have occurred that
summarise and relate to the history of the international monetary system. These are: the
Gold Standard, World War I and II and the collapse of the Gold Standard, the Bretton-
Woods Era and lastly, the current system of Floating Exchange Rates and Targeted
Inflation.

The Gold Standard, 1815-1914

Around 1815, England was a powerful European, and hence world, trading nation who was
leading the globe into less mercantillistic and more open trade policy, political system and
more secular beliefs which put them in a position where they were able and fit to impose
their own order on the monetary system. A stable system was in need in the light of
increasing world trade. This order was the Gold Standard. The Gold Standard is a policy of
establishing gold as the medium of exchange, store of value and unit of account in a
country. Each country tied the value of their currency to an ounce of gold, virtually creating
a fixed exchange rate system. For example, £4.27=1oz gold=US$20.67.

World War I, World War II and the Collapse of the Gold Standard
When World War I broke out in 1914, countries were in need of money in order to pay for
the war effort. During the war, the economic strain on nations was high and surely, one by
one, they abandoned their pledge to ensure convertibility of currency to gold. In other
words, they printed money to pay for the war effort, resulting in extremely high inflation
caused by the increased money supply.

The Bretton-Woods Era or the Gold Exchange Standard

As World War II came to an end it became clear that action needed to be taken, a new
monetary system was in order, one that would replace the Gold Standard that had broken
down in the Inter-War Period and effectively handle the Post-War Period. At Bretton Woods,
New Hampshire, a meeting was held by the allied powers and two proposals made. The
first was the British proposal by John M. Keynes which suggested having a real world bank
called the International Clearing Union (ICU) that would issue and manage a proposed
global currency called the ‘Bancor.’ The second was the American proposal which
suggested that the U.S Dollar become the world reserve currency (as it was strong and
stable) which would be based on gold (at $35 an ounce) and convertible to gold for central
bank purposes.

Floating Exchange Rates and Targeted Inflation

This current system is a slight variation of the previous. Instead of basing the reserve USD
on gold and pegging currencies against the USD, the value of each currency is determined
by the demand and supply for that currency in the foreign exchange market, the single
largest market in the world. The exchange rates are therefore nominally flexible (apart from
select cases) but are watched closely by central banks in order to make sure they do not
cause instability in the economy. 

Gold Standard as a Currency in Our World Today

This section will explore the validity and benefit of a reintroduction of the Gold Standard in
our world today based mostly on information from relevant readings Why we can’t return to
a gold standard—yet by Paul Nathan and What Would A return of The Gold Standard
Mean? By Kira Brecht as well as various other sources.

Introduction to I.M.F:
The International Monetary Fund (I.M.F.) is an international
monetary institution established by 44 nations under the Bretton
Woods Agreement of July 1944.

Objective of the I.M.F.:

1. To promote international monetary co-operative through a
permanent institution which provides the machinery for consultation
and collaboration in international monetary problems?

2. To facilitate the expansion and balanced growth of international

trade and to contribute there by to the promotion and maintenance of
high levels of employment and real incomes.

3. To promote exchange stability and orderly exchange arrangements

and to avoid competitive devaluation.

4. To help in the establishment of a multilateral system of payments in

respect of current transactions between members and in the
elimination of foreign exchange restrictions.

5. To provide means for international adjustment, superior to

deflation by making available increased international reserves.

Functions of I.M.F.:
The functions of I.M.F. can be discussed under the following
three heads:
Main Features of International Monetary System:

What Is an International Bond?

An international bond is a debt obligation that is issued in a country by a non-
domestic entity. Generally, it is denominated in the currency of its issuer's native
country. Like other bonds, it pays interest at specific intervals and pays its
principal amount back to bondholder at maturity.

Types of International Bonds

Eurobonds
Eurobonds are debt issued and traded in countries other than the
country in which the bond’s currency or value is denominated in. These
bonds are often issued in a currency that is not the domestic currency of the
issuer.

Global Bonds
Global bonds are similar to Eurobonds, but they can also be traded and
issued in the country whose currency is used to value the bond. Drawing
from our Eurobond example above, an example of a global bond
will be one in which the French company issues bonds denominated in the
U.S. dollar and offers the bonds in both Japan and America.

Brady Bonds
Brady bonds are sovereign debt securities, issued by developing countries but
denominated in U.S. dollars and backed by U.S. Treasury bonds. Part of a global
program developed in 1989, Brady bonds are a means to help countries with
emerging or embattled economies better manage their international debt.
International Equity Market:
An international equity market is an important source of global finance. One way, this type
of international market ensures the involvement of a wide variety of contributors, on the
other way; it also makes processes for global economies to prosper. Market valuations and
turnovers are two important tools for assessing the economic status of international equity
market. Students also learn how these markets are created and the essential elements that
govern them.

Risk of Investing In International Equities:

There are several risks associated with international equity markets –

 Currency risk – The value of dollar may differ from the value of the currencies of
those countries where the fund is invested. The return on investment fluctuates due
to this reason. When the dollar is weaker in the market, the return will be pretty
impressive regardless of how the investments are performing. On the other hand,
when the dollar is strong in the international market, the effect may be opposite.
 Liquidity risk – The US stock market is fairly liquid in comparison to other stick
markets. A large volume of stocks is traded her every day. The foreign market is
comparatively less liquid than the US market. As a result, a seller in other markets
may have to wait for a long time for a buyer, which means a loss to a trader
belonging to the US market.
 Political risk – Political environment always influence a stock market in every
country. In-stable government may lead to poor performance of a stock. This is a
problem in many developing countries.

BASIS FOR
ADR GDR
COMPARISON

Acronym American Depository Global Depository Receipt

Receipt

Meaning ADR is a negotiable GDR is a negotiable

instrument issued by a US
bank, representing non-US
company stock, trading in
the US stock exchange.
instrument issued by the
international depository
bank, representing foreign
company's stock trading
globally.

Relevance Foreign companies can Foreign companies can

 BASIS FOR
ADR GDR
COMPARISON

trade in US stock market. trade in any country's stock

market other than the US
stock market.

Issued in United States domestic European capital market.

capital market.

Listed in American Stock Exchange Non-US Stock Exchange

such as NYSE or NASDAQ such as London Stock
Exchange or Luxemberg
Stock Exchange.

Negotiation In America only. All over the world.

Disclosure Onerous Less onerous

Requirement

Market Retail investor market Institutional market.

Cross Border Listing?

Cross border listing involves companies that trade on the stock exchange of
their home country and also on a stock exchange in another country. A Cross
Border Listing gives rise to the possibility of arbitrage opportunities, as
identical assets are trading in two different markets.

Benefits of Cross Border Listing

Because of the benefits of being cross-listed, more and more companies are
getting themselves listed on stock exchange markets based outside of their
home countries. Here are the benefits of such a move.
 

1. Gain exposure and access to more capital

Cross-listed companies are able to access more potential investors, which

means access to more capital. Their stock may also gain more attention by
being traded in more than one part of the world. With this, there is a better
chance to raise capital because the company gets more exposure in the
market.

2. Help in improving a company’s structure of corporate governance

Cross-listings often require companies to establish a clear and well-defined set

of rules that govern its corporate structure. This means that it must be open
regarding its operations. Many cross-listed companies improve their
governing structure that guides the company’s directions and goals.

3. Attract more and better talent

Every company needs good talent or front-liners in order to perform well in

the stock market and in serving its customers. With a cross border listing, the
company gains exposure, increasing its chances of attracting top talent.

Also, being cross-border listed requires a company’s Equity Incentive Plan to

be more lucrative than those of companies that are not. This helps it create a
pool of hardworking and devoted talent.

4. Improves the reputation of a company

Opting for a cross border listing on the NYSE or other major exchanges
enhances a company’s public profile. It can be used as an advertising strategy
for cross-border listed companies to attract foreign investors.
What is Global Registered Share (GRS)
A global registered share (GRS, or Global Share) is a security that is issued in
the United States but is registered in multiple markets around the world and
trades in multiple currencies. With GRSs, identical shares may trade on different
stock exchanges and in various currencies across country borders without
needing to be converted into local currencies

What Is Transaction Exposure?

Transaction exposure (or translation exposure) is the level of uncertainty
businesses involved in international trade face. Specifically, it is the risk
that currency exchange rates will fluctuate after a firm has already undertaken a
financial obligation. A high level of vulnerability to shifting exchange rates can
lead to major capital losses for these international businesses.

Risks of Transaction Exposure

The danger of transaction exposure is typically one-sided. Only the business that
completes a transaction in a foreign currency may feel the vulnerability. The
entity that is receiving or paying a bill using its home currency is not subjected to
the same risk. Usually, the buyer agrees to buy the product using foreign money.
If this is the case, the hazard comes it that foreign currency should appreciate,
costing the buyer to spend more than they had budgeted for the goods.