INTERNATIONAL FINANCE AND E-BANKING (REVIEWER)

MODULE 1-2: Introduction to International Business and Multinational Corporation

Globalization- is the word used to describe the growing interdependence of the world’s

economies, cultures, and populations brought about by cross-border trade in goods and services,

technology, and flows of investment, people, and information.

Globalization is a social, cultural, political, and legal phenomenon.

Socially, it leads to greater interaction among various populations.

Culturally, globalization represents the exchange of ideas, values, and artistic expression among

cultures. Globalization also represents a trend toward the development of a single world culture.

Politically, globalization has shifted attention to intergovernmental organizations like the United

Nations (UN) and the World Trade Organization (WTO).

Legally, globalization has altered how international law is created and enforced.

Multinational Corporation (MNC)

- is an international corporation that derives at least a quarter of its revenues outside its home

country.

- has facilities and other assets in at least one country other than its home country.

- are for-profit enterprises that conduct business in more than one country.

-to make a profit and reach their financial goals

-business organization whose activities are located in more than two countries and is the org

form that defines foreign direct investment.

How a Multinational Corporation Works?

----No lecture :<<

Types of Multinationals

 Multinational Decentralized Corporation

- There are no administrative or management centers. Every office has their own

management structure. (e.g Fast Food chains—may mga tinatawag na managers na

kung saan sila ang namamahala sa business operation ng kanilang nasasakupang

branch. Ibig sabihin, may kanya-kanya silang paraan sa kung papaano nila

gagampanan ang trabaho nila. Sa ganitong paraan, mas may freedom silang gawin

yung alam nilang makakatulong sa kumpanya without constrictions or pressure.

 Global Centralized Corporation

- So being centralized means that there is a chief administrative and management office

or head office. Dito manggagaling usually yung mga instructions or plans na dapat

gawin ng ibang offices sa iba’t ibang lugar/bansa. Kumbaga, each of their offices

should follow or take into consideration what the head office wants to be done in their

operations.

- These businesses may also develop production infrastructure in these countries to

optimize affordable resources and acquire cost advantages

 International Company

- The research and development of the parent company are observed and obeyed. (e.g

Apple—kung ano ‘yong na innovate nitong mga bagong produkto ay siya ring
 naibebenta sa iba’t ibang parte ng mundo. Kumbaga, sinusunod nila kung anuman

‘yong naiinnovate ng parent company)

 Transitional Enterprise

-This is the combination of the three types of multinational corporation.

Enterprises generally have decentralized org. structure.

-these corporations do business in several countries without one location as a corporate

home.

The International Flow of Funds

Exports and Imports help into money to flow from one market to another.

Balance of Payments

The balance of payment shows the value of all the transactions that took place between the

domestic and the foreign residents in a specific period.

Debit=Credit

Exports > imports (surplus balance of payments)

Exports < imports (deficit balance of payments)

Two Components of the Balance of Payment:

 Current Account

- Short-term transactions of goods and services (import & export). Income from land

and foreign shares, etc.

 Capital Account
 - The sum of total inflow and outflow of capital. Long-term transactions or investments

that affect the non-current assets and liabilities of a country.

the factors that influence the flow of international funds are -

1. Impact of Inflation - If the inflation rate of a country increases or rises as compared to

the other countries with whom they trade, then the value of the current account will

decrease after taking an assumption that all the other factors are constant. In this case, the

country’s exports will decrease as no one would like to purchase at inflated prices and the

imports of the country will increase as the local companies will also purchase products

from the overseas market as they can buy from them at a low price which will assist their

working by saving their costs.

2. National Income - If the gross domestic product of a country increase, it gives a rise to

the per capita income of the people of the country which increases the consumption as

well as the spending of the country and this will definitely increase the demand for the

foreign goods and will give adverse impact on the balance of payment as the imports of

the country will increase with the increase in the level of income of the public.

3. Government policies of a country - The government policies of a country impact the

most on the trade between two countries at an international level. The policies of a

country help them or restrict them to do import and export transactions with the other

countries that can totally change the conditions of the balance of payment and balance of

trade of a country and can determine the growth pattern of a country. This is one of the

most important factors that affects and controls the flow of funds from one country to the
 other which constitutes the international trade and flow of funds from one country to

another country.

4. Subsidies provided for traders - The rate subsidies decide the volume of exports in a

country. If a country promotes exports in its country, then it tends to provide a lot of

subsidies on international trade and mainly on the export activities. In India, huge

subsidies are provided on the exports of goods and services from India to any other

country and another example is China where they receive free loans and the free lands

from the government for the production of goods and services that can be exported in

future and these firms incurred a very low cost of operation as most of their fixed cost

and fluctuating costs are subsidizes by the government of their own country to promote

the international flow of funds which is necessary for the overall development of the

economy and for the development of the country and its growth in respect of other

countries. These subsidies are helpful for a countries exporters and importers to capture

the larger share of the global market.

5. Restriction on imports - If the government of a country imposes heavy duties on the

imports and related activities in their countries then it will help the country to improve

their balance of payment position as the public will not be able to purchase the goods and

products from the other countries and if they will purchase it will decrease their

profitability as the heavy duties are levied on the imports of the goods and it will increase

their cost of production or business as well. On the other hand, if the country levied less

duty on the imports then people of the country will import more and more from the other

countries and will adversely affect the balance of payment position of a country.
 6. Restrictions on the piracy - In some cases, a government can affect international trade

flows by its lack of restrictions on piracy.

In a country like China, the problem of piracy is very common. Most of the item that is pirated in

China are CDs and DVDs that are originally produced in countries like the United States and

England. The Chinese people sell these products on the streets at a very low price than the

original cost of the product. They also sell these products to the local retail outlets in China and

due to these piracy activities in China, the United States almost suffers a loss of nearly $2 billion

every year. As a result, the United States has a deficit in the balance of trade and this also

resulted in lowering the imports from other countries in China which affects the balance of

payment in China also.

7. Impact of exchange rates of foreign currency - 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. If the foreign currency in which the

export or import transactions takes place more fluctuates at a higher level, in that case,

the balance of payment for that specific period will also fluctuate at a greater extent and

somehow equal to the extent of changes in the foreign currency in the international

market.

FACTORS INFLUENCING INTERNATIONAL FLOW OF FUNDS

 Impact of Inflation

- Rate of increase in prices over a given period.

↑ Production Cost, ↑ Prices

 ↑ Prices, ↓ Purchasing power of a currency

Pag mataas yung production cost, siyempre tataasan din yung price ng produkto. Kapag

tumaas ang price, bababa yung value ng pera—ibig sabihin, kakaunti na lang ang kaya

nitong bilhin na goods and services. Kung dati ang 1000 pesos ay isang kahon na ng mga

groceries, ngayon halos iilan na lang na items ang kaya nitong mabili.

 Impact of National Income

↑ GDP, ↑ Public’s Level of Income

Imports Demand increases than exports— results to deficit balance of payment

Habang tumataas ang GDP ng bansa, tumataas din ang level of income ng mga tao. So mas

tataas ang imports demand dahil may kakayahan na tayong bumili/magimport kaysa magproduce

(mag export). So pagdating sa balance of payment, mas tataas ang imports natin kaysa exports

kaya considered itong deficit balance of payments.

 Impact of Government Restrictions

Restrictions on import & export transactions. Kung walang policies na iimplement and susundin,

malamang magkakaproblema tayo sa international flow of funds. Hindi pwedeng import lang

nang import, hindi rin pwedeng export lang ng export. May sineset na limitations or guidelines

when having importation and exportation para mamaintain yung balance of payments and trade.

Subsidies provided for traders- sum of money granted by the government to assist traders and

encourage more exporters.

Restriction on Imports – may mga iniimpose na policies & restrictions pagdating sa

importation. Kumbaga, hindi lahat ay pwedeng mag import, at limited lang ang pwedeng iimport
to prevent deficit in balance of payment. May mga pinapayagan lang na authorized distributors

to import goods and sell it in their countries pero may policies pa rin na sinusunod and of course,

may tax. Smuggling is illegal kasi.

Restrictions on the piracy- pag hinayaan kasi ng gobyerno ang mga fake or pirated goods or

products, it would affect balance of payments. People will rely on it as it offers lesser cost than

its original value.

 Impact of Exchange Rates of foreign currency

Pag mataas ang value ng dollar against sa currency natin, if we were to import, lesser quantity

lang ang kaya nating iimport of course. Ganun din sa exportation of goods, kaya nilang bumili ng

mas marami sa atin kaysa sa previous periods. Example: Kung yung bigas natin ay ₱1,000 per

cavan and then eexport natin siya at a rate of $1 = ₱50. So mabibili nila at $20 per cavan. Pag

tumaas ang exchange rate like for example naging $1 = ₱55, mabibili nila at $18.18. Imagine,

dahil sa pagbabago nung exchange rate nung foreign currency na ‘yon, lugi na tayo. Though

positive or good news ‘yon para sa mga napapadalhan from US dahil malaki ang palitan ng

dolyar, iba naman ang epekto nito sa imports and exports ng ating bansa.

ADVANTAGES OF INTERNATIONAL FLOW OF FUNDS

 Increased Aggregate Demand

 Increased Production Capacity

 Technological Advancement

 The surplus on the financial account of the balance of payment

 Easy Finances

 The Inflow of Foreign Currencies

Advantages of International Flow of Funds

1. Increase Aggregate Demand - The demand for the products overall increases if the

international flow of funds is allowed in a country. Before the implementation of

globalization all over the world the demand for the local products were not so good and

many of the industries has faced failure before the globalization but after it as the

international trade was allowed, the demand for the local, as well as international product,

got a rise and most of the manufacturing companies emerged as big giant industries at

that time.

2. Increased Production Capacity - After the globalization era, many countries emerged

as a manufacturing hub for one or the other good and the existing production capacity

also rise of the countries and the manufacturing units as they now had buyers for their

products in a huge quantity which has increased their profits and thus their production

capacity as well. If in case the flow of funds from one country to another is restricted in

future then many of the manufacturing companies will be at the verge of crisis and the

economy of many countries will crash.

3. Technological Advancement - If the import and export from one country to the another

is easy and promoted then the country also becomes technologically advanced as the new

and innovated technology can easily float from one country to the another. On the other

hand, if the import and export policy from one country to the other is restricted then the

country becomes obsolete in terms of the technology and innovations used by them for

various purposes of manufacturing and research and development activities.

 4. The surplus on the financial account of the balance of payment - Capital inflows from

any other country out of the world can help to finance a current account deficit. With the

help of attracting capital flows from the international market, it enables UK households to

effectively import more goods and services. Without these capital inflows, a current

account deficit would lead to a devaluation in the exchange rate to restore equilibrium in

the balance of payments.

5. Easy Finances - In the international market the flow of funds is very easy and it assists

the domestic companies and even government to raise funds from outside the country

which is easier with the help of the flow of funds from outside the country by mean of

foreign direct investment.

6. The inflow of Foreign Currencies - The international flow of funds helps the country to

get foreign currency easily as all the transactions of imports and exports take place in the

foreign currency only.

DISADVANTAGES OF INTERNATIONAL FLOW OF FUNDS

 The loss to Domestic Players

 Tax Evasion

 Destroying the real estate market

 Money Laundering

Disadvantages of International Flow of Funds

1. The loss to Domestic Players - Internationalization of flow of funds that means the

promotion of imports and exports transaction can destroy the market of domestic players.

The domestic market gets affected when the international player enters the domestic

market with its more advanced products and services and destroys the domestic players.

2. Tax Evasion - International companies like Facebook and Amazon move to the countries

that have lower tax boundations. The companies save their expenditure on corporate

taxation by operating in the underdeveloped and developing countries where the tax on

doing business and related activities is very less. For example; Amazon – Luxumberg,

Google in Ireland.

3. Destroying the real estate market - The international flow of funds can also be in the

way of purchase of assets or real estate property in the other country. Many multinational

companies invest in the real estate property in the other countries which helps them to

curtail their profits in the form of investments in the other countries and helps them to

reduce their tax liability on the profits. This sometimes increases the price of the real

estate property in the domestic country as multinational corporations set up their plants in

a particular area. For example – The biggest plant of Samsung is going to set up in Noida

in India after this news the prices of the real estate property in Noida is continuously

rising.

4. Money Laundering - The problem of money laundering can be there when the funds are

easily allowed to flow from one country to another country which can also become the

cause of many illegal and criminal activities like terrorist attacks and emergence of black

money in the banks of other countries.

MODULE 3-4 THE EXCHAGE MANAGEMENT AND INTERNATIONAL MONEY

MARKET

FOREIGN EXCHANGE- is the trading of one currency for another

 Dito sinasabi nila if nagtravel ka sa ibang country you need to exchange your money sa

currency nila. For example, nagtravel tayo sa America and then Peso atin we need to

exchange yung peso into dollars.

 Pero pagsa good naman pagtrading, when the demand increases, the price also increases.

Nagmumultiply yung value ng currency.

 Ganun din kapag when the demand decreases, the price also decreases.

EUR=1 USD=1.18

Factors that affect foreign exchange

1. Inflation- nagkakaroon ng depreciation of currency kapag tumataas ang inflation ng

isang bansa.

- Changes in market inflation cause changes in currency exchange rates. A country with a

lower inflation rate than another will see an appreciation in the value of its currency. The

prices of goods and services increase at a slower rate where the inflation is low. A

country with a consistently lower inflation rate exhibits a rising currency value while a
 country with higher inflation typically sees depreciation in its currency and is usually

accompanied by higher interest rates

2. Interest Rates and exchange rates are highly correlated

*Lower interest rates tend to decrease exchange rates.

*Having a higher interest can attract foreign capital or investment

- Changes in interest rate affect currency value and dollar exchange rate. Forex rates,

interest rates, and inflation are all correlated. Increases in interest rates cause a country's

currency to appreciate because higher interest rates provide higher rates to lenders,

thereby attracting more foreign capital, which causes a rise in exchange rates

3. Balance of payments or Current Account Deficits

*It is a balance account between a trading country and its partners. Nagrereflect lahat dito mga

trading payments of goods and services na nangyari between country.

*kapag may deficit sa current account ibig sabihin the value of imports is greater than the value

of exports so dahil dito magcacause ng depreciation sa value ng currency.

*when the value of exports is greater than the value of import means we have a surplus.

- A country’s current account reflects balance of trade and earnings on foreign investment. It

consists of total number of transactions including its exports, imports, debt, etc. A deficit in

current account due to spending more of its currency on importing products than it is earning

through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its

domestic currency.
4.Public Debt- kapag may large deficit and debt ang isang bansa magiging less attractive ito.

Because it encourages a higher implation that’s means magkakaroon tayo ng mababang value sa

currency.

* Foreign investors are less likely to invest sa may malaking government debt or deficit.

-Government debt is public debt or national debt owned by the central government. A country

with government debt is less likely to acquire foreign capital, leading to inflation. Foreign

investors will sell their bonds in the open market if the market predicts government debt within a

certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Political Stability and economic performance

*napaka halaga din na maganda at stable ang ekonomiya ng isang bansa kasi mga foreign

investor isa ito sa factor na hinahanap nila. Kung hindi stable it turn to loss the confidence of a

currency of a country..0

-  country's political state and economic performance can affect its currency

strength. A country with less risk for political turmoil is more attractive to foreign investors, as a

result, drawing investment away from other countries with more political and economic stability.

Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency.

A country with sound financial and trade policy does not give any room for uncertainty in value

of its currency. But, a country prone to political confusions may see a depreciation in exchange

rates.

6. Terms of trade- comparing the exports prices into import prices.

*If the price of country export increases by a greater rate than the imports the terms of rate

favorably improve because it tends to show currency appreciation. However, if the price of

import increases more the the rate of exports ibig sabihin nun yung currency value ng bansa ay

madedecrease.

- Related to current accounts and balance of payments, the terms of trade is the ratio of export

prices to import prices. A country's terms of trade improves if its exports prices rise at a greater

rate than its imports prices. This results in higher revenue, which causes a higher demand for the

country's currency and an increase in its currency's value. This results in an appreciation of

exchange rate.

FOREIGN EXCHANGE MARKET

(FOREX MARKET OR FX MARKET)

- Largest Financial market

- It is the over the counter (OTC) global marketplace that determines the exchange rate

currencies around the world.

- Plays a vital role in a global economy kasi everyday TRILLION OF DOLLARS the

exchange from one country to another.

- It is essential for international business kasi ito ang ginagamit natin to trade kung

bibili sa ibang countries kailangan muna magpapalit ng local currency sa bansa nila

and forex market makes this happen.

- Forex market includes the Government businesses and the investors.

- Government_ use this to implement policies.

 - Businesses-international trade

SIZE OF THE FOREIGN EXCHANGE MARKET

It is a unique for several reasons, mainly because of its size. Trading volume in the Forex

market is generally very large.

 MICRO LOT

The Smallest. Madalas ito ang gamit when we first start strading sa forex.

 MINI LOT- 10x large sa micro lot

 STANDARD LOT-The original largest trade size. Dati ito ang lang ang tinatanggap na

pwedeng gamitin sa foreign exchange rate.

-It carries substantial risk of lost and it is not suitable for everyone.

TRADING IN A FOREIGN EXCHANGE MARKET

- Is open 24 hours a day, five days a week across major financial centers across the

globe.

- This means that you can buy or sell currencies at any time during the day.

- Exchange rate can exchange in one second.

- Buy and sell

DIFFERENCE IN THE MARKET MARKET

 The Spot Market-

*Commodities or financial instruments na binili or nabenta in a couple of days.

*Cash or Physical MArket

 *It is a organize market

 Forward Market

Informal over the counter market by its contract. Dito pumapasok ang mga future

delivery contracts.

Highly customize

 Future Contract

*contrast to spot market

* specified date

*derivatives contracts

EXCHANGE RATE FORECASTING

* it is basically ito yung exchange rates by gathering all the relevant informations about the

factors that affect the certain currencies today.

* Forecasting is necessary to find out wheather the currency will appreciate or depreciate int the

future.

*it helps minimize risk and maximize returns that’s why we need to forecast in exchange rate.

 Purchasing Power Parity- “BASKET OF GOODS”- one of the popular

macroeconomic metrics to compare the economic productivity and standard living

between countries.

*Compares different country currency through the BASKET OF GOODS approach.

According to this concept the 2 currencies are equilibrium (pareho o balance)

 Relative Economic Streg- Economic strength approach

*It looks at the strength of the economic growth of different country to forecast the

direction of exchange rate.

*It is the base the idea of having a strong economic growth will more be attracted to the

foreign investors.

 Economic Models of Forecasting Exchange Rates

*Currency movements

*Economic theory

*Historical datas.

FOREIGN EXCHANGE RISK

 IMPLICIT FX RISK- transactions affected by change in exchange rates.

 EXPLICIT FX RISK- rates change between transaction date and settlement date.

 ECONOMIC RISK- long-term effects of exchange rate changes.

INTERNATIONAL AND FINANCIAL MONETARY SYSTEM

(DIFFRENTIATE THESE 2 KASAMA SA QUIZ)

-the international is consistent with policies institution practice regulations and mechanisms

that determine foreign exchange rates.

DIFFERENT TYPES OF EXCHANGE RATE

-managed float system (-Dirty floating

- where exchange rate fluctuates, and the central banks attempts to influence by buying and

selling currencies

-halfway of fixed exchange rate and flexible rate.

-flexible exchange rate

- is a monetary system that allows the exchange rate to be determined by supply and demand.

-the influence of exchange rate

International Capital Market- are the same mechanism but in the global sphere, in which

governments, companies, and people borrow and invest across national boundaries. In

addition to the benefits and purposes of a domestic capital market, international capital

markets provide the following benefits:

 INTERNATIONAL MONETARY MARKET/IMM

*Where international currency transaction between numerous central banks of

countries is carried on.

*Forex trading

*To handle the currency trading between countries.

* Interest Rate products that have an original maturity of less than 366 days, trade in

what is commonly referred to as the “Money Market”

*Money market instruments, like T-bills, CDs, commercial paper do not make

periodic payments, and they trade in yield terms..

* money market products from longer dated interest rate products like notes and

bonds.

 INTERNATIONAL CREDIT MARKET

/ICM

*Refers to the market through which companies and government issue debt to

investors.

*Short term commercial paper, junk bonds, investment, grade bonds

*Trading bonds

* loan capital market

* Sometimes called the debt market, the credit market also includes debt offerings,

such as notes and securitized obligations, including collateralized debt

obligations (CDOs), mortgage-backed securities, and credit default swaps (CDS).

DeBT MARKET- debt offering

*London, interbank offer rate (LIBOR)

*Syndicated loans

*INTERNATIONAL BON MARKET/IBM

-is market for bonds that are traded beyond national boundaries (DOMESTIC).

-pull together investors from different countries.

-financing and interests

-FOREIGN BONDS- sold outside the issuers of the country. Dominated the

currency where its issued.

-EURO BONDS- issued in country other one whose currency is dominated.

INTERNATIONAL STOCK MARKET

-stock exchange is a facility for the trading of securities and other financial

instruments

-part ownership
-equity shares

INTERNATIONAL FINANCIAL INSTITUTIONS

-were founded by group of countries to founded by groups to promote public and

private investment to faster economic and social development in developing and

transitioning countries.

ITERNATIONAL MONEY FUND

*Dec 7, 1945, Brentwood

*Global economic growth

*Reduce poverties

* is an international organization that promotes global economic growth and financial

stability, encourages international trade, and reduces poverty. 

*FINACIAL ASSISTANCE-LOANS

- loans to countries that are experiencing economic distress to prevent or mitigate

financial crises

*TECHNICAL ASSISTANCE- DEVELOPMENT OF THE PRODUCTIVITY

-  provides technical assistance, training, and policy advice to member countries

through its capacity building programs. These programs include training in data

collection and analysis, which feed into the IMF's project of monitoring national and

global economies.

*SURVEILLANCE- MONITORING ACTIVITY

- The IMF collects massive amounts of data on national economies, international

trade, and the global economy in aggregate. The organization also provides regularly

updated economic forecasts at the national and international levels

FINMAN E3 CHAPTER 5

FOREIGN DIRECT INVESTMENT

o the practice of Investing in businesses in foreign countries.

 In other words, FDI occurs when a firm invests directly sa mga facilities to produce or

market goods or services in a foreign country.

 For example, if American multinational corporation or firm nag open up siya ng

operations in Vietnam or india either by opening up its own premises or partnering with a

local firm then that investment would be considered as part of FDI.

 Foreign Direct Investment is when a company owns another company in a different

country. FDI is different from when companies simply put their money into asset in

another country or yung tinatawag nilang Foreign Portfolio Investment most probably

pag sinabi nating ng Foreign Portfolio Investment ito lang yung bumibili sila ng share or

ng stocks or ng bonds sa different foreign countries. So hindi ganon ang FDI. Foreign

companies FDI are directly involved with day to day operations in other country. This

means na they aren’t just bringing money with them but also nagshashare sila doon ng

knowledge, skills and technology. A lot of economist gusto nila ang FDI kasi no

especially when its flowing from rich countries into poorer countries. The idea is when

international companies pumasok sa ibang bansa they can either shake up an existing

industry because they bringing competition for the domestic companies that already exist

or nagcrecreate sila ng entirely new industries.

  FDI can also strengthen yung local economies by creating maraming jobs ng mga new

jobs and boosting yung government tax revenues later pag uusapan natin yan sa benefits

ng FDI.

o Foreign direct investments (FDI) are substantial investments

made by a company into a foreign concern.

o The investment may involve acquiring a source of materials,

expanding a company's footprint, or developing a multinational

presence.

o As of 2020, the U.S. is second to China in attracting FDI.

TYPES OF FDI

 There are three types of FDI

1. Horizontal FDI - The acquisition of or merger with firms in the same stage of the

production process within the same industry.

 First is itong horizontal integration or what we know horizontal FDI this includes the

acquisition of or merger with firms in the same stage of the production process within the

same industry. It occurs when the multinational corporation or firms undertakes the same

productions activies in multiple countries.

 The example here would be ano that suppose an American Car Mnufacturer inacquire

niya yung Japenese Car Manufacturer they are both in the same part of production or in

the same part of production process and within the same industry and then that’s when

they are part of horizontal FDI.

 A firm may pursue strategy to increase its economies of scales as well as to increase its

market share.

 Horizontal FDI is where funds or invested abroad in the same industry. In other words a

business invest in a foreign firm that produces similar goods.

 For example si nike a US based firm may purchase PUMA a Germany based firm they

are both in industry of sports wear and therefore would be classified as form of horizontal

FDI.

 For example ditto sa photo si Disney inacquire siya si PIXAR way back 2007 same

industry and same activities therefore they are also classified as horizontal FDI.

 Facebook inacquire niya si Instagram pareho silang social media platform.

2. Vertical FDI

 Is where an investment is made within the supply chain but not directly in the same

industry. In other words yung mga business nag iinvest in a foreign firm that may supply

or sell to.

 For instance, hersheys is a US chocolate manufacturer may look to into invest to cocoa

producers in brazil this is known as Backward Vertical FDI because a firm purchasing a

supplier or potential supplier in the supply chain.

 In Forward Vertical FDI is where a firm invest sa isang foreign company that is further

along in the supply chain.

 For instance, ito ngang si hersheys may look to purchase a share in Alibaba where it sells

its products.

 A company that undergoes vertical integration acquires a company operate in a

production process of the same industries some of the reason when a company may
 choose to integrate vertically include streghtening yung supply chain or reducing costs or

capturing streams profits or accessing new distribution channels to accomplish this one

company acquires another and that either before or after supply chain process.

 Backward integration company can integrate vertically in two ways backward and

forward. Backward occurs when a company decides to buy another company that makes

input for the acquiring of companies product. For example a car manufacturer pursuing a

background integration when it acquires tire manufacturer. Forward integration naman

occurs when company decides to take control post production process. Car manufacturer

may acquire automotive dealership through the process of forward integration or

acquiring a business a head of its own supply chain.

Forward Vertical FDI - The acquisition of or merger with firms further along the supply

chain. This may include a furniture manufacturer acquiring a retail furniture store.

Backward Vertical FDI - The acquisition of or merger with firms at earlier stages of the

production process. This might include a car manufacturer purchasing a supplier of car

parts.

3. Conglomerate - The acquisition of or merger with firms' different industries.

 Is where an investment is made in a completely different industries. In other words hindi

siya link in any direct way to the investors business. For instance, si amazon madaming

ano yun industry like clothing, health care, uniliver and also san Miguel. San iguel is one

of the Philippine largest and most diversified conglomerates. meron siya sa beer meron

siya sa coffee meron siya sa sports so diverse when we say conglomerate. Sa iba this may

seem strange but it offers big opportunities sa mga businesses na gustong mag expand

and idiversify yung business into new areas. To explain some big businesses come to
 appoint where yung demand nila for its fundamental business is nagiistart ng magdecline

in order to survive it must invest sa mga new ventures even yung mga malalaking

company with a strong demand may look to new industries where growth and return on

investment are significantly larger.

TYPES OF MOTIVES FOR FDI

1. Resource-seeking

- Firms are motivated to invest abroad to acquire

specific resources at a lower cost that could be

obtained in their home country.

* firms generally seek in three types of resources

1. Physical resources – such as yung mga rare earth crued oil and agricultural products.

2. Cheap and diligent unskilled or semiskilled labor – for example, many clothing

companies moved yung kanilang production facilities to Thailand, Vietnam, Bangladesh,

for the low-cost labor.

3. Technological capacity, management, or marketing

expertise and organizational skills – for example naman nito is to access yung

technological and managerial know how that is available in a vital market. Firms may

benefit from let say establishing a presence in a key industry or cluster such as

engineering. For example engineering sa Germany and sa japan. Fashion sa Italy or

software in the US and India.

  Resource seeking syempre most probably low-cost kaya ang oobtain tayo sa ibang bansa

kaya nag aacquire or nakikipag merge tayo sa ibang facilities in other country that’s one

reason because gusto mong makaacquire ng low cost resources.

2. Market-seeking

- Firms that invest in a particular country or

region to serve markets in that country

or region.

* For example, many companies such as Samsung, IBM or voxwagen invest all over the world

because mas nakakagenerate sila ng more sales abroad than in their home countries. Apart from

market size and expected market growth.

1. Follow main suppliers or customers – if a firms main supplier or customer have

expanded overseas then the firm might need to follow them in order to retain nga yung

business. For example, si Toyota when Toyota decides expands to a foreign market its

domestic suppliers might follow Toyotas suppliers moved and branch out to foreign

country as well.

2. Adapt to local tastes - Second firm may need to adapt its product to local taste and

specific market requirements which can only be achieve through market presence in the

form of foreign direct invesments. For example realizing na yung mga American drivers

is in particular have powerful appitite for crossovers and SUV’s so nag create si BMW ng

entire X series sa united states.

 3. Save production and transaction costs – the third is production and the transaction

costs of serving local market from an adjusted facilities may be lower than supplying the

market from the distance kaya nag iinvest din yung mga market seeker in FDI.

4. Part of global strategy – lastly a firm may consider if necessary to have a physical

presence in the leading markets served by its competitors as part of its global strategies.

For example, si caterpillar entered japan way back 1970’s to hinder the ability of its

major rival na si comatsu para magexpand ng mga activities sa US so that’s part of global

strategy market seeking kaya nag iinvest sila sa FDI.

3. Efficiency-seeking

* the motivation of efficiency seeking FDI is to

- Rationalize production, distribution, and

marketing activities through common

governance of and synergy-building among

geographically dispersed operations.

* such rationalization is essentially two sources

1. The advantages of differences in the cost of

factor endowments between countries.

2. The economies of scale and scope.

* for example, to reduces yung mga sourcing and yung production cost by now accessing

expensive labor and other cheap inputs of the production process many multinational

corporations MNC nagbubuild sila ng manufacturing facilities sa china, Mexico, western Europe

and india.
 4. Favorable government policy-seeking

 Many firms invest overseas para magtake advantage ng kanilang foreign government

favorable policies in addition to restricting in the imports some government may offer;

Subsidies, Low-interest loans, Tax concessions.

 To a foreign firm para maencourage sila to invest locally and this favorable policies and

governmental endorsement might facilitate a firms global expansions and for example

1990’s si kentaky nag offered ng incentive kay Toyota worth 147million dollars to

pursued it to build its US automobile assembly plans doon sa US the package included;

Tax breaks, State spending on infrastructure, Low-interest loans.

BENEFITS OF FDI

1. Increased employment – the creation of job is most obvious advantage of FDI and it is

also one of the important reason kung bakit yung isang nation especially a developing

one aims to attract yung foreign direct investment. Increased FDI boost the

manufacturing services sectors ng host country which creates jobs and helps to reduce the

unemployment.

2. Human Resource Development – Human Capital refers to the knowledge and

competence ng isang workforce, skills that are required and improved upon or through

foreign companies training to boost education and human capital in the host country.

Once develop human capital in other words those skilled and experience workers can

then train human resource and other local companies thereby creating a riffle effect. If
 trinain mo yan may FDI ka sa US yung human resource investment mo doon itrain mo

siya doon pwede mo itong magamit locally doon the host country and magkakaroon na

ng riffle effect.

3. Provision of Finance and Technology – host countries can get access to the latest

financing tools, technologies, and operational practices from inward FDI. Overtime the

introduction of the newer enhanced technologies, processes result in their diffusion in the

local economy consequently the effiency of industry is improved.

4. An increase in exports – it is important to understand that hindi lahat ng goods produce

through FDI are intended for domestic conception many of those products have global

markets. For example, si BMW South Carolina plant exports siya around 200,000 SUV

during 2020 with a value of 8 million dollars to china, Germany, south korea, Canada,

Russia and many other countries. So nag increase siya ng exports. As a result ung united

states and other state nanagkaroon ng increase in exports nagkaroon din sila ng increase

in their sales.

5. The creation of a competitive market – FDI helps create a competitive environment in

addition for breaking domestic monopolies in host countries. A healthy competitive

environment pushes a firms para magcontinue siya sa enhancement sa kanilang process

and product or kanilang product offerings thereby postering innovation consumers in the

host country also gain access to a wider range of competitively price products.

6. Stimulation of Economic Development – this is another important advantage of FDI

kasi it is a source of external capital and higher revenues for countries. When a company

or factory is constructed atleast some local labor materials and equipments are utilized

once the construction is complete the factory will then hide some local employees and
 make further use of local materials and services and yung people who are employed by

such factories less have more money to spend. This factors also create additional tax

revenues for the government that can be infused to create and improving yung physical

and financial infrastructure.

COST OF FDI

1. It can replace local business – the entry of large foreign giants into delicate domestic

markets can mean bad news para sa mga local and small businesses because nasa risk sila

ng displacement or bankruptcy so one cost of FDI.

2. No guarantee benefits for the recipient countries – FDI enables foreign multinational

corporation or MNCs to obtain yung ownership of raw materials and goods with little

evidents of capital and being redistributed throughout the domestic economy. Walang

guaranteed benefits sa mga recipient na bansa.

3. It can encourage political corruption – in order to sees the foreign market FDI’s have

gone extend of corrupting high officials and political bosses and in various countries and

in certain countries FDI influence the political set up for personal gain. For example most

of the latin American countries have experience like drug trafficking and money

laundering.

4. It can contribute to pollution – kase some developing countries might lessen yung

kanilang environmental regulation para makaattract ng maraming MNC. FDI can

contribute to the pollution problems in the host country minsan kasi binababa nila talaga

yun para makaattract ng mas maraming foreign direct investors.

5. It can promote cultural erosion – in all countries where FDI have made inroads there

has been a cultural shock experience sa mga local people kasi they must adapt doon sa
 culture that is not familiar sakanila. As a result the domestic culture either nawawala or

suffers a setbacks this felt by both families and as a whole in other words it causes

erosion in the value system of the people kasi kailangan nga nilang mag adjust dahil

samga pumapasok na ibang countries dahil may mga sarasariling cultures ang mga yan.

POLITICAL RISK

- Range from the outright expropriation of foreign assets to unexpected

changes in the tax laws that hurt the profitability of foreign projects.

Depending on the incidence, political risk can be classified into two types:

1. Macro risk - where all foreign operations are affected by adverse political

developments in the host country.

* impacts lahat ng asset classes that are exposed doon sa particular na country or region. Imagine

in a country for example that has elected a government na oppose doon sa foreign influence and

interference any company na engage doon sa foreign direct investment or has operations doon sa

country nay un would face tremendous macro risk because yung newly elected government

would expropriate any or all foreign operations regardless of industry. Many organizations and

academic issue reports that access countries or regions degree of macro risk. Furthermore

companies have the opportunities para ipurchase yung political risk insurance from a variety of

organizations to mitigate yung financial losses.

2. Micro risk - where only selected areas of foreign business operations or

particular foreign firms are affected.

* are firm specific political risk that affect businesses that conduct operations outside their home

country borders. This risk do not impact all the companies or industries doing business in a

foreign country but instead impact in a specific firm kaya micro. Micro risk occur at the project

level thus impacting a specific project ng isang companies nanag aattempt na mag implement sa

isang foreign country kaya this risk can stem from political, economic, governmental, or societal

changes or events that have occurred in the host country. For example si company A nagestablish

siya ng manufacturing facility in another country to take advantage doon sa lower labor cost ng

bansang iyon after a period of time the workers in that facility decides to go on strikes for better

wages and benefits. The company A magsusuffer siya sa reduce ng revenue as the manufacturing

plan is idle during the strike. In this example only operations from company A were face with an

adverse situation yung ibang operation ng company ay hindi naman naapektuhan that’s micro

risk.

* Macro Risk is differ than Micro Risk because it refers to the risk across the all businesses or

industries for entire geographic regions or countries. Unlike sa micro risk firm specific. Macro

Risk can stem from changes leadership, political and civil unrest, monetary policy ship and

changes in government regulation and taxation.

POLITICAL RISK

Depending on the manner in which firms are affected, political risk can be classified into three

types:

1. Transfer risk - which arises from uncertainty about cross-border flows of capital,

payments, know-how, and the like.

 Transfer risk is defined as a threat that a local currency cannot be converted into another

nations currency due to the changes in nominal value, face or Par value or because of

specific regulatory or exchange risk restriction. CONVERSION RISK. This may arise

when a currency may not widely traded and capital controls prevent and an investor

business from freely moving yung currency niya in or out of the country. For example,

supposed banking regulations in a country prineprevent niya yung isang business from

withdrawing funds in a foreign banks for several months after the sale has been

completed while the funds are being held let say the value of the foreign currency is

bumaba relative to the value of currency from the country where the business is located

the end result would be losing of money on the overall transaction simply due to the

timing issue that must be followed in accordance with the law. This is transfer risk that

some businesses when engaging in commercial transactions with company in foreign

companies. Another example of transfer risk includes doon sa module unexpected

imposition of capital controls inbound or outbond and with holding taxes revenue on

dividend and interest payments.

2. Operational risk - which is associated with uncertainty about the host country's policies

affecting the local operations of MNCs.

 Operational risk is the risk of a change in a value cause by the fact of actual losses

incurred in adequate or fail in internal processes people and system from external events

including yung mga legal risk differ from the expected losses contrary to the other risk

the operational risk are usally not willingly incurred nor are they revenue driven

moreover hindi sila diversifiable and cannot be layed off this means that as long as

people, systems and processes remain imperfect operational risk cannot be fully
 eliminated. Operational risk nonetheless a manageable as to keep loses within some level

of risk tolerance. For example the amount of risk is preferred to accept its pursuit

objectives determining the balancing and cost of improvement against the expected

benefits wider trends such as globalization expansion of the internet and the rise of social

media as well as the increasing demand for the greater corporate accountability world

wide, reinforcement need of proper operational risk management. For example, includes

unexpected changes environmental policies, sourcing or local content requirements,

minimum wage law and restriction to access local credit facilities.

3. Control risk - which arises from uncertainty about the host country's policy regarding

ownership and control of local operations.

 Risk that a mistatement due to error or fraud that could occurs in an assertion and that

would be material individually or in combination with other mistatements that will not be

prevented or detected on timely basis maybe companies internal controls. Control risk

functions of the effectiveness of the decisions and operations of internal control. Example

nito includes restriction imposed of maximum ownership shares by foreigners mandatory

transfer of ownership to local firms over a certain period of time or yung mga tinatawag

na fade out of requirements and the nationalization of local operations of MNC’s.