Motives for Internationalisation of Financial Markets

• Pro tability: The Price di erentials among markets serves as an important incentive to
internationalise. Exporters bene t from the higher margins in the foreign markets. As, domestic
market competition may leads to limit a rm’s pro tability. Some of the policy incentives such as
exemption from the indirect taxes and duties, several incentives by the government for export-
oriented production, and marketing support schemes contribute to enhance the pro tability of
rms in International Marketing.

• Growth: Firm enter international market when the domestic market potential saturates and they
are forced to explore alternative marketing opportunities overseas. However, given the size of the
Indian Market, enormous opportunities for most of the practices exist in the domestic market itself.
Therefore, growth is the motive of only a few selected companies to internationalise. This is also
true for large market economies such as the US and China. It may also be observed that countries
with smaller market size, such as Singapore, Hong Kong etc, had no other option but to internalise.
fi
fi
ff
fi
fi
fi
fi
• Risk Spread: A Company operating in domestic markets is highly vulnerable to economic
upheavals in the home market. Overseas markets provide an opportunity to reduce their
dependence on one market and spread the market risks.

• Access to Imported Inputs: The National trade policies provide for import of Inputs used for
exports production, which are otherwise restricted. Besides, there are number of incentive
schemes which provide duty exemption or remission on import of inputs for export production,
such as advanced licensing, duty exemption, export promotion, capital goods schemes. it helps
the companies in accessing imported inputs and technical know how to upgrade their operations
and increase their competitiveness.

• Uniqueness of Product or Services: The Products with unique attributes are unlikely to meet
any competition in the overseas market and enjoy enormous opportunities in international markets,
For Example: herbal and medicinal plants, handicrafts, value-added BPO services, and software
development at competitive prices provide Indian rms an edge over other countries and
smoothen their entity into International markets.
fi
• Marketing Opportunities Due to Life Cycles: Each market shows a di erent stage of life
cycle for di erent products, which varies widely across country markets. When a product or service
gets saturated in the domestic or an international market, a rm may make use of such challenges
and convert them into market opportunities by operating into International markets. Strategies to
launch new products in the existing markets or identify new markets for existing products may be
adopted.

• Spreading R&D Costs: By way of spreading the potential market size, a rm recovers quickly
the costs incurred on research and development. It is especially true for products involving higher
costs of R&d, where use of price skimming strategies necessitate faster recovery of costs incurred,
such as software, microprocessors, pharmaceuticals products, etc. International Market facilitate
speedy recovery of such costs because of the largest market size and also due to larger coverage
of the right market segments in International Market.

• Resource utilisation: New Industries are developed where resources are readily and abundantly
available. This reduces considerable transport costs of raw materials. This is especially true in case
of mineral based industries.
ff
fi
ff
fi
• Competition and Costs: Competition leads to improvements in manufacturing research and development
management practices, planning, quality control and costs.

• Quality Improvement: Larger markets and improved margins help large investments in quality
improvements. These include better equipments training and adopting quality systems. Quality improvement
gives larger markets again and the cycle continues.

• Economic Integration and Free Markets: The growth of liberalisation is opening free markets. There is
movement in goods and services from country to country. Companies look for growth opportunities in free
market. Ex: German Chemical companies going International from Germany as local consumption in Germany
is too small.
• Living Standards: Increased Production and markets lead to improvement in gross domestic produce of
the countries and hence improve per capita earnings. The Improvements give developments in living
standards of people. Ex: Asian economies and improvements in living standards in India since over a decade.

• Emergence of WTO: A number of friendly and neighbouring countries enter into trade agreements to
develop trade. The World Trade Organisation ( WTO ) replaced General Agreement on Tari s and Trade ( GATT)
in 1994. WTO has 120 members and helps to develop multilateral trade.

• Unifying E ect and Peace: Two way business help development activities and economic growth,
Business develops long lasting relationship of trust and a feel good factor. All this lead to peace between the
countries.
ff
ff
 Eurobond Market

Bonds are those bonds which are initially sold outside the country of the borrower. Euro-bonds are direct
claims on leading multinational companies, government or governmental enterprises.

They are sold simultaneously in many countries through multinational syndicates of under writing banks.

• Types of Euro-Bonds:

• Straight Euro-Bond: These bonds have xed maturities and carry a xed rate of interest. These are
repaid by amortisation or in a lump sum at the maturity date. These are technically unsecured bonds
because almost all of them are not secured by any speci c property of the borrower. The lenders usually
look to the nature of the borrower’s assets, its earning power, and its general credit strength.

• Convertible Euro-Bond: These bonds are convertible into parent common stock and have become
increasingly popular because the market for straight Euro-bonds has weakened. They provide investors
with a steady income and an opportunity to participate in rising stock prices. International Investors are
in ation conscious; they prefer convertible Euro-bonds which maintain the purchasing power of their
money.
fl

fi
fi
fi
• Bond with Warrants: Some Eurobonds are issued with warrants. A warrant is an option to buy a stated number
of common shares at a stated price during a prescribed period. Warrants pay no dividends, have no voting rights,
and become worthless at expiration unless the price of the common stock exceeds the exercise price.

• Currency Option Bonds/Multiple Currency-Bonds: Currency option bonds allows the bond holder receive
the interest payment and the principal in any of the currency speci ed in the bond. The bond holder can choose
the currency of their coupon and principal from among the two or more currencies speci ed in the bond at the
predetermined exchange rate.

• Currency Cocktail/Currency Basket Bonds: Currency Basket bonds have been developed to stabilise the
purchasing power of the coupon. This is accomplished by combining various currencies as per the weighting
process. The amount of each currency in baskets generally remains constant but the value of the basket changes,
as some of the currencies depreciate or appreciate relative to each other.

• Floating Rate Bonds: The rate of return on these bonds are adjusted at regular intervals. usually every six
months. to re ect changes in short term market rates.

• Stripped bonds: These bonds are bearer form bonds, easy to sell. U.S govt. rst issued these for foreign
Investors. Treasury regulation permit U.S corporations to sell bearer bonds to foreign residents.
fl
fi
fi
fi
 Advantages of the Euro-Bond

To the Borrower

• The size and depth of the market are large enough that it has the capacity to absorb large and frequent requirements.

• The Euro-bond market has a freedom and exibility not found in domestic markets. The issuing techniques ,are it
possible to bypass restrictions such as requirements of o cial authorisation, formal disclosure, exchange listing
obligations, which govern the issue of securities by domestic as well as foreign borrowers in the individual national
markets.

• The cost of issue of Euro bonds are relatively low around 2.5 percent of the face value of the issue.

• Interest costs on dollar Euro-bonds are competitive in most nancial markets. Multinationals have been able to raise
funds at a slightly lower cost in the Euro-bond market.

• Maturities in the Euro-bond market are suited to long-term funding requirements. Maturities may reach thirty years, but
fteen years Euro-bonds are most common. In the medium range, ve to ten years Euro-bonds run into competition.

• A key feature of the Euro-bond market is the development of a sound institutional framework for underwriting,
distribution, and placing of securities
fi
fl
ffi
fi
fi
 Advantages of the Euro-Bond

To the Investors

• Eurobonds are issued in such a form that interest can be paid free of income tax or withholding
taxes of the borrowing countries. Also, the bonds are issued in bearer form and held outside the
country of the investors, enabling the investor to evade domestic Income tax.

• Issue of Eurobonds have, on the whole, an excellent reputation for credit worthithness. Most of
the borrowers, either government, international organisation, or large multinational company,
have rst class reputation.

• A special advantage to borrowers as well as lenders is provided by convertible Euro-bonds.

Holders of convertible debentures are given an option to exchange their bonds at a xed price
and within a speci ed period for the stock of the parent company. A bond with a warrant gives
the bondholder an option to buy a certain number of shares of common stock at a stated price.

• The more the price of the underlying stock rises, the more valuable the warrant becomes.
fi
fi
fi