GLOBAL FINANCE

How firms engage in international business

Firms engage in international business through various strategies and activities. Here
are some common ways in which firms engage in international business:
1. Exporting and Importing: Firms can engage in international business by
exporting their products or services to foreign markets or by importing goods and
services from other countries.
2. Foreign Direct Investment (FDI): Firms can establish a physical presence in
foreign countries by setting up subsidiaries, branches, or joint ventures. This
allows them to have direct control over their operations in foreign markets.
3. Licensing and Franchising: Firms can engage in international business by
licensing their intellectual property, such as patents, trademarks, or copyrights, to
foreign partners. This allows the foreign partners to produce and sell the licensed
products or services in their respective markets.
4. Contract Manufacturing and Outsourcing: Firms can engage in international
business by outsourcing their production or services to foreign countries. This
can involve contracting with foreign manufacturers or service providers to
produce goods or provide services on behalf of the firm.
5. Strategic Alliances and Joint Ventures: Firms can form strategic alliances or
joint ventures with foreign partners to collaborate on specific projects or enter
new markets together. This allows firms to leverage the expertise, resources, and
market knowledge of their partners.
6. E-commerce and Online Platforms: With the rise of e-commerce and online
platforms, firms can engage in international business by selling their products or
services directly to customers in foreign markets through online channels.

It is important for firms to consider factors such as market research, cultural differences,
legal and regulatory frameworks, logistics, and supply chain management when
engaging in international business.

Balance of Payments

The balance of payments is a record of all international transactions between a country

and the rest of the world over a specific period of time. It consists of two main
components: the current account and the capital and financial account.

Current Account

The current account captures the net flow of money resulting from a country's
international trade in goods, services, income, and current transfers. It includes the
following components:
 1. Goods: This includes exports and imports of physical goods, such as machinery,
vehicles, and consumer products.
2. Services: This includes exports and imports of intangible services, such as
tourism, transportation, financial services, and software.
3. Income: This includes income earned by residents of a country from their
investments abroad (such as dividends and interest) and income earned by
foreign residents from their investments in the country.
4. Current Transfers: This includes transfers of money between countries that do
not involve the exchange of goods or services, such as foreign aid, remittances,
and grants.

Capital and Financial Accounts

The capital and financial accounts capture the net change in ownership of assets and
liabilities between a country and the rest of the world. It includes the following
components:
1. Capital Account: This includes capital transfers, such as debt forgiveness and
non-produced, non-financial assets.
2. Financial Account: This includes transactions related to financial assets and
liabilities, such as foreign direct investment, portfolio investment, derivatives, and
changes in reserve assets.
It is important to note that the current account and the capital and financial account
must sum to zero, as every transaction is recorded as both a debit and a credit in the
balance of payments accounting system.
Understanding the balance of payments is crucial for policymakers, economists, and
businesses as it provides insights into a country's international economic transactions,
its net international investment position, and its overall economic health.