Unit 1 Overview of International Business


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This presentation deals with general introductory topics such as globalization and its impact, WTO and its impact, Role of World Bank, IMF, Special Drawing Rights, Nature, scope and significance of international finance and Use of IT in international finance.

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Unit 1 Overview of International Business

  1. 1. International Finance (405 B)Unit 1: Overview of International BusinessMrs. Charu Rastogi
  2. 2. Agenda Globalization and its impact. WTO and its impact. Role of World Bank, IMF, SDR. Nature, scope and significance ofinternational finance. Use of IT in international finance.Mrs. Charu Rastogi, Asst.Professor 2
  3. 3. GLOBALIZATIONMeaning, Dimensions and ImpactMrs. Charu Rastogi, Asst.Professor 3
  4. 4. Globalization : Meaning IMF defines globalization as: ‘the growing economicinterdependence of countries worldwide throughincreasing volume and variety of cross-bordertransactions in goods and services, freer internationalcapital flows, and more rapid and widespread diffusionof technology’ Globalization is the movement towards the expansionof economic and social ties between countries throughthe spread of corporate institutions and the capitalistphilosophy that leads to the shrinking of the world ineconomic terms It is characterized by growing economic, financial, trade,and communications integration.Mrs. Charu Rastogi, Asst.Professor 4
  5. 5. Integration of Economies Made possible by:◦ Technology◦ Communication networks◦ Internet access◦ Growth of economic cooperation – tradingblocs (EU, NAFTA, etc.)◦ Movement to free tradeMrs. Charu Rastogi, Asst.Professor 5
  6. 6. Globalization : Impact Rise of Multinational Enterprises – businesses headquartered inone country but business operations in number of other country. Characteristics of MNCs:◦ Expanding revenue◦ Lowering costs◦ Sourcing raw materials◦ Controlling key supplies◦ Control of processing◦ Global economies of scale Key Issues:◦ Damage to the environment◦ Exploitation of labour◦ Monopoly power◦ Economic degradation◦ Non-renewable resources◦ Damage to culturesMrs. Charu Rastogi, Asst.Professor 6
  7. 7. Globalization : Positive Impact Increased choice / alternatives Improved quality of products due to competition Greater potential for growth Increase international economies of scale Greater employment opportunities Flow of foreign capital Impact on cultureMrs. Charu Rastogi, Asst.Professor 7
  8. 8. Globalization : Negative Impact Increased risk of contagion during recessions Increase in gap between the rich and the poor Dominance of global trade by the rich, northernhemisphere countries Lack of opportunities for the poor to be able to haveaccess to markets Exploitation of workers Increased gap between rich and poor fuels potentialterrorist reaction Ethical responsibility of business Efforts to remove trade barriers through lobbyingMrs. Charu Rastogi, Asst.Professor 8
  9. 9. WTO AND ITS IMPACTMrs. Charu Rastogi, Asst.Professor 9
  10. 10.  Trade agreements are either bilateral, involving two countries, ormultilateral. Bilateral Trade is the exchange of goods between two countries. Bilateral trade agreements give preference to certain countries incommercial relationships, facilitating trade and investmentbetween the home country and the foreign country by reducing oreliminating tariffs, import quotas, export restraints and other tradebarriers. A multilateral trade agreement involves three or more countrieswho wish to regulate trade between the nations withoutdiscrimination. They are usually intended to lower trade barriers betweenparticipating countries and, as a consequence, increase the degreeof economic integration between the participants.Trade AgreementsMrs. Charu Rastogi, Asst.Professor 10
  11. 11.  Although multilateral trade existed earlier, it was onlyafter World War II that nations recognized the need fora set of rules with the objective of securing marketaccess for post-war recovering economies. The first such set of rules came in 1947 in the form ofthe General Agreement on Tariffs and Trade (GATT). GATT was replaced in 1995 by the World TradeOrganization, which has more than 150 members.MTA to GATTMrs. Charu Rastogi, Asst.Professor 11
  12. 12.  The General Agreement on Tariffs and Trade (GATT) is amultilateral agreement regulating international trade. According to its preamble, its purpose is the "substantial reductionof tariffs and other trade barriers and the elimination ofpreferences, on a reciprocal and mutually advantageous basis." It was negotiated during the UN Conference on Trade andEmployment and was the outcome of the failure of negotiatinggovernments to create the International Trade Organization (ITO). GATT was signed in 1947 by 23 countries and lasted until 1993,when it was replaced by the World Trade Organization in 1995. Theoriginal GATT text (GATT 1947) is still in effect under the WTOframework, subject to the modifications of GATT 1994. GATT was a legal agreement. WTO is the watchdog trade ingoods/services, foreign investment, IPR, etc.GATTMrs. Charu Rastogi, Asst.Professor 12
  13. 13.  The WTO began life on 1 January 1995, but its trading system ishalf a century older. Since 1947, the General Agreement on Tariffsand Trade (GATT) had provided the rules for the system The World Trade Organization (WTO) deals with the rules of tradebetween nations at a global or near-global level. But there is moreto it than that. There are a number of ways of looking at the WTO. It’s anorganization for liberalizing trade. It’s a forum for governments tonegotiate trade agreements. It’s a place for them to settle tradedisputes. It operates a system of trade rules. There are a total of 157 member countries in the WTO, while 26countries are currently negotiating their membership In 2012, the WTO welcomed 4 new members: Montenegro, Samoa,Russian Federation and VanuatuWhat is the WTO?Mrs. Charu Rastogi, Asst.Professor 13
  14. 14.  Above all, it’s a negotiating forum◦ The bulk of the WTOs current work comes from the 1986-94 negotiations called theUruguay Round and earlier negotiations under GATT. The WTO is currently the host to newnegotiations, under the “Doha Development Agenda” launched in 2001.◦ Where countries have faced trade barriers and wanted them lowered, the negotiationshave helped to liberalize trade It’s a set of rules◦ At its heart are the WTO agreements, negotiated and signed by the bulk of the world’strading nations. They are essentially contracts, binding governments to keep their tradepolicies within agreed limits.◦ Although negotiated and signed by governments, the goal is to help producers of goodsand services, exporters, and importers conduct their business, while allowing governmentsto meet social and environmental objectives. And it helps to settle disputes◦ Trade relations often involve conflicting interests and interpretation of agreements. Themost harmonious way to settle these differences is through some neutral procedure basedon an agreed legal foundation. That is the purpose behind the dispute settlement processwritten into the WTO agreements Assisting developing countries in trade policy issues, through technical assistanceand training programmes Cooperating with other international organizations Reviewing national trade policiesWhat does the WTO do? (Functions)Mrs. Charu Rastogi, Asst.Professor 14
  15. 15.  Goods and investment — the Multilateral Agreementson Trade in Goods including the GATT 1994 and theTrade Related Investment Measures Services — the General Agreement on Trade inServices Intellectual property — the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Dispute settlement (DSU) Reviews of governments trade policies (TPRM)The Agreement Establishing the WTOMrs. Charu Rastogi, Asst.Professor 15
  16. 16.  Trade without discrimination◦ Most-favoured-nation (MFN): treating other people equally◦ National treatment: Treating foreigners and locals equally Freer trade: gradually, through negotiation Predictability: through binding and transparency◦ In the WTO, when countries agree to open their markets forgoods or services, they “bind” their commitments.◦ A country can change its bindings, but only after negotiatingwith its trading partners, which could mean compensating themfor loss of trade. Promoting fair competition Encouraging development and economic reformPrinciples of WTOMrs. Charu Rastogi, Asst.Professor 16
  17. 17. Name Start Duration CountriesSubjectscoveredAchievementsGeneva April 1946 7 months 23 TariffsSigning of GATT, 45,000 tariffconcessions affecting $10 billion oftradeAnnecy April 1949 5 months 13 TariffsCountries exchanged some 5,000tariff concessionsTorquaySeptember19508 months 38 TariffsCountries exchanged some 8,700tariff concessions, cutting the 1948tariff levels by 25%Geneva IIJanuary19565 months 26Tariffs,admission ofJapan$2.5 billion in tariff reductionsDillonSeptember196011 months 26 TariffsTariff concessions worth $4.9billion of world tradeKennedy May 1964 37 months 62Tariffs, Anti-dumpingTariff concessions worth $40 billionof world tradeGATT/ WTO Trade RoundsMrs. Charu Rastogi, Asst.Professor 17
  18. 18. Name Start Duration Countries Subjects covered AchievementsTokyoSept’197374 months 102Tariffs, non-tariffmeasures,"framework"agreementsTariff reductions worth more than$300 billion dollars achievedUruguaySept’198687 months 123Tariffs, non-tariffmeasures, rules,services, intellectualproperty, disputesettlement, textiles,agriculture, creationof WTO, etcThe round led to the creation ofWTO, and extended the range oftrade negotiations, leading tomajor reductions in tariffs (about40%) and agricultural subsidies,an agreement to allow full accessfor textiles and clothing fromdeveloping countries, and anextension of intellectual propertyrights.DohaNov’2001- 141Tariffs, non-tariffmeasures,agriculture, laborstandards,environment,competition,investment,transparency, patentsetcThe round is not yet concluded.Mrs. Charu Rastogi, Asst.Professor 18
  19. 19. Mrs. Charu Rastogi, Asst.Professor 19
  20. 20. WTO backs S.Korea in dispute, U.S.does not defend A World Trade Organization panel backedSouth Korea on Tuesday in achallenge to a controversial U.S. method for calculating duties on unfairlypriced imports, after the United States offered no defense in the dispute. The ruling is the latest in a series of defeats for the United States overzeroing, a method of calculating anti-dumping duties that is opposed by allother WTO members. The consistent approach by WTO dispute panels and WHOs appellatebody made the U.S. Department of Commerce discontinue zeroing lastmonth in order to comply with the rulings. But U.S. officials say they believe the appellate body has overstepped itspowers in condemning zeroing, and are pushing in the current Doha roundof trade negotiations for zeroing to be formally recognized. Doha willreplace existing rules deriving from the previous Uruguay roundnegotiations. "The United States considers that the Uruguay Round AntidumpingAgreement permitted zeroing, and we will work hard to reaffirm the abilityto use this practice through the negotiations," Carol Guthrie,spokeswoman for the U.S. Trade Representative, told Reuters in a recentcomment.Mrs. Charu Rastogi, Asst.Professor 20
  21. 21.  In the ruling published on Tuesday, the dispute panel backed the U.S. contentionthat previous WTO panel and appellate ruling did not form binding precedents, butstill concluded that the United States had broken trade rules. The South Korean case, launched in 2009, involved duties imposed onstainless steel coils, sheets and strip. Argentina, Brazil, Canada, Ecuador, the EuropeanUnion, Japan, Mexico and Thailand have also won WTO disputes over zeroing withthe United States. WTO rules allow members to impose duties on goods that are dumped -- sold forless than they cost at home, if that damages businesses in the importing country. Setting anti-dumping duties often involves comparing batches of goods. In zeroing,the authorities ignore examples where the imported goods actually cost more thanthey do at home, which critics say unfairly inflates the duties. Zeroing is controversial even within the United States, as importers of consumergoods and components say it drives up the cost of their purchases, while exportersfear they could suffer retaliation if the United States pursues the policy. Source: http://www.reuters.com/article/2011/01/18/us-trade-zeroing-idUSTRE70H4M720110118Mrs. Charu Rastogi, Asst.Professor 21
  22. 22. IMPACT OF WTO ON THE INDIANECONOMY The world trade organization wasestablished to deal with all the majoraspects of international trade and it hadfar reaching effects not only on Indiasforeign trade but also on its internaleconomy. The impact of WTO on theIndian economy can be analyzed on thebasis and general concepts.Mrs. Charu Rastogi, Asst.Professor 22
  23. 23. IMPACTThe WTO has both favourable and unfavourableimpact on the Indian economy. FAVOURABLE IMPACT1. Increase in export earnings:Increase in export earnings can be viewed fromgrowth in merchandise export and growth inservice exportsMrs. Charu Rastogi, Asst.Professor 23
  24. 24.  Growth in merchandise exports :The establishment of the WTO has increasedthe exports of developing countries because ofreduction in tariff and non-tariff trade barriers .India’s merchandise exports have increasedfrom 32 billion us $(1995) to185 billion us$(2008-09) Growth in service exports:The WTO introduced the GATS (GeneralAgreement on Trade in Services )that provedbeneficial for countries like India . India’s serviceexports increased from 5 billion us $(1995)to102 billion us $(2008-09) for 45% of India’sservice exports) Mrs. Charu Rastogi, Asst.Professor 24
  25. 25. 2. Agricultural exports:Reduction of trade barriers and domesticsubsidies raise the price of agricultural productsin international markets, India hopes to benefitfrom this in the form of higher export earningsfrom agriculture.3. Textiles and clothing :The phasing out of MFA will largely benefit thetextiles sector. It will help the developingcountries like India to increase the export oftextiles and clothing.Mrs. Charu Rastogi, Asst.Professor 25
  26. 26. 4. Foreign direct investment:As per the TRIMS agreement ,restrictions on foreigninvestment have been withdrawn by the member nationsof WTO .This has benefited developing countries by way offoreign direct investment ,euro equities and portfolioinvestment .In 2008-09 the net foreign direct investment inIndia was 35 billion us $5. Multi lateral rules and discipline:It is expected that fair trade conditions will be created, dueto rules and discipline related to practices like anti-dumping, subsidies and countervailing measures,safeguards and dispute settlements .such conditions willbenefit India in its attempt to globalise its economy.Mrs. Charu Rastogi, Asst.Professor 26
  27. 27.  UNFAVOURABLE IMPACT1) TRIPs:- (Trade Related Intellectual Property)Protection of the Intellectual property hasbeen a major concern of the WTO. As aMember of WTO, India has to comply withthe TRIPs standard. However the agreementof TRIPs Goes against the Indian Patent Act1970, in the following ways.◦ Pharmaceutical Sector:- Under the Indian PatentAct only process patent are granted to chemicals,drugs and medicines. Thus the company canlegally manufacture once it has the productpatent. So Indian Pharmaceutical companies couldsell good quality products at lower prices.However under TRIPs agreementMrs. Charu Rastogi, Asst.Professor 27
  28. 28. COMPARISON OF INDIAS PATENT ACT AND TRIPSIndian Patent Act of 1970 TRIPsOnly process not product patentsin food, medicines, chemicalsProcess and product patents inalmost all fields of technologyTerm of patents 14 years; 5-7 inchemicals, drugsTerm of patents 20 yearsCompulsory licensing and licenseof rightLimited compulsory licensing, nolicense of rightSeveral areas excluded frompatents (method of agriculture, anyprocess for medicinal surgical orother treatment of humans, orsimilar treatment of animals andplants to render them free ofdisease or increase economic valueof products)Almost all fields of technologypatentable. Only area conclusivelyexcluded from patentability is plantvarieties; debate regarding someareas in agriculture andbiotechnologyGovernment allowed to usepatented invention to preventscarcityVery limited scope forgovernments to use patentedinventionsMrs. Charu Rastogi, Asst.Professor 28
  29. 29. ◦ Agriculture:- The TRIPS Agreement of the WTO includesthree items related to agriculture: Geographicalindications (Art 22-24); Patent protection of agriculturalchemical products (Arts. 70.8 and 70.9); Plant VarietyProtection (Art 27.3(b)). Out of which the plant varietyprotection is of great importance for the currentscenario.TRIPS is a clearly anti-developing country agreementcontend the critics. Its provisions seriously threaten selfreliance in agriculture and the livelihoods of farmers, byseeking to establish a monopoly because it embodiesthe philosophy of the industrialized nations where itwas developed and where the primary goal is to protecttheir interests.◦ Micro-organisms : Under TRIPs Agreement, patentinghas been extended to micro-organisms as well. This willlargely benefit MNCs and not developing countries likeIndia.Mrs. Charu Rastogi, Asst.Professor 29
  30. 30. 2) TRIMS : (Trade Related Investment Measures)The Agreement on TRIMs also favours developednations as there are no rules in the agreement toformulate international rules for controlling businesspractices of foreign investors. Also, complying with theTRIMs agreement will contradict our objective of self –reliant growth based on locally available technologyand resources.3) GATS: (General Agreement on Trade In services)The Agreement on GATS will also favour the developednations more. Thus, the rapidly growing service sectorin India will now have to compete with giant foreignfirms.Moreover, since foreign firms are allowed to remit theirprofits, dividends and royalties to their parent company,it will cause foreign exchange burden for India.Mrs. Charu Rastogi, Asst.Professor 30
  31. 31. 4) TRADE AND NON – TARIFF BARRIERS :Reduction of trade and non-tariff barriers has adversely affected theexports of various developing nations.Various Indian products have been hit by. Non- tariff barriers. Theseinclude textiles, marine products, floriculture, pharmaceuticals,basmati rice, carpets, leather goods etc.5) LDC exports :Many member nations have agreed to provide duty – free and quota– free market access to all products originating from least developedcountries.India will have to now bear the adverse effect of competing withcheap LDC exports internationally. Moreover, LDC exports will alsocome to the Indian market and thus compete with domesticallyproduced goods.Mrs. Charu Rastogi, Asst.Professor 31
  32. 32. CONCLUSION Thus the WTO is a powerful body that will enactinternational laws on various matters. It will alsoglobalise many countries and help them to developtheir competitive advantage and seek benefits fromadvanced technology of other nations. Though countries like India will face seriousproblems by complying to the WTO agreements itcan also benefit from it by taking advantage of thechanging international environment .Mrs. Charu Rastogi, Asst.Professor 32
  33. 33. ROLE OF WORLD BANK, IMFAND SDRMrs. Charu Rastogi, Asst.Professor 33
  34. 34. World Bank The World Bank is an international financial institution thatprovides loans to developing countries for capital programs The World Banks official goal is the reduction of poverty. According to the World Banks Articles of Agreement (asamended effective 16 February 1989), all of its decisionsmust be guided by a commitment to promote foreigninvestment, international trade, and facilitate capitalinvestment The World Bank comprises two institutions:◦ The International Bank for Reconstruction and Development(IBRD) lends to governments of middle-income and creditworthylow-income countries.◦ The International Development Association (IDA) providesinterest-free loans—called credits— and grants to governmentsof the poorest countries.Mrs. Charu Rastogi, Asst.Professor 34
  35. 35.  The World Bank differs from the World Bank Group, inthat the World Bank comprises only two institutions:the International Bank for Reconstruction andDevelopment (IBRD) and the International DevelopmentAssociation (IDA), whereas the latter incorporates thesetwo in addition to three more: International FinanceCorporation (IFC), Multilateral Investment GuaranteeAgency (MIGA), and International Centre for Settlementof Investment Disputes (ICSID)Mrs. Charu Rastogi, Asst.Professor 35
  36. 36. Role of World Bank Loans and Advances The main function of the bank is to give loans tomember country or to private entrepreneurs on theguarantee of their government for productivepurpose These loans are given through the medium of centralbank of the country The Bank collects progress report on those projects ofthe member country for which loans are advanced tothem Providing Technical Assistance Technical guidance is of two kinds, one relates todevelopment plan & the other to the study ofeconomies, analysis and improvement of key metricsMrs. Charu Rastogi, Asst.Professor 36
  37. 37. Role of World Bank Training programs The Bank arranges to imparts training to the officials of themember countries in matter relating to planning ,economicdevelopment, public finance & other economic activities Coordinating development assistance The bank also coordinates assistance given to member countryfrom various agencies /countries Settlement of international disputes World bank also acts as a mediator to settle internationaldispute In 1960 Indo-Pakistan River Water Dispute & Suez Canal Disputecould be settled only by the efforts of the world bank For disputes regarding foreign investment ,recently a Centre forSettlement Of Investment Disputes (ICSID)has been set upMrs. Charu Rastogi, Asst.Professor 37
  38. 38. Role of World Bank Provide financial assistance to world welfare institutions World bank provide financial assistance to United NationsEducational, Scientific and Cultural Organization(UNESCO)United Nations Childrens Fund(UNICEF), World HealthOrganization (WHO), International Labor Organization (ILO).Food& Agricultural Organization (FAO), etc. Conducts economic research World Bank has established subsidiary institutions likeInternational development Association (IDA), InternationalFinance Corporation (IFC) and Multinational InvestmentGuarantee Agency (MIGA) To provide capital to developing countries for reconstruction &development of their economies To promote growth of international trade & help maintain BOPequilibrium of the member countriesMrs. Charu Rastogi, Asst.Professor 38
  39. 39. IMF The International Monetary Fund (IMF) is an organization of188 countries, working to foster global monetarycooperation, secure financial stability, facilitate internationaltrade, promote high employment and sustainable economicgrowth, and reduce poverty around the world. Goals of IMF:◦ promoting international monetary cooperation;◦ facilitating the expansion and balanced growth of internationaltrade;◦ promoting exchange stability;◦ assisting in the establishment of a multilateral system ofpayments; and◦ making resources available (with adequate safeguards) tomembers experiencing balance of payments difficulties More Details: IMF at a GlanceMrs. Charu Rastogi, Asst.Professor 39
  40. 40. Role of IMF in current economicScenario The global economic crisis created the worst recession since theGreat Depression of the 1930s. The crisis began in the mortgagemarkets in the United States in 2007 and swiftly escalated into acrisis that affected activity and institutions worldwide. The IMF mobilized on many fronts to support its membercountries, increasing its lending, using its cross-country experienceto advise on policy solutions, and introducing reforms tomodernize its operations and become more responsive to membercountries’ needs. As the apex of the crisis shifted to Europe, the Fund has becomeactively engaged in the region and is also working with the G-20 tosupport a multilateral approachMrs. Charu Rastogi, Asst.Professor 40
  41. 41. Role of IMF in current economicScenario A partner in Europe: The IMF is actively engaged in Europe as a provider of policyadvice, financing, and technical assistance Reinforcing multilateralism: The crisis highlighted the tremendous benefits frominternational cooperation. Without the cooperation spearheaded by the Group ofTwenty industrialized and emerging market economies (G-20) the crisis could have beenmuch worse. At the request of the G-20, the IMF provides the technical analysis needed to evaluatehow members’ policies fit together—and whether, collectively, they can achieve the G-20’s goals. Rethinking macroeconomic principles: In this context, the IMF is encouraging awholesale re-examination of macroeconomic policy principles in the wake of the globaleconomic crisis. Stepping up crisis lending: IMF has approved a major overhaul of how it lends moneyby offering higher amounts and tailoring loan terms to countries’ varying strengths andcircumstances. Strengthening the international monetary system Supporting low-income countries: The IMF has upgraded its support for low-incomecountries, reflecting the changing nature of economic conditions in these countries andtheir increased vulnerabilities due to the effects of the global economic crisis.Mrs. Charu Rastogi, Asst.Professor 41
  42. 42. Functions of IMF Providing short terms credit to member countries formeeting temporary difficulties due to adverse balanceof payments. Reconciling conflicting claims of member countries. Providing a reservoir of currencies of member-countriesand enabling members to bor-row on anotherscurrency. Promoting orderly adjustment of exchange rates. Advising member countries on economic, monetary andtechnical matters.Mrs. Charu Rastogi, Asst.Professor 42
  43. 43. Introduction of SDR The SDR was created by the IMF in 1969 to support the BrettonWoods fixed exchange rate system. A country participating in thissystem needed official reserves—government or central bankholdings of gold and widely accepted foreign currencies—thatcould be used to purchase the domestic currency in foreignexchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold andthe U.S. dollar—proved inadequate for supporting the expansion ofworld trade and financial development that was taking place.Therefore, the international community decided to create a newinternational reserve asset under the auspices of the IMF. However, only a few years later, the Bretton Woods systemcollapsed and the major currencies shifted to a floating exchangerate regime. In addition, the growth in international capitalmarkets facilitated borrowing by creditworthy governments. Bothof these developments lessened the need for SDRs.Mrs. Charu Rastogi, Asst.Professor 43
  44. 44. Special Drawing Rights The SDR is an international reserve asset, created by the IMF in 1969 tosupplement its member countries official reserves. Its value is based on a basket of four key international currencies (yen,dollars, pounds and euros), and SDRs can be exchanged for freely usablecurrencies. The value of an SDR is defined as the value of a fixed amount of yen,dollars, pounds and euros, expressed in dollars at the current exchangerate. The composition of the basket is altered every five years to reflectchanges in the importance of different currencies in the worlds tradingsystem. With a general SDR allocation that took effect on August 28 and a specialallocation on September 9, 2009, the amount of SDRs increased from SDR21.4 billion to around SDR 204 billion (equivalent to about $310 billion,converted using the rate of August 20, 2012). The main function of the SDR is to supplement a shortfall of preferredforeign exchange reserve assets, namely gold and the US dollar For more information, click hereMrs. Charu Rastogi, Asst.Professor 44
  45. 45. Role of SDR The SDR is neither a currency, nor a claim on the IMF.Rather, it is a potential claim on the freely usablecurrencies of IMF members. Holders of SDRs can obtain these currencies in exchangefor their SDRs in two ways: first, through thearrangement of voluntary exchanges betweenmembers; and second, by the IMF designating memberswith strong external positions to purchase SDRs frommembers with weak external positions. In addition to its role as a supplementary reserve asset,the SDR serves as the unit of account of the IMF andsome other international organizations. Watch this video on SDRsMrs. Charu Rastogi, Asst.Professor 45
  46. 46. International Finance The economic interaction among differentnations involving the monetary payments andthe exchange of currency. The cornerstone of international finance isforeign exchange, including foreign exchangemarkets and exchange rates. International trade, the study of trade betweennations, is a related area of internationalfinance.Mrs. Charu Rastogi, Asst.Professor 46
  47. 47. International Finance International finance examines the dynamics of theglobal financial system, international monetary systems,balance of payments, exchange rates,, and how thesetopics relate to international trade. Sometimes referred to as multinational finance,international finance is additionally concerned withmatters of international financial management.Mrs. Charu Rastogi, Asst.Professor 47
  48. 48. Scope of International Finance Knowledge of international finance is crucial for MNCs in twoimportant ways: It help the companies & financial managers to decide howinternational events will affects the firm & what steps can betaken to gain from positive developments & insulate fromharmful ones It helps companies to recognize how the firm will be affected bymovement in exchange rate, interest rate & asset rates The consequences of events affecting the stock markets &interest rate of one country immediately show up around theworld this is due to the integral & independent financialenvironment which exist around the world They have been close link between money & capital market All this makes it necessary for every MNC & aspiring managerto take a close look at the ever changing & dynamic field ofinternational financeMrs. Charu Rastogi, Asst.Professor 48
  49. 49. Scope of International Finance Three interrelated parts of international finance - International Financial Economics:◦ Concerned with causes and effects of financial flows amongnations -application of macroeconomic theory and policy to theglobal economy. International Financial Management:◦ Concerned with how individual economic units, especiallyMNCs, cope with the complex financial environment ofinternational business. Focuses on issues most relevant formaking sound business decision in a global economy International Financial Markets:◦ Concerned with international financial/investment instruments,foreign exchange markets, international banking, internationalsecurities markets, financial derivatives, etcMrs. Charu Rastogi, Asst.Professor 49
  50. 50. Significance of International Finance Access to capital market across the world enables a country toborrow during tough times & lend during good times IF promotes domestic investment & growth through capital import Worldwide cash flows can exerts a corrective force against badgovernment policies IF prevent excessive domestic regulation through global financialinstitutions IF leads to healthy competition & hence more effective bankingsystem IF promotes the integration of economies ,facilitating the easy flowof capital. The free transfer of funds would eventually result inmore equality among countries that are a part of the globalfinancial system It provides information on vital areas of investment & leads toeffective capital allocationMrs. Charu Rastogi, Asst.Professor 50
  51. 51. Use of IT in International Finance Information technology has many uses in finance. Fromtrading financial instruments to keeping records ofpersonal budgets to reporting the earnings of abusiness, computer technology is used by financialcompanies daily. Information technology allows therapid calculation of financial statistics, as well aselectronic transfers of money.Mrs. Charu Rastogi, Asst.Professor 51
  52. 52. Use of IT in International Finance Trading◦ Financial trading is enhanced with information technology. Somecomputer systems even trade for the users. A system isprogrammed to enter buy and sell orders when the price of astock or bond reaches a certain level, and automatically closesthe order when the target price or the stop-loss is reached.Computer based trading is useful when a trader has a systemthat allows profitable trading and does not want to enter eachorder individually. Information technology provides instantinformation for stock traders to make decisions, and allowsthem to enter orders that are immediately executed.Mrs. Charu Rastogi, Asst.Professor 52
  53. 53. Use of IT in International Finance Financial Markets◦ Financial markets are markets for information. As such, they aredirectly influenced by advances in information dissemination,storage and processing associated with the commercialdevelopment of internetMrs. Charu Rastogi, Asst.Professor 53
  54. 54. Use of IT in International Finance Financial transfers Trade settlement methods Forex risk managementMrs. Charu Rastogi, Asst.Professor 54
  55. 55. Mrs. Charu Rastogi, Asst.Professor 55