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Unit 1 Overview of International Business

Unit 1 Overview of International Business

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.

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 Business Mrs. Charu Rastogi
  2. 2. Agenda  Globalization and its impact.  WTO and its impact.  Role of World Bank, IMF, SDR.  Nature, scope and significance of international finance.  Use of IT in international finance. Mrs. Charu Rastogi, Asst.Professor 2
  3. 3. GLOBALIZATION Meaning, Dimensions and Impact Mrs. Charu Rastogi, Asst.Professor 3
  4. 4. Globalization : Meaning  IMF defines globalization as: ‘the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology’  Globalization is the movement towards the expansion of economic and social ties between countries through the spread of corporate institutions and the capitalist philosophy that leads to the shrinking of the world in economic 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 – trading blocs (EU, NAFTA, etc.) ◦ Movement to free trade Mrs. Charu Rastogi, Asst.Professor 5
  6. 6. Globalization : Impact  Rise of Multinational Enterprises – businesses headquartered in one 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 cultures Mrs. 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 culture Mrs. 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, northern hemisphere countries  Lack of opportunities for the poor to be able to have access to markets  Exploitation of workers  Increased gap between rich and poor fuels potential terrorist reaction  Ethical responsibility of business  Efforts to remove trade barriers through lobbying Mrs. Charu Rastogi, Asst.Professor 8
  9. 9. WTO AND ITS IMPACT Mrs. Charu Rastogi, Asst.Professor 9
  10. 10.  Trade agreements are either bilateral, involving two countries, or multilateral.  Bilateral Trade is the exchange of goods between two countries.  Bilateral trade agreements give preference to certain countries in commercial relationships, facilitating trade and investment between the home country and the foreign country by reducing or eliminating tariffs, import quotas, export restraints and other trade barriers.  A multilateral trade agreement involves three or more countries who wish to regulate trade between the nations without discrimination.  They are usually intended to lower trade barriers between participating countries and, as a consequence, increase the degree of economic integration between the participants. Trade Agreements Mrs. Charu Rastogi, Asst.Professor 10
  11. 11.  Although multilateral trade existed earlier, it was only after World War II that nations recognized the need for a set of rules with the objective of securing market access for post-war recovering economies.  The first such set of rules came in 1947 in the form of the General Agreement on Tariffs and Trade (GATT).  GATT was replaced in 1995 by the World Trade Organization, which has more than 150 members. MTA to GATT Mrs. Charu Rastogi, Asst.Professor 11
  12. 12.  The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement regulating international trade.  According to its preamble, its purpose is the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis."  It was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments 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. The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.  GATT was a legal agreement. WTO is the watchdog trade in goods/services, foreign investment, IPR, etc. GATT Mrs. Charu Rastogi, Asst.Professor 12
  13. 13.  The WTO began life on 1 January 1995, but its trading system is half a century older. Since 1947, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system  The World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level. But there is more to it than that.  There are a number of ways of looking at the WTO. It’s an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules.  There are a total of 157 member countries in the WTO, while 26 countries are currently negotiating their membership  In 2012, the WTO welcomed 4 new members: Montenegro, Samoa, Russian Federation and Vanuatu What is the WTO? Mrs. Charu Rastogi, Asst.Professor 13
  14. 14.  Above all, it’s a negotiating forum ◦ The bulk of the WTO's current work comes from the 1986-94 negotiations called the Uruguay Round and earlier negotiations under GATT. The WTO is currently the host to new negotiations, under the “Doha Development Agenda” launched in 2001. ◦ Where countries have faced trade barriers and wanted them lowered, the negotiations have 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’s trading nations. They are essentially contracts, binding governments to keep their trade policies within agreed limits. ◦ Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.  And it helps to settle disputes ◦ Trade relations often involve conflicting interests and interpretation of agreements. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written into the WTO agreements  Assisting developing countries in trade policy issues, through technical assistance and training programmes  Cooperating with other international organizations  Reviewing national trade policies What does the WTO do? (Functions) Mrs. Charu Rastogi, Asst.Professor 14
  15. 15.  Goods and investment — the Multilateral Agreements on Trade in Goods including the GATT 1994 and the Trade Related Investment Measures  Services — the General Agreement on Trade in Services  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 WTO Mrs. 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 for goods or services, they “bind” their commitments. ◦ A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade.  Promoting fair competition  Encouraging development and economic reform Principles of WTO Mrs. Charu Rastogi, Asst.Professor 16
  17. 17. Name Start Duration Countries Subjects covered Achievements Geneva April 1946 7 months 23 Tariffs Signing of GATT, 45,000 tariff concessions affecting $10 billion of trade Annecy April 1949 5 months 13 Tariffs Countries exchanged some 5,000 tariff concessions Torquay September 1950 8 months 38 Tariffs Countries exchanged some 8,700 tariff concessions, cutting the 1948 tariff levels by 25% Geneva II January 1956 5 months 26 Tariffs, admission of Japan $2.5 billion in tariff reductions Dillon September 1960 11 months 26 Tariffs Tariff concessions worth $4.9 billion of world trade Kennedy May 1964 37 months 62 Tariffs, Anti- dumping Tariff concessions worth $40 billion of world trade GATT/ WTO Trade Rounds Mrs. Charu Rastogi, Asst.Professor 17
  18. 18. Name Start Duration Countries Subjects covered Achievements Tokyo Sept’ 1973 74 months 102 Tariffs, non-tariff measures, "framework" agreements Tariff reductions worth more than $300 billion dollars achieved Uruguay Sept’ 1986 87 months 123 Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc The round led to the creation of WTO, and extended the range of trade negotiations, leading to major reductions in tariffs (about 40%) and agricultural subsidies, an agreement to allow full access for textiles and clothing from developing countries, and an extension of intellectual property rights. Doha Nov’ 2001 - 141 Tariffs, non-tariff measures, agriculture, labor standards, environment, competition, investment, transparency, patents etc The 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 a challenge to a controversial U.S. method for calculating duties on unfairly priced 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 over zeroing, a method of calculating anti-dumping duties that is opposed by all other WTO members.  The consistent approach by WTO dispute panels and WHO's appellate body made the U.S. Department of Commerce discontinue zeroing last month in order to comply with the rulings.  But U.S. officials say they believe the appellate body has overstepped its powers in condemning zeroing, and are pushing in the current Doha round of trade negotiations for zeroing to be formally recognized. Doha will replace existing rules deriving from the previous Uruguay round negotiations.  "The United States considers that the Uruguay Round Antidumping Agreement permitted zeroing, and we will work hard to reaffirm the ability to use this practice through the negotiations," Carol Guthrie, spokeswoman for the U.S. Trade Representative, told Reuters in a recent comment. Mrs. Charu Rastogi, Asst.Professor 20
  21. 21.  In the ruling published on Tuesday, the dispute panel backed the U.S. contention that previous WTO panel and appellate ruling did not form binding precedents, but still concluded that the United States had broken trade rules.  The South Korean case, launched in 2009, involved duties imposed on stainless steel coils, sheets and strip.  Argentina, Brazil, Canada, Ecuador, the European Union, Japan, Mexico and Thailand have also won WTO disputes over zeroing with the United States.  WTO rules allow members to impose duties on goods that are dumped -- sold for less 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 than they do at home, which critics say unfairly inflates the duties.  Zeroing is controversial even within the United States, as importers of consumer goods and components say it drives up the cost of their purchases, while exporters fear they could suffer retaliation if the United States pursues the policy.  Source: http://www.reuters.com/article/2011/01/18/us-trade-zeroing- idUSTRE70H4M720110118 Mrs. Charu Rastogi, Asst.Professor 21
  22. 22. IMPACT OF WTO ON THE INDIAN ECONOMY  The world trade organization was established to deal with all the major aspects of international trade and it had far reaching effects not only on India's foreign trade but also on its internal economy. The impact of WTO on the Indian economy can be analyzed on the basis and general concepts. Mrs. Charu Rastogi, Asst.Professor 22
  23. 23. IMPACT The WTO has both favourable and unfavourable impact on the Indian economy.  FAVOURABLE IMPACT 1. Increase in export earnings: Increase in export earnings can be viewed from growth in merchandise export and growth in service exports Mrs. Charu Rastogi, Asst.Professor 23
  24. 24.  Growth in merchandise exports : The establishment of the WTO has increased the exports of developing countries because of reduction in tariff and non-tariff trade barriers . India’s merchandise exports have increased from 32 billion us $(1995) to185 billion us $(2008-09)  Growth in service exports: The WTO introduced the GATS (General Agreement on Trade in Services )that proved beneficial for countries like India . India’s service exports increased from 5 billion us $(1995)to 102 billion us $(2008-09) for 45% of India’s service exports) Mrs. Charu Rastogi, Asst.Professor 24
  25. 25. 2. Agricultural exports: Reduction of trade barriers and domestic subsidies raise the price of agricultural products in international markets, India hopes to benefit from this in the form of higher export earnings from agriculture. 3. Textiles and clothing : The phasing out of MFA will largely benefit the textiles sector. It will help the developing countries like India to increase the export of textiles and clothing. Mrs. Charu Rastogi, Asst.Professor 25
  26. 26. 4. Foreign direct investment: As per the TRIMS agreement ,restrictions on foreign investment have been withdrawn by the member nations of WTO .This has benefited developing countries by way of foreign direct investment ,euro equities and portfolio investment .In 2008-09 the net foreign direct investment in India was 35 billion us $ 5. Multi lateral rules and discipline: It is expected that fair trade conditions will be created, due to rules and discipline related to practices like anti- dumping, subsidies and countervailing measures, safeguards and dispute settlements .such conditions will benefit India in its attempt to globalise its economy. Mrs. Charu Rastogi, Asst.Professor 26
  27. 27.  UNFAVOURABLE IMPACT 1) TRIPs:- (Trade Related Intellectual Property) Protection of the Intellectual property has been a major concern of the WTO. As a Member of WTO, India has to comply with the TRIPs standard. However the agreement of TRIPs Goes against the Indian Patent Act 1970, in the following ways. ◦ Pharmaceutical Sector:- Under the Indian Patent Act only process patent are granted to chemicals, drugs and medicines. Thus the company can legally manufacture once it has the product patent. So Indian Pharmaceutical companies could sell good quality products at lower prices. However under TRIPs agreement Mrs. Charu Rastogi, Asst.Professor 27
  28. 28. COMPARISON OF INDIA'S PATENT ACT AND TRIPS Indian Patent Act of 1970 TRIPs Only process not product patents in food, medicines, chemicals Process and product patents in almost all fields of technology Term of patents 14 years; 5-7 in chemicals, drugs Term of patents 20 years Compulsory licensing and license of right Limited compulsory licensing, no license of right Several areas excluded from patents (method of agriculture, any process for medicinal surgical or other treatment of humans, or similar treatment of animals and plants to render them free of disease or increase economic value of products) Almost all fields of technology patentable. Only area conclusively excluded from patentability is plant varieties; debate regarding some areas in agriculture and biotechnology Government allowed to use patented invention to prevent scarcity Very limited scope for governments to use patented inventions Mrs. Charu Rastogi, Asst.Professor 28
  29. 29. ◦ Agriculture:- The TRIPS Agreement of the WTO includes three items related to agriculture: Geographical indications (Art 22-24); Patent protection of agricultural chemical products (Arts. 70.8 and 70.9); Plant Variety Protection (Art 27.3(b)). Out of which the plant variety protection is of great importance for the current scenario. TRIPS is a clearly anti-developing country agreement contend the critics. Its provisions seriously threaten self reliance in agriculture and the livelihoods of farmers, by seeking to establish a monopoly because it embodies the philosophy of the industrialized nations where it was developed and where the primary goal is to protect their interests. ◦ Micro-organisms : Under TRIPs Agreement, patenting has been extended to micro-organisms as well. This will largely benefit MNCs and not developing countries like India. Mrs. Charu Rastogi, Asst.Professor 29
  30. 30. 2) TRIMS : (Trade Related Investment Measures) The Agreement on TRIMs also favours developed nations as there are no rules in the agreement to formulate international rules for controlling business practices of foreign investors. Also, complying with the TRIMs agreement will contradict our objective of self – reliant growth based on locally available technology and resources. 3) GATS: (General Agreement on Trade In services) The Agreement on GATS will also favour the developed nations more. Thus, the rapidly growing service sector in India will now have to compete with giant foreign firms. Moreover, since foreign firms are allowed to remit their profits, 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 the exports of various developing nations. Various Indian products have been hit by. Non- tariff barriers. These include 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 developed countries. India will have to now bear the adverse effect of competing with cheap LDC exports internationally. Moreover, LDC exports will also come to the Indian market and thus compete with domestically produced goods. Mrs. Charu Rastogi, Asst.Professor 31
  32. 32. CONCLUSION  Thus the WTO is a powerful body that will enact international laws on various matters. It will also globalise many countries and help them to develop their competitive advantage and seek benefits from advanced technology of other nations.  Though countries like India will face serious problems by complying to the WTO agreements it can also benefit from it by taking advantage of the changing international environment . Mrs. Charu Rastogi, Asst.Professor 32
  33. 33. ROLE OF WORLD BANK, IMF AND SDR Mrs. Charu Rastogi, Asst.Professor 33
  34. 34. World Bank  The World Bank is an international financial institution that provides loans to developing countries for capital programs  The World Bank's official goal is the reduction of poverty.  According to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment  The World Bank comprises two institutions: ◦ The International Bank for Reconstruction and Development (IBRD) lends to governments of middle-income and creditworthy low-income countries. ◦ The International Development Association (IDA) provides interest-free loans—called credits— and grants to governments of the poorest countries. Mrs. Charu Rastogi, Asst.Professor 34
  35. 35.  The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of 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 to member country or to private entrepreneurs on the guarantee of their government for productive purpose  These loans are given through the medium of central bank of the country  The Bank collects progress report on those projects of the member country for which loans are advanced to them  Providing Technical Assistance  Technical guidance is of two kinds, one relates to development plan & the other to the study of economies, analysis and improvement of key metrics Mrs. Charu Rastogi, Asst.Professor 36
  37. 37. Role of World Bank  Training programs  The Bank arranges to imparts training to the officials of the member countries in matter relating to planning ,economic development, public finance & other economic activities  Coordinating development assistance  The bank also coordinates assistance given to member country from various agencies /countries  Settlement of international disputes  World bank also acts as a mediator to settle international dispute  In 1960 Indo-Pakistan River Water Dispute & Suez Canal Dispute could be settled only by the efforts of the world bank  For disputes regarding foreign investment ,recently a Centre for Settlement Of Investment Disputes (ICSID)has been set up Mrs. 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 Nations Educational, Scientific and Cultural Organization(UNESCO )United Nations Children's Fund(UNICEF), World Health Organization (WHO), International Labor Organization (ILO).Food & Agricultural Organization (FAO), etc.  Conducts economic research  World Bank has established subsidiary institutions like International development Association (IDA), International Finance Corporation (IFC) and Multinational Investment Guarantee Agency (MIGA)  To provide capital to developing countries for reconstruction & development of their economies  To promote growth of international trade & help maintain BOP equilibrium of the member countries Mrs. Charu Rastogi, Asst.Professor 38
  39. 39. IMF  The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.  Goals of IMF: ◦ promoting international monetary cooperation; ◦ facilitating the expansion and balanced growth of international trade; ◦ promoting exchange stability; ◦ assisting in the establishment of a multilateral system of payments; and ◦ making resources available (with adequate safeguards) to members experiencing balance of payments difficulties  More Details: IMF at a Glance Mrs. Charu Rastogi, Asst.Professor 39
  40. 40. Role of IMF in current economic Scenario  The global economic crisis created the worst recession since the Great Depression of the 1930s. The crisis began in the mortgage markets in the United States in 2007 and swiftly escalated into a crisis that affected activity and institutions worldwide.  The IMF mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries’ needs.  As the apex of the crisis shifted to Europe, the Fund has become actively engaged in the region and is also working with the G-20 to support a multilateral approach Mrs. Charu Rastogi, Asst.Professor 40
  41. 41. Role of IMF in current economic Scenario  A partner in Europe: The IMF is actively engaged in Europe as a provider of policy advice, financing, and technical assistance  Reinforcing multilateralism: The crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the Group of Twenty industrialized and emerging market economies (G-20) the crisis could have been much worse.  At the request of the G-20, the IMF provides the technical analysis needed to evaluate how 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 a wholesale re-examination of macroeconomic policy principles in the wake of the global economic crisis.  Stepping up crisis lending: IMF has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances.  Strengthening the international monetary system  Supporting low-income countries: The IMF has upgraded its support for low-income countries, reflecting the changing nature of economic conditions in these countries and their 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 for meeting temporary difficulties due to adverse balance of payments.  Reconciling conflicting claims of member countries.  Providing a reservoir of currencies of member-countries and enabling members to bor-row on another's currency.  Promoting orderly adjustment of exchange rates.  Advising member countries on economic, monetary and technical matters. Mrs. Charu Rastogi, Asst.Professor 42
  43. 43. Introduction of SDR  The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate.  But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.  However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of 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 to supplement 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 usable currencies.  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 exchange rate. The composition of the basket is altered every five years to reflect changes in the importance of different currencies in the world's trading system.  With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 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 preferred foreign exchange reserve assets, namely gold and the US dollar  For more information, click here Mrs. 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 usable currencies of IMF members.  Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members 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 and some other international organizations.  Watch this video on SDRs Mrs. Charu Rastogi, Asst.Professor 45
  46. 46. International Finance  The economic interaction among different nations involving the monetary payments and the exchange of currency.  The cornerstone of international finance is foreign exchange, including foreign exchange markets and exchange rates.  International trade, the study of trade between nations, is a related area of international finance. Mrs. Charu Rastogi, Asst.Professor 46
  47. 47. International Finance  International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates,, and how these topics relate to international trade.  Sometimes referred to as multinational finance, international finance is additionally concerned with matters 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 two important ways:  It help the companies & financial managers to decide how international events will affects the firm & what steps can be taken to gain from positive developments & insulate from harmful ones  It helps companies to recognize how the firm will be affected by movement in exchange rate, interest rate & asset rates  The consequences of events affecting the stock markets & interest rate of one country immediately show up around the world this is due to the integral & independent financial environment which exist around the world  They have been close link between money & capital market  All this makes it necessary for every MNC & aspiring manager to take a close look at the ever changing & dynamic field of international finance Mrs. 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 among nations -application of macroeconomic theory and policy to the global economy.  International Financial Management: ◦ Concerned with how individual economic units, especially MNCs, cope with the complex financial environment of international business. Focuses on issues most relevant for making sound business decision in a global economy  International Financial Markets: ◦ Concerned with international financial/investment instruments, foreign exchange markets, international banking, international securities markets, financial derivatives, etc Mrs. Charu Rastogi, Asst.Professor 49
  50. 50. Significance of International Finance  Access to capital market across the world enables a country to borrow during tough times & lend during good times  IF promotes domestic investment & growth through capital import  Worldwide cash flows can exerts a corrective force against bad government policies  IF prevent excessive domestic regulation through global financial institutions  IF leads to healthy competition & hence more effective banking system  IF promotes the integration of economies ,facilitating the easy flow of capital. The free transfer of funds would eventually result in more equality among countries that are a part of the global financial system  It provides information on vital areas of investment & leads to effective capital allocation Mrs. Charu Rastogi, Asst.Professor 50
  51. 51. Use of IT in International Finance  Information technology has many uses in finance. From trading financial instruments to keeping records of personal budgets to reporting the earnings of a business, computer technology is used by financial companies daily. Information technology allows the rapid calculation of financial statistics, as well as electronic 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. Some computer systems even trade for the users. A system is programmed to enter buy and sell orders when the price of a stock or bond reaches a certain level, and automatically closes the order when the target price or the stop-loss is reached. Computer based trading is useful when a trader has a system that allows profitable trading and does not want to enter each order individually. Information technology provides instant information for stock traders to make decisions, and allows them 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 are directly influenced by advances in information dissemination, storage and processing associated with the commercial development of internet Mrs. Charu Rastogi, Asst.Professor 53
  54. 54. Use of IT in International Finance  Financial transfers  Trade settlement methods  Forex risk management Mrs. Charu Rastogi, Asst.Professor 54
  55. 55. Mrs. Charu Rastogi, Asst.Professor 55

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