International Capital Flows FDI in international business

International business

1. International Trade Flows
1.Sea / River Route i. Export
2.Land Route ii. Import
3.Air Route iii. Entrepot
4.E-commerce
Discussion on trade flows in landlocked countries Africa , Asia ,
South America and Europe.

2. International Capital Flows
Capital can be broadly classified into
1.Equity Capital -Human Capital
2.Debt Capital -Social Capital
3.Working Capital -Intellectual Capital
4.Trading Capital -Physical Capital
Foreign fund flows :
i.Commercial Borrowings
ii.Official Foreign Aids in terms of Loans and Grants
iii.FDI
iv.FPI

3. Factors Affecting International Trade
i.Emergence of Trade Blocks
ii.GATT / WTO
iii.Unification of Germany
iv.Inception of Euro and expansion of EU
v.Most Favoured Nations / Free Trade Agreements
vi.Trade Frictions
vii.Using exchange rate as policy
viii.Outsourcing
ix.Trade policies as security reasons
x.Trade policies as political reasons

4. Factors Affecting International Trade Flows
Factors affecting broadly classified :
1.Inflation
2.National Income
3.Exchange Rates
4.Government Policies

5. Inflation & International Trade
Increaseininflationrateofacountryrelativetoother
countrieswithwhichittrades,duetoriseingeneralprice
levelofrawmaterials,intermediategoodsandthepriceof
finishedgoods/productsthecountrywouldpurchasemore
goodsfromothercountries(imports).
Whereasthecountry’sexporttoothercountrieswould
decline.

6. National Income & International Trade
IncaseofhigherpercentageincreaseinNationalIncomelevel
thanthoseofothercountriestherealincomelevel(with
inflationadjustment)rises.Inturnconsumptionlevelrisesand
thispercentageofincreaseinconsumptionwouldresultinlikely
demandforimportedgoods(import)

7. GovernmentPolicies&InternationalTrade
Effect on its Balance of Trade :
1.Subsidiesforexports:Domesticfirmscanproducegoodsat
lowercostthantheircompetitorsresultinginincreased
demandfortheexports.
-DirectSubsidy:CashGrant,TaxBreaks
-IndirectSubsidy:Interestfreeloans,InsuranceAccelerated
Depreciations,Lowinterestloans,FreightReimbursement
-Farmersorproducersgetinformfertilizers,water,electricity.
-Manufacturersintermsofland,mineralresources,capitaletc

8. Tariff & Non-Tariff Barriers
Disrupt flows of imports :
1.Tariff
2.Quota
3.Phytosanitary & Health standards
4.Putting products/goods in restricted and prohibitive
category
( already discussed these above in other sessions)

9. Lack of Restrictions on Piracy
-CD & DVDs
-Films & Music
-Apparels
-Daily use items
-Watches
-Mobiles
-Computer Softwares

10. Exchange Rate & International Trade
Currencyofonecountryvaluedintermsofothercurrencies
throughexchangerates.
1.Depreciationofhomecurrencyvalueintermsofotherthen
exportablegoodsbecomescheaperinrelationtoothers
resultinginmoreexports.
2.Appreciationofhomecurrencyvalueintermsofotherthen
exportablegoodsbecomescostlierinrelationtoothers
resultinginlessexports.

11. Foreign Direct Investment (FDI)
Investmentfromabusinessunitinonecountryintoabusinessor
corporationofanothercountrywithlasting’businessinterest’.
1.OwnershipInterests
2.Substantialstake
3.ManagementControlwithvotingpower
4.Manageandinfluencefirmsoperations
5.Essentiallypartofdecisionmaking

12. Overseas Direct Investment (ODI)
Business strategy : domestic firm expands operations to foreign land.
i.Green field investment : parent company creating subsidiary to
ii.M&A
iii.Reflect upon maturity of economy of home nations

13. Motives for FDI
1.Imperfectmarketforfactorsofproduction,capital,labour,
technology.ResourcerichAfricabutlackadvancedtechnologyand
infrastructure.Asia,Africa,LatinAmericacapitalisscarcebutlabour
ischeap.Capital,education,skill,R&Dishighbutexpensive.Hence
costreductionandcompetitivepricingofproductsaremotivesbehind
MNCsinvestingthroughFDIroute.HenceManufacturersrelocating
theirproductionunitsinAsia.
2.Imperfectmarketforproducts:Obsoletemobiles,automobiles,
computersindevelopednationsareusedindevelopingnations.
3.HorizontalExpansion:Facilitiessetupmeetspecificgeographicalarea
forexpansionofrevenueandmarkets.ToyotaandHondasetting
facilitiesinUSAtocatertoAmericanmarketstoovercometrade
barrierifanyandcutdowntransportationandancillarycost.

14. Contd…
4.VerticalExpansion:Derivingtheadvantageofeconomiesofscaleand
cateringtoalllocations.Successivestagesproductionsarecarriedoutat
differentlocationswithoutputofoneservinginputforothers.(Crudeoil
explorationcombinedwithrefining).
5.Conglomerate:unrelatedtocorebusiness
6.RiskDiversifications:Differingbusinesscyclesindifferentlocations
providestabilitytorevenue,profitandcashflowsoftheMNCs.
7.Tapskilled/cheapworkforcewithaboveaveragereturn

15. Recent Examples of FDI
i.Microsoft investing on digital skilling initiatives in Karnataka
ii.LULU group establishing AI facility in Bangalore
iii.DP World investing deep-draft ports and economic zones
iv.Boeing establishing engineering and technology center
v.Hyundai motors acquired General Motor’s Talegaon plant in
Maharashtra
vi.Mercedes-Benz plant investment
vii.Hindalco signing contract with Metra-Spa Italy
viii.Nvidia contract with Reliance and TATA for manufacturing
supercomputers

16. Benefits of FDI
1.EconomicIntegrationleadtoeconomicconvergencebridgingthe
gapbetweendevelopedanddevelopingeconomies.
2.Widerconsumerchoice
3.Increasedcompetitions
4.Employmenttolocalpopulation CRITICISMAGAINSTFDI
5.Humandevelopment I.Overexploitationofresources
6.Increasecapitalbase ii.DomesticIndustrysuffer
7.ImprovedTechnology iii.Clashofbusinessculture
8.Enhancedincome iv.Impactenvironment
9.Reducefiscaldeficit v.Influenceexchangeandinterestrate

17. Foreign Portfolio Investment ( FPI )
FPIconsistsofsecuritiesandotherfinancialassetsheldby
investorsinanothercountry.Doesnotprovidedirectownershipof
acompany’sassetsandrelativelyliquiddependingonthevolatility
ofthemarket.
Decisionisinfluencedbyfactorslike:
1.Taxrateoninterestordividend:Relativelylowtaxratesattract
moreFPI.
2.InterestRates:Fundsflowtocountrieswithhighinterestrates
providedcurrencynotexpectedtoweaken.
3.Exchangerates:Returnisaffectedbychangeinvalueof
securityandchangeinvalueofcurrencyinwhichsecurity
denominated.Country’shomecurrencydepreciatesitsnot
advantagetoFPIandviceversa.

18. Theories of FDI
MacDougall-KempHypothesis:Boththehostand
investingcountriesbenefitintermsofriseinnationalincome
duetoFDI.
IndustrialOrganisationTheory:Inaimperfectmarket
conditionssomefirmpossessescertainadvantageswhich
outweighstheirdisadvantages.GrahamandKrugman(19890)
empiricallyfoundthatEuropeanfirmsinvestedinUSAtocash
inontheirtechnologicalsuperiority.
LocationSpecificTheory:Cheapandabundantraw
materialattractsinvestors.Sincerealwagesvariesamong
countrieslow-costtechnologymovetolowwagecountries.

19. Contd….
ProductCycleTheory(RaymondVernon):Producthasinitial
stage‘innovation’duetoR&Dandmanufacturedforhomemarket
andpartlyexportedanddemandisprice-inelastic.Then‘maturing
productstage’withrivalssteppinginandtheinnovatorreduce
priceatthisprice-elasticstage.Manufacturingbasediversifiedto
overcometariffbarrierandproductgetinternationalized.Atthe
’standardisedproductstage’themanufacturingshifttoother
destinationstotakeadvantagesoffactorofproductions.
‘Dematuringstage’breaksdownthestandardisationwith
sophisticatedmodelsoftheproductbeingmanufacturedinhigh-
incomecountries.

20. Contd…..
InternationalisationApproach:Inimperfectmarketflowof
technologyorknowledgewithinfirmisalmostzero(transaction
cost)wherebetweenotherfirmshashightransactioncosts.
Thusitistheinternationalisationbenefitmanifestinginthe
cost-freeintra-firmflowoftechnologyoranyotherknowledge
thatmotivatesafirmtogointernational.
TheEclecticParadigm(Dunning):Itisacombinationof
threeadvantagesOwnership(O),Location(L)and
Internalisation(I)thatmotivatesafirmtomakeFDI.

21. Contd…..
Currency-basedApproaches:Afirmmovesfromstrong
currencycountrytoweak-currencycountry.
Politico-economicsTheories:Afirmmovesfrom
politicallyunstablecountrytoapoliticallystablecountry.
ModifiedTheoriesforThirdWorldFirms:Firms
locatedindevelopingcountriespossessfirm-specific
advantageonaccountofmodificationsoftechnology.All
theoriesdiscussedareapplicabletoMNCsofdeveloping
world.

22. Factors Affecting Flow of FDI
i.Privatization
ii.Government Regulations
iii.Size and potential growth of economy
iv.Resources availability
v.Tax rates
vi.Wage rates and labour policies
vii.Availability of skill and technology
viii.Transport & infrastructure
ix.Political stability
x.Property Rights

23. Factors Affecting Flow of FPI
1.Tax Rates on interests and dividends
2.Interest Rates
3.Growth Prospects
4.Exchange Rates

24. Investment Portfolio
1.Stocks : Provide growth over time but accompanied by
potentially high volatility.
2.Bonds : Provide income but less volatile
3.Commodities and Real Estate : Provide potential inflation
protection
4.Cash : Stabilizing factor at the time of turbulence

25. Agencies that Facilitates International Flows
1.IMF:CompensatoryFinancingFacility(CFF)tohelp
countriestoovercomefinancialproblemsduetoreduced
exportearningsandresultantimpact.SDRasinternational
reserveassettotideovercurrencycrisis.IMFrespondedto
coronaviruscrisisbycommittingandsupportingneedy
nationsbylending.
2.WorldBank:Theirloansarenotsubsidizedasthey
haveprofitorientedphilosophy.Providesmallportionof
financingneedsbycofinancingagreementthroughofficial
aidagencies,exportcreditagenciesandcommercialbanks.

26. Contd….
WTO:Forumformultilateralnegotiationsandsettlementof
tradedisputes.
InternationalFinancialCorporation:(1956)Establishedto
promoteprivateenterpriseinthecountry.Provideloansto
corporationsandpurchasestocksandborrowinthefinancial
markets.
InternationalDevelopmentAssociation(IDA):(1960)
Lendfundstopoornationsthatcannotqualifyforloansfrom
WorldBank.
BankforInternationalSettlement(BIS):Commonly
providesfinancingforcentralbanksinLatinAmericanandEast
Europeannations.

27. Contd…
OECD:Promotesinternationalcountryrelationshipand
facilitatesgovernanceingovernmentsandcorporationsof
countrieswithmarketeconomythatledtoglobalization.
AfricanDevelopmentBank:Focusingondevelopment
ofAfricancountries
AsianDevelopmentBank:Toenhancesocialand
economicdevelopmentinAsia.