Transcript Ib Modl-4 - Amity

Introduction to International
Financial Systems
Module-4
Prof srikanth venkataswamy
An Introduction to Financial
Market
In economics, a financial market is a
mechanism that allows people to
easily buy & sell (trade) financial
securities (such as stocks & bonds),
commodities
(such
as
precious
metals or agricultural goods) and
transact currencies .
Prof srikanth venkataswamy
Types of Financial Market
Capital
market
Commodity
Market
Money
Market
Financial Market
Derivative
s Market
Insurance
Market
Prof srikanth venkataswamy
Foreign
Exchange
Market
Types of Financial Markets:
The financial markets can be divided into different
subtypes:
1. Commodity markets, which facilitate the trading
of commodities.
2. Money markets, which provide short term debt
financing and investment.
3. Derivatives markets, which provide instruments
for the management of financial risk.
4. Futures markets, which provide standardized
5. Forward contracts for trading products at some
future date; see also forward market.
6. Insurance markets, which facilitate the
redistribution of various risks.
7. Foreign exchange markets, which facilitate the
trading of foreign exchange.
Prof srikanth venkataswamy
Business firms or organisations raise funds
from investors in the form of equites and
debts (collectively known as the capital
structure) and
further reinvest it into various investment
schemes by carefully analyzing the returns
in order to meet out their obligations
relating to purchase of assets which
provides them long term benefits of
compensation.
Prof srikanth venkataswamy
In finance: Investments
 In finance, investment is the commitment of
funds through collateralized lending, or making a
deposit into a secured institution.
 In contrast to investment; dollar cost averaging,
market timing, and diversification are phrases
associated with speculation.
 Investments are often made indirectly through
intermediaries, such as banks, Credit Unions,
Brokers, Lenders, and insurance companies.
Though their legal and procedural details differ,
an intermediary generally makes an investment
using money from many individuals, each of
whom receives a claim on the intermediary.
Prof srikanth venkataswamy
Trade:
Business of any kind; matter of mutual
consideration; affair; dealing.
The business which a person has learned,
and which he engages in, for procuring
subsistence, or for profit; occupation;
especially, mechanical employment as
distinguished from the liberal arts, the
learned professions, and agriculture; as,
we speak of the trade of a smith, of a
carpenter, or mason, but not now of the
trade of a farmer, or a lawyer, or a
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physician
FDI: Foreign Direct Investment
Foreign Direct Investment, or FDI, is a type of
investment that involves the injection of foreign
funds into an enterprise that operates in a different
country of origin from the investor.
Foreign Direct Investment or FDI, is a measure of
foreign ownership of domestic productive assets such
as factories, land and organizations. This does not
include foreign investments in stock markets. Instead,
FDI refers more specifically to the investment of foreign
assets into domestic goods and services. FDIs are
generally favored over equity investments which tend
to flow out of an economy at the first sign of trouble
which leaves countries more susceptible to shocks in
their money markets.
Foreign direct investments have become the major economic
driver of globalization, accounting for over had of all
cross-border investments.
Prof srikanth venkataswamy
FDI: Foreign Direct Investment
The most profound effect has been seen in in
developing countries, where yearly foreign direct
investment flows have increased from an
average of less than $10 billion in the 1970s to a
yearly average of less than $20 billion the 1980s.
From 1998 to 1999 itself, FDI grew from $179
billion to $208 billion and now comprise a large
portion of global FDI.
According to UNCTAD, spurred on by mergers and
acquisitions and the internationalization of
production in a range of industries, inward FDI
for developing countries rose from $481 billion in
1998 to $636 billion in 2006.
And China is at the forefront of
FDI growth, followed
by Russia, Brazil and Mexico.
Prof srikanth venkataswamy
FDI: Foreign Direct Investment
 FDIs do not only provide an foreign capital and
funds, but also provides domestic countries with
an exchange of skill sets, information and
expertise, job opportunities and improved
productivity levels.
 The "Asian Tiger" economies such as China,
South Korea, Singapore and the Philippines
benefitted tremendously and experienced high
levels of economic growth at the onset of
foreign direct investment into their economies.
 Given the high growth rates and changes to
global investment patterns, the definition to FDI
has evolved to include foreign mergers and
acquisitions, investments in joint ventures or
strategic alliances with local enterprises.
Prof srikanth venkataswamy
Trends in Foreign Direct
Investment (FDI)
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

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Historically, FDI has been directed at developing nations as
firms from advanced economies invested in other markets,
with the US capturing most of the FDI inflows.
While developed countries still account for the largest share
of FDI inflows, data shows that the stock and flow of FDI
has increased and is moving towards developing nations,
especially in the emerging economies around the world.
Aside from using FDIs as investment channel and a method
to reduce operating costs, many companies and
organizations are now looking at FDI was a way to
internationalize.
FDIs allow companies to avoid governmental pressure on
local production and cope with protectionist measures by
circumventing trade barriers. The move into local markets
also ensures that companies are closer to their consumer
market, especially if companies set up locally-based
(national) sales offices.
Prof srikanth venkataswamy
Prof srikanth venkataswamy
Classifications of Foreign Direct
Investment
FDIs can be classified as;
 Inward FDI and Outward FDI, depending
on the direction of flow of money.
 Inward FDI occurs when foreign capital is
invested in local resources. The factors
propelling the growth of inward FDI
include tax breaks, low interest rates and
grants.
 Outward FDI, also referred to as "direct
investment abroad", is backed by the
government against all associated risk.
Prof srikanth venkataswamy
Benefits of Foreign Direct
Investment
 One of the advantages of foreign direct
investment is that it helps in the economic
development of the particular country
where the investment is being made.
 This is especially applicable for developing
economies. During the 1990s, foreign
direct investment was one of the major
external sources of financing for most
countries that were growing economically.
 It has also been noted that foreign direct
investment has helped several countries
when they faced economic hardship.
Prof srikanth venkataswamy
Benefits of Foreign Direct
Investment contd….
 For host countries, inward FDI has the potential for job
creation and employment, which is often followed by
higher wages.
 Resource transfer, in terms of capital and technical
knowledge, is also a key motivator that encourages
inward FDI.
 FDI has been used more as a market entry strategy for
investors, rather than an investment strategy.
 FDI growth has increased at a higher rate than the level
of world trade as businesses attempt to circumvent
protectionist measures through direct investments.
 Additionally for investors, FDI provides the
benefits of reduced cost through the realization of
scale economies, and coordination advantages,
Prof srikanth venkataswamy
especially for integrated
supply chains.
Benefits of Foreign Direct
Investment contd….
 The preference for a direct investment
approach rather than licensing and
franchising can also been viewed in terms
of strategic control, where management
rights allows for technological know-how
and intellectual property to be kept inhouse.
 FDIs are favoured in particular because of
its long term durability and commitment to
a host countries economy and would be
less susceptible to short term changes in
market conditions, therefore ensuring a
certain level ofProfcontinuity
and stability in
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the money flow.
Disadvantages of Foreign Direct
Investment
 Many developing economies have tried to
restrict, and even resist, foreign
investments because of nationalist
sentiments and concerns over foreign
economic and political influence.
 One pertinent reason for this sentiment is
that many developing countries, or at
least countries with a history of
colonialism, fear that foreign direct
investment may result in a form of
modern day economic colonialism,
exposing host countries and leaving them
and their resources
vulnerable to the
Prof srikanth venkataswamy
exploitations of the foreign company.
Disadvantages of Foreign Direct
Investment
 While the levels of FDI tend to be resilient during
periods of economic uncertainty, it has the
potential of adversely affecting the net capital
flow of a developing economy especially if it does
not have a healthy and sustainable FDI schedule
It is also often argued that
 FDIs generate negative externalities in the
labour market of the host economy. Why so? All
firms are profit maximizing entities, and one way
to achieve this is often the most direct approach
of cost reduction.
 FDIs may enter the host country for unique
strategic reasons but there is ultimately the need
to achieve returns
investments.
Profon
srikanth
venkataswamy
Disadvantages of Foreign Direct
Investment
 Evidence shows that multinational companies do
pay a slight premium over local-term wages, but
does this really benefit the host economy?
Paying a premium for the price of labour may
improve the consumption power of workers, but
it also has the detrimental ability of disrupting
the local employment market.
 When prices rise, supply increases while demand
falls. Similarly, when the price of labour increase,
wage premiums in this case, this creates a
distortion and creates a disequilibrium in the
labour market. Job matching stops being efficient
and may even create unemployment.
Prof srikanth venkataswamy