CU-BBA-SEM-V-Global Financial Environment-Second Draft

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER-V GLOBAL FINANCIAL ENVIRONMENT

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 2 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1 – Introduction............................................................................................................. 4 Unit 2 – Factors Influencing Global Financial Environment ................................................ 26 Unit 3 – Balance Of Payment .............................................................................................. 46 Unit 4 – Convertibility Of Currencies.................................................................................. 66 Unit 5 – Trade Blocks ......................................................................................................... 95 Unit 6 – Types Of Trade Blocks ........................................................................................ 109 Unit 7 – Trade Commodities I ........................................................................................... 129 Unit 8 – Trade Commodities Ii.......................................................................................... 146 Unit 9 – Impact Of Export And Import On Economy Fdi .................................................. 161 Unit 10 – Make In India .................................................................................................... 176 Unit 11 – Trade Cycles...................................................................................................... 193 Unit 12 – Inflation............................................................................................................. 204 Unit 13 – Measures To Control Inflation ........................................................................... 222 3 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 – INTRODUCTION STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning 1.3 Need and Scope of Global Financial Environment 1.4 Summary 1.5 Keywords 1.6 Learning Activity 1.7 Unit End Questions 1.8 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Define global financial environment.  Examine the need of international financial environment.  Describe the functions of international finance.  Identify the scope of global financial environment.  Explain the need of Bretton Wood Conference. 1.1 INTRODUCTION An international or global financial environment represents the conditions for activity in the economy or in the financial markets around the world. It can be influenced by governments, corporations, investors around the world etc. An important feature is the growing interdependence of the economies of different countries, the transfer from the internationalization of economic life to the globalization of production processes and financial environment. The global financial sector, which is the most influenced by the globalization, is the most important element of the global economy. It is a global system of accumulation of financial resources with distribution and redistribution between the world’s economic subjects based on the principles of competition, which also became global. The financial spheres, which previously were each more distinct (currency and credit markets, securities markets, financial management, taxation) are becoming increasingly 4 CU IDOL SELF LEARNING MATERIAL (SLM)

integrated, due to the introduction of new financial instruments, innovative financial engineering and multinational approach to decision making in financial management. The global financial environment is changing as a result of the globalization process, Eurocurrency market growth, the development of a common European market, the growing role of transnational corporations and international debt crisis. Sometimes, macroeconomic events occur that cause a ripple effect throughout the international financial environment. Even if a condition or event unfolds in a single country, the influence of that country's economy has the potential to move the markets around the world. This could be due to the fact that other countries are creditors of the nation where an event, positive or negative, has occurred or is likely to unfold. The influence of a major global economy or an emerging market has the potential to cause a stir in the financial environment, which could impact borrowing costs, cross-border deals, and profit opportunities. E.g. A downgrade of a country's debt by a rating agency could damage the value of that country's debt and suggest that a default might be imminent. These conditions have the potential to trigger a sell-off, which is when there are more sellers than buyers of risky debt in the markets. Just as an international financial environment can be influenced in a negative way, it can also be impacted in a positive fashion. An attractive international financial environment is one where investment and economic growth are ripe or already happening. When an economy is growing, it leads to greater infrastructure development and often a greater number of available jobs. Subsequently, international investors might recognize an opportunity to allocate capital to these growth initiatives in an attempt to profit, while corporations could develop partnerships or create new locations in the overseas markets. All of this activity is likely to create a good financial environment. It's not unusual for the international financial environment surrounding the stock markets around the world to be a result of one country responding to another. With all of the various time zones around the world, trading sessions occur at different periods of the day globally. When one country's stock market is under extreme selling pressure during the session, this sentiment has the potential to impact the direction of trading in another country when that market begins trading. This can be referred to as market contagion when the influence of one market's behaviour adversely impacts activity internationally. The increasing economic integration of goods, services, and financial markets presents opportunities and challenges for governments, business firms and individuals. 1.2 MEANING A financial environment is a part of an economy with the major players being firms, investors, and markets. Essentially, this sector can represent a large part of a well-developed economy as individuals who retain private property have the ability to grow their capital. 5 CU IDOL SELF LEARNING MATERIAL (SLM)

Firms are any business that offers goods or services to consumers. Investors are individuals or businesses that place capital into businesses for financial returns. Markets represent the financial environment that makes this all possible. Historically, firms were very small or even nonexistent in economies or financial markets. Though a few firms have always been in existence, the ability for a large number of firms was not possible until markets became more mature. Mature markets allow for more access to resources necessary to produce goods and services. As firms begin to grow, expand, and multiply, higher capital needs to persist in order for firms to succeed. Capital sources include money from outside parties, such as investors. Many times investors are individuals who have more capital than is necessary to provide a sufficient living standard. Any excess capital can actually make individuals more money if they invest the funds into a firm that offers a financial return. This symbiotic relationship in the financial environment allows both parties to increase their capital. Many different factors play a role for individuals making investments. A few of these may include risk, current market conditions and competition among others. The last player in the financial environment is the market. Markets represent any place where sellers and buyers can meet together and exchange items. In most cases, the exchange is capital for goods or services. Markets may be local, regional, or international, depending on the economy. Free markets tend to have fewer government regulations, allowing for an increased exchange of goods due to lower transaction costs. Financial environment can exist anywhere so long as the major players exist in the economy. Newer markets tend to have fewer resources and lower levels of economic activity due to their lack of resources. The financial environment is also subject to the business cycle, which dictates the stages of growth and decline in the economy. For example, when a new financial market or environment receives an influx of resources, it has the ability to grow and expand as the players see fit. Decline occurs when the market is saturated with goods and services due to a lack of demand. International Financial Environment An international or global financial environment represents the conditions for activity in the economy or in the financial markets around the world. It can be influenced by something major, such as the credit worthiness of one country's debt. Governments, corporations, and other investors around the world participate in purchasing the debt of other nations as profit opportunities arise. Global financial environment has changed remarkably over 40 years or so. International financial environment is totally different from domestic financial environment. It is subject to several external forces like foreign exchange market, currency convertibility, international monitory system, balance of payments, and international financial markets. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

 Foreign Exchange Market Foreign exchange market is the market in which money denominated in one currency is bought and sold with money denominated in another currency. It is an over the counter market (no single physical or electronic market place) or an organized exchange with a central trade clearing mechanism where traders meet and exchange currencies. It spans the globe, with prices moving and currencies trading somewhere every hour of every business day. World’s major trading starts each morning in Sydney and Tokyo, and ends up in the San Francisco and Los-Angeles. The foreign exchange market consists of two tiers: the interbankmarket or wholesale market, and retail market or client market. The participants in the wholesale market are commercial banks, investment banks, corporations and central banks, and brokers who trade on their own account. On the other hand, the retail market comprises of travellers, and tourists who exchange one currency for another in the form of currency notes or traveller cheques. Many people do not pay attention to exchange rates because rarely do they need to. The typical person's daily life is conducted in their domestic currency. Exchange rates only come into focus for occasional transactions, such as foreign travel, import payments or overseas remittances. An international traveller might harbour for a strong domestic currency because that would make travel to Europe inexpensive. But the downside is a strong currency can exert significant drag on the economy over the long term, as entire industries are rendered non-competitive and thousands of jobs are lost. While some might prefer a strong currency, a weak currency can result in more economic benefits. The value of the domestic currency in the foreign exchange market is a key consideration for central banks when they set monetary policy. Directly or indirectly, currency levels may play a role in the interest rate you pay on your mortgage, the returns on your investment portfolio, and the price of groceries at your local supermarket, and even your job prospects. A currency's level directly impacts the economy in the following ways- i. Merchandise Trade This refers to a nation's imports and exports. In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy. A weak or strong currency can contribute to a nation's trade deficit or trade surplus over time. For example, assume you are a U.S. exporter who sells widgets at $10 each to a buyer in Europe. The exchange rate is €1=$1.25. Therefore, the cost to your European buyer is €8 per widget. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

Now let's say the dollar weakens and the exchange rate is €1=$1.35. Your buyer wants to negotiate a better price, and you can afford to give them a break while still clearing at least $10 per widget. Even if you set the new price at €7.50 per widget, which is a 6.25% discount from your buyer's perspective, your price in dollars is $10.13 at the current exchange rate. A weak U.S. dollar allows your export business to remain competitive in international markets. Conversely, a stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism. But before this happens, export-dependent industries can be damaged by an unduly strong currency. ii. Capital Flows Foreign capital tends to flow into countries that have strong governments, dynamic economies, and stable currencies. A nation needs a relatively stable currency to attract capital from foreign investors. Otherwise, the prospect of exchange-rate losses inflicted by currency depreciation may deter overseas investors. There are two types of capital flows: foreign direct investment (FDI), in which foreign investors take stakes in existing companies or build new facilities in the recipient market; and foreign portfolio investment, in which foreign investors buy, sell and trade securities in the recipient market. FDI is a critical funding source for growing economies such as China and India. Governments generally prefer FDI to foreign portfolio investments, because the latter is hot money that can leave the country quickly when conditions grow tough. This capital flight can be sparked by any negative event, such as a devaluation of the currency. iii. Inflation A devalued currency can result in \"imported\" inflation for countries that are substantial importers. A sudden 20% decline in the domestic currency could result in imports costing 25% more, as a 20% decline means a 25% increase is needed to get back to the original price point. iv. Interest Rates As mentioned earlier, exchange rates are a key consideration for most central banks when setting monetary policy. In September 2012, Bank of Canada governor Mark Carney said the bank took the persistent strength of the Canadian dollar into account when setting monetary policy. Carney said the Canadian dollar's strength was one reason why his country's monetary policy had been \"exceptionally accommodative\" for so long. A strong domestic currency exerts drag on the economy, achieving the same result as a tighter monetary policy (i.e. higher interest rates). In addition, further tightening of monetary policy at a time when the domestic currency is already strong may exacerbate 8 CU IDOL SELF LEARNING MATERIAL (SLM)

the problem by attracting hot money from foreign investors seeking higher yielding investments (which would further strengthen the domestic currency).  Currency Convertibility Currency convertibility is the ease with which a country's currency can be converted into gold or another currency. Currency convertibility is important for international commerce as globally sourced goods must be paid for in an agreed-upon currency that may not be the buyer's domestic currency. When a country has poor currency convertibility, meaning it is difficult to swap it for another currency or store of value, it poses a risk and barrier to trade with foreign countries who have no need for the domestic currency. There tends to be a correlation between a country's economy and the convertibility of its currency. The stronger an economy is on the global scale, the more likely its currency will be easily converted into other major currencies. Government constraints may result in a currency with a low convertibility. For example, a government with low reserves of hard foreign currency usually restricts currency convertibility because that government would otherwise not be in a position to intervene in the foreign exchange (forex) market (i.e., to revalue, devalue) in order to support their own currency if and when necessary. Countries with a currency that has poor convertibility are at a global trade disadvantage because transactions don't run as smoothly as those with good convertibility. This reality will deter other countries from trading with them. Poor currency convertibility can contribute to slower economic growth as global trade opportunities are missed. There are ways to trade in foreign currencies which do not exchange internationally or whose trade is severely limited or legally restricted in the domestic market. Non- deliverable forward contracts (NDFs) can give a trader, for instance, indirect exposure to the Chinese renminbi, Indian rupee, South Korean won, new Taiwan dollar, and Brazilian real and other inconvertible currencies. Foreign exchange market assumes that currencies of various countries are freely convertible into other currencies. But this assumption is not true, because many countries restrict the residents and non-residents to convert the local currency into foreign currency, which makes international business more difficult. Many international business firms use “counter trade” practices to overcome the problem that arises due to currency convertibility restrictions.  International Monetary System Any country needs to have its own monetary system and an authority to maintain order in the system, and facilitate trade and investment. India has its own monetary policy, and the Reserve Bank of India (RBI) administers it. The same is the case with world, its 9 CU IDOL SELF LEARNING MATERIAL (SLM)

needs a monetary system to promote trade and investment across the countries. International monetary system exists since 1944. The International Monetary Fund (IMF) and the World Bank have been maintaining order in the international monetary system and general economic development respectively. i. The IMF came into existence in 1944. Along with the World Bank, it was created to bring financial stability to the world following World War II. ii. The IMF is funded by quota subscriptions. Member states pay according to the size of their economy, and voting rights are based on this quota. iii. Special Drawing Rights (SDRs) is the unit of account of the IMF. The SDR is made up of a basket of five currencies: the U.S. dollar, the euro, the Japanese yen, the Chinese RMB, and the British pound. iv. When member countries run into trouble, they can turn to the IMF for advice and financial assistance. v. Out of the 195 countries in the world, 190 countries are members of the IMF. The IMF is funded by quota subscriptions paid by member states. The size of each quota is determined by the size of each member's economy. The quota in turn determines the weight each country has within the IMFand hence it’s voting rightsas well as how much financing it can receive from the IMF. Twenty-five percent of each country's quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members. Before SDRs, the Bretton Woods system had been based on a fixed exchange rate, and it was feared that there would not be enough reserves to finance global economic growth. Therefore, in 1969, the IMF created the SDRs, which are a kind of international reserve asset. They were created to supplement the international reserves of the time, which were gold and the U.S. dollar.  International Financial Markets A well-developed, smoothly operating financial market plays an important role in contributing to the health and efficiency of an economy. There is a strong positive relationship between financial market development and economic growth. Financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services. The combination of well-developed financial markets and institutions, as well as a diverse array of financial products and instruments, suits the needs of borrowers and lenders and therefore the overall economy. Individuals, businesses, and governments in need of funds can easily discover which financial institutions or which financial markets may provide funding and what the cost will be for the borrower. This allows investors to compare the cost of financing to their 10 CU IDOL SELF LEARNING MATERIAL (SLM)

expected return on investment, thus making the investment choice that best suits their needs. In this way, financial markets direct the allocation of credit throughout the economy and facilitate the production of goods and services. A recent example is the integrating existing EU financial markets.The European Union, with its single banking market and single currency, the Euro, has created Europe-wide financial markets and institutions. These markets use the Euro to facilitate saving, investment, borrowing, and lending. Euro-denominated stock, bond, and derivative markets serve all of the EU countries that use the Euro—replacing smaller, less-liquid, offerings and products that previously were available mostly on a country-by-country basis. In addition, the Euro likely increases the attractiveness of Euro-based financial markets and instruments to the rest of the world. Within the EU, the Euro eliminates the cross- border exchange rate risks that are part of transactions between countries with different currencies. The Euro and integrated “Euro-based” financial markets and institutions should make the credit allocation process in Europe more competitive and more efficient in the long run. International financial market was born in mid-fifties and gradually grown in size and scope. International financial markets comprises of international banks, Eurocurrency market, Eurobond market, and international stock market. International banks play a crucial role in financing international business by acting as both commercial banks and investment banks. Most international banking is undertaken through reciprocal correspondent relationships between banks located in different countries. But nowadays large bank have internationalized their operations they have their own overseas operations so as to improve their ability to compete internationally. Eurocurrency market originally called as Eurodollar market, which helps to deposit surplus cash efficiently and conveniently, and it helps to raise short-term bank loans to finance corporate working capital needs, including imports and exports. Eurobond market helps to MNCs to raise long-term debt by issuing bonds. International bonds are typically classified as either foreign bonds or Eurobonds. A foreign bond is issued by a borrower foreign to the country where the bond is placed. On the other hand Eurobonds are sold in countries other than the country represented by the currency denominating them.  Balance of Payments International trade and other international transactions result in a flow of funds between countries. All transactions relating to the flow of goods, services and funds across national boundaries are recorded in the balance of payments of the countries concerned. Balance of payments (BoPs) is systematic statement that systematically summarizes, for a specified period of time, the monetary transactions of an economy with the rest of the world. Put in simple words, the balance of payments of a country is a systematic record 11 CU IDOL SELF LEARNING MATERIAL (SLM)

of all transactions between the ‘residents’ of a country and the rest of the world. The balance of payments includes both visible and invisible transactions. It presents a classified record of: i. All receipts on account of goods exported, services rendered and capital received by residents. ii. Payments made by then on account of goods imported and services received from the capital transferred to non-residents or foreigners. Thus the transactions include the exports and imports (by individuals, firms and government agencies) of goods and services, income flows, capital flows and gifts and similar one-sided transfer of payments. A rule of thumb that aids in understanding the BOP is to follow the cash flow. Balance of payments for a country is the sum of the Current Account, the Capital Account, and the change in Official Reserves.  Current account Balance of payments comprises of three kinds of accounts - current, capital and financial account. The current account calculates the total value of imports and exports of goods and services. The latter is called 'invisibles'. India's current account has run a deficit for many years. This deficit (CAD) hit a peak of $87.8 billion in 2012-13 on account of a high import bill - especially due to oil and gold imports. Since gold is a non-essential commodity, the government imposed measures to curb imports. As a result, trade deficit - when imports exceed exports - fell to $147.6 billion in 2013-14 from $195.7 billion the previous year. However, in terms of net trade of services, India reported a surplus of $73 billion, up from $64.9 billion in FY13. This helped the CAD fall by more than half to $32.4 billion.  Capital and financial accounts Money is also exchanged between countries through investments or other kinds of financial transactions. This is calculated in the capital and financial accounts. After the 1990 crisis when India did not have enough money left to fund its deficit, it opened markets partially to foreign investors. Today, India runs a net surplus of $33.3 billion in its capital and financial accounts. This money is used to fund the current account deficit. An increase in borrowings from outside the country has a negative impact on the capital account, while an increase in foreign investment inflows has a positive impact.  Rupee impact India's capital and current accounts have a strong bearing on the rupee value. This is because, when you owe the world money, you have to sell rupee and buy dollars or other foreign currencies. Similarly, when a foreigner invests in India, rupee is bought while dollars are sold. An increase in demand for the rupee leads to an appreciation in its value and vice-versa. This was the reason why the rupee fell 20% to Rs 69-to-a-dollar levels 12 CU IDOL SELF LEARNING MATERIAL (SLM)

between May and August 2013. Foreign investors exited the Indian capital market in droves, while the country's current account deficit stood at a lifetime high.  Credit ratings Every country's sovereign bond - issued by the government - is analyzed by credit ratings agencies. Depending on the risks involved, a credit rating is given from time to time. Greater the risks, poorer is the credit rating. For this reason, an increase in deficit is detrimental to credit rating. This is because a high deficit is a liability. When a country owes more to the world, the risks of a default of interest payments to bond holders increase. This is the reason credit ratings agencies like Moody's and S&P issued warnings to India about its high current account and fiscal deficits. The global crisis has shown the importance of the activities of credit rating agencies. These companies, assessing the creditworthiness of company’s money lenders, but also the same debt instruments have a large impact on global financial markets and the overall economy. Granted ratings translate into concrete decisions for investors in the international economic markets. Credit rating agencies issued ratings in favour of the relevant arguments, but above all its high reputation. However, in the event of bankruptcy of a highly acclaimed company, or errors and poorly defined risk, the agency does not take any responsibility for it. It is this situation occurred and occurred before and during the crisis. During the expansion of the real estate market banks are exposed to a high risk associated with the segment of loans with lower rather than eliminate the risk transfer it to someone else through securitization and issuance of such securities as ABS and CDS. However, unreliable and not entirely objective rating agencies staged these bonds high ratings, rather than a threat, so the risks associated with investments in those instruments were disregarded. You can also have doubts about the ratings issued for the country after the outbreak of the financial crisis and consequently, economic growth and debt. The ratings are in fact taken into account the individual opinions of analysts, so why are so respected rating agencies analysts, and not other institutions or specialists. You cannot, of course, to blame the rating agencies for the crisis, but you should think how well they assess the credibility of the government. 1.3 NEED AND SCOPE OF GLOBAL FINANCIAL ENVIRONMENT International Finance is an important part of financial economics. It mainly discusses the issues related with monetary interactions of at least two or more countries. International finance is concerned with subjects such as exchange rates of currencies, monetary systems of the world, foreign direct investment (FDI), and other important issues associated with international financial management. Like international trade and business, international finance exists due to the fact that economic activities of businesses, governments, and organizations get affected by the 13 CU IDOL SELF LEARNING MATERIAL (SLM)

existence of nations. It is a known fact that countries often borrow and lend from each other. In such trades, many countries use their own currencies. Therefore, we must understand how the currencies compare with each other. Moreover, we should also have a good understanding of how these goods are paid for and what is the determining factor of the prices that the currencies trade at. The World Bank, the International Finance Corporation (IFC), the International Monetary Fund (IMF), and the National Bureau of Economic Research (NBER) are some of the notable international finance organizations. International trade is one of the most important factors of growth and prosperity of participating economies. Its importance has got magnified many times due to globalization. Moreover, the resurgence of the US from being the biggest international creditor to become the largest international debtor is an important issue. These issues are a part of international macroeconomics, which is popularly known as international finance. Importance of International Finance International finance plays a critical role in international trade and inter-economy exchange of goods and services. Global Economy In the 1990s, the world reached the climax in a drama of economic change. No onecan deny the effects of these changes on our hopes for peace and prosperity. Thedisintegration of the Soviet Union, political and economic freedom in Eastern Europe, the emergence of market- oriented economies in Asia, the creation of a single European market, trade liberalization through regional trading blocs, such asthe European Union, and the world’s joint mechanism, such as the World TradeOrganization. As global integration advances amid intensified international competition,the United States, Japan, and Europe are expected to lead the world towarda system of free trade and open markets. Three recent changes have had a profound effect on the international financialenvironment: the end of the Cold War, the emergence of growing markets amongthe developing countries of East Asia and Latin America, and the increasing globalizationof the international economy. Understanding these changes should helpyou see where the international economy is headed in the future so that you canmore effectively respond to these challenges, fulfil your responsibilities, and takeadvantage of these opportunities.  End of the ColdWar In 1989 the Soviet Union relaxed its control over theeastern European countries that had suffered its domination for over 40 years.These countries immediately seized the opportunity to throw off authoritarianCommunist rule. Two years later the Soviet Union itself underwent a political andideological upheaval, which quickly led to its breakup into 15 independent states. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Most of these and other formerly centrally planned economies are now engaged ina process of transition from central planning and state ownership to market forcesand private ownership.  Industrialization and Growth of Developing World The second greatchange of recent years has been the rapid industrialization and economic growth ofcountries in several parts of the world. The first of these emerging markets were thefour Asian “tigers”: Hong Kong, Singapore, South Korea, and Taiwan. China andother Asian countries have followed in their footsteps. Having overcome the debtcrisis of the 1980s and undertaken economic and political reforms, some of the LatinAmerican countries such as Argentina, Brazil, Chile, Mexico, and Venezuela have also begun to see faster and more sustained growth.  Increased Globalization The third major change in the international financialenvironment is even more sweeping than the first two. National economiesare becoming steadily more integrated. Technological barriers have fallen astransportation and communication costs have dropped. Government-made barriershave also fallen as tariffs and non-tariff barriers have been reduced in a series ofmultilateral negotiations and trading blocs since the Second World War. Function of International Finance The main functions of international finance are as follows -  Distribution function Its essence is that through the mechanism of international finance the cash distribution and redistribution of world product are carried out. Due to the international finance cash funds are created, distributed and used and different needs of the world economy are met. Distribution function is intended to promote the organization of the balanced and efficient global production and development of all the sectors of the world economy with the aim of the most complete satisfaction of necessities of the world community.  Regulatory function This is associated with the intervention of international monetary and financial institutions with the help of finance in the process of production.  Stabilizing function Its essence is to create stable conditions for economic and social relations in the global economic system.  Control function 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Its general essence is the monitoring the production and distribution of world social product in money form by recording and analyzing its movement. The result of this function is making decisions on international finance and development of current and strategy international financial policy. Effect of Global Financial Environment on Businesses There are also many examples of the growing importance of international operationsfor individual companies. Exxon Mobile, DaimlerChrysler, Coca Cola, andMcDonald’s earn more than half of their total operating profits through internationaloperations. MNCs, such as BP Amoco, General Motors, and Sony, do businessin more than 150 countries around the world. Nestle, Philips Electronics, Ford,and IBM have more workers overseas than in their home countries. In 1996 Nestle,for example, had 203,100 workers overseas compared with only 6,700 workers in itshome country Switzerland. By the same token, global finance has also become increasingly important as itserves world trade and foreign investment. International earning assets forBankAmerica, for example, represent more than half of its total earning assets.Deutsche Bank maintains more than 500 overseas branches in over 100 countries.Simply stated, each nation is economically related to other nations through acomplex network of international trade, foreign investment, and international loans.Most large and many medium-size companies around the world have internationalbusiness operations. In recent years it has become clear that internationalevents significantly affect companies which do not have foreign operations. Businessschool graduates have an advantage in moving their companies forward if theyunderstand the basic elements of international finance. Scope International financial environment, sometimes known as international macroeconomics, is the study of monetary interactions between two or more countries, focusing on areas such as foreign direct investment and currency exchange rates.  International finance is the study of monetary environment that transpire between two or more countries rather than narrowly focusing on individual markets.  It focuses on areas such as foreign direct investment and currency exchange rates.  Increased globalization has magnified the importance of international financial environment.  An initiative known as the Bretton Woods system aims to standardize international monetary exchanges and policies in a broader effort to nurture post World War II economic stability. Bretton Woods System 16 CU IDOL SELF LEARNING MATERIAL (SLM)

The Bretton Woods system was created at the Bretton Woods conference in 1944, where the 40 participating countries agreed to establish a fixed exchange rate system. The collective goal of this initiative was to standardize international monetary exchanges and policies in a broader effort to create post World War II stability. The Bretton Woods conference catalyzed the development of international institutions that play a foundational role in the global economy. These include the International Monetary Fund (IMF), a consortium of 189 countries dedicated to creating global monetary cooperation, and the International Bank for Reconstruction and Development, which later became known as the World Bank. The United Nations Monetary and Financial Conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire, where delegates from forty-four nations created a new international monetary system known as the Bretton Woods system. These countries saw the opportunity for a new international system after World War II that would draw on the lessons of the previous gold standards and the experience of the Great Depression and provide for post-war reconstruction. It was an unprecedented cooperative effort for nations that had been setting up barriers between their economies for more than a decade. They sought to create a system that would not only avoid the rigidity of previous international monetary systems, but would also address the lack of cooperation among the countries on those systems. The classic gold standard had been abandoned after World War I. In the interwar period, governments not only undertook competitive devaluations but also set up restrictive trade policies that worsened the Great Depression. Those at Bretton Woods envisioned an international monetary system that would ensure exchange rate stability, prevent competitive devaluations, and promote economic growth. Although all participants agreed on the goals of the new system, plans to implement them differed. To reach a collective agreement was an enormous international undertaking. Preparation began more than two years before the conference, and financial experts held countless bilateral and multilateral meetings to arrive at a common approach. While the principal responsibility for international economic policy lies with the Treasury Department in the United States, the Federal Reserve participated by offering advice and counsel on the new system. The primary designers of the new system were John Maynard Keynes, adviser to the British Treasury, and Harry Dexter White, the chief international economist at the Treasury Department. Keynes, one of the most influential economists of the time (and arguably still today), called for the creation of a large institution with the resources and authority to step in when imbalances occur. This approach was consistent with his belief that public institutions should be able to intervene in times of crises. The Keynes plan envisioned a global central bank called the Clearing Union. This bank would issue a new international currency, the “bancor,” 17 CU IDOL SELF LEARNING MATERIAL (SLM)

which would be used to settle international imbalances. Keynes proposed raising funds of $26 million for the Clearing Union. Each country would receive a limited line of credit that would prevent it from running a balance of payments deficit, but each country would also be discouraged from running surpluses by having to remit excess bancor to the Clearing Union. The plan reflected Keynes’s concerns about the global post-war economy. He assumed the United States would experience another depression, causing other countries to run a balance- of-payments deficit and forcing them to choose between domestic stability and exchange rate stability. White’s plan for a new institution was one of more limited powers and resources. It reflected the concerns that much of the financial resources of the Clearing Union envisioned by Keynes would be used to buy American goods, resulting in the United States holding the majority of bancor. White proposed a new monetary institution called the Stabilization Fund. Rather than issue a new currency, it would be funded with a finite pool of national currencies and gold of $5 million that would effectively limit the supply of reserve credit. The plan adopted at Bretton Woods resembled the White plan with some concessions in response to Keynes’s concerns. A clause was added in case a country ran a balance of payments surplus and its currency became scarce in world trade. The fund could ration that currency and authorize limited imports from the surplus country. In addition, the total resources for the fund were raised from $5 million to $8.5 million. The 730 delegates at Bretton Woods agreed to establish two new institutions. The International Monetary Fund (IMF) would monitor exchange rates and lend reserve currencies to nations with balance-of-payments deficits. The International Bank for Reconstruction and Development, now known as the World Bank Group, was responsible for providing financial assistance for the reconstruction after World War II and the economic development of less developed countries. The IMF came into formal existence in December 1945, when its first twenty-nine member countries signed its article of agreement. The countries agreed to keep their currencies fixed but adjustable (within a 1 percent band) to the dollar, and the dollar was fixed to gold at $35 an ounce. To this day, when a country joins the IMF, it receives a quota based on its relative position in the world economy, which determines how much it contributes to the fund. In 1958, the Bretton Woods system became fully functional as currencies became convertible. Countries settled international balances in dollars, and US dollars were convertible to gold at a fixed exchange rate of $35 an ounce. The United States had the responsibility of keeping the price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility. The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfill its obligation to redeem dollars 18 CU IDOL SELF LEARNING MATERIAL (SLM)

for gold at the official price. In 1971, President Richard Nixon ended the dollar’s convertibility to gold. Examples of Global Impact of Currencies The forex market is the most actively traded market in the world, with an excess of more than $5 trillion traded daily, far exceeding global equities.Despite such enormous trading volumes, currencies usually stay off the front pages. However, there are times when currencies move in dramatic fashion and the reverberations are felt around the world. We list below a few examples- The Asian Crisis of 1997-98 A prime example of the havoc caused by adverse currency moves is the Asian Financial Crisis, which began with the devaluation of the Thai baht in summer of 1997. The devaluation occurred after the baht came under intense speculative attack, forcing Thailand's central bank to abandon its peg to the U.S. dollar and float the currency. This currency contagion spread to neighbouring countries such as Indonesia, Malaysia and South Korea, leading to a severe contraction in these economies as bankruptcies soared and stock markets plunged. China's Undervalued Yuan Between 1995 and 2005, China held the renminbi steady at about 8.2 per dollar, enabling its export juggernaut to gather steam from what trade partners said was an artificially suppressed and undervalued currency. In 2005, China responded to the growing chorus of complaints from the U.S. and other nations. It allowed the Yuan to steadily appreciate, from over 8.2 RMB to the dollar to about 6 per dollar by 2013. Japanese Yen's Gyrations from 2008 to Mid-2013 The Japanese yen was one of the most volatile currencies between 2008 and 2013. Because of Japan's policy of near zero-bound interest rates, traders favoured the yen for carry trades, in which they borrowed yen for next to nothing and invested in higher yielding overseas assets. But as the global credit crunch intensified in 2008, the yen began appreciating sharply as panicked investors bought the currency in droves to repay yen-denominated loans. As a result, the yen appreciated by more than 25% against the U.S. dollar in the five months to January 2009. Then in 2013, Prime Minister Shinzo Abe unveiled monetary stimulus and fiscal stimulus plans (nicknamed \"Abenomics\") that led to a 16% plunge in the yen within the first five months of the year. Euro Fears (2010-12) Concerns that the deeply indebted nations of Greece, Portugal, Spain and Italy would be forced out of the European Union led the euro to plunge 20% from 1.51 to the dollar in December 2009 to about 1.19 in June 2010. The euro recovered its strength over the next 19 CU IDOL SELF LEARNING MATERIAL (SLM)

year, but that only proved temporary. A resurgence of EU break-up fears led to a 19% slump in the euro from May 2011 to July 2012. Benefit from Currency Fluctuation Here are some suggestions for investor to benefit from currency moves-  Invest Overseas US-based investors who believe the greenback is weakening should invest in strong overseas markets, because your returns will be boosted by foreign currency gains. Consider the Canadian S&P/TSX Composite Index between 2000 and 2010. The S&P 500 Index was virtually flat over this period, yet the TSX generated about 72% returns in Canadian dollar terms. For U.S. investors buying Canadian equities with greenbacks, U.S. dollar returns were about 137%, or 9% per annum, due to the steep appreciation of the Canadian dollar.  Invest in U.S. Multinationals The U.S. has many large multinational companies that derive a substantial part of revenues and earnings from foreign countries. Earnings of U.S. multinationals are boosted by the weaker dollar, which should translate into higher stock prices when the greenback is weak.  Refrain From Borrowing in Low-Interest Foreign Currencies This has admittedly not been a pressing issue since 2000, as U.S. interest rates have been at record lows for years. However, at some point they will rise again. When that happens, investors who are tempted to borrow in foreign currencies at lower interest rates should remember those who had to scramble to repay borrowed yen in 2008. The moral of the story: never borrow in a foreign currency if it is liable to appreciate and you do not understand or cannot hedge the exchange risk.  Hedge Currency Risk Adverse currency moves can significantly impact your finances, especially if you have substantial forex exposure. But there are plenty of choices to hedge currency risk, such as currency futures, currency forwards, currency options and exchange-traded funds such as the INVESCO Euro Currency Shares Euro Trust (FXE) and INVESCO Currency Shares Japanese Yen Trust (FXY). 1.4 SUMMARY  A global financial environment represents the conditions for activity in the economy or in the financial markets around the world. It can impact economies of two or more countries positively or negatively. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

 The environment is subject to several external forces like foreign exchange market, currency convertibility, international monitory system, balance of payments, and international financial markets.  Foreign exchange market is the market in which money denominated in one currency is bought and sold with money denominated in another currency.  Foreign exchange market assumes that currencies of various countries are freely convertible into other currencies.  The International Monetary Fund (IMF) and the World Bank have been maintaining order in the international monetary system and general economic development respectively.  International financial market was born in mid-fifties and gradually grown in size and scope. International financial markets comprises of international banks, Eurocurrency market, Eurobond market, and international stock market. International banks play a crucial role in financing international business by acting as both commercial banks and investment banks.  Balance of payments (BoPs) is systematic statement that systematically summarizes, for a specified period of time, the monetary transactions of an economy with the rest of the world.  Three recent changes have had a profound effect on the international financial environment: the end of the Cold War, the emergence of growing markets among the developing countries of East Asia and Latin America, and the increasing globalization of the international economy.  The Bretton Woods system was created at the Bretton Woods conference in 1944, where the 40 participating countries agreed to establish a fixed exchange rate system. The collective goal of this initiative was to standardize international monetary exchanges and policies in a broader effort to create post World War II stability.  The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfill its obligation to redeem dollars for gold at the official price. In 1971, President Richard Nixon ended the dollar’s convertibility to gold.  Currency moves can have a wide-ranging impact on a domestic economy and globally as well. When the greenback is weak, investors can take advantage by investing overseas or in U.S. multinationals. Because currency moves can be a potent risk when one has a large forex exposure, it may be best to hedge this risk through the many hedging instruments available. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

 Currency exchange rates can impact merchandise trade, economic growth, capital flows, inflation and interest rates.  Examples of large currency moves impacting financial markets include the Asian Financial Crisis and the unwinding of the Japanese yen carry trade.  Investors can benefit from a weak greenback by investing in overseas equities. A weaker dollar can boost their returns in U.S. dollar terms.  Investors should hedge their foreign currency risk via instruments such as futures, forwards and options. 1.5 KEYWORDS  Balance of Payments- A financial statement prepared for a given country summarizing the flows of goods, services, and funds between the residents of that country and the residents of the rest of the world during a certain period of time. The balance of payments is prepared using the concept of double-entry bookkeeping, where the total of debits equals the total of credits.  Balance of Trade- The net of imports and exports of goods and services reported in the balance of payments.  Eurobond - A bond underwritten by an international syndicate of banks and marketed internationally in countries other than the country of the currency in which it is denominated. The issue is thus not subject to national restrictions.  International Monetary Fund (IMF) - An international institution created to provide a forum in which nations can jointly examine each other's economic policies, discuss the operation of the international monetary system, and negotiate revisions in international monetary relations. The objectives of the Fund include supervising the exchange market intervention of member nations, providing the financing needed by members to overcome short-term payments imbalances, and encouraging monetary cooperation and international trade among nations.  World Bank (International Bank for Reconstruction and Development) - A creation of the Bretton Woods negotiations in July 1944, the bank began operations in June 1946. The original intent of the bank was to make post-war reconstruction loans, a role soon supplanted by the Marshall Plan. The bank consequently shifted its attention to development lending. Funds for lending are obtained from the paid-in capital subscriptions of member nations, from borrowings in the world's capital markets, and from net earnings. 1.6 LEARNING ACTIVITY 22 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Discuss the impact of Covid-19 on global economy? ___________________________________________________________________________ ___________________________________________________________________________ 2. The Green stimulus was given by USA, South Korea, China and European Union in 2008 and 2009 during recession. Discuss the effect of these measures on global economies in light with economic and social impacts? ___________________________________________________________________________ ___________________________________________________________________________ 1.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List the functions of international finance. 2. Describe in brief ‘Bretton Wood conference’. 3. Define foreign exchange markets. 4. Define balance of payment. 5. List the major players in financial environment. Long Question 1. Illustrate the need of international financial environment. 2. Describe the effect of globalization in international finance. 3. Examine the effect of global environment on businesses. 4. Examine the role of IMF creation in view of international financial environment. 5. Describe the 3 changes which had profound effect on global monetary environment. B. Multiple Choice Questions 1. What is the function of the financial management due to globalisation? a. Less demanding and complex b. More demanding and complex c. Less important and complex d. Outdated and complex 2. How many countries are involved in the issue related to monetary interaction of 23 international finance? a. one country CU IDOL SELF LEARNING MATERIAL (SLM)

b. two or more countries c. five countries d. None of the above 3. What does international finance is concerned with? a. exchange rates of currencies b. monetary systems of the world c. foreign direct investment d. all of these 4. What is the full form of IMS? a. International monetary source b. International monetary system c. International monetary structure d. International monetary society 5. What does the Bretton Woods accord for? a. 1879 created the gold standard as the basis of international finance. b. 1914 formulated a new international monetary system after the collapse of the gold standard. c. 1944 formulated a new international monetary system after the collapse of the gold standard. d. None of these. Answers 1-b, 2-b, 3-d, 4- b, 5-c 1.8 REFERENCES References  Ambler, C.A., and Mesenbourgh, T.L. (1992), EDI-Reporting Standard for the Future. Washington, D.C.: U.S. Department of Commerce.  Bloomstron, M., Lipsey, R.E. and Kulchycky, K. (1988) U.S. and Swedish direct investment exports. Chicago: University of Chicago Press.  Bryant, R.C. (1980), Money and Monetary Policy in Interdependent Nations. Washington, D.C.: The Brookings Institution. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

Textbooks  Maurice, D.L (2005), International finance (4th ed.), New York: Routledge.  Mayer, H. (1986), Recent Innovations in International Banking, Basle, Switzerland: Bank for International Settlements.  Laopodis, N.T. (1989), International Interest Linkages and Monetary Policy, Basle, Switzerland: Bank for International Settlements. Websites  http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/S000023MA/P001406/M0 22365/ET/1504613265M-28,Q-1.pdf  https://www.tutorialspoint.com/international_finance/forex_market_players.htm  http://ngunakua.blogspot.com/p/topic-6-global-financial-environment_13.html 25 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2 – FACTORS INFLUENCING GLOBAL FINANCIAL ENVIRONMENT STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Factors Influencing Global Financial Environment 2.2.1 Economic Growth 2.2.2 Real Sector 2.3 Summary 2.4 Keywords 2.5 Learning Activity 2.6 Unit End Questions 2.7 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Examine the factors that affect international business.  Describe the effect of international economic environment on real estate.  Examine closely the effect of economic growth as a factor on global business. 2.1 INTRODUCTION International business refers to all commercial activities such as the trade of goods, services, technology, knowledge, and capital across national borders. The cross-border transactions take place between individuals, business firms and government agencies. Thus, international business refers to cross-border transactions of goods and services taking place between two or more countries. Also, International business occurs in different forms-  Cross border transactions of goods and services from one country to another  Contractual agreements to use products, services and processes of other nations  Operating sales, manufacturing, research and development activities in foreign markets. Globalization connects different world economies and paved the way for international businesses to flourish across boundaries. Coupled with digitalization, it has grown manifold 26 CU IDOL SELF LEARNING MATERIAL (SLM)

in the past few decades worldwide. It refers to all the cross border transactions of goods, capital, technology, managerial knowledge, and services that take place between two or more countries. In today’s globalized world, every company needs to be known internationally as well. For this, the company sets up its operations in many nations. These are known as Multinational Companies (MNCs). Most of the social and economic changes that are happening now are only due to globalization. Liberalization agreements among many countries characterize international business. MNCs are tapping the valuable resources of host countries that lack equipment, workforce, and experience and create jobs and revenue. By doing so, it receives tax breaks, explores new markets, and increases revenue across borders. However, all these activities of making the world smaller are not without significant factors affecting the international business. Multinational Corporation (MNC) MNC is a corporate organization that has its operations and facilities in more than one country. MNC is a large corporation which produces and sells its goods and services in number of countries. Generally, MNC firm has a centralized head office and number of offices in other countries. Thus, MNC’s are large size firms that have their operations in number of countries and all the operations are centrally controlled by parent company. Various companies are involved in transacting their goods, services and capital across the national borders and are affected by number of factors. Various restrictions are also imposed on companies that are transacting their business at international level. Various internal and external factors directly impact the working of these business firms. Various external environment factors directly affecting the working of large MNCs include social conditions of economy, political and legal factors, etc. Micro environment of business includes various internal environment factors of business firm that affects the performance and decision making of an organization. Various micro environment factors of international business include customers, competitors, distribution channels, suppliers, public, etc. Thus, micro environment factors are factors that exist in the immediate operation environment of business and directly impact the operations of business organization. Micro factors of business also involve various factors relating to resource availability and usage of resources.  Impact of customers on business Customers are important micro environment factor of business that impacts the operations of business organization. Customers have gained lot of importance in 21st century. Business firms in current times cannot successfully run a business without fulfilment of needs and wants of customers. Also, customer preferences changes at regular pace which influences the working of business firms (Seidel, 2019). Thus, 27 CU IDOL SELF LEARNING MATERIAL (SLM)

customer focus and engagement have become key factor for business firm to be considered while determining the type of products and services to be offered to customers. Customer engagement also influences the competitive position of business firm. For instance, Woolworths has taken various initiatives to provide convenient services to customer. Woolworths also has developed online portal to provide convenient shopping facility to customers. Various store innovation has also been done by Woolworths to ensure that customer do not face any difficulty in shopping. Woolworths also ensures that customers get fresh fruits and vegetables. Along with this, Woolworths is known for providing superior services to customers at reasonable prices. All these initiatives have helped Woolworths to achieve competitive position in industry. In addition to this, Woolworths also has adopted number of rapid prototyping techniques to try new ideas with customers and to gain their feedback from customers regarding various products and services.  Suppliers factors affecting business: Suppliers provide various raw materials, technology, human resources and other components to the company. International business firms operate on large scale and procure resources and other supplies from number of suppliers. It is must for international business firm to have well managed supply chain. Business firms should remain in touch with various suppliers to reduce their operational cost and to ensure that various raw materials required in business are readily available (HQ, 2015). However, growing concern for quality products and need for sustainable and ethical products have increased the bargaining power of number of suppliers. Location, price charged by suppliers, quality of products provided by suppliers etc. affects the selection of suppliers by the business firm. Also, price charged by various suppliers directly impacts the cost structure of various goods produced by the business organization. For instance, Woolworths has developed effective supply chain management system by developing effective relations with number of suppliers and procuring timely supplies from suppliers. Various products of suppliers such as fresh fruits and vegetables are directly stored in the retail stores of the company. Thus, Woolworths ensures that fresh and quality produce is procured from suppliers.  Competitors factors affecting business Various competitive factors also affect the working of company. Large number of competitors exists in the industry and initiatives undertaken by competitors directly influence the working of company. Market share of the competitors also affects the profitability of business firm. However, larger competition in the market signified huge demand for the product in the market. Products and services provided by competitors also creates new demand trends in the industry by creating demand for new products and services which further reduces the demand of firm products and services in the industry. Rapid change in the needs of customers is also the result of actions taken by competitors. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

This further influences the business organization to bring some innovation and develop products according to the needs of customers (\"Competitive Forces Affecting Business Environment\", 2019). Thus, it is must for business firms to provide differentiated products to customers to gain larger market share.  Industry rivalry affecting business Rivalry among the existing competitors also affects the operations of business firms. Behaviour of competitors affects the operations of business organization. Competitive rivalry also pressurizes business firms to offer quality produce to customers at reasonable prices. Also, competitive rivalry influences business firms to increase their spending on product and service innovation. 2.2 FACTORS INFLUENCING GLOBAL FINANCIAL ENVIRONMENT Factors influencing global financial environment can be divided into Internal and external factors. Internal Factors Internal factors are factors within the control of company and are referred to both tangible and intangible factors of organization which influences the strengths and weaknesses of an organization. Various internal factors that affect an organization are discussed as follows-  Human resources Human resources are one of the biggest treasures of an organization as whole operations to the company depend on its human resources. Effective and hardworking staff members help in achieving competitive position in the industry whereas lack of skilled staff members reduces the profitability of business organization and may lead to closure of business (Internal & External Environmental Factors, 2019). Thus, working of an organization depends on efficiency, effectiveness, performance and skill base of staff members.  Financial resources Financial resources refer to the funds available with the company to carry out various operations in the organizations. Funds are the base for growth and competitive position in the industry. Lack of availability of this resource leads to failure and closure of business organization.  Innovation capabilities Innovation refers to the ability of business organization to introduce new ideas into the business operations. Innovation capability is also one of the important factors that affect the operations of business organization.  Organizational structure 29 CU IDOL SELF LEARNING MATERIAL (SLM)

Type of organization structure shapes the employee behaviour in organization and also influences the type of communication taking place in organization. Team based structures helps in free flow of information (Johnson, 2019).  Value proposition Value proposition is the belief of customers as to how the products and services of organization will meet the expectations of customers. Value proposition also influences customers to purchase goods from the organization. Currently, Woolworths price based marketing campaign has helped in achieving “cheap cheap” slogan for the new value proposition. External Factors Following is the detail discussion on various external factors that are affecting the working of international corporations-  Legal liabilities Cross-country businesses have to deal with the legal framework of two or more countries. They may differ in terms of age, disability discrimination, wage rates, employment, environment, and others. Hence, it affects the working of the MNCs to abide by all the rules of all the countries. In addition, many international lending agencies could affect legal culture and working policies.  Political factors The different political considerations of the countries involved in the global business either facilitate or hinder the business. The trade agreements entered between the governments of countries are the ones that are the most affected by political stability, foreign trade regulations, change of actions of the new governments, and many more. In addition, doing businesses with countries that lack political stability will directly influence the operations of the MNCs.  Technological factors Technology factors are what increases the economic growth and the social change to happen. Hence, they have both positive and negative impacts on the countries due to cross border businesses. In addition, it could threaten the existence of the local businesses to the level of extinction or increase their level to global standards.  Social factors The social environment and culture, like the peoples' customs, lifestyles have a direct impact on international business. The social factors, like education, awareness, status, and trends of the people in society, determine the consumers' behaviour for purchasing goods and services. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

 Environmental factors The external environmental factors have become significant issues for global business in the last few years due to an increase in environmental awareness. The factors like climate change, weather, temperature affects the demand pattern of many goods and services. More demand moving towards environmentally friendly products and services of different levels in countries is also an essential factor. Many more factors that are significant affect international business, but it is only on the rise every year against all the odds.  Economic factors Economic factors relates to the economic system of the country where the firm has its operations. Many economic factors that directly affect the international business includes among others- i. Fiscal policies ii. Inflation rates iii. Interest rates iv. Income distribution v. Employment level vi. Allocation of government budget vii. The purchasing power of the customers viii. Demand for various products ix. Value of the country's currency x. Economic growth xi. Real sector 2.2.1 Economic Growth It is a factor of the international business environment that attracts foreign businesses to be set up in the nation. A country could be less developed (Third world), developing or more developed (industrialized). A less developed country is a poor country, a developing country is moving from poor to a rich and more developed country is a rich country. It all depends upon infrastructure, education, technology and healthcare etc. A country develops its GDP annually that shows its progress economically. But a more thorough approach is needed to identify some factors and for this, the company needs to ask what is  The economic sector to enter the business  The stage of growth of the country and how fast is it growing 31 CU IDOL SELF LEARNING MATERIAL (SLM)

 Level of national and per capita income  Incidents of direct and indirect taxes  The infrastructure facilities available  Sources of financial resources and their costs.  The availability of manpower-managerial, technical & workers available & their salary & wage structures. Economic development is a series of processes and strategies which countries and organizations utilize to increase domestic and international economies. How development strategies are implemented tends to differ depending on organizational goals, as well as the overall condition of the global economy. For example, currently, America is seeking to improve its economy by having the Federal Reserve tighten its budget, Europe is concentrating on mending issues surrounding migrant and debt crises and China is attempting a financial reform to improve its weakening financial stability. With global economic powerhouses focusing on domestic repairs, many industry experts wonder how the international economy will fare in coming months. Although there are no guarantees with economic issues, taking a deeper look at the following six areas can help international relations professionals develop a better understanding of current international economic development trends.  Free Trade versus Protectionism Protectionism is a policy aimed at regulating trade in a country by enforcing tariffs that protect domestic producers from being shut out by excessively cheap imports. Free trade, on the other hand, is a policy that suggests that there ought to be no barriers on international trade. Traditionally, free trade is considered an asset of the international economy, and the World Trade Organization (WTO) is currently working to repeal barriers limiting free trade. If barriers are revoked, the international economy should see a significant boost as countries would be able to trade freely without domestic limitations.  Peaking International Growth China failed to properly handle a collapsing stock market bubble in 2015, the U.S. Federal Reserve is engaged in an ongoing cycle of rate hiking, and the economies of Russia and Brazil are in a constant state of fragility. With some of the leading domestic economies struggling, questions arise on whether the international economy has reached its peak and have any further room for growth. The answer to this question is still unclear, but 2017 will be a critical year if the global economy hopes to make an upturn.  Growing Pains in Emerging Markets 32 CU IDOL SELF LEARNING MATERIAL (SLM)

At the moment, there are key emerging economic markets in South Africa, Malaysia and Turkey. Each of these countries is currently facing the compound stress of domestic corporate debt in an economy where the U.S. dollar is only growing stronger. In Turkey, for example, the country is currently experiencing domestic economic stress due to political uncertainty regarding the conflict in Syria. If these emerging economies fail, it could produce massive ripples throughout the global economy due to the imbalances caused by crashing domestic markets.  The Impact of Global Warming Climate change is a growing concern across a number of industries and organizations, yet it is especially concerning for domestic and international economies. According to a recent study, more heat results in fewer crops, impacts overall worker productivity and causes alterations in domestic and individual income. In fact, the study projects that by the end of the century there will be a 23% decrease in global incomes as a result of climate change. However, not every country will be negatively impacted by global warming, as northern countries are predicted to benefit from rising temperatures. As a result, many industry professionals predict that global warming could lead to a restructuring of the international economy as northern countries, such as Russia, take advantage of increased crop and trade requests.  Populist Challengers Pose a Threat to European Economies With several political shifts resulting from a number of newly elected officials, Europe is currently facing economic challenges as both sides of the political spectrum battle for economic control. In France, Greece and Spain, the general public has become sceptical of austerity policies as they believe that, at this point, enough spending cuts have already been made. Greece in particular is frustrated by financial cuts as they attempt to work out of their massive debt crisis. To assist with working out of their crisis, Greek government officials have invited leaders from countries such as France and Spain to Athens in order to aid in the formation of an anti-austerity alliance. Such an alliance could be of benefit for the international economy if major European countries are able to find economic stability.  Brexit and United Kingdom (U.K.) Markets The British vote to leave the European Union (EU) resulted in financial uncertainty and a slowdown of the country’s economic activity. In particular, the purchasing power of the British pound took a heavy blow and the impact on domestic and international businesses within England has not been spread evenly. Facing a situation with limited options, U.K. businesses may be forced to significantly decrease imports due to the decline of the British pound’s purchasing power against other currencies. As a result, the international economy may struggle due to economic imbalances, specifically exporters benefiting 33 CU IDOL SELF LEARNING MATERIAL (SLM)

from declining domestic costs while importers struggle with increased expenses and declining revenue. With international events constantly carrying the ability to impact global markets, international relations professionals need to continually enhance their understanding of international economic development by monitoring and analyzingongoing progress within the industry. It is important for industry leaders to remain knowledgeable of upcoming trends and insights to stay ahead of the curve and work toward positive economic development. 2.2.2 Real Sector Real estate represents a significant portion of most people's wealth, and this is especially true for many homeowners.The size and scale of the real estate market make it an attractive and lucrative sector for many investors.There are a number of factors that impact real estate prices, availability, and investment potential. The main factors that affect the real estate market and the variety of investments are-  Demographics provide information on the age, income, and regional preferences of actual or potential buyers, what percentage of buyers are retirees, and what percentage might buy a vacation or second home.  Interest rates impact the price and demand of real estate—lower rates bring in more buyers, reflecting the lower cost of getting a mortgage, but also expand the demand for real estate, which can then drive up prices.  Real estate prices often follow the cycles of the economy, but investors can mitigate this risk by buying REITs or other diversified holdings that are either not tied to economic cycles or that can withstand downturns.  Government policies and legislation, including tax incentives, deductions, and subsidies can boost or hinder demand for real estate. Demographics Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. For example, the baby boomers that were born between 1945 and 1964 are an example of a demographic trend with the potential to significantly influence the real estate market. The transition of these baby boomers to retirement is one of the more interesting generational trends in the last century, and the retirement of these baby boomers, which began back in 2010, is bound to be noticed in the market for decades to come. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

There are numerous ways this type of demographic shift can affect the real estate market, but for an investor, some key questions to ask might be-  How would this affect the demand for second homes in popular vacation areas as more people start to retire?  How would this affect the demand for larger homes if incomes are smaller and the children have all moved out? These and other questions can help investors narrow down the type and location of potentially desirable real estate investments long before the trend has started. Interest Rates Interest rates also have a major impact on the real estate markets. If you're considering buying a home with a mortgage it is beneficial to research interest rates using a mortgage calculator. Changes in interest rates can greatly influence a person's ability to purchase a residential property. That is because the lower interest rates go, the lower the cost to obtain a mortgage to buy a home will be, which creates a higher demand for real estate, which again pushes prices up. It's important to note that as interest rates rise, the cost to obtain a mortgage increases, thus lowering demand and prices of real estate. However, when looking at the impact of interest rates on an equity investment such as a real estate investment trust (REIT), rather than on residential real estate, the relationship can be thought of as similar to a bond's relationship with interest rates. When interest rates decline, the value of a bond goes up because its coupon rate becomes more desirable, and when interest rates increase, the value of bonds decreases. Similarly, when the interest rate decreases in the market, REITs' high yields become more attractive and their value goes up. When interest rates increase, the yield on a REIT becomes less attractive and it pushes their value down. The Economy Another key factor that affects the value of real estate is the overall health of the economy. This is generally measured by economic indicators such as the GDP, employment data, manufacturing activity, the prices of goods, etc. Broadly speaking, when the economy is sluggish, so is real estate. However, the cyclicality of the economy can have varying effects on different types of real estate. For example, if a REIT has a larger percentage of its investments in hotels, it would typically be more affected by an economic downturn than a REIT that had invested in office buildings. Hotels are a form of property that is very sensitive to economic activity due to the type of lease structure inherent in the business. Renting a hotel room can be thought of as a form of short-term lease that can be easily avoided by hotel customers should the economy be doing poorly. On the other hand, office tenants generally have longer-term leases that can't be changed in the middle of an economic downturn. Thus, although you should be aware of the 35 CU IDOL SELF LEARNING MATERIAL (SLM)

part of the cycle the economy is in, you should also be cognizant of the real estate property's sensitivity to the economic cycle. Government Policies/Subsidies Legislation is also another factor that can have a sizable impact on property demand and prices. Tax credits, deductions, and subsidies are some of the ways the government can temporarily boost demand for real estate for as long as they are in place. Being aware of current government incentives can help you determine changes in supply and demand and identify potentially false trends. Globalization of Real Estate From increased business opportunities to advancing technologies, the word “globalization” often pops up in various contexts and is reflected in different ways. Over the years, economic self-sufficiency became more obsolete as people saw a major shift in demographics, different trade policies between economic regions, and more efficient ways to connect to other parts of the world. Economies are now linked between each other, producing a continuing flow of goods, services, investments, people and information. The world we live in is a truly globalized one where diversity produces labour opportunities and concepts such as global GDP which plays a heavy factor in measuring the local economy. Real estate has been placed in an interesting position with several economic studies agreeing that the globalization phenomenon has made it both a global and local asset. As the world becomes more connected, development opportunities pave the way to demand beyond one’s current location. Wealthy investors and international companies may eye a certain land or property, increasing real estate demand that stems from distant geographies. What follows is a flow of foreign investment that allows faraway assets to be purchased, and this can have major impacts on local economic measures. Emergence of Global Hubs New York, Paris, London, Tokyo— these are most likely some of the first names of major cities that come to mind. As a result of globalization, these major cities boast diverse populations, the latest trends and bustling economic activity. These cities fall under the classification of “global hubs” which are essential in performing specific pan-regional functions. Despite the lack of a widely accepted definition of the term, scholars have identified key criteria to describe a “global hub,” such as the density of transport and economic links, presence of major global companies and international political institutions and a concentration of knowledge. For example, a multinational corporation can use New York as its global headquarters that can overlook all business operations in North America. At the same time, it can easily network and coordinate with its other major headquarters around the world—from a branch in London that oversees European operations to another branch in Tokyo that is in charge of 36 CU IDOL SELF LEARNING MATERIAL (SLM)

all Asian priorities. From a business stand point, these “global hubs” are strategic since there is a heavy flow of capital, information and labour in these cities which can attract investments and provide an ease of business. While some cities have maintained this status over the years, globalization has allowed other key cities to emerge—particularly from cities in the developing countries. Significant growth has been seen in markets from places like Beijing, Dubai, Mumbai, Moscow and Sao Paulo where major business activities are conducted. Cheaper Labour and Production Costs Because of expanding business practices, the real estate supply chain has undergone major developments, particularly due to offshoring. Because developing countries provide cheaper costs of material and production, key functions have been transferred outside the local region. For example, India labour costs are much more affordable versus U.S. ones, therefore design, finance and property management activities can be off shored to Indian design, finance and accounting firms. At the same time, because Chinese steel is cheaper versus local ones, U.S. real estate and construction firms would rather purchase their supplies there. Offshoring provides a heap of benefits, especially for developing countries. Globalized business practices presents the opportunities for the sharing of knowledge and skills that further enhances a developing country’s ability to perform in the global stage. At the same time, the affordable labour and production costs that they provide leads to sharper demand for other resources and inputs that drive real estate prices and construction. Increased Demand and Lower Risk of Obsolescence Fast growing economies in places like China and India have seen high labour productivity, economic growth and an expansion of the middle-class—a medley of factors that havebrought higher demand in residential real estate. Now, more than ever, people wish to migrate to the urbanized global hubs. At the same time, their spending power has increased as financial reforms have made mortgages more accessible to them at relatively low interest rates. There is a now a race to obtain the best land assets and properties in the global hubs. Rural Chinese citizens are eager to invest in Beijing or Shanghai. Meanwhile, rural Indian home seekers are looking into houses in Mumbai. Some may even consider looking for homes in Europe or the Americas where they may plan to immigrate or spend their vacations in the near future. This continuing demand from both locals and foreigners is highly beneficial to global hubs, increasing their values and lowering any possible risk of obsolescence or vacancy. Changes in Demographic Profile With demand bringing in a higher number of people towards major global hubs, there is a shift in the population demographic that can also present new opportunities in real estate. For 37 CU IDOL SELF LEARNING MATERIAL (SLM)

example, traditional joint families may break down, thus increasing demand for more housing units. Relocation of rural workers to urban settings will mean more apartments. People who can afford for houses in a major city will consider investing for their children who are planning to attend school there. Motivations from different demographics create higherdemand for properties in major cities. Another interesting change related towards the globalization of real estate can be seenthrough the increasing aging population in both industrialized and developing countries. The rise in aging dependents leads to the large sales of homes in developing countries where the elderly can comfortably retire. Changing Effects on Property Values In theory, globalization connects each region and can provide opportunities that can align international economic links, standardize business practices and can lead to an equalization of property growth in different parts of the world. Similar patterns of property growth values and returns have been seen across different markets. The reality, however, is globalization provides both a converging and polarizing effect on the markets. A comparison of real estate growth will always show major price gaps between urban metropolitan areas and the rural ones which can be attributed to the concentration of investments, goods and services in the global hubs. This causes property price growth and the cost of living to be more expensive in these particular areas, making them less affordable for the general local population. Thus, there is a shift in the way that economists predict the changes in housing prices. From a local perspective, prices change depending on local factors such as earned income. But, in the global market that we live in today, factors such as the amount of foreign investment pooled into an area plays a bigger role. For example, more U.S. properties purchased by Chinese investors in a specific location can lead to more expensive sales and rental prices. This can be both a pro and a con, depending on how one looks at it. It can be a good thing, especially for existing homeowners since more foreign investments can mean an increase in home value as well as the city’s tax revenues. On the other hand, higher prices can make the cost of living less affordable. Determining both the global and local effects on the market is what real estate players need in order to come up with future investment strategies. New Foreign Investment Opportunities With higher property demands in global hubs coupled with easier access to both finances and market knowledge, investors are eager to look into new opportunities outside their local geographies. Many invest in development projects or facilities for production, sales, and distribution of supplies or output. Others would invest in real estate financial securities. It is important to note that these investments aren’t exclusive to places like North America or Europe. Foreign investors are highly optimistic to invest in global hubs across the developing world for high yields and stable returns. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

Demand due to globalization differs among different property types. This is especially true for the commercial real estate sector. Office properties are highly popular among businesses that wish to expand to other locations. On the other hand, retail space sees less demand due to the rise of e-commerce. Interestingly, however, retail spaces are significantly strong in major cities across Asia and the Middle East where international chains and brands operate in large shopping centres. Manila, for example, has seen significant economic growth and investment in recent years, attracting investors and allowing big international retail brands to operate on its popular malls.These are some of the major strengths that globalization offers, especially for the real estate industry. Globalization, however, is not perfect and faces some key issues to address such as unaffordable housing due to expensive prices or loose mortgage regulations resulting to a housing bubble. The fact that all global markets are connected also means that economic shocks in one country can affect the others such as the 2008 recession or the EU Referendum earlier this year. Therefore, investors should remain vigilant in studying both the local and global markets in order to come up with the most effective strategies for the best property yields. Effect of Financial Crisis on Real Estate Commercial real estate did not cause the global financial crisis, but is caught up in the same vicious cycle of value destruction as virtually every other asset class. Securitized real estate has already gone through several rounds of re-pricing; private equity real estate will also experience significant but more drawn-out re-pricing. Although price discovery, re-pricing, and eventual recovery differ by country, the global crisis also reveals some surprising similarities across markets. These are worth understanding, since debt and equity now move with relative ease across political borders. Academic research shows that during a financial crisis all asset classes become highly correlated, and the risk-reducing power of diversification is temporarily lost. But research also shows that banking crises have happened repeatedly and don’t last forever. In 2009, real estate investors must rely on rational analysis to guide their investment decisions. This advice is especially relevant (and difficult to execute) when markets are in turmoil. “Keep your head, when those around you are losing theirs,” wrote Rudyard Kipling. In the years ahead, many real estate investors will be losing their heads: expect to see assets fall into the hands of financial institutions that are unprepared to operate them effectively over the long haul. And expect panic selling by those who need to raise liquidity in a hurry. Countries like Australia, Korea, and Germany are likely to move through the re-pricing process faster than the United States. While the price correction process is painful, it is also a necessary pre-condition to a capital market recovery by laying the foundation for stronger performance in the years ahead. SWOT Analysis SWOT analysis is one of the most important business analysis tools that help in understanding the internal and external business environment of a firm. SWOT analysis refers to the framework that involves analysis of the competitive position of the business firm 39 CU IDOL SELF LEARNING MATERIAL (SLM)

which further is useful in conducting strategic planning for business firm. Thus, SWOT analysis is a strategic planning tool that helps in identifying the internal and external environment factors of business firm. Internal environment analysis of business firm involves analysis of the strengths and weaknesses of a business organization that are also within the control of business firm. External analysis includes analysis of opportunities and threats of business organization which are external to business firm. Thus, it has been identified that business firms by applying SWOT analysis can identify various competencies and characteristics of business organization. Following is the detailed analysis of various elements of SWOT analysis-  Strengths Strengths are internal attributes of the company that helps in achieving strategic business position through distinct competencies. Various strengths of business firm include strong employee attitude, excellent customer service, established brand image etc.  Weaknesses Weaknesses are the internal constraints of business firm that stops an organization to achieve the competitive position in industry. Thus, weaknesses are the areas which need improvement by the business firm. For instance, weak brand image and lack of capital of business firm restricts the business to achieve competitive advantage (Parsons, 2019).  Opportunities Opportunities are the favourable external factors that can help business firm to achieve competitive advantage. For instance, expanding business in untapped markets and gaining large number of customers is a good opportunity for business firm.  Threats Threats refer to negative external environment forces that can harm a business organization. Business firms lack control over external environment threats which may cause number of problems and difficulties for business firm. For instance, change in behaviour of consumers or entry of new firms in industry. 2.3 SUMMARY  In today’s globalized world, every company needs to be known internationally. For this, the company sets up its operations in many nations. These are known as Multinational Companies (MNCs).  There are six factors which affect global financial environment. These factors include – Political, legal, economical, technological, social and environmental. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

 Economic growth is a factor of the international business environment that attracts foreign businesses to set up in the nation. A country develops its GDP annually that shows its progress economically.  Economic development is a series of processes and strategies which countries and organizations utilize to increase domestic and international economies. ... With global economic powerhouses focusing on domestic repairs, many industry experts wonder how the international economy will fare in coming months.  Real estate represents a significant portion of most people's wealth, and this is especially true for many homeowners.The size and scale of the real estate market make it an attractive and lucrative sector for many investors.  Demographics provide information on the age, income, and regional preferences of actual or potential buyers, what percentage of buyers are retirees, and what percentage might buy a vacation or second home.  Interest rates impact the price and demand of real estate—lower rates bring in more buyers, reflecting the lower cost of getting a mortgage, but also expand the demand for real estate, which can then drive up prices.  Real estate prices often follow the cycles of the economy, but investors can mitigate this risk by buying REITs or other diversified holdings that are either not tied to economic cycles or that can withstand downturns.  Government policies and legislation, including tax incentives, deductions, and subsidies can boost or hinder demand for real estate.  Economies are now linked between each other, producing a continuing flow of goods, services, investments, people and information. The world we live in is a truly globalized one where diversity produces labour opportunities and concepts such as global GDP which plays a heavy factor in measuring the local economy.  Global financial crisis had resulted in real-estate (commercial or private) undergoing several rounds of re-pricing.  Protectionism is a policy aimed at regulating trade in a country by enforcing tariffs that protect domestic producers from being shut out by excessively cheap imports. Free trade, on the other hand, is a policy that suggests that there ought to be no barriers on international trade.  Traditionally, free trade is considered an asset of the international economy, and the World Trade Organization (WTO) is currently working to repeal barriers limiting free trade. If barriers are revoked, the international economy should see a significant boost as countries would be able to trade freely without domestic limitations. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

2.4 KEYWORDS  Global financial Environment - The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic factors that together facilitate international flows of financial capital for purposes of investment and trade financing.  Micro-environment - These are the forces of the international business environment that affect the functioning of the firm directly. This includes the suppliers, various market intermediaries and service organizations such as middlemen, transporters, advertising and marketing research agencies, competitor’s customers and the general public.  Macro-environment - Macro-environment is a broader term that affects the firm’s international business environment as well as the micro-environment factors. These key features of Macro-environment that impact the international business environment are Political, economic, cultural, technological, competitive, etc.  Economic environment - It is a factor of the international business environment that attracts foreign businesses to be set up in the nation. A country could be less developed (Third world), developing or more developed (industrialized). A less developed country is a poor country, a developing country is moving from poor to a rich and more developed country is a rich country.  Technological environment - This is an external factor affecting the international business environment of the company.  General Partner (GP) - A class of partner in a partnership. The general partner retains liability for the actions of the partnership. In the private equity world, the GP is the fund manager while the limited partners (LPs) are the institutional and high net worth investors in the partnership. The GP earns a management fee and a percentage of profits.  Primary Investments- An original limited partner commitment to a private equity fund, which does not include any transfer of limited partner interests / ownership. These commitments are typically made during the fundraising period for that private equity fund and are sometimes referred to as blind pool commitments.  Trade Sale- The sale of a portfolio company to another company, typically operating in the same industry.  Turnaround - A process resulting in a substantial increase in a company’s revenues, profits and reputation.  Valuation Method- The policy guidelines a management team uses to value the holdings in the fund's portfolio. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

 Venture Capital- a segment of the private equity industry which focuses on investing in new companies with high growth rates.  Vintage- the year that a private equity fund stops accepting new investors and begins to make investments on behalf of those investors.  Liquidation- The selling off of all assets of a company prior to the complete cessation of operations. Corporations that choose to liquidate declare Chapter 7 bankruptcy. In liquidation, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders.  Management buyout (MBO) - A leveraged buyout controlled by the members of the management team of a company or a division.  Management Fee - A fee charged to the limited partners in a fund by the general partner. Management fees in a private equity fund typically range from 0.75% to 3% of capital under management, depending on the type and size of fund.  Market capitalization- The value of a publicly traded company as determined by multiplying the number of shares outstanding by the current share price.  Private Equity- Equity investments in non-public companies. More specifically, private equity firms offer capital in return for participation in the company's share capital. At the same time they may also support portfolio companies on technology, organizational, commercial and financing issues.  Portfolio Company- A company that has received an investment from a private equity fund. 2.5 LEARNING ACTIVITY 1. Discuss the effect on climate change with respect to global economic environment? ___________________________________________________________________________ ___________________________________________________________________________ 2. How can any firm cope up with changing technological environment? ___________________________________________________________________________ ___________________________________________________________________________ 2.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain how technological factors affect international business. 43 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Explain how legal liabilities affect international business. 3. What is the effect of financial crisis on real estate? 4. Define global financial environment. 5. Define demographics. Long Questions 1. Describe the role of globalization in global financial environment. 2. Describe the six factors that affect international business. 3. Discuss the role of global financial environment in real estate. 4. What is economic growth? Explain in detail. 5. What are the components of economic factors that affect international business? B. Multiple Choice Questions 1. What does a geographical indication specify? a. Place of origin of goods. b. Special characteristics of the product associated with the place of origin. c. Place and special characters of the product. d. Place or special characters of the product 2. What is the essential feature of FDI? a. Investment of very high value. b. Investment in shares. c. Investor’s influence on the management of the enterprise. d. Investment of low value. 3. Which of the following statement with respect to culture is false? a. Culture is enduring. b. Culture is changing. c. Culture is evolved among the members of society. d. Culture is determined by national boundaries. 4. Which of the following is not a component of culture? 44 a. Attitudes. b. Beliefs. c. Education. d. Life expectancy. CU IDOL SELF LEARNING MATERIAL (SLM)

5. Which of the following improvement is expected by the firm when entering into international business? a. Marketing. b. All spheres of marketing, operation and finance simultaneously. c. Any or all spheres of marketing, operation and finance. d. Finance only. Answers 1-c, 2-c, 3-d, 4- d, 5-c 2.7 REFERENCES References  Abdullah, F. (1987). Financial Management and the Multinational Firm, Englewood Cliffs, NJ: Prentice-Hall.  Baker, J. C. (1998). International Finance, Upper Saddle, NJ: Prentice-Hall.  Butler, K. C. (1999). Multinational Finance, Cincinnati: South-Western Publishing Co. Textbooks  Eiteman, D. K., A. I. Stonehill, and M. H. Moffett, International Business Finance, New York: Addison-Wesley Publishing Co., 1998.  Eun, C. S. and G. S. Resnick (2001). International Financial Management, Boston: McGraw-Hill.  Glain, S. (1997). Asian Firms, Amid Currency Turmoil, Turn to Hedging Experts to Cut Risk. The Wall Street Journal. Websites  https://www.icmrindia.org/courseware/Global%20Business%20Environment/Global %20Business%20Environment.htm#:~:text=The%20global%20business%20environ ment%20can,on%20resource%20use%20and%20capabilities.  https://ecampusontario.pressbooks.pub/businessfuncdn/chapter/global/  https://www.yourarticlelibrary.com/management/7-important-characteristics-of- business-environment/891 https://www.adityabirlacapital.com/abc-of-money/factors-affecting-stock-market 45 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 – BALANCE OF PAYMENT STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Contents 3.3 Disequilibria in Bop 3.4 Measures to Bring Back Equilibrium in Bop 3.4.1 Methods 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Define balance of Payment (BOP).  Describe the content of balance of Payment.  Examine the disequilibria in BOP and measures to rectify it. 3.1 INTRODUCTION The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period. Usually, the BOP is calculated every quarter and every calendar year.All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit.Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance, but in practice, this is rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. Tracking the transactions under BOP is something similar to the double entry system of accounting. This means, all the transactions will have a debit entry and a corresponding credit entry. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. The BOP consists of three main accounts: the current account, the capital account, and the financial account. The current account is meant to balance against the sum of the financial and capital account but rarely does. A country’s BOP is vital for the following reasons-  The BOP of a country reveals its financial and economic status.  A BOP statement can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.  The BOP statement helps the Government to decide on fiscal and trade policies.  It provides important information to analyze and understand the economic dealings of a country with other countries. By studying its BOP statement and its components closely, one would be able to identify trends that may be beneficial or harmful to the economy of the county and thus, then take appropriate measures. Globalization in the late 20th-century led to BOP liberalization in many emerging market economies. These countries lifted restrictions on BOP accounts to take advantage of the cash flows arriving from foreign, developed nations, which in turn boosted their economies. Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavourable balance'.Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance'. Balance of Payment – Bookkeeping The balance of payments is essentially an application of the double-entry bookkeeping, since it records both transactions and the money flows associated with those transactions. Transactions, which give rise to money receipts of the rest of the world, are recorded in the credit side of the balance of payments. On the other hand, transactions, which lead to monetary payments abroad, are recorded in the debit side of the balance of payments accounts. If we do this in a proper way debits and credits will always be equal, so that in an accounting sense the balance of payments will always be in balance. An accounting balance is however not synonymous with balance of payments equilibrium. It is important to keep in mind that a balance-of-payments account records flows between countries over a specified period of time (usually a year for the full accounts, but often less for some components of the accounts). Some items in the balance of payments are readily identified as flows, such as 47 CU IDOL SELF LEARNING MATERIAL (SLM)

exports. Other items, however, are flows arising from changes in stocks. Traditionally there are two basic elements in a perfectly compiled set of balance-of-payments account: the current account and the capital account. Each of these is usually subdivided, the former into visible and invisible trade and unrequited transfers, the latter into long-term and short-term private transactions and changes in official reserves. The essential difference between the two is that capital account transactions necessarily involve domestic residents either acquiring or surrendering claims on foreign residents, whereas current account transactions do not. In practice there is a third element, the 'balancing item' or 'errors and omissions', which reflects our inability to record all international transactions accurately. 3.2 CONTENTS The BOP is divided into four main categories: the current account, the capital account, the financial account and unilateral transfer account. Within these categories are sub-divisions, each of which accounts for a different type of international monetary transaction. Current Account The current account is used to monitor the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with respect to raw materials and manufactured goods. It also includes receipts from engineering, tourism, transportation, business services, stocks, and royalties from patents and copyrights. When all the goods and services are combined, together they make up to a country’s Balance Of Trade (BOT). There are various categories of trade and transfers which happen across countries. It could be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries is referred to as visible items and import/export of services (banking, information technology etc) is referred to as invisible items. Unilateral transfers refer to money sent as gifts or donations to residents of foreign countries. This can also be personal transfers like – money sent by relatives to their family located in another country. The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold, or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that are directly received. Items of Current Account The main components of the current account are:  Trade in goods (visible balance)  Trade in services (invisible balance), e.g. insurance and services  Investment incomes, e.g. dividends, interest and migrants remittances from abroad  Net transfers – e.g. International aid. Capital Account All capital transactions between the countries are monitored through the capital account. Capital transactions include the purchase and sale of assets (non-financial) like land and properties. The capital account also includes the flow of taxes, purchase and sale of fixed assets etc by migrants moving out/into a different country. The deficit or surplus in the current account is managed through the finance from the capital account and vice versa. There are 3 major elements of a capital account:  Loans and borrowings- It includes all types of loans from both the private and public sectors located in foreign countries.  Investments – These are funds invested in the corporate stocks by non-residents  Foreign exchange reserves – Foreign exchange reserves held by the central bank of a country to monitor and control the exchange rate does impact the capital account The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds. The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production 49 CU IDOL SELF LEARNING MATERIAL (SLM)

process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured damage to fixed assets.  All transactions relating to borrowings from abroad by private sector, government, etc. Receipts of such loans and repayment of loans by foreigners are recorded on the positive (credit) side.  All transactions of lending to abroad by private sector and government. Lending abroad and repayment of loans to abroad is recorded as negative or debit item. Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented. Also included are government-owned assets, such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF), private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account. The flow of funds from and to foreign countries through various investments in real estates, business ventures, foreign direct investments etc is monitored through the financial account. This account measures the changes in the foreign ownership of domestic assets and domestic ownership of foreign assets. On analyzing these changes, it can be understood if the country is selling or acquiring more assets (like gold, stocks, equity etc). This consists of changes in international reserve assets – those used for setting accounts between government central banks. On account of deficit or surplus emerging out in capital account, current account and unilateral transfers with other countries, the inter-governmental settlements needed to be done regularly. To finance deficit and surplus emerging out on account of Balance of payment position, the particular country has to use the international reserve assets. The convertible currencies like US Dollar, gold, monetary gold, SDR allocations by the IMF and foreign currency assets are few examples of international reserve assets. If the overall balance of payments is surplus, the surplus, the surplus amount adds to the official reserve account. If the overall balance of payments is deficit and if accommodation capital is not available, the official reserve account balance is reduced by the amount of deficit. Unilateral Transfer Account This account is somewhat like the capital account, except that it involves capital movements and gifts for which there are no return commitments or claims. Thus, a personal remittance to a resident of a foreign country involves no commitment for repayment and is classified as a unilateral transfer. These unilateral transfers may be on private account or governmental accounts in the form of grants. 50 CU IDOL SELF LEARNING MATERIAL (SLM)