International Finance -Introduction ,Meaning,Objectives,Features & Importance
International Finance is concerned with the financial management of a global business. It describes how to trade in international markets, exchange foreign currency, and profit from such activities. Indeed, international finance is a critical component of financial economics. It primarily addresses issues concerning the monetary interactions of at least two or more countries. International finance is concerned with issues such as currency exchange rates, global monetary systems, foreign direct investment (FDI), and other critical aspects of international financial management.
International Finance is a section of financial economics which deals with the macroeconomic relation between two countries and their monetary transactions. The concepts like interest rate, exchange rate, FDI, FPI and currency prevailing in the trade come under this type of finance.
Objectives of International Finance
- To reduce global poverty and improve people’s living conditions and standards
- To support sustainable economic, social and institutional development.
- To promote regional cooperation and integration.
- To lessen poverty and promote the long term development of the economy.
Nature/Features of International Finance
- Expanded opportunity to business
- Foreign Exchange Risk
- Political Risk
- Market imperfections
-Expanded opportunity to business : Due to globalization in business there is an expanded opportunity to the business. Business can raise more funds through less cost of capital.
-Foreign Exchange Risk-An understanding of foreign exchange is very important for the investors and managers in today’s world of unforeseen changes in exchange rates. This rates is generally ignored and is lesser in domestic economies as it extends to only that particular economy , but when it comes to global level it should be very seriously taken as there is risk of violation foreign exchange rates. It may be regarded as most serious international problem.
-Political Risk : One of the major risk which an company may encounter in
international finance is political risk. It may result in loss. As new acts and laws may be enforced or may change decisions taken by prior person.
- Market imperfections : Market imperfections is in trend nowadays, and this is one of major demerit for the concern . These are various changes in nation’s law, taxation , rules and regulations and culture etc.
Need for Foreign Capital
In a developing nation like India, the following factors lead to the requirement for foreign capital:
-Inadequacy of domestic capital: Due to the huge demands of development projects in the direction of rapid economic development and industrialization, foreign capital is required to meet these demands due to the inadequacy of domestic capital.
-The technology gap: A significant technological gap exists between developed and developing nations, necessitating the import of foreign technology. These technologies typically accompany foreign capital in the form of private foreign investment or international partnerships. Thus, the need for foreign capital is extremely high.
-The initial risk: Due to lack of experience, expertise and heavy initial risk, there is always a lack of flow of domestic capital into lines of production. The foreign capital taking initial risk stimulates the flow of domestic capital and stock entrepreneurship.
-Development of basic infrastructure: There is also a lack of basic infrastructure which is very essential for the economic development of the underdeveloped.
-Balance of payment support: During the process of economic development, the underdeveloped countries usually face a crisis of balance of payments due to heavy imports of capital goods, technical know-how, spare parts and even industrial raw materials. Thus, foreign capital is needed to face the crisis during this period.
Scope of International Finance
- It is important while determine the exchange rates of the country. One can do this against the commodity or the common currency.
- It plays a crucial role in investing in foreign debt securities to have a clear idea about the market.
- The transaction between countries can be significant in assessing the economic conditions of the other country.
- One can use arbitrage in tax, risk, and price to market imperfections
to book good profits while transacting in international trade.
Importance of International Finance
International finance plays a critical role in international trade and inter-economy exchange of goods and services. It is important for a number of reasons, the most notable ones are listed here −
- Access to capital market across the world enable a country to borrow during tough time and lends during good time.
- It promotes domestic investment and growth through capital impact.
- It Prevent excessive domestic through global financial institutions.
- Promote healthy competitions and effective banking facilities .
- It provide information on the vital area of investment and leads to effective capital allocation.
- International finance organizations such as IMF, World Bank etc. mediate and resolve financial disputes among member nations.
- It helps in comparing the inflation rates and getting an idea about investing in international debt securities.
- Utilizing IFRS is an important factor for many stages of international finance. Financial statements made by the countries that have adopted IFRS are similar. It helps many countries to follow similar reporting systems.
- Various economic factors help in making international investment decisions. Economic factors of economies help in determining whether or not investors’ money is safe with foreign debt securities.
So this are all the importance of International Finance .
International finance is defined as the set of relations for the creation and using of funds (assets), needed for foreign economic activity of international companies and countries. Like international trade and business, international finance exists due to the fact that economic activities of businesses, governments, and organizations get affected by the 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. Liberal trade is the principal driver of internationalization which encompasses unimpeded flows of capital labor and technology across national boundaries. Free trade is always beneficial because it encourages nations to specialize in the products they are best at and import those they are less good at. This results in efficient allocation of resources and maximization of welfare.