SYMBIOSIS SCHOOL OF ECONOMICS

INTERNATIONAL FINANCIAL MANAGEMENT

SHRIPAD LIMAYE
What is prudence in the conduct of every private family
can scarce be folly in that of a great kingdom. If a foreign
country can supply us with a commodity cheaper than we
ourselves can make it, better buy it of them with some part
of the produce of our own industry employed in a way in
which we have some advantage.

ADAM SMITH (1776)

LEARNING OBJECTIVES
● Gain knowledge about the core of the subject International Finance, understanding
and analyzing different risks in the market.
● Compare and contrast accounting procedures in a closed economy and an open
economy.
● Know the structure and functioning of the foreign exchange market and use of
appropriate derivative tool to safeguard the positions in the forex market. All this
would also be in the context of Indian Foreign Exchange Market. Comment on the
issue of capital account convertibility in India.

Evaluate the International Financial System mainly after the Second World War.
Analyze the growth patterns, strategies, major reforms along with the major crisis
happened in different countries.
SYLLABUS

❖ Introduction

❖ Forex Markets

❖ Exchange Rate Behaviour

❖ Exchange Rate Risk Management

❖ International Financing
INTRODUCTION

❖ International finance

❖ Importance to MNC’s, investors, banks

❖ Types of international transactions:

▪ Foreign Direct Investments,
▪ FII,
▪ International trade,
▪ Risks in international finance
FOREX MARKETS
Introduction

➢ Types of foreign exchange rates- spot rate, forward rate, inter bank rate,
two quote rates, cross rate, Regulating and controlling foreign exchange
market

➢ Methods of exchange rate control

➢ Foreign exchange trading activity in India

➢ Foreign exchange market reforms

➢ Gains from Capital Account Convertibility (CAC)

➢ Tara pore Committee on CAC.

EXCHANGE RATE BEHAVIOUR

➢ Government influence on exchange rates

➢ International arbitrage and interest rate parity

➢ Relationships among inflation, interest rates and exchange rates

EXCHANGE RATE RISK MANAGEMENT

➢ Forecasting exchange rates

➢ Measuring exposure to exchange rate fluctuations

➢ Managing transaction exposure

➢ Managing economic exposure and

➢ Measuring translation exposure

INTERNATIONAL FINANCING
➢ International Equity and Debt Financing

➢ Patterns of Equity and Debt financing

➢ International Cost of Capital.

AGENDA
❖International finance

❖Importance to MNC’s, investors, banks

❖Types of international transactions:

▪ Foreign Direct Investments,
▪ FII,
▪ International trade,
▪ Risks in international finance
LEARNING OBJECTIVES
❑ Explain the scope of international finance

❑ Discuss the objectives of multinational companies

❑ Elaborate the differences in international financial management and

domestic financial management

❑ Describe the international business methods

❑ Discuss the fields of international business

OVERVIEW INTERNATIONAL FINANCE

▪ In a Globalised world, every country is dependent on another country

for their requirements

▪ Developed countries seek cheap and skilled labour from developing

countries

▪ Developing countries seek services and goods developed countries

▪ International Trade is important factor for growth and prosperity

CONCEPT OF INTERNATIONAL FINANCE
International Finance deals with management of finances in global business e.g.

➢ how to trade in International markets

➢ how to exchange foreign currency

In a broader sense the scope of International Finance covers:

❑ Exchange rates of various currencies

❑ Monetary systems of the world
❑ Foreign Direct Investments (FDI)
❑ Foreign Portfolio Investments (FPI)
❑ Interest Rates
❑ Foreign Exchange Management and Regulations
MEANING OF INTERNATIONAL FINANCE
It is a discipline of financing the international economic and commercial relations
between countries.

It includes international markets

It is related to management, economic, commercial and accounting activities of

MNCs, governments and private individuals.

It involves conversion of one currency into another.

It coordinates all financial and non-financial operations with the objectives of

maximization of the shareholders’ wealth.
NATURE OF INTERNATIONAL FINANCE
Finance is an art and science of handling and managing monetary resources of the
concern efficiently and effectively

International finance can be said to be focused on financial decisions, allocation

decisions and profit distribution or dividend decisions

Features of International Finance:

✓ Foreign Exchange Risks

✓ Political Risks

✓ Market imperfections
NEED FOR FOREIGN CAPITAL

❖ Inadequacy of domestic capital

❖ The technology gap

❖ Initial risks

❖ Development of basic Infrastructure (Transport, Communication,

Power etc)

❖ Balance of Payment support

SIGNIFICANCE OF INTERNATIONAL FINANCE
Expectation for higher profits

Expansion of production capacities

Competition in the domestic markets

Limitation of the domestic markets

Political stability

Availability of resources (Technology, Skilled Labour)

Higher logistics costs

SIGNIFICANCE OF INTERNATIONAL FINANCE (CONTD)

Proximity of raw materials

Increase in market share

Highrer rate of economic development

Tariffs and import quota

Exchange rates

Financial Stability and safety

TRIGGERS FOR FINANCIAL GLOBALISATION

❑ Advancement in Information Communication and Technology

❑ Globalisation of national economies

❑ Liberalization of national financial and capital markets

❑ Competition among intermediary services

DOMESTIC FINANCE VS INTERNATIONAL FINANCE
❖ Meaning – National boundary

❖ Taxation, Cultural, Economic environment

❖ Currency rates, hedging and derivatives

❖ Diversity in culture, Languages and values of their stakeholders

❖ Options for raising capital

❖ Global Accounting Language (IFRS / GAAP)

CHALLENGES IN INTERNATIONAL FINANCE
Varies Economic Systems

Tariff and non-tariff trade barriers

Political risks

Environmental safeguards

Dumping

Cultural differences

Intellectual property rights

Cyber crimes
CHALLENGES IN INTERNATIONAL FINANCE (CONTD..)
Transfer Pricing

International Taxation

Economic and currency crisis

Interest rates

Exchange rate risks

International terrorism

Credit worthiness

Methods of payment
TERMS USED
International business.: Any business transaction between parties from more than one
country is a part of international business.

International trade : International trade is the exchange of goods and services between
countries.

International finance : International finance is the study of monetary interactions that

transpire between two or more countries.

Foreign exchange risk : Foreign exchange risk refers to the losses that an international
financial transaction may incur due to currency fluctuations.

Political risk: Political risk is the risk an investment’s returns could suffer as a result of
political changes or instability in a country.
Thank You
MULTINATIONAL CORPORATIONS (MNC)

Parent Company operates in multiple countries through Subsidiaries or

Associate Companies / Joint Ventures

Carries risks arising out of

• Cultural differences
• Different currencies
• Taxations
• Government policies

Goals – Market share, Cost reduction, Profit Maximisation, Wealth Maximisation

EVOLUTION OF MULTINATIONAL CORPORATION
The multinational corporation is a company engaged in producing and selling goods
or services in more than one country

It normally consists of a parent company located in the home country and few or
more foreign subsidiaries

It is the globally coordinated allocation of resources by a single centralized

management that differentiates
the multinational enterprise from other firms engaged in international business

MNCs make decisions about market-entry strategy; ownership of foreign operations;

and production, marketing, and financial activities with an eye to what is best for the
corporation as a whole.
TYPES OF MNC
The true multinational corporation emphasizes group performance
rather than the performance of its individual parts

Types:

❑ Raw-Material Seekers

❑ Marker Seekers

❑ Cost Minimizers
APPROACHES TO INTERNATIONAL BUSINESS

Douglas Wind and Pelmutter advocated four approaches of international

business. They are:

1. Ethnocentric Approach

2. Polycentric Approach

3. Regiocentric Approach

4. Geocentric Approach.
ETHNOCENTRIC APPROACH

The domestic companies normally formulate their strategies, their product design
and their operations towards the national markets, customers and competitors

Excessive production more than the demand for the product, export to foreign
countries

The domestic company continues the exports to the foreign countries and views the
foreign markets as an extension to the domestic markets

The company exports the same product designed for domestic markets to foreign
countries under this approach
POLYCENTRIC APPROACH

The company establishes a foreign subsidiary company and decentralizes all the
operations and delegates decision-making and policymaking authority to its
executives.

Separate organisation structure for the foreign company is created

REGIO CENTRIC APPROACH

The company after operating successfully in a foreign country, thinks of exporting

to the neighboring countries of the host country.

The foreign subsidiary considers the regional environment (laws, culture, policies,
etc) for formulating policies and strategies

The foreign company markets more or less the same product designed under
polycentric approach in other countries of the region, but with different market
strategies
GEOCENTRIC APPROACH

Globalised economy

The headquarters coordinate the activities of the subsidiaries

Each subsidiary functions like an independent and autonomous

company in formulating policies, strategies, product design, human
resource policies, operations,
FOREIGN DIRECT INVESTMENTS (FDI)
Foreign Direct Investments are commonly made in open economies that have skilled
workforce and growth prospects

FDIs not only bring money with them but also skills, technology and knowledge.

Foreign direct investment (FDI) is an investment from a party in one country into a
business or corporation in another country with the intention of establishing a lasting
interest.

A lasting interest is established when an investor obtains at least 10% of the voting
power/ control in a firm.

Control represents the intent to actively manage and influence a foreign firm’s
operations.
INTERNATIONAL CAPITAL FLOWS
Capital, labor, and technology do move across national boundaries . Thus
International trade and movements of productive resources can be regarded as
substitutes for one another

As in the case of international trade, the movement of productive resources from

nations with relative abundance and low remuneration to nations with relative
scarcity and high remuneration has a tendency to equalize factor returns
internationally and generally increases welfare

There are two main types of foreign investments: portfolio investments and direct
investments
METHODS OF FDI

An investor can make a foreign direct investment by expanding their business in a

foreign country

Reinvesting profits from overseas operations, as well as intracompany loans to

overseas subsidiaries, are also considered foreign direct investments

Other methods:

▪ Acquiring voting stock in a foreign company

▪ Mergers and acquisitions
▪ Joint ventures with foreign corporations
TYPES OF FDI

➢ Horizontal

➢ Vertical

➢ Conglomerate

➢ Platform
TYPES OF FDI
Horizontal: a business expands its domestic operations to a foreign country. In this case, the business
conducts the same activities but in a foreign country. For example, McDonald’s opening restaurants in
Japan would be considered horizontal FDI.

Vertical: a business expands into a foreign country by moving to a different level of the supply chain. In
other words, a firm conducts different activities abroad but these activities are still related to the main
business. Using the same example, McDonald’s could purchase a large-scale farm in Canada to produce
meat for their restaurants.

Conglomerate: a business acquires an unrelated business in a foreign country. This is uncommon, as it

requires overcoming two barriers to entry: entering a foreign country and entering a new industry or
market. An example of this would be if Virgin Group, which is based in the United Kingdom, acquired a
clothing line in France.

Platform: a business expands into a foreign country but the output from the foreign operations is
exported to a third country. This is also referred to as export-platform FDI. Platform FDI commonly
happens in low-cost locations inside free-trade areas. For example, if Ford purchased manufacturing
plants in Ireland with the primary purpose of exporting cars to other countries in the EU..
THEORIES OF FDI
❖ Capital Market Theory / Currency Area Theory

❖ Location-based approach to FDI theories

❖ Institutional FDI Fitness theory

❖ Internalization theory

❖ Product Life Cycle Theory

❖ Investment Development Path Theory

CAPITAL MARKET THEORY
One of the earliest theories which explained FDI

It postulated that foreign investment in general arose as a result of capital market imperfections. FDI
specifically was the result of differences between source and host country currencies

According to Aliber (1970; 1971), weaker currencies have a higher FDI-attraction ability and are better
able to take advantage of differences in the market capitalisation rate, compared to stronger country
currencies

MNCs based in hard currency areas can borrow at a lower interest rate than host country firms because
portfolio investors overlook the foreign aspect of source country MNCs. This gives source country firms
the borrowing advantage because they can access cheaper sources of capital for their overseas affiliates
and subsidiaries than what local firms would access the same funds for.

This is however a very basic approach to the economics of FDI, because FDI flows are more complicated
than just being about commonalities between nations.
INSTITUTIONAL FDI FITNESS THEORY
FDI fitness focuses on a country’s ability to attract, absorb and retain FDI.

It is this country ability to adapt, or to fit to the internal and external expectations of its
investors, which gives countries the upper-hand in harnessing FDI inflows.

FDI fitness theory rests on four fundamental pillars:

▪ Government - The role of a country’s political strength plays the biggest role in the FDI
game. Government fitness requires the adoption of protective regulation to manage market
fitness.
▪ Market - accounts for the economic and financial aspects of institutional FDI fitness, in the
form of machinery (physical capital) and credit (financial capital).,
▪ Educational - educated human capital enhances R&D creativity and information processing
ability and
▪ Socio-cultural fitness – Base of the pyramid
INTERNALIZATION THEORY
Deals with transaction cost

This is the cost of searching and determining the market price, or, once the price is found, the cost of negotiation,
signing and enforcement of contracts between the parties involved in the transaction.

A theory of the multi-plant enterprise was required, and internalisation theory filled this gap

‘Internalisation’ refers to the fact that MNEs replace external markets in proprietary knowledge and semi-
processed products with internal managerial coordination.

It provides an explanation of why multinational business activity is concentrated in innovative knowledge-intensive

industries, and in industries where the quality of components and raw materials is difficult to measure and control

Before internalisation theory it was widely believed that multinational firms transferred capital to a foreign
country, while afterwards it was recognised that it is mainly knowledge that they transfer; capital is transferred, if
at all, mainly to protect the knowledge and to appropriate profit from its exploitation abroad

Source: https://centaur.reading.ac.uk/38244/3/Coase%20and%20International%20Business%203.pdf
PRODUCT LIFE THEORY
The theory, detailed that a product goes through various stages in the course of its progress.
These stages are:

(1) New product stage - innovation or invention of products will mostly be done in
developed nations, because of the economy of the nation

(2) Maturing product stage - The product enters this stage when it has established demand
in developed nations. The manufacturer, would need to open manufacturing plants in each
nation where the product has demand. Due to local production, labour costs and export
costs will decline which will, and in result reduce the per unit cost and increase the revenue.
This stage may include product development

(3) Standardized product stage - In this stage exports to nations various developed and under
developed nations will begin. Foreign product competition will reach its peak due to which
the product will start losing its market. Then, the cycle of a new product begins
INVESTMENT DEVELOPMENT PATH THEORY

The IDP essentially traces out the net cross-border flows of industrial knowledge, the
flows that are internalised in foreign direct investment (FDI) and that restructure and
upgrade the global economy.

There is also the non-equity type of knowledge transfer such as licensing, turn-key
operations

In this way, the IDP can thus be view as a cross-border learning curve exhibited by a
nation that successfully move up the stages of development by acquiring industrial
knowledge from its more advanced ‘neighbours’.
FDI IN INDIAN ECONOMY

Three routes / categories

BENEFITS OF FDI

1. Brings in financial resources for economic development.

2. Brings in new technologies, skills, knowledge, etc.

3. Generates more employment opportunities for the people.

4. Brings in a more competitive business environment in the country.

5. Improves the quality of products and services in sectors.

DISADVANTAGES OF FDI

✓ It can affect domestic investment, and domestic companies adversely

✓ Small companies in a country may not be able to withstand the onslaught of

MNCs in their sector. There is the risk of many domestic firms shutting shop as a
result of increased FDI.

✓ FDI may also adversely affect the exchange rates of a country.

REGULATORY FRAMEWORK IN INDIA FOR FDI
• Companies Act

• Securities and Exchange Board of India Act, 1992 and SEBI Regulations

• Foreign Exchange Management Act (FEMA), 1999

• Foreign Trade (Development and Regulation) Act, 1992

• Civil Procedure Code, 1908

• Indian Contract Act, 1872

• Arbitration and Conciliation Act, 1996

• Competition Act, 2002

COMPLIANCES UNDER COMPANIES ACT, 2013
Conditions of Private Placement provisions as given in Section 42 of the Companies Act, 2013 are
required to be complied with. Section 42 of the Companies Act, 2013 also provides a similar time
limit. Within 60 days of receipt of money, shares are required to be allotted.

Within 30 days from the date of allotment of share, Return of Private Placement is required to be
filed with ROC in Form PAS-3. Other Important Conditions under Companies Act, 2013 Board of
Directors to identify such persons (not more than 200 in an FY) each of who will take not less than
INR 25,000 of the face value of shares under Section 42.

For each such investment, shareholder approval is required to be taken. An offer letter is required to
be issued in Form PAS-4. Money to be kept in a separate bank account till the time of allotment. If
shares are not issued within 60 days, then the money is required to be refunded within 15 days
otherwise 12% p.a. Interest is payable from the 61st day of allotment.
COMPLIANCES UNDER SEBI ACT, 1992
Several changes have been made to the SEBI (Foreign Institutional Investors) Regulations, 1995 to
diversify the foreign institutional investor base and to further facilitate the inflow of foreign portfolio
investment. The changes have also aimed at facilitating investment in debt securities through the FII
route.
The changes are as follows:
The eligible categories of FIIs have been expanded to include university funds, endowments,
foundations, charitable trusts, and charitable societies which have a track record of 5 years and which
are registered with a statutory authority in their country of incorporation or establishment.

Each FII or sub-account of an FII has been permitted to invest up to 10% of the equity of any one
company, subject to the overall limit of 24% on investments by all FIIs, NRIs, and OCBs. The 24% limit
may be raised to 30% in the case of individual companies who have obtained shareholder approval
for the same.

FIIs have been permitted to invest in unlisted securities. FIIs have been allowed to invest their
proprietary funds. FIIs who obtain specific approval from SEBI have been permitted to invest 100% of
their portfolios in debt securities. Such investment may be in listed or to be listed corporate debt
securities or in dated government securities and is treated to be part of the overall limit on external
commercial borrowing.
COMPLIANCES UNDER SEBI ACT, 1992
The impact of these changes was felt as several endowment funds, proprietary funds, and 100%
debt funds of FIIs obtained registration. Further details are given in Part II of this Report. To simplify
the FII registration process, SEBI and RBI set up a coordination committee. At the end of 1996-97,
there were no applications for FII registration pending with SEBI and RBI. Foreign investment in
Indian securities has also been made possible through the purchase of Global Depository Receipts,
Foreign Currency Convertible Bonds, and Foreign Currency Bonds issued by Indian issuers which
are listed, traded and settled overseas.

Foreign investors, whether registered as FII or not, may also invest in Indian securities outside the
FII route. Such investment requires case-by-case approval from the Foreign Investment Promotion
Board (FIPB) and the RBI, or only by the RBI depending on the size of investment and the industry in
which this investment is to be made.

Foreign financial services institutions have also been allowed to set up joint ventures in
stockbroking, asset management companies, merchant banking, and other financial services firms
along with Indian partners. Foreign participation in financial services requires the approval of FIPB.
In 1996-97, the FIPB announced guidelines for foreign investment in the non-banking financial
services sector.
FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992
The Foreign Trade (Development and Regulation) Act, 1992 governs and regulates India's foreign policy. The
Act was not enacted as a new piece of legislation to regulate foreign policy, but rather as a substitute for
the Import and Exports (Control) Act of 1947. The Foreign Trade (Development and Regulation) Act, 1992
now regulates and manages India's whole export and import scenario.

This act has removed all of the intricacies of the previous act and has given the Indian government some of
the most powerful control tools available. This act is regarded as the most important piece of legislation
governing the country's foreign trade. The Act was enacted with the primary goal of providing an
appropriate framework for the development and standardization of foreign commerce by facilitating
imports and increasing exports in the country, as well as any other matters related to it. The Central
Government has been given several authorities under this Act.

According to the act's provisions, the Central Government has complete authority to enact any laws
connected to foreign commerce to achieve the act's goals. This Act also gives the government the authority
to make any provisions related to the formulation of national import and export policy.

The Act also allows the Central Government to designate a Director-General by notifying the appointment
in the Official Gazette, and for the Director-General to carry out all foreign trade policies by the rules.
FEMA, 1999
1. Entry route - Procedure for government approval
2. Sectoral Caps
3. Eligible Investor
4. Pricing Guideline
5. Equity Investment
6. Convertible Note
7. Requirement of KYC
8. Right issue or Bonus Issue of shares
9. ESOP - Shares of Indian companies
10.Reporting Requirements
ENTRY ROUTES FOR INVESTMENTS
• Investments can be made by non-residents in the equity shares/fully, compulsorily, and
mandatorily convertible debentures/fully, compulsorily, and mandatorily convertible preference
shares of an Indian company, through the Automatic Route or the Government Route.
• FDI under the Government Approval route has to be subject to Govt. approval where;
• An Indian company that is not owned and & controlled by a resident entity.
• An Indian company whose ownership and control are transferred to the non-resident entity.
• Where a foreign entity converts its debt instrument to foreign investment.
• Investment by NRIs or Company, trust and partnership firms incorporated outside India, under
Schedule IV of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019
CAPS ON INVESTMENTS
Investments can be made by a person resident outside India in the capital of a resident entity only
to the extent of the percentage of the total capital as specified in the FDI policy.
ENTRY CONDITIONS ON INVESTMENTS
Investments by non-residents can be permitted in the capital of a resident entity in certain
sectors/activities with entry conditions. Such conditions may include norms for minimum
capitalization, lock-in period, etc.
OTHER CONDITIONS INVESTMENTS BESIDES ENTRY
CONDITIONS
Besides the entry conditions on foreign investment, the investment/investors are required to
comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local
laws/regulations.
CASES THAT DO NOT REQUIRE FRESH APPROVAL
• The entities that already have prior government approval.
• In case of Additional foreign investment into the entity where the prior approval of the
Government had been obtained earlier.
• Additional foreign investment up to the cumulative amount of Rs 5000 crore into the same
entity within an approved foreign equity percentage/or into a wholly-owned subsidiary
ONLINE FILING OF APPLICATION FOR GOVERNMENT
APPROVAL

• Guidelines for e-filing of applications, filing of amendment applications, and instructions to

applicants are available at the Foreign Investment Facilitation Portal
SECTOR SPECIFIC CONDITIONS ON FDI
• Prohibited Sectors
• Lottery Business including Government/private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Chit funds, Nidhi Company, Trading in Transferable Development Rights
• Real Estate Business
• Manufacturing of cigars, cheroots, cigarettes
• Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway
operations.
• Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business, Gambling, and Betting
activities
PERMITTED SECTORS
• In the following sectors/activities, FDI up to the limit indicated against each sector/activity is
allowed, subject to applicable laws/regulations; security, and other conditionalities. In
sectors/activities not listed below, FDI is permitted up to100% on the automatic route, subject to
applicable laws/regulations; security, and other conditionality.
• Sectoral cap i.e. the maximum amount which can be invested by foreign investors in an entity,
unless provided otherwise, is composite and includes all types of foreign investments, direct and
indirect, regardless of whether the said investments have been made under Schedules I (FDI), II
(FPI), III (NRI), VI (LLPs), VII (FVCI), VIII(Investment Vehicles), and IX (SDRs), respectively, of Foreign
Exchange Management (Non-Debt Instruments) Rules, 2019.
• Those entities where ownership or control transferred from Indian entities to nonresident entities
subject to the government approval.
• The sectors which are already under 100% automatic route and are without conditionalities
would not be affected.
• Total foreign investment, direct and indirect, in an entity will not exceed the sectoral/statutory
cap.
CONCLUSION
It is reasonable to conclude that foreign direct investment is the solution for any country's economic
woes. Various market-oriented measures are being implemented in an attempt to promote
economic activity. Furthermore, the Indian economy has recently been geared up to compete in the
international market, where foreign investors recognize the possibility for significant returns, as seen
by the foreign direct investment success stories that have already been achieved. In emerging
countries, FDI has become increasingly important.

What does this imply in terms of economic development and poverty reduction? Although FDI is
certainly good for overall growth, the question of whether it helps raise per capita incomes and
hence reduce income poverty remains unanswered. It's only a tangential link at best.

The evidence on increasing per capita incomes is mixed, and direct employment is limited, with
skilled (non-poor) employees benefiting the most. Furthermore, if FDI inflows are generally beneficial
to growth but raise income disparity (since skilled people earn more and are more inclined to work in
FDI), it is possible that all else being equal, FDI inflows put downward pressure on income growth.
GOVERNMENT MEASURES TO INCREASE FDI

Production linked incentive scheme (PLI) – 2020

Amendment to FDI Policy 2017 – 100% FDI under automatic route for
coal mining

100 % FDI under automatic route for contract manufacturing

Foreign Investment Facilitation Portal ( FIFP) – Single point online

interface to facilitate FDI
Adobe Acrobat
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PRODUCTION LINKED INCENTIVES (PLI)
Production Linked Incentive, or PLI, scheme of the Government of India is a form of performance-
linked incentive to give companies incentives on incremental sales from products manufactured in
domestic units. It is aimed at boosting the manufacturing sector and to reduce imports.

Objective of these schemes entail Make in India, incentivising foreign manufacturers to start production in
India and incentivise domestic manufacturers to expand their production and exports

These schemes will reduce pollution, climate change, carbon footprint, reduce oil and fuel import bill
through domestic alternative substitution, boost job creation and economy. Society of Indian Automobile
Manufacturers welcomed this as it will enhance the competitiveness and boost growth
FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992
The act has empowered the Central Government to make provisions for the development as
well as regulation of foreign trade

This act authorizes the government to formulate as well as announce the export and import
policy and to also keep amending the same on a timely basis. The government has also been
given a wide power to prohibit, restrict and regulate the exports and imports in general as well
as specified cases of foreign trade.

The act commands every importer as well as exporter to obtain a code number called the
‘Importer Exporter Code Number (IEC)’ from the Director-General or the authorized officer

The act provides the balancing of all the budgetary targets in terms of imports and exports so
that the nation reaches the very peak of economic development
GOVERNMENT AUTHORITIES CONCERNING FDI
o Foreign Investment Promotion Board (FIPB)

o Department for Promotion of Industry and Internal Trade (DPIIT)

o Reserve Bank of India (RBI)

o Directorate General of Foreign Trade (DGFT)

o Ministry of Corporate Affairs, Government of India

o Securities and Exchange Board of India (SEBI)

o Income Tax Department

o Several Ministries of the GOI such as Power, Information & Communication, Energy, etc.
WAY FORWARD WITH FDI

1. FDI is a major driver of economic growth and an important source of

non-debt finance for the economic development of India. A robust and
easily accessible FDI regime, thus, should be ensured.

2. Economic growth in the post-pandemic period and India’s large market

shall continue to attract market seeking investments to the country.
FOREIGN PORTFOLIO INVESTMENT (FPI)
Foreign portfolio investment (FPI) consists of securities and other financial assets passively held
by foreign investors

It does not provide the investor with direct ownership of financial assets and is relatively liquid
depending on the volatility of the market

FPIs include stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts
(ADRs), and Global Depositary Receipts (GDRs).

FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).

FPI Regulations, 2019

FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble
in an economy. FPI is more liquid and less risky than FDI.
DIFFERENCE BETWEEN FDI AND FPI
THANK YOU
RISKS IN INTERNATIONAL FINANCE

Learning Objectives:

• Understand and measure political risk and country risk involved in investment
decisions at multinational levels;

• Know various factors having bearing on political/country risk; and

• Explain various approaches to political risk management

COUNTRY RISK
Country risk includes the adverse political and economic risks of operating in a country

For example, a recession in a country, which reduces the revenues of exporters to that nation is
a realization of country risk Labour strikes by a country’s dockworkers, truckers, and transit
workers that disrupt production and distribution of products, thus lowering profits, also qualify
as country risks. Clashes between rival ethnic or religious groups that prevent people in a
country from conducting business activities can also be considered country risks.

Country risk involves the possibility of losses due to country specific economic, political or social
events or because of company specific characteristics, therefore all political risks are country
risk but all country risks are not political risks.

Sovereign risks involve the possibility of losses on private claims as well as on direct investment.

Country Risk includes a variety of factors ranging from government’s confiscation of a firm’s
assets to government’s encouragement of a negative attitude towards foreign business.
COUNTRY RISK

Country risk also affects investors who buy emerging market securities and the
banks that lend to countries.

In international bond markets, country risk refers to any factor related to a country
that can cause a borrower in that country to default on a loan.

The narrower risk associated with a government defaulting on its bond payments is
called sovereign risk.

Usually, the abilities of a private firm and its government to pay off international
debt are highly correlated.
POLITICAL RISKS
Political risk indicates the commencement of risk arises due to change in the governing
body of a country and therefore poses a risk to the investors who have investments in
financial instruments like debt funds, mutual funds, equity, etc. Specific terms like
corruption, terrorism, etc., related to the politics of a country may arise due to change in a
political scenario, which further might result in a change in the regulations of the nation.

Political risk can also be termed as geopolitical risks that arise due to conflict between two
countries. There can be hindrance across the businesses and finally slash the confidence
level of the investors.

This risk may arise at any level, such as the national level, federal level, state level, etc.

Thus, based on the scenarios, political risks can be divided into two types, such as macro
risks and micro risks
MACRO RISKS
By macro risk we mean, risks affecting all the multinational firms alike.

The major macro risks are:

(a)Forced Disinvestment

(b)Unwelcomed Regulations

(c)Interface with Operations, and

(d) Social Strife

FORCED DISINVESTMENT
Governments may, as a matter of political philosophy, force firms to disinvest.

Forced disinvestment may take place for variety of reasons such as:
(a) that the government believes that it may make better utilization resources,
(b)it feels that such a take over may improve the image of the government,
(c) government wants to control these resources for strategic or developmental reasons

e.g. takeover of oil exploration and oil producing industry

The forced disinvestments are legal under international law as long as it is accompanied by
adequate compensations.

Forced disinvestments are practiced in following two forms: Takeovers/Nationalisation

Usually takeovers and nationalisation are done as a matter of political philosophy. While
doing so, a general policy of takeover or nationalisation is announced with a package of
compensation.
FORCED DISINVESTMENT
The company owners are asked to withdraw from the management for announced
compensation which usually does not match with the expectation of the owners of
company.

Takeovers and nationalisations are usually done when the ideological base of the
government changes from right or centrist to socialist or to communist ideology.

Confiscation/ Expropriation with or without Compensation

This step may be taken by governments because of political rivalry among nations
or because of idealistic shift in government’s political philosophy.
UNWELCOMED REGULATIONS

The purpose of these regulations is to reduce profitability of MNC’s.

These regulations may relate to the tax laws, ownership, management, repatriation
“of profits, reinvestment, limitations on employment and location.

Generally government regulates MNC’s activities to increase revenue and to

encourage a particular aspect of development.

In doing so, the government may become liberal towards MNCs for some
investments for some time and as soon as the objective is served, the returns from
the project may drop due to unwe1comed regulations
INTERFACE WITH OPERATIONS
Interface with operations refer to any government activity that makes it difficult for business
to operate effectively

This risk includes such things as government’s encouragement of unionisation, government’s

expression of negative comments -about foreigners and discriminatory government support
to locally owned and operated business.

The governments generally engage in these kinds of activities when they believe that a
foreign company’s operation could be detrimental to local development or would harm the
political interest of the government

In contrast, forced disinvestment and unwe1comed regulations have identifiable and

immediate impact on foreign business but the interface with the operations may be less
obvious and the effects are unclear

The political risk due to government interface with the business is difficult to assess and
manage because the actions are usually done in a subtle way
SOCIAL STRIFE
In any country there may be social strife arising due to ethnic, racial, religious, tribal or
civil tensions or natural calamities such as drought, etc. may cause economic
dislocation.

Social strife means general breakdown of government machinery leading to economic

disturbances giving rise to political risk
MACRO RISKS
Micro risks are firm specific and affect every firm differently.

The micro risks are:

a) Goal conflicts with economic policies, and

b) Corruption and bureaucratic delays

GOAL CONFLICTS WITH ECONOMIC POLICY
Conflicts between objectives of multinational firms and host governments have risen over
such issues as the firm’s impact on economic development, perceived infringement on
national sovereignty, foreign control of key industries, sharing of ownership and control with
local interests, impact on host country’s balance of payment, influence on the exchange rate
and control over export market, and of domestic versus foreign executives.

The economic policies of the government are geared to achieve sustainable rate of growth in
per capita, gross national product, full employment, price stability external balance and fair
distribution of income.

The policies through which these objectives are to be achieved are as follows:
• Monetary Policies
• Fiscal Policies
• Trade Policies and Economic controls
• Balance of Payment and Exchange Rate Policy
• Economic Development Policies
MONETARY POLICY
Through monetary policy, government wants to control the cost and availability of domestic
credit and long term capital as a means of achieving the national economic priorities

The multinational corporation can circumvent the policy by turning to the parent.

If credit flow is restricted and it has become costlier, the MNC can implement its spending
plans with the help of parent but local competitors face the crunch thus changing the
competitive position of the domestic companies.

National policy is thus frustrated when large amounts of foreign currency is changed into
domestic currency for buy-outs or for speculative purposes.
FISCAL POLICY
To attract FDI the government commits tax concession and some times even provide
subsidies.

After some time when the government wants to achieve revenue targets, because of
the commitments the MNCs are insulated, therefore the achievement falls short of
targets.
TRADE POLICY AND ECONOMIC PROTECTIONS
Nationalistic economic policies are often made to protect domestic industry.

To protect domestic industry from competition tariff and non-tariff barriers are used.

Although, negotiations under GATT have reduced level of tariff barriers, but nontariff barriers remain.

Non-tariff barriers restrict imports by some procedure other than direct financial costs.

These barriers are difficult to identify because these barriers may be in the name of ecological balance,
health, safety, quality and other social clauses and security.

In Uruguay Round, the removal of non-tariff barriers was the main issue.
Balance of payment problems: Repatriation by MNCs put pressure on the much needed foreign
exchange resources.

The outflow is in the form of dividend, management fees, royalty, etc. which puts pressure on balance of
payment. This makes the balance of payment situation more bad, therefore the governments are forced
to regulate the activities of MNC.
ECONOMIC POLICY AND GOAL CONFLICTS
Infant industry argument or old industry arguments are sometimes advanced as valid
arguments for protective tariffs or restrictions on foreign investments, even though
many industries are protected long after they have matured.

India, Mexico, Brazil and Argentina induct indigenisation clauses in the agreements
with MNCs.

Other clauses, such as, ownership component or a clause asking a minimum

percentage of local manufacture, are also inducted in agreements.
CORRUPTION AND BUREAUCRATIC DELAYS

Political corruption and blackmail contribute to the risk.

Corruption is endemic to developing countries. If these bribes are not paid, either
the projects are not cleared or delayed through bureaucratic system to make the
project infructuous.

Delay in clearing the project costs the company and the nation alike.
SOCIAL RISKS
Social risk for a business includes actions that affect the communities around them

Examples include labor issues, human rights violations within the workforce, and corruption
by company officials

Public health issues can also be a concern as they can impact absenteeism and worker
morale

Political uncertainty can be a social risk if the company doesn’t have a good understanding of
the local power structure and who the power brokers are.

For example, a business trying to open a new location can run into zoning issues with the
local community planning board

Companies that have problems with social risk face political backlash, public outcry, and a
damaged legal standing and may not be sustainable in the long term.
SOCIO-CULTURAL RISKS

The socio-cultural environment is important for multinational companies.

There are various socio-cultural factors that significantly affect the economic activity as well
as the performance of multinational companies.

The key socio-cultural factors that have a major impact on the operation of the multinational
companies are:

➢ Culture
➢ Language
➢ Religion
➢ Level of education
➢ Customer preferences
CULTURE

Culture is defined as „shared motives values, beliefs, identities, and

interpretations or meaning of significant events that result from common
experiences of members of collectives and are transmitted across age
generations”

In general, culture is considered as the accepted behaviors, customs, and values of

a given society

Form multinational companies’ perspective, a culture of every foreign country

through its elements affects their business activities.
ELEMENTS OF CULTURE
1. Attitude and belief: In every host country, there are norms of behavior based on attitudes and beliefs
that constitute a part of its culture. y. Multinational companies face a different set of attitudes and
beliefs of a culture in each foreign country separately, and it influences all aspects of human behavior,
providing organization and directions to a society and its individuals.
2. Attitude toward time: It refers to people’s behavior about punctuality, responses to business
communication, responses to deadlines and the amount of time that they spent waiting for an
appointment
3. Attitude toward work and leisure: There are differences in attitude towards work and leisure among
various countries. In some countries, people work much more hours than is necessary to satisfy their
basic needs of living. This attitude is indicative of their views towards wealth and material gains.
4. Attitude toward achievement - Cultural diversity in the general attitudes towards work is related to
people’s achievement motivation.
5. Attitude toward change- Multinational companies should anticipate a difference in attitudes toward
change between separate countries. They should take into consideration some key cultural issues,
such what aspects of a culture resist change, how the process of change takes place in different
foreign countries, how the areas of resistance differ among them, and how long it takes time for
implementing same change.
6. Attitude toward job: The importance of certain profession in country significantly determinate a
number and quality of people who want and seek to join that profession
LANGUAGE
Language The diversity of language among various foreign countries is a source of many
challenges for multinational companies.

Although there is a tendency of accepting the English language as a universal business

language, the companies are aware that it also provokes resistance by locals in many of
countries where they operate

Nonverbal communication creates difficulties for multinational companies due of various

meanings of its elements in the separate countries, such as eye contact, facial expressions,
gestures, etc. (nonvocal elements of speaking) and pitch, volume, speaking rate, etc.

The languages difficulties can be reduced by appointing expatriates on the top managerial
positions in the local subsidiary or nationals that have good knowledge of parent company’s
language and corporate culture.

The presence of more than one language in a given country is an indicator of diversity in its
population.
RELIGION
Religion is considered as “a socially shared set of beliefs, ideas, and actions that relate to a
reality that cannot be verified empirically yet affects the course of natural and human events-a
way of life woven around people’s ultimate concerns”.

In many countries around the world, religion plays a significant role in people’s life. Religion
even determines the way people think of work. Consequently, religion considerably affects on
business activity and corporate culture.

Many companies adapt their working process according to a predominant religion of a given
country in terms of the holidays, working hours, food habits, a way of dressing, etc

Multinational companies, for instance, should be aware of religious holidays in each country
where they operate.
LEVEL OF EDUCATION
Education significantly affects the lifestyle of a population of any country in the world, the way of
their thinking, their attitude toward work, etc.

Education level and level of literacy of population of a given country are indicators of the quality
of their potential workforce

Economic potential and progress of any country depend on the education of its population.

Implications:

1. Countries with a well-educated population attract high-wage industries. (Brain power)

2. The market potential of any country primarily depends on education (e.g. Germany, England)
3. The level of education and the level of literacy of population in a given country considerable
determine the way of marketing research, packaging and advertising conducted by multinational
companies.
CUSTOMER PREFERENCES

The needs and tastes of consumers in various countries are significantly becoming similar
(Global convergence)

As a result of the spread of global communication and facilitated travel opportunities, certain
social behaviors are getting similar globally

Today, people around the world watch same movies, listen to the same music, play the same
video games and use the same Internet websites

Therefore, many multinational companies with global strategy offer same or very similar
products in many various countries. As result, global market convergence is created whereby
the world is considered as a global market of same products and services.
ECONOMIC RISKS
Economic risk is referred to as the risk exposure of an investment made in a foreign country
due to changes in the business conditions or adverse effect of macroeconomic factors like
government policies or collapse of the current government and significant swing in the
exchange rates.

Types:
1. Sovereign Risk

2. Unexpected swing in exchange rates

3. Credit Risk
ECONOMIC RISKS
1. Sovereign risks: Sovereign Risk is the risk that a government cannot repay its debt and default on its
payments. When a government becomes bankrupt, it directly impacts the businesses in the country.
Sovereign Risk is not limited to a government defaulting but also includes the political unrest and
change in the policies made by the government. A change in government policies can impact the
exchange rate, which might affect the business transactions, resulting in a loss where the business
was supposed to make a profit.

2. Unexpected Swing in Exchange Rate: When the market moves considerably, it affects international
trade. This can be due to speculation or the news that can cause a fall in demand for a particular
product or currency. Oil prices can significantly impact the market movement of other traded
products. Change in inflation, interest rates, import-export duties, and taxes also impact the exchange
rate. Since this directly impacts trade, exchange rates risk seeming to be a significant economic risk.

3. Credit risk: This type of sovereign risk is the risk that the counterparty will default in making the
obligation it owes. Credit risk is entirely out of control since it depends on another entity’s worthiness
to pay its debts. The counterparty’s business activities need to be monitored on a timely basis so that
the business transactions are closed at the right time without the risk of counterparty default to make
it payments.
REACTION TO RISKS
The political risk index tries to incorporate all these economic, geographical and social aspects, so that
political risk may be indicated in a concise manner. These indices measure over all business climate of a
country

Capital Flight and Political Risk: Some of the finance consultants believe that Capital flight is one good
indicator of the degree of political risk. By capital flight we mean the export of savings by a nation’s
citizens because of the fears about the safety of their capital.

Reasons for capital flight:

1. Government Regulations and Controls: Some times governments try to control and regulate the use of savings to
channelise the resources to a particular sector. In this case, government enacts the rules for using capital. The
return on investment is fixed by the government.
2. Taxes: If the government imposes heavy taxes on returns from investment the net return, becomes low. The
capital flight occur in search of better returns.
3. Low Returns: If the economy itself is providing low returns, the capital flight would occur.
4. High Inflation: The countries having high inflation also face capital flight, because domestic hedging against
inflation becomes difficult therefore the citizens try to hedge through a foreign currency which is less likely to
depreciate.
5. Political Instability: Perhaps the most powerful motivation to capital flight comes from political instability because
no one is sure about the return on investment.
WRAP UP
1. Political risk: Political risk determines a country’s political stability, either internally or externally. For
instance, a recent military coup would increase a nation’s internal political risk for businesses as rules
and regulations suddenly shift. Other risks in this category could include war, terrorism, corruption and
excessive bureaucracy (i.e. host government red tape is preventing certain fund transfers or other
transactions).
2. Sovereign risk: There is some crossover between political and sovereign risk, although the latter – also
known as sovereign default risk – primarily examines debt. Specifically, this risk category measures the
build up of debt that is the obligation of a government or its agencies (or that is guaranteed by the
government), and how much said government is anticipated to fulfil these obligations.
3. Economic risk: Economic risk encompasses a wide range of potential issues that could lead a country
to renege on its external debts or that may cause other types of currency crisis (i.e. recession). A major
factor here is economic growth – the health of a nation’s GDP and the outlook for its future. For
instance, if a country relies on a few key exports and the prices for these are dropping, this creates a
negative outlook and may increase the economic risk for foreign trading partners.
4. Exchange risk: Any predicted loss created by sudden changes in exchange rate are generally covered
under the exchange risk factor. This is another all-encompassing term as fluctuations in the foreign
exchange can be caused by a wide variety of factors. Economic and political factors such as those
mentioned above can be significant drivers of exchange risk, although currency reserves, interest rates
and inflation are also potential factors.
THANK YOU