 The gold standard is a monetary system where a country's currency or paper money has

a value directly linked to gold. With the gold standard, countries agreed to convert paper
money into a fixed amount of gold. A country that uses the gold standard sets a fixed
price for gold and buys and sells gold at that price. That fixed price is used to determine
the value of the currency. For example, if the U.S. sets the price of gold at $500 an
ounce, the value of the dollar would be 1/500th of an ounce of gold.

The gold standard is a monetary system where a country's currency or paper money has
a value directly linked to gold. With the gold standard, countries agreed to convert paper
money into a fixed amount of gold. A country that uses the gold standard sets a fixed
price for gold and buys and sells gold at that price. That fixed price is used to determine
the value of the currency. For example, if the U.S. sets the price of gold at $500 an
ounce, the value of the dollar would be 1/500th of an ounce of gold.

The pre-1914 gold standard: a fixed exchange system: In the pre-1914 era, most of
the major trading nations accepted and participated in an international monetary system
called the gold standard. Under this regime, countries use gold as a medium of exchange
and a store of value. The gold standard had a stable exchange rate.

 Fixed exchange rates: 1945-73:

a. The Bretton woods agreement was signed by representatives of 44 countries in 1944 to
establish a system of fixed exchange rates.
b. Under this system, the value each currency was fixed by government action relative to
the value of gold or some currency of reference. US dollar was used frequently as a
reference currency to establish the relative prices of all other currencies
c. At this conference, they agreed to establish a new monetary order, which centered on
IMF and IBRD (World Bank).
d. IMF provides short term balance of payment adjustment loans, while the world bank
makes long term development and reconstruction loans.
e. The agreement emphasized the stability of exchange rates by adopting the concept of
fixed but adjustable rates.

Breakdown of the Bretton woods system:

 a. The late 1940s marked the beginning of large deficits in the US balance of payments.
America’s payments deficits resulted in dilution of US gold and other reserves during the
1960s and early 1970s.
b. In 1971, most major currencies were permitted to fluctuate. US dollars fell in value
against a number of major currencies. Several countries caused major concern by
imposing some trade and exchange controls which was feared that such protective
measures might become widespread to curtain international commerce.
c. In order to solve these problems, the world’s leading trading countries, called the ‘Group
of Ten’, produced the Smithsonian Agreement in 1971.

1. 2. Meaning:- • International monetary systems are sets of internationally agreed rules,

conventions and supporting institutions, that facilitate international trade, cross border
investment and generally there allocation of capital between nation states. • International
monetary system refers to the system prevailing in world foreign exchange markets through
which international trade and capital movement are financed and exchange rates are
determined.
2. 3. • The International Monetary System is part of the institutional framework that binds
national economies, such a system permits producers to specialize in those goods for which
they have a comparative advantage, and serves to seek profitable investment opportunities
on a global basis.
3. 4. Features that IMS should possess:- • Flow of international trade and investment according
to comparative advantage. • Stability in foreign exchange and should be stable. • Promoting
Balance of Payments adjustments to prevent disruptions associated with temporary or
chronic imbalances. • Providing countries with sufficient liquidity to finance temporary
balance of payments deficits.

international monetary system

a system forpromoting INTERNATIONAL
TRADE and SPECIALIZATION while at thesame time ensuring long-run individual BALANCE OF
PAYMENTS EQUILIBRIUM. To be effective, an international monetary system must beable to:

a. provide a system of EXCHANGE RATES between national currencies;

b. provide an ADJUSTMENT MECHANISM capable of removingpayments imbalance;
c. provide a quantum of INTERNATIONAL
RESERVES to financepayments deficits. In addition, because of the structural weaknesses ofso
me countries, particularly DEVELOPING
COUNTRIES, financial aidfacilitates are required to help resolve problems of indebtedness (seeI
NTERNATIONAL DEBT).
Automatic Price Adjustment under Gold Standard and
Flexible Exchange Rates!
Under the international gold standard which operated between 1880-
1914, the currency in use was made of gold or was convertible into gold
at a fixed rate. The central bank of the country was always ready to buy
and sell gold at the specified price.

The rate at which the standard money of the country was convertible
into gold was called the mint price of gold. This rate was called the
mint parity or mint par of exchange because it was based on the mint
price of gold. But the actual rate of exchange could vary above and
below the mint parity by the cost of shipping gold between the two
countries.

The exchange rate under the gold standard was determined by the
forces of demand and supply between the gold points and was
prevented from moving outside the gold points by shipments of gold.
The main objective was to keep bop in equilibrium.

A deficit or surplus in bop under the gold standard was automatically

adjusted by the price-specie-flow mechanism. For instance, a bop
deficit of a country meant a fall in its foreign exchange reserves due to
an outflow of its gold to a surplus country.

This reduced the country’s money supply thereby bringing a fall in the
general price level. This, in turn, would increase its exports and reduce
its imports. This adjustment process in bop was supplemented by a
rise in interest rates as a result of reduction in money supply. This led
to the inflow of short-term capital from the surplus country. Thus the
inflow of short-term capital from the surplus to the deficit country
helped in restoring bop equilibrium.

There are many roles and uses of Special Drawing Rights which created by IMF. In 1969,
it is used to maintain the constant exchange rate system that was set by the Bretton
Woods.

Besides, SDR can be used to balance the accounts of the participants. This can achieve
the requirement for supplementing to current reserve. If the IMF's members want to
achieve the requirement, the SDR can be used to obtain foreign exchange. This
transaction can be done by designation by IMF of one member to another member to
exchange the SDR to freely usable currency.

Furthermore, SDR is also used to settle financial obligations. The member countries can
get the loans from SDR at the agreed maturities date and interest rates. After that, the
countries should repay the loans and payment of interest with SDR.

Other than the uses above, there are two ways that the SDR can perform as the
protection for the financial requirements. To discuss about it, first, the participants may
allocate the SDR for the time period that had promised before by recorded it in a
register. Besides, the second way is the participants may have the same opinion that
SDR would perform as the protection for the financial requirements and the transferor
would receive back the SDR when the requirement had been achieved.

Background of the Eurocurrency Market

The eurocurrency market originated in the aftermath of World War II when the Marshall
Plan to rebuild Europe sent a flood of dollars overseas. The market developed first in
London as banks needed a market for dollar deposits outside the United States. Dollars
held outside the United States are referred to as eurodollars, even if they are held in
Asian markets such as Singapore or Caribbean markets such as Grand Cayman.

The eurocurrency market has expanded to include other currencies such as the yen and
the British pound whenever they trade outside of their home market. However, the
eurodollar market remains the largest.
Euro currency: a euro currency is any freely convertible currency deposited in a bank outside
its country of origin. These deposits can be placed in a foreign bank or in a foreign branch of a
domestic US bank.

Euro currency market: The Eurocurrency market consists of those banks which accept
deposits and make loans in foreign currencies. Bank in which euro currencies are deposited are
called euro banks. Thus euro banks are the major world banks that conduct a euro currency
business in addition to all other banking functions.

Features of euro currency market

 It is a large international money market relatively free from government regulation and
interference.
 The deposits in the euro currency market are primarily for the short term. This
sometimes leads to problems about managing risk, since most euro currency loans are
for longer period of times.
 Transactions in this market are generally very large with government, public sector
organizations tending to borrow most of the funds. This makes the market a wholesale
market rather than a retail market.
 Approximately 80% of the euro currency market is interbank, which means that the
transactions take place between banks.
 The Eurocurrency market exists for savings and time deposits rather than demand
deposits.
 Generally the Eurocurrency borrowing rate depends on the creditworthiness of the
customer and is large enough to cover various costs and also to build large reserves
against possible losses.

Short term and medium prospects of euro currency market

 Short term euro currency borrowings have a maturity period of less than one year.
 Borrowing at maturities exceeding one year is also feasible and is known as Euro credit.
A euro credit consists of loans that mature in one to five years. The euro credit may be in
the form of loans, lines of credit or medium and long term credit including syndication.
 Syndication occurs when several banks pool their resources to extend a large loan to a
borrower so as to spread the risk.
Another special feature of the Eurocurrency market is the difference in interest rates as
compared with domestic markets. Eurocurrency loans generally carry a lower rate of interest
than the rates in the domestic market. Eurocurrency deposits generally tend to yield more than
domestic deposits because of large transactions and the absence of controls and their attendant
costs.

Significance of Eurocurrency market

 Eurocurrency market is a major source of short term loans to help meet the corporate
working capital requirement including the financing of imports and exports.
 Eurocurrency deposits are an efficient and convenient money market device for holding
excess corporate liquidity.
 It plays a key role in the capital investment decisions of many firms since it is the
funding source of corporate borrowings.
 It complements the domestic financial markets, giving greater excess to borrowing and
lending to financial market participants in each country where it is permitted to
function.

Three conditions for Eurocurrency market to exist

 First national governments must allow foreign currency deposits to be made.

 Second the country whose currency is being used must allow foreign entities to own and
exchange deposits in that currency.
 There must be a significant reason, such as low cost or ease of use of that motivates
individuals to use this market and not the domestic one

Euro currency interest rates

 The base interest rate paid on deposits among banks in the Eurocurrency market is
called LIBOR, the London Interbank Offered rate.(Outside London, which is the centre
of the entire Euro market, the base rate on deposits is generally slightly higher.)LIBOR is
determined by the supply and demand for funds in the euro market for each currency.

 The most important characteristic of the euro currency market is that loans are made on
a floating rate basis. Interest rates on loans to governments, corporations and non prime
banks are set at fixed margin above LIBOR for the given period and the currency chosen.
 At the end of the each period, the interest rate for the next period is calculated at the
same fixed margin over the new LIBOR.

 The margin or spread between the lending bank’s cost of funds and the interest charged
from borrower, varies a good deal among borrowers and is based on the borrower’s
perceived riskiness. Typically, such spreads have ranged from slightly below 0.5% to
over 3%, with the median being somewhere between 1% and 2%.

 The maturity of a loan can vary from approximately three to ten years. The lenders in
this market are mostly exclusively banks. In any single loan, there will normally be a
number of participating banks that forma syndicate.

ADR and GDR are commonly used by the Indian companies to raise funds from
the foreign capital market. The principal difference between ADR and GDR is in
the market; they are issued and in the exchange, they are listed. While ADR is
traded on US stock exchanges, GDR is traded on European stock exchanges.

Depository Receipt is a mechanism through which a domestic company can

raise finance from the international equity market. In this system, the shares of
the company domiciled in one country are held by the depository i.e. Overseas
Depository Bank, and issues claim against these shares. Such claims are known
as Depository Receipts that are denominated in the convertible currency, mostly
US$, but these can also be denominated in Euros. Now, these receipts are listed
on the stock exchanges.

ADR and GDR are two depository receipt, that is traded in local stock exchange
but represent a security issued by a foreign public listed company.

Definition of ADR

American Depository Receipt (ADR), is a negotiable certificate, issued by a US

bank, denominated in US$ representing securities of a foreign company trading
in the United States stock market. The receipts are a claim against the number of
shares underlying. ADR’s are offered for sale to American investors. By way of
ADR, the US investors can invest in non-US companies. The dividend is paid to
the ADR holders, is in US dollars.

ADR’s are easily transferable, without any stamp duty. The transfer of ADR
automatically transfers the number of shares underlying.
Definition of GDR

GDR or Global Depository Receipt is a negotiable instrument used to tap the

financial markets of various countries with a single instrument. The receipts are
issued by the depository bank, in more than one country representing a fixed
number of shares in a foreign company. The holders of GDR can convert them
into shares by surrendering the receipts to the bank.

Prior approval of Ministry of Finance and FIPB (Foreign Investment Promotion

Board) is taken by the company planning for the issue of GDR.

Key Differences Between ADR and GDR

The important difference between ADR and GDR are indicated in the following
points:

1. ADR is an abbreviation for American Depository Receipt whereas GDR is

an acronym for Global Depository Receipt.
2. ADR is a depository receipt issued by a US depository bank, against a
certain number of shares of non-US company stock, trading in the US stock
exchange. GDR is a negotiable instrument issued by the international
depository bank, representing foreign company’s stock that is offered for
sale in the international market.
3. With the help of ADR, foreign companies can trade in US stock market,
through various bank branches. On the other hand, GDR helps foreign
companies to trade in any country’s stock market other than the US stock
market, through ODB’s branches.
4. ADR is issued in America while GDR is issued in Europe.
5. ADR is listed in American Stock Exchange i.e. New York Stock Exchange
(NYSE) or National Association of Securities Dealers Automated
Quotations (NASDAQ). Conversely, GDR is listed in non-US stock
exchanges like London Stock Exchange or Luxembourg Stock Exchange.
6. ADR can be negotiated in America only while GDR can be negotiated in all
around the world.
7. When it comes to disclosure requirements for ADR’s, stipulated by the
Securities Exchange Commission (SEC) are onerous. Unlike GDR’s whose
disclosure requirements are less onerous.
8. Talking about the market, ADR market is a retail investor market, where
the investor’s participation is large and provides a proper valuation of a
 company’s stock. As opposed to the GDR, where the market is an
institutional one, with less liquidity.

Euro bond market

Euro bonds are unsecured debt securities issued and sold in markets outside the home country
of the issuer (borrower) and denominated in a currency different from that of home country of
the issuer. Euro bonds are underwritten and sold in more than one market simultaneously
usually through international syndicates and are purchased by an international investing public
that extends far beyond the confines of the countries of issue. For example, a dollar
denominated bond issued in the UK is a Euro (dollar) bond; similarly a Yen denominated bond
in the US is a euro (Yen) bond.

Occasionally, Euro bond issues may provide currency options, which enable the creditor to
demand repayment in one of several currencies and thereby reduce the exchange risk inherent
in single currency foreign bonds

Features of Euro Bond

 Like an Eurocurrency market, the Eurobond market is an off shore operation not subject
to national controls, which most countries have over domestic issues of securities
denominated in local currency.
 Euro bond issues are not subject to die costly and time consuming registration
procedure. Disclosure requirements are also less stringent than those which apply to
domestic issues. This feature appeals to many MNCs, which often do not wish to disclose
detailed and highly sensitive information.
 Euro bonds are issued in bearer form, which facilitates their negotiation in the secondary
market. This feature also means that the country of die ultimate owner of the bond is not
a matter of public record.
 Euro bonds offer investors, exemption from tax –withholding provisions not applicable
to domestic and foreign bonds. This feature allow US MNCs to reduce their borrowing
cost by having their offshore financing subsidiaries issue Euro dollar bonds with
payment of interest and principal guaranteed by the parent company.
 (1) Cost of issue of Eurobonds is low which is around 2.5% of face value of the issue
Eurodollar Market

The term euro dollar refers to US dollars accumulated over the years by European banks and
other banks outside the United States. Since these dollars are outside the jurisdiction of the
United States government; the European Banks are free to deal in them without any restriction.
In addition to the US dollars acquired by banks with their own or foreign currency, Euro dollar
also come into existence when a domestic or foreign holder of dollar demand deposits in the
United States places them on deposit in a bank outside the United States.

Growth of the Euro Dollar Market

It is generally agreed that it originated in the early 1950s by the desire of the Soviet Union and
Eastern European countries to place their dollar holdings in the European Banks to avoid the
risk of such balances being blocked if deposited in US banks.

Basically the Eurocurrency market has thrived on one basic reason that is he absence of
government regulation. By operating in Eurocurrencies, banks, suppliers of funds are able to
avoid certain regulatory costs that would otherwise be imposed.

Briefly, the fast growth of the Eurodollar market in the 1965-1980 periods has been attributed
mainly to the following four reasons:

 Larger deficit in the US balance of payments, particularly during the 1960s, which
resulted in the accumulation of substantial dollars held by foreign financial institutions
and individuals.
 The restrictive environment which prevailed in the United States during the 1963-1974
periods to stem capital outflows. These restrictions, which took the form of both
voluntary and mandatory controls, encouraged US and foreign MNCs to borrow dollars
abroad.
 The massive balance of payments surpluses realized by OPEC countries due to sharp
increase in oil prices in 1973-1974 and again in 1978. A good proportion of these
“petrodollars” was deposited in the financial institution outside the United States.

The efficiency and lower cost base of the Eurodollar market. Being a wholesale funds market,
operating free of restrictions at a substantially lower cost than its counterpart in the United
States, it has been able to attract dollar deposits by offering high interest rates as well as making
dollar loans available to borrowers at lower interest rates
1. International bonds: international bonds are the debt instruments. They are issued
by international agencies, governments and companies for borrowing foreign
currency for a specified period of time. The issuer pay interest to the creditor and
makes the repayment of capital
Types of international bonds;
a. Foreign bonds and Euro Bonds
 Foreign bond and euro bond: in case of foreign bond, the issuer selects a
foreign financial market where the bonds are issued in the currency of that
country. Foreign bonds are underwritten normally by the underwriters of the
country where they are issued.
 Euro bond: in case of euro bonds, bonds are denominated in a currency other
than the currency of the country where the bonds are issued. Eurobonds are
underwritten by the underwriter of multi-nationally.
b. Global bonds: it is the World Bank which issued the global bonds for the first
time in 1989 and 1990. Since 1992, such bonds are being used also by companies.
Presently there are seven currencies in which such bonds are denominated
namely: Australian dollar, Canadian dollar, Japanese dollar, DM, Finnish
Markka, Swedish Krona and Euro.

Features of Global Bond

 They carry high ratings

 They are normally large in size.
 They are offered for simultaneous placement in different countries.
c. Straight bonds: in this case interest rate is fixed. The interest rate is known as
coupon rate. The credit standing of the borrower is also taken into consideration
for fixing the coupon rate. Straight bonds are of many varieties:
 Bullet redemption bond: in this repayment of the principal is made at the
end of the maturity and not in installment every year.
 Rising coupon bond: in rising coupon bond, the coupon rate rises over
time. The benefit is that the borrower has to pay small amount of interest
payment during early years of debt.
 Zero coupon bonds: it carries no interest payment. Since there is no
interest payment, it is issued at discount and redeemed at par. It is the
discount that compensates for the loss of interest faced by the creditor.
  Bonds with currency option: in case of bonds with currency options, the
investor has the right to receive the payments in a currency other than the
currency of the issue.
 Bull and bear bonds: the bull bonds are those where the amount of
redemption rises with a rise in index. The bear bonds are those where the
amount of redemption falls with a fall in the index.
d. Floating rate bonds: bonds which do not carry fixed rate of interest.
e. Convertible bonds: international bonds are also convertible bond meaning that
these bonds are convertible into equity shares. Convertible bonds command a
comparatively high market value because of the convertibility privilege.
A. Medium term instruments:
1. Medium term euro notes: it is just an extension of the short term euro notes. They
are a compromise between short term euro notes and long term euro bonds as their
maturity range from one year and five to seven years. Every three or six months the
short term euro notes are redeemed and a fresh issue is made. Alternatively a
medium-term euro note is issued to get medium-term funds in foreign currency
without any need for redemption and fresh issue.

Medium term euro notes are not underwritten, yet there is a provision for
underwriting. This is for ensuring the borrowers that they get the funds even if they
lack sufficient creditworthiness. Medium-term euro notes carry fixed rate of interest,
although floating rates are also there.

B. Short term instruments

1. Euro notes: euro notes are like promissory notes issued by the companies for
obtaining short term funds. They emerged in early 1980s with growing securitization
in the international financial market.

Features of Euro notes:

 They are denominated in any currency other than the currency of the country
where they are issued.
 They represent low cost funding route
 Documentation facilities are the minimum.
  They can be easily tailored to suit the requirements of different kinds of
borrowers
 Investors too prefer them in view of short maturity
 When issuer plans to issue euro notes, it hires the services of facility agents or the
lead arranger. On the advice of the lead arranger it issues the notes, gets them
underwritten and sells them through the placement agents. After the selling
period is over, the underwriter buys the unsold issues.

Core components:

 Underwriting fee
 One-time management fee for structuring, pricing and documentation
 Margin in the notes themselves

Documentation

 Underwriting agreement
 Paying agency agreement
 Information memorandum
 Financial position of the issuer

2. Euro commercial paper: it emerged in mid 1980s. it is a promissory note like the
short term euro notes but it is different from euro notes in that it is not underwritten
and also it is issued by high credit worthy borrowers.
Features
 It is not underwritten because it is issued only by those companies that
possess a high degree of rating
 ECPs came up on the pattern of domestic market commercial papers that had
a beginning in the USA and then in Canada as in 1950s.
 ECPs face minimal documentation.

CP is a corporate short term, unsecured promising note issued on a discount to yield basis. It is
redeemable at a face value on maturity. Its maturity generally does not exceed 270 days. Issuers usually
roll over the issue and use the proceeds from the new issue to retire the old issue. CP is a cheap and
flexible source of funds especially for highly rated borrowers. It is cheaper than banks Loans. But
generally these require a backup credit line from a bank ranging from 50% - 100%. Investors in CP
consists of money market funds, insurance companies, pension funds, other financial institutions and
corporations with short term cash surpluses.

Disadvantages As there exists no apparent control mechanism in Euro market, it may create some
adverse effects. (1) Speculation : - It induces short term speculative activities which results in generation
of “hot money”. It makes more difficult for central banks to stabilize their currency exchange rates. (2)
Less effective national monetary policy: - Since the doors are open for offshore market, national
monetary authorities lose effective control over monetary policy .It makes national monetary policy less
effective . (3) Inflation Tendencies : - Euro market creates too much of international liquidity which may
hamper the balance of world economy. It may result in inflationary tendencies. (4) Sovereign Risk : - In
Case of domestic deposit, there is only risk of intervention by one government. But in case of Euro
deposits, there is risk of intervention of both the governments. The government of the country in which
Euro bank operates may seize the assets of the bank and block repayment of liabilities or other wise
restrict its activities through political action

Advantage

International liquidity: - Euro currency markets create international liquidity. A company can increase
the market of its securities. It can increase the liquidity of securities by making them globally tradable. It
enables the companies to attract more buyers for their securities. It can enhance the image of the
company in the international market. (3) Deficit Financing :- In case of deficit,any country can easily
borrow from Euro market to adjust her balance of payment. (4) Efficient allocation of capital
worldwide:- It allows the investors to diversify their portfolio globally. (5) Better financial risk
management :- Euro market has enhanced the ability of business to manage their financial risk in much
better ways. (6) Cheaper Financing:- In Euro market the company can raise large amount of funds at
lower costs. It is very economical source of financing. Moreover as the holders of Euro securities do not
get voting rights, it does not cause any harm to the managerial control of the issuer company. (7) Closer
to market price:- The companies can issue Euro securities at a price which is closer to the market price
of securities at the time of issue. (8) Better rates on deposits & loans : - As Euro markets are not subject
to so many regulations , interest rate ceilings or any other pressure to allocate funds for unprofitable
purposes as generally imposed by government , they can offer better rates for Euro deposits and Euro
loans . Moreover they can keep margins small and overhead costs low. They can also take benefits of
low tax locations. (9) Freedom and Flexibility : - Euro market has a freedom and flexibility which is not
found in domestic markets . (10) Size and depth : - Euro market has capacity to absorb large and
frequent issues due to its size and depth .

Commercial Paper Yields

Commercial paper is a discount instrument—the interest earned

is the difference between the face value and the discounted
purchase price. Yields are calculated using a banker's year of
360 days.

To calculate the investment yield (aka bond equivalent yield)

of commercial paper so as to compare it to the rates of return of
other investments:

1. calculate the interest rate for the period;

2. then compound the rate by the number of periods in a

year.

Formula for Calculating the Investment Yield or Bond Equivalent

Yield (BEY)

Interest Rate Per Term Number of Terms per Year

Face Value - Price Paid Actual Number of Days in Year

BEY = ─────────────── x ───────────────────
Price Paid Term Length in Days
Assume, for example, that an investor purchases a $10,000 Treasury bill at a $300 discount
from par value (a price of $9,700), and that the security matures in 120 days. In this case, the
discount yield is ($300 discount)[/$10,000 par value] * 360/120 days to maturity, or a 9%
dividend yield.

Devaluation is the most effective remedy for correcting adverse balance of trade.
Devaluation

Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of
home currency against foreign currency. While depreciation is a spontaneous fall due to interactions of
market forces, devaluation is official act enforced by the monetary authority. Generally the international
monetary fund advocates the policy of devaluation as a corrective measure of disequilibrium for the
countries facing adverse balance of payment position. When India's balance of payment worsened in
1991, IMF suggested devaluation. Accordingly, the value of Indian currency has been reduced by 18 to
20% in terms of various currencies. The 1991 devaluation brought the desired effect. The very next year
the import declined while exports picked up.

When devaluation is effected, the value of home currency goes down against foreign currency, Let us
suppose the exchange rate remains $1 = Rs. 10 before devaluation. Let us suppose, devaluation takes
place which reduces the value of home currency and now the exchange rate becomes $1 = Rs. 20. After
such a change our goods becomes cheap in foreign market. This is because, after devaluation, dollar is
exchanged for more Indian currencies which push up the demand for exports. At the same time, imports
become costlier as Indians have to pay more currencies to obtain one dollar. Thus demand for imports is
reduced.

Generally devaluation is resorted to where there is serious adverse balance of payment problem.

Limitations of Devaluation :-

 Devaluation is successful only when other country does not retaliate the same. If
both the countries go for the same, the effect is nil.
 Devaluation is successful only when the demand for exports and imports is elastic.
In case it is inelastic, it may turn the situation worse.
 Devaluation, though helps correcting disequilibrium, is considered to be a weakness for the
country.

Devaluation may bring inflation in the following conditions :-

 Devaluation brings the imports down, When imports are reduced, the domestic supply of such
goods must be increased to the same extent. If not, scarcity of such goods unleash inflationary
trends.
 A growing country like India is capital thirsty. Due to non availability of capital goods in India, we
have no option but to continue imports at higher costs. This will force the industries depending
upon capital goods to push up their prices.
 When demand for our export rises, more and more goods produced in a country would go for
exports and thus creating shortage of such goods at the domestic level. This results in rising
prices and inflation.
  Devaluation may not be effective if the deficit arises due to cyclical or structural changes.

Central Banks are government agencies that regulate their national

currencies in order to maintain a healthy economic environment,
balance exports and imports, prevent inflation, and stimulate
growth within their economies. Central banks have a direct impact
on the financial markets, and in particular the foreign exchange
markets. The Central Bank is responsible for keeping their domestic
economic affairs in order, while remaining competitive in the global
environment.

Central banks have a unique place in foreign exchange markets. First,

unlike the other groups involved in foreign exchange markets, the
central banks’ involvement in foreign exchange markets doesn’t have
a profit motive.

Second, central banks’ decisions regarding monetary policy are

extremely influential on exchange rate determination. Central banks
indirectly affect exchange rates through their monetary policy
decisions. In every country, central banks are responsible for
conducting monetary policy, among their other roles. The main goals
of monetary policy are to promote price stability and economic growth.

Basically, a central bank addresses the domestic economy’s problems

by changing the quantity of money and interest rates, which leads to
changes in the exchange rate as well.

Third, central banks can directly affect exchange rates

through interventions into foreign exchange markets. A central bank
can use its domestic currency and foreign currency reserves to buy or
sell foreign currencies directly in the foreign exchange market.
Alternatively, central banks may be involved in foreign exchange
markets for reasons that aren’t related to their own countries but are
related to the common concerns at the international level. For
example, several central banks may come together in a joint action in
foreign exchange markets to provide liquidity and credit across the
world.

What is '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. Foreign portfolio investment differs from foreign direct investment (FDI), in
which a domestic company runs a foreign firm, because although FDI allows a company
to maintain better control over the firm held abroad, it may face more difficulty selling
the firm at a premium price in the future.

Advantages of FPI :
1. There is a substantial increase in the secondary market depth and breadth due to the
presence of such investors.
2. The Capital Market acquires an institutional character since global liquidity is
channelled into local markets in a planned manner through research and analytical
studies. These funds transiate into diversified investments against predefined risk
parameters.
3. These investments increase demand for the shares of target companies thereby
increasing their PE Ratios. This helps such companies to raise capital at lower cost.
4. International investors are provided with an avenue for investment diversification,
wealth protection and at a macro level an opportunity for cross country hedging in
terms of currencies, industries and geographical locations.
5. The growth in FPI in recent years can be attributed to better investor protection
regulations in developing countries, liberalisation in the terms of access to such
markets and better macro-economic fundamentals of emerging economies.
6. They provide a buffer for financing the Balance of Payments deficits thereby helping
to preserve the foreign currency reserves of the host entry.
Disadvantages of FPI :
1. Political Risk represented by the possibility of change in the political environment
resulting in change in investment norms and repatriation regulations.
2. Emerging markets which are the beneficiaries of most FPI traditionally suffer from low
retail participation which results in inadequate liquidity which results in price volatility.
3. Due to the unpredictable nature of such funds there is a tendency to shift from one
market to another at short intervals. Volatility arising out of FPI inflows and outflows
has adverse effects on the host country economy.
4. Emerging economics tend to have depreciation prone currencies. This exposes the
foreign investor to exchange rate risk on both principal and returns.

CHIPS – An acronym for Clearing House Interbank Payments System. The Clearing House
Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and
settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international
payments more quickly by replacing official bank checks with electronic bookkeeping entriesThis
system is operated by the New York Clearing House Association and accounts for 90% of all
international funds transfers. Banks using CHIPS maintain accounts at the New York Federal
Reserve Bank, and final settlement is made through adjustments in these accounts. The CHIPS Uid is
a six-digit code that contains all the information that is necessary to identify the person who is wiring the
money. Thus your name, address, routing number, account number, and so forth are all contained in this
CHIPS code. The Clearing House Interbank Payments System confidentially stores the code, or information,
as it does that of all individuals.

CHIPS is operated by the New York Clearing House Association, and balances are settled at the end
of each business day by net adjusting entries to each bank’s account at the Federal Reserve Bank of
New York.

CHIPS funds transfers are not governed by Regulation J but rather are governed by the CHIPS
Operating Rules.

SWIFT – An acronym for Society for Worldwide Interbank Financial Telecommunications, SWIFT
is a non-profit cooperative headquartered in a southeastern suburb of Brussels, Belgium, just a
cannon-shot away from Waterloo. It is a messaging network that financial institutions use to
securely transmit information and instructions through a standardized system of codes.

SWIFT assigns each financial organization a unique code that has either eight
characters or 11 characters.

SWIFT actually is not a payment system but rather is simply a communication or message system
used to instruct a bank to transfer funds from a specific account to a specified account at another
bank. Then the actual transfer of the funds is carried out on clearing systems such as Fedwire or
CHIPS.
A SWIFT message is an advice or an instruction for a bank to transfer funds from one account to
another; so for example, a funds transfer might start out as a SWIFT message for a certain bank to
transfer a certain amount of funds from one account to another account, and then the bank receiving
the SWIFT message would use Fed Wire or CHIPS to make the transfer.

SWIFT communications and payment orders are governed by the SWIFT Operating Rules.

1. Differentiate between balance of trade and balance of payment

Definition of Balance of Trade

Trade refers to buying and selling of goods, but when it comes to buying and
selling of goods globally, then it is known as import and export. The Balance of
Trade is the balance of the imports and exports of commodities made to/by a
country during a particular year. It is the most important part of the current
account of the country’s Balance of Payment. It keeps records of tangible items
only.

The Balance of Trade shows the variability in the imports and exports of
merchandise made by a country with the rest of the world over a period. If
the imports and exports made to/by the country tallies, then this situation is
known as Trade Equilibrium, but if imports exceed exports, then the condition is
unfavourable as it states that the economic status of the country is not good, and
so this situation is termed as Trade Deficit. Now, if the value of exports is greater
than the value of imports, this is a favourable situation because it indicates the
good economic position of the country, thus known as trade surplus.

Definition of Balance of Payments

The Balance of Payments is a set of accounts that recognises all the commercial
transactions performed by the country in a particular period with the remaining
countries of the world. It keeps the record of all the monetary transactions done
globally by the country on commodities, services and income during the year.

It combines all the public-private investments to know the inflow and outflow of
money in the economy over a period. If the BOP is equal to zero, then it means
that both the debits and credits are equal, but if the debit is more than credit,
then it is a sign of deficit while if the credit exceeds debit, then it shows a surplus.
The Balance of Payment has been divided into the following sets of accounts:
  Current Account: The account that keeps the record of both tangible and
intangible items. Tangible items include goods while the intangible items
are services and income.
 Capital Account: The account keeps a record of all the capital
expenditure made and income generated collectively by the public and
private sector. Foreign Direct Investment, External Commercial
Borrowing, Government loan to Foreign Government, etc. are included in
Capital Account.
 Errors and Omissions: If in case the receipts and payments do not
match with each other then balance amount will be shown as errors
and omissions.

Key Differences Between Balance of Trade and Balance

of Payments
The following are the major differences between the balance of trade and balance
of payments:

1. A statement recording the imports and exports done in goods by/from the
country with the other countries, during a particular period is known as the
Balance of Trade. The Balance of Payment captures all the monetary
transaction performed internationally by the country during a course of
time.
2. The Balance of Trade accounts for, only physical items, whereas Balance of
Payment keeps track of physical as well as non-physical items.
3. The Balance of Payments records capital receipts or payments, but Balance
of Trade does not include it.
4. The Balance of Trade can show a surplus, deficit or it can be balanced too.
On the other hand, Balance of Payments is always balanced.
5. The Balance of Trade is a major segment of Balance of Payment.
6. The Balance of Trade provides the only half picture of the country’s
economic position. Conversely, Balance of Payment gives a complete view
of the country’s economic position.
Definition: LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for
unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term
interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as
mortgages. It is an indicator of the health of the financial system and provides an idea of the
trajectory of impending policy rates of central banks.
LIBOR is an average of inter-bank deposit rates offered by members of the British
Bankers Association (BBA). Because of its basis on supply and demand, LIBOR is
used as the rate of reference for many securities around the globe. Libor is actually a
group of rates for 10 participating currencies, including the U.S. dollar, the euro, the British
pound and the Canadian dollar. There are 15 different LIBOR rates, each corresponding
to varying maturity dates and currencies. That means that Libor is 150 rates produced
every business day.

You may have noticed that the definition of LIBOR is included when calculating rates for
variable rate loans. LIBOR’s seven available maturities and associated rates are:
overnight, one week, and 1, 2, 3, 6, and 12 months. These maturity figures state the
cyclical duration for which the variable interest rate can change on your loan. For
instance, the interest rate on a one-week term can change weekly, and the 3-month term
can change every 3 months (or quarterly). Because these cyclical changes may change
your loan’s interest rate, it is important to note that your monthly payment and the total
expected interest owed over the life of the loan may change as well.
To see which maturity is associated with your variable rate loan, look for the timeframe
before the word LIBOR found on your promissory note. You can also read the loan
agreement to understand how often the interest rate is subject to adjustment and
understand how to identify the correct index amount. For example, Education Loan
Finance’s variable rate loans are subject to adjustment quarterly based upon the 3-month
LIBOR, while other lenders may adjust rates more frequently by basing rates upon the 1-
month LIBOR.
LIBOR Changes and Your Interest Rate
While variable rate loans, whether refinanced or not, tend to have starting rates that are
often lower than fixed loan rates for the same maturity date, these variable rates can
change after you close on your loan — including the possibility to increase over the life
of your loan. Changes in LIBOR result in changes to your variable rate loan’s interest
rate.
Here is how it works: If the 3-month LIBOR is 0.4 percent and Education Loan Finance’s
(or your lending institution’s) margin is 3 percent, then your monthly rate would be 3.40
percent for those three months. However, if the 3-month LIBOR changes to 1 percent in
the next quarter (remember, this scenario is working on a 3-month cyclical change), then
your monthly rate would increase to 4 percent for those next three months.
If the LIBOR increases dramatically to a rate such as 15 percent, Education Loan Finance
actually puts a 9.95 percent interest rate cap on the interest rate that you will be charged
for 5, 7, 10, 15, or 20-year variable rate loan terms. This means that no matter how high
the LIBOR rate increases, you will never pay more than 9.95 percent interest on the
aforementioned variable rate loans if you choose a variable rate loan and refinance your
student loan with Education Loan Finance.

What is a 'Syndicated Loan'

A syndicated loan, also known as a syndicated bank facility, is a loan offered by a group
of lenders – referred to as a syndicate – who work together to provide funds for a single
borrower. The borrower could be a corporation, a large project or a sovereignty, such as
a government. The loan can involve a fixed amount of funds, a credit line or a
combination of the two.

Syndicated loans arise when a project requires too large a loan for a single lender or
when a project needs a specialized lender with expertise in a specific asset class.
Syndicating the loan allows lenders to spread risk and take part in financial
opportunities that may be too large for their individual capital base. Interest rates on this
type of loan can be fixed or floating, based on a benchmark rate such as the London
Interbank Offered Rate (LIBOR).

In cases of syndicated loans, there is typically a lead bank or underwriter, known as the
arranger, the agent or the lead lender. This lender may put up a proportionally bigger
share of the loan, or it may perform duties such as dispersing cash flows among the
other syndicate members and administrative tasks.

The main goal of syndicated lending is to spread the risk of a borrower default across
multiple lenders such as banks, or institutional investors such as pension funds
and hedge funds. Because syndicated loans tend to be much larger than standard bank
loans, the risk of even one borrower defaulting could cripple a single lender. Syndicated
loans are also used in the leveraged buyout community to fund large corporate
takeovers with primarily debt funding.

Chapter 3

How does Tax Policy impact foreign investments

Corporate Tax Policy

A factor that can drive investors away from one country and to another is a country’s tax policy.
Investment capital flows from areas with high taxes to those with low taxes. To attract new
companies, countries may offer custom-tailored tax relief or infrastructure projects. When
federal policy drives up taxes and Increases regulatory costs, companies look to other countries
where such costs are lower.
Tax rates: Tax competition for FDI is a reality in today’s global environment. Investors routinely
compare tax burdens in different locations, as do policy makers with comparisons typically made
across countries that are similar in terms of location and market size. Therefore large multinationals
used to seek to invest in countries with lower corporation tax rates.

1. Explain the various issues involved in international project appraisal

2. Introduction • The fundamental goal of the finance manager is to maximize shareholder’s

wealth. • This can be done if the firm selects those projects that maximize the company’s
value. • The selection process involves a detailed analysis of every project on every aspect. •
International projects involve more factors to be analyzed as compared to the domestic
projects.
3. 3. Issues to be analyzed for International Project Appraisal Foreign Exchange Remittance
Taxation Project v/s parent cash flow Adjustment for risk Financing arrangements Inflation
Uncertain salvage value Blocked funds
4. 4. Foreign Exchange Risk • Risk that the currency will appreciate or depreciate over a period
of time. • It help in understanding the cash flows generated by the project over its life cycle. •
To made the estimates, the manager should – – – – Estimate the inflation rate in host
country The cash flows in terms of local currency Adjust the cash flows for inflation Convert
the cash flows into parent country currency according to the expected depreciation or
appreciation rate calculated on the basis of PPP.
5. 5. Remittance Restrictions • Many countries impose a variety of restriction on transfer of
profits, depreciation and other fees accruing to the parent company. • Normally the project
cash flow includes profits and depreciation but parent’s CF consist of the amount that can be
legally transformed. • There are some techniques to curtail the restrictions like transfer
pricing, overhead payment, etc. • To obtain a conservative estimate of the contribution by the
project the financial manager can include only the income which is remittable by law in the
host country.
6. 6. Tax Issues • For a project evaluation only cash flows after tax are relevant. • In
international projects, there exists two taxing jurisdiction. • There exists the differences in
dividend management fees, royalties, etc., • To calculate the actual after tax cash flow, the
higher tax rate are used. • This shows a conservative scenario that if the project is
acceptable under this condition then it will be necessarily acceptable under more favorable
tax scenario.
7. 7. Project Versus Parent Cash Flows • Substantial differences can exist between the project
and parent cash flows because of tax regulations and exchange control. • Also, expenses
such as management fees and royalties are returns to the parent company. • Project
Evaluation should be done on the basis of: – Its own cash flows? – Cash flows accruing to
the parent company? – Both?
8. 8. Basis of its own cash flows • The project must be able to compete successfully with other
domestic firms & also earn a rate of return in excess of its locally based competitors. • If not,
then it is better for parent company to invest in the equity/ government bonds of local firms.
9. 9. Contd.. • Evaluating projects on the basis of local cash flows has the advantage of
avoiding currency conversion & hence eliminating problems involved with fluctuating/
forecasting exchange rates changes for the life of the projects.
10. 10. From the viewpoint of parent company • Cash flows which are actually remitted to the
parent are the ultimate yardstick for company performance. • This helps in determining the
financial viability of the project from the viewpoint of the MNC as a whole. • Cash flows
include both operating & financial like fees, royalties and interest on loans given by parent
company.
11. 11. Financial Analysis of Foreign Projects First Stage • Project cash flows are computed &
analyzed from subsidiary viewpoint & & consider it as separate entity. Second Stage • It
 involves evaluation of the profit on the basis of forecasts of cash flows which will be
transferable to the parent company. Third Stage • From viewpoint of parent- Include indirect
benefits or costs from the company as a whole, which are attributable to the foreign project in
question.
12. 12. Financing Arrangements • The value of the project will be determined by the manner in
which it is financed. • For example: many times, international agencies in order to promote
cross border trade finance at below market rates. • In case of subsidized financing,
determine whether subsidized financing is separable or not from the project.
13. 13. Contd.. • When the subsidized financing is inseparable then the value of loan should be
added to that of the project in making investment decision. • But, if it is separable, then there
is no need to allocate the value of loan in the project.
14. 14. Blocked Funds • Blocked funds are the cash flows generate by a foreign project that
cannot be immediately transferred to the parent, usually because of exchange controls
imposed by the govt. of the country in which the funds are held.
15. 15. Contd.. • Some countries require that the earnings generated by the subsidiary be
reinvested locally for at least a certain period of time before they can be remitted to the
parent company. • Blocked funds cause a discrepancy b/w the project value from parent’s
and local perspective. • Also, this can possibly affect the accept/ reject decision for a project.
16. 16. The impact of inflation on the parent’sINFLATION & subsidiary’s cash flow can be
quite volatile from year to year some countries. It may cause currency to weaken &
Inaccurate inflation forecast by a country, can lead to inaccurate cash flow forecast. Thus
MNCs cannot afford to ignore the impact of inflation in the cash flowhence influence a
project’s cash flow
17. 17. Uncertain salvage value • The salvage value of a project has an important impact on the
NPV of the project. When the salvage value is uncertain, the cash flow will not be accurate &
the MNC may need to calculate various possible outcome for the salvage value & estimate
the NPV based on each possible outcome. The feasibility of the project may then depend
upon the present value of the salvage value.
18. 18. Adjustment for risk Cash flow v/s Discount rate adjustment: • Another important
dimension in multinational capital budgeting is whether to adjust cash flow or the discount
rate to account for the additional risk arises from the foreign location of the project. •
Traditionally, MNCs have adjusted the discount rate by moving it upwards for riskier projects
to reflect the political and foreign exchanged uncertainties
19. 19. • Adjusting the discount rate is quite a popular method with MNCs mainly because of its
simplicity and the rule that the required rate of return of a project should be in accordance
with the degree of risk which it is exposed to. • However, combining all risk into a single
discount rate has several drawbacks.
20. 20. • The annual cash flow are discounted using the applicable rate for that type of project
either at the host country or at the parent country. Probability and certainty equivalent
techniques like decision tree analysis are used in economic and financial forecasting. Cash
flows generated by the project and remitted to the parent during each time period are
adjusted for political risk, exchange rate and other uncertainties by converting them into
certainty equivalent. The method of adjusting the cash flows rather than discount rate is
generally the more popular method and is usually recommended by finance managers.
There is generally more information on the specific impact of a given risk on a projects’ cash
flow than on its discount rate.
Political environment: it is an important factor that influences the international business,
especially when it is different between the home and host country. Political set up vary widely
between the two extremes

1. Democracy: a democratic political system involves citizens directly or indirectly in the

policy formulation of a country
2. Totalitarianism: it is a political system political power lies in few hands with virtually no
opposition

Political risk: it is unexpected changes in political set up in the host country leading to
unexpected discontinuities that bring about changes in various business environments.

Types of political risk

1. Macro risk: that affect all foreign firms in the country

a. expropriation: it means the seizure of private property by the government and
involves the payment of compensation
b. currency inconvertibility: sometimes the host country enacts laws prohibiting foreign
companies from taking their money out of the country or exchanging the host
country currency for any other currency
c. credit risk: it is refusal to honor a financial contract with foreign company or foreign
debts
2. micro risk: that affects a particular firm
a. Conflict of interest: the host government desires to have sustainable growth rate,
price stability and so on, but the policy of MNC’s operating there is to maximize
corporate wealth. For example transfer of funds by MNC’ may influence the money
supply and may cause the inflation or deflation.
b. Corruption: it is endemic in many countries, as a result MNC’s have to face severe
problems

Evaluation of political risk

1. Qualitative approach: it involves inter-personal contact with persons who are well
acquainted with the political structure of a particular country or region or sometimes a
company sends a team of people (experts) for on the spot study of the political situation
in a particular country.
2. Quantitative approach
 a. Primary risk investment screening matrix: it is a computer programme involving
about 200 variables and reducing them to two numbers. These variables include:
 Frequency of changes in govt.
 Level of violence
 Conflicts with other nations
 Economic factors like inflation rate, growth rate
b. Decision tree approach: to find out the probability of nationalization. This analysis
starts from the very contention whether there will be change in the government or
not. If there is a change, the new govt. may or may not opt for nationalization. If it
does opt for nationalization, the question of whether it will pay adequate
compensation arises or not. Thus in each possible event, there are many possible sub
events. Probabilities of the events occurring are indicated along the tree branches.

Management of the political risk

a. Management prior to investment:

1. Capital budgeting: in this the factor of political risk is included in the process of
capital budgeting and discount rate is increased.
2. By reducing the investment flow: the political risk can be reduced by reducing the
investment inflow from the parent to the subsidiary and filling the gap through the
local borrowing in the host country
3. Agreement: the political risk can also be reduced by negotiating agreements with the
host govt. prior to making investment.
4. Insurance of risk: the investing firm can be insured against political risk. Insurance
can be purchased from government agencies and private financial service
organization.
b. Risk management during the life time of the project
1. Joint venture: in this the participants are the local shareholders who have political
powers to pressurize the government to take a decision in the favor of enterprise
2. Political support: risk can be managed with political support. Sometimes MNCs act
as a medium through which host government fulfills its political needs.
3. Structured operating environment: risk can be reduced by creating a linkage of
dependency between the firm operating in high risk country and other units of the
same firm operating in other countries.
 DEFINITION of 'Multilateral Investment Guarantee Agency -
MIGA'
An organization established in 1988 by the World Bank and based in Washington, D.C.
The goal of Multilateral Investment Guarantee Agency (MIGA) is to promote investment
in developing countries. The organization offers a variety of services in order to
encourage foreign direct investment, including risk insurance against foreign exchange
restrictions, outbreak of conflicts or wars, imposed spending limits and related
restrictions on company assets.

BREAKING DOWN 'Multilateral Investment Guarantee Agency -

MIGA'
In addition to providing political risk insurance to corporations that want to invest in
developing countries, MIGA offers advisory services to developing country
governments. The organization advises on the policies and procedures these
governments should follow and the best ways these countries can attract foreign
investment. Other services by the MIGA include licensing arrangements, franchising
and technology support.

MIGA can help investors and lenders deal with these risks by insuringeligible projects against losses relating to:

 Currency inconvertibility and transfer restriction

 Expropriation
 War, terrorism, and civil disturbance
 Breach of contract
 Non-honoring of financial obligations
MIGA provides political risk insurance (guarantees) for projects in a broad range of sectors in developing member
countries, covering all regions of the world.

MIGA guarantees offer much more than just the assurance that losses will be recovered. Our insurance also benefits
investors and lenders by:

 Deterring harmful actions - MIGA’s status as a member of the World Bank Group and its relationship with
shareholder governments provides additional leverage in protecting investments.
 Resolving disputes - As an honest broker, MIGA intervenes at the first sign of trouble to resolve potential
investment disputes before they reach claim status, helping to maintain investments and keep revenues flowing. If
MIGA is unable to prevent a claim, our strong balance sheet allows us to make prompt payments.
 Accessing funding - Our guarantees can help investors obtain project finance from banks and equity partners.
 Lowering borrowing costs - MIGA-guaranteed loans may help reduce risk-capital ratings of projects.
 Increasing tenors - The agency can provide insurance coverage for up to 15 years (in some cases 20), which may
increase the tenor of loans available to investors.Providing extensive country knowledge - MIGA applies decades of
experience, global reach, and knowledge of developing countries to each transaction.
 Providing environmental and social expertise - MIGA helps investors and lenders ensure that projects comply
with what are considered to be the world’s best social and environmental safeguards.

Stages in the Development of a Multinational Corporation

-
MNC
Typical stages in the growth of a multinational corporation are as follows
1.
The domestic firm begins to export its products abroad through middlemen in
the home country.
2.
As sales of products inc
rease abroad, the firm begins to sell directly to an
importer located abroad. The firm establishes an export department or division
in the home country.
3.
The firm establishes a sales branch abroad to handle sale:, and promotional
work in a given foreign mar
ket. The manager of the sales branch is directly
responsible to the home office.
4.
An overseas sales subsidiary is established. It is incorporated in a foreign
country and hence enjoys, greater autonomy than a sales branch.
5.
The firm starts production in the,
foreign country through contract,
manufacturing or assembly operations.
6.
A manufacturing facility is established abroad. Now the fain has a subsidiary
abroad that, manufactures and sells the product in the foreign
-
market.
7.
The subsidiaries or operating uni
ts abroad are integrated, the parent company
takes strategic, or, policy decisions, for all subsidiaries. The subsidiaries
operation undercapitalized planning and control.
MBA
-
Knowledge Base