International Finance

Nowadays, the issue of increasing countries’ independence and intense globalization requires a clear analysis and research. The most important element of the global economy, which is most experiencing globalization, is a financial sector. It is a global system of financial resources accumulation to the distribution and redistribution between world economic entities on the principles of competition, which also has become global. The financial sectors, which previously were more individual, become more integrated through the introduction of new financial instruments, innovative financial technology, and multinational approach to decision-making on financial management. The purpose of this essay is to determine the nature of international finance and basic trends through the research of its components such as international trade, international financial markets, international industry analysis, and foreign direct investment.

International Trade

International finance is a set of relations with the creation and use of funds required for foreign economic activities of international companies and countries. It appeared thousands of years ago when there were elementary forms of international trade. Thereafter, relations were on barter surplus production between individuals, families, clans, and tribes. Nowadays, international trade is a combination of foreign trade in goods, services, and products of intellectual labor in the entire world.

International trade is a benefit for the economy of each country. A prominent scientist-economist, Smith, has proved that a state can have an absolute advantage over another country (countries) regarding trade (Lang 27). If a country can produce a given amount of output using the smallest amount of inputs, it has an absolute advantage. The theory of absolute advantages was further developed in the writings of Ricardo, a famous British economist. He states that international trade may be beneficial to each of the two nations even when none of them has an absolute advantage in production of certain goods (Lang 28). Indeed, each country has a product which manufacture will be more profitable for the existing cost ratio than the production of other goods. For this commodity, the country has a comparative advantage, and the goods are the subject of trade transactions.

Export and import are important indicators of international trade. Export brings a great income to the state budget. However, the situation may change in 20 years. For example, in 1995, the United States was the world leader in export whereas in 2004, Germany has taken its place with an export volume of nearly 1000 billion dollars (see Figure 1). In 2014, it was a sharp increase in world export; and China became the leader with an export volume of 2,300 billion dollars.

One may note that China has made the great emphasis on international trade, thus filling the state budget. International trade is an important tool for balance between production capacity and consumers benefits that allows obtaining products in shortage and realizes a surplus which is not absorbed by the domestic market.

International Financial Markets

International finance is closely connected with international markets being an environment where they are collected and distributed. International financial market (IFM) is a global system of free mobilizing financial resources and providing them for borrowers from different countries in a competitive market. Nowadays, the IFM has become a large scale and turned into an attractive source of raising funds for the development of national economies. The main purpose of this market is providing access to financial resources and projects.

Daily, people are in contact with the international trade in goods as wearing clothes of Italian manufacturer or listening to American player. Trading financial assets is less visible to ordinal individuals while their turnover is much greater. This trade takes place in the international financial markets. They contribute to economic growth through the creation of money and derivatives, reduce of financial risk, and increase of investment. In general, these markets offer more opportunities to companies, entrepreneurs, and individuals to participate in and contribute to the global economic growth.

To better understand the nature of financial markets, it is important to consider their components and features of operation. The main components are the capital market, commodity market, and derivative market (Thakor). Half of the world market is the capital market (see Figure 2). In turn, the capital market includes stocks, bonds, mutual funds, and exchange-traded funds. Recently, stocks of large corporations make the bulk of this market. Commodity and derivative markets accounted for 25% of the global financial market.

Therefore, international financial markets are characterized by high capital mobility because trade in financial assets is easy and reliable due to low transactions costs in liquid markets. Any economic sphere cannot operate successfully without analysis.

International Industry Analysis

International industry analysis (IIA) is a very useful tool for the development of international finance. It is based on the observation of the profit, which varies between sectors of the economy. The main purpose of the analysis is to determine the attractiveness of a particular industry. The first step is to measure the degree of competition among existing countries. Strong competition can reduce profit potential for the state within a particular industry. The next part of the analysis is to define the availability of substitutes (products or services) which may limit the country's ability to raise prices. The third step is to evaluate the bargaining power of buyers because powerful customers may have a significant impact on prices. In addition, it is important to explore the bargaining power of suppliers because big providers can demand premium prices and limit profit. Finally, the last part of this analysis is to determine entry barriers (threat of new entrants). The latter act as a motivating factor against the new competitors. International industry analysis enables a country to build a strong competitive strategy.

Since this analysis is used to identify the most attractive industries, a special attention should be paid to the 2016 forecasts. It is assumed that the Healthcare technology will be the most profitable sector in 2016 with a profit margin of 21.63% (Liyan). Technology Services will take second place. The least attractive sector will be Distribution Services with a 1.84% net profit margin. Only transportation industry is predicting to have a reduced profit margin in 2016. Thus, to determine attractive and promising sectors, international industry analysis becomes a necessity in the development of international finance.

Foreign Direct Investment

Another component that characterizes international finance is the foreign direct investment (FDI). It is cash or other financial assets that investor from another country invests in an enterprise and has control of the acquired business. Such businesses that make foreign direct investments are often called ‘multinational corporations’ (Grimsley). Such financing is a benefit for the multinational corporation and the foreign country. There are some advantages of foreign direct investment for multinational enterprises. The first gain is the access to the markets. Some countries adopt laws that highly restrict access to their markets. FDI is an effective way to enter into a foreign market. One more advantage is access to resources. With the help of foreign investment, it is possible to buy important natural resources such as precious metals and fossil fuels. For example, oil companies often invest huge amount of money to develop oil fields; however, FDI reduces the cost of production. It is evident that companies frequently invest in countries with cheaper labor and less stringent rules of regulation.

Moreover, FDI has some advantages for foreign countries. Firstly, it is a source of external capital and increased revenue (Grimsley). Developing country, received huge foreign investment can make a breakthrough in the economic development. Another advantage is the creation of new industries. Multinationals do not necessary own the entire foreign property. Sometimes, a local firm can found an alliance with a foreign investor to help develop a new industry. Thus, the country is developing a new industry and fills a market, and the company has access to the market through cooperation with local firm.

In addition, it is important to consider the major world leaders in investment and the amount of profit they received by using FDI. According to statistics from the World Bank, the leader among investor countries is China with the volume of income from investments about 290 billion dollars. The second place belongs to the United States with the volume of return on investment of almost 132 billion dollars. Thus, foreign direct investment has many advantages for the economy of multinational corporations and to the country. Each government has put emphasis on this, developing a strategy for the country.

In conclusion, the development of international finance is impossible without international trade, international markets, industry analysis, and foreign direct investment. Although a country has many natural resources, developed infrastructure, or potential human capital but is not involved in the development of international finance, it will never become a world economic leader. International trade and international investments allow the country to move to the next level of development gaining big profits. International financial markets contribute to implementation of various financial transactions, through which countries can cooperate. Industry analysis helps to find the most attractive sector for the purpose of establishing and investing in new firms, alliances, and cooperation. The aforementioned financial categories are interrelated. Nowadays, international relations, particularly international finances, are playing a crucial role in the global economy.

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