FINC3240 International Finance Chapter 2 International Flow of Funds 1 Financial managers of MNCs care about the flows of funds between countries Why International fund flows may cause changes in currency exchange rates 2 Chapter Overview A Balance of Payments B Factors Affecting International Trade Flows C Factors Affecting DFI D Factors Affecting International Portfolio Investment 3 Balance of Payments a measure of international money flow A summary of transactions between domestic and foreign residents for a specific country over a period of time It accounts for transactions by businesses individuals and the government Transactions that reflect fund inflows generate positive numbers credits Transactions that reflect fund outflows generate negative numbers debits 4 Balance of Payments 1 Current Account a Payments for merchandise and services export import balance of trade b Factor income payments interest and dividend payment on financial assets c Transfer payments aid grants gifts a summary of fund flows due to purchases of goods or services or the income on financial assets A large current account deficit indicates sending more cash abroad than receiving money 5 Exhibit 2 2 Summary of U S Current Account in the Year 2006 in billions of 6 2006 Distribution of U S Exports and Imports Insert Exhibit 2 4 from page 28 7 Balance of Payments 2 Capital Accounts includes a Value of financial assets transferred across country borders by people who move to a different country b Value of nonproduced nonfinancial assets that are transferred across country borders such as trades of patents and trademark 8 Balance of Payments 3 Financial Accounts a Direct foreign investment DFI also includes transaction of long term financial assets such as stocks and bonds between countries that affect the transfer of control b Portfolio investment transaction of long term financial assets such as stocks and bonds between countries that do not affect the transfer of control c Other capital investment transaction of short term financial assets such as market securities between countries money 9 Factors Affecting International Trade Flows A Inflation US inflation increase US import US export rise drop B National income higher demand for foreign goods C Government policy subsidizing exporters restrictions on imports D Exchange Rates stronger US dollar US import US export rise drop 10 Factors Affecting Direct Foreign Investment DFI A Restrictions B Privatization C Potential Economic Growth D Tax Rates E Exchange Rates 11 Factors Affecting International Portfolio Investment A Foreign tax Rates on Interest or Dividends B Interest Rates C Exchange Rates 12 Agencies that Facilitate International Flows 1 International Monetary Funds IMF 2 World Bank 3 World Trade Organization WTO 13 Example 1 Assume a simple world in which the United States exports soft drinks and beer to France and imports wine from France If the U S imposes large tariffs on the French wine explain the likely impact on the values of the U S beverage firms U S wine producers the French beverage firms and the French wine producers 14 Example 2 a Assume that US dollar is presently weak and is expected to strengthen over time How will these expectation affect the tendency of US investors to invest in foreign securities How will these expectation affect the tendency of foreign investors to invest in US b Explain whether low interest rates in US can affect the tendency of US based MNCs to invest abroad 15 Homework 2 Homework 2 Q A 2 9 13 a Next in class discussion topic chapter 2 Q A 15 a 16