CH 8 International Finance VOCABULARY PORTFOLIO INVESTMENTS investments in a foreign country via the purchase of stocks bonds or other financial instruments They do not exercise managerial control of the foreign operation SOVEREIGN LENDING loans from private financial institutions in one country to sovereign governments in other countries FOREIGN DIRECT INVESTMENT investments in a foreign country via the acquisition of a local facility or the establishment of a new facility Direct investors maintain managerial control of the foreign operation WORLD BANK an important international institution that provides loans at below market interest rates to developing countries typically to enable them to carry out development projects DEPRESSION a severe downturn in the business cycle typically associated with a major decline in economic activity DEFAULT to fail to make payments on a debt INTERNATIONAL MONETARY FUNDS a major international economic institution that was established in 1944 to manage international monetary relations and that has gradually reoriented itself to focus on the international financial system especially debt and currency crisis I 2008 and Greek Financial Crisis Credit crunch in housing market o Relatable to toxic assets loans made to people who shouldn t get a loan out o This led to credit freeze banks no longer able to loan money o Greece announced that their deficit was worse than previously thought They need a bail out and in exchange EU and IMF are making them change their policies Reduce government spending Increase their taxes o All of this caused massive protests II Cross Border Investment Portfolio investor has no role in management o Bonds o Loans o Stocks does Foreign Direct Investment FDI investor acquires real assets facilities in a foreign country o Investor has direct control over assets and what company III Why Invest and Borrow Abroad Investors invest abroad to earn higher rates of return on their capital their goal is to make money o Capital is scarce in a poor country therefore expensive So you move your money form where profits are low to where profits are higher o Higher interest rate o Price of money price of capital Borrowers borrow capital to increase productivity of other factors of production especially labor o Need to pay back money plus interest so you NEED to make o Economic growth development you need to invest in your o Concern with any type of loan is whether the loan will be paid money country back IV Distributional Conflicts Most international investment goes to wealthy countries o Wealthy countries are more stable so initially more likely to repay their loan Borrowers have to repay debt o This might require you to raise taxes reduce government service spending or restrain wages Austerity measures Less generous with government resources Debtor creditor interaction marked by o Credible commitment problem Obsolescing bargain o Information problem Debtor may claim it cant pay to get a better deal Debtor weapon threat of default Creditor weapon cut off debtor from future loans take property freeze V International Monetary Fund The IMF was established at Bretton Woods to manage the international monetary system o They hand out concessional loans a form of aid more than finance given by foreign government Lending emphasizes development project o Deals with short terms o Primary concern is financial crisis in developing nations IMF provides o Bridge loans lenders of last resort o Stabilization agreements Intended to put a country on a stabilized path Usually done by devaluing of currency o Negotiates new terms with lenders On its own loan or other banks 3rd party Ex Greece The power the IMF has over the country and banks in order to create credible commitment is by attaching conditions to their bridge loans and stabilization agreements Biased toward lenders aka rich developed countries o All members have voted according to its financial contribution US 18 EU 32 allowing them to veto issues o Many criticize this Has not prevented financial crisis Non democratic aka not one country one vote but based on financial contribution Voting share adjustments October 2000 o 40 to rich countries 40 to developing 20 to very poor o US has the most votes o G 20 agrees to give over 6 voting share to dynamic developing countries VI Multinational Corporations Foreign Direct Investment FDI o Has control over the actor o Examples of FDIs Greenfield building a new factory in a country Mergers and acquisitions buying an existing company from another county Budweiser owned in Brazil Joint ventures o Nearly 75 of FDI flow among wealthy countries o FDI why and where Market access Better promote product Minimizes factor costs Permissive tax Regulatory environment Might be expensive in a rich country rather than a poorer country Natural resources o Why do countries seek FDI Spill over effects Less risky than loans Creates jobs level The improvement of human capital o Unlike trade FDI is not deeply regulated at the international Out sourcing is often associated with multinational corporations o Works best with Greenfield o Jobs are outsourced to other countries o Is good and bad its another form of trade Bad for those who lose jobs in the US Good for consumers with cheaper products and cheaper labor force Thousands of Bilateral Investment Treaties BITs providing protection for each other s investors VII Factor Flow People Labor If you are capital abundant expect to have laborers knocking on your door The Hecksher Ohlin Theorem tells us about immigration o Countries with abundant unskilled labor will export unskilled labor countries with scarce unskilled labor will import Benefits and Costs of immigration o It benefits employer because it will reduce wages o Its costs harm the unskilled workers of developed countries o The economy as a whole profits from benefits of a larger labor force 04 16 2015 04 16 2015
View Full Document
Unlocking...