Bachelor of Commerce

(B.COM)

DSE - 02
INTERNATIONAL BUSINESS

Block-3
International Financial Environment

UNIT 1 Regional Economic Cooperation

UNIT 2 International Financial System & Institution

UNIT 3 Foreign Exchange Market & Risk Management

UNIT 4 Foreign Investment in Indian Perspective

Odisha State Open University, Sambalpur Page 1

 Bachelor of Commerce

(B.COM)
DSE - 02
INTERNATIONAL BUSINESS

Course Writer
Mr. Khirod Chandra Maharana
Academic Consultant (Commerce)
Odisha State Open University

Course Editor
Ms. Basanti Oram
Academic Consultant (Commerce)
Odisha State Open University

MATERIAL PRODUCTION

Prof (Dr.) Manas Ranjan Pujari

Registrar
Odisha State Open University

(cc) OSOU, 2020. International Financial

Environment is made available under a Creative
Commons Attribution Share Alike 4.0 http:
Creative commons.org/ licences/by-sa/4.0

Odisha State Open University, Sambalpur Page 2

UNIT 01 REGIONAL ECONOMIC COOPERATION

Structure
1.0 Learning Objectives
1.1 Introduction
1.2 Need for Regional Economic Cooperation
1.3 Guidelines for promoting regional economic Cooperation
1.4 Important Regional Organisations
1.5 Regional Economic Integration
1.6 Pros and Cons of Regional Economic Cooperation
1.7 Let us Sum Up
1.8 Key Words
1.9 Further Readings
1.10 Model Questions

1.0 LEARNING OBJECTIVES

After studying this unit you will be able to know:

 The meaning and need of regional economic cooperation
 The guidelines for promoting regional economic Cooperation
 Pros and Cons of Regional Economic Cooperation

1.1 INTRODUCTION

Regional economic cooperation is a mean of achieving global economic

integration. It establishes a model for attracting tec hnology and capital. In
today's world, regional economic cooperation is seen as a strategy of
boosting economic development and ensuring economic security within a
given geographical region. Many regional organi zations collaborate with
their member countries to ensure that their geographical region develops
holistically.

When countries join forces to construct free trade zones or customs unions, they
gain preferential trade access to each other's markets. The economic impacts of
such agreements on member countries and the global trading system are examined
in this article. The benefits and costs of trade creation and trade diversion, as well
as profits from expanded scale and competitiveness, all have an impact on member
countries. Beyond the elimination of import duties and quotas, deeper integration
can be pursued by taking additional steps to eliminate market segmentation and

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encourage integration. The impact on the global trading system is not
obvious.There is no evidence that regionalism has slowed multilateral
liberalization, and they aren't convinced that expanding regional agreements will
eliminate the need for global liberalization initiatives.

1.2 NEED FOR REGIONAL ECONOMIC COOPERATION

Regional economic cooperation allows a huge portion of the popu lation to

escape poverty. As a result, it is a means of enhancing economic
development and improving people's living situations.There are numerous
advantages to international economic collaboration. It has the potential to
lead to new transportation, commerce, and investment opportunities.It
enables participating countries to overcome their home market's modest
size and obtain economies of scale. Furthermore, it improves business
competitiveness and leads to the establishment of new supply networks. A
large market enables the emerging countries to boost existing businesses
while also promoting new ones.

1.3 GUIDELINES FOR PROMOTING REGIONAL ECONOMIC

COOPERATION

Every nation attempts to promote regional economic cooperation , but

there are specific guidelines that should be followed.
 First and foremost, cooperation should be supported equity,
equality and also as mutual benefit. These three factors should be
taken under consideration, additionally to social disparity and
differences within the level of development among countries in
specific regions
 Cooperation should be supported by deliberation, consultation, also
as consensus on all economic issues.
 It should involve commitment towards the common goals of all the
participating countries, and there should be equal respect for each
other.
 Cooperation should even be supported by the models of economic
openness, also as interdependence. It should be according to the
principles of the multilateral trading system, which was established
by the erstwhile GATT.
 Cooperation should aim to enrich and be built on current bilateral
and other sorts of arrangements among member countries.

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1.4 IMPORTANT REGIONAL ORGANIZATIONS

Organization Head (As of Headquarters Members

April 2020)

Association Lim Jock Jakarta, Indonesia, Malaysia,

of South-East Hoi Indonesia Philippines,
Nations Singapore, Thailand,
(ASEAN) Brunei, Myanmar,
Lao PDR, Cambodia,
Vietnam

Asia-Pacific Mahathir Queenstown, Australia, Brunei,

Economic Bin Singapore Canada, Chile,
Cooperation Mohamad China, Hong Kong,
(APEC) Indonesia, Japan,
Korea,
Malaysia, Mexico,
New Zealand, Papua
New Guinea, Peru,
Philippines, Russia,
Singapore, Chinese
Taipei, Thailand,
USA, Vietnam

Bay of HE Dhaka, Bangladesh, Bhutan,

Bengal Mohammad Bangladesh India, Myanmar,
Initiative for Shahidul Nepal, Sri Lanka,
Multi- Islam Thailand
Sectoral
Technical and
Economic
Cooperation
(BIMSTEC)

South Asian H E Esala Kathmandu, Afghanistan, Bhutan,

Association Ruwan Nepal Pakistan,
for Regional Weerakoon Bangladesh, India,
Cooperation Nepal, Maldives,
(SAARC) Pakistan, Sri Lanka

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Indian Ocean Dr. Ebene, India, South Africa,
Rim Nomvuyo Mauritius Mozambique,
Association N Nokwe Tanzania, Kenya,
(IORA) Madagascar,
Comoros, Mauritius,
Seychelles, Iran,
Oman, UAE, Yemen,
Sri Lanka,
Bangladesh,
Malaysia, Indonesia,
Singapore, Thailand,
Australia, and
Somalia.

Shanghai Vladimir Beijing, China China, Kazakhstan,

Cooperation Norov Kyrgyzstan, Russia,
Organisation Tajikistan,
Uzbekistan, India,
Pakistan

1.5 REGIONAL ECONOMIC INTEGRATION

There are four main types of regional economic integration.

1. Free trade area. This is the foremost basic sort of economic cooperation.
Member countries remove all barriers to trade between themselves but are
liberal to independently determine trade policies with nonmember nations.
An example is that the North American Trade Agreement (NAFTA).
2. Customs union. This type provides economic cooperation during a free-
trade zone. Trade barriers are removed between member countries. The first
difference from the trade area is that members comply with treating trade
with nonmember countries similarly.
3. Common market. This type allows for the creation of economically
integrated markets between member countries. Trade barriers are removed,
as are any restrictions on the movement of labor and capital between
member countries. Like customs unions, there's a standard national trading
policy for trade with non-member nations. The first advantage to figure is
that they do not need a visa or working papers to work in another member

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 country of a standard market. An example is that the European Union for
Eastern and Southern Africa (COMESA).
4. Economic union. When countries participate in an economic agreement to
abolish trade barriers and embrace common economic policies is called the
European Union (EU).

There has been an upsurge in these trading blocs over the last decade, with over one
hundred agreements in existence and more in the works. A trade bloc is a free-trade
zone (or near-free-trade zone) formed by two or more nations' tax, tariff, and trade
agreements. Some trading blocs have resulted in more comprehensive agreements
in terms of economic cooperation than others. Also There are advantages and
disadvantages to forming regional accords.

1.6 PROS AND CONS OF REGIONAL ECONOMIC COOPERATION

Pros: The pros of creating regional agreements include the following:

 Trade creation. By reducing trade and investment restrictions, these

provide additional chances for countries to trade with one another.
Cooperation results in lower prices for consumers in those nations when
tariffs are reduced or eliminated. According to studies, regional economic
integration plays a key role in the less-developed countries' comparatively
high growth rates.
 Employment opportunities. Economic integration can assist improve job
prospects by reducing barriers tothe labour movement.
 Consensus and cooperation. It may be easier for member countries to
reach an agreement with a smaller number of countries. Closer political
cooperation may also be facilitated by regional understanding.

Cons: The cons involved in creating regional agreements include the following:

 Trade diversion. Trade diversion is the inverse of trade creation. Member

countries are permitted to trade more with one another than with non-
member countries. Because in a member country, this might entail
increasing commerce with a less efficient or more expensive producer.In
this way, the agreement can unwittingly shield weaker enterprises by
functioning as a trade barrier. Regional accords have essentially created new
trade barriers with nations outside of the trading bloc.

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  Employment shifts and reductions. Countries may shift production to
member countries with lower labor costs. Workers may also relocate to
obtain access to better employment and pay. Sudden swings in employment
might put a strain on member countries' resources.
 Loss of national sovereignty. Nations may find that they must give up
more of their political and economic rights with each new round of
discussions and agreements inside a regional bloc.

1.7 LET US SUM UP

Regional economic integration groups are organizations that help countries improve
their economic development by agreeing to provide other member states,
preferential treatment in trade and other areas. Organizations that promote
economic integration may develop uniform standards and practices in a range of
sectors, including environmental regulations. The process by which national
economies become increasingly regionally intertwined is known as regional
cooperation and integration (RCI). Building high-quality cross-border
infrastructure, closer trade integration, intraregional supply chains, and stronger
financial links, as well as motivating the provision of regional public goods, RCI
promotes growth and narrows development gaps between ADB's developing
member countries, allowing slow-moving economies to accelerate their expansion.

1.8 KEYWORDS
 SEZ:A special economic zone (SEZ) is an area in which the business and
trade laws are different from the rest of the country.
 Tariff:A tariff is a form of tax imposed on imported goods or services.
Tariffs are a common element in international trade. The primary reasons
for imposing tariffs include the reduction in the importation of goods.
 GATT:The General Agreement on Tariffs and Trade (GATT) covers
international trade in goods. The workings of the GATT agreement are the
responsibility of the Council for Trade in Goods (Goods Council) which is
made up of representatives from all WTO member countries.
 SAARC: The South Asian Association for Regional Cooperation is the
regional intergovernmental organization and geopolitical union of states in
South Asia. Its member states are Afghanistan, Bangladesh, Bhutan, India,
the Maldives, Nepal, Pakistan, and Sri Lanka.
 Free Trade:Free trade is a trade policy that does not restrict imports or
exports. It can also be understood as the free market idea applied to
international trade.

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  Economic Union:An economic union is an agreement between two or more
nations to allow goods, services, money, and workers to move over borders
freely.

1.9 FURTHER READINGS

 Daniels John, D. Lee H. Rodenbaugh and David P. Sullivan. International
Business. Pearson Education
 Cherunilam, Francis. International Business: Text and Cases. PHI Learning
 Charles W.L. Hill and Arun Kumar Jain, International Business. New Delhi:
McGraw Hill Education
 Johnson, Debra.And Colin Turner. International Business - Themes &
Issues in the Modern
 Global Economy. London: Routledge.
 Michael R. Czinkota et al. International Business. Fortforth: The Dryden
Press.
 Peng and Srivastav, Global Business, Cengage Learning
 Subba Rao P – International Business-Himalaya Publishing House

1.10 MODEL QUESTIONS

Q1: What is the need for regional economic cooperation?
Q2: Describe some important regional organizations.
Q3: What are the guidelines for promoting regional economic cooperation?
Q4: Explain the advantages and disadvantages of Regional Economic Integration.
Q5: Write short notes on the following:
o GATT
o SAARC
o EU
o Free Trade

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UNIT 02: INTERNATIONAL FINANCIAL SYSTEM AND INSTITUTION

Structure

2.0 Learning Objectives

2.1 Introduction
2.2 International Financial Institutions
2.3 World Bank
2.4 International Monetary Fund
2.5 Asian Development Bank
2.6 Let us sum up
2.7 Key Words
2.8 Further Readings
2.9 Model Questions

2.0 LEARNING OBJECTIVES

After studying the unit, you will be able to know:

 The Concept of International Financial System
 Functions of International Monetary Fund
 Various Activities of World Bank Group
 About ADB and its organization

2.1 INTRODUCTION

The full range of interest- and return-bearing assets, bank and nonbank financial
institutions, financial markets that trade and determine the prices of these assets,
and nonmarket activities (e.g., private equity transactions, private equity/hedge
fund joint ventures) make up the international financial system (IFS). International
banks, the Eurocurrency market, the Eurobond market, and the international stock
market are all part of the international financial markets. International banks, which
serve as both commercial and investment banks, play a critical role in international
company finance. The IMF has three primary responsibilities: economic
development, lending, and capacity building. The IMF analyses trends that
influence member economies as well as the global economy as a whole through
economic surveillance. After World War II, the most well-known IFIs were
founded to aid in the reconstruction of Europe and to offer channels for
international collaboration in the management of the global financial system.

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2.2 INTERNATIONAL FINANCIAL INSTITUTIONS

Three main International Financial Institutions participating in the financial system

mainly
 World Bank
 International Monetary Fund IMF and
 Asian Development Bank ADB

2.3 WORLD BANK

The World Bank is an international financial agency that helps low- and middle-
income countries with loans and grants to fund capital projects. The World Bank
Group (WBG) is the largest multilateral supplier of Aid for Commerce, which is
aimed to help poor nations engage in international trade more efficiently. The
WBG's Trade and Competitiveness Global Practice has experts working all around
the world to assist the institution's clients in overcoming challenges.

The main pillars of the World Bank Group’s work in trade are:

 Trade Policy and Integration

 Trade Performance
 Competition Policies
 Trade Facilitation and Logistics

World Bank's work related to trade facilitation and Logistics

 The World Bank Group is a leader in evaluating logistics performance,
including customs and border control, which is a critical component of trade
facilitation.

 The World Bank's experts produce a variety of reports and toolkits for
practitioners looking to improve their countries' logistics and border
management.

The World Bank Group works with developing country authorities and private sector
leaders to promote connectivity and enable commerce to achieve the dual goals of
reducing extreme poverty and enhancing shared prosperity. The World Bank, for
example, spent $5.8 billion on trade facilitation programs in the fiscal year 2013,
including:

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  Customs and border management
 Streamlining documentary requirements
 Trade infrastructure investment
 Port efficiency
 Transport security
 Logistics and transport services
 Regional trade facilitation and trade corridors
 Transit and multimodal transport
Furthermore, the World Bank's trade facilitation experts have created a set of toolkits,
data tools, and publications to aid developing countries in their attempts to improve
trade facilitation. A database that provides a comprehensive cross-country benchmark
for logistics performance, a diagnostic toolkit for trade and transport facilitation, a
book that examines the magnitude and nature of logistics costs borne by landlocked
developing countries, and a series of handbooks that address the issue of streamlining
customs and border clearance procedures through comprehensive border management
reform are among the products available.

Customs and Border Management

Approximately $300 million in customs-related operations and technical aid

initiatives are included in the present trade portfolio. The scope has grown in recent
years to include trade facilitation activities with other border control organizations
involved in the processing and clearance of products. This effort has increasingly
involved the use of information and communication technology (ICT) to enable
enhanced transparency and efficiency, as well as collaborative border management
techniques. The organization is also strongly involved in promoting the
implementation of the new World Trade Organization (WTO) Trade Facilitation
Agreement as well as the adoption of other international standards.

2.4 INTERNATIONAL MONETARY FUND

The International Monetary Fund (IMF) is a 190-country institution dedicated to global

monetary cooperation, financial stability, international trade facilitation, high
employment and long-term economic growth, and poverty reduction. The International
Monetary Fund (IMF) is a non-profit organization that works to promote global
economic growth and financial stability, as well as international trade and poverty
reduction. Member country quotas are a major driver of voting power in IMF
decisions.

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Washington, D.C. is home to the International Monetary Fund (IMF). The IMF
currently has 189 member nations, each of which has a proportional representation on
the executive board based on its financial importance. Quotas are an important factor
in determining voting power in IMF decisions. Basic votes are added to one vote per
SDR 100,000 of quota (same for all members). "To enhance global monetary
cooperation, secure financial stability, ease international commerce, promote high
employment and sustainable economic growth, and eliminate poverty around the
world,".

IMF Activities

 Surveillance

The International Monetary Fund (IMF) collects vast volumes of data on national
economies, international commerce, and the global economy as a whole. The agency
also provides national and worldwide economic forecasts that are updated on a regular
basis. These estimates are supplemented by comprehensive analyses on the impact of
fiscal, monetary, and trade policy on growth prospects and financial stability, which
are published in the World Economic Outlook.

 Capacity Building

Through its capacity-building programs, IMF provides member nations with technical
support, training, and policy advice. These programs involve data gathering and
analysis training that feeds into the IMF's national and global economy monitoring
program.

 Lending

The IMF provides loans to nations in economic hardship to prevent financial

catastrophes. Members donate to a pool based on a quota system for this lending.
Loan resources of SDR 11.4 billion (SDR 0.4 billion more than target) were
acquired in 2019 to support the IMF's concessional lending efforts over the
following decade. Funding from the IMF is frequently contingent on recipients
implementing reforms to boost their development potential and financial stability.
These conditional loans, known as structural adjustment schemes, have been
criticized for worsening poverty and reinforcing colonial processes.

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2.5 ASIAN DEVELOPMENT BANKS (ADBs)

The Asian Development Bank (ADB) is an international development finance

agency whose aim is to assist developing member countries in reducing poverty and
improving people's quality of life. ADB, which has its headquarters in Manila and
was founded in 1966, is owned and financed by its 67 members, 48 of them are
from the area and 19 from other parts of the world. Governments, the commercial
sector, nongovernmental organisations, development agencies, community-based
organisations, and foundations are the ADB's key partners. ADB will follow three
complementing strategic agendas: inclusive growth, ecologically sustainable
growth, and regional integration, as outlined in Strategy 2020, a long-term strategic
framework approved in 2008. ADB's major instruments in pursuing its goal include
loans, technical assistance, grants, advice, and knowledge. Despite the fact that the
majority of its lending is to governments and the public sector, the ADB also
provides direct assistance to private firms in developing nations through equity
investments, guarantees, and loans. Furthermore, its triple-A credit rating aids in
the mobilisation of funding for development.

Organization
ADB is composed of 67 members, 48 of which are from the Asia and Pacific
region. The various authorities in ADB consist of:

Board of Governors
The board of governors has all of the institution's power, assigns some of these
rights to the board of directors. The board of governors used to convene once a year
during a large annual meeting.

Board of Directors
The board of directors is in charge of the bank's general operations; it makes
decisions about the bank's policies, loans, and investments, as well as providing
technical assistance to the bank to check roots borrowing near the bank's financial
accounts for approval by the board of governors. It also approves the bank's
budgets. The board of directors is made up of 12 directors who are chosen by the
board of governors. Eight of the twelve are chosen from inside Asia and the Pacific,
while four others are chosen from outside the region. The board of directors works
full time at the ADB headquarters in Manila, the Philippines shares the board of
directors.

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Audit Committee
The council is answerable for helping the directorate to satisfy its Chartered
commanded liability of guaranteeing that address monetary revealing and inner
controls including Audit. The primary elements of the panel to instruct on the
arrangement regarding autonomous external examiners to survey the yearly review
plan.

Budget Review Committee

Committee review the budget as well as the institutional business plan for which it
is proposed that examine whether the policies and strategies are effectively and
efficiently interpolated in the budget or not. The committee review process usually
involves extensive discussion with the various departments and offices.

Ethics Committee
The board of directors formed it in November 2006 to address issues relating to the
application of the code of conduct for directors alternates and residents who have
been requested by the board of directors as necessary under the food or ethical
committee and procedures.

Human Resources Committee

The Asian Development Bank's human resources management is overseen by the
Human Resources Committee, whose principal function is to reduce monitoring
and provide recommendations to the board of directors on 80 20 human resource
plans and policies.

Administrative Tribunal
ADB board of directors established the Administrative Tribunal in 1991 as an
external mechanism to review personal decisions by the management.

Aims and Objectives of ADB

The Asian Development Bank's basic existence is based on the achievement of a

certain goal. The goal is to help the Asian and Pacific regions prosper economically.
Its primary goal is to promote economic and financial cooperation among member
nations. It allows them to start new ventures without fear of running out of money.

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ADB Funds and Resources

Most of ADB's lending comes from its ordinary capital resources (OCR), offered at
near-market terms to lower- to middle-income countries, and beginning in 2017, at very
low interest rates to lower income countries. ADB also provides loans and grants from
various funds, of which the Asian Development Fund is the largest. The Asian
Development Fund (ADF) offers grants that help reduce poverty in ADB's poorest
borrowing countries. An innovation to combine concessional lending operations with
OCR balance sheet to enhance ADB’s lending capacity took effect on 1 January 2017.
This has increased ADB’s financial capacity to well over $20 billion by 2020.

(Source : https://www.adb.org)

2.6 LET US SUM UP

The international financial system (IFS) includes all interest- and return-bearing
assets, bank and non-bank financial institutions, financial markets that trade and
determine the prices of these assets, and nonmarket activities (e.g., private equity
transactions, private equity/hedge fund joint ventures, leveraged buyouts whether
bank-financed or not, and so on) that allow financial assets to be exchanged. The
International Financial System (IFS) is at the center of the global credit creation
and allocation process. To be sure, the IFS is reliant on the IMS's smooth operation
and wise management, as well as the ready supply of currencies, to support the
payment system. Nonetheless, the IFS encompasses the complete range of financial
assets, including derivatives, credit classes, and the organizations that engage in the
exchange of these assets, as well as their regulatory and governing bodies, going
much beyond IMS's basic payments and currency pricing role. The IFS includes the
IMS but goes far beyond it in terms of function and complexity.

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2.7 KEYWORDS

 Fiscal Policy: In economics and political science, fiscal policy is the use of
government revenue collection and expenditure to influence a country's
economy.
 Globalization: Globalisation is the process by which the world is becoming
increasingly interconnected as a result of massively increased trade and
cultural exchange. Globalization has increased the production of goods and
services.
 Capital Market: A capital market is a financial market in which long-term
debt or equity-backed securities are bought and sold, in contrast to a money
market where short-term debt is bought and sold
 Regional Trade:Regional trading agreements refer to a treaty that is signed
by two or more countries to encourage free movement of goods and services
across the borders of their members
 Logistics:Logistics refers to the overall process of managing how resources
are acquired, stored, and transported to their final destination.
 Capacity Building: Capacitybuilding is defined as the process of
developing and strengthening the skills, instincts, abilities, processes, and
resources that organizations and communities need to survive, adapt, and
thrive in a fast-changing world.

2.8 FURTHER READINGS

 Daniels John, D. Lee H. Rodenbaugh and David P. Sullivan. International
Business. Pearson Education
 Cherunilam, Francis. International Business: Text and Cases. PHI Learning
 Charles W.L. Hill and Arun Kumar Jain, International Business. New Delhi:
McGraw Hill Education
 Johnson, Debra. & Colin Turner. International Business - Themes & Issues
in the Modern
 Global Economy. London: Routledge.
 Michael R. Czinkota. et al. International Business. Fortforth: The Dryden
Press.
 Peng and Srivastav, Global Business, Cengage Learning
 Subba Rao P – International Business-Himalaya Publishing House

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2.9 MODEL QUESTIONS

Q1: Discuss briefly the various channels through which the international financial
system functions.
Q2: Write a brief note on the organizational structure of ADB
Q3: What are the functions and activities of the International Monetary Fund?
Q4: What are the pillars of the World Bank Group?
Q5: Discuss the various functions performed by ADB
Q6: What are the major sources of Funding of ABD?

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UNIT 03: FOREIGN EXCHANGE MARKET AND RISK
MANAGEMENT

Structure
3.0 Learning Objectives
3.1 Introduction
3.2 Major Foreign Exchange Markets
3.3 Participants of Foreign Exchange Markets
3.3.1 Dealers/Brokers/Arbitrageurs and Speculators
3.3.2. Central Banks
3.3.3 Commercial Banks
3.4 Settlement of Transactions & Exchange Quotation
3.5 Factors determining Exchange Rates
3.6 Functions of Foreign Exchange Markets
3.7 Risk in International Business
3.8 Let us Sum up
3.9 Keywords
3.10 Further Readings
3.11 Model Questions

3.0 LEARNING OBJECTIVES

After studying this unit you will be able to know:

 The meaning, functions, and participants of foreign exchange markets
 The factors determining exchange rates
 Different types of risk in Foreign Exchange Market

3.1 INTRODUCTION

The unfamiliar trade market is an over-the-counter (OTC) commercial center that

decides the swapping scale for worldwide monetary forms. It is, by a wide margin,
the biggest monetary market on the planet and is contained a worldwide
organization of monetary focuses that execute 24 hours every day, shutting just on
the ends of the week. Monetary standards are constantly exchanged sets, so the
"esteem" of one of the monetary standards in that pair is comparative with the
worth of the other. The unfamiliar trade market works through monetary
organizations and works on a few levels. In the background, banks go to fewer
monetary firms known as "sellers", who are associated with huge amounts of
unfamiliar trade exchanging. Most unfamiliar trade sellers are banks, so this in the

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background market is once in a while called the "interbank market" (albeit a couple
of insurance agencies and different sorts of monetary firms are involved).
Exchanges between unfamiliar trade vendors can be extremely huge, including a
huge number of dollars. In light of the power issue, while including two monetary
forms, Forex has close to nothing (assuming any) administrative element directing
its activities.

3.2 MAJOR FOREIGN EXCHANGE MARKET

A global internet network where traders and investors purchase and sell currencies
is referred to as the foreign exchange market. It doesn't have a physical place. It is
open 24 hours a day, 5 1/2 days a week. The foreign exchange market is one of the
world's most important financial marketplaces. Their importance in the worldwide
payment system cannot be overstated. Their operations/dealings must be
trustworthy for them to play their function effectively. The term "trustworthy"
refers to the fulfillment of contractual duties. For example, if two parties have
entered into a forward contract of a currency pair (means one is purchasing and the
other is selling), both of them should be willing to honor their side of the contract
as the case may be.

Following are the major foreign exchange markets:

 Spot Markets: A spot market is where financial instruments, such as

commodities, currencies, and securities, are traded for immediate delivery.
The term "delivery" refers to the exchange of cash for a financial
instrument.
 Forward Markets: A forward market is a market where financial products
are priced in advance for delivery in the future. The foreign exchange
market is the most common name for it, but it can also relate to securities,
commodities, and interest rates.
 Future Markets: Future markets can help with a variety of issues that arise
in forwarding markets. In terms of the underlying philosophy, future
markets are comparable to forward markets. Contracts, on the other hand,
are standardized, and trade is centralized (on a stock exchange like NSE,
BSE, and KOSPI). Because exchanges have a clearing firm that acts as the
counterparty to both sides of each transaction and guarantees the trade, there
is no counterparty risk. When compared to forwarding markets, the futures
market is far more liquid because it allows an unlimited number of people to
participate in the same trade (like, buy FEB NIFTY Future).

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  Options Markets: Options are derivatives contracts that allow the buyer the
right, but not the duty, to purchase or sell a specific amount of an underlying
asset at a specific price on or before the contract's expiration date. Options
contracts can be used to reduce the risk for investors when used as a
hedging tool.
 Swaps Markets: Swaps, Futures, and Options are called the derivative
because they derive their value from the underlying exchange rates.

3.3 PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET

 Dealers typically buy currencies when they are cheap and sell them when
they are expensive. Dealers operate on a wholesale basis, with the majority
of their transactions being interbank, however, they may occasionally
interact with corporations or central banks. They have low transaction costs
and tight spreads, owing to their extensive knowledge in exchange risk
management and the fierce competition among banks. Customers seeking to
buy or sell foreign currency for educational, travel, or tourism purposes are
served by retail dealers. These transactions have a broad spread, and they
only account for a small part of total trade.

 Exchange brokers/ Brokers: Brokers are not permitted to take market

positions. Their mission is to identify a buyer and a seller for the same
amount of money in the specified currencies. Their pay is in the form of
commissions. They are continuously in contact with banks and on the
lookout for potential counterparties. Brokers handle a significant share of
foreign exchange transactions. While they specialize in certain currencies,
they are capable of dealing with all major currencies. Brokers exist to help
dealers save money, minimize risk, and maintain anonymity. Brokers charge
a tiny cost of roughly 0.01 percent of the transaction amount in interbank
trade. They demand greater commissions in illiquid currency transactions.
The commission is shared between the parties involved in the transaction.
With the help of brokers, banks can avoid unfavorable situations. Banks can
trade directly or through licensed exchange brokers in India. Accredited
exchange brokers are only allowed to contract exchange business on behalf
of authorized foreign exchange dealers if they agree to follow the rates,
rules, and conditions set forth by the Foreign Exchanges Dealers'
Association of India (FEDAI). All contracts must include a clause stating
that they are subject to the FEDAI's Rules and Regulations.

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  Arbitrageurs profit by spotting price differences that allow them to buy
cheap and sell expensively. Their operations are risk-free; nonetheless, in a
free and open market, the opportunity for currency arbitrage is limited, and
it is largely limited to dealer banks. Speculators, unlike arbitrageurs, are
willing to take risks. When an individual's expectations disagree with the
market's expectations, speculation results in financial transactions.
Speculators invest in foreign exchange primarily to profit from an expected
but uncertain change in the exchange rate. Speculation is defined as an open
position in a foreign currency. When banks or corporations accept a foreign
currency net asset or net liability, they are engaging in speculating.
Speculators are divided into two groups: bulls and bears. A bull believes
that a currency will appreciate in the future. He buys the currency today,
either Spot or Forwards, with the hopes of selling it at a higher price later.
Bulls buy a currency and hold it for a long time. A bear anticipates a
currency to depreciate in the future. He sells Spot or Futures now in the
hopes of repurchasing it at a lower price later. The bears take a short bet on
a specific stock.

 Central Banks participate to control their money supply, interest rate, and
inflation to stabilize the home money market. Central banks intervene in the
market to reduce fluctuations of the domestic currency and to ensure an
exchange rate compatible with the requirements of the national economy. Their
objective is not to make a profit out of these interventions but to influence the
value of the national currency in the interest of the country's economic
wellbeing. For example, if the rupee shows signs of depreciating, the central
bank may release (sell) a certain amount of foreign currency. This increased
supply of foreign currency will halt the depreciation of the rupee. The reverse
operation may be done to stop the rupee from appreciation. Commercial banks
act as go-betweens for currency buyers and sellers. Banks' job is to help their
customers convert one currency into another. They also use these marketplaces
to earn money through speculation and the arbitrage process. Market makers
are big commercial banks. They quote, bid, and ask prices at the same time,
showing their willingness to purchase and sell foreign currencies at quoted
rates. Huge commercial banks' purchases and sales rarely coincide, resulting in
large fluctuations in their foreign currency holdings, exposing them to
exchange risk.

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They operate as speculators when they take the risk on purpose. Banks, on the other
hand, seek to keep their exposure minimal and avoid very significant investments.
Banks connect using a network of telephones, faxes, and other communication tools
provided by Reuters, Telerate, and Bloomberg, among others. Commercial banks
also take part on behalf of companies that trade with companies situated in other
nations.

3.4 SETTLEMENT OF TRANSACTIONS IN EXCHANGE QUOTATION

For sending and settling foreign exchange transactions, foreign exchange markets
make full use of recent advances in telecommunications. Banks transmit messages
and settle transactions at electronic clearinghouses like CHIPS in New York using
the unique SWIFT network.

 SWIFT: SWIFT stands for Society for Worldwide Interbank Financial

Telecommunications. A cooperative society owned by over 250 banks in
Europe and North America and based in Brussels, Belgium. It's a global
communications network for international financial market transactions that
connects more than 25,000 financial institutions worldwide using bank-
identified codes. Messages are sent from one country to the next via
centrally situated interconnected operating centers in Amsterdam and
Virginia. Through regional processors in each nation, the member countries
are linked to the center. The national networks connect the local banks in
each country to the regional processors. The SWIFT System enables the
member banks to transact among themselves quickly
(i) International Payments
(ii) Statements
(iii) Other messages connected with international banking.

The transmission of messages takes only seconds, making this technology both
cost-effective and time-saving. Bank of India, Allahabad Bank, Andhra Bank, Bank
of Baroda, Bank of Maharashtra, Canara Bank, Central Bank of India, Dena Bank,
Indian Bank, HDFC Bank Limited, Export-Import Bank of India, ICICI Bank
Limited, Reserve Bank of India, State Bank of India, Syndicate Bank, UCO Bank,
Yes Bank Limited, and Reserve Bank of India, State Bank of India, State Bank of
India, Syndicate Bank, UCO Bank, Yes Mumbai is home to the regional processing
center.

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  CHIPS: The Clearing House Interbank Payment System (CHIPS) is an
acronym for Clearing House Interbank Payment System. The New York
Clearing House Association is an electronic payment system owned by 12
private commercial banks. A CHIP began operations in 1971 and has since
evolved to become the largest payment system in the world. CHIPS is used
to settle foreign exchange and Eurodollar transactions. It provides a system
for the settlement of multiple dollar transactions between member banks in
New York daily, without the requirement for the actual exchange of
cheques/funds for each transaction.

3.5 FACTORS DETERMINING EXCHANGE RATES

 Balance of Payments: The demand for and supply of foreign exchange,

which determines the currency's value, is represented by the balance of
payments. Exports, both visible and invisible, comprise the foreign
exchange supply side. Imports, both visible and unseen, generate demand
for foreign currency. To put it another way, exporting a country's currency
generates demand for that country's currency in the foreign exchange
market. Imports into the country, on the other hand, will enhance the supply
of the country's currency in the foreign exchange market.

 Inflation: Inflation in the country would raise commodity prices on the

domestic market. Exports may decline as prices rise, as the pricing may no
longer be competitive. The demand for the currency would fall as exports
fell, resulting in a decrease in the currency's external value. It's worth noting
that the unit represents the proportional rate of inflation in the two countries
that create exchange rate fluctuations. If both India and the United States
experience 10% inflation, the exchange rate between the rupee and the
dollar will remain unchanged. If inflation in India is 15% and in the United
States is 10%, the price increase in India will be larger than in the United
States. As a result, the rupee will lose value against the US dollar.

 Interest rate:The short–term flow of capital is heavily influenced by the

interest rate. When a country's interest rate rises, it attracts short-term
capital from other countries. This would enhance demand for the home
country's currency, and thus its value. A country's interest rate may rise in
response to tight money conditions or to attract foreign investment. A rise in
the interest rate has the effect of strengthening the country's currency by
increasing inflows of investment and reducing outflows of investment by
the country's inhabitants.

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3.6 FUNCTIONS OF FOREIGN EXCHANGE MARKETS

The unfamiliar trade market is an institutional course of action for purchasing and
selling unfamiliar monetary forms. Exporters sell unfamiliar monetary forms. The
shippers get them. The unfamiliar trade market is only a piece of the currency
market in the monetary focuses. It is where unfamiliar cash is purchased and sold.
The purchasers and vendors of cases on unfamiliar cash and the mediators together
comprise an unfamiliar trade market.

It isn't limited to some random nation or a topographical region. In this manner, the
unfamiliar trade market is the market for public cash (unfamiliar cash) anyplace on
the planet, as the monetary focuses of the world are joined in a solitary market.

There is a wide assortment of sellers in the unfamiliar trade market. The most
significant among them are the banks. Banks managing in unfamiliar trade have
branches with significant equilibriums in various nations. Through their branches
and journalists, the administrations of such banks, generally called "Trade Banks,"
are accessible everywhere.

The following are the important functions of a foreign exchange market:

 Transfer of Purchasing Power: A foreign exchange market's fundamental

function is to move purchasing power from one country to another and from
one currency to another. Foreign currency markets' international clearing
function plays a critical role in promoting international trade and capital
movement.
 Provision of credit: Foreign exchange markets' credit functions play a
significant part in the growth of international trade, as international trade is
heavily reliant on credit facilities. Pre-shipment and post-shipment
financing may be available to exporters. Importers can also take use of
credit. The Eurodollar market has risen to prominence as a major global
credit market.
 Provision of Hedging Facilities: Hedging facilities are another key
function of the foreign exchange market. Covering foreign trade risks with
hedging is a way for exporters and importers to protect themselves against
losses resulting from currency rate swings.

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3.7 RISK IN INTERNATIONAL BUSINESS

The International Business faces risk due to the following reasons:

 Interactions with and across various political, legal, taxation, and cultural
systems.
 Operations in a broader range of product and factor markets, each with
varying levels of competitiveness and efficiency.
 Trades in a broader range of currencies and uses foreign exchange markets
often.
 International finance markets that are unregulated.

Types of Risk:

The difference between the projected and actual value of a company's assets,
liabilities, operating revenues, operating expenses, and other anomalous income and
expenses is a clue to changes in numerous economic and financial variables such as
exchange rates, interest rates, inflation rates, and so on.

Generally, risks which a firm has been categorized as:

 Foreign exchange rate risk: Foreign currency risk, often known as

exchange rate risk, is the possibility of financial loss as a result of
fluctuating exchange rates. Foreign exchange risk, to put it another way, is
the risk that changes in currency exchange rates will influence a company's
financial performance or financial condition.

 Interest rate risk: Interest rate swings throughout time alter a company's
cash flow requirements for interest payments. At the time of debt
sanctioning, the rate of interest is established and agreed upon by the parties
(lender and borrower). The interest rate could be fixed or linked to another
variable or benchmark. It is referred to as a 'Fixed Interest Rate Debt
Instrument' if it is constant (FXR). If the rate is tied to another variable or
benchmark, such as LIBOR (London Interbank Offer Rate), the debt
instrument is referred to as a Floating Interest Rate Debt Instrument (FIR).

 Credit risk: In a transaction, credit risk is the possibility that the

transaction's counter party may fail to meet its obligations. This risk exists
in all trade and commerce transactions, thus it also applies to foreign trade
and foreign exchange operations.

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  Legal risk: Legal risk is the risk that arises as a result of a contract or
transaction's legal enforceability. Due to pending or newly generated
political and legal concerns between the two trade countries, the contract is
usually unenforceable. Different legal taxes, restrictions, regulations,
exchange and trade controls, financial transaction controls, tariff controls,
and quotas systems are all risk factors or aspects in international trade and
finance flows.

 Liquidity risk: Liquidity risk occurs when market positions are such that
they cannot be liquidated without a significant price reduction. Liquidity
risk refers to the hazards that, whether directly or indirectly, affect the
liquidity and, as a result, the long-term solvency of market participants. Due
to a lack of resources, efficient and swift capital movement surveillance,
and insufficient liquidity to confront developing crises, the international
financial system has been unable to satisfy the growing needs of global
commerce and finance.

 Settlement risk: Because of the time difference in the markets in which

cash flow between two currencies must be paid and received, i.e. settled.
Settlement risk is determined by a variety of factors, including the
borrowing company's ability to meet its debt service obligations on time, as
represented by the risk of its business, financial risk, market risk, labour
issues, dividend restrictions, profit fluctuations, and a variety of other
company-related issues. Unexpected depreciation of a country's currency
can affect a corporation that is a net importer, but it can also help an
exporter.

 Political risk: Political risk arises from a country's political upheavals or

instability. The monetary, fiscal, legal, and other policies of the country
facing the changes are always altered as a result of such variability or
changes. It jeopardizes the functioning of the country's financial and
commercial operations around the world, as well as the foreign enterprise's
operations in the host country. When a country is found to have an unstable
component, such a risk arises, which has a negative impact on the country's
foreign trade and exchange. Because of the political risk, property rights and
wealth protection are in jeopardy.

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3.8 LET US SUM UP

The foreign exchange market, sometimes known as the over-the-counter market, is

a global decentralized or over-the-counter market for currency trading. Every
currency's foreign exchange rate is determined by this market. It encompasses all
aspects of purchasing, selling, and exchanging currencies at current or fixed prices.
Spot Markets are a type of foreign exchange market. Markets in the future. Futures
and options markets are two types of markets. Markets for swaps. Foreign exchange
and political risks are two of the most significant international risks for
corporations. Foreign exchange risk refers to the risk of currency value fluctuations,
which are mainly caused by the home currency appreciating against a foreign
currency.

3.9 KEYWORDS

 Foreign Exchange: Foreign exchange, or forex, is the conversion of one

country's currency into another. In a free economy, a country's currency is
valued according to the laws of supply and demand.
 Transfer Pricing: Transfer pricing is an accounting practice that represents
the price that one division in a company charges another division for goods
and services provided. Transfer pricing can lead to tax savings for
corporations, though tax authorities may contest their claims
 Option Market: Options are a type of derivative product that allows
investors to speculate on or hedge against the volatility of an underlying
stock
 SWIFT: Swift payments are payments done through the network. Swift
assigns each bank an eight- or 11-character long code, known as the bank
identifier. It is similar to the IFSC code used for domestic interbank
transfers, with Swift being used for international transfers.
 Exchange Rate Quotation: In financial terms, the exchange rate is the
price at which one currency will be exchanged against another currency.
The exchange rate can be quoted directly or indirectly. The quote is direct
when the price of one unit of foreign currency is expressed in terms of the
domestic currency.
 Balance of Payment: The balance of payments (BOP) is an accounting of a
country's international transactions for a particular period. Any transaction
that causes money to flow into a country is a credit to its BOP account, and
any transaction that causes money to flow out is a debit.

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  Credit Risk: Credit risk is the possibility of a loss resulting from a
borrower's failure to repay a loan or meet contractual obligations.
Traditionally, it refers to the risk that a lender may not receive the owed
principal and interest, which results in an interruption of cash flows and
increased costs for collection.

3.10 FURTHER READINGS

 Daniels John, D. Lee H. Rodenbaugh and David P. Sullivan. International
Business. Pearson Education
 Cherunilam, Francis. International Business: Text and Cases. PHI Learning
 Charles W.L. Hill and Arun Kumar Jain, International Business. New Delhi:
McGraw Hill Education
 Johnson, Debra. and Colin Turner. International Business - Themes &
Issues in the Modern
 Global Economy. London: Routledge.
 Michael R. Czinkota. et al. International Business. Fortforth: The Dryden
Press.
 Peng and Srivastav, Global Business, Cengage Learning
 Subba Rao P – International Business-Himalaya Publishing House

3.11 MODEL QUESTIONS

Q1: Describe the functions of a foreign exchange market?

Q2: Who are the participants of a foreign exchange market?
Q3: What are the factors that determine the exchange rate?
Q4: What are the different types of risk in International Business?
Q5: Write short notes in the following:
 Swap Market
 Commercial Banks
 SWIFT
 Credit Risk

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UNIT 04: FOREIGN INVESTMENT IN INDIAN PERSPECTIVE

Structure
4.0 Learning Objectives
4.1 Introduction
4.2 Types of Foreign Investment
4.3 Foreign Direct Investment
4.3.1 Evolution of FDI Policy
4.3.2 Determinant of FDI Inflows
4.3.3 Evolution of FDI
4.4 Foreign Portfolio
4.5 FDI vs FPI
4.6 Foreign Institutional Investment
4.7 Foreign Investment in Indian Perspective
4.8 Suggestions for the Increasing flow of FDI into the country
4.9 Government Initiatives
4.10 Let us Sum up
4.11 Key Words
4.12 Further Readings
4.13 Model Questions

4.0 LEARNING OBJECTIVES

After studying this unit, you will be able to know:

 Meaning and Types of Foreign Investments
 Difference between FDI & FPI
 The reason for low FDI investment in India and
 The ways to increase FDI flow to India

4.1 INTRODUCTION

A foreign investor's investment in domestic enterprises and assets of another

country is referred to as foreign investment. Large multinational firms will create
branches and extend their investments in other nations to explore new prospects for
economic growth. Understanding the notion of foreign investments, examining
reasons for low FDI investment in India, and suggesting measures to improve FDI
flow to India are the learning objectives.

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Foreign capital plays an important part in the country's economic development. It is
a source of income from modernization as well as a source of employment in the
economy. Foreign firms are setting up joint ventures and wholly-owned enterprises
in services such as computer software, telecommunications, financial services, and
tourism as a result of India's recent liberalisation of its investment regulations,
making it one of the fastest-growing destinations for global investment inflows. The
current chapter looks at the latest trends and patterns in India's foreign capital
flows. Foreign capital refers to the capital flows from resident entity of one country
to the resident entity of another country president entity may be an individual
corporate for a government.

4.2 TYPES OF FOREIGN INVESTMENTS

Any investment done in India with funds coming from outside the country is
referred to as foreign investment. Foreign Investment would include investments
made by foreign corporations, foreign nationals, and non-resident Indians,
according to this definition.
Types of Foreign Investments
Funds from a foreign country could be invested in shares, properties,
ownership/management or collaboration. Based on this, Foreign Investments are
classified as below.

 Foreign Direct Investment (FDI)

 Foreign Portfolio Investment (FPI)
 Foreign Institutional Investment (FII)

Details on each of the foreign investment types can be found below:

 Foreign Direct Investment (FDI)

FDI is an investment in the form of controlling ownership in commercial interests
in another country made by a corporation or individual based in one country. FDI
could take the form of establishing company activities, joint ventures, mergers, and
acquisitions, or the construction of new facilities, among other things.

 Foreign Portfolio Investment (FPI)

Foreign portfolio investment (FPI) is the purchase of Indian securities by foreign
entities and non-residents, such as shares, government bonds, corporate bonds,

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convertible securities, infrastructure securities, and so on. The goal is to secure a
controlling interest in India at a lower cost than FDI and with more flexibility in
terms of entry and exit.

 Foreign Institutional Investment (FII)

Foreign portfolio investment (FPI) is the purchase of securities, real estate, and
other financial assets by foreign entities. Mutual fund companies, hedge fund
businesses, and other financial institutions are among the investors. The goal isn't to
take a controlling stake in the company but to diversify the portfolio, ensure
hedging, and generate high profits with speedy entrance and exit.

The differences in FPI and FII are mostly in the type of investors and hence the
terms FPI and FII are used interchangeably.

4.3 FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) refers to physical investments made in the home
country by foreign investors. Direct investments in buildings, machinery, and
equipment are referred to as physical investments. The Reserve Bank of India
(RBI) describes FDI as a process in which a resident of one country (i.e. home
country) buys ownership of a firm in another country to manage its production,
distribution, and other operations (i.e. the host country).

In India there are three important elements of FDI:

(a) Equity investments by foreign investors;
(b) Reinvested earnings i.e. retained earnings of FDI companies;
(c) Debt Investment (particularly the inter-corporate debt between related
entities).

4.3.1 Evolution of FDI Policy

1950-1960s: India began an import-substituting industrialisation plan soon after

independence, with a concentration on heavy industries. Given the lack of
technology, skills, and entrepreneurial experience in India, the country's stance
toward FDI has become more welcoming. FDI was sought on mutually beneficial
terms, with a preference for 75% local ownership.

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1960-1970s: As local capacity strengthened through import substitution and the
outflow of dividends, profits, royalties, technical fees, and other fees increased
dramatically in the late 1960s, the government adopted a more restricted approach
to FDI. Proposals that did not include technology transfer or those who sought more
than 40% foreign ownership were restricted. Foreign businesses' continued
activities (together with those of domestic large industrial houses) were restricted to
a narrow range of core or high-priority industries beginning in 1973. The FERA
[Foreign Exchange Regulation Act of 1973] requires all foreign firms operating in
India with up to 40% foreign stock to register under Indian corporate law. Only
enterprises functioning in high-priority or high-technology industries, tea
plantations, or those producing primarily for export were exempt from the overall
40 percent limit.

The 1980s: In the 1980s, attitudes regarding FDI began to shift as part of a
modernization strategy that included liberalized capital goods and technology
imports, exposing Indian industry to competition, and giving MNEs a larger role in
the promotion of manufactured exports. Liberalization of industrial licensing
(permission) standards, a slew of incentives and exemptions from foreign equity
limitations, under FERA to 100 percent export-oriented units, and some freedom in
foreign ownership were among the policy measures introduced in the 1980s.

The 1990s Onwards: The announcement of the New Industrial Policy (NIP) on
July 24, 1991, marked a major shift in FDI policy, with the general abolition of
licensing and automatic clearance for some types of FDI that met the conditions, as
well as the opening up of some new sectors, such as mining, telecommunications,
railways, airlines, ports, and others, subject to sectoral caps. Foreign ownership was
allowed in most industries, in some cases automatically, while some, such as
defence equipment and products allocated for small-scale manufacturing, were
restricted to 26% and 24% respectively.

Since then, considerable steps have been taken to lift more FDI prohibitions. Civil
aviation, for example, has been liberalised, FDI has been allowed to a limited level
in multi-brand retail, and sectoral ceilings have been raised upward, in certain cases
to 100% in sectors like telecom. The government issued guidelines for foreign
institutional investors (FII) investing in 1992. FIIs were permitted to invest in a
wide range of securities with complete repatriation rights. In June 2013, FII
investments were reclassified as FPIs, requiring them to hold less than 10% of a
company's shares. Any holding of more than 10% qualifies as FDI. Since 1991, the
policy on outside investment has also been liberalised.

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With the surge in foreign exchange, outward investment limits have been gradually
lowered, and Indian businesses can now invest up to 100 percent of their net worth
abroad on an automatic basis. With 82 nations, India has signed 88 Double
Taxation Avoidance Treaties (DTAAs) and Bilateral Investment Promotion and
Protection Agreements (BIPAs).

4.3.2 Determinant of FDI Inflows:

1. Market size: Because FDI is frequently intended to sell fruits directly to

countries around the world to attract investment, the population size is vital
for economic growth and equity investments. Some countries may be at a
disadvantage because it is not worth investing in a tiny population.
2. Level up openness:The share of exports and imports in today's GDP is a
common indicator of a country's openness. The more this host country
opens its economy to outside external trade, the more Remo and emerging
market prices rise.
3. Availability of raw materials and a trip to the visitation instruments:
According to Metro Track, more investors are flocking to African countries
for X policy because the country's order to draw metals helps investors
lower production costs. This is one of the reasons why investors have lately
flocked to African countries for X policy.
4. Tax Policy:Fiscal policies determine the general with policy and general
text available, including business and personal tax rates and their influence
in the word, assuming all other factors are equal. With increased tax rates,
Vellore should have a better chance of obtaining a project in the country.
5. Government regulations and policies on investment: Foreign direct
investment in a country is determined by policies that are available to both
local and foreign investors. A country that replaces policies that favor local
investors over foreign investors can discourage foreign direct investment in
that market. Tech solutions can also encourage or discourage foreign
investors.
6. Foreign exchange rate: It is the rate at which one currency can be
converted into another or the local country's relative strength in relation to
the foreign country. The high quality of the exchange rate of the host
country's currency discourages foreign investment because it raises
uncertainty about the host country's future economic and business prospects.
7. Inflation: Low inflation rates are thought to be a sign of internal economic
stability in the host country, while high inflation rates indicate the
government's ability to balance a bad budget and the central bank's failure to
conduct recruitment policy. Changes in inflation rates, whether domestic or

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 foreign, are expected to alter the net returns of the man's optimal investment
decisions, and thus have a negative impact on FDI.

4.4 FOREIGN PORTFOLIO INVESTMENT

FPI alludes to the transient speculations by an unfamiliar element in the monetary

business sectors. These are aberrant speculations and remember venture for tradable
protections, like offers, bonds, debenture of the organizations. Unfamiliar Portfolio
financial backers don't apply the executive's control on the venture in which they
contribute. There are three sorts of FPI in India:

a) Foreign Institutional Investment: These are the ventures made by unfamiliar

foundations like benefits reserves, unfamiliar shared assets, and so forth in the
monetary business sectors.

b) Funds raised through Global Depository Receipts or American Depository

Receipts (GDRs/ADRs): GDRs and ADRs are instruments that imply the
acquisition of a portion of Indian organizations by unfamiliar financial backers or
American financial backers separately.
c) Off-shore reserves: The plans of shared assets that are dispatched in a far-off
country.

FPI Inflow & Its Impact:

As the Indian economy gained traction and capital markets began to offer attractive
returns, large amounts of portfolio investments in the form of short-term equity
investments by FII flooded into India. The annual net inflows fluctuate a lot. All
other foreign resources, such as foreign borrowings, NRI deposits, ADRs, and
GDRs, have a far lower servicing load than FII inflows. While it is widely assumed
that FII helps a country grow its foreign exchange reserves. Due to their highly
volatile character, exposure to these foreign inflows also increases the demand for
greater foreign exchange reserves.

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4.5 FDI VS FPI

 FDI speeds up the development interaction chiefly because of predominant

innovation moves and more prominent rivalry that for the most part go with
FDI. FDI additionally further develops the commodity intensity of the
country. Along these lines, FDI has positive overflow impacts on the
economy. FPI empowers the nation to utilize immense pooled unfamiliar
assets and straightforwardly doesn't include any sort of prevalent innovation
or administrative exchanges. In this way, FPI has a restricted overflow
impact than FDIs.
 FDI ponders earnestness and responsibility part of unfamiliar financial
backers since FDI causes high starting set up cost and higher leave costs as
far as trouble in selling a stake in the firm. In this manner, unfamiliar direct
financial backers stay put for the long haul in the nation thus helping to
further develop the development possibilities of the country. FPI is directed
by momentary gains and includes issues to leave the country. FPI will in
general be more unpredictable than direct ventures. The abrupt FPI surges at
the hour of homegrown emergency might disturb the improvement
interaction of the country.
 Portfolio financial backers because of their momentary viewpoint might
enjoy speculative exercises in the homegrown monetary market and may
create issues for the homegrown financial backers.
 FDIs are straightforwardly overseen by unfamiliar proprietors FPI then
again is overseen by "outside chiefs". So FDI brings about better
resourcesfor the executives.
 The expanded FDI streams give a positive sign with regards to the drawn-
out possibilities of the homegrown economy and the more prominent
respectability of the country. An extremely significant measure of FPI of
momentary nature portrays hazards in the homegrown economy.

4.6 FOREIGN INSTITUTIONAL INVESTMENT

An institutional, person, or group entity intending to participate in the economy of a

country other than its own is known as a foreign institutional investor. Emerging
economies benefit from FIIs since they provide finances and capital to enterprises
in developing countries. Hedge funds, mutual funds, insurance firms, and
investment banks are some of the most common investors. FIIs typically invest in
overseas financial markets and have stakes. As a result of the healthy inflow of

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cash, the companies invested in by FIIs often have enhanced capital structures. As a
result, FIIs aid financial innovation and capital market expansion.

The introduction of a foreign institutional investor (FII) can trigger a significant

shift in domestic financial markets. It boosts demand for local currency and steers
inflation in the right direction. As a result, the managing authority of a country sets
limits on how much of a domestic company's stock FIIs can own. To avoid
exploitation, this assures that the FII's impact on the corporation is limited.

4.7 FOREIGN INVESTMENT IN INDIAN PERSPECTIVE

Foreign Direct Investment (FDI) has been a major non-debt financial resource for
India's economic development, in addition to being a critical engine of economic
growth. Foreign companies invest in India to take advantage of lower salaries and
unique investment benefits such as tax breaks, among other things. It also implies
gaining technological know-how and creating jobs in a country where foreign
investment is made. Foreign capital continues to come into India, thanks to the
Indian government's favorable policy regime and thriving economic environment.
In recent years, the government has made a number of steps, including loosening
FDI restrictions in areas like defence, PSU oil refineries, telecommunications,
electricity exchanges, and stock exchanges, among others.

Market size

As per the Department for Promotion of Industry and Internal Trade (DPIIT), FDI
value inflow in India remained at US$ 529.63 billion between April 2000 and
March 2021, demonstrating that the public authority's endeavors to further develop
simplicity of working together and loosening up FDI standards have yielded results.

FDI value inflow in India remained at US$ 59.64 billion between April 2020 and
March 2021. Information for 2020-21 shows that the program and equipment area
pulled in the most noteworthy FDI value inflow of US$ 26.15 billion, trailed by
development (foundation) exercises (US$ 7.88 billion), administrations area (US$
5.06 billion), and exchanging (US$ 2.61 billion).

Between April 2020 and March 2021), India got the most elevated FDI value
inflow from Singapore (US$ 17.42 billion), trailed by the US (US$ 13.82 billion),
Mauritius (US$ 5.64 billion), the UAE (US$ 4.20 billion), Cayman Islands (US$
2.80 billion), the Netherlands (US$ 2.79 billion) and the UK (US$ 2.04 billion).

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In a similar period, Gujarat got the most elevated FDI value inflow of US$ 21.89
billion, trailed by Maharashtra (US$ 16.17 billion), Karnataka (US$ 7.67 billion),
and Delhi (US$ 5.47 billion).

Investments/ Developments

Some of the significant FDI announcements made recently are as follows:

 In FY21, total FDI inflow amounted to US$ 81.72 billion, a 10% YoY
increase.
 In April 2021, FDI inflow stood at US$ 6.24 billion, registering an increase
of 38% YoY.
 In June 2021, Urban Company, a home services marketplace, announced
that it has raised ~Rs. 1,857 crore (US$ 255 million) in a fundraiser round
led by Wellington Management, Proses Ventures, and Dragoneer.
 In April 2021, Amazon India launched the US$ 250 million ‘Amazon
Smbhav Venture Fund’ for Indian start-ups and entrepreneurs to boost
technology innovations in the areas of digitisation, agriculture, and
healthcare.
 In November 2020, Rs. 2,480 crore (US$ 337.53 million) foreign direct
investment (FDI) in ATC Telecom Infra Pvt Ltd. was approved by the
Union Cabinet.
 In November 2020, Amazon Web Services (AWS) announced to invest US$
2.77 billion (Rs. 20,761 crores) in Telangana to set up multiple data centers;
this is the largest FDI in the history of the state.
 Since April 2020, the government has received over 120 foreign direct
investment (FDI) proposals worth ~Rs. 12,000 crore (US$ 1.63 billion)
from China. Between April 2000 and September 2020, India received US$
2.43 billion in FDI from China.
 According to the Reserve Bank of India (RBI), India’s outward foreign
direct investments (OFDI) in equity, loan, and guaranteed issues stood at
US$ 3.77 billion in May 2021 vs. US$ 3.43 billion in April 2021.
 In May 2021, Ernst & Young (EY) ranked India as the most attractive solar
market for PV investments and deployments.

Government Initiatives

In June 2021, the Finance Ministers of G-7 nations including the US, the UK,
Japan, Italy, Germany, France, and Canada achieved a noteworthy agreement on

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burdening worldwide firms; under this, the base worldwide duty rate would be
essentially 15%. The move is relied upon to additional lift unfamiliar direct
interests in the country.

In May 2021, the Finance Ministry advised the last principles for the unfamiliar
speculation limit (74%) in the protection area. This is relied upon to help 23 private
life backup plans, 21 private non-life guarantors, and seven particular private
medical coverage firms.

In December 2020, the public authority of Uttar Pradesh consented to furnish

Samsung Display Noida Private Limited with exceptional motivating forces to set
up a versatile and IT show item-producing unit. Under the Central Government's
plan for the advancement of assembling electronic parts and semiconductors
(SPECS), Samsung will likewise get a monetary motivating force of Rs. 460 crore
(US$ 62.61 million). This venture will foster a worldwide product center in Uttar
Pradesh and will assist the state withdrawing in unfamiliar direct speculations
(FDI).

In December 2020, changes in the rules for the arrangement of Direct-to-Home

(DTH) administrations have been endorsed by the Union Cabinet, empowering
100% FDI in the DTH broadcasting administrations market.

Road ahead

India is relied upon to draw in unfamiliar direct ventures (FDI) of US$ 120-160
billion every year by 2025, as per CII and EY report. In recent years, the nation saw
a 6.8% ascent in GDP with FDI expanding to GDP at 1.8%. The Economic Times
announced. India ranked 43rd on the Institute for Management Development
(IMD's) yearly World Competitiveness Index 2021. As per the IMD, India's
advancements in government productivity are fundamental because of moderately
stable public accounts (despite COVID-19-actuated difficulties) and hopeful
opinions among Indian business partners concerning the financing and endowments
presented by the public authority to private firms.

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How much FDI did India receive in FY21?

As per the Indian government, FDI value inflow added to US$59.64 billion out of
the absolute US$81.72 billion that India got in FY21. This internal FDI value
showed a 19 percent development over the past financial, which remained at
US$49.98 billion. A significant extent (US$51.47 billion) of this inflow was gotten
during the initial nine months of FY21 that is from April to December 2020, with
the most noteworthy flood recorded in August 2020.

According to UNCTAD's June report, India got US$64 billion out of 2020, up from
US$51 billion of every 2019, driven by acquisitions in the data and correspondence
innovation (ICT) industry. This is reasonable as the pandemic encouraged
extraordinary interest for computerized frameworks and administrations, bringing
about designated Greenfield project ventures across the world. In India, this
incorporated a US$2.8 billion speculation by Amazon into the country's ICT
industry.

Who were the top investor countries in India in FY21?

Singapore was India's leading foreign investor in FY21, accounting for US$15.71
billion in FDI equity from April to December 2020. In total, Singapore was
responsible for 29% of India's FDI inflow. The United States was the second-
largest investor in India, accounting for 23% of total FDI. When compared to the
previous financial year, the amount of inbound FDI equity from the United States
increased by 227 percent.

Mauritius turned into India's third-biggest financial backer in FY21, with a nine
percent share. A glance at total FDI inflow figures from April 2000 to December
2020, notwithstanding, shows that Mauritius has been the biggest donor of FDI
value inflow into India throughout the previous twenty years. Other driving
financial backer nations in FY21 incorporated the UAE, Cayman Islands,
Netherlands, Japan, UK, and Germany.

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Saudi Arabia became the top investor in terms of % growth in FDI received in
FY21 over the previous year, with an investment of US$2,816.08 million in FY21
compared to US$89.93 million in FY20. In comparison to the previous fiscal year,
the UK raised its share of FDI equity in India by 44%.

Which were the top FDI recipient sectors in India in FY21?

In FY21, computer software and hardware were the leading sectors drawing the
most FDI equity input, accounting for 44% of total FDI inflow. FDI equity inflows
into this sector totaled US$24.4 billion from April to December 2020, a four-fold
increase from FY 2018-19, when the sum was roughly US$6.4 billion. FDI into this
sector was $7.7 billion in FY20.

4.8 SUGGESTIONS FOR INCREASED FLOW OF FDI INTO THE

COUNTRY

 Flexible labour laws: China receives the most foreign direct investment in
the manufacturing sector, which has helped the country become the
manufacturing capital of the world. India's manufacturing sector can thrive
if infrastructure facilities are improved, and the country should take the
initiative to adopt more flexible labour laws.
 Relook at sectoral caps: Even though the government has increased FDI
sectoral caps over time, it is time to revisit issues such as limits in search
sectors such as coal mining, insurance, real estate, and retail trade, in
addition to the small-scale sector, the government should allow more
investment into the country under automatic route reforms such as drinking
more sectors under the automatic route. There is a need to improve as a z in
terms of their size road and forth connectedness acid power to supply and
decentralised decision-making by increasing the FDI ceiling and reducing
the process delays as to be begun.
 Geographical disparities of FDI should be removed. Many states are
enacting substantial afforestation paper requirements for the establishment
and operation of industrial units, but many state governments are still not
promoting events like West Bengal, which was formerly known as the
"Manchester of India," and attracts only 1% of FDI to the country. Bihar,
Jharkhand, and Chhattisgarh, and out with which material, but due to a lack
of four initiatives by the governments of these states, these states were
defeated.
 Promote Greenfield projects: India's volume of Italy has increased due to
merger and acquisition rather than large simple projects, and this does not

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 necessarily imply a fusion of New Capital into a country if it is invested
early and intra company logos business-friendly environment must be
created on Friday to attract the last princess project decoration should be
simplified so that the realisation ratio is improved.
 Developed Markets: Because many firms prefer leverage investing to
investing their gas, it is stated that nations with well-developed financial
markets stand to benefit considerably from FDI inflows. India has a well-
developed equities market but lacks well-developed markets.
 The education sector should be open to FDI: India has a true love
working population, however, thanks to beautiful quality elementary
education and higher education theories steel and fruits, India has a true
love working population. By granting the status of primary and higher
education in the country, FDI in this sector must be encouraged, but suitable
steps must be taken to assure quality education. Issues of commercialisation
of education, regional gain, and structural gain must be addressed as a
priority.
 Strength and research and development in the country:As a method of
improving our country's technology of cowardice and competitiveness,
India must intentionally aim to recruit more FBI into our IND.
 Skilled Manpower: There is a desperate need for skilled manpower;
however, increasing their talent pool has nothing to do with increasing the
number of students graduating from college; there are already plenty of
them. It is estimated that only 30% of college graduates are employable;
therefore, what needs to be done to make the remaining 70% employable.
 Fiscal and financial incentives: Nations expanding the opposition with one
another to draw in FDI by offering a few motivating forces and other
concessionary measures division of physical and expense impetuses nations
could offer monetary motivators like direct capital auxiliaries sponsorships
financed credit or committed framework many are Asian organizations
having especially forceful utilizing differential assessment treatment and
other understood and express is unequivocal endowments to draw in FDI is
it is beating of found some normal duty motivating force proposed to FDR
decrease corporate Income Tax Act occasions speculation remittances and
text as sped up deterioration exceptions from chose direct roundabout
charges send out handling zones sped up devaluation is the most proficient
motivating force to draw in FDI.

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4.9 GOVERNMENT INITIATIVES

The Indian government has changed its FDI policy in order to encourage FDI
influx. In 2014, the government raised the foreign investment ceiling in the
insurance sector from 26% to 49%. In September 2014, it also introduced the Make
in India project, under which the FDI policy for 25 sectors was further liberalised.
Since the beginning of the "Make in India" initiative in April 2015, FDI inflow into
India has surged by 48 percent. The government boosted FDI in defence
manufacturing from 49 percent to 74 percent under the automatic method in May
2020. The government revised its current consolidated FDI policy in April 2020 to
prohibit opportunistic takeovers or acquisitions of Indian enterprises by foreign
companies. Non-Resident Indians (NRIs) were allowed to buy up to 100 percent of
Air India's stock in March 2020. In terms of FDI inflows, India was ranked 15th in
the world in 2013, rose to 9th in 2014, and became the top destination for foreign
direct investment in 2015. The India Investment Grid (IIG) was developed by the
Department of Promotion of Industry and Internal Trade and Invest India to provide
a pan-India database of projects from Indian promoters for promoting and enabling
foreign investments.

4.10 LET US SUM UP

Foreign direct investment (FDI) is an important source of funds for India's

economic development. To take advantage of India's evolving economic
environment and lower salaries, foreign corporations engage directly in fast-
growing private sector businesses. Other crucial elements include transparency in
policy and enforcement of intellectual property rights, as well as the extent of
corruption, contract enforcement, and the tax system. In addition, cost
competitiveness, the availability of trained labour, and the business climate all
contribute to attracting FDI. As investors establish new businesses in foreign
countries, FDI creates new jobs and possibilities. This can result in residents
earning more money and having more purchasing power, resulting in an overall rise
in the targeted economies. By encouraging international organisations to enter the
domestic market, FDI helps to create a dynamic environment and break down
domestic monopolies. A stable business climate helps enterprises to develop their
products and processes on a regular basis, which fosters creativity.

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4.11 KEYWORDS
 FDI Policy: A foreign direct investment is an investment in the form of a
controlling ownership in a business in one country by an entity based in
another country.
 Urbanization: Urbanisation is an increase in the number of people living in
towns and cities.
 FDI Inflow: FDI net inflows are the value of inward direct investment
made by non-resident investors in the reporting economy, including
reinvested earnings and intra-company loans, net of repatriation of capital,
and repayment of loans.
 NRI Deposits: An NRI fixed deposit is a type of FD account, which allows
Indians living abroad to invest through their Non-resident Ordinary (NRO)
accounts. This investment option enables NRIs to invest in Indian rupees
and enjoy high-interest rates applicable on fixed deposits in India, as
compared to other major economies.
 CII: CII engages business, political, academic, and other leaders of society
to shape global, regional, and industry agendas. It is a membership-based
organisation.

4.12 FURTHER READINGS

 Daniels John, D. Lee H. Rodenbaugh and David P. Sullivan. International
Business. Pearson Education
 Cherunilam, Francis. International Business: Text and Cases. PHI Learning
 Charles W.L. Hill and Arun Kumar Jain, International Business. New Delhi:
McGraw Hill Education
 Johnson, Debra. & Colin Turner. International Business - Themes & Issues
in the Modern
 Global Economy. London: Routledge.
 Michael R. Czinkota. et al. International Business. Fortforth: The Dryden
Press.
 Peng and Srivastav, Global Business, Cengage Learning
 Subba Rao P – International Business-Himalaya Publishing House

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4.13 MODEL QUESTIONS

Q1: Discuss the various factors affecting the flow of foreign direct investment in a
country.
Q2: Why does India lag behind China in attracting FDI in the manufacturing
sector?
Q3: Suggest suitable measures to improve FDI inflows to India.
Q4: Discuss the growth of FDI policy in India since Independence

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