Chapter Eight: Int'l Finance Flashcards
Cross Border Investment
Investing in companies or projects located in a different country than where the investor is based. Financial ties can make societies mutually vulnerable.
Portfolio Investment
Type of cross border investment
A group of investments that an investor uses to earn a profit while making sure that capital/assets are preserved ( bonds, loans, stocks)
Direct investment (FDI)
Long-term investment in a foreign business that gives the investor a significant level of influence over the company’s management
Border conflicts in investment
- terms of the investment
- loans
- obsolescing bargain
Borrowing country conflicts in investment
- foreign capital may be fickle
- foreign capital inflows may benefit some more than others
- moral hazard: political actor has incentives to behave irresponsibly
Debtor-creditor interactions
- commitment problem
- incomplete information
- default and retaliation
International Monetary Fund (IMF)
Established at Bretton Woods to manage the international monetary system. A country facing debt difficulties can turn to the IMF to negotiate a program of economic policies in exchange for economic loans.
IMF benefits
- provides information
- can facilitate agreement(s) that otherwise would be difficult
IMF Criticisms
- negligible impact on preventing crises
- negotiations can be nondemocratic
- IMF forces noneconomic policy concessions
FDI (Multinational Corps.)
- Greenfield investment: a country comes into a place and builds its own company
- Mergers and acquisitions
- Joint ventures
What access do corps. get when they go multinational?
- market access
- natural resources
- minimize factor costs
- permissive tax environment
- permissive regulatory environment
Multinational corps. (MNC) faults
- not investing at home
- outsourcing jobs to countries with lower wages
- looking for pollution-friendly regimes
- seeking ethically relaxed governments
Why do countries seek FDI?
- less risky than loans
- creates jobs
- spillover effects (skills, practices, managerial skills, HR, etc.)
Host country complaints
- MNCs that pay too little in taxes
- Insensitivity to social cultural, and political norms
- MNC dominance of domestic markets
- Capital more mobile than labor
Host country’s weapons
- ability to regulate and tax companies
- threats to nationalize MNCs
