The following is a discussion on the international finance issues and their impact on foreign and domestic corporations in any given country. The international finance or trade in the global arena has a huge influence on the domestic arena. The international finance is influential in the world more than any other time due to the advancement in technology as well as the globalization, which has made interconnectedness easier. The issues involved in International finance are worth the scrutiny because; they are the foundation of the modern economy and no nation can survive on its own. This means that what happens in one country will have an impact on what will happen to the other country. International finance refers to the study to the global trade and its effects on the individual country.
Issues in international finance
The following are issues, which affect the international finance or the way nation’s trade with each other. The first one is politics where political inclination of a particular country determines how that country will trade. This is because; it will also determine the kind of trade partners, which the nation will have. The ways countries related during the era of cold war where the allies of Soviet Union traded together and the allies of United States traded together shows this. This meant that the trade between nations fostered the political values, which that nation upheld (Cohen, 1993)
The other issue, which affects the international finance, is the Gross Domestic Product of a particular country. The Gross Domestic product is the total per capita income of a given nation. This per capita income determines how a country is going to relate to other nations because high per capita income means that the country produces more and that it has a capability of lending to other nations. The per capita income is also a determinant of the performance of a country’s economy in relation to other countries. The per capita income is significant in driving the international finance (Gerber, 2010)
The balance of payments is also a key factor in international trade. Balance of trade refers to the difference between the amount of exports and the amount of imports. Positive balance of payments therefore refers to a situation where the country’s exports are higher than the country’s imports whereas negative balance of payments refers to a situation where the country’s exports are lower than the country’s imports. It is the major cause of underdevelopment and it makes the particular nation that has negative balance of payment to be dependent on other nations, which is the major characteristic of developing nations. They import more than they export thus having a negative balance of payments (Cohen, 1993)
Technology has also affected the international finance in a great way. The twenty first century has experienced high levels of integration of technology leading to more interconnectedness and complications as well as advancing the manner in which nation’s trade. There has been a lot of communication that is vital to growth in business as well as the economic growth. It is now possible for a customer in one country to buy goods and services in another country online. There has also been lots of marketing and exchange of goods and services enabled by the integrated technologies (Gerber, 2010).
The social integration, which is happening in the world, has also had a bearing on the international finance. People in the world are in a better position to accommodate the cultures and the social welfare of others, which has created more social bond between people of different countries. The social activities, which have gained international recognition such as sporting activities include the Olympics and the World Cup. These have assisted in bringing people together thereby promoting international trade (Hendrix, 2010).
The other factor, which has been of influence in the international finance, is the development of global financial institutions, which assist nations as well as multinationals to trade with other nations. Examples of such financial institutions include banks such as the World Bank and the International Monetary Fund. These institutions do a lot to monitor their balance of payments in different countries. They also lend foreign currencies and assist countries to trade with other nations on a fair ground. These institutions also develop policies, which govern the exchange of goods and services between nations.
How international finance affects corporations and countries
There are ways in which international finance affects both the foreign and the domestic corporations in the economy of any given nation. As discussed earlier, negative balance of payments in a given country often leads to the dependency on other nations. Nations, which import more than they are exporting, tend to go short of foreign currency. This makes them to lack foreign currency to trade with other nations. The government may opt to fill in this void by printing more money. When the currency of the country is increased in the economy because of printing more money, the aftermath of this is inflation. This makes the value of the currency to go down thus decreasing its power to purchase goods and services. A case in hand is that of Zimbabwe which had inflation of one thousand per cent because of the negative balance of payments.
International finance has also led to the liberalization of domestic markets. In the past, most of the nations had controlled or regulated their markets. However, in the advent of globalization every nation is looking for ways in which its products are sold in other nations. The governments had to shed of their controlling nature and allow competitors to come in so that they get permission to compete in other nations. (Cohen, 1993)
Reduced tariff or trade barriers have also been because of international finance. The international trade between different nations has seen countries reduce their tariff on various goods and services. This is to ensure that they also get reduced tariffs for their goods in other countries. Regional integration is a result of international finance. For nations to remain competitive and ensure that they have a positive balance of payments, they are coming up together as blocks.
Countries within such a block obtain preferential treatment when it comes to their goods and services. These nations are able to obtain worthwhile returns because of the reduced tariffs. Some of the competitive blocks have been the European Union, which has performed very well as block especially in ensuring unlimited movement of people between those nations. The Latin America has also formed a block although it is not effective. Nations in Africa have their blocks, which aim at securing free movement of goods, services, and people between those nations (Hendrix, 2010).
The international finance has also had an effect on the corporations’ especially those that deal with the international markets. The corporations are affected by stiff competition, which is fronted by the international corporations. This is because, companies from other nations, which have capability of offering cheaper goods and services, are getting into the markets and edging out traditional service providers’ who do not have the leverage of integrated technology (Hendrix, 2010).
The companies have also been affected by the rapid expansion of international companies that increase their competitiveness in other nations by buying out other corporations in other countries to increase their capability to do business with an added advantage. These multinationals establish the companies, which they have bought as their franchises. This reduces the costs in terms of labor and transportation of those goods as well as other logistics.
Other than the mergers and amalgamations’ being experienced by companies so that they can be stronger as well as be excellent in ensuring that they are outperforming the normal companies these corporations have had the leverage of technology, which has allowed them to trade with people across the globe through the internet. The inability of the governments to restrict trade through the internet has made it possible to have the increased trade between people in different nations. One can buy a book online at a significantly lower price compared to how it cost if bought from a local bookstore. This has indeed increased the revenues of many countries (Hall, 2000).
The international trade has also given advantage to many of the corporations allowing them to get credit facilities from foreign banks and other foreign credit institutions. This is especially because; the local financial institutions rate of lending may be higher than the international lending rates. This has seen many businesses securing credit from foreign institutions (Gerber, 2010).
The liberalization or the opening up of markets has also led to the issuance of bond and bills to foreign institutions as well. Governments can now sell their bonds and bills to institutions as well as other countries to fund their budget deficit. This is especially because during the time of depression, most of the governments have engaged in massive spending to curb the ongoing international recession. This has led to massive borrowing by the governments to take care of budget deficit. However, this spending is risky and it is predictable that it will make the economy of some nation’s economy to crumble if they do not put hold on their debts.
The other issue, which affects countries and corporation although it is a macroeconomic factor, is the issue of recession. Recession refers to a prolonged economic decline, experienced for a particular period. The recession occurs when a country is experiencing low levels of growth, characterized by high rates of inflation, very high rates of unemployment (Gerber, 2010).
This is has been brought about by massive accumulation of debts by many of the European countries. Most of these debts have come about due to decline of real estate value in Europe, as the value of this property was the guarantee of the loans. Countries such as Spain and Italy are some of the top countries, which have sunk in massive debts. This recession has not only affected those countries but it has had a massive effect on every other country in the world.
Other than recession, the other issue that arises is the boom, which refers to a situation where the countries and corporations as well experience a period of expansion due to the rapid expansion and growth in the economy for a prolonged period of time (Hendrix, 2010). This period is characterized by high levels of employment and low rates of inflation. It is comes about when the country is experiencing positive balance of payments and when major economies in the world are expanding their operations in other countries.
In conclusion, the international finance is very broad and it covers almost every façade of life especially in this era of interconnectivity and regional integration, which is making the international markets to be very competitive. The governments as well as corporations of any given nation must therefore work together to achieve a positive balance of payments. The governments must support companies as well as those activities, which trade in the international markets.
This is because; failure to export more than they are importing will lead to increased debts and dependency on other nations. The government must also ensure that they have cut down on their spending so that they can reduce debts as well as seek for better ways of curbing inflation. Failure by both the government and the corporations of a given country to promote the products or services, which earn them foreign exchange, will be very detrimental to the economy of that country as well as the living standard of people within that particular country.
Cohen, B. (1993). International political economy of monetary relations. London: Edward Elgar Publishing Ltd.
Gerber, J. (2010). International economics. New York: Pearson Education.
Hall, P. (2000). International money and finance. New Jersey: Blackwell Publishing.
Hendrix, V. (2010). International finance and open-economy macroeconomics: Theory, history, and policy. Berlin: World Scientific Publishing Ltd.