Campus Classrooms

Unit 5: International Finance and

Contemporary Issues in
International Business
Foreign Direct Investment
 Foreign Direct Investment (FDI) is an investment from a party in
one country into a business or corporation in another country with
the intention of establishing a lasting interest.
 It is a cross border investment.

Benefits of FDI
 Increased Employment: The primary benefit of FDI is the
creation of jobs. It is also among the main reasons for a developing
country to opt for FDI.
 Human Resource Development: The workforce’s expertise
and knowledge are referred to as human capital. The country’s
education and human capital quotient are increased by the
acquisition and improvement of skills through training and
experience.
 Development of Areas: A nation’s neglected parts can become
industrial hubs by using FDI. Consequently, this enhances the local
social economy of the state and the country. An example of this
procedure is the Hyundai facility in Tamil Nadu, India.
 Provision of Finance & Technology: The introduction of
more advanced technology and procedures with the help from FDI,
eventually causes them to spread throughout the local economy,
increasing the industry’s efficacy and efficiency.
 Stability of Exchange Rate: Continuous foreign exchange
flows are a result of Foreign Direct Investment (FDI) into a nation.
It helps in keeping an adequate foreign exchange reserve at the
nation’s central bank. This in turn ensures stable exchange rates.

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Types of FDI
 Horizontal: A company grows internationally by extending its
home activities. In this particular scenario, the company operates in
a foreign nation while carrying out the same operations (as of home
country). McDonald’s opening restaurants in Japan, for example,
would be regarded as horizontal FDI.
 Vertical: FDI expansion involves a company going up the supply
chain to a new level in order to grow into another nation. For
example, McDonald’s could acquire a major Canadian farm to
supply meat and eggs to its outlets.
 Conglomerates: These are companies that buy unrelated
companies abroad. This is unusual since it involves breaking
through two entry barriers for entering a foreign nation and breaking
into a new market or industry. For example, the UK-based company
named as ‘Virgin Group’ purchased a French clothes brand.
 Platform: A business expands into a foreign country but the output
from the foreign operations is exported to a third country. This is
also referred to as export-platform FDI. Platform FDI typically takes
place in free-trade areas’ of accessible and low cost regions. For
example, suppose Ford invested in manufacturing facilities in
Ireland primarily to export automobiles to other EU nations.
Drawbacks of FDI
 Loss of Domestic Control: One major concern with FDI is the
possibility of losing control over domestic industry and resources.
When foreign investors purchase local companies, they may have an
influence in significant decisions that impact the host country’s
economy and identity.
 Competition for Resources: As FDI increases, there could be
more competition for regional resources like labour and raw
materials.
 Global Economic Trend Sensitivity: Developing nations that
heavily rely on foreign direct investment are vulnerable to shifts in
the world economy. The stability of the host country may be
impacted if FDI declines in reaction to a global economic downturn.

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 Political Risks: Uncertainty for foreign investors might arise from

unfavourable political conditions or changes in government policies
i.e. political factors might cause a downfall in FDIs.

Greenfield Investment
 This is a form of foreign direct investment where a parent company
starts a new venture in a foreign country by constructing new
operational facilities from the ground up.
 In addition to building new facilities, most parent companies also
create new long-term jobs in the foreign country by hiring new
employees.
Importance of Greenfield Investment
 Greenfield investments generate employment opportunities for the
citizens of the country.
 Under a Greenfield investment, intermediary requirements are
entirely eliminated.
 Companies entering the new market through Greenfield investment
obtain total dominance over the products and services manufactured
or sold or provided by them.
 High level of quality control over the manufacturing and sale of
products and/or services.
Disadvantages of Greenfield Investment
 Costly: Establishing a Greenfield site has high fixed costs.
 Risky: They carry a very high level of risk.
 Regulations: Government regulations may hamper foreign direct
investments.

Mergers & Acquisition

Mergers
 According to Gaughan (2002), a merger is a process in which two
corporations combine and only one survives and the merged
corporation concludes to exist.

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 Sometimes there is a combination of two companies where both the

companies conclude to exist and an entirely new company is created.
Types of Mergers
 Conglomerate Merger: A conglomerate merger combines two
businesses with unconnected and different business operations from
various industries. Diversifying corporate processes, cross selling
products, and reducing risk exposure are all advantages of a
conglomerate merger.
 Market Extension Merger: Companies that sell the same items
but compete in separate markets often merge together under this type
of merger. Companies that merge in a market extension transaction
want to expand their clients by gaining access to a larger market.
 Product Extension Merger: Product extension merger is also
known as congeneric mergers. Here two companies that provide
separate services to the same customer base, like a Wi-Fi provider
and a computer manufacturer, work together.
 Horizontal Merger: A horizontal merger combines two
businesses from the same sector, which may include both direct and
indirect competitors. Greater purchasing power, more marketing
options, less rivalry, and a wider audience reach are all advantages
of a horizontal merger. Two businesses that compete directly and
have similar product lines and markets merge together.
 Vertical Merger: In a vertical merger, two businesses that
operate at several points in the same supply chain and provide
various items or services for the same final product come together.
An improved supply chain, reduced costs, and improved product
control are all advantages of a vertical merger.
Advantages of Mergers
 Increases Market Share: By combining the resources that both
firms bring to the business agreement and operating in the same
domain or offering identical products and services, a new company
can capture a larger market share.

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 Reduction in Cost of Production: Businesses can cut costs by

achieving economies of scale, for example, by purchasing raw
materials in large quantities cost can be reduced.
 Expansion of Business: A business that seeks to expand in a
particular region may merge with the firm operating in the same
region with, identical and comparable product lines.
 Access to More Financial Resources: The combined financial
resources of all companies involved in a merger or acquisition
improve the existing companies’ overall financial position and help
the company to access more funds.
Disadvantages of Mergers
 Creates Unemployment: A firm may decide to get rid of the
other company’s underperforming assets in an aggressive merger. It
might lead to workers losing their jobs and creating unemployment.
 Increased Legal Costs: The legal business transaction of
merging two businesses frequently involves the participation of
various important professionals including lawyers, agents,
registrars, etc. This intern increases the legal cost.
 Raise Price of Products: A merger increases market share and
lessens competition. As a result, the new business might establish a
monopoly and raise the pricing of the goods and services it offers.

Acquisitions
 An acquisition is when company purchases the maximum stakes in
other company.
 The firm whose shares have been purchased becomes the subsidiary
of Purchaser Company. The subsidiary company’s assets and
liabilities come under the holding company and hence subsidiary
loses its legal identity.
 In simple words, acquisition involves a company purchasing an
existing company in a foreign market.
 The acquired company can then be integrated into the buyer’s
existing operations or operate as a standalone entity.

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Benefits of Acquisition
 Access to Expertise: Small businesses can access expertise like
financial, legal, and human resource professionals when they partner
with larger massive enterprises.
 Access to Capital: After an acquisition, a small company’s access
to finance is improved.
 Fresh Ideas: With new perspectives and ideas and a zeal for
assisting the company in achieving its objectives, a new team of
professionals is frequently assembled with the aid of mergers and
acquisitions.
 Increased Market Share: A speedy growth in your company’s
market share may be possible through an acquisition.
 Easy Entry to New Markets: Through Merger & Acquisition,
a business can quickly enter new markets and product categories
with a well-known brand, a solid reputation, and an established
customer base.
Challenges in Acquisition
 Cultural Differences: Each corporation has a unique culture that
has evolved since it was founded. It can be difficult to buy a
company whose culture clashes with your own.
 Duplication of task: Employees may duplicate one other’s tasks
as a result of acquisitions. Two departments or individuals may
perform the same task when two businesses with similar products or
services unite. This may result in high wage expenditures for the
corporation.
 Reduce Level of Motivation: When two companies go through
the process of acquisition, many employees are laid off and others
have a constant fear of being laid off and this creates lower level of
motivation and low morale among the employees.
 Conflicting Objectives: Given that the two companies engaged
in the transaction formerly operated separately, they might have
different goals now.

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Strategic Alliances
 An agreement between two independent companies to collaborate
on a project that will benefit both parties while maintaining each
company’s independence is known as a strategic alliance.
 These alliances are often long-term in character, with each company
contributing its resources and experience to the table in order to
accomplish shared objectives and expansion.
Types of Strategic Alliances
 Joint Venture: A joint venture is when two businesses decide to
work together to form a completely new, independent business that
each of the original businesses will become a parent company of.
 Equity Strategic Alliance: An equity strategic alliance is
created when one company purchases a certain equity percentage of
the other company.
 Non-Equity Strategic Alliance: A non-equity strategic alliance
is created when two or more companies sign a contractual
relationship to pool their resources and capabilities together.
Advantages of Strategic Alliances
 Increased Resources: Businesses can obtain access to more
resources in the form of products, knowledge, assets, etc. by opting
for strategic alliances.
 Access to New Markets: Getting access to a new market is one
of the most common motivations for forming strategic alliances.
 Expanded Customer Base: Companies frequently select their
partners depending on where they are in the market or how well
established they are locally.
 Greater Brand Awareness: Strategic alliances have the added
benefit of increasing brand exposure through growth into new areas
and an increased customer base. Consumers of both the firms can be
targeted by involving in a strategic alliance.

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Concept of Exchange Rate

 Exchange rates refer to the value at which one country’s currency
can be exchanged for another.
 These rates are crucial in international trade and finance, influencing
the flow of goods, services, and capital across borders.
Factors Affecting Echange Rates
 Economic Factors: Strong economic performance, low
unemployment, and stable inflation can strengthen a currency.
 Political Stability: It is a well-known fact that nations with stable
political systems typically have more valuable currencies.
 Export or Import Activities: The net exports and imports of a
nation affect exchange rates and the value of its currencies. A home
country’s exchange rate will rise in relation to other foreign
currencies if it exports more goods than it purchases, creating a
greater demand for the currency.
 Inflation Rates: Exchange rates and currency values are impacted
by changes in inflation rates. When everything else is equal, a
country’s greater inflation rate will lead to a decline in demand for
its own currency.
 Balance of Payments: A significant trade or international
balance of payments deficit indicates that a nation’s foreign
exchange profits are less than its foreign exchange expenditures and
that its demand for foreign exchange exceeds its supply, which
drives up the foreign exchange rate and depreciates the value of the
nation’s currency.
Types of Exchange Rate
 Fixed Exchange Rate: A system known as fixed exchange rates
is one in which the value of the currency of one nation is fixed in
respect to the value of another nation’s currency or basket of
currencies. Maintaining stability in financial flows and international
trade is the primary objective of this.
 Floating Exchange Rate: A monetary arrangement known as a
floating exchange rate system occurs when supply and demand in

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the foreign exchange market determine the value of a nation’s

currency. In contrast to fixed exchange rates, which are linked to a
certain currency or group of currencies, flexible exchange rates can
vary from time to time. The exchange rate modifies itself to maintain
equilibrium in the market when changes in economic conditions
such as variations in trade balances, change in inflation rates, etc.
occurs.
Theories of Exchange Rates
 Purchasing Power Parity (PPP) Theory:
 Professor Gustav Cassel of Sweden was the one who first
proposed the Purchasing Power Parity theory (PPP). This idea
states that the relative purchasing power of two currencies
determines the rate of exchange between them. That rate will be
the same for both purchasing powers.
 According to this theory, money tends to have the same
purchasing power in its home nation as it would if it were
exchanged for another currency and used outside the country.
Thus, exchange rate reflects equality of parity of purchasing
powers of the two currencies.
 Interest Rate Parity (IRP) Theory:
 According to the Interest Rate Parity (IRP) theory, the difference
between the interest rates of two nations stays the same as the
difference determined by applying the forward and spot exchange
rate techniques. Interest rate parity links spot exchange, interest,
and as well as exchange rates abroad.
 “Interest rate parity refers to a condition where the relationship
between interest rates and the spot and forward currency values of
two countries are in equilibrium. As a result there are no interest
rate arbitrage opportunities between those two currencies.”
Interest rate parity is of two types Covered Interest Rate Parity
(CIRP) and Uncovered Interest rate Parity (UIP).

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Outsourcing
Outsourcing is a business practice in which a company hires a third
party to perform tasks, handle operations or provide services for the
company.
Advantages of Outsourcing
 Increased Attention to Key Business Operations: The
business can concentrate on its strengths by opting for the process
of outsourcing, letting up your employees to work on their primary
responsibilities and long-term planning can provide better results to
the organization.
 Increased Efficiency: Selecting an outsourcing provider with
expertise in the procedure or service the company need to complete
will help it obtain a more effective, efficient, and frequently higher-
quality solution.
 Controlled Expenses: The money saved by outsourcing might
be used to invest in other parts of the company.
 Increased Reach: Through outsourcing, you may be able to
access resources and facilities that would not otherwise be available
or are not cheap.
 Increased Edge over Competitors: The business may take full
use of other business’s knowledge and expertise by outsourcing and
can outperform when compared to their competitors.
Outsourcing and Its Potential for India
Reasons why IT industry in India are best choice:
 The Largest Talent Pool of Professionals: One of the main
benefits of outsourcing IT services from India is having access to an
extensive pool of skilled professionals in a variety of technologies.
As per the most recent data released by Statista, there are 27.7
million developers globally, with 5.4 million of them being Indian.
India now has more software engineers (19%) than any other
country in the world, surpassing the United States (4.4 million).

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 Cost Effective Resources Available at Flexible Pricing:

Cost effectiveness remains one of the main benefits of outsourcing
to India, even after thirty years. According to the most recent data
on software engineer hourly wages provided by Glassdoor, hiring a
full-time programmer in the United States costs $91,156 per year
which is ten times more, as the cost of hiring for the same job role
would cost $9751 per annum in India.
 High Quality Services: India provides excellent service delivery
in addition to a highly skilled workforce. Its software developers use
cutting-edge technology, software, and infrastructure to provide a
competitive edge. The best international standards are followed by
outsourcing companies in India including Capability Maturing
Model, Total Quality Management, Customer Operations
Performance Centre, etc.
 Favourable Government Policies toward IT Industry:
The development of the nation’s information technology and
information technology enabled services sectors has been
encouraged by a number of actions made by the Indian government.
Some of the actions that have been implemented include the budget
allocation for the IT and telecom sectors in the Union Budget 2023-
24 was Rs. 97,579.05 crore (US$ 11.77 billion), The Software
Technology Park (STP) Scheme, etc.
 Modern Infrastructure: Modern technology is incorporated
into every aspect of India’s modern infrastructure, which supports
the country’s fast expanding economy. With a GDP of $3.7 trillion,
India currently ranks fifth in the world, ahead of the UK, France,
Canada, Russia, and Australia.

Sustainable Development
“Sustainable development is development that meets the needs of the
present, without compromising the ability of future generations to meet
their own needs.”
- Sustainable Development Commission

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Three Pillars of Sustainability

 Environmental Sustainability: We must make sure that we are
using natural resources like materials, energy fuels, land, water, etc.
at a sustainable rate if we are to live in a really sustainable way and
this is often termed as environmental sustainability. Because certain
resources are more readily available than others, we must take into
account factors like material scarcity, the harm that comes from
extracting these resources to the environment, and whether or not
the resource can still be used in accordance with the circular
economy.
 Economic Sustainability: A company or nation must use its
resources ethically and efficiently in order to be able to run
sustainably and generate an operational profit on a regular basis.
This is known as economic sustainability. An organisation cannot
operate or survive without a profit. In the long run, a company
cannot remain viable if it does not operate properly and utilise its
resources effectively.
 Social Sustainability: Social sustainability is the ability of
society, or any social system, to persistently achieve a good social
well-being. Achieving social sustainability ensures that the social
well-being of a country, an organisation, or a community can be
maintained in the long term.
Sustainable Development Goals
 SDG 12: Responsible Consumption and Production
Goal 12 i.e. Responsible Consumption and Production talks about
the following targets under it:
1) The 10-Year Framework of Programmes on Sustainable
Consumption and Production Patterns should be implemented,
with industrialised nations leading the way while also taking
developing nations’ capacities and development into
consideration.
2) Attain sustainable management and efficient utilization of natural
resources by the year 2030.

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3) Attain environmentally responsible management of chemicals

and all forms of waste by 2020, following established
international frameworks. Steps should also be taken to diminish
their release into air, water, and soil to minimize adverse impacts
on human health and the environment.
4) Reduce waste production by 2030 by implementing reuse,
recycling, prevention, and reduction.
5) Foster the adoption of sustainable practices by companies,
particularly by large and transnational entities.
 SDG 17: Partnerships for the Goals
Goal 17 i.e. Partnerships for the Goals talks about the following
targets under it:
1) Strengthen domestic resource mobilization, through international
support to developing countries, to improve domestic capacity for
tax and other revenue collection.
2) Establish and put into effect policies that encourage investment
in least developed countries.
3) Encourage the development, transfer, dissemination, and
diffusion of environmentally friendly technologies to developing
nations.
4) Strengthen the Global Partnership for Sustainable Development,
complemented by multi-stakeholder partnerships that mobilize
and share knowledge, expertise, technology and financial
resources, to support the achievement of the Sustainable
Development Goals in all countries, in particular developing
countries.
Business and Sustainability
 Businesses serve as important sources of employment, creative
thinking, R&D, manufacturing, commercialization, and income
generation.
 Businesses undoubtedly play a crucial role in achieving almost all
targets listed in the SDG’s.
 This goes beyond simply creating more knowledge, tools, personnel,
operations, and practices.
 Its focus is also on tackling depravation, improving prosperity,
reducing inequality and protecting the external environment.

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