Impact of Financial Crisis on Emerging Markets
Added on 2020-02-12
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Importance of capital flowsfor Multinational Enterprisesand impacts of capital flows indeveloping and developedcountries
Table of ContentsINTRODUCTION...........................................................................................................................4IMPORTANCE OF CAPITAL FLOWS FOR DEVELOPING COUNTRIES ...........................26CONCLUSION..............................................................................................................................31REFERENCES..............................................................................................................................32
INTRODUCTIONOrganisations which are working in the international markets are having responsibility tofollow international corporates laws, rules and regulations to make a fair trade within the market.It is essential for the companies which are working in the UK to follow all the rules andregulations while working in the national and international market. International trade lawsemphasis on the fair trade in between those companies which belongs to different nations. Itinvolves a set of rules and regulations which are appropriate to handle a business in between twocountries. So it is essential for a company which is working in the international market to followall the rules and regulations which rules on the trade style, finance and product quality1. Theselaws works on the business also so it is essential for the companies to manage their capitalinvestment accordingly. Capital flows are related to the financial investment in a particularproject, plan and operation by which organisation can increase and improve their profits andrevenues. It is an important factor for the companies to manage their capital flow which cansupports them to improve their profits by new investments. As well as it has a huge importancefor the national economical growth. It help to a manage flow of the currency and as well as in theto develop economy. IMPORTANCE OF LAWS ON INTERNATIONAL MNC'SFrom 1970's the government of the countries for Multinational Corporations have been keepingan eye on their operation so as to ensure fair enough operations of the enterprises within thecountry. The government imposes certain kind of Acts and Regulations that the enterprises haveto abide and work in accordance with the protocols of that particular country 2. Also it depends1Jongwanich J, Kohpaiboon A. Capital flows and real exchange rates in emerging Asiancountries. Journal of Asian Economics. 2013 Feb 28;24:138-46.2Chang YP, Zhu DH. The role of perceived social capital and flow experience in buildingusers’ continuance intention to social networking sites in China. Computers in Human Behavior.
on the enterprises itself that how they respond to the specifications provided by the governmentand how much they can gain from that country with their fair and unbiased business.The MNC is provided with a set of rules and acts that the enterprise has to abide and act inparallel to the country's protocols.The UK government formulated a set of acts and regulations that has to be followed by thecompanies.The Enterprise Act 2002: The Enterprise Act 2002 was made on 27th August 2015, was laidbefore the government on 28th August 2015 and was finally came into action on 1st October2015.The act included five main policy objectives : competition decision-making by independentbodies, figure out anti-competitive activities, to make a damper effect, imGopinath G, HelpmanE, Rogoff K, editors. Handbook of international economics. Elsevier; 2014 Feb 22.provecompetition policy 3. The Companies Act made certain provisions for the companies facingdownfall in the long run and to create a rescue method for those companies so as to save the lifeof the companies facing insolvency. It also helped the companies to save their assets being givento the creditors as a result of outstanding liability. The act proved to be of great help to thecorporations facing a situation of bankruptcy or insolvency. Enterprise and Regulatory Reform Act 2013: This act has been framed by the parliament ofUnited Kingdom abbreviated as ERRA, aims at reforming the regulatory environment faced bythe enterprises over there. It also includes a number of laws regarding employment , competitionand market authority. The act proposed liability of the employer to employee as an importantissue as per the Health and Safety at Work Act 1974. For instance at the present time, anyemployee getting injured at the workplace can claim for the injury according to the act.Therefore the act established a complete liability of the employer to his employees and it is hisduty to protect his employees in any case of injury. The act has proved beneficial for theemployees in case they get injured at the workplace they can claim against it without a need togive any evidence of the injury 2012 May 31;28(3):995-1001.3Petrosillo I, Semeraro T, Zurlini G. Detecting the ‘conservation effect’on themaintenance of natural capital flow in different natural parks. Ecological Economics. 2010 Mar15;69(5):1115-23.
The Competition Act 1998: This act has been framed for reforming the business ideas andpractices been conducted in the country. The most important goal of the act was to produce aharmony with the other countries competition policy like Europe. Also it made provisions aboutthe existing competition in the market and to abuse the superior or dominant position in themarket. The Act has laid impact on the organisations in the following ways:It has regulated the unfair competition and cartel activities which may adversely affect theefficiency of the market.It has promoted healthy competition and increased the efficiency of the marketplace.A regulatory framework has been formulated by the act to establish a healthy and faircompetition. Fair Trading Act 1973: The Fair Trading Act of 1973 framed a non-profit and non-governmentbody known as Office of Fair Trading (OFT). The main aim of the act was to implementprotection of consumers and enforce competition law.The purpose of OFT was to see that markets are working good for consumers and also had acheck on the unfair business practices and ensuring healthy competition among the markets. Thisact has been applied to each and every trade practice prevailing in the market and ensuresconsumers with their rights to know about the safety of the goods and services they are receivingfrom the enterprise 4. This act also bans the false conduct of business and provides the provisionfor unbiased and healthy trade practices.The Insolvency Act 1986: This act was farmed by the parliament of UK in 1986 and aimed atproviding a platform for the issues related to insolvency of any person or corporation. This actimplemented the ideas of CORK report that included Individual Voluntary Arrangement(IVA)and Company Voluntary Arrangement(CVA),It framed laws regarding insolvency and a number of other legislative amendments since 1986.This act handles the issues of the companies that are incapable of paying their debts. The terminsolvency is concerned with the incapability in repayment of the debts. It enforces an attempt torescue the companies which are in a situation of bankruptcy. It minimizes the difficulties of the4Aizenman J, Sushko V. Capital flow types, external financing needs, and industrialgrowth: 99 countries, 1991-2007. National Bureau of Economic Research; 2011 Jul 15.Jeanne O. Capital flow management. The American Economic Review. 2012 May1;102(3):203-6.
companies in terms of its losses and finally it divides the burden of debt into the organisation'scommunity say for example,, its employees, the creditors, and the related stakeholders. In asituation where the company cannot be rescued it is then liquidated where its assets are sold outand the debt is paid off.The Companies Act 2006 : In the British parliament history it has been the longest act,containing 1300 sections, with 700 pages and holding 16 schedules. The act was enforced intostages with final enactment on 1st October 2009.It provides comprehensive details about the lawsof the company in UK. The Act explains the duties of the director of the company. There arevarious provisions mentioned in the act for private and public companies. It says that thedirectors must consider the company as a single unit which enforces the enlightened shareholdersapproach given by the Law Commissions(1999) and CLR(2001), which defines that the directorsshould equally consider the shareholders and the stakeholders while managing the enterprise. Itnot only considered the concerns of the the shareholders rather it laid emphasis on the corporategovernance which is a vital part of an economy. It also describes that with the factor of goodcorporate governance, a company should lay emphasis on the wider aspect of corporate ethics.The Corporation Tax Act 2009 : This act came into action on 1st April 2009. It reframed someof the enactments and laws in order to make clear provisions for the laws existing at the time.The highlighted objective of the act is to reframe the charges to tax of corporations and primarycorporation tax legislation being adopted by the corporations in calculating their income. This actis the fifth bill made by the Tax Law Rewrite Project. The basic idea of the bill remained samewhile rewriting.Limited Liability Act 1885 : The act explains about the limited liability of the enterprise whichcould be established by the common people of the UK also 5. The act also said that theshareholders will be directly responsible for the unpaid part of their shares. It allowed around 25members for the companies for limited liability. The act excluded the insurance companies. Italso emphasised that the partners of a business are equally responsible for the whole debt beingconcerned.The Employment Rights Act: The Employment Right Act was enacted in 1996, by theconservative government to reframe the prevailing law on the rights of the individuals in UK5Tong H, Wei SJ. The composition matters: capital inflows and liquidity crunch during aglobal economic crisis. Review of Financial Studies. 2011 Jun 1;24(6):2023-52.
labour law. It included the basic rights of the employees being engaged in any organisation likeunfair dismissal, notice given before the dismissal, flexibility in the working time etc. This acthelped a lot in the protection of the employee's rights at their workplace. Hence all of the abovementioned Acts and laws clearly shows the impact of their enactment practically. They not onlybring the balance among the corporate and the society but also it takes care about the concerns ofthe small businesses. The enactment of various acts and laws let the corporations flow in apositive way and make them work in a fair and healthy environment.IMPORTANCE OF CAPITAL FLOW FOR MNC'SCapital Flow means the making the money to flow in the market for business purpose,investment, or trading. It can be understood as the capital to be invested in the enterprise, or themoney to be invested in the research and development work 6. In broader aspect it can beunderstood by the example of government where the government directs tax receipts for the tradeand businesses with the other countries. Basically it is nothing but the movement of money forthe purpose of trade and business. International capital flow results in the economic developmentof a country by enhancing the skills of doing business in the international market. They resolvethe problem of balance of payment of the developed countries. As the developed economiesenjoy an advantage of financial stability and advanced technology, they gain the maximumbenefit capital flow by investing in the developing economies in order to establish their financialstability in the foreign markets also. They utilise the opportunity of establishing their market inthe foreign countries also so as to expand their business roots all over the world. Internationalflow of capital is nothing but just the flow of funds from one country to another. The increase incapital flow has been much more than the trade flow at international level due to liberalisation inthe financial markets. Capital flow can be both long-term and short-term which depends on thecredit instrument engaged. Short-term capital flow is the one in which the credit instrument isinvolved for less than one year and for more than one year involvement of a credit instrument thecapital flow will be termed as long-term. It is the change in the position of the company's cashwith change in time period. If the inflow of capital is more than the outflow then the companyholds a good position. And if the situation is opposite then it is not a good indicator for thefinancial health of the enterprise. As capital is the base from where the functioning of an6Tong H, Wei SJ. The composition matters: capital inflows and liquidity crunch during aglobal economic crisis. Review of Financial Studies. 2011 Jun 1;24(6):2023-52.
organisation starts, the enterprise should hold a strong financial position. The strong capital flowin an organisation depicts that it is having good buying power and can increase its businessthrough raising its capital more and more. A positive capital flow indicates following plus pointsfor an organisation:Cope up with Debt: If an enterprise borrows money to acquire its assets, it most probablyuses its future capital flow to make the purchases. And as a result the company needs positivecapital flow in order to cope up with the debt commitments. Most of the companies have longand short term credits and loans and these loans are repaid in monthly instalments. Thesemonthly instalments restrict the free flow of capital into the organisation as the repayment ofloan is the obligation for the organisation.Growth: In addition to keep a pace with the debt management, the positive capital flowlet the organisation to strengthen its root in conducting business activities. If the organisation ishaving strong capital flow it will further invest in the growth of its infrastructure, technologicalRey H. Dilemma not trilemma: the global financial cycle and monetary policy independence.National Bureau of Economic Research; 2015 May 14. development, research and development,and attaining more powerful assets to be implemented in further growth of the enterprise. Thepositive capital flow in the organisation will led the strategic development and strong flexibilityto deal with uninvited risks.Flexibility: Strong capital flow in the enterprise ensures flexibility in dealing with theuneven situations and handling them smoothly without endangering the growth of the company.It also ensures the ability to make critical decisions which could not be met without financialstability of the organisation 7. If it is having financial prosperity then it could divide its capitalinto shareholders and owners as dividends which would improve the inter-personal relationshipof the owners of the company. This also improves the brand image of the company and as aresult it can borrow debt at any time from the lenders due to its good position in the market.In terms of international trade the capital floe is always from rich to poor country or fromdeveloped to developing countries. Private capital flow are mainly of three categories which are as follows: Foreign DirectInvestment(FDI), Portfolio Investment, and other investment which involves capital flow of7Agosin MR, Huaita F. Overreaction in capital flows to emerging markets: Booms andsudden stops. Journal of International Money and Finance. 2012 Sep 30;31(5):1140-55.
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