International Trade Finance and Investment: Capital Allocation, Theories, and Challenges Faced by Emerging Economies

This report explores the allocation of capital in domestic and international economies for trade, development, and investment purposes. It discusses the theories related to competitive and absolute advantage, the contributions of organizations in international trade, and the challenges faced by emerging economies due to industrialization and trade policies. The report evaluates the Indian economy as an emerging economy and its performance in agriculture, manufacturing, and international trade.

International Trade
finance and
Investment

Table of Contents
Executive Summary.........................................................................................................................3
Question 1- Evaluate the manner in which financial markets allocate capital in domestic
economy and at international level for trade, development and investment purpose......................4
Brief background of financial market.....................................................................................4
Domestic economy and capital allocation..............................................................................5
International Economy and capital allocation........................................................................6
Discuss about the trade, financial and investment theories....................................................7
Discuss the contributions of the following organisations in international trade....................8
Question 2- Critically evaluate an emerging economy about the challenges faced by them
because of industrialisation and trade policies.................................................................................8
Evaluation of emerging economy...........................................................................................8
Evaluation of the challenges faced by the country because of industrialisation and trade
policies..................................................................................................................................10
CONCLUSION..............................................................................................................................11
Recommendations..........................................................................................................................11
REFERENCES..............................................................................................................................13

Executive Summary
For an investor to make investment in a big concern. Thus, it should properly investigate
into the opportunity ion which it is going to invest. It should have full knowledge about the
economy in which it desires to invest. It is important to have knowledge about the various
organisations working for it. Here, the economy of India is examined as it is one of the biggest
emerging economy of the world. The report discusses about the way in which the capital in
allocated among the domestic and international economy. Further it discusses about the impact
of industrialisation and trade policy on India.

Question 1- Evaluate the manner in which financial markets allocate capital
in domestic economy and at international level for trade, development and
investment purpose.
Brief background of financial market.
Debt market can be defined as an area where the investing activity of purchase and sale
are done through loans. They offer low rate of investment and involves less risk. The payment of
interest is fixed under this market. For example, bonds, mortgages, debentures.
Equity market refers to a stock market where securities and equity instruments are traded.
The return on investment in these markets are usually high and simultaneously comprises of
higher risk. The risk factor is directly aligned to the expected rate of return. The rate of dividend
is not fixed. Such as, equity shares of a company listed under London stock Exchange (Wang, Li,
and Zhong, 2019).
Both the above markets have some key players which holds the power to influence them
to its full extent. The players are as follows.
Key Players of Financial Market
Investors
Borrowers
Lenders
 Investors – These are the people who invests their amount in their holding these markets.
They are the depositors of money who deposit their amount with financial institutions
like banks or invests in financial markets by purchasing shares and debentures. They
provide their own money to others with a motive of earning some income in form of
interest or dividend. For example, the general public of economy (Laszlo, Baker, and
Eisenberg, 2017).
 Borrowers- They are seekers of funds. These people are in need of money for investing it
in their business. They borrow this amount from public, in the form of issuing them,

shares, from debentures, from financial institutions in form of bank loans, bonds and
many more. For example, Tesco company arranged its funds by issuing shares to public.
 Lenders- They act as intermediaries for investors and borrowers. They collect money
from investors and lend that to borrowers. These are normally the banks. Many time
businesses also give loans to other companies. There are also many private lenders who
provide their funds to others in lieu of interest. For instance, Barclays bank carries the
function of lending money (Wasiuzzaman, 2019).
Domestic economy and capital allocation.
Capital allocation can be defined as a process of ascertaining the most beneficial and
efficient strategy in which the financial resources of firm are invested so that value of equity for
shareholders can be increased and the profits of business can also be maximised. Along with this
they also look upon the risk factor while selecting the strategy. For instance, the Bank of England
is given the responsibility of allocating money to various policies. They analyse various aspects
like availability of resources, need of project and it success rate for determining the figure to be
allotted to various programmes. In the domestic economy there are three major players who
performs the function of capital allocation.
Key Players of Capital allocation System
Banking System
Domestic market
Stock market
 Banking System – They plays an important role in allocation of capital by accepting
saving and using that amount to avails funds to needed person in the form of loans. In this
way they act as a middle man for arranging the movement of cash. Central banks develop
policies for distributing the amount and fixes various rate like Bank rate for controlling
the movement of money (Smith, 2021). The present monetary policy of UK has been set
with a view of meeting the target inflation rate of 2 % and in accordance with need of
attaining sustainment in growth and employment. FCA and Bank of England governs the
financial system of UK.

 Domestic Money Market- This market allocate the capital by accepting short term
deposits from the people and give them as loan for longer duration to the companies.
These markets usually deal in short term funds. The instruments of this market are
treasury bills, commercial papers and certificated of deposits.
 Stock Market- This is a place where all the shares and debentures of company are traded
for satisfying the capital need of companies. The London Stock Exchange is the
controller of this market. All the stocks listed under it only can trade their stocks. In
March 2021, the exchange was at £3.8 trillion. While AIM is a part of LSE which acts a
stock exchange for small and medium size companies. Through this they can make use of
stock exchange and can have access to investors. At present it comprise of around £ 80
million per listing with 821 nations.
The capital allocation in the domestic economy can be done by giving the
companies a permission to borrow the funds from the local currency itself. It will help the
capital market to rectify the mismatch the funds of currency from the borrowers and at
the same time will reduce the risks. The GDP of the country will also improve and can set
a pricing benchmark of the citizens of the county to avoid financial risk.
International Economy and capital allocation
International capital market can be defined as a financial centre at global level where the
bonds, currencies, debentures, mutual funds, shares and other financial securities are being sold
and purchased. There are various markets under this, which are discussed below:
 Commercial Banks- These banks create a link between the various countries by
performing the function of money exchange and linking the bank accounts at
international level. Just like domestic banks they also accept deposits and provide money
to different countries or clients from various nations. For example, Asian Development
bank (Sarkar, 2020).
 Bond market- This is a market for bonds that helps in trading them across the borders.
They attract investors from international market to invest in bonds and trade them. They
are issued by company in non-domestic entity. Mostly this market trade in the Euros and
dollars.
 Global Stock market- It means the international level of market that negotiate their stocks
with domestic firms. This facilitates the investors to purchase shares of different

countries without any restriction. They help in providing funds to the nation who are not
able to arrange money from their own money men. For example, the Australian Stock
exchange (Nassani, and et.al., 2017).
 Derivatives- These are the used to maintain a balance in the exchange rate for trading
goods at international level. The value of these derivatives are based on the agreed
financial asset. For Instance, JSE's International Derivatives.
By the help of the financial instruments and the markets the country can use the strategy of
hedging which will help in lowing the fiscal risks and gain more market share for the
country. It will also benefit the economy of the nation.
Discuss about the trade, financial and investment theories.
According to Ricardo, nations which produces goods with single factor of production,
which is normally the labour who do move cross country but do transfer within different the
sectors. They bring constant returns and there is perfect competition in the market. The two
theories related to it are discussed below:
 Competitive advantage- In the economic model, agents have a comparative advantage
on others for manufacturing the particular type of good if that product can be
manufactured at low cost or at a price that can be produced at a price which is lower than
the marginal cost of the whole trade. It describes the reality of profit gained from the
variances occurring due to technological change. It provides argument in favour of the
trade and specialisation in the countries. It becomes more complex thus the approach was
shifted to more realistic parameters from balanced exchange of stocks (Al-khedhairi,
2019).
 Absolute advantage- According to this theory, economic concept is used in analysing
the capability of party in producing superior product. It means to produce a particular
quantity of good at low cost. As per this theory, for becoming rich it is important for the
organisations or countries to be specialised in the goods they produce and the services
offered by them. They should produce a good in which they have some absolute
advantage and also should involve themselves with such countries which can provide
them free trade facility. Thus, the resources of the nation can be optimally utilised
(Nassani and et.al., 2019).

Discuss the contributions of the following organisations in international trade.
International Trade refers to the exchange of goods, capital, services and currency across
borders and territories. The goods are transferred from those countries which have surplus to the
nation where this is shortage. There are various organisations working under it.
 World Trade Organisation- It took lots of actions for promoting trade at international
level. It framed rules which administer the functioning of import and export. It solves all
types of disputes occurring among the nations regarding the trade. If lifted up the trade
barriers that were becoming a hindrance in the normal operations of trading at world
level. The agreement of WTO has lots of provision that take care of the interests of the
countries.
 Regional Trade Agreements- These contracts helps in lowering down the cost of trade
and defining the rules for the economies to operate in it. With this, countries got a huge
market at world level where they can manage sell their goods at low cost and increase
their margin rate. This in return encouraged the economy to grow as by increasing the
value of export, nations can increase their GDP level (Feather, and Meme, 2019).
 Investment treaties between states- These treaties helps the organisations or countries
or investors in protecting them from the host nation's conduct or abuse. They prevent the
investing party from any kind of discrimination or a treatment that is not equitable. It
provided security to the countries and encouraged them to invest in other states without
hesitation.
Question 2- Critically evaluate an emerging economy about the challenges
faced by them because of industrialisation and trade policies.
Evaluation of emerging economy.
Emerging economy refers to the nation who is not developed and is under the status of
developing economic country. This tag is given to a nation when it increases its reach to
international market and start dealing in international market at bug level in terms of finance,
investment and trade (Dörry, 2017). Here, the economy chosen for analysis is India. It is at
present a fast growing economy dealing in almost all kinds of international trades. The GDP of
India is $ 2.62 lakh crores at present which is at second position in global level after UK. But
looking deep inside into it, since the last 5 years, the GDP of country is falling continuously.

Through the above chart thus is very much clear that the GDP growth of business
is falling continuously. The growth rate of GDP of a country is dependent on the price of its local
currency. Evaluation of the economy of India on following basis are as follows:
 Agriculture- This is the most important sector of an Indian economy. Around 58 % of the
population of this nation is still dependent on this source only. It involves farming,
fishing and forestry as well. The gross value added by this for the year 2020 was
determined to be Rs. 19.48 lakh crores which is $ 276.37 billion in US dollars. This
accounted for a total of 17.8 % share in the GVA at current prices (Bailey, 2017). Due to
emergence of pandemic, the economy faced a lot. In the presence of lock down, the
disposable income of people decreased which resulted in their fall in purchase. Fr
handling this, the government had to announce grants of subsidies for this field. The
export sector was also affected. But it was positive, it grew by 17.34% which proved to
be beneficial for the nation.
 Manufacturing- The launch of 'Make in India' programme was one of the biggest
movement for the raise in this sector. It gave recognition to the nation at global level.
This also increased the opportunities for employment in the nation. This sector is
positioned at second for increasing the GDP of country after agriculture. Administration
Data 1: GDP Growth (annual %) - India, 2021

of India also took lots o0f steps for bringing a boost in this unit such as MUDRA, Start-
up India and many more. This resulted in 25% growth in it. This sector is also planning to
spent a lot amount on research and development of the industries. In the year 2019, the
export value of this section was around 43%.
 International trade- It is a practice in which the goods and services are exchanged among
countries at global level. It is important for a nation to do more exports than imports.
More exportation if goods means that the company is focussing of inflow of capital while
more imports shows that the nation is spending more than earning and its currency is
going out (Petri, 2018.). Balance of the economy can be maintained only if they are more
exporting. At present the trade balance of the nation is negative and is showing a fall in
percentage of near about 88.55 % in year 2020.
 Inflation- This is defined as a rise in the price of products and services over a specific
period of time. It is the opposite of deflation where the prices of goods increases. It is the
critical indicator which showcases the benefits of nation. The degree with which the
increase in costs of various factors happens that affects the whole economy. It directly has
impact on their living standards. The inflation rate of India affects the interest rate of the
banks, rate of pension and many more.
Evaluation of the challenges faced by the country because of industrialisation and
trade policies.
Industrialisation can be defined as a process in which the society and economy of whole
industry changed. This involved the swap of hand work into automated machines. But there are
some challenges that were faced by India due to industrialisation and trade policy (Newman, and
Posner, 2018).
 Corruption- with industrialisation, the corruption level of India increased. Now the
politicians started demanding more commission for approving the setup of an industry.
This negatively affected the economy of country. People who do not have much to pay as
corruption were not able to set their units.
 Tax problems- India had to face taxation problem, it was not able to charge tax from
these industries properly and they had to update their policy. Also, increased number of
industrialists raise the level of income tax. The government was facing shortage of funds
for supporting these companies and had to increase the rate of tax.

 Environmental concern- Emergence of industries put a lot of impact on the environment.
The waste from these units was getting deposited in the rivers. The emissions of gases
from the units was affecting the air and thus increased the pollution level of the country
(Wen, Yang, and Zhou 2019).
 Infrastructure- Setting up of factories demands land for its operations and most of it was
covered with agriculture. This needed to be cleared which affected the infrastructure of
the country.
Problems faced by India due to Trade policy
India was in dilemma that whether the nation should move on with the trade policy or
not. This is because by entering in this agreement, India had to remove all types of trade barriers
and has to open door for external players. This affected the home sellers as the demand for the
products of these vendors decreased. Also, now the nation has to import products if the other
nation desired to export its products.
CONCLUSION
From the above analysis, it can be concluded that the financial markets play a major role
in allocating the capital to the country men and various nations. There are various players who
focuses on the optimum distribution of these funds so that these resources can be used properly.
In domestic level, the banks, private lenders, share market handle all these activities. Whereas at
international level, this work is done by World Bank and international monetary funds. World
Trade organisations along with other institutions perform the task of managing the trade at
international level. This gives a boost to the whole economy of globe. But all this thing created
only after industrialisation and emergence of trade policy. This helped the economies in up
gradation but also made them to face lots of challenges. Lots of people lost their jobs and it also
affected the environment very badly. But overall the economy of the nation was benefited a lot
with this change.
Recommendations
According to the above report, it can be recommended to an investor that:

 It should invest its amount in parts, some in equity and some in secured format like
debentures. This will reduce its risk. This is because the economy of whole world is
changing very fast and it is safe to move with some back up investment.
 It should avoid in investing in international market if it does not have any knowledge in
relation to that.
 There are various strategies in which it can invest. It can invest in other country by
creating a partnership with other business which already know the country in which it
demands to invest. Starting a venture is also a good option for entering foreign market.

REFERENCES
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