International Finance and Trade

This assignment delves into the intricate connection between international finance and trade. Students are tasked with examining fundamental concepts, prominent theories, and the practical consequences of this interplay in the global economy. The analysis should encompass various aspects such as capital allocation, risk management, multinational corporations, and the impact of international institutions on trade flows.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
International trade, finance and investment
Name of the Student:
Name of the University:
Author Note:

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Executive Summary:
Evaluation of financial market in allocation of capital across countries has been demonstrated in
the report. Capital allocation analysis of domestic economy and emerging economy that is
United Kingdom that is Britain and India has been done. Analysis has been done using various
aspects such as stock market, investment, borrowing capacity and asset management of
countries. Capital allocation within international market as a whole has also been discussed. In
the later part of report, some challenges faced by emerging economy resulting from its trade
policies and industrialization have also been discussed.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Table of Contents
Background of financial markets:....................................................................................................4
Capital allocation within domestic economy (United Kingdom):...................................................5
Capital allocation within international markets:............................................................................10
Evaluation of emerging economy (India):.....................................................................................12
Critical evaluation of challenges that country faces due to industrialization and trade policies:..15
Conclusion:....................................................................................................................................17
Reference lists:...............................................................................................................................18

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Background of financial markets:
Financial market is place where financial assets such as securities are exchanges, created
and transferred. Financial system of any economy works through financial market by facilitating
allocation and creation of liquidity and credit, assisting balanced economic growth progress and
serving as intermediaries for savings mobilization. There are four components of financial
market and this comprises of capital market, money market, credit market and foreign exchange
market (Arrfelt et al. 2013).
Capital market- The long-term investment of economy is financed through capital
market and transactions will be placed for over years in this market.
Money market- Banks, government and financial institutions mostly dominates this
market where funds are available for periods ranging from a day up to years. Money market is a
debt market for highly liquid, low risks and short term instruments.
Credit market- Credit market is a market where financial institutions, banks and non
banking financial institutions provide long-term, medium and short term loans to individuals and
corporations.
Foreign exchange market- This market is one of the most integrated and developed
market across globe. Requirements of multi currencies in economy are dealt by foreign exchange
market where exchanging of currencies takes place. Fund transfer in this market takes place
depending upon exchange rate (Vollrath 2014).
Financial instruments are other constituents of financial market that is a claim against
future income of individual or institutions. Financial market instruments are listed below:

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Money market instruments- These are instruments that is financial assets that can be
converted into money at minimum cost. Some of important money market are call money, term
money, treasury bills, commercial paper and certificate of deposits.
Capital market instruments- These instruments are generally for long-term investments
and this comprise of preference shares, equity shares, non convertible preference shares,
preference shares in equity segments. Instruments in equity segments involve zero coupon bonds,
debentures and deep discount bonds.
Cash instruments- Cash instruments are readily transferrable and their value is derived
directly from market. Deposit accounts, loan and receivables and other financial assets are some
of the cash instruments.
Derivative instruments- Value of derivative market instruments are derived from
underlying entities such as index, assets and interest rate. Exchange traded derivatives and over
the counter are some of the derivative instruments.
Hybrid instruments- Hybrid instruments have the features of both debenture and equity
such as warrants and convertible debentures.
Capital allocation within domestic economy (United Kingdom):
The largest financial sector of European Union is financial sector of United Kingdom that
helps in capital allocation improvement within the country. In the current economy, extent of
state ownership is viewed to be inversely related with efficiency of capital allocation and
positively correlated with information that is firms specific. There are three easy in which capital
allocation improvement can be done in economy. Firstly, improvement in capital allocation can
be witnessed due to falling state ownership. Secondly, synchronicity in stock price is less where

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
countries restore specific information in individual stock price. Lastly, strong minority rights of
investors help in allocating of capital in a better way. United Kingdom has highest score in
regard to investor’s minority rights. The largest market that makes up capital market of UK is
management of assets and asset managers have the changing role of debt investors in context of
changing landscape of UK’s capital market (Williams et al. 2017).
One of the significant facilitator of funding of UK Company is function of capital
allocation of asset management firms. This helps in contributing to long-term productivity
growth. The potential for long-term holding has facilitated successful capital allocation within
UK market and this also helps in long-term engagement of companies. Changing landscape of
capital market in UK has enabled existing companies to reduce their cost of capital by accessing
to new capitals and cheaper bond financing. This has helped in extending supply off funds to
nation’s economic cycle and productivity growth capacity across multiple asset class structures
and funding. UK has diversified financial channels facilitated by alternative form of debt
finances and variety of infrastructure projects and goes beyond the public corporate debt market
(Szirmai et al. 2013).
Range of capital allocation in UK market:
(Source: un.org 2017)

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
The majority of households of UK market draw on services of asset management that
involves portfolio diversification, provision of investment vehicles, investment strategies and
wide range of assets classes.
Economies of scale are delivered to investors and savers of UK by actively managed and
index tracking funds. Occupational and personal pensions are the most common form of
financial wealth ownership and this constitutes direct ownership of securities and defined
contribution schemes. There is a growing importance of asset managers due to commonness of
private pension funds. Size of holdings of financial assets has great variations that impact the
distribution of wealth of society (Kowit et al. 2016).
UK government fiscal policy- In recent years, government of UK has shifted to fiscal
policy from monetary policy that has helped in boosting economic activities across nation.
Automatic and discretionary are the two types of fiscal policy practiced by UK government.
Education, pension and heath are the main areas of UK government spending for fiscal year
2016. Some of fiscal measures involves cutting down of taxes and increase in spending. The
impact of Brexit has constrained UK government effort to apply fiscal policy stimulus (Subedi
2016).

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
UK government spending:
(Source: Un.org 2017)
Borrowing- Bank of England is the apex bank of UK that helps in strengthening
financial position of other commercial banks in the pace of rapid growth of credit cards, car
finance and personal loans. There has been reduction in annual public borrowing of UK
government and net public sector borrowing of nation has fallen to £ 48.7 billion. Lending
conditions have eased and consumer credit has increased rapidly. However, it is expected that in
coming year, total borrowing will rise and net borrowing as gross domestic value proportion is
higher compared to previous year.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Ownership of financial assets by UK households:
(Source: Theinvestmentassociation.org 2017)
Investment- Financial exchange in London plays an active role in intermediating funds
and securities between domestic and international investors. Debt and equity markets In UK have
cope up with several shocks and changes in accounting and investment rules. For insurance
securities, there has been reduction in equity holding in relation to fixed income securities. Some
of developments are considerably impacting future regulations of financial market of UK such as
consolidation of securities regulators and risk based supervision approach. Financial exchange of
nation has high quality of trading and exchange rate market functions well as compared to other
industrialized economies. Global financial activities taking place in London does not have the
possibility of influencing UK market stability (Avdjiev et al. 2016).

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Ownership of financial assets by UK households:
(Source: Gopinath et al. 2017)
Profit and risk of potential players- Money market activities of England helps in
distributing liquidity supplied by bank of England. Bank of England is not required to give
recourse of liquidity distribution by participants of market. Foreign exchange market of UK
currency that is pound sterling has not required intervention of government. Increasing
unevenness of liquidity market and order flows might create difficult situation of traders in
managing their positions. In some extreme circumstances, UK interbank money market system
has the potential of action as contagion channel (Faccio et al. 2016). The London’s clearing
house integrity is being threatened by intraday risk exposure and this needs to be resolved
because of its increasing importance in global financial market.
Capital allocation within international markets:
Trade theories would assist in explaining the capital allocation in international market.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Countries get involved in trading activities because the goods and services in home countries are
produced at potential economic disadvantage. When the transactions is made at lower costs by
development of internal market of companies is the international trade theories notion.
Factor proportion theory and classical trade theory would help in explaining the
international trade between countries. A country producing goods and services at competitive
advantage price is able to derive benefits and gains and extent of importing and exporting is
related to nations that ate trading as per classical theory. Goods that are produced at competitive
disadvantage prices should be imported from other countries (Helpman and Razin 2014).
The basis of capital allocation and international trade between countries is difference
between production characteristics and resource endowments. However, classical theory has not
been able to explain distinction between relative advantages. In accordance to factor proportion
theory, goods and services that require usage of scare resource of home country will be imported
and other goods and services will be exported that harness large amount of resources and factors
(Frieden 2015).
The cross border flow of capital has increased substantially in recent years. Organizations
of developed as well as developing economies need finance from international investors and they
are becoming heavily dependent upon them. It has been found that local currencies biased the
foreign investors’ portfolio. Emerging economies bonds are invested by foreign companies or
investors from developed countries. Emerging economies are reflected by inflation risks, weaker
financial institutions and weaker capital markets. Organizations balance their capital allocation
between maintenance investment and strategic replacement (Desierto 2015).

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
It is suggested by recent research that asset allocation of investors should be compared to
their market proportion because changes in expected return is implied by changes in asset market
class. Global invested capital market size grew to USD $ 101.1 trillion by the end of year 2014
as compared to USD $ 61.4 trillion (Foley and Manova 2015). The global trade scenario
continues to be gloomy due to fall of growth value of merchandize trade in year 2015. The mega
foreign trade agreement have slowed down due to slow down in global growth, Brexit,
increasing sentiments of anti globalization, rising measures of protectionist in many countries.
India not being a part of major foreign trade agreements, slow down of such FTA can be a
blessing in disguise as their growth had the possibility of harming emerging nation interest.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Evaluation of emerging economy (India):
Indian economy is one of the fastest growing emerging economies of world and the
growth of export of country had been negative in recent years. In India, the main focus of
reforms is to stabilize and make financial market and institutions and make them efficient. A
regulatory framework is been enabled by consistent efforts of the Reserve bank of India with
effective and prompt development of institutional and technological infrastructure, effective
supervision and using market participants to change the interface through a consultative and
constructive process. Careful adoption of international benchmarks has been done with
increasing efforts that is appropriate to the condition of India.
India, China and World GDP growth rate:
(Source: Bhaduri and Kumar 2014)
India is the major growth driver of world economy and is regarded as one bright spot in
global landscape. India share of export to United Kingdom has declined. There has been
exponential growth in Indian capital market in terms of mobilization of resources, numbers of

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
listed stocks, trading volumes, and investor base and market capitalization. Profile of investors,
intermediaries and issuers has changed significantly along with this growth. A fundamental
institutional change has been witnessed in Indian capital market leading to a considerable
improvement in transparency, efficiency and safety and reduction in cost of transactions.
Efficiency and framework of settlement and trading have improved due to measures taken by
SEBI (Securities Exchange Board of India) such as rolling settlement, market determined
resource allocation, derivatives and sophisticated management of risks. This has made capital
market of India comparable in terms of quality to many developed countries. Depository systems
for securities have been adopted by India where electronically book entry is done (Bustos et al.
2016).
The value of shareholders can be maximized by efficient allocation of capital through
targeted incentivization of business unit earnings and products that is superior adjusted risk
return. Financial constraints faced by firms in India might get reduced due to financial
liberalization resulting from increased capital availability. Financial liberalization in country will
also help in affecting allocation of capital to highest value. It has been ascertained that allocation
of investment funds within the country has improved due to reform of banking sector as a part of
financial liberalization. However, there was not much efficient allocation of capital and in the
early period of liberalization, there was no considerable rise in investment allocation efficiency
(Bhaduri and Kumar 2014). The reason might be attributable to the fact that there had been
misallocation of funds post liberalization making difficult for funds to channel to some
productive investments.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
Best companies of India in terms of capital allocation:
(Source: Bhaduri and Kumar 2014)
Above chart depicts efficient allocation of capital by some companies in India exhibited
by their return on capital employed. It is viewed by these companies that improvement of
performance can be done by allocation of capital in a better way. The major source and critical
driver of economic development of country is foreign direct investment. It is ensured by
government that foreign capital keeps flowing to the country by creating a robust business
environment and favorable policy regime. In recent years, many initiatives have been taken by
Indian government as relaxing norms of FDI in sectors such as Telecom, PSU oil refineries,
defense, stock exchange, power exchange and others. Under the finance Act, 2017, CBDT
(Central board of direct tax) has exempted foreign direct investment, court approved transactions
and employee stock options from long-term capital gain tax (Grath 2016). Canada is the fifth
largest foreign direct investment partner of India and the flow of capital in financial year 2016,
was over US $ 6.5 billion. It is expected by World Bank that private investment in India in year
2018-2019 is expected to grow by 8.8% by overtaking growth of private consumption and

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
thereby contributing to drive the gross domestic product of country. The greater share of defense
allocation of investment and capital in India should be shifted technology like China.
Critical evaluation of challenges that country faces due to industrialization and trade
policies:
The woeful state of infrastructure is one of the biggest problems for doing business in
India and the poor infrastructure is acting as heave on development of Indian economy. One of
major challenge in terms of trade facilitation is removal of high costs and delays resulting from
documentation and procedural factors in addition to infrastructure bottlenecks. Both
administrative and statutory needs of multiple compliance requirements should be reduced by
limiting the time of litigation disposal (Baltagi et al. 2014).
In the present scenario, the immediate challenge faced by India is revival of export
growth in the wake of rising non tariff measures adopted by several countries. Compared to other
emerging economies, share of India in world export is comparatively small and considering this,
the challenge is to increase the share of exports in world trade. Export growth rate of India by
year 2020 should be around US $ 882 billion (Simmons 2014).
The public sector enterprises performance remained poor despite substantial expansion
during period of planning. Several reasons have contributed to losses of these enterprises such as
lack of proper management, faulty pricing policy that necessities huge provision of budgets
every year. Industrial sector of country did not witness increased investment due to failure of
generating required surplus. The financial sector of India does not have the capability to mediate
and mobilize capital for responding to economic changes. Export growth and Indian industry
have become less competitive due to higher cost of capital. Equity market of India is still volatile

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
on part of foreign and domestic investors despite of some recent improvements. In India, bond
market does not practically exist. Investment of substantial amount of savings in nation can be
improved due to insurance industry liberalization. There are flaws in the banking system that is
mainly dominated by state owned banks that carries bad loans amounting to 15%-25% in total
(Szirmai et al. 2013).
There are major limitations in trade policies on India as they do not seek to attain export
competitiveness by focusing on incentivizing businesses. Policies do not contain provisions for
generation of employment and they are short-term result oriented. Restriction still prevails in
trade promotion activities and they suffer from archaic designs. For market access gains, tariffs is
not regarded an important factor and negotiations and trade policies over emphasizes tariffs.
Some other factor such as quality and technical standard should be incorporated in trade policies.
Setting up of operations in country is faced with challenge of infrastructure deficits, supply side
constraints and higher input and cost of transactions (Patterson 2015).
Conclusion:
The report demonstrates the financial market of developed and emerging economy that is
United Kingdom and India. From the discussion of capital allocation of both the countries, it can
be inferred that capital market of India still lacks on several fronts as against Britain. Economy
of India faces several challenges due to prevailing drawbacks of their trade policies and
industrialization. It is required to facilitate the development of bond and capital market in India
and take appropriate measures by government to deal with trade policies shortcomings. Growth
of domestic investors needs to be speed up by making them capable of buying foreign corporate
bonds. The efficiency of Indian capital market was substantially improved resulting from decline
in transaction costs. However, financial market of nation has become increasingly global over

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
the past few years and they have gained from flow of foreign institutional investors. There is a
need for Indian capital market to evolve continuously to deal with various challenges faced with
growing global landscape. Introduction of innovative financial products and necessary boost to
corporate debt market can be provided by setting forth of infrastructural developments while
ensuring investors best interests.

INTERNATIONAL TRADE, FINANCE AND INVESTMENT
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INTERNATIONAL TRADE, FINANCE AND INVESTMENT
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INTERNATIONAL TRADE, FINANCE AND INVESTMENT