International Trade Finance and Investment Report - Finance

This report provides a comprehensive analysis of international trade finance and investment, examining the role of financial markets in capital allocation within domestic and international economies. It delves into the evolution and functions of financial markets, with a specific focus on the UK's financial landscape, including its banking systems, derivatives markets, and foreign exchange. The report evaluates capital allocation strategies within the UK, considering the impact of Brexit and government initiatives. Furthermore, it explores capital allocation in the international context, addressing the challenges and opportunities arising from global trade and investment. An in-depth evaluation of the UK's economy is presented, including its GDP, inflation, fiscal policies, and consumer spending, alongside an assessment of trade policy challenges and recommendations for future growth. The analysis highlights the impact of Brexit and the need for strategic capital allocation to navigate the evolving economic environment.

INTERNATIONAL TRADE
FINANCE AND INVESTMENT

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................1
BACKGROUND OF FINANCIAL MARKETS............................................................................2
CAPITAL ALLOCATION WITHIN THE DOMESTIC ECONOMY...........................................3
CAPITAL ALLOCATION IN THE INTERNATIONAL ECONOMY.........................................4
EVALUATION OF ECONOMY OF UK.......................................................................................6
NATIONAL ECONOMIC POLICIES ...........................................................................................9
EVALUATION OF TRADE POLICY CHALLENGES ...............................................................9
CONCLUSION..............................................................................................................................10
RECOMMENDATIONS...............................................................................................................11
REFERENCES..............................................................................................................................13

EXECUTIVE SUMMARY
It can be summarized that financial markets play an important role in an economy, where they
direct the flow of money either by way of savings or investment to form capital. This capital
further facilitates production of goods and services and trade. It further enunciates the allocation
of capital within domestic and international economy, which is used for4 the growth and
developmental purposes of the company. Apart from that detailed analysis of the UK free trade
economy and the challenges it faces because of industrialization and the various trade policy
decisions.
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BACKGROUND: FINANCIAL MARKETS
Financial markets are the one which facilitates trade between buyers and sellers who
exchange goods at a particular price, which is also decided by the forces of this market. It plays a
crucial role in directing money flow from the savers to the investors in the economy. They
determine the growth and development of the economy by accumulating capital that is further
used in the production of goods and services (Huang and Zhang, 2017).
The origin of these markets can be traced in the past, before the 20th century. The wall street that
was started in 1792 in VOC Amsterdam is one of the initial establishments which was
synonymous to the stock market. In London the evolution began with the forming of the London
Stock Exchange in 1801. The issuing of shares was banned until 1825 after it established. It has
been governed over the years for its strong performance
UK's financial markets with capital and capabilities is one of the most innovative and dynamic
markets globally. Most of the global finance companies wishes to incorporate their business in
UK. The role of such financial market in the growth of the British economy is immense and it
has established itself as one of the largest fund management centre of the world. It is also famous
for its wealth management services to the domestic as well as overseas client. It has a well-
established banking systems, derivative markets and foreign exchange, which is possible by a
stable political environment with favourable legal and regulatory structures. It has suitable
private equity and the venture capital segments which is a major contributor towards its GDP
growth rate. The efficient financial markets are responsible for the smooth conduct of its
business activities (Polzin, 2017).
The regulation of these markets is done by a single regulatory authority under which further the
other companies are consolidated. The FSA is the governing body for regulating the all the
finance related activities and services in UK. Analysis of all the activities on the basis of their
risk and return portfolio is done by this organization.
Proper money supply is maintained between those who have surplus and those who need money
to facilitate their operations. The effectiveness of the money markets is also very important
because it helps in governing the interest rates, the level of trade, exchange rate and ultimately
the GDP growth rate. It helps in controlling the rate of inflation in the economy and also re-
bounces the economy from a depressed condition. Some major functions played by the financial
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markets is the mobilization of funds to those who are in need like the businesses planning
expansion activities, price determination function on the basis of which the exchange of goods
and services is facilitated between the buyers and sellers in the marketplace. It also maintains
liquidity in the economy and leads to development of the economy by generating the growth
prospects for the same.
ALLOCATION OF CAPITAL WITHIN THE DOMESTIC ECONOMY
The allocation of capital within the domestic economy of UK is done with utmost care
and prudence, such that it can contribute to the growth and development of the country. The
capital allocation decision shall determine the future growth prospects for the country. The
allocation of various financial resources, manpower, technology is equitably distributed to the
various sectors and regions of economy based on the priorities to the activities (Meyer, 2017).
Post the Brexit policy market reacted to the shock, and the companies which were depended on
the domestic market growth were subsequently marked down. On the contrary the companies
who are exporting goods were benefited from the falling pound and the large companies still
managed somehow but the small companies totally got disrupted. Still, it is not completely over
as the trade agreement is yet to be signed which shall further lead to movements in the market.
In order to deal with the current situation various investment plans have been developed by the
government and accordingly the capital allocation in future for the domestic economy of UK
shall be decided. Governmental infrastructure projects can be one of the opportunities where
capital should be allocated in UK in order to facilitate growth in the country. One of the great
deals could be the financing of the long term export plans with other countries after leaving the
European Union (Liu, Park and Sohn, 2018). It is to allocate a proportion of capital in the newly
built proactive industrial policy which shall help be in the generating the competitive advantage
over the labour-intensive countries. As per the industrial policy the major resources shall be
allocated to the sectors which are tech friendly, knowledge based and are capital extensive.
Investments in the region of digital development where the nation shall turn digital to build
connectivity internationally.
Capital markets also form a crucial part of the UK's economy. A large number of
companies whose revenues constitute the ninety percent of the total GDP have borrowed capital
with the help of capital markets and has grown the capital resources as well as have generated
huge employment for the country. All the markets like the stock market, bond market,
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derivatives market and the private equity market are used in order to borrow money. These also
prove an the investment opportunities to those who have surplus capital. The banking system and
the stock market all these form the capital market and are very essential to direct the flow of
money to those who can use it for further production and multiply it.
CAPITAL ALLOCATION IN THE INTERNATIONAL ECONOMY
Capital allocation of the money is done internationally such that it can effectively
compete globally and generate revenues by exploiting the resources of other companies. Capital
allocation internationally must be conducted in an efficient manner so that both the balance of
payments and the balance of trade can be maintained. Currently as the trends and various reports
reveal that the country is facing threats from the high accumulation of the government debts. So
this condition has to be avoided with the help of proper allocation of financial resources.
The investments in the foreign countries must be carried out due diligently with complete
knowledge about the country, its growth prospects, political stability, exchange rate, availability
of resources, investment opportunities and the international relations (Boermans and Vermeulen,
2020). After the Brexit policy and its exit from the European Union it has several opportunities
of forming good trade relations with the other developing or the developed countries by forming
efficient trade deals. Various mergers and acquisitions are also planned globally to facilitate the
expansions and innovations in the existing businesses. The corporate resources are to be
employed in the most profitable ventures internationally which shall generate competitive
advantage for the economy.
The international capital market comprises debt and equity components which are used by the
various countries who are the participants to borrow cheap money from international market and
also get better returns. This also helps in diversifying the risk element of the company in the
global markets. The exchange rate of the company is also established with the help of
international markets and in order to produce growth and development of the country it needs to
generate greater value of its exchange rate in comparison to other countries.
The most common uses of allocating the capital internationally can be the investment, repaying
of the debts, repurchasing shares, mergers and the acquisitions, involving in the strategic
partnerships and the payment of the dividend.
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It could be evaluated that the global portfolios for allocation are driven through the neglected
aspects. The investment in countries are often biased towards the currencies of their own to the
extent where every country holds bulk of debts securities. Capital is crossing the borders and is
demanding the companies to allocate their resources over wider market area. Foreign direct
investments is attracted towards the countries having stable economic with higher returns. The
UK has been seen investing more in EU member for the liberal economic trade policies for the
UK. Rising financial markets are causing the company to diversify their risk in other markets.
The diversification helps in reducing the risks in portfolio. The steps taken by IMF and World
Bank influences the allocation of financial funds. The world bank monitors and IMF monitors
the inflation rate and interest rates that defines the allocation of capital to be made by the
investors.
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EVALUATION OF ECONOMY OF UK
Eight years after trough in the output after financial crisis, economy of UK is slowing
down. Output, demand and the jobs are resilient in last four years since 2016 after Brexit vote.
Strength of labour market is notable achievement for government. The economy is slowed down
even when economy of world is picking quite strongly. Economy of UK is positioned at number
6 among the largest economies of the world. Growth has slowed down and more contraction is
seen after Brexit. From 2018 investments have declined, public debt stood above 85 percent of
the GDP and consumption level has also declined due to weaker growth of real income of people
. Consolidation of the fiscal policies that made the public deficit to fall below 2% of the GDP in
last 15 for first time and the fall in inflation to 1.8%. The government is focusing over Brexit
preparations which will involve the major administrative and the legislative changes.
Comprehensive strategy are underway for increasing the productivity, that are based over human
and physical capital (Lee, 2019). Government has planned to increase the investment spendings
above 3% of the GDP and for increasing budget spending. The unemployment rate of country is
rising at historic highs and is estimated 3.8% of working population as per IMF and this is
further expected to grow at 4.8% in the year 2020. Macroeconomic performance of UK conceals
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situations of the inequality and weaknesses. Country has lowest amount of the capital investment
from non government sector as percentage of the GDP.
GDP Rate: The GDP per capita of country is declining which shows that growth of economy has
slow and the pandemic will further affect the GDP of UK. However the economy is today 12%
bigger as before the time of recession . This slowdown is not only related to Brexit factors.
Inflation rate: The target of country is to control the increasing inflation rate and rate of inflation
has declined from last four years to 1.8 which shows company is growing but at very slow pace.
Fiscal and monetary policies: Policy interest rates are increasing every year which shows that
economy is highly unstable and increasing rate will make the borrowing of funds costly for the
businesses and reducing new start ups (Levchenko and Haidura, 2017). Fiscal balance as against
the GDP is negative from last five years.
Consumer index: Spending of the consumers is continuously declining as inflation was very high
and the real income growth is very weak. This is causing the companies to see considerable
decline in their profitability.
Investments: there has been decline the investments in country since Brexit. The policies are not
able to attract new investors due to the fluctuating economic state of country.
On the other international reserves are increasing of UK while the current account balance is
showing negative growth.
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Unemployment rate: It was decreasing till 2019 but again increased to 5.4% again in year 2020.
It is the most challenging factor for government in currents scenario.
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Critical evaluation of the challenges faced by country because of industrialisation and the trade
policies
NATIONAL ECONOMIC POLICIES
The government is planning to put UK at forefront of industries in future.
Among the national policies it has framed policies for increasing productivity
investments fund to around 31 billion, supporting investment in housing, digital infrastructure
and transport. Boosting the digital infrastructure above 1 billion of the public investments
including for 5G and and to encourage the roll outs of the full – fibre networks. For encouraging
the growth of business environment it has adopted adopted roll out sector and launch deal
partnerships between industry and governments for increasing the sector productivity
(Kazancoglu and et.al., 2021). Drive for 20 billion investment in the high potential and
innovative businesses, inclusive of 2.5 billion investment in British Business bank. Launch of
review actions for improving growth and productivity.
Industrialisation could be described as transformation of social and economic society to
the industrial economy. Industrial revolution has brought both advantages and disadvantages for
the country. The first advantage is unprecedented scale of the operation which became possible.
Use of machines made companies to make products very faster that made products more
accessible and cheaper. On flip side there is massive overcrowding in cities for the starters which
existing infrastructure was not well equipped for handling. Increase in output made the economy
to grow at rapid speed. It also made new innovations and development of production which made
life easier (Keogh-Brown and et.al., 2020). Mobility has increased to significant level for all the
products. Disadvantages include unregulated growth and poor working conditions. They were
forced to work in unhealthy and unsafe environment and lower pay. The increase in factories led
to more pollution of environment.
EVALUATION OF TRADE POLICY CHALLENGES
UK follows single market trade policy with EU. European commission has provided
choice for trading relations after Brexit of becoming rule taker that provides full market access as
Norway and to have standard FTA like Canada. EU has made partial integration with Norway
and Canada where no integration is allowed for Single market economy . Leaving issue of the
tariffs that are eliminated in free trade deals, aim of UK is to have free access to Single market
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for the services avoiding regulatory barriers. The trade policies are influencing the
industrialisation in economy.
EU-UK Economic Area
UK accepts broadly Single market rules and the parallel institutions, and also negotiates
the new arrangements for freedom of the movement and a greater input for devising regulations.
EU – UK Deep & Comprehensive FTA (Reverse Ukraine)
It will allow the participation in Single Market in the sectors that remains aligned and this
subject to the oversight. In this harmonised sectors will face barriers (Trade Policies Challenges,
2020).
EU – UK comprehensive FTA ( Canada plus)
It will be modelled on CETA with aim of the agreeing active access for the
provisions and services for the enhanced regulatory cooperation, for minimising
trade barriers to extent possible.
CONCLUSION
The project undertaken shows a detailed analysis of the financial market in UK. It
describes that this market is one of the largest in the world and is the major contributing factor
for the growth and developmental activities. It shows the division of these and the crucial role-
played by them in facilitating trade and investment in the nation. It also analyses the allocation of
capital within the domestic and the international economy as per the needs. Mobilization of
funds is done such that the savers and the investors of money can be integrated, this shall help in
accumulation of capital resources (Bruno and et.al., 2017). These capital resources boost the
production efficiency of the company , employment generation and the developmental projects.
Apart from this it shall also highlight the economy UK and its characteristics. The economy has
the policy of free trade but with minimum control and intervention by the government. It also
discloses the various challenges posed on the economy due to the era of industrialization and
various trade policies of the nation causing disruptions. Lastly it shall include the necessary
recommendations that should be undertaken to improvise the conditions of the economy.
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RECOMMENDATIONS
The International monetary Fund says that the UK economy should form strategies to
improve the condition of its economy and that it has scope of increasing the efficiency level.
There are certain suggestions to improvise the current status of the economy:-
 The government debts of the country are very high in comparison to other countries
which needs to effectively tackled. To create the public finances is very important as per
the recent trends and then to allocate these finances to facilitate the developmental
activities in the country (Liu and Zhang, 2020).
 The Brexit policy is also creating lot of uncertainties in the market which can be
improved by properly designing the trade agreement which shall not impose taxes in the
cross border exchange, free excess to the markets of European Union shall be provided
and the job security shall remain intact.
 Invest or allot more budget to the research activities that can be helpful in technological
advancement and in accordance with that the infrastructure of the country can be built in
terms of health, education, transport and the energy sector.
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 Its productivity levels have also fell as compared to the past trends. Operational
efficiency is very crucial for the overall growth of the country (Hameiri and Jones,
2018).
 Currently UK's economy is facing the housing bubble because the house price to earning
ratio is very high in its case. This sector needs the government intervention to prevent
unnecessary price hikes.
 After taking the exit from the European Union, they need to establish trade agreements
with other developed countries which help its long term growth plans and leads to
sustainable development of the country (Salim and et.al., 2017).
 It can also work to boost the levels of employment and reduce the risk that is posed on
the job security of its citizens due to the Brexit policy decision.
 It also helps in meeting the demographic challenges and balancing the workforce by
incorporating the old age people in the corporations.
 Majority of its competition is with the labour intensive countries so it also has to develop
its efficiency in the same.
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REFERENCES
Books and Journals
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productivity? A heterogeneous empirical analysis from Chinese manufacturing. China
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barriers and solutions. Renewable and Sustainable Energy Reviews. 77. pp.525-535.
Meyer, F. V., 2017. International trade policy (Vol. 14). Routledge.
Liu, Y., Park, J. L. and Sohn, B., 2018. Foreign Investment in Emerging Markets: International
Diversification or Familiarity Bias?. Emerging Markets Finance and Trade. 54(10).
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Boermans, M. A. and Vermeulen, R., 2020. International investment positions revisited: Investor
heterogeneity and individual security characteristics. Review of International
Economics. 28(2). pp.466-496.
Bruno, R. L. and et.al., 2017. Foreign direct investment and the relationship between the United
Kingdom and the European Union. In The Economics of UK-EU Relations (pp. 139-
173). Palgrave Macmillan, Cham.
Liu, G. and Zhang, C., 2020. Economic policy uncertainty and firms' investment and financing
decisions in China. China Economic Review. 63. p.101279.
Hameiri, S. and Jones, L., 2018. China challenges global governance? Chinese international
development finance and the AIIB. International Affairs. 94(3). pp.573-593.
Salim, R. and et.al., 2017. Can foreign direct investment harness energy consumption in China?
A time series investigation. Energy Economics. 66. pp.43-53.
Lee, D.H., 2019. Building evaluation model of biohydrogen industry with circular economy in
Asian countries. International Journal of Hydrogen Energy. 44(6). pp.3278-3289.
Levchenko, O.M. and Haidura, H.M., 2017. METHODS OF EVALUATION OF
INNOVATION ACTIVE UNIVERSITIES’CONTRIBUTION IN THE DEVELOPMENT
OF KNOWLEDGE ECONOMY (INTERNATIONAL EXPERIENCE). tendencies and
prospects. p.28.
Keogh-Brown, M.R., and et.al., 2020. The impact of Covid-19, associated behaviours and
policies on the UK economy: A computable general equilibrium model. SSM-population
health.12. p.100651.
Kazancoglu, Y., and et.al., 2021. Performance evaluation of reverse logistics in food supply
chains in a circular economy using system dynamics. Business Strategy and the
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Online
Trade Policies Challenges. 2020. [Online] Available trough:
<https://www.instituteforgovernment.org.uk/summary-trade-after-brexit>
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