University Finance Essay: International Trade and FDI

This essay provides a comprehensive overview of how global firms manage international trade finance and foreign direct investments (FDI). It begins by discussing the funding options available to multinational corporations (MNCs), including equity and debt financing, and the key elements involved in raising equity capital from international markets. The essay then delves into international trade finance, examining the role of letters of credit, currency risk, and the importance of maintaining documentation for international transactions. It also explores FDI and political risk, analyzing factors such as market competitiveness, production location, and control over foreign operations, as well as strategies to mitigate political and payment risks. Finally, the essay covers multinational capital budgeting and cross-border acquisitions, outlining the complexities of capital budgeting for foreign projects, currency risks associated with acquisitions, and strategies to manage these risks. The essay concludes by summarizing key strategies and policies for successful international trade and investment, emphasizing the importance of analyzing market conditions and managing risks to ensure sustainable growth and prosperity for global firms.

Running head: INTERNATIONAL TRADE FINANCE
INTERNATIONAL TRADE FINANCE
Name of the Student:
Name of the University:
Author Note:

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Executive Summary
Globalization can be beneficial as well as very complicated for the foreign investors and hence it
is important for the foreign investors to strategically plan their FDI options.in I do this report on
how the foreign trade finance and FDI managed by foreign firms.

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Table of Contents
1.1 Introduction...........................................................................................................................3
1.2 Discussion..................................................................................................................................3
1.2.1 How do global firms manage their international trade finance and foreign direct
investments?................................................................................................................................3
1.2.2 International trade finance..............................................................................................5
1.2.3 FDI and political risk......................................................................................................6
1.2.4 Cross-border acquisitions & multinational capital budgeting........................................7
1.3 Conclusion.................................................................................................................................8

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1.1 Introduction
Globalization have helped every taking part country to grow and flourish. Different
investors and MNEs are coming forward to invest in foreign countries and make investment in
foreign financial market. However, there are many terms like investment strategies, position,
condition and risks should tested at first very thoroughly which associated with the investment. It
is important for the multinational companies to analyze their own competitiveness in the foreign
market before investing in there. There are many techniques discussed below which will help the
companies to flourish more and increase their competitiveness for the betterment. The FDI and
other funding options are available for every MNEs which needs proper strategies to apply and
policies to flourish more. They also discuss different instruments are also which will help the
companies to choose their suitable option that will help them to sustain in the foreign market and
do a hassle free business and also being capable of competing with the local competitors. They
also discuss some political risks and investments below with detail to understand which of the
strategy to apply for benefit.
1.2 Discussion
1.2.1 How do global firms manage their international trade finance and foreign
direct investments?
1.2.1.1 Funding
When any company starts their business then it is important to manage their funding
properly. The business can choose between equity and debt for the funding source. The best
option would be to utilize the optimal financial structure where a smart mixture of equity and
debt will help the company to make profit with minimum liability. Multinational companies have

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the potential to manage their fund using more of debts because they can support higher debt
ratio. When this companies diversifies their cash flows globally then they can reduce the
variability in their cash flow. There are three key elements which needs to kept in mind while
raising equity capital from international market and the three elements are equity listing, equity
issuance and private placement. There are many reasons as why a MNC would sell or cross-list
their shares in a very liquid stock exchange like this would increase the liquidity of the existing
shares, price of the shares will increase while overcoming the mis-pricing, getting the secondary
market for their shares in host country and many more.
There are many primary alternative instruments which are available in the global market
for MNCs to raise debts from enjoy following:
 Syndicate loans: different loan taker can take part hence allows them to diversify
their risk and exposure. This helps the borrower to gain a lot and avail the capital
at a very lower cost.
 Euronotes: euronotes was considered as the development in the global money
market because it helps the borrower to get short-term fund at a cheaper rate than
the syndicate loan.
 Euro-commercial paper: it is like the commercial paper which issued in the
domestic market all over the globe. This is a short-term debt type provided to the
bank or corporations.
 Euro-medium term notes: this is like the normal bond because it has principal,
maturity, coupon structure and rates. This allows to continue issuance over a time
unlike the bond.

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 International bonds: these bonds created by the investment bankers for those
foreign investors who does not like the normal bond regulations and timing.
Eurobonds and foreign banks are the classification for international bonds. There
is a distinction between them which depends upon the fact whether the investor in
from domestic or foreign.
1.2.2 International trade finance
When there is a new customer in the global market and it is nonaffiliated buyer then it
becomes hard for the exporter to assess the credit worthiness of the importer. Here the exporter
will rely over a letter of credit along with other documents. While for the affiliated buyers it is
not tough to import fund from different exporters. Globalization have helped many different big
firms to manufacture or sell their products in different countries which reduces their cost of
production and increases their profit. In this globalization period letter of credit and draft are
different because bank issues L/C to promise for payment when submitted the letter to the bank
and draft is a document sent by business firm to ask the bank to pay the money. L/C also linked
because it states a condition under that the bank promises to pay a draft drawn. There is a big
difference between currency risk and risk of non-completion. Currency risk is a type of risk
where the currency carries for doing the payment of the import gets changed relative to other
currency and risk of non-completion means the risk of non-payment by the one of the party.
While doing business in global market the exporters insists the other party for letter of credit so
that the payment secured from a well-known bank.
There are some documentations which needs to maintained by the exporter while doing
business globally. However, even after all this rules and regulations set by the council. For this
extreme times various governments have developed different agencies who will work as agents

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for the companies to insure the payment for the other party so that the trust sustains and business
continues to flourish with no hassle from any of the party. It is important to maintain the rules for
internal trade so that it maintains a global harmony with no conflict. Every business have to
clearly know about what are the rules to become affiliated buyer or seller, securing the payment
being both the party and involving the government for a smooth payment option with no hassle.
All these points ensure that there will be a regular international trade between every countries so
that the economy of every country improves with the help of other country and the global market
of goods and finances also improves.
1.2.3 FDI and political risk
Before entering the global every firm should analyze their competitiveness, their
production location, their level of control over any foreign operation and what amount they want
to invest into the foreign business. The most threat of the domestic firms is from the MNEs
because they take advantage of the market imperfections and they utilize their techniques to
gather the targeted audience. This creates a competitive advantage over the market. Before
setting up business in different nation, it is important for every business to analyze the market
first and then find out strategies to get competitive advantage. Firms can utilize the economies of
scale and scope for the purpose of analyzing the production economies, financial economies,
transportation economies, purchasing economies and marketing economies. It’s seen that a firm
which is already operating in a competitive home market have the most competitiveness in them
and they have different strategies and policies to maintain their position in market at any cost.
Every MNEs try to maintain the OLI paradigm where it properly analyzed whether they have the
competitive advantage in them for sustaining in other market and attract customers over there
and whether or not they can manage the entire value chain.

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To avoid the risk of payment and other political factors it is important for every business
to link their finances with the OLI paradigm. The behavioral approach from different factors
helps the investor to understand where exactly to invest in foreign market. It suggests proper
analysis to done by the exporter whether it is beneficial in producing the good in the importing
country or is it more beneficial in exporting the already manufactured good there. This is a risk
which every firm takes when they are exporting their goods to other country. A MNE have to
also think about whether they will operate in the market by doing a joint venture with any
capable local partner or they will operate by themselves. The MNE also have to make another
decisions like whether they do Greenfield investment or acquisition. Acquisition is more
beneficial for the MNE to grow here the MNE will gain an already grown business, it is also
cost-effective and it will help the MNE to get strategies to tackle political, environmental and
other uncertainties. Hence, this is the only reason which have helped the MNEs to grow their
business in foreign market easily.
1.2.4 Cross-border acquisitions & multinational capital budgeting
Multinational capital budgeting is a type of traditional capital budgeting where cash
outflows and cash inflows will associated with the long-term investment projects. However,
there are many complexities related to the foreign project in capital budgeting more than
domestic case enjoy distinguishing parent cash flow from project cash flow and many others.
MNEs should test that the risk adjusted return over any investment in other nation should be
more than the local competitors in the similar project. This will help the MNE to analyze their
competitiveness in that economy. Before investing in any of the project it is necessary to analyze
the IRR from that project and how much of the blocked cash flow will be there in urgent cases
should focused so that for any type of uncertainty, various strategies and policies can developed.

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Strategies and policies should also involve the situation of when there will be an inflation in the
host country. The main important analysis will be to compare the cost of equity of the nation in
which the MNEs will invest their money upon whether or not it will be beneficial.
There are three stages considered to be the cross-border acquisition, the first one is
identification and valuation of the target, execution of acquisition purchase and offer from tender
and management of post-acquisition transition. However, there are currency risks associated with
the cross-border acquisition because it involves financing, bidding, settlement and operating
stages for the foreign companies. The most difficult exposure for currency is when the assorted
risk associated with both timing and information of the business. It believed that the uncertainty
in every stage declines when the stages are complete and it reaches the agreements and contracts.
In an initial bid, if denominated in foreign currency then it will create contingent foreign
currency exposure for bidder. This exposure will grow when there will be occurrence of
negotiations, gaining of approval, regulatory request and emergence of competitive bidders in
market. Even after applying different hedging strategies, the purchase currency call option will
remain the simplest one. Following the simple steps will help the foreign investors and MNEs to
securely do their business in other countries. Some simple steps and simple regulations would
help them to flourish better and improve the economy of themselves and host countries.
1.3 Conclusion
After analyzing the strategies and policies of how the MNEs manage their international
trade finance and FDI it can clearly concluded that the foreign companies and investors can
easily apply some of the basic knowledge and strategies to test their competitiveness, the market
position of the other nation and predict the possibilities of their growth and prosperity. There are

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many related risk in the market which associated with the investment and all of them needs to
professionally tested so that preventive measures can adopted and the investors can sustain
growth. Payment risks, acquisition risk and a lot of things compared before the final investment
done. Different funding discussed and the most suitable funding option varies according to the
condition and type of market the investor will invest. Suitable portfolio options also depends
upon the invested market and the investor have to also deal with different foreign market
complexities associated with the investment, strategies and policies also have to developed
accordingly. The investor or the MNEs must know how to deal with this kind of situation and
make the best use of it for benefit.

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Bibliography:
David, K., Arthur, I., & Michael, H. (2004). Multinational business finance. Addison-Wesley.