GIFEB Finals Reviewer  Platform – business expands into a foreign country but the output from the foreign

operations is exported to a third country

TOPIC 5: INTERNATIONAL INVESTMENT

International Investment – an investor diversifies his portfolio by purchasing various

financial instruments like shares, mutual funds, etc.; KEY WORDS: portfolio diversification, Supply Chain
different financial instruments
Input > Process > Output
FINANCIAL INSTRUMENT (DRCBB)
Raw materials > Refine RM (Production) > Output > Distributed to the different
Debentures and Bonds > Receivables > Cash Deposits > Bank Balances > Bills of Exchange intermediaries (channel members) > Consumers

TYPES OF INTERNATIONAL INVESTMENT  Backward FDI

 Forward FDI
1. Foreign Direct Investment
- Investor invests in a business situated on foreign land in order to acquire Advantages of FDI:
ownership or collaboration
 Economic growth  Human capital development
- Can be made by: (1) obtaining a lasting interest; or (2) expanding one’s business
 Technology  Increase in exports
into a foreign country
 Exchange rate stability  Improved capital flow
- Direct or indirect ownership of 10% or more of the voting power in the business,
 Creation of a competitive market  Climate
according to the Organization of Economic Cooperation and Development
 Research and Development
(OECD)

Methods for a domestic investor to acquire voting power in a foreign company:

Disadvantages of FDI:
 Acquiring voting stock in a foreign company
 Hindrance of domestic investment  The risk from political change
 Mergers and acquisitions
 Negative exchange rates  Higher cost
 Joint ventures with foreign corporations
 Economic non-viability  Expropriation
 Starting a subsidiary of a domestic firm in a foreign country
 Modern-day economic colonialism  Poor performance
Types of Foreign Direct Investment  Inflation and exchange crises  Trade deficit
 Increase in pollution
 Horizontal – business conducts the same activities but in a foreign country
 Vertical – business expands by moving to a different level of the supply chain
 Conglomerate – business acquires an unrelated business in a foreign country FDI transactions are done in 3 main ways:
 1. Greenfield Projects – FDI is used to start an enterprise in a foreign country from services
scratch. Also includes the construction of new plants, offices, etc.
2. Joint Ventures – FDI is used to enter in venture with the foreign corporations in
Brownfield Investment – Benefits Brownfield Investment - Drawbacks
order to expand their business in a foreign country; corporate joint venture,
Time saving – Investor does not need to Local regulation – The local regulations are
partnership joint venture, contractual joint venture
build infrastructure, so the time taken to less liberal than those of developed
3. Brownfield Investment – Type of FDI in which investment is used to merge or
initiate production is reduced. economies, which may become a hurdle to
acquire an enterprise on foreign land the optimum production level.
Advantages of Greenfield Investments Disadvantages of Greenfield Investments Local intelligence – The benefits of local Outdated facility – The abandoned facility
Helps to gain high-quality control and Requires a huge amount of capital knowledge add to the advantage of the has lower utility for the new product to be
management of brand image expenditure investor. undertaken.
Creates job for the people in the country in Involves venturing a project outside the Boost to the local economy – The local Repatriation Laws – The local repatriation
which Greenfield Investments take place country of incorporation; planning, economy boosts quickly from increased laws are highly restrictive.
direction, and coordinating becomes very jobs and increased GDP due to the quicker
difficult. initiation of production.
Requirements for intermediary under a The country in which Greenfield Environmental benefits – The local Cleanup costs – The costs are borne by the
Greenfield investment are removed Investments are made may face adverse environment is better as the investor helps investor, which is an added disadvantage.
completely, resulting in a high amount of consequences clean up the hazardous waste of past
control over the whole project industrial activities.
Customers and potential clients will get a High fixed costs are involved in making an Renovation – Old, dilapidated buildings get
good impression that the company is investment in another country by the renovated, which reduces the risk of them
committed to the market and the parent company falling apart.
environment
Press opportunity increases Government policies will become a hurdle Greenfield vs Brownfield
for achieving their goals if there are
discouraging government policies in that Greenfield Brownfield
country Nature of investment The investor constructs a The existing facility is either
Implementation of long-term strategy Involves a huge amount of entry cost completely new facility on a used as it is or is
becomes easy, while the company becomes vacant plot of land redeveloped for the new
lucrative to changes and opportunities production
around it Efficiency They take care of all kinds of There may be restrictions
Companies entering the new market Greenfield investment is considered the efficiency hazards at the on the amount of
through Greenfield Investments obtain riskiest among others planning stage. Therefore, redevelopment that can be
total dominance over the products and the production levels are done, suiting the new
 optimum in such projects. production requirements.  Trade Policy and coherence of FDI and trade policies
Therefore, this could
become a hurdle to the How Governments Encourage FDI
efficiency of the project. Governments seek to promote FDI when they are eager to expand their domestic economy
Cost Require greater investment Some projects may initiate and attract new technologies, business know-how, and capital to their country.
as all that the investing by making minor
company gets in the land, modifications to the existing  Financial incentives: Host countries offer businesses a combination of tax incentives
and the entire construction facilities and loans to invest. Home-country governments may also offer a combination of
is undertaken insurance, loans, and tax breaks in an effort to promote their companies’ overseas
Time Require greater time for the Require lesser time investments.
same reasons as their costs  Infrastructure: Host governments improve or enhance local infrastructure – in
are higher energy, transportation, and communications – to encourage specific industries to
Cleanup Costs Don’t incur any cleanup cost Cleanup costs are incurred
invest.
since Brownfield investment
 Administrative processes and regulatory environment: Host-country governments
sites may be contaminated
due to prior usage streamline the process of establishing offices or production in their countries.
Risk of failure Have a higher risk of failure Lesser risk of failure  Invest in education: Countries seek to improve their workforce through education
because they incur higher and job training. An educated and skilled workforce is an important investment
costs; therefore, they may criterion for many global businesses.
lead to a larger loss if these  Political, economic, and legal stability: Host-country governments seek to reassure
projects fail businesses that the local operating conditions are stable, transparent, and unlikely to
change.

Factors Affecting International Investment How Governments Discourage or Restrict FDI

In Case of FDI
 Ease of doing business in the country, like rules and regulations related to entry in
the market
 Political and social conditions of the economy
 Policies on the functioning and structure of markets
 Policies related to ease the business (i.e., investment promotion, incentives,
improvements in amenities, and other measures to reduce the cost of business)
 Privatization Policy
Governments seek to limit or control FDI to protect local industries and key resources,
preserve the national and local culture, protect segments of their domestic population,
maintain political and economic independence, and manage or control economic growth.
 Ownership restrictions: Host governments can specify ownership restrictions if they
want to keep the control of local markets or industries in their citizens’ hands.
 Tax rates and sanctions: A company’s home government usually imposes these
restrictions in an effort to persuade the companies to invest in the domestic market
rather than a foreign one.
 2. Foreign Portfolio Investment – an investment made in a foreign economy by an 5. Know-how – Does the company want access to local technology or business process
investor with no motive to gain any role in the management of any organization; a knowledge?
component of capital transactions in the balance of payments (national accounting) 6. Customers and competitors – Do the company’s clients or competitors operate in
the country?
Characteristics
7. Policy – Are there local incentives (cash and noncash) for investing in one country
1. Not actively exercising control over investment versus another?
2. More liquid 8. Ease – Is it relatively straightforward to invest and/or set up operations in the
3. Short term oriented country, or is there another country in which setup might be easier?
4. Lower risk 9. Culture – Is the workforce or labor pool already skilled for the company’s needs or
5. Less capital will extensive training be required?
10. Impact – How will this investment impact the company’s revenue and profitability?
Factors affecting portfolio investment 11. Expatriation of funds – Can the company easily take profits out of the country, or
 Economic growth prospects are there local restrictions?
 Sovereign risk 12. Exit – Can the company easily and orderly exit from a local investment, or are local
 Interest rate laws and regulations cumbersome and expensive?
 Tax rates
 Exchange rate
TOPIC 6: GLOBAL FINANCIAL INTEGRATION
Advantages Disadvantages
 Portfolio diversification  Political risk Overview
 International credit  Volatile asset pricing - The degree of integration of financial markets around the world increased
 Interest rate  Liquidity significantly during the late 1980s and 1990s
 Improves liquidity - Key factors underlying this process: (1) the increased globalization of
 Exchange rate benefit investments seeking higher rates of return; and (2) the opportunity to diversify
risk internationally
Factors that influence a company’s decision to invest: - Many countries have encouraged inflows of capital by: (1) dismantling
restrictions; (2) deregulating domestic financial markets; and (3) improving their
1. Cost – Is it cheaper to produce in the local market than elsewhere? economic environment and prospects through the introduction of market-
2. Logistics – Is it cheaper to produce locally if the transportation costs are significant? oriented reforms
3. Market – Has the company identified a significant local market? - East Asia, Latin America, and Eastern Europe have removed restrictions on
4. Natural resources – Is the company interested in obtaining access to local resources international financial transactions
or commodities?
 - Access to world capital markets expands investors’ opportunities for portfolio
diversification and provides a potential for achieving higher risk-adjusted rates of
return
- Recent financial crises: (1) the Mexican peso crisis of December 1994; (2) the
Asian crisis triggered by the collapse of the Thai baht in July 1997; (3) the Russia
crisis of August 1998; (4) the collapse of the Brazilian real in January 1999; and
(5) the subprime crisis of 2008 that resulted in the collapse of Lehman Brothers
Potential Benefits
A. Consumption Smoothing
 Financial openness allows countries to borrow during economic downturns and lend
during expansions, enabling households to smooth out consumption over time.
 Capital flows facilitate international risk sharing and can increase welfare if shocks
are temporary.
B. Domestic Investment and Growth
 Financial openness provides access to international resources, supplementing
domestic saving and increasing physical capital per worker.
 Foreign direct investment (FDI) has significant long-term effects, including the
transfer of managerial and technological know-how, improved labor force skills, and
spillover effects on domestic investment.
C. Enhanced Macroeconomic Discipline
 Free flow of capital across borders can incentivize countries to adopt disciplined
macroeconomic policies, reducing policy mistakes and promoting stability.
 Macroeconomic and financial stability resulting from an open capital account can
lead to more efficient resource allocation and higher economic growth.
D. Increased Banking System Efficiency and Financial Stability
 Financial openness can deepen domestic financial markets and improve the
efficiency of financial intermediation.
 Foreign bank penetration enhances competition, reduces costs, improves technology
and risk management, and contributes to the development of bank supervision and
legal frameworks.
 Foreign banks can enhance access to international capital, contribute to the stability
of the domestic financial system, and improve the loan portfolios of domestic banks.
Potential Cost
A. Concentration of Capital Flows and Lack of Access
 Cross-border capital flows are often concentrated in a small number of recipient
countries, leaving many small countries with limited access to financing.
 Low-income countries have seen a decrease in capital flows, while larger middle-
income countries have received a significant share.
B. Domestic Misallocation of Capital Flows
 Open capital accounts may lead to domestic investments that are speculative or of
low quality, such as in the real estate sector.
 Investments in nontradable sectors with low productivity can hinder export capacity
and contribute to growing external imbalances.
C. Loss of Macroeconomic Stability
 Financial openness can result in rapid monetary expansion, inflationary pressures,
real exchange rate appreciation, and widening current account deficits.
 Flexible exchange rates may bring corrective movements in trade flows, but fixed
exchange rates can lead to currency crises and increased financial instability.
D. Herding, Contagion, and Volatility of Capital Flows
  Highly open financial markets are prone to volatile capital movements, including • Safe and secure method of banking;
large reversals in short-term flows and speculative pressures.
• Hassle free process;
 Volatility in capital flows can lead to liquidity runs, bank runs, and systemic financial
• Avoidance of queues for all utility bill payment;
crises.
• Easy transfers from one account to another;
E. Risk of Entry by Foreign Banks
• Unique user id and password;
 Foreign bank penetration may prioritize credit rationing to larger and more
creditworthy borrowers, potentially neglecting small firms in the non-tradable • Application for fresh cheque book;
sector.
• Keep a check on your balance and all investments.
 This can negatively impact output, employment, and income distribution, limiting
the overall efficiency improvement in the financial sector.

Types of E-banking services Internet banking also provides various services, such as:

• Internet Banking. • NEFT/RTGS funds transfer;

• Mobile banking. • Balance Check;

• Automated Teller Machine (ATM’s). • Utility bill payment;

• Debit Cards. • Open or close fixed deposit account;

• Credit Cards • Buy sovereign gold bonds;

• Electronic Funds Transfer (EFT). • Buy Insurance;

• Electronic Clearing Services (ECS). • Set-up auto payment;

• Electronic Data Interchange • Book all kinds of tickets online;

• Telebanking. • Issue of Cheque book;

• Door-Step Banking. • Buying/selling Shares, IPOs;

Features of internet banking • Buying or Selling using E-commerce websites;

• Daily Account Statements.

 Greater choice: Consumers benefit from a Making a rash decision: Financial products
greater choice of products and services that are bought instantly online may make
because they can be bought remotely, it easier for consumers to make quick,
regardless of location. uninformed decisions.
Cheaper deals: Fintech companies may not Technology-based risks: Financial products
TOPIC 7: FINANCIAL TECHNOLOGY need to invest money in a physical bought online may leave you more exposed
infrastructure so they may be able to offer
to technology-based risks, e.g., your
Financial Technology (Fintech) cheaper deals to consumers. personal date could be misused or you
- any technology that delivers financial services through software, i.e., online could fall victim to cybercrime.
banking, mobile payment apps, or even cryptocurrency More personalized products: Technology Financial exclusion: Technology can exclude
allows fintech companies to collect and those who don’t know how to use the
- primary objectives are to change the way consumers and businesses access their
store more information on customers so internet or devices like computers,
finances and compete with traditional financial services
they may be able to offer consumers more smartphones, and tablets.
Examples of fintech personalized products or services.

- Fintech is changing the world of finance for consumers in a myriad of ways, e.g.,
you can now open a bank account over the internet, you can link the account to TECHNOLOGIES THAT CONTRIBUTE TO FINTECH
your smartphone and use it to monitor your transactions, and you can turn your 1. Artificial Intelligence (AI) and Machine Learning (ML) – some of the most used
smartphone into a “digital wallet” technologies in fintech; some of the fintech applications of AI and ML include credit
- Fintech is also rapidly changing the insurance and investment industries. Car scoring, fraud detection, regulatory compliance, and wealth management
insurance providers now sell “telematics-based” insurance where your driving is
monitored using data collected via your smartphone or a “black box” fitted in Artificial Intelligence (AI) – the process of imparting data, information, and human
your car. intelligence to machines; purpose is to develop self-reliant systems that can mimic human
- Advances in technology means consumers can also invest over the internet on behavior; most AI systems stimulate natural intelligence to solve complex problems
an “execution only” basis without any face-to-face interaction.
Common examples of AI: Google Translate (Machine translation), Sophia (Robotics), Siri
POTENTIAL BENEFITS POTENTIAL RISKS (Virtual assistant), Tesla (Self-driving vehicle)
Speed and convenience: Fintech products Unclear rights: Fintech companies may be
Machine Learning (ML) – uses computer algorithms and analytics to build predictive models
tend to be delivered online and so are new to the financial industry and use
that can solve business problems; based on algorithms that can learn from data without
easier and quicker for consumers to access. different business models to traditional
providers. This can make it harder to relying on rule-based programming
ascertain which ones are regulated and What can ML and AI applications in the financial industry improve?
what your rights are if something goes
wrong. 1. Increased cost-efficiency – automated processes require less staff to be involved
 2. Advanced fraud prevention – any abnormality can’t be left unnoticed by a properly
adjusted operating system
3. Reduced biases – predefined checks enable the system to be predictive and stable
4. Boosted customer engagement – personalized settings motivate customers to be
more involved in a product
5. Enhanced scalability – your system can be easily adjusted to the scale of your
business needs
6. Improved time-management – the algorithm works faster than you
TOP 10 APPLICATIONS OF AI AND ML IN THE FINTECH SECTOR
1) Advanced Decision Making: AI and ML approaches actively contribute to data
visualization and analysis, allowing for more accurate decision-making
2) Customer Experience Automation: Fintech organizations are turning to AI-powered
customer support bots to provide their clients with a convenient and frictionless
experience
3) Virtual Financial Assistants: Allows users to make decisions about their financial
objectives and portfolios, as well as track stock and bond prices, among other things
4) Security: Users may instantly view any activity connected to their accounts/assets
and keep track of questionable behaviors using AI and ML online security
5) Managing Assets: AI is actively used by investment businesses to build algorithms
for anticipating trends and patterns
6) Loaning: Loans made possible by AI and ML technologies greatly decrease
operational downtime and the probability of mistakes; candidate assessments and
the ultimate judgment will be devoid of human prejudice
7) Accurate Forecasting: Fintech programs may do extensive computations and analysis
to make very accurate predictions about an asset’s future financial performance
8) Increased Personalization: The industry now has the potential to personalize one’s
money using platforms such as smart wallets
9) Client Risk Analysis: AI is also used to automate customer selection based on their
risk profile; delegating selection/review procedures to AI has the extra benefit of
removing human bias
10) Trading: For hedge funds and investment banks, ML algorithms are used to do
significant data analysis to facilitate trading
2. Big Data and Data Analytics – Data from customers and markets is of high value to
fintech companies. Through large datasets, consumer preferences, spending habits,
and investment behavior can be extracted and used to develop predictive analytics.
Predictive analytics – predicting how customers are likely to behave using past information
and mathematical algorithm
Big Data – its value will increase as the Internet of Things (IoT), mobile technology advances,
and improved authentication mechanisms above become available.
BIG DATA 3 DISTINCT V CHARACTERISTICS:
1) Volume – traditional technologies are incapable of processing the massive amounts
of data that a big data platform must handle
2) Velocity – data must be processed in real-time
3) Variety – a strong big data platform should be able to handle a variety of data
formats, including unstructured data such as audio, tweets, status updates, and
videos
BENEFITS OF BIG DATA IN FINTECH INDUSTRY
 Customer Orientation: Fintech may utilize big data to develop through user profiles
and precise client segmentation strategies, allowing them to customize their services
to their specific demands.
 Enhanced Security: Big data may assist fintech in developing accurate fraud
detection systems by detecting any odd transactions.
 Improved Risk Assessments: Fintech can operate with more financial certainty,
manage cash flow, and give consumers competitive rates thanks to improved risk
assessments.
  Unmatched Customer Service: Fintech may use big data to establish a digital trail of
a customer’s financial behavior, spot possible problems, and give consistent
assistance.
 Chatbots, Bots, and Robotic Process Automation: Chatbots use AI to enable
interaction 24/7. These chatbots may assist consumers in a number of ways,
including handling transactions and providing vital information.
3. Robotic Process Automation (RPA) – the process of assigning manual, repetitive
tasks to robotics instead of humans in order to streamline workflows in financial
institutions.
Most widespread applications of RPA in finance are:
EIGHT EFFECTS OF FINTECH AND BLOCKCHAIN ON FINANCIAL INSTITUTIONS
 Statistics and data collection
 Regulatory compliance management
 Communication and marketing through emails and chatbots
 Transaction management
FIVE WAYS TO USE RPA IN FINANCE
 Drive sustainable growth - With an RPA implementation, your financial institution
can have customer behavior data automatically sent to specific people in the
organization. ML models help group customers into categories based on their
behavior, so the most appealing products or services can be recommended to them.
 Boost operational efficiency - RPA technology drives down operational costs by
automating the transaction-heavy, manually intensive tasks that require
reconciliation.
 Revitalize the customer experience - RPA tools can improve all aspects of the
customer experience, from initial onboarding to account updates. New customers
can open new accounts and apply for additional products in minutes with
automated Know Your Customer (KYC) validation.
 Fight financial crime - RPA improves the speed and accuracy of fraud detection. RPA
bots confirm whether data adheres to federal anti-money laundering (AML)
guidelines.
 Manage regulatory compliance - financial institutions can use RPA to strengthen
governance of financial processes. RPA helps consolidate data from specific systems
or documents to reduce the manual business processes involved with compliance
reporting.
4. Blockchain – blockchain technology is being adopted at a large scale in the financial
industry primarily due to its ability to securely store transaction records and other
sensitive data. It is also the backbone of many cryptocurrencies.
1) Improved Service - Blockchain will be able to offer personalized services that fit
specific needs.
2) Speed and Cost Savings - Blockchain could quickly provide this service as it can be
programmed to accept information from any source with no human intervention
needed. This means that every business could apply for a license without taking days
off work or the like.
3) Shift in Control - Users will own and manage their data without having to deal with
middlemen.
4) Huge Size - blockchain platforms have what it takes to manage high transaction
volume without slowing down, which is a viable competitive advantage. There are
no limits; blockchains do not need to rely on intermediaries to process any
transactions efficiently.
5) Faster Transactions - blockchain transactions do not require third parties for
verification; rather, they are stored publicly. Once you request one network node, it
will be processed immediately across all nodes.
6) Lower Costs - smart contracts will immensely reduce the need for manpower and
other related operating costs.
7) Better Transparency - Blockchain has better transparency than traditional financial
institutions do.
 8) More Opportunities - Due to their limitations, there will be vastly more
opportunities and services that traditional financial institutions don't provide.
APPLICATIONS OF FINTECH
1. Crowdfunding Platforms – A way of raising money to finance projects and
businesses; enables fundraisers to collect money from a large number of people via
online platforms; often used by startup companies or growing businesses
MAIN TYPES OF CROWDFUNDING
 Peer-to-peer lending – the crowd lends money to a company with the
understanding that the money will be repaid with interest; very similar to traditional
borrowing from a bank
 Equity crowdfunding – Sale of a stake in a business to a number of investors in
return for investment; similar to common stock
 Rewards-based crowdfunding – Individuals donate to a project or business with
expectations of receiving in return a non-financial reward
 Donation-based crowdfunding – Individuals donate small amounts to meet the
larger funding aim of a specific charitable project while receiving no financial or
material return
 Profit-sharing / revenue-sharing – Businesses can share future profits or revenues
with the crowd in return for funding now
 Debt-securities crowdfunding – Individuals invest in a debt security issued by the
company, such as a bond
 Hybrid models – Offer businesses the opportunity to combine elements of more
than one crowdfunding type
2. Mobile Payments – the transfer of payment of funds using a mobile device to
execute and confirm the payment; payment tool can be a digital (virtual or e-)
wallet, mobile browser, or SIM toolkit/mobile menu; regulated transactions that take
place through your mobile device
“Peer to peer” mobile payment – making an e-transfer via your bank to pay a friend back
Brick-and-mortar mobile payment – you are using an app on your mobile device to pay for a
specific goods or services
Examples of mobile payment: Venmo and Interac
3. Robo-Advisors – a digital service that uses highly specialized software to do the job
of wealth managers or investment advisors; typically have the users (the investors)
to answer some simple questions to determine your risk appetite; online investment
management services that use algorithms to allocate assets and generate portfolios
for customers optimally
4. Insuretech – the application of technology to the insurance model, which allows
companies to provide tailored insurance services and data security; helps streamline
the insurance process through online claims filing and policy management
KEY APPLICATIONS OF INSURTECH
 Verification of Customer Identity - Some insurtech companies have used blockchain
to develop prototype software that stores customer identification details from
issuing authorities. This enables an insurance company, the reinsurer, and the broker
to have complete control over all customer records.
 Managing Claims - Companies can use blockchain technology to create a
standardized claims document--evaluated by underwriters in real-time. They can
also automate smart contract elements, ensuring its execution is flexible and
transparent.
 Smart Contract Formulation - Smart contracts increase the speed and accuracy of
clearing claims. Companies can register contracts, run authentications, and clear
claims much faster, without the need for an assessor. This reduces the likelihood of
fraud and increases customer satisfaction.
 Detecting Fraud and Risk Prevention - With insurtech, companies can detect and
eliminate the chances of fraud with a decentralized digital depository. This verifies
the authenticity of the individual and the claim, safeguarding against duplicate
transactions or third-party interferences--enabling all transactions to public record.
 Payment Processing - Insurance companies must have the ability to streamline
premiums and claims; simplify the process sand reduce errors.
 5. RegTech (regulatory technology) – focuses on the automation of compliance
processes for financial institutions; offers fast and cost-effective management of
large amounts of data; a community of tech companies that solve challenges arising
from a technology-driven economy through automation; seek to monitor
transactions that take place online in real-time to identify issues or irregularities in
the digital payment sphere

RegTech MAY SERVE THE FOLLOWING PURPOSES:

 Customer Identity Verification

 Transaction monitoring
 Customer risk assessment
 Data storage and record-keeping
 Automated suspicious activity reporting
 Data analysis
 Cyber-security
 International sanctions screening
 Politically Exposed Person (PEP) screening – defined as high-risk customers with
more excellent opportunities than ordinary citizens to acquire assets through illegal
means such as taking bribes and money laundering
 Adverse media monitoring