INTERNATIONAL FLOW OF FUNDS

• The international flow of funds refers to the movement of money across

countries. This includes investments, trade payments, remittances, and any form of
capital transfer between countries. It's essentially how money is transferred and
allocated globally.

• INTERNATIONAL FLOW OF FUNDS – basically it takes place when buying and selling
of goods and services occurred between the international market by means of export
and import from one country to another country.

• The transactions of international business cause the flow of funds from one country to
another and helps into money to flow from one to another market

These flows can be categorized into two main types:

1. capital flows – include investments in assets like real estate, stocks, and bonds.

2. trade flows- involve the export and import

• It's worth noting that these flows are influenced by numerous factors, including
interest rates, economic stability, political climate, and expectations of future
events. A country with higher interest rates, for instance, might attract more foreign
investment, leading to an inflow of funds.

• How do international institutions, such as the International Monetary Fund or the

World Bank, play a role in this?

• Institutions like the IMF and the World Bank help regulate and facilitate these
flows. They provide financial assistance, advice, and policy recommendations to
member countries. This assistance can either stimulate or slow down the flow of funds
depending on the economic situation of the recipient country.

Take note that all the transactions that are related to the export services by one country
result in the inflow of funds and all the transactions related to the import services are the
reason behind the outflow of the funds.

• BALANCE OF PAYMENT it refers to a summary of transactions between domestic and

foreign residents for a specific country over a specified period of time.

It represents an accounting of a country's international transactions for a period usually a

quarter or a year.

• Financial managers must monitor the balance of payments so that they can determine
how the flow of international transactions is changing over time
 • The balance of payment can be in surplus or in deficit within a specific period of time.

• The surplus balance of payment will be recognized when the export transactions are
more than the import transactions in a given specific period of time.

• On the other hand, when the export transactions are less than the import transactions
of the country in a given specific period of time it is said as deficit balance of payment

COMPONENTS OF BALANCE OF PAYMENT

1. Current account - it represents a summary of the flow of funds between one

specified country and all other countries due to purchase of goods and services.

The short-term transactions of a country and the difference between the savings and the
deposits aggregately constitutes the current account of the balance of payment

COMPONENTS OF CURRENT ACCOUNT:

• Balance of trade - is simply the difference between merchandise exports and

merchandise imports. Commonly represented by tangible products some of the
common examples are computers and clothing that are transported between
countries.
• Transfer payment - it represents aid grants and gifts from one country to other
countries. When the company purchased raw materials from other country then they
secure international payment it also belongs to transfer payments
• Factor income payments it represents the income received by the investors on foreign
investments in the financial assets. Consequently, the factor income received by the
Filipino investors will reflect as an inflow of funds into the Philippines, factor income
paid by the Philippines will reflect as an outlaw of funds from the Philippines

2. Capital account - it includes the value of financial assets transferred across

country borders by people who move to a different country. It includes all the
trade transactions of international business between one country or a nation or
the other country or nation.

The following items are also included in the capital account of the balance of payment:

• investments and loans of foreign countries

• banking and other forms of foreign capital
COMPONENT OF CAPITAL ACCOUNT:

• Financial account – it covers claims on or liabilities to non-residents specifically with

regard to financial assets. It is a measurement of increases or decreases in international
ownership of assets.

Component of Financial Account:

1. Direct foreign investment portfolio. it represents the investment in fixed assets in

foreign countries that can be used to conduct business operations.

Importance of the Balance of Payments:

• Economic Indicator: The BOP can act as an indicator of the economic and political
stability of a country.
• Policy Formulation: Government and monetary authorities can frame policies based
on the BOP to manage exchange rates, trade, and capital flows.
• Investment Decisions: Investors and multinational enterprises often look at a
country's BOP to make informed investment decisions.

The Balance of Payments is a crucial tool for understanding a country's economic

relationship with the rest of the world. It helps policymakers, economists, and analysts
gauge the economic health of a country, make informed decisions, and plan for the future.
Like all financial statements, the BOP requires careful interpretation and understanding of its
components and the broader economic context in which a country operates.

Key Factors Influencing the International Flow of Funds:

1. Economic Factors:
• Interest Rates: Higher interest rates in a country tend to attract foreign
capital seeking better returns.
• Economic Growth: Rapid economic growth in a nation can attract foreign
investments seeking to tap into that growth.
• Inflation: High inflation can deter investments since it erodes purchasing
power and can destabilize the economy.
• Exchange Rates: Stable or appreciating currencies can attract foreign funds,
whereas rapidly depreciating currencies might deter them.
• Balance of Payments: A country with a consistent current account surplus
might be seen as an attractive investment destination.
2. Political and Institutional Factors:
• Political Stability: Countries with stable political systems and governance
structures tend to attract foreign investments.
• Regulatory Environment: Clear and fair regulatory environments, especially
regarding foreign investments and repatriation of profits, can be appealing to
international investors.
 • Legal System: A robust legal system that upholds property rights and
contracts will generally be seen as investor-friendly.
3. Technological Factors:
• Infrastructure: Advanced physical and digital infrastructure can facilitate
business operations, attracting foreign investments.
• Technological Readiness: Countries that are technologically advanced or are
rapidly adopting new technologies can be seen as growth markets.
4. Social and Cultural Factors:
• Cultural Compatibility: Similarities in culture or business practices can
encourage cross-border investments and partnerships.
• Labor and Skills: Availability of a skilled and cost-effective labor force can
pull in foreign investments, especially in sectors like manufacturing and IT.
5. Geographical and Environmental Factors:
• Geopolitical Position: Strategic geopolitical locations, like proximity to major
markets or key shipping routes, can influence fund flow.
• Natural Resources: Countries rich in certain resources (oil, minerals, arable
land) can attract specific kinds of foreign investments.

➢ Overall, the international flow of fund helps the sellers to sell their products and
services in international level to expand their local brand into an international brand
and to expand their business at an international market which not only helps the
company but also the society as they generate more employment opportunities and
provide better quality products to them
➢ It is good in most of the aspects for the development of a country and the world's
economy.