Factors Affecting International Investment

By Justin Beach, eHow Contributor

As of 2009, the Chinese government held more than $1 trillion in U.S. bonds

The ability to make money is the primary thing that investors are looking for. Regardless of whether it's international or domestic investment, purely financial investment or the investment in stores or factories in a foreign market, investors are looking for an opportunity to make money. A variety of factors may influence the decision to invest internationally but they are very similar to the factors that influence domestic investment.

Print this article

1. Government
o

Governments may try to lure international investment by granting incentives such as tax breaks and loan guarantees. This may attract some investments, but it will typically only work if other investment factors are sound. A tax break on profits, for example, is only effective if investors feel they can make a profit to begin. Government interest rates also play a role. High rates on bonds, for example, can stimulate foreign direct investment in government bonds and other instruments. High-loan interest, on the other hand, can have a negative effect on corporate investment such as the building of new factories.

Domestic Fundamentals
o

The domestic situation also has an impact on foreign investments. Factors such as the income of the population, the wages demanded by the workers, the skill and education level of the work force and the availability of resources and raw materials

required in a specific industry also have an impact on the profitability of a company and its attractiveness as an investment opportunity. The domestic economy is also of interest to investors. If, for example, a company is considering introducing a new product to a new country, investors will be interested in whether or not there is a demand for that product and whether or not the domestic population can afford it.

Company Fundamentals
o

When individual investors or fund managers look at an international investment, the specific company is the most important consideration. They look at what the company does and what its business plans and prospects are like. The company fundamentals, such as profit, dividends, debt and assets, are all a consideration just as they would be when an investor looks at a domestic company. When investing internationally, investors also look at other related concerns like domestic politics and tax policy, but the company itself must be attractive as an investment opportunity first.

Stability
o

Another important point for international investment is stability. All governments, economies and cultures experience some amount of change. Countries have elections and governments change; however, investors like to know whether debts are going to be honored and whether tax policy or international investment rules are going to change significantly. Investors may hold off putting money into a country if an election is looming, but serious instability such as the possibility of a revolution may keep them away altogether.

Advantages of international investing These days investing in foreign countries is gaining more and more popularity. The true sense is this that international or offshore investing is basically the investments made outside of your country. This thing is very beneficial and normally done the ones who love to get higher returns and want to achieve their all goals of life. This is done by those investors for getting the higher returns on investments or for planning of tax. 1 Avoid Taxes and Get Returns:

There are many international companies, which offer bonds and equity assets, which are

financially sound. These companies offer some great investment policies, which are also time tested and 100% legal. There are many investors who have the strategy of investing twenty to thirty percent of their all income in foreign countries. This thing is basically done to avoid all the taxes and to get the high returns. 2 Reduction in Tax:

The main and good advantage of this is the reduction of tax. There are many different small countries; these countries have very limited resources, which allow corporations and individuals to set up a company. Normally, these different companies will not any operational facilities, in the hosted country. This way the corporation or the individual have to pay little tax or even no tax for the investment made in the foreign country. Yes, this thing is more profitable and beneficial from the investors point of view. 2. Diversify the Portfolio: The next big advantage of this is that it is one of the best and great ways to diversify the portfolio of investment. There are many good chances to get some bigger returns from all these types of investments as investors can get a chance to access all the profitable markets. The most amazing and popular methods followed by every investor in making international investments are through incorporating a company. The main thing is that international investments offers complete security of the assets of investor. But the most important thing is to wisely choose the country to invest money. This thing can really help in protecting assets. With the help of international investment, investor can enjoy many benefits.

Financial Functions In Multinational Firms Finance is the Life Blood of the Business and so the case of MNCs also. The only difference in finance of domestic companies and MNCs is that the finance in domestic companies is in domestic currency where as in case of the MNCs the finance is in multi currencies. But whatever be the conditions, with out finance, no company can exist. Finance is required for many purposes like purchase of raw material, purchase of machinery, purchases of the related items, payment of salaries, meeting the operational expenses, etc., so the finance is required for all these purposes. The activities of providing finance to the MNCs are known as Financing MNCs. There are three types of financing namely Short Term Financing, Financing Foreign Trade and Long- Term Financing. Short Term Financing is Financing the working capital requirements of multinational companies foreign affiliates poses a complex decision problem. This complexity stems from the large number of financing options available to the subsidiary of an MNC. Subsidiaries have access to funds from sister affiliates and the parent, as well as external sources. Foreign Trade is the main business of the the traders of ever country. Almost all the MNCs are heavily involved of foreign trade in addition to their other international activities. So they require finance for all activities related to the trade, working capital, and other services namely letter of credit and acceptances. Hence, the people who are responsible for the management of the MNCs must have the practical knowledge of the institutions to facilitate the international movement of goods. The following are the long term financing particularly for the capital equipments and other big items given to the MNCs who are actively engaged in the Foreign Trade. Export Financing Export Credit Subsidies and Export Credit Insurance. Items requiring long repayment arrangements, most government of developed countries have attempted to provide their domestic exporters with competitive edge in the form low-cost export financing and concessionary rates on political and economic risk insurance. Nearly every development nation has its own export-import agency for development and trade financing.

Definition of securitization of receivables The securitization of receivables consists in the sale of a pool of receivables to a dedicated vehicle that finances this purchase by issuing securities on the market. Repayment of principal and payment of interest due under these securities are made with the cash flow generated by the assigned receivables. The assets of the dedicated vehicle consist exclusively in the pool of receivables purchased under the securitization transaction (and the cash flow generated by the assigned receivables) and the liabilities, in the securities issued on the market. The word "securitization" is used to describe this transformation of receivables into securities, the securities issued by the dedicated vehicle representing the assigned receivables. advantages of securitization The French legislation on securitization was implemented by the Act of December 23, 1988 creating the Fonds Communs de Crances ("FCC"), and by the Decree of March 9, 1989. Until 1998, only credit institutions, the Caisse des Dpts et Consignations and insurance companies were allowed to assign their receivables to an FCC. The purpose of the 1988 law was mainly to allow the credit institutions to extend loans while respecting the Cooke ratio, requiring any credit institution to maintain an 8% ratio between its equity and its funding commitments. Indeed, the securitization of loans is one of the most efficient ways to respond to the needs of capitalization and profitability of credit institutions, allowing a reduction of their assets without compromising the profitability linked to these assets nor affecting their commercial relationship with the assigned debtors. In the absence of a specific legal framework and due to specific constraints under French law, prior to 1998, corporate companies who wished to securitize their receivables had to (i) use off-shore securitization vehicles or (ii) transfer their receivables to a credit institution which in turn securitized the receivables in accordance with the law governing FCCs. However, two problems remained: 1. an immediate assignment could have been considered as a fraudulent way to circumvent the FCC legislation and thus could have been nullified; for that reason, the Commission des Opration de Bourse, the French equivalent of the SEC, imposed in the Dauphin transaction that the credit institution acting as intermediary holds the receivables during several months; 2. legally, the credit institution was responsible for collecting the receivables vis-vis the FCC. The originator of the receivables acted as sub?servicer of the receivables under the credit institution's responsibility, but the credit institution was not released from all liability.

The FCC's legal framework was eased by various amendments and supplements, including the new Act of July 2, 1998, the Decree of November 6, 1998 and the Act of June 25, 1999 regarding savings and financial security. The Act of July 2, 1998 now authorizes corporate companies to securitize their receivables directly to the FCC, and has lifted three major constraints by allowing the FCC to borrow, lifting the obligation to inform the debtors of the assigned receivables and easing the conditions for the transfer and collection of the assigned receivables. FCCs may now directly purchase receivables held by corporate companies. Such companies have direct access to an off-balance sheet refinancing, without the costs incurred by the interference of an intermediary and under optimal market conditions, provided that appropriate credit enhancement devices are set up at the FCC level. This extension of the eligible assets has already allowed the creation of FCC Facto at the end of 1998, created to acquire commercial receivables purchased by FactoFrance Heller in its factoring business and of Securifact in November 1999. Both transactions were arranged by Gestion et Titrisation Internationales. Until now, no market learning effect has been observed, since both transactions were financed through multi-seller conduits and not directly onto the market. Other FCCs are in process of being set up. These amendments lead to believe, based on the U.S. asset-backed securities market practice, that new securitization practices will be implemented and that the volume of securitized corporate receivables will increase.

Securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, orCollateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS). Critics have suggested that the complexity inherent in securitization can limit investors' ability to monitor risk, and that competitive securitization markets with multiple securitizers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitization is believed to have played an important role in the U.S. subprime mortgage crisis.[1] In addition, off-balance sheet treatment for securitizations coupled with guarantees from the issuer can hide the extent of leverage of the securitizing firm, thereby facilitating risky capital structures and leading to an under-pricing of credit risk. Off balance sheet securitizations are believed to have played a large role in the high leverage level of U.S. financial institutions before the financial crisis, and the need for bailouts.[2] The granularity of pools of securitized assets is a mitigant to the credit risk of individual borrowers. Unlike general corporate debt, thecredit quality of securitised debt is nonstationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches may experience dramatic credit deterioration and loss.[3] Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3.455 trillion in the US and $652 billion in Europe.[4] WBS (Whole Business Securitization) arrangements first appeared in the United Kingdomin the 1990s, and became common in various Commonwealth legal systems where senior creditors of an insolvent business effectively gain the right to control the company.[5]

Definition of 'Foreign Direct Investment - FDI'

An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Investopedia explains 'Foreign Direct Investment - FDI'

The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company. An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile. Read more: http://www.investopedia.com/terms/f/fdi.asp#ixzz1447P1e26 4.1.2 Concentration Banking A firm may open collection centres (banks) in different parts of the country to save the postal delays. This is known as concentration banking. Under this system, the collection centres are opened as near to the debtors as possible, hence reducing the time in dispatch, collection etc. The firm may instruct the customers to mail their payments to a regional collection centre / bank rathen than to the Central Office. The Cheque received by the regional collection centre are deposited for collection into a local bank account. Surplus funds from various local bank accounts are transferred regularly (mostly daily) to a concentration account at one of the company's principal banks. For effecting the transfer several options are available. With the vast network of branches set up by banks regional / local collection centres can be easily established. To ensure that the system of collection works according to plan, it is helpful to periodically audit the actual transfers by the collecting banks and see whether they are are in conformity with the instruction given. The concentration banking results in saving of time of collection, and hence results in better cash management. However, the selection of collection centres must be based on the volume of billing / business in a particular geographical area. It may be noted tha the concentration banking also involve a cost in terms of minimum cash balance required with a bank or in the form of normal minimum cost of maintaining a current account.

Concentration banking can be combined with the lock box arrangement to ensure that the funds are pooled centrally as quickly as possible. INTERNATIONAL CASH MANAGEMENT Cash Management domestic firms to child's play compared with that in large multinational corporation operating in dozens of countries, each with its own currency, banking system and legal structure. Unilever, for example manufactures and sells allover the world. To operate effectively Unilver has numerous bank accounts so that some banking transactions can take place near to the point of business transaction can take place near to the point of business. Sales receipts from America will be paid into local banks there, likewise many operating expenses will be paid for with funds drawn from those same banks. The problem for Unilever is that some of those bank accounts will have high inflows and others high outflows, so interest could be payable on one while funds are lying idel or earning a low rate of return in another. Therefore, as well as taking advantage of the benefit of having local banks carry out local transactions, large firms need to set in place a co-ordinating system to ensure that funds are transferred from where there is surplus to where they are needed. A single centralized cash management system is an unattainable idea for these companies, althogh they are edging towards it. For example, suppose that you are the treasurer of a large multination company with operations through out Europe. You could allow the separte business to manage their own cash but that would be costly and would almost certainly result in each one accumalating little hoards of cash. The solution is to set up a regional system. In this case the company establishes a local concentration account with a bank in each country. Then any surplus cash is swept daily into central multicurrency accounts in London or another European banking center. This cash is then invested in marketable securites or used to finance any subsidiaries that have a cash shortage. Payments also can be made out of the regional center. For example, to pay wages in each European country, the company just needs to send its principal bank a computer file with details of the payment to be made, the bank then finds the least costly way to transfer the for the funds to be credited on the correct day to the employees in each country. Most large multinationals have several banks in each country, but the more banks they use, the less control they have over their cash balances. So development of regional cash management system favours banks that can offer a worldwide branch network.

Intertnational financial flows

International capital flows are the financial side ofINTERNATIONAL TRADE.1 When someone imports a good or service, the buyer (the importer) gives the seller (the exporter) a monetary payment, just as in domestic transactions. If total exports were equal to total imports, these monetary transactions would balance at net zero: people in the country would receive as much in financial flows as they paid out in financial flows. But generally the trade balance is not zero. The most general description of a countrys balance of trade, covering its trade in goods and services, income receipts, and transfers, is called its current account balance. If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other real property ownership claims. This net financial flow is called its capital account balance.

When the countrys imports exceed its exports, it has a current account deficit. Its foreign trading partners who hold net monetary claims can continue to hold their claims as monetary deposits or currency, or they can use the money to buy other financial assets, real property, or equities (stocks) in the trade-deficit country. Net capital flows comprise the sum of these monetary, financial, real property, and equity claims. Capital flows move in the opposite direction to the goods and services trade claims that give rise to them. Thus, a country with a current account deficit necessarily has a capital account surplus. In BALANCE-OFPAYMENTS accounting terms, the current-account balance, which is the total balance of internationally traded goods and services, is just offset by the capital-account balance, which is the total balance of claims that domestic investors and foreign investors have acquired in newly invested financial, real property, and equity assets in each others countries. While all the above statements are true by definition of the accounting terms, the data on international trade and financial flows are generally riddled with errors, generally because of undercounting. Therefore, the international capital and trade data contain a balancing error term called net errors and omissions.

Because the capital account is the mirror image of the current account, one might expect total recorded world tradeexports plus imports summed over all countriesto equal financial flowspayments plus receipts. But in fact, during 19962001, the former was $17.3 trillion, more than three times the latter, at $5.0 trillion.2 There are three explanations for this. First, many financial transactions

between international financial institutions are cleared by netting daily offsetting transactions. For example, if on a particular day, U.S. banks have claims on French banks for $10 million and French banks have claims on U.S. banks for $12 million, the transactions will be cleared through their central banks with a recorded net flow of only $2 million from the United States to France even though $22 million of exports was financed. Second, since the 1970s, there have been sustained and unexplained balance-of-payments discrepancies in both trade and financial flows; part of these balance-of-payments anomalies is almost certainly due to unrecorded capital flows. Third, a huge share of export and import trade is intrafirm transactions; that is, flows of goods, material, or semifinished parts (especially automobiles and other nonelectronic machinery) between parent companies and their subsidiaries. Compensation for such trade is accomplished with accounting debits and credits within the firms books and does not require actual financial flows. Although data on such intrafirm transactions are not generally available for all industrial countries, intrafirm trade for the United States in recent years accounts for 3040 percent of exports and 3545 percent of imports.3 The bulk of capital flows are transactions between the richest nations. In 2003, of the more than $6.4 trillion in gross financial transactions, about $5.4 trillion (84 percent) involved the 24 industrial countries and almost $1.0 trillion (15 percent) involved the 162 less-developed countries (LDCs) or economic territories, with the rest, less than 1 percent, accounted for by international organizations.4 The shares of both industrial nations and the international organizations have been receding from their highs in 1998: 90 percent for industrial nations and 5 percent for the international organizations. In that year the combination of the Russian debt default and ruble devaluation, the south Asia financial crisis, and the lingering uncertainty about financial consequences of the return of Hong Kong to Chinese sovereignty in July 1997 drove the LDC share down to 5 percent of world capital flows.5 In the more tranquil five years following these crises, 19992003, LDC financial transactions involving mainland China and Hong Kong averaged 28 percent of the LDC total, and adding Taiwan, Singapore, and Korea brings the share to 53 percent of the developing-country transactions. Of the remaining forty-seven percentage points of developing-country transactions, Europe (primarily Russia, Turkey, Poland, and the Czech Republic) and the Western Hemisphere (primarily Mexico, Brazil, and Chile) each accounted for about sixteen percentage points, with the Middle East and Africa combining for the remaining sixteen percentage points.
Composition of Capital and Financial Flows

Trade imbalances are financed by offsetting capital and financial flows, which generate changes in net foreign assets. These payments can be any combination of the following:

capital investments

portfolio investments in either debt or equity securities

direct investment in domestic firms (FDI) including start-ups

changes in international reserves9

The Importance of Foreign Direct Investment in Total International Investment Flows The first question we attempt to answer here is about the size of direct investment flows relative to other forms of international investment. For almost all countries, a three-way division is published by the IMF, separating international investment flows into direct investment, portfolio investment, and other investment. The definition of direct investment has been discussed above. Portfolio in- 315 The Role of FDI in International Capital Flows vestment includes equity securities, debt securities in the form of bonds, money market instruments, and financial derivatives, such as options, all excluding any of these included in direct investment or reserve assets. The distinction between long and short term formerly made has been abandoned on

the ground that original maturity is now of relatively little importance. The final category of other investment includes trade credit, loans, financial leases, currency, and deposits, mostly short-term assets. The categories do not match those of the pre-1980 data we use, and some of the following tables therefore show an overlap for 1980-84. The data for years before 1980 are on a similar basis to later ones for direct investment, reported as investment by, mainly outflows from the reporting country, and investment in, mainly inflows to the reporting country. That is the case for most flows, but there can be reverse flows on both sides. A countrys firms can repatriate accumulated earnings from their foreign affiliates or sell foreign operations to foreign buyers, resulting in a negative outflow (a positive entry in the balance of payments), and foreign firms in a host country can repatriate earnings or sell operations, producing a negative inflow of capital (a negative entry in the balance of payments). For categories other than direct investment, the flows before 1980 are reported on a net basis, not distinguishing between changes in assets and changes in liabilities. There is thus no natural world total for those categories because every transaction should enter as both an asset change and a liability change, and the total should therefore be zero. For these categories we approximate gross flows very roughly by aggregating the net flows of those countries that report net outflows in that category in each year. That is, we aggregate all the negative balance-of-payments entries in each year under the headings of port-

folio investment, net, and other investment, net, The alternative of aggregating positive entries should give the same result if the data were complete, but of course they are not. Judging by the 1980-84 overlap, the 1969-79 estimates for portfolio investment outflow are understated by almost 30 percent and those for other investment by almost half. The amounts of the three major types of investment flows, by these imperfect measures, are shown in appendix table 6A.1. All types of international capital flows increased enormously. Since these are nominal values, they reflect the rise in world nominal income, which was, in 1990-94, about five and a half times as high as in 1970-74. All the forms of international capital flow grew faster than world nominal income. If we take the overlap in 1980-84 as an indicator of the underestimate of gross flows during 1970-79, we would conclude that the flow of direct investment grew the most and that other investment hardly grew faster than income (table 6.1). Since 1980, where we do have estimates of gross flows, portfolio investment has grown somewhat faster than direct investment, and other investment hardly grew until 1995, when it jumped ahead of the other two. The long-term trend, if there is one, seems tohave been an increase in the 316 Robert E. Lipsey share of direct investment in total investment flows from 1980 through 1994, and possibly since 1970 (table 6.2). After 1994, the trend was apparently reversed, with a burst of portfolio and other investment, but the direct investment

share remained well above that of the early 1970s. All these statements have an important cloud over them. That is the persistent world current account deficit that has remained stubbornly close to $100 billion a year, instead of zero, as it should be. That deficit, which is really a discrepancy item, is so large that it implies that the correct figures for some of these entries could be very far different from those we are relying on to study and follow investment flows. The latest indicator of how far some of these numbers are from the facts they are supposed to represent is the results of the recently completed survey of U.S. portfolio investment abroad, which found that the market value of US.-owned foreign securities at the end of 1994 was $910 billion instead of the previously estimated $556 billion, an addition of 64%. Definition of 'Unilateral Transfer'
An economic transactions between residents of two nations over a stipulated period of time, usually a calendar year. Typically, these transactions consist of gift exchanges, pension

payments and the like, but they can encompass other goods and services as well.

Investopedia explains 'Unilateral Transfer'

Unilateral transfers are included in the current account of a nation's balance of payments. They are distinct from international trade, encompassing such things as humanitarian aid and payments made by immigrants to their former country of residence.

Read more: http://www.investopedia.com/terms/u/unilateral-transfers.asp#ixzz143e84DXf

Unilateral transfers
Items in the current account of the balance of payments of a country's accounting books that correspond to gifts from foreigners or pension payments to foreign residents who once worked in the particular country.