International Financing and Choice of Sources of Funds

Why is International Financing Required?

International finance plays a very crucial role in terms of international trade and inter-economy relation in the sector of exchange of goods and services. International Financing is important for various reasons, one being the important tool to estimate the exchange rates prevailing, these rates further helps the investors in deciding about their investment in foreign companies. 

Also, International Financing helps in utilizing the financial statements made by the countries who have adopted the style of IFRS. This helps the countries to follow the similar reporting systems.

 

International Finance

International finance also known as international macroeconomics here one will come across monetary interactions that are studied between two or more countries. The study is focused on areas such as foreign direct investment and currency exchange rates.

The understanding of the International Finance can be illustrated in the following points below: 

  • International finance is the study of monetary interactions which happens between two or more countries. 

  • International finance talks about foreign direct investment and currency exchange rates.

  • Increase in globalization has intensified the importance of international finance.

  • The concept of International Finance crosses the barriers of the nations and deals about the international funding rather than restricting itself to particular national boundaries.

The International Finance Research is conducted by the large institutes like the International Finance Corporation, National Bureau of Economic Research. All these research institutions are dedicated to the research and development of the global market.


Sources of International Finance

The sources of International finance can be excavated deep in the international economy and international market. The various sources for International Finance are as follows:

  1. Commercial Banks 

Global Commercial Banks all over the international market provide loans in the foreign currency to the companies. These banks are very crucial in financing the non-trade international operations. They facilitate international trading to occur smoothly. 

  1. International Agencies and Development Banks 

The developmental banks and other international agencies have come forth over the years for the purpose of financing in the international sector. The agencies are set up by the government of the developed countries of the world. The highly industrious agencies among this sector are – International Finance Corporation, EXIM Bank and Asian Development Bank.  

  1. International Capital Markets 

The budding organizations which include the multinational companies depend upon the fairly large amount of loans known as the foreign currency. The financial instruments which are used by these organizations include – American Depository Receipts, Global Depository Receipts, and Foreign Currency Convertible Bonds.


International Finance Examples

We have understood the meaning and the sources of International Financing. Detailing our knowledge by citing a few examples will allow in-depth knowledge about International Finance.

The examples of International Finance are as follows:

  • Personal Banking

One’s personal banking matters can cross the borders of their nation, their scope of banking increases with personal banking systems. The students studying abroad can set up their foreign accounts, they can move their money from the United States to other overseas accounts. 

  • Company Assets Shifts

A company may need to move the financial assets from the U.S. to any other country. This is international finance that happens in the form of re-allocation of the assets. The companies doing these transactions must be well versed with the prevailing law which is laid down by the government agencies who keep a vigilant alert in this type of cross-border activity.  

  • Sales, Purchases, Trade 

The buying, selling, and trading of the foreign commodities is a way for the world's financial systems to operate. Foreign cars, branded foreign clothes, foreign home goods, and even international pet products consist of the world’s populations, all these require a lot of international finance transactions, in the form of buying, selling, and trading with the familiarity of the prevailing laws.

FAQs (Frequently Asked Questions)

1. What is International Trade?

Ans. International trade means the exchange of capital, goods, and services across the international borders or territories as there is a need or want of the goods or services. Also, in most countries, such trade represents the GDP of the nation. International trade that happens between different countries is a crucial factor in raising the living standards by providing employment and enabling the consumers to enjoy a greater variety of goods and services.

2. What is International Macroeconomics?

Ans. International Macroeconomics deals with the global aspects of doing business cycles with macroeconomic policy. We know globalization is proceeding quickly, which implies that the economies are becoming more and more interconnected to one another.

3. What is meant by American Depository Receipts, Global Depository Receipts and Foreign Currency Convertible Bonds?

Ans. An American depositary receipt is a kind of negotiable security which represents the securities of a company that trades in the financial markets of the U.S. 

Next, a global depositary receipt (GDR) is quite similar to American depositary receipt, which is a type of bank certificate representing the shares in a foreign company.

While, a foreign currency convertible bond (FCCB) is a type of convertible bond that is issued in a currency different from the issuer's domestic currency.

4. What are the Two types of Trade?

Ans. The two type of trade are:

  1. Domestic Trade.

  2. International Trade.