International Finance Term Paper Example | Topics and Well Written Essays - 1750 words

International Finance - Term Paper Example Such as a skewed change rate can create a business's exports inexpensive as compared to their foreign counterparts, although for a nation to attain this artificially, they have to trade their own currency by borrowing against the country's assets to pay for another country's currency. If exports or all investment is in high demand, a nation's currency will increase in value due to the demand for that currency to fund exported commodities, services, as well as investment. Companies that depend on exports can find their goods unexpectedly competitive - or excessively costly - in a foreign country’s markets as exchange rates rise and fall. In the same way, businesses that depend on imports can see the charges of these imports fluctuate with the exchange rate. â€Å"Exchange rates directly affect the realized return on an investment portfolio with overseas holdings. If you own stock in a foreign company and the local currency goes up 10 percent, the value of your investment goes up 12 percent even if the stock price does not change at all† (Levi, p. 201, 2009). The study of international finance usually refers to trade and foreign investment as alternative policies. This replacement can however be called into uncertainty as the need to struggle on several foreign markets taken into account. With reference to the theory of international trade, classical conclusion of Mundell has been challenged because of inadequate competition. In addition, macroeconomic series of foreign investment and trade emphasize that these two approaches of internationalisation are complements evidently. â€Å"If foreign investment displaces trade, exports will be at least replaced by local sales on foreign markets, detrimental to the domestic industry of the investor. On the contrary, if trade and foreign investment are confirmed as complements, investing abroad might lead to greater competitiveness in foreign markets, which is beneficial to exports from the investing country and thus to its industry. In order to clarify these relationships, a bilateral and sectoral empirical approach is proposed based on a matching of trade and foreign investment data authorising a break down by industry and partner country. It permits to control for joint determinants of trade and foreign investment such as market size, per capita income or regional integration, or conversely for economies of scale having an opposite impact on both forms of internationalisation† (Sercu, p. 184, 2009). With the most disaggregated data, the finding of complementarities involving trade and foreign investment flows is legalized for many industries. Outward foreign investment is linked further exports and imports, within the industry considered, in comparison with the state of investment. However, in view of the fact that the previous rise more as compared to the latter, investment in a foreign country is linked with a trade excess. On the other hand, inward foreign investment is lin ked with a trade deficit of the host nation. Overflows between industries are substantial. The impact of foreign investment on trade is much higher as these overflows are accounted for, even if the international trade surplus stays comparable with the one approximated on the industry of investment level. A huge share of the complementarities between trade and foreign investment at the macroeconomic level can be clarified by huge overflows between i