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UNIVERSITY OF MUMBAI PROJECT REPORT ON

OBSTACLES TO INTERNATIONAL INVESTMENT
IN PARTIAL FULLFILMENT FOR BACHELORS OF FINANCIAL MARKET 2011-12

PROJECT GUIDE PROF. BHAVANA PARAB SUBMITTED BY: PATANKAR.NIMISH.AJIT

Roll No: 3028

MAHATAMA EDUCATION SOCIETY‟S PILLAI‟S COLLEGE OF ARTS, COMMERCE &SCIENCE NEW PANVEL

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MAHATAMA EDUCATION SOCIETY‟S PILLAI‟S COLLEGE OF ARTS, COMMERCE, SCIENCE NEW PANVEL

CERTIFICATE To whomsoever it may concern

This is to certify that the work entered in this journal is the work of PATANKAR NIMISH AJIT T.Y.F.M , have successfully completed a

project report on the Obstacles to International Investment topic terms of the year 2011-12 in the college as laid down by the college authority

_____________ (Professor/Guide) Prof. Bhavana Parab

______________ (BFM Co- ordinator) Prof. Jennie prajith

Date: __________

_______________ (External Examiner)

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DECLARATION
I, PATANKAR NIMISH AJIT student of T.Y.F/M, MAHATAMA EDUCATION SOCIETY‟S PILLAI‟S COLLEGE OF ARTS,

COMMERCE & SCIENCE, hereby declare that I have completed the project report on Obstacles to International Investment in the academic year 2011-12.The information submitted by me is true & original to the best of my knowledge.

Signature

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A.Kutty for his support and facilities provided to me for the same. I would also extend my thanks to our Vice Principal Mr.B. I would like to thank all those who directly and indirectly helped me in completion of this project.N. I would especially thank my Professor Prof.Com F/M Coordinator Prof. 4|Page .Y. Lastly. I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project. Commerce and Science. the success of any project depends largely on the encouragement and guidelines of many others. Bhavana Parab and the T.ACKNOWLEDGEMENT I would like to thank my college that is Pillai‟s College of Arts. Without those efforts this project would not have been successful. Jennie Prajith for giving her valuable guidance in the design and the changes that were required to be made for the proper implementation of the project. New Panvel where I have gained plenty of knowledge which helped me in turning this project a success. Apart from my efforts.

3 2.4 3.4 2.2 3. 5|Page .5 3 3.3 3.7 3.8 3.1 2.5 3.1 3. 1 1.2 2.1 1.6 3.9 4 5 6 7 Executive summary Introduction Objectives of the study Research Methodology Profile of Institution Establishment History Corporate Affairs Global Equity Funds Risk Management Conceptual Framework Concept of International Investment International Diversification Barriers to International Investment Foreign Exchange Risk Information barriers Regulatory barriers Political risk Taxation system Double Taxation Avoidance Agreement (DTAA) Collection & analysis of data Interpretation of data Conclusion Suggestions & Recommendations Appendices Bibliography Page No. CONTENT NO No.INDEX Serial No.2 2 2.

corruption. Changes in Tariffs & Subsidies. In this project I have included both primary and secondary data. however. Different methods and High cost of sources of information in companies in some markets. In foreign exchange. Investor psychology & High costs. Such as difference between domestic market and international market which are operate in two different places & time. Hence either the issuing company or the investors prone to make losses on account of forex risk. For the purpose of eliminate the obstacles there are several measures taken by governments of various countries. Different accounting standards. International investment can prove to be profitable in long run there are quit few risks in which investors considers while investing abroad. e.g. The asymmetric information between domestic investors and foreign investors with respect to investment allocation leads to moral hazard on thus generate an inadequate amount of borrowings. DTAA (Double Taxation Avoidance Agreement). governance & control. These all barriers create risk & obstacles towards the International investment. International investment refers to invest money in foreign market. It is a vast concept of investment. environmental concerns and global terrorism etc. improving foreign affairs & relations. capital invested and returns thereof are in one currency. 6|Page . Legal and Regulatory barriers can hinder the flow of goods and services and the movement of capital & people. The value creation. There are also important factors which can make its impact on foreign investment such as. using that capital is in different currency. Also there are regulatory & political barriers which affect the Foreign Direct Investment. Along with risk there are two major barriers which make its impact on International investment. In taxation system there is risk occurred by differences in tax laws in various fetches different returns to the investors of different residential status. Political risk includes political instability. antiglobalization movements.EXECUTIVE SUMMARY International investment is a modern concept of investment. Some countries impose restrictions on foreign investment to protect their domestic industry and money markets. On the other hand there are some information barriers such as Language differences.

Investor psychology & Higher costs. In international investment if an investor can hold on to their investments for a longish period instead of locking on to their losses by selling early..1 INTRODUCTION International investment is a modern concept of investment. they will benefit from the discipline. recent trends show that these differences are increasing day by day. It is true that volatility does exit. Even currency fluctuations can sometimes prove to be expensive for the international investor. This is rather troubling since it would beneficial for investor if during a slump in domestic markets performed differently. This type of investment is popular because it can provide diversification and opportunities for superior growth. International investing is a type of investment that involves purchasing securities that originate in other countries. Actually it is beneficial to the investor investing abroad. these differences seem to increase during the period of down markets and decrease during period of upward markets. In any investment the investor‘s psychology plays an important role. It is generally believed that there is a difference between local financial market and international market. Investing in foreign markets can involve higher costs for the investor due to higher transactions costs for commissions. Traditionally most investors believe that international markets are not volatile. but one is likely to incur losses. One should be vary of investment taxes and other unexpected taxes in foreign countries. Such as difference between domestic market and international market which are operate in two different places & time. International investment can prove to be profitable in long run there are quit few risks in which investors considers while investing abroad. Moreover. but it can be mitigated 7|Page . It is a vast concept of investment. This can have an adverse bearing on the on investor‘s returns. However. market impact cost etc. and higher portfolio management cost because of greater cost of research and so on. There is also important factors which can make its impact on foreign investment such as.Chapter No.

Information barriers. Over cautious investors. Such obstacles are Foreign exchange risk. 8|Page . Along with risks investors have been facing many other obstacles in foreign investment. Different accounting standards. Regulatory barriers. Differences in taxation system for different residential status. Political risk.through diversification in international mutual funds. These all barriers make their impact on international investment by their own way. sell it sooner than they would sell an investment with similar risk level in a domestic market. Capital control & other both economic factor (micro & macro). when they see a loss in an international investment.

5) To find out the effect of International Investment on Indian economy 9|Page . 2) To study about sources of International Investment 3) To understand the barriers in International Investment in India.1. 4) To evaluate the measure for reducing the barriers in International Investment in India.1 Objectives of the Study 1) To understand the concept of International Investment.

Websites :.2 Research Methodology Primary data: Primary data is a term for data collected on source which has not been subjected to processing or any other manipulation.imf. functions. Secondary data: Secondary data is the data collected by someone other than the user. books. There are various sources by which we can collect secondary data. Global Capital Market –Dipak Abhyankar.1.A. websites & newspaper.org www.www. etc. Secondary data includes newspapers. suggestions & preferences. concept & other relative information. Secondary data includes information in detail.Mint 10 | P a g e . it is known as raw data. Through survey method we can analyze people‘s opinion. Along with it includes many features. In this project secondary data have collected by books. wikicfo. Research methodology Primary data Surveys Secondary data Books Global Business – V.Avdhani.com Newspaper:. In this project primary data have collected by survey method which questionnaire.

Chapter No.2 Profile of the Institution 11 | P a g e ..

governments and individuals. The firm also engages in proprietary trading and private equity deals. Former employees include Robert Rubin and Henry Paulson who served as United States Secretary of the Treasury under Presidents Bill Clinton and George W. The firm provides mergers and acquisitions advice. investment management. Key people   Lloyd Blankfein (Chairman & CEO) Gary Cohn(President & COO) David Viniar(Executive VP & CFO) Goldman Sachs has frequently performed above the market despite worsening economic conditions.35B. and other financial services primarily with institutional clients. 12 | P a g e . asset management. respectively.1 Establishment The Goldman Sachs Group. and is a primary dealer in the United States Treasury security market. as well as Mark Carney. For the fiscal year 2010 ended in December. Goldman Sachs was founded in 1869 by Marcus Goldman. which include corporations. underwriting services. and is headquartered at 200 West Street in the Lower Manhattan area of New York City. (NYSE: GS) is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking. with additional offices in major international financial centers. and prime brokerage to its clients. Bush. the governor of the Bank of Canada since 2008. securities. Inc.2. Goldman Sachs reported a total revenue of $39B and a net income $8.

at 200 West Street. In 1885. at 30 Hudson Street. In 1882. Goldman's son-in-law Samuel Sachs joined the firm. 13 | P a g e . The company made a name for it pioneering the use of commercial paper for entrepreneurs and was invited to join the New York Stock Exchange (NYSE) in 1896. in Manhattan. Goldman Sachs & Co.2. in Jersey City Goldman Sachs Headquarters.2 History Goldman Sachs Tower. 1869–1930 Goldman Sachs was founded in New York in 1869 by the German-born Marcus Goldman. Goldman took his son Henry and his son-in-law Ludwig Dreyfuss into the business and the firm adopted its present name.

it launched the Goldman Sachs Trading Corp. 14 | P a g e . It was Weinberg's actions that helped to restore some of Goldman's tarnished reputation. Levy took over as Senior Partner from Weinberg. Sidney Weinberg assumed the role of senior partner and shifted Goldman's focus away from trading and towards investment banking. On the back of Weinberg. Goldman was lead advisor on the Ford Motor Company's IPO in 1956. Roebuck and Company in 1906. At the same time. The fund failed as a result of the Stock Market Crash of 1929. It also was at this time that the firm became an early innovator in risk arbitrage. 1928. which implied that as long as money is made over the long term trading losses in the short term were not to be worried about. so the focus was always on the future. On December 4. one from investment banking and one from securities trading. In 1969. It is Levy who is credited with Goldman's famous philosophy of being "long-term greedy". the first occasion when men succeeded on a large scale in swindling themselves. Levy was a pioneer in block trading and the firm established this trend under his guidance. which at the time was a major coup on Wall Street. perhaps. It managed one of the largest IPOs to date. Weinberg retired from the firm. Gus Levy joined the firm in the 1950s as a securities trader. Under Weinberg's reign the firm also started an investment research division and a municipal bond department. That same year. For most of the 1950s and 1960s. partners reinvested almost all of their earnings in the firm. Goldman was a player in establishing the initial public offering (IPO) market. Of this case and others like Blue Ridge Corporation and Shenandoah Corporation John Kenneth Galbraith wrote: The Autumn of 1929 was. it formed an investment banking division in 1956 in an attempt to spread around influence and not focus it all on Weinberg. hurting the firm's reputation for several years afterward. Due to Weinberg's heavy influence at the firm. 1930–1980 In 1930. that of Sears. which started a trend at Goldman where there would be two powers generally vying for supremacy. this would be Weinberg and Levy. and built Goldman's trading franchise once again.In the early 20th century. a closed-end fund with characteristics similar to that of a Ponzi scheme.

then the largest REIT offering in history. During the 1970s. In accordance with the beginning of the dissolution of the Soviet Union. Aron was a player in the coffee and gold markets. 1980–1999 On November 16. In the same year. the firm also became involved in facilitating the global privatization movement by advising companies that were spinning off from their parent governments. which manages the majority of its mutual funds and hedge funds today. when the Penn Central Transportation Company went bankrupt with over $80 million in commercial paper outstanding. This action would boost the firm's reputation as an investment advisor because it pledged to no longer participate in hostile takeovers. joined the firm as a result of this merger. the firm also expanded in several ways.Another financial crisis for the firm occurred in 1970. the firm also 15 | P a g e . Miller. Under the direction of Senior Partner Stanley R. the firm formed Goldman Sachs Asset Management. and the resulting lawsuits threatened the partnership capital and life of the firm. Aron& Company. most of it issued by Goldman Sachs. Whitehead assumed roles of co-senior partners in 1976. The bankruptcy was large. and the current CEO of Goldman. and created a private wealth division along with a fixed income division in 1972. In 1986. and John C. and Commodities. One of their initiatives was the establishment of the 14 business principles that are still used to this day. Currencies. J. It also pioneered the "white knight" strategy in 1974 during its attempts to defend Electric Storage Battery against a hostile takeover bid from International Nickel and Goldman's rival Morgan Stanley. once again emphasizing the co-leadership at the firm. Weinberg (the son of Sidney Weinberg). In 1985 it underwrote the public offering of the Real Estate Investment Trust that owned Rockefeller Center. Lloyd Blankfein. It was this bankruptcy that resulted in credit ratings being created for every issuer of commercial paper today by several credit rating services. a commodities trading firm which merged with the Fixed Income division to become known as Fixed Income. John L. 1981. it opened its first international office in London in 1970. the firm made a move by acquiring J.

underwrote the IPO of Microsoft. Robert Rubin and Stephen Friedman assumed the Co-Senior Partnership in 1990 and pledged to focus on globalization of the firm and strengthening the Merger & Acquisition and Trading business lines. Goldman was lead underwriter of the Yahoo! IPO and in 1998 it was global coordinator of the NTT DoCoMo IPO. It was this same year that Jon Corzine assumed leadership of the firm following the departure of Rubin and Friedman. 1994.S. Another momentous event in Goldman's history was the Mexican bailout of 1995. Henry Paulson took over as Senior Partner. In 1996. It also launched the Goldman Sachs Commodity Index (GSCI) and opened a Beijing office in 1994. but later sold the shares to Tishman Speyer in 2000. of which Goldman was a key holder. On November 22. Rubin drew criticism in Congress for using a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds. corporation. the Mexican Bolsa stock market had admitted Goldman Sachs and one other firm to operate on that market. 1986 also was the year when Goldman became the first United States bank to rank in the top 10 of mergers and acquisitions in the United Kingdom. The 1994 economic crisis in Mexico threatened to wipe out the value of Mexico's bonds held by Goldman Sachs. During the 1980s the firm became the first bank to distribute its investment research electronically and created the first public offering of original issue deep-discount bond. advised General Electric on its acquisition of RCA and joined the London and Tokyo stock exchanges. In 1999. 16 | P a g e . the firm introduced paperless trading to the New York Stock Exchange and lead-managed the first-ever global debt offering by a U. The firm joined David Rockefeller and partners in a 50–50 joint ownership of Rockefeller Center during 1994. During their reign.

More recently. In 2003 it took a 45% stake in a joint venture with JB Were. after further stock offerings to the public. and firms such as Citigroup and Merrill Lynch. the World Bank. In 1999. The firm is also heavily involved in energy trading. Goldman opened a full-service broker-dealer in Brazil in 2007. and 18% was held by retired Goldman partners and two longtime investors. This left approximately 12% of the company as being held by the public.S. for $531 million. It expanded its investments in companies to include Burger King. In May 2006.Since 1999 One of the largest events in the firm's history was its own IPO in 1999. Paulson became Chairman and Chief Executive Officer of the firm. Blankfein was promoted to Chairman and Chief Executive Officer. Treasury Department. one of the world's premier market-making firms. It also advised on a debt offering for the Government of China and the first electronic offering for the World Bank. In 2009 The Private Wealth Management arm of JB Were was sold into a joint venture with National Australia Bank. As of 2009. Goldman is 67% owned by institutions (such as pension funds and other banks). Paulson left the firm to serve as U. on both a principal and agent basis. Treasury Secretary. 22% of the company was held by non-partner employees. Goldman acquired Hull Trading Company. Sumitomo Bank Ltd. the firm has been busy both in investment banking and in trading activities. Alliance Atlantis alongside CanWest Global Communications to own sole broadcast rights to the all three CSI series. With the firm's 1999 IPO. including the oil speculation market. 17 | P a g e .3 billion in September 2000. The decision to go public was one that the partners debated for decades. McJunkin Corporation. the U. after having set up an investment banking office in 1996. and Hawaii's Kamehameha Activities Assn (the investing arm of Kamehameha Schools). Leeds. one of the largest specialist firms on the New York Stock Exchange. with some 48% still held by the partnership pool. for $6. Former Goldman employees have headed the New York Stock Exchange. & Kellogg. the White House staff.S. the Australian investment bank. In the end. and in January 2007. Goldman decided to offer only a small portion of the company to the public. and Lloyd C. It purchased Spear.

4 out of 119 total companies on the list. Paulson. Blankfein received a $67.2.701 people worldwide In 2006. the firm reported earnings of US$9. The investment banking segment accounts for around 17 percent of Goldman Sachs' revenues. In Business Week's recent release of the Best Places to Launch a Career 2008. However. who chose to take his bonus entirely in company stock. this number represents the arithmetic mean of total compensation and is highly skewed upwards as several hundred of the top recipients command the majority of the Bonus Pools. leaving the median that most employees receive well below this number.9 million bonus in his first year. for a long time during the 1980s. He chose to receive "some" cash unlike his predecessor. moves generally viewed as unfriendly to shareholders of targeted companies.1 in Annual Net Income when compared with 86 peers in the Investment Services sector. which increased the firm's reputation immensely among sitting management teams at the time. Goldman Sachs employed 31. 18 | P a g e . The company ranks No. Goldman Sachs divided into three businesses units: Investment banking Investment banking is divided into two divisions and includes Financial Advisory (mergers and acquisitions.000. Blankfein. Goldman Sachs was ranked No. Goldman Sachs. investitures.69. Goldman Sachs is one of the leading M&A advisory firms. It was reported that the average total compensation per employee in 2006 was US$622. was the only major investment bank with a strict policy against helping to initiate a hostile takeover. equityrelated and debt instruments). corporate defense activities. The firm gained a reputation as a white knight in the mergers and acquisitions sector by advising clients on how to avoid hostile takeovers. restructuring and spin-offs) and Underwriting (public offerings and private placements of equity.34 billion and record earnings per share of $19. often topping the league tables in terms of transaction size.3 Corporate affairs As of 2009. The current Chief Executive Officer is Lloyd C.

structured and derivative products). resulting in now-CEO Blankfein's appointment to President and Chief Operating Officer after John Thain's departure to run the NYSE and John L.The firm has also been involved in both advising and brokering deals to privatize major highways by selling them to foreign investors. mortgage-backed securities and loans. Upon its IPO. Trading & principal investments Trading and Principal Investments is the largest of the three segments. The Asset Management division provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles) across all major asset classes to a diverse group of institutions and individuals worldwide. including Indiana. and futures contracts on world markets). insurance-linked securities. Texas. options. and Chicago. Currency and Commodities (trading in interest rate and credit products. structured products and executing client trades in equities. Goldman predicted that this segment would not grow as fast as its Investment Banking division and would be responsible for a shrinking proportion of earnings. This segment consists of the revenues and profit gained from the Bank's trading activities. and is the company's profit center. and Principal Investments (merchant banking investments and funds). On average. In addition to advising 4 state and local governments on privatization projects. but rather an attempt to profit from bid-ask spreads in the process of acting as a market maker. both on behalf of its clients (known as flow trading) and for its own account (known as proprietary trading). equity-related products. The unit primarily generates revenues in the form of management 19 | P a g e . equity derivatives. The segment is divided into three divisions and includes Fixed Income. Thornton's departure for an academic position in China. currencies and commodities. the firm's Asset Management and Securities Services segment is divided into two components: Asset Management and Securities Services. Equities (trading in equities. The opposite has been true however. Asset management and securities services As the name suggests. Most trading done by Goldman is not speculative. around 68 percent of Goldman's revenues and profits are derived from trading.

mutual funds. In 2009. $11 billion from qualified institutional and high net worth clients and $9 billion from the firm and its employees. and pension funds. One of the most prominent funds is the GS Capital Partners V fund. Goldman closed GS Capital Partners VI with $20 billion in committed capital. which comprises over $8. GS Capital Partners GS Capital Partners is the private equity arm of Goldman Sachs. with $20.5 billion in 2007. securities lending. privately negotiated equity investments. after client redemptions and weaker investment performance.[54] On April 23. This was down from $32. 2007. custody. GS Capital Partners VI is the current primary investment vehicle for Goldman Sachs to make large. financing. 20 | P a g e . The division generates revenues primarily in the form of interest rate spreads or fees. the Goldman Sachs Asset Management hedge fund was the 9th largest in the United States. The Securities Services division provides clearing. and reporting services to institutional clients.and incentive fees.58 billion under management. It has invested over $17 billion in the 20 years from 1986 to 2006.5 billion of equity. including hedge funds.

7 1.com.2.5 4.7 0.7 4.9 23.4 GLOBAL EQUITY FUNDS 1) Goldman Sachs N-11 Equity Fund N-11 countries have large.6 Index 22.. These economies may experience rising productivity coupled with favorable demographics.6 1.7 15.0 3.7 2. compared to the global average.. growing and young populations.0 23.4 2..goldmansachs. _n-11equityfund_101552_20110630_fc.. COUNTRY ALLOCATION (%) COUNTRY Mexico South Korea Indonesia Turkey Nigeria Philippines Pakistan Bangladesh Vietnam Egypt South Africa Cash and cash equivalents Fund 24.7 2.6 1.2 3.0 15.pdf) 21 | P a g e .0 15.7 4.. The dramatic expansion of the N-11 middle-and high-income classes will be a key driving force behind the rise in consumer consumption.0 0.1 4. This diversity combined with domestic consumption offers the potential for strong equity market performance.0 (*source-http://www2.8 2. The N-11 provides geographic diversification as well as exposure to diverse stages of economic development-ranging from more advanced growth economies to traditional emerging markets.8 15. The growth of the N11countries could be one of the largest developments in the world economy.7 4. and as a result experience a faster growth rate than the world average.

.9 0.0 Index 24.4 21... It primarily invests in the growth stocks of mid-cap companies.. The fund employs a fundamental analysis with a bottom-up stock picking approach to make its investments.goldmansachs.6 2.1 17. The fund was formerly known as Goldman Sachs Asia Growth Fund.7 20.4 3.7 15.6 1.1 3.com..1 8.9 6.2) Goldman Sachs Asia Equity Fund The fund primarily invests in the public equity markets of Asia.4 0. Goldman Sachs Asia Equity Fund was formed on July 08.9 4.pdf) 22 | P a g e .ret_asiaequityfund_380701_20110630_fc. It benchmarks the performance of its portfolios against the MSCI All Country Asia Free ex-Japan Index (under hedged).7 4.3 9. 1994 and is domiciled in the United Kingdom.0 10.6 11. TOP TEN COUNTRY WEIGHTS (%) COUNTRY China South Korea Taiwan Hong Kong India Singapore Malaysia Indonesia Thailand Philippines Fund 25.8 (*source http://www2.7 6.

Russia.3) Goldman Sachs BRIC Fund The BRIC concept was first identified by Goldman...2 15.8 Index 36. or whose securities are principally traded outside the U.1 11.0 15.goldmansachs.7 13.4 8. in 2001.0 21.1 1.goldmansachs.0 2.6 3.0 Index 20. A group of countries that will be next global leaders..0 13.ret_bricfund_101153_20110630_fc. India and China—to identify the world are fastest growing economies.8 9. The Fund's objective is long-term capital appreciation.S.pdf) 4) Goldman Sachs Concentrated International Equity Fund Goldman Sachs Concentrated International Equity Fund is an open-end fund incorporated in the USA. COUNTRY ALLOCATION (%) COUNTRY China Brazil India Russia Fund 36.8 6.5 (*source-http://www2.7 3. Sachs & Co.com.5 8. Goldman Sachs created and coined the term BRIC—Brazil.9 2.3 10..1 (*sourcehttp://www2.S.4 8.9 33. The Fund invests primarily in equity securities of companies that are organized outside the U.9 33.4 17.2 5..com……ret_concentratedinternationalequityfund_10008 23 | P a g e . to potentially become four of the world‘s top six economies by 2032.9 2..8 14. TOP TEN COUNTRY WEIGHTS (%) COUNTRY Japan United Kingdom France Switzerland Australia Italy Germany Hong Kong Sweden Denmark 0_20110630_fc.6 2.In 2001. Our latest forecasts illustrate their anticipated momentum as key drivers of global economic recovery.pdf) Fund 24.

goldmansachs.0 2.1 2.7 9.4 11.5) Goldman Sachs Strategic International Equity Fund The Fund offers a broadly diversified portfolio of companies from developed and emerging countries around the world.com……………………. TOP TEN COUNTRY WEIGHTS (%) COUNTRY Japan United Kingdom France Switzerland Australia Germany Italy Hong Kong Denmark Sweden Fund 23.S.5 8.0 21. Goldman Sachs Strategic International Equity Fund is an open-end fund incorporated in the USA.1 6.1 (*sourcehttp://www2.ret_strategicinternationalequityfund _101274_20110630_fc.3 10.2 5.6 2.3 3.4 8. The Fund's objective is long-term growth of capital.pdf) 24 | P a g e .8 2.6 9.5 Index 20.7 20.6 9.7 1. The Fund invests in the stocks of leading companies within developed and emerging countries around the world and outside the U..1 3.

1 6.2 2.7 17.6) Goldman Sachs Emerging Markets Equity Fund The fund invests in the public equity markets across the global emerging markets.8 7.4 7. The fund conducts in-house research to make its investments.. This fund capitalize on the growth potential in emerging markets by identifying mis-priced stocks that represent alpha opportunities through intensive bottom-up.4 3.8 11.7 Index 17.7 12.0 14. It employs a fundamental analysis with a bottom-up stock picking approach to create its portfolio.ret_emergingmarketsequityfund_30070 4_20110630_fc.6 (*sourcehttp://www2.goldmansachs.1 9.pdf) 25 | P a g e .com……………….2 7. TOP TEN COUNTRY WEIGHTS (%) COUNTRY China Brazil South Korea Taiwan Russia India South Africa Mexico Malaysia Indonesia Fund 18.9 6. The fund typically invests in growth stocks of all market capitalization companies.3 15.5 14.0 4.1 2.3 4. It invests in stocks of companies operating across diversified sectors.6 3. fundamental research.

9 8.ret_internationalsmallcapfund_100221_ 20110630_fc.9 3.3 16. The fund benchmarks the performance of its portfolio against the S&P/Citigroup EMI World ex-U.3 Index 16.pdf) 26 | P a g e . It was formerly known as Goldman Sachs International Growth Opportunities Fund.8 10.8 2. The fund primarily invests in stocks of small cap companies. TOP TEN COUNTRY WEIGHTS (%) COUNTRY United Kingdom Japan Canada Germany France Australia South Korea Switzerland Italy Netherland Fund 18. Index.2 7.goldmansachs.7 1.4 6. It makes its investments in stocks of companies operating across diversified sectors.4 6..8 (*sourcehttp://www2.9 4.1 4.4 9.com……………….2 5.5 7.1 3.6 6.7 16. It employs fundamental analysis and uses bottom-up stock selection approach to create its portfolio.8 11.S.7) Goldman Sachs International Small Cap Fund The fund invests in the public equity market across the globe excluding United States.

Singapore and Bangalore. This team is at the center of the firm's daily trading activities and looks at all businesses and asset classes across the firm globally. including Value at Risk (VaR) and stress tests. analyzing and reporting market risk. 27 | P a g e . Hong Kong. Risk Modeling is the core group that designs and implements all risk models for our trading portfolio. including VaR models. including monitoring adherence to limits.5 Risk Management Market Risk Management & Analysis measures. Market Risk Strategies is responsible for designing and implementing market risk measurement models as well as approving pricing models used by the firm. Those who join us will be able to operate at a fast pace and in a constantly changing risk environment. Seoul. for all our trading desks globally      Verifying and approving pricing models Advising on the modeling of complex trades Reporting market risk information to external bodies Participating in evaluating and introducing new products and business The department is made up of the following three groups with representation in New York. London.2. The group is comprised of two teams: Risk Modeling and Derivatives Analysis. Much focus is given to liquidity and risk concentration. across asset classes. strong analytical skills and a strong desire to truly understand the financial markets. analyzes and controls the market risk of the firm globally responsibilities include:   Playing a key role in the risk/reward decision making process of the Firm wide Risk Committee Measuring the losses that the firm would experience under a variety of normal and extreme market conditions. Market Risk Analysis is looking for pro-active and driven people with a great eye for detail. Varieties of quantitative measures are used. Market Risk Analysis is responsible for measuring. stress testing and hedging analysis. Tokyo. We are looking for people who have strong quantitative and technological training.

the group also plays a direct role in the strategic risk/reward decision-making process. The group assesses and quantifies model risk. By attributing risk capital to individual trading businesses. 28 | P a g e . approves all pricing models and advises senior management on the risks associated with particularly large and complex transactions.Derivatives Analysis consists of derivatives modeling experts focused on the risk management of exotic derivatives. monitoring and reporting our market risk capital to regulators. Corporate Risk is responsible for calculating.

People often invest internationally for diversification. economic and social events -Low liquidity -Less access to important information -Foreign legal remedies -Varying market operations and procedures International investing is a procedure that many investors choose to get involved in by investing money outside of their domestic market. and international investing may present special risks. For example. to take advantage of emerging markets. All types of investments involve risk. including: -Fluctuations in currency exchange rates -Changes in market value -Significant political. to spread the investment risk among foreign companies and markets.1 Concept of International Investment The strategy of selecting globally-based investment instruments as part of an investment portfolio. an investor could purchase some stocks 29 | P a g e . Depository Receipts. International investing includes such investment vehicles as mutual funds. 3-Conceptual Framework 3.Chapter No. exchange-traded funds (ETFs) or direct investments in foreign markets. instead of holding a portfolio of only domestic stocks and bonds. International investments can be included in an investment portfolio to provide diversification and growth opportunities. and for growth.

you can diversify your portfolio more than you could with only domestic investments. Americans owed more to foreigners than foreigners owed to Americans. In the mid-1980s. There are a few benefits that you can realize by investing internationally that may not come with traditional investments. as well as the compass and explosives. Another benefit of this type of investment is that it can provide large amounts of growth. and ice cream. Products have been traded across borders throughout recorded civilization. pasta. among other things. This is an investment in which an investment bank purchases shares in a foreign corporation and then issues domestic shares that can be traded on the stock exchange. HISTORY International business is not a new phenomenon. this relationship was reversed: the United States became a creditor country. cheese. it extends back into history beyond the Phoenicians. Another method is the depository receipt. For example. If the economy of your country performs poorly. having money in another economy can keep the value of your portfolio up. 30 | P a g e . This allows you to invest money in a fund and then the fund manager buys foreign investments. literally shaping the world as we know it. There are several ways that you could choose to invest internationally. Mutual funds and exchange traded funds are one of the most common methods.from a foreign country or buy shares of a mutual fund that specializes in international investment. Many investors focus on emerging markets of the world where there is ample opportunity for growth. the United States was a debtor nation in international accounts. were brought to the Western world from China via the Silk Road. another major transformation occurred as the nation moved from net creditor back to net debtor. at least as officially measured. From roughly 1917-1918 to the mid-1980s. By investing internationally. extending back beyond the Silk Road that once connected East with West from Xian to Rome. that is. The Silk Road was probably the most influential international trade route of the last two millennia. From the colonial era to 1914.

Toyota. or 17 percent of all foreign direct investment. in 1990. This localization 31 | P a g e . compared with $34 billion.S. to some extent. Sometimes trade friction can also promote foreign direct investment. is the largest exporter of automobiles from the United States. The increase in foreign direct investment is also promoted by the efforts of many national governments to attract multinationals and by the leverage that the governments of large potential markets.FOREIGN DIRECT INVESTMENT Foreign direct investment—which means investment in manufacturing and service facilities in a foreign country—is another facet of the increasing integration of national economies. mainly in Asia. Since most of the U. Flows to developing countries in 1997 amounted to $149 billion. Similarly. but a growing share is now going to developing countries. The overall annual world inflow of foreign direct investment reached $400 billion in 1997. Japanese automakers.S. a Japanese automaker with a major factory in Marysville. However. have in granting access to multinationals. today foreign direct investment and international trade have become complementary. have expanded their local production by setting up production facilities in the United States. and Mitsubishi. Nissan. trade deficit with Japan is attributed to Japanese cars exported from Japan. Honda. Investment in the United States by Japanese companies is. Between 1990 and 1997. Most of this investment went from one developed country to another. Texas. As firms invest in manufacturing and distribution facilities outside their home countries to expand into new markets around the world. foreign direct investment was considered to be an alternative to exports in order to avoid tariff barriers. Dell Computer uses a factory in Ireland to supply personal computers in Europe instead of exporting from Austin. For example. a function of the trade imbalances between the two nations and of the U. such as Honda. In the past. such as China and India. representing 37 percent of all global foreign direct investment. whereas foreign direct investment nearly doubled over the same period. the value of international trade grew by just under 60 percent in dollar terms. Ohio. they have added to the stock of foreign direct investment. government's consequent pressure on Japan to do something to reduce the bilateral trade deficit.

The effect of this trend is that all nations with even partially convertible currencies are exposed to the fluctuations in the currency markets. in today's international financial markets. A rising currency value will also deter foreign investment in the country and encourage outflow of investment. The weekly volume of international trade in currencies exceeds the annual value of the trade in goods and services. commodity supplies and demand. They trade on the accounts of the banks and financial institutions they work for. for all practical purposes. it was as an adjunct to the international trade transaction in goods and services— banks and firms bought and sold currencies to complete the export or import transaction or to hedge the exposure to fluctuations in the exchange rates in the currencies of interest in the trade transaction. A rise in the value of the local currency due to these daily flows vis-à-vis other currencies makes exports more expensive (at least in the short run) and can add to the trade deficit or reduce the trade surplus.strategy reduces Japanese automakers' vulnerability to retaliation by the United States under the Super 301 laws of the Omnibus Trade and Competitiveness Act of 1988. The massive depreciation of many Asian currencies in the 1997-1999 period. However. It may also encourage a decrease in the interest rates in the country if the central bank of that country wants to maintain the currency exchange rate and a decrease in the interest rate would spur local investment. When trading in foreign currencies began. An interesting example is the Mexican meltdown in early 1995 and the massive devaluation of the peso. interest rates. political events. such as investment in foreign stocks and bonds. and so on. known as the Asian 32 | P a g e . The enormous quantities of money that are traded on a daily basis have assumed a life of their own. In the international financial markets. mostly on the basis of daily news on inflation rates. which was exacerbated by the withdrawal of money by foreign investors. disappeared. stock and bond market movements. the borders between nations have. PORTFOLIO INVESTMENT The increasing integration of economies also derives from portfolio investment (or indirect investment) in foreign countries and from money flows in the international financial markets. traders usually trade currencies without an underlying trade transaction. Portfolio investment refers to investments in foreign countries that are withdraw able at short notice.

Commodity trading is one of the preferred investment options. The price of copper is universal. the influence of these short-term money flows is a far more powerful determinant of exchange rates than an investment by a Japanese or German automaker. A huge number of investors put their money in these options for several reasons like less volatility of this market. is also an instance of the influence of these short-term movements of money. but which is supplied without qualitative differentiation across a market. Examples are petroleum and copper. that is. those who invest exclusively in foreign securities and those who invest in both domestic market and abroad markets. and fluctuates daily based on global supply and demand. Commodity A commodity is a good for which there is demand. The main benefit of broadly diversified international equity funds is the opportunity to take advantage of political and economical circumstances in different regions. The international equity style box is a valuable tool for investors to use to determine the risk-return structures of their international stocks/portfolios and/or how these investments fit into their investing criteria. It is also known as an "international stock style box". The commodity market investors put their money in both the national and international markets and the recent growth in the international markets have attracted 33 | P a g e . At the same time the growth prospects of this market are also good. Following are the financial instrument which are traded in international investment International Equity Funds International equity funds are funds that create geographically diversified portfolios These funds are divided into two categories. They are considered more aggressive than domestic funds that invest only in foreign market. Today. A visual representation of the principal investment characteristics of foreign stocks and foreign stock funds.financial crisis. A commodity has full or partial fungibility. the market treats it as equivalent or nearly so no matter who produces it.

Making investments in the international commodities markets is not a new concept. Bonds The foreign bond market is that in which bonds are brought out by foreign borrowers.more investors. The futures and options are a part of the international commodity trading activities and the international commodity exchanges are used for future or commodity trading. The foreign bonds are normally designated in the local currency. The local market authorities look after the issuing and selling of foreign bonds. there are certain international commodities exchanges that have been built for the purpose of trading some particular commodities like coffee. At the same time. metals. petroleum etc. petroleum and so on. Some defining characteristics of the foreign bond markets are:      Issuers are normally governments and private sector utilities such as the railway companies It was standard practice to underwrite as well as organize underwriting risk Issues were pledged by the retail investors and the institutional investors The structure of a foreign bond at that time is similar to the present day foreign bonds Continental private banks and old merchant houses in London connected the investors and the issuers 34 | P a g e . There are a number of such exchanges and the United States of America has the maximum number of commodities followed by the United Kingdom. Some of these are the agricultural products. gold. The foreign bonds are traded in the foreign bond markets which constituted a significant portion of the international bond market until a few decades ago. Only those commodities are selected for trading purpose that has huge demand in the local market. Both of these are kind of contracts with different features related to the commodity trading.

Eurobonds . commodities. The most common underlying assets include stocks.Eurobonds differ from the others in that they are not sold in any particular national bond market. currencies. interest rates and market indexes. Most derivatives are characterized by high leverage. it would not be sold in the United States. it would be sold outside the country which uses that currency. Derivative Derivative means a security whose price is dependent upon or derived from one or more underlying assets. If a Eurobond is designated in any currency. Eurobonds are issued by a group of multinational banks. 35 | P a g e . bonds. For example if a Eurobond is denominated in the United States dollar. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.

it should be discussed separately because of its specific features and significance for the company development. multinational diversification attracts companies with big opportunities for long term growth by entering new business sectors and growth in the existing business on the markets of other (new for the company) countries.   Highly competitive and well-known trademarks can be used jointly.  As a result of the larger scale there are opportunities to capitalize savings during the integrated work in the different sectors using the existing expertise along the business chain.  Valuable resources can be transferred from business to business and from country to country. for the different countries (consistent with their national characteristics) on the other.2 International Diversification Although international diversification can be identified as one of the above mentioned forms (related or unrelated) depending on the area of the main business activities. These strategies have to be developed by high competence managers. Partnership potential can be capitalized in the form of the different business sectors and countries and strategic coordination. Multinational diversification is considered one of the strategic paths to continue diversifying the company activities after the diversification at national level has been completed. It also includes diversification of business and of national markets. Regardless of the great challenges and difficulties of its implementation.  The different business activities at home and abroad can be funded internally which brings better instruments to fight competition and achieve higher sales.for the different sectors of the company business on the one side. 36 | P a g e .3. This process requires to be developed and executed at different strategies . At the same time it can increase the competitive advantages of the business in different ways:  Full use of resources and distribution of costs on the basis of the growing market and product range which leads to economies of scale and accumulated new experience.

56 billion in 1997-98 (as per BOP accounts of RBI).9 per cent in 1997. and which fell below that of India in 1994 and 1995. It declined sharply to 1 per cent in 1999 and 2000 but has recovered sharply to 1. This gap probably 37 | P a g e .3 The most remarkable transformation has occurred in South Korea. Though the share of Argentina. till 2000two to five times that of India‘s measured inflow. China with 17 per cent had the highest share of developing country FDI followed by Brazil with 13. Thailand. In contrast FDI inflows into Vietnam were 6.9 per cent of developing country FDI. it was. India‘s performance on the FDI front has shown a significant improvement since last year.9 per cent of its GDP. FDI inflows grew by 65 per cent to US$ 3. This growth of 65 per cent is particularly encouraging at a time when global FDI inflows have declined by over 40 per cent. Similarly China attracts FDI equal to 3.9 percent of its GDP in 2001. India‘s measured FDI as a percentage of total Gross Domestic Product(GDP) is quite low in comparison to other competing countries.7 per cent in 2001. India‘s share of developing country FDI fell at the end of the nineties. whose share in developing country FDI inflows was identical to that of India in 1993. Because of the Asian crisis in 199798 and the effect of sanctions on investor‘s sentiment. Even Malaysia.8 per cent of its GDP. but has again widened in 2001. which has recently developed an image of being somewhat against the globalization paradigm.91 billion during 2001-02 thus exceeding the previous peak of US $ 3. but was four times that of India‘s in 2000.8 per cent of its GDP in 2000. had a ratio four times that of India in 2000. Malaysia and Taiwan is much lower than that of China and Brazil. The gap between the shares of these two countries narrowed during the nineties with Brazil gradually catching up with China. Singapore. There has however been a significant improvement during 2001.Foreign Investment in India India‘s share in FDI inflows among developing countries reached a peak of 1. In 2000. South Korea. The upward trend in FDI inflows has been sustained during the current financial year with FDI Inflows during April-June 2002 about double that during the corresponding period of 2001. India the 12th largest country in the world in terms of GDP at current exchange rates is able to attract FDI equal only to 0. which has a relatively low FDI-GDP ratio among the major developing country recipients of FDI. receives FDI equal to 3.

Further. including mutual funds and insurance companies have been sellers in the Indian equity market. Meanwhile. global investors are borrowing cheap and investing in countries that offer the potential of an attractive return on investment. According to data available with the Securities and Exchange Board of India (Sebi) net cumulative FII inflows as on November 10. the number of registered subaccounts is 5. according to Sebi. With interest rates hovering around near-zero levels in most of Europe and US. India's benchmark indices . FIIs have also invested nearly $18 billion in the Indian debt market ever since November 1992.have also been one of the best-performing equity indices of the world in the recent past. the current calendar year has also been the best in terms of annual FII inflows.Sensex and Nifty . The net inflow into India has been significantly higher than the whole of Asia put together.64 billion in 2010. As on November 10.India has emerged as the star performer in terms of attracting foreign inflows into the domestic equity market. 2010 was $101.592. FIIs have been net buyers at $28. Interestingly.The record inflows have come at a time when most of the leading economies of the world are fighting against a slowdown in domestic growth.25 billion. According to Sebi. Thus.narrowed in 2001 and could narrow further in 2002 if the recent acceleration in growth of FDI into India can be sustained. The market regulator maintains data on FII inflows since November 1992.738 FIIs registered in India. there are a total of 1. Foreign institutional investors (FIIs) in India Foreign institutional investors (FIIs) that have been betting big on the Indian equity market this year have seen their cumulative inflows since 1992 cross a significant milestone of $100 billion. despite of the fact that the undertone of most recent reports by leading foreign institutional investors (FIIs) has been cautious. the massive buying by foreign investors comes at a time when most of the domestic institutional investors. Apart from the equity market. 38 | P a g e .

American Depositary Receipt An American Depositary Receipt (ADR) is how the stock of most foreign companies trades in United States stock markets.ADR . depositary bank and represents one or more shares of a foreign stock or a fraction of a share.COM INDIA LTD SATYAM COMPUTER SERVICES LIMITED SIFY LTD. Indian ADR Trading in US ADR ISSUE DR. Technology Services Technology Services Technology Services Fixed Line Comm.gdr. REDDY'S LABORATORIES LTD. Depository banks have numerous responsibilities to the holders of ADRs and to the non-U. HDFC BANK LTD. The price of an ADR is often close to the price of the foreign stock in its home market. investors usually find it more convenient to own the ADR. (* sourcehttp://www.co. Each ADR is issued by a U. If investors own an ADR they have the right to obtain the foreign stock it represents. ICICI BANK LTD. Technology Services EXCH NYSE NYSE NYSE NASDAQ NYSE NASDAQ NYSE NASDAQ NYSE NYSE . company the ADRs represent.S. The largest depositary bank is The Bank of New York. but U.in/) 39 | P a g e SYMBOL RDY HDB IBN INFY MTE REDF SAY SIFY VSL WIT INDUSTRY Pharmaceutical Banks Banks Technology Services Fixed Line Comm. adjusted for the ratio of ADRs to foreign company shares. INFOSYS TECHNOLOGIES LIMITED MAHANAGAR TELEPHONE NIGAM LIMITED REDIFF. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).S.S. VIDESH SANCHAR NIGAM LIMITED WIPRO LTD.

I.00 55.0 1. especially those from emerging markets.0 5.00 Shares per GDR GDR Issue Price **(US$) Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Ind.05 15.67 26. which can be subject of worldwide circulation on capital markets.94 12.0 3.Global Depositary Receipt Global Depository Receipt (GDR) . which purchase shares of foreign companies and deposit it on the accounts.00 25.00 48.0 1.00 50.0 6.11 22.00 10. Prices of GDR's are often close to values of shares.77 9.0 1.50 40 | P a g e .00 90.77 110.00 100.00 125.0 1.0 9. Shipping G.00 40.00 70.79 16.00 125.0 1.0 3.F. Hotels EID Parry Finolex Cab Flex Industries G.0 5.75 9.0 2.16m 9.98 20.67 12.56 13. GDR's are also spelled as Global Depositary Receipt.00 35.E.0 1.00 61.78 12.0 1.00 40.# Bombay Dye BSES Ltd Century Textiles CESC Core Parent Crompton Greaves DCW Dr.39 16.00 137.C GAIL Garden Silk Grasim (1st) Grasim (2nd) Textiles Autos Autos Paper Textiles Power Diversified Power Pharma Electrical Diversified Pharma Hotels Fertiliser Cables Packaging Shipping Fertiliser Oil & Refineries Textiles Diversified Diversified 1. Indian GDR GDR Companies # euro convertible bond **adjusted for bonus Industry Segregation Size Of GDR Issue US $ Mill 125.0 1.40 254.00 50. Reddy's E.0 5.60 7.0 5.30 8.00 100.20 14.0 1.55 11.0 1.0 1.28 12.60 8.50 45.N.0 2.00 30.0 1. Very similar to GDR's are ADR's. GDR's are emitted by banks.00 100.GDR .89 8.certificate issued by international bank. Global Depository Receipt facilitates trade of shares.

GujAmbuja # Himachal Futuri Hindalco (1st) Hindalco (2nd) Hindustan Dev. India Cements Indian Alum. Indian Hotels Indian Rayon Indo Gulf Indo Rama ICICI ICICI (ADR) Infosys IPCL ITC J.K. Corp Jain Irrig JCT Ltd. KesoramInd L & T (1st) L & T (2nd) Mah&Mah MTNL NEPC Micon Nippon Denro# Oriental Hotels Ranbaxy Labs Raymond Woolen Reliance Reliance (2nd) Reliance Petroleum S.A.I.L. Satyam Infoway S.I.E.L. Sanghi Poly SIV Ind SPIC SBI

Cement Telecomm. Aluminium Aluminium Diversified Cement Aluminium Hotels Diversified Fertiliser Textiles Finance Finance IT Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified Diversified Autos Telecom Diversified Steel Hotels Pharma Textile Diversified Diversified Diversified Steel IT Diversified Textiles Textiles Fertiliser Banking

80.00 50.00 72.00 100.00 76.00 90.00 60.00 86.25 125.00 100.00 50.00 230.00 315 70.38 85.00 68.85 55.00 30.00 45.00 30.00 150.00 135.00 74.75 418.53 47.70 125.00 30.00 100.00 60.00 150.00 300.00 100 125.00 75.00 40.00 50.00 45.00 65.00 369.95

1.0 4.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 10.0 5.0 5.0 0.5 3.0 1.0 1.0 1.0 10.0 1.0 2.0 2.0 1.0 2.0 1.0 10.0 1.5 1.0 2.0 2.0 2.0 15.0 15.0 1.0 3.0 5.0 1.0 5.0 2.0

5.95 9.30 10.73 16.00 2.05 4.23 6.77 16.60 15.01 4.51 11.37 11.50 9.80 34 13.87 7.65 8.00 11.13 16.96 1.60 16.70 15.35 4.46 11.958 3.18 21.36 12.75 19.38 10.61 16.35 23.50 23.0 12.97 18.0 14.64 9.56 6.37 11.15 14.15

41 | P a g e

Sterlite India# Tata Electric Telco (1st) Telco (2nd) Tube Invest United Phos. UshaBeltron Videocon Int. VSNL Wockhardt

Diversified Power Autos Autos Cycles & Acc. Pesticides Cables Electronics Telecomm. Pharma

100.00 65.00 115.00 200.00 45.60 55.00 35.00 90.00 527.00 75.00

1.0 100.0 1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0

17.86 710.00 8.75 14.25 6.58 20.50 10.70 8.10 13.93 14.35

(* sourcehttp://www.gdr.co.in/)

42 | P a g e

3.3 Barriers to International Investment
We all know that the investment and risk are cannot be separated. In case of, international investment there is also relation between risk and investment. International investment includes Foreign Direct Investment (FDI), Portfolio investment by foreigner investors & institutions or investment in foreign securities. Generally it is considered that the foreign investment beneficial for both developed and developing countries but there are many hurdles have faced by MNC‘s, foreign investors in their home country and also in foreign countries. It is a mistake to view international investments in isolation. The key to investing in foreign markets is to develop a strategy an investor will be comfortable with and not abandon prematurely. This will also depend upon an ability to accept day- to- day fluctuations, some of which may not be in one‘s hands at all. In case of domestic investment investors can inform about risk very easily but in case of foreign investment they have a little idea about risks in foreign investment. Investors can‘t get information about foreign market without mediums like newspaper, news channels & Internet but it cannot help much. Following are some of common risks while investing abroad are as follows 1) Correlation between International & Domestic Investments 2) Higher costs to transactions in foreign securities 3) Investor Psychology in offshore markets Along with these common risks investors, institutions & MNC‘s have to face many barriers that explained in above topics.

43 | P a g e

Let us understand this distinction clearly. It is also called as ―currency risk‖ or ―exchange-rate risk‖. i. Besides.3. the magnitude of the risk is determined by the magnitude of the exposure and the degree of variability in the relevant risk factor. it can affect investors who have made some international investments. The example of such foreign exchange risk may be in an investment with the currency exchange rate during converting money to another currency when its value is decreasing or increasing as if it needs to be converted back into the original currency. Exposure is a measure of the sensitivity of the value of a financial item (asset. This foreign exchange risk in the ordinary course of events influences business of export and import.4 Foreign Exchange Risk Foreign exchange risk means 1) It is a probability of loss that might occur according to the changes in Forex rates. April 1993 to about July 1995 the exchange rate between rupee and US dollar was almost rock steady. It may also arise from commodity-based transactions where commodity prices are determined and traded in another currency. translation and economic exposures. Foreign exchange risk arises through transaction. it had significant exposure to this exchange rate. Consider a firm whose business involved both exports to and imports from the US. at the same time it would have said that it didn‘t perceive significant risk on this account because given the stability of the rupee-dollar fluctuations would have been perceived to be minimal. 2) Foreign exchange risk that the prices will have to be closed out specified by an adverse in oscillations of exchange rates.. Thus. 44 | P a g e . liability or cash flow) to changes in the relevant risk factor while risk is a measure of variability of the value of the item attributable to the risk factor. During this period the firm would have readily agreed that its operating cash flows were very sensitive to the rupee-dollar exchange rate.e. Foreign exchange risk for global corporate are more referred as exposures.

Transaction exposure. subsequent fluctuations in exchange rates can change the value of that contract. for a specific quantity of goods and a specific amount of money. defined as a type of foreign exchange risk faced by companies that engage in international trade. 45 | P a g e . the greater the risk associated with exchange rate fluctuations. exists in any worldwide market. The greater the time between the agreement and the settlement of the contract. It is the risk that exchange rate fluctuations will change the value of a contract before it is settled.Foreign Exchange Exposure Transaction Exposure Translation Exposure Economic Exposure Exposure from changing in commodities prices Transaction Exposure Transaction exposure. Transaction exposure is also called transaction risk. Once a crosscurrency contract has been agreed upon. Foreign exchange rates can fluctuate instantaneously. A cross-currency transaction is one that involves multiple currencies. A business contract may extend over a period of months. can occur in either developed or developing nations. meaning risk that foreign exchange rate changes will adversely affect a cross-currency transaction before it is settled. A company that has agreed to but not yet settled a cross-currency contract that has transaction exposure.

The contract still stands at 100 units of foreign currency. Now the value of the 100 units of foreign currency that the foreign company will pay the domestic company has changed – the payment is now only worth 50 units of domestic currency.000 units of product to the foreign company and the foreign company will pay for the goods in 3 months with 100 units of foreign currency. the domestic firm suffered a 50% loss in value. Now one unit of domestic currency is worth 2 units of foreign currency.wikicfo. The contract states that the domestic company will ship 1. The money the foreign company will pay the domestic company is equal to 100 units of domestic currency.aspx?Page=Transaction%20Exposure&NS=&AspxA uto Detect Cookie Support=1) 46 | P a g e . Assume the current exchange rate is: 1 unit of domestic currency equals 1 unit of foreign currency. However.Example For example. because the contract specified payment in the foreign currency. The value of the contract is exposed to the risk of exchange rate fluctuations. now has transaction exposure. The domestic company. the one that is going to receive payment in a foreign currency. (*sourcehttp://www. let‘s say a domestic company signs a contract with a foreign company.com/Wiki/Default. The foreign currency has devalued against the domestic currency. The next day the exchange rate changes and then remains constant at the new exchange rate for 3 months.

the parent company will report its assets and liabilities in its home currency. Ultimately. it must include the assets and liabilities it has in other currencies. all of the values will be translated into the home currency. Assume the domestic division of a multinational company incurs a net operating loss of $3. Example Here is a simplified example of accounting exposure. Before the parent company consolidates its financial reports. The more assets or liabilities the company has that are denominated in a foreign currency. for financial reporting. the greater the translation risk. Therefore foreign exchange rate fluctuations actually change the value of the parent company‘s assets and liabilities. It is the risk that foreign exchange rate fluctuations will adversely affect the translation of the subsidiary‘s assets and liabilities – denominated in foreign currency – into the home currency of the parent company when consolidating financial statements. So when the parent company is preparing its financial statements.000 units of foreign currency. At the time. Translation exposure can affect any company that has assets or liabilities that are denominated in a foreign currency or any company that operates in a foreign marketplace that uses a currency other than the parent company‘s home currency. the exchange rate between the dollar and the foreign currency is 1 to 1.Translation Exposure Translation exposure is a type of foreign exchange risk faced by multinational corporations that have subsidiaries operating in another country. or translation risk. Now 1 unit of foreign currency is only worth 47 | P a g e . But at the same time. So the foreign subsidiary‘s profit exactly cancels out the domestic division‘s loss. When valuing the foreign assets and liabilities for the purpose of financial reporting. a foreign subsidiary of the company made of profit of 3. This is essentially the definition of accounting exposure. Translation exposure is also called accounting exposure.000. the exchange rate between the dollar and the foreign currency changes.

(*source http://www. based on historical events. the liquidity of the subsidiary is impaired. Suddenly the profit of the foreign subsidiary is only worth $1. A subsidiary's ultimate liquidity position.$. can be significantly different depending upon the expected disposition of its cash balances when its own currency devalues. a local devaluation will have an impact on the subsidiary not always identified by the parent. due to hedging or offsetting. the parent may not be able to augment it." which attempts to give management an additional means of analyzing effects of foreign exchange movements on operations. 48 | P a g e . However. Whichever translation convention is used. The group position may show. it is among those current assets always translated at current rates and affected by devaluation. It can be important to identify economic exposure from the very beginning of foreign exchange policy determination. profits. the resultant consolidation merely indicates the reported position of a group at a given point in time. This is a simplified example of translation exposure. a neutral position in a particular currency.wikicfo. Now the company as a whole must report a loss. If liquid balances have been built up for imports or dividend payments.ashx) Economic Exposure Exposure determination in the accounting sense points out those items which will have a negative effect on consolidation if the currency in which they are denominated should change in value. however. Even if the group is covered against the currency in question. and net worth. A similar effect on liquidity can arise from parity changes involving accounts payable. or short-term debt or the local subsidiary. Both of these are included in the term "economic exposure.50.com/wiki/Translation%20Exposure. Cash is a typical example.500 and it no longer cancels out the domestic division‘s loss. this does not necessarily show the opening impact of a parity change on any single member of the group or the effect on future flows of income in the group. accounts receivable.

Foreign exchange policy must be consolidated with the general financial policy of the company. Short-term investments in several currencies both have exchange and liquidity. At the senior management level. important to identify the price elasticity of inventory and its ultimate destination (hard currency markets. controller. the company will determine whether its foreign exchange policy should be basically cautious or aggressive. After the initial data gathering and consolidation.The realization of inventory presents a further example. and sales divisions. usually by a senior management committee with representatives of treasury. This should be included in the identification of economic exposure. the corporate policy vis-a-vis its foreign exchange position should be established. however. Under a cautious policy the attitude is that the firm's operations should basically be protected against risk of loss in foreign exchange that is. insulated from the international environment in that regard. knowing the elasticity element can allow the group to raise prices before the event. aspects. 49 | P a g e . as well as risk. Short-term borrowing by a subsidiary for working capital purposes and anticipated future borrowing will affect both corporate liquidity and exchange exposure. It is. Inventory to be sold in only one market may be considered an exposed asset if its price cannot be raised after a local devaluation. for example) to determine which portion is exposed and which is not. management essentially wishes to remain covered against foreseeable exchange risk and devote managerial attention to more basic areas such as product development and marketing. If it is to be cautious.

and obtain the most efficient pricing. Book -Global Capital Market . suppliers of commodities. if the exchange rate moves favorably. the hedger should understand both the exposure and the market to hedge when exposure involves combined commodity and currency rates. and a component of.S organizations. an organization can access both risks independently. by DipakAbhyankar) 50 | P a g e . exchange rates may be embedded in. exposure to commodities prices may indirectly result in foreign exchange exposure for non-U.S dollars. In real world by splitting the risk into currency and commodity components. In most cases. determine an appropriate strategy for dealing with price and rate uncertainties. like any other business.Foreign Exchange Exposure from Commodity Prices Since many commodities are priced and traded internationally in U. Without the benefit of hindsight. Protection through fixed rate contracts that provide exchange rate protection is beneficial if the exchange rate moves adversely. Even when purchases or sales are made in the domestic currency. However. the buyer might be better off without a fixed exchange rate. the commodity price. are forced to pass along changes in the exchange rate to their customers or suffer losses themselves. (*source-page no 195 chapter 10 th Obstacles to International Investment.

Information Asymmetry In economics and contract theory. Home court advantage is evident in international portfolio investment. Examples of this problem are adverse selection and moral hazard. or effectively retaliate for breaches of. information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.5 INFORMATION BARRIERS Language differences. Some asymmetric information models can also be used in situations where at least one party can enforce. and high cost of sources of information on companies in some market are information barriers to investment. Information asymmetry models Information asymmetry models assume that at least one party to a transaction has relevant information whereas the others do not. certain parts of an agreement whereas the others cannot Information Assymetry Adverse Selection Morale Hazard 51 | P a g e . Different accounting standards and methods. Information is more available to any local corporate. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry.3.

a situation in which one party in a transaction has more information than another. because the principal usually cannot completely monitor the agent. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.Adverse selection Adverse selection. The agent may have an incentive 52 | P a g e . Economists explain moral hazard as a special case of information asymmetry. In particular. where one party. insurance.e. acts on behalf of another party. For example. high-activity (and hence least profitable) customers. access to different information): the "bad" products or services are more likely to be selected. moral hazard is a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk. because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company. or negative selection is a term used in economics. Moral hazard also arises in a principal-agent problem. Moral Hazard In economic theory. called an agent. More broadly. a person with insurance against automobile theft may be less cautious about locking his or her car. moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. called the principal. anti-selection. statistics. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its low-balance. The agent usually has more information about his or her actions or intentions than the principal does. leaving another party to hold some responsibility for the consequences of those actions. moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information. and therefore has a tendency to act less carefully than it otherwise would. Two ways to model adverse selection are with signaling games and screening games. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions. and risk management.

In a purely capitalist scenario. the Federal Reserve – assumed the ultimate risk on behalf of the citizenry at large. Decreased valuation of a corporation before any bailout will prevent risky. pushed risk onto the lenders. In finance In the period 1998-2007 regulators kept and published detailed statistics on the ethnicity and location of those receiving loans. national credit authorities – in the U. Lenders. some riskier than others. speculative business decisions by executives who conduct due diligence in their business transactions. Investors bought securities and hedged against the risk of default and prepayment. Investment banks bought mortgages and chopped up mortgage-backed securities into slices. however. pushing those risks further along. The risk and burdens of loss became apparent to Lehman Brothers (who did not benefit from a bailout) and other financial institutions and mortgage companies such as Citibank and Countrywide Financial Corporation. Others believe that financial bailouts of lending institutions do not encourage risky lending behavior. whose valuation plunged during the subprime mortgage crisis.to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned. who sold mortgages soon after underwriting them. since there is no guarantee to lending institutions that a bailout will occur.S. In the 2007– 2008 subprime crisis.. Brokers. The data that the regulators focused on was more relevant to politically mobilizing voting blocks in particular electorates than to keeping the financial system solvent. the last one holding the risk (like a game of musical chairs) is the one who faces the potential losses. but failed to pay similar attention to their credit worthiness. 53 | P a g e . who were not lending their own money. pushed risk onto investors. default rates or vulnerability to a housing downturn.

Most public companies are required by law to use generally accepted accounting principles for their home countries. partnerships and sole proprietorships may not use accrual basis accounting. All over the world. Large multi-national corporations may use International Financial Reporting Standards to produce their financial statements. When a manager may readily lay blame on an innocent subordinate. different countries vary in their general accounting 54 | P a g e . When the failure of the project is of minimal overall consequence to the firm. such as in cases of nepotism or pet projects.In management Moral hazard can occur when upper management is shielded from the consequences of poor decision making. and the terminology is not always consistent between companies. When a manager is protected by someone higher in the corporate structure. or they may use the generally accepted accounting principles of their home country. When there is no clear means of determining who is accountable for a given project. There is no international standard for calculating the summary data presented in all financial statements. but private companies. countries and time periods. This situation can occur in a variety of situations. When funding and/or managerial status for a project is independent of the project's success. such as the following:       When a manager has a secure position from which he or she cannot be readily removed. Accounting methods and principles Financial ratios may not be directly comparable between companies that use different accounting methods or follow various standard accounting practices. industries. regardless of the local impact on the managed division.

countries that meet and discuss business regulations can establish and analyze financial transactions coming from one point. It must be emphasized that IASC provides guidelines for its member countries but cannot impose members to comply with the set standards. for instance US adopted the German practice after the war.procedures since each nation has its own financial framework. cross-border rising of huge amount of capital has also generated considerable interest in the generally accepted accounting principles in advanced countries such as USA. Nonetheless. It is just an agreement between countries to report in accordance to what has been set by IAS for publicly-traded companies. accountants from every country still needs to adhere to certain type of financial reporting. Initiatives taken by International Organization Securities Commission (IOSCO) towards propagating 55 | P a g e . Further. Some countries follow GAAP but more developed countries prefer International Accounting standards (IAS). It can aid companies that deal with different countries for their product by consolidating varying forms of accounting reports. The paradigm shift in the economic environment in India during last few years has led to increasing attention being devoted to accounting standards as a means towards ensuring potent and transparent financial reporting by corporate. Japan employs a complex form of accounting that even code breakers have a hard time deciphering. The body solely responsible for regulatory guidelines that affect accounting reports and practices is the government. the International Accounting Standards have been established so that countries can adhere to a guideline for accounting reports. Although the GAAP has been agreed upon. Also. The international financial reporting standards were recognized after it was release in 2001. Every country has its own unique political and social climate that affects the government. International accounting exists because the financial transaction of developed countries is more complicated than that of developing nations. For example. Some set of information for one country may not be relevant or applicable in another country‘s finances. The IAS was formerly issued by the Board of the International Accounting Standards Committee (IASC). The IAS contains the directives on how some accounting transactions should be reported and recorded in financial statements. History may be a factor in the development of accounting procedures.

English language levels in this country are quite sketchy. Language Differences Every country in the world has its own culture and value base. Today. other factors can make cross culture communication difficult. Mandarin is the most common language as well as the official dialect. to recognize that. This should form part of your business strategy or structure. For example what one culture feels to be a very positive 56 | P a g e . accounting standards in India have come a long way. The changing face of the world's economy has seen some of the most successful countries of the 20th Century in danger of losing their economic stronghold in the 21st. As we are already aware. it now stands second in the league for richest countries.International Accounting Standards(IASs)/ International Financial Reporting Standards (IFRSs). as the uniform language of business to protect the interests of international investors have brought into focus the IASs/ IFRSs. the aid of a translator is necessary to avoid misunderstandings and mistranslations. It would be prudent to do some research on any culture you may be working with. more than twenty five years ago. to fall in line with the international and national expectations. took upon itself the leadership role by establishing Accounting Standards Board. in order to spot differences you will need to be able to communicate effectively. the services of a translator or interpreter should be a prime consideration. The Institute of Chartered Accountants of India. Presented hereinafter are some salient features of the accounting standardsetting endeavors‘ in India. being a premier accounting body in the country. economic and cultural changes. issued by the International Accounting Standards Board (IASB). It is important when dealing with other cultures. When dealing with colleagues or clients from a different culture. communication problems do not arise solely due to the fact that people speak different languages. you need to know your own approach to culture and the approach of the other culture. your own culture and sense of identity can have an impact on your approach to work and business later in life. most people conform to a certain national business culture.China for example has found itself in the midst of social.

communications style. in many research situations. the realty is that. or a continuation of business. such as market research firms. the need to have the correct information written down and in the style of the culture you are dealing with. The margin for error here is massive. locating in-depth. today‘s reports are much more accessible than in the past when research suppliers required clients to sign up for high-priced subscription services. since gaining access to good research can be costly. on the surface it may not seem practical for small companies or individuals to take advantage of these sources. Today many information sources permit the purchase 57 | P a g e . in many situations. Consequently. Purchasing a subscription would then give the client access to a large number of reports. especially those in which reliable market estimates are critical. research seekers also know that the level of detail available in a single report may be enough to provide answers to most of their questions in which case these reports can be real time savers (though marketers are cautioned against relying on a single source for information to make marketing decisions). may be the difference between one deal only. acquiring the best researched market information requires a fee. High cost of sources of information on companies There are many sources marketers can turn to in order to obtain research information. Many cultures place emphasis on written communication. Expensive sources of information generally include accessing reports from the originators of the research. while the cost of reports can appear prohibitive. can be seen as downright rude by another culture. However. numbersrelated market information is difficult and expensive. Companies in the business of producing market metrics are mostly doing so to make money and do not give the information away for free. Also. A translator who is proficient in that language and who also has knowledge of the culture. while research seekers can get lucky finding information through inexpensive means. However. will save you time and money in the long-term. only when something is written down do they have a strong belief in it. Yet. Misreading a situation because of differing communication styles is bad for business.

as we noted earlier. Often these reports are produced by a specific researcher who has been following the market/industry for many years and produces regular updates which include offering comments and insight that go beyond the numbers. But these reports come with a high price tag.. 58 | P a g e . It is not uncommon to pay a large sum for a report that is only a hundred or so pages long. Many companies engaged in market research services offer both customized research activities (i.of single research reports without the requirement to commit to a subscription.e.e. produce work that nearly anyone can buy). many research reports are updates of existing reports.. including forecasts and trend analysis. However. produce work only for a single paying client) and commercial research (i. Commercial reports produced by reputable firms are generally well-researched and contain extensive product/industry metrics and statistics.

quotas and non-tariff barriers such as excessive regulations are now commonly used to protect domestic industry from foreign competition. Trade barriers initially arose in the form of tariffs levied to generate revenue. This is the premise of most free trade agreements and embargoes.3. and there are many reasons countries impost trade barriers. boycotts and sanctions. For all of these reasons. Finally.6 Regulatory Barriers Legal and Regulatory barriers can hinder the flow of goods and services and the movement of capital and people. Very high or low tariffs can be used to reward or punish other nations in support of foreign policy initiatives. For many countries. countries often use barriers as tools of foreign policy. Regulatory barrires Trade barriers Control on capital Government procurement Border & Immigration control Techonological Trade Barriers Trade barriers are as ancient as trade itself. Tariffs. trade barriers are sensitive and controversial issues. tariffs are a major source of income and are critical to the national economy. 59 | P a g e .

Import Duties/Tariffs Cultural Barriers Restrictive Tariffs Lack of Intellectual Property Protection Export Subsidies Trade Barriers Excessive Regulations Countervailing Duties Licensing Boycotts. Embargoes and Trade sanctions Quotas 60 | P a g e .

tariffs are important to the national economy and can help raise funds for important social programs. • Direct or indirect subsidies by a foreign government in favor of domestic suppliers. • Lack of competitive bidding on government tenders. fees and paperwork requirements. This means the government provides a domestic company some kind of financial assistance in order to make that company‘s product cheaper than a similar imported product. labeling and certification requirements not required of domestic manufacturers.company/government interference. import licenses. • Intellectual property infringement. made it less arbitrary. Alternatively. • Burdensome standards. patent and trademarks. including copyright. • Export controls such as license requirements and restricted buyer lists. Restrictive Tariffs: Governments select certain import items to ―limit‖ by placing restrictively high tariffs on them. effectively keeping foreign suppliers out of the market. • Influence pedaling .TYPES OF TRADE BARRIERS • Tariffs. This has simplified tariff application. a subsidy can make it easier for a 61 | P a g e . quotas. The first 6 numbers of HTS and Schedule B codes are identical for all WTO member countries. and thus easier to reduce tariffs on groups of products. corruption and requests for payoffs. testing. Export Subsidies: A federal program of financial assistance to aid domestic producers is considered an export subsidy. • Bribery. and customs barriers that are not uniformly applied. Import Duties/Tariffs: For many countries. WTO members have agreed to utilize product identifying codes called Harmonized Tariff Schedule (HTS) for imports and Schedule B forex ports. This makes imported products relatively more expensive and less appealing to domestic consumers.

Countervailing duties are tariffs imposed to offset discounted Imports often subsidized by foreign governments. and any subsidy that exceeds that limit is illegal and takes market share away from unsubsidized competitors. Governments maintain subsidies to fund core industries or fledgling industries in order for them to remain viable in the face of foreign competition.S. Many subsidies controversial and are alleged to be protectionist (because a country is protecting its domestic producers through the subsidy) and harmful to international trade. Boycotts. Trade sanctions with Iraq were designed to get Iraq to comply with UN resolutions and prevent them from continuing to source items used to manufacture military weapons. import duties/tariff scan be an effective tool to offset the discount and protect domestic suppliers. where they might otherwise not be price-competitive. request to retaliate against Canadian processed dairy export subsidies is a good example of tariffs as a legitimate tool used to protect industries unfairly harmed by foreign suppliers who dump good sin to their country. The U.domestic producer to sell goods in foreign markets. grants. 62 | P a g e . Licensing: Import and export licensing is meant to be used to protect national interests by limiting access to dangerous imports and ensuring that critical technology is not shared with terrorists or rogue nations.g. If too excessive. effectively limiting foreign penetration in the local market. Bans. e. The WTO sets a ceiling for subsidies. they can limit access to foreign markets. etc. This can be done through tax breaks. Embargoes and Trade sanctions: These trade policies can be used in support of foreign policy as reward or punishment for cooperation or lack of cooperation. Quotas: National governments select certain import items they want to limit and place quantitative quotas on market access. Countervailing Duties: When a country feels another country is ―dumping‖ products into their market unfairly (selling at less than cost and often with support of subsidies).

Usually. except perhaps those considered necessary for health or national security. Cultural Barriers: The most obvious unofficial barriers to free trade are language and cultural differences. Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. regardless of the standards the products meet in their domestic market. The government can make these standards extremely difficult for a company to meet. thus lowering prices and hurting poor-country farmers. but they can be if the standards are too complex for a foreign company to meet compliance. religious nuances and social etiquette unknown to thee exporter can contribute to their product‘s failure in foreign markets. however.Excessive Regulations: Standards. this can be explained by the theory of comparative advantage. Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency. then a trade war results. Because rich-country players call most of the shots and set trade policies. even those countries promoting free trade heavily subsidize certain industries. A country may require that foreign products coming into its markets meet its standards. and often are the cause of issues in packaging and labeling. Furthermore. such as agriculture and steel. Trade barriers are often criticized for the effect they have on the developing world. testing. goods such as crops that developing countries are best at producing still face high barriers. In practice. These can hinder processing of paperwork. with low rates for raw 63 | P a g e . Tariffs also tend to be anti-poor. In theory. labeling and certification: These types of standards aren‘t necessarily trade barriers. If two or more nations repeatedly use trade barriers against each other. Trade barriers such as taxes on food imports or subsidies for farmers in developed economies lead to overproduction and dumping on world markets. education and the right in-country partners. free trade involves the removal of all such barriers. these barriers can be overcome with research. Lack of Intellectual Property Protection: A country which has weak protection of intellectual property laws fails to protect imported products from illegal acts like trademark infringement. and thus discourage imports.

saying that capital controls can be useful as a regular policy tool even when there is no crisis to react to.commodities and high rates for labor-intensive processed goods. Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s. caps on the allowed volume for the international sale or purchase of various financial assets. though it still cautions against their overuse. at least among economists and within the administrations of developing countries. By the time of the 2008–09 crisis. In late 2009 several countries imposed capital controls even though their economies had recovered or were little affected by the global crisis. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world. After the Asian Financial Crisis of 1997–98. In the 1970s free market economists became increasingly successful in persuading their colleagues that capital controls were in the main harmful. There have been several shifts of opinion on whether capital controls are beneficial and in what circumstances they should be used. or even limits on the amount of money a private citizen is allowed to remove from the country. minimum stay requirements. and the international financial institutions (the IMF and WB) began to take an increasingly critical view of capital controls and persuaded many countries to abandon them. Control on capital Capital controls are measures such as transaction taxes and other limits or outright prohibitions. Types of capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate. there was a shift back towards the view that capital controls can be appropriate and even essential in times of financial crisis. even the IMF had endorsed the use capital controls as a response. The use of capital controls 64 | P a g e . The US. other western governments. transaction taxes such as the proposed Tobin tax. requirements for mandatory approval. By February 2010 the IMF had almost entirely reversed the position it had adopted in the 80s and 90s. the reason given was to limit capital inflows which threatened to over-heat their economies. which a nation's government can use to regulate the flows into and out of the country's capital account. This period was the first time capital controls had been endorsed by mainstream economics.

Only the US and Japan 65 | P a g e . With 10 to 15% of GDP in developed countries. Japan and Brazil. Only 14 countries are parties to the Government Procurement Agreement (GPA). public procurement is arguably the largest segment of trade that continues to be relatively sheltered from international commitments. a plural lateral international treaty under the auspices of the WTO. World Bank and Asian Development Bank all now consider that capital controls are an acceptable way for states to regulate potentially harmful capital flows. data are scarce. though concerns remain about their effectiveness among both senior government officials and analysts working in the financial markets. government procurement accounts for a substantial part of the global economy. and up to 20% in developing countries. 11% in the US and 18% in Japan. these government procurement markets were estimated to amount to around €212 billion in India and the Mercosur (Brazil and Argentina) put together. For emerging and developing economies. is the procurement of goods and services on behalf of a public authority. but these markets are expected to increase significantly and are likely to become important future business opportunities in sectors where industry is highly competitive. In 2007. such as a government agency. waste. Government procurement Government procurement. However. The UN. corruption or local protectionism. This may still be relatively small in absolute terms. It usually requires the procuring authority to issue public tenders if the value of the procurement exceeds a certain threshold. In 2007. the law of most countries regulates government procurement more or less closely. To prevent fraud. these markets are far from being negligible from a commercial point of view. public procurement spending amounted to some 16% of GDP in the EU. The untapped potential is considerable. Public procurement markets remain significantly closed to foreign participants as clearly illustrated by the problems highlighted in the US. China. However.since the crises has increased markedly and proposals from the IMF and G20 have been made for international coordination that will increase their effectiveness. Government procurement is also the subject of the Agreement on Government Procurement. also called public tendering or public procurement.

Moreover. the GPA is also characterized by an important asymmetry between what the different parties offer in terms of market access commitments. add to traders‘ transport costs and make goods less competitive in the foreign market. Furthermore. in particular with regard to our strategic partners that have not made reciprocal commitments. Clearly our trading partners have fallen short of reciprocity in this domain. with the EU being much more open than the other parties. Most countries in the triad have laws controlling the entry of foreigners. Efforts will need to be reinforced in order to increase international commitments – be it through the on GPA negotiations and the extension of its membership. the value of US procurement offered to foreign bidders in the GPA is just €34 billion and. This can make time. particularly for people from Muslim 66 | P a g e . quotas. there is a strong case to push for more market access in public procurement. requiring employers to search for a national employee before employing a foreign one. Many barriers remain to the movement of people. This stands in sharp contrast to €312billion worth of the public procurement markets that the EU has committed to open. They can require the filling in of export/import forms and customs officers stopping vehicles and checking goods at the frontier. through the FTAs negotiated by the EU or through targeted bilateral actions. It is therefore no surprise that when the financial and economic crisis hit in 2008/09. and refusal by the authorities to accredit foreign educational and vocational qualifications. for Japan it was €22 billion. For example. These include stringent visa requirements. a proliferation of protectionist measures in the area of public procurement was noted. Border & Immigration Controls Border controls affect trade in goods. Thus.among the six strategic partners identified in this report are currently GPA members while China is in the process of negotiating its accession. in 2007. US immigration laws make it difficult for people to enter the USA to find work or to study and the policy got stricter after September 11. even those countries that have signed up to the GPA have negotiated important limits to their market opening commitments in the form of minimum thresholds or exclusions of sectors or entities (such as sub-federal).

The EU has tried to deal with this through its Single Market programme. logos as well as books and films.countries in the Middle East. brand names. It uses the principle of mutual recognition whereby countries accept products from other member states so long as they do not constitute a danger to the consumer. Even if member states were to recognize other standards. They can take a number of forms. and attracting skilled workers and professionals. Migrants are seen as one part of the answer to this because they tend to be young and have a higher fertility rate than the indigenous population. These are thousands upon thousands of different technical specifications relating to goods and services which can effectively protect domestic markets from foreign competition and consequently restrict trade. But some products such as electric plugs. the invention of new products and production processes. Firms who own these argue that they should have the legal right to prevent others from commercially exploiting them. The EU and Japan both control immigration although these controls are under review given concerns that low birth rates and the aging of the population will cause shortage of workers. The law is aimed at keeping down the entry of unskilled workers. However the extent of protection and enforcement of these rights vary widely around the world. Companies in the service sector can also be hampered by the myriad of technical standards and requirements. The USA permits 675. or different levels of liquidity for financial institutions operating in their territory. the Continental two-prong plug could not be sold in the UK where the three-pin plug is the norm. Financial institutions such as bank may find it difficult to use the internet to sell their services in foreign markets because countries may lay down different solvency requirements.000 immigrants each year. Some countries such as China 67 | P a g e . light bulbs and television do not lend themselves to this approach. IPRs relate to ideas and knowledge that are an increasingly important part of trade. Technological Technical standards and regulation can be formidable barriers. Different national policies towards what are called intellectual property rights (IPRs) could constitute barriers as well. Regarding rail transport. countries have different electrification and signaling systems making it difficult for foreign companies to enter and compete with domestic rail firms. for example.

Louis Vuitton and Rolex. Firms owning these IPRs argue that the lack of protection stunts their trade and FDI in those countries. 68 | P a g e . DVDs of popular firms made in USA. and designer goods branded with the names of Versace.and Malaysia do not offer the firms creating the ideas and knowledge much protection against counterfeiting By all accounts it is very easy in Malaysia to obtain counterfeit versions of western music CDs.

firms also design non-market strategies to influence the political. little research examines how firms differ in their strategies for managing political risk. Political Risk and Political Capabilities The risk of direct or indirect political expropriation is a concern for multinationals considering potential investments in many countries. the vast majority of firms investing abroad in this industry. In its broadest sense. including forced renegotiations of contracts with public entities. political and economic sources of political risk.3. and nationalization of privately-owned assets without due compensation. administrative and judicial actors who govern the non-market environment. avoidance of agreed commitments on tax benefits. foreign investment in politically hazardous environments is dominated by a small subset of multinational corporations. for example. including many of the largest. The growing literature on how firms design strategies specifically to manage and mitigate political risk draws naturally on research examining the institutional. In the same way that firms devise market-based strategies to shape the distribution of economic rents between competitors in the market place. choose to avoid the highest risk locations.7 Political Risk The political environment and the risk of political or administrative expropriation of quasi-rents shape the design of firms‘ international investment strategies. Within the power generation sector. unfavorable revisions of regulatory rules. The common assumption is that political risk has a similar influence on investment strategy across all firms. it appears that firms do differ in their responses to political risk. specifically in their propensity to enter relatively risky countries. Political expropriation takes many forms. however. While political risk has been recognized in economics and managerial literatures as being an important factor in foreign investment decisions. Anecdotally. each of which reduces the financial returns from a given investment. ceteris paribus. 69 | P a g e . political risk is the probability that the state will use its monopoly on legal coercion to renege on prior agreements with private firms in order to affect are distribution of rents among private and public sector actors.

however. Macro political risks affect all participants in a given country. Macro-level political risks have similar impacts across all foreign actors in a given location. sovereign credit defaults.and micro-level political risks. these events pose risks that can alter the way a foreign government must conduct its affairs as well. or project specific risk. Political Risk Macro level risk/Country specific risk Micro level risk/Firm specific risk Global specific risk Transfer Risk Operational Risk Cultural & Institutional risk Interest rate risk Bussiness risk Foreign exchange risk 1] Macro-level political risk Macro-level political risk looks at non-project specific risks. These events pose both portfolio investment and foreign direct investment risks that can change the overall suitability of a destination for investment. 70 | P a g e .There are both macro. While these are included in country risk analysis. Micro-level risks focus on sector. and regional political events often means that events at the local level may have follow-on effects for stakeholders on a macro-level. endemic corruption. Moreover. Other types of risk include government currency actions. national. regulatory changes. firm. it would be incorrect to equate macro-level political risk analysis with country risk as country risk only looks at national-level risks and also includes financial and economic risks. the coupling of local. war declarations and government composition changes. A common misconception is that macro-level political risk only looks at country-level political risk.

dividends. Quantifying the risk remains difficult because the decision to restrict capital may be a purely political response to another problem. thereby fully blocking transfers of funds abroad. the desired local financial structure. Restrictions could make it difficult to repatriate profits. foreign firms have more at stake because of their foreign ownership. When a government runs short of foreign exchange and cannot obtain additional funds through borrowing or attracting new foreign investment. the host government might simply require approval of all transfer of funds abroad. In very severe cases the government might make its currency nonconvertible into other currencies. and optimal links with subsidiaries. thus reserving the right to set a priority on the use of scarce foreign exchange in favor of necessities rather than luxuries. In theory. 1. 2. it usually limits transfers of foreign exchange out of the country. BLOCKED FUNDS Transfer risk is defined as limitations on the MNE‘s ability to transfer funds into and out of a host country without restrictions. this does not discriminate against foreign-owned firms because it applies to everyone. a firm can analyze the effect of blocked funds on expected return on investment. or capital. 3.Transfer Risk This risk arising from a decision by a foreign government to restrict capital movements. MNEs can react to the potential for blocked funds at three stages. Since a government can change capital movement rules at any time. with the implication that difficulty earning foreign currency increases the probability that some form of capital controls can emerge. in practice. Funds that cannot be moved must be reinvested in the local country in a manner that avoids deterioration in their real value because of inflation or exchange depreciation. Operational Risk 71 | P a g e . Prior to making an investment. transfer risk applies to all types of investments. Depending on the size of a foreign exchange shortage. a restriction known as blocked funds. It usually is analyzed as a function of a country‘s ability to earn foreign currency. During operations a firm can attempt to move funds through a variety of repositioning techniques.

market risk is exploited by traders and fund managers. MNEs that are resident in the most industrialized countries face serious risks because of cultural and institutional differences. Cultural & Institutional Risk When investing in some of the emerging markets. determines their appetite for operational risk.An operational risk is. Among many such differences are • Differences in allowable ownership structures • Differences in human resource norms • Differences in religious heritage • Nepotism and corruption in the host country • Protection of intellectual property rights • Protectionism 72 | P a g e .the amount of risk they are prepared to accept in pursuit of their objectives. as the name suggests. and that losses will arise from errors and ineffective operations. physical or environmental risks. The size of the loss they are prepared to accept. It is a very broad concept which focuses on the risks arising from the people. because the cost of correcting the errors or improving the systems is disproportionate to the benefit they will receive. and insurance risk is exploited by insurers. systems and processes through which a company operates. because it is not used to generate profit. In contrast. a risk arising from execution of a company's business functions. The approach to managing operational risk differs from that applied to other types of risk. They all however manage operational risk to keep losses within their risk appetite . processes and systems are imperfect. credit risk is exploited by lending institutions to create profit. What this means in practical terms is that organizations accept that their people. It also includes other categories such as fraud risks. legal risks.

Even the United States would not welcome foreign ownership of large key defenserelated firms such as Boeing Aircraft. India. many countries have required that MNEs share ownership of their foreign subsidiaries with local firms or citizens. firms in certain industries are still either excluded from ownership completely or must accept being a minority owner. joint ventures were the only way an MNE could operate in some host countries. agriculture. or other sectors that are deemed critical for the host nation. banking. China. It also qualifies as a country-specific risk. This requirement has been eliminated or modified in more recent years by these countries and most others. Since the Taliban‘s downfall in late 2001. The most extreme example of discrimination against women has been highlighted in Afghanistan while the Taliban were in power. However. Thus. It is expected that the private sector in Afghanistan will also reintegrate women into the workforce. This lack of flexibility to downsize in response to business cycles affects both MNEs and their local competitors. it is somewhat difficult for a woman manager to be accepted by local employees and managers in many Middle Eastern countries. and Korea. It is often very difficult to fire local employees due to host country labor laws and union contracts. 73 | P a g e . Cultural differences can also inhibit an MNE‘s staffing policies. Mexico. several women have been suggested for important government roles. For example. Prominent countries that used to require majority local ownership were Japan.Ownership structure Historically. Human resource norms MNEs are often required by host countries to employ a certain proportion of host country citizens rather than staffing mainly with foreign expatriates. These industries are typically related to national defense.

Indeed one Muslim country. Although it is popular to blame the Muslim religion for its part in fomenting the conflict. Despite religious differences. Saudi Arabia.S. Indonesia was famous for nepotism and corruption under the now-deposed Suharto government. the United States has an anti bribery law that would imprison any U. especially in extractive and natural resource industries. MNEs have operated successfully in emerging markets. Bribery is not limited to emerging markets. It is also a problem in even the most industrialized countries. and forest products. and Syria is being fed by some extremist Muslim clerics who are enraged about the continuing violence in Israel and the occupied Arab territories. This law was passed in reaction to an attempt by Lockheed Aircraft to bribe a Japanese Prime Minister. It strongly supported efforts to rid the world of bin Laden. and a number of other African countries had a history of nepotism and corruption after they threw out their colonial governments after World War II. Turkey. Jihads are calls for Muslims to attack the infidels (Jews and Christians).Religious heritage The current hostile environment for MNEs in some Middle Eastern countries such as Iran. 74 | P a g e . a number of Middle Eastern countries. and Jordan. Nepotism and Corruption MNEs must deal with endemic nepotism and corruption in a number of important foreign investment locations. In fact. the root cause of these conflicts is a mixture of religious fervor for some and politics for others. The main MNE strategy is to understand and respect the host country‘s religious traditions. Uganda. including the United States and Japan. minerals. natural gas. business executive found guilty of bribing a foreign government official. Osama bin Laden‘s call for jihad against the United States has not generated any great interest on the part of moderate Muslims. China and Russia have recently launched wellpublicized crackdowns on those practices. However. such as Egypt. has had a secular government for many decades. Iraq. Kenya. are relatively passive when it comes to jihads. such as oil. Nigeria.

MNEs and individuals need to protect their intellectual property rights through the legal process. educational materials (textbooks). Examples of copyrighted creative materials are software programs. Industries that are protected are usually related to defense. and prescription pharmaceutical drugs. courts in some countries have historically not done a fair job of protecting intellectual property rights of anyone. much less of foreign MNEs. In those countries the legal process is costly and subject to bribery. 75 | P a g e . art). film. agriculture. and entertainment products (music. processing techniques. Examples of patented technology are unique manufactured products. Protectionism Protectionism is defined as the attempt by a national government to protect certain of its designated industries from foreign competition. Intellectual property rights grant the exclusive use of patented technology and copyrighted creative materials. and ―infant‖ industries. However.Intellectual property rights Rogue businesses in some host countries have historically infringed on the intellectual property rights of both MNEs and individuals.

Whereas political risk for business may involve understanding the host government and how its actions and attitudes can impact a business initiative. Firms are responsive to a constituency of their owners and other stakeholders. control over export markets. whereby government initiatives (be they diplomatic or military or other) may be complicated as a result of political risk. The valid needs of these sets of constituents need not be the same. conflicts between objectives of MNEs and host governments have arisen over such issues as the firm‘s impact on economic development. perceived infringement on national sovereignty. In addition to the macro political risks. impact on a host country‘s balance of payments. Historically. Attitudes about conflicts are often colored by views about free enterprise versus state socialism. the degree of nationalism or international is present. use of domestic versus foreign executives and workers. sharing or non sharing of ownership and control with local interests. Governments are normally responsive to a constituency of their citizens. government political risk analysis requires a keen understanding of politics and policy that includes both the client government as well as the host government of the activity. foreign control of key industries. or the place of religious views in determining appropriate economic and financial 76 | P a g e . Governance risks The most important type of governance risk for the MNE on the subsidiary level arises from a goal conflict between bona fide objectives of host governments and the private firms operating within their spheres of influence. An examination of these types of political risks might look at how the local political climate in a given region may impact a business endeavor. companies have to pay attention to the industry and relative contribution of their firms to the local economy.2] Micro-level political risk Micro-level political risks are project-specific risks. Political risk is also relevant for government project decision-making. governments impose constraints on the activities of private firms as part of their normal administrative and legislative functioning. but governments set the rules. and exploitation of national resources. Consequently. influence on the foreign exchange value of its currency.

All business transactions involve some degree of risk. and vice versa. especially when they were negotiated with a previous administration. Nevertheless. and designing risk-reducing operating strategies to be used after the foreign investment decision has been made. called 77 | P a g e . and risk. Pre negotiation often includes negotiating investment agreements. Interest rate risk Interest rate risk is the risk (variability in value) borne by an interest-bearing asset. If a company is entirely financed by equity." i. but. In general. buying investment insurance and guarantees. The best approach to goal conflict management is to anticipate problems and negotiate understandings ahead of time. etc. These additional risks. schedule delays.. Business Risk A company's risk is composed of financial risk. such as a loan or a bond. Asset liability management is a common name for the complete set of techniques used to manage risk within a general enterprise risk management framework. the price of a fixed rate bond will fall. as rates rise. This is because such projects are typically debt-financed and are prone to end up in what has been called the "debt trap. When business transactions occur across international borders. pre negotiation of all conceivable areas of conflict provides a better basis for a successful future for both parties than does overlooking the possibility that divergent objectives will evolve over time. it would be susceptible to business risk or changes in the overall economic climate. they carry additional risks not present in domestic transactions. Different cultures apply different ethics to the question of honoring prior contracts.e. so-called megaprojects. which is linked to debt. unforeseen interest rate increases. one-off investment projects. Interest rate risk is commonly measured by the bond's duration. a situation where – due to cost overruns.behavior. – the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt. which is often linked to economic climate. it would pose almost no financial risk. due to variability of interest rates. Interest rate risk has been shown to be particularly significant and particularly damaging for very large.

socio-political institutions. typically include risks arising from a variety of national differences in economic structures. 78 | P a g e . while influenced by economic fundamentals. policies. so exchange risk rises unless natural hedges (alignment of revenues and costs in the same currency) can be developed. Economic theory guides exchange rate risk analysis over longer periods of time (more than one to two years). Exchange risk includes an unexpected change in currency regime such as a change from a fixed to a floating exchange rate. In the short run. Short-term pressures. Exchange rate risk Exchange Risk is an unexpected adverse movement in the exchange rate. and currencies. risk for many currencies can be eliminated at an acceptable cost through various hedging mechanisms and futures arrangements. Currency hedging becomes impractical over the life of the plant or similar direct investment.country risks. tend to be driven by currency trading momentum best assessed by currency traders. geography.

rights & Future Crisis planning Cyberattacks Globalspecific risks Cross border chain supply integration Poverty Anti globalization movements Environmental concerns 79 | P a g e . and cyber attacks on computer information systems. In addition to terrorism. of course. environmental concerns.3] Global-specific risks Global-specific risks faced by MNEs have come to the forefront in recent years. the attack by terrorists on that win towers of the World Trade Center in New York on September 11. other global-specific risks include the antiglobalization movement. Many MNEs had major operations in the World Trade Center and suffered heavy casualties among their employees. poverty in emerging markets. The most visible recent risk was. 2001. Terrorism & war Governance .

they need to take defensive steps to limit the damage. Particularly exposed are the foreign subsidiaries of MNEs and their employees. Focusing on inventory velocity. has allowed these MNEs to generate increasing profits and cash flows with less capital being bottled-up in the production cycle. the war in Afghanistan and Iraq. Cross border chain supply integration The drive to increase efficiency in manufacturing has driven many MNEs to adopt just-in-time (JIT) near-zero inventory systems. ethnic strife. This finely tuned supply chain 80 | P a g e . Therefore. insurance. Resolving war and ethnic strife is beyond the ability of MNEs. and terrorism because they are symbols of their respective parent countries.Terrorism & war Although the World Trade Center attack and its aftermath. outright war with other countries. Nearly every year one or more host countries experience some form of ethnic strife. MNEs must depend on governments to fight terrorism and protect their foreign subsidiaries (and now even the parent firm). or terrorism. diversification. No MNE has the tools to avert terrorism. foreign subsidiaries are especially exposed to war. As mentioned earlier. Instead. Crisis planning means educating management and other employees about how to react to various scenarios of violence. have affected nearly everyone in the world. Crisis planning MNEs can be subject to damage by being in harm‘s way. It seems that foreign MNEs are often singled out as symbols of oppression because they represent their parent country. Crisis planning has become a major activity for MNEs at both the foreign subsidiary and parent firm levels. the speed at which inventory moves through a manufacturing process. More terrorist acts are expected to occur in the future. arriving only as needed and not before. especially if it is the United States. many other acts of terrorism have been committed in recent years. and the likes are not suited to the task. Hedging.

Once again. particularly to NAFTA and the European Union. Anti globalization movements During the past decade there has been a growing negative reaction by some groups to reduced trade barriers and efforts to create regional markets. joined in to make their causes more visible. NAFTA has been vigorously opposed by those sectors of the labor movement that could lose jobs to Mexico. It is based on the manufacturing methods employed by specific industries and on consumers ‘desire for certain products such as large automobiles and sport vehicles that are not fuel efficient. Antiglobalization forces were not solely responsible for these riots or for subsequent riots in Quebec and Prague in 2001. The accusation is that MNEs frustrated by pollution controls in their home country have relocated these activities to countries with weaker pollution controls. dilution of individual national control as new members are admitted. MNEs do not have the tools to combat anti-globalism. they are blamed for fostering the problem in the first place. In 2001. MNEs must rely on governments and crisis planning to manage these risks. however. and most recently the disappearance of individual national currencies in mid-2002. The anti-globalization movement has become more visible following riots in Seattle during the 2001 annual meeting of the World Trade Organization. Indeed. Environmental concerns MNEs have been accused of exporting their environmental problems to other countries. Opposition within the European Union centers on loss of cultural identity. over centralization of power in a large bureaucracy in Brussels. Other disaffected groups. which attempted to 81 | P a g e . Once again. such as environmentalists and even anarchists. the Kyoto Treaty. Another accusation is that MNEs contribute to the problem of global warming. that accusation applies to all firms in all countries.system. is subject to significant political risk if the supply chain extends across borders. solving environmental problems is dependent on governments passing legislation and implementing pollution control standards.when the euro became the only currency in 12 of the 15 member nations. However.

MNEs can face costly cyber attacks because of their visibility and the complexity of their internal information systems. one of the targeted MNEs. we know of no uniquely international strategies that MNEs can use to combat cyber attacks. with the notable exception of the United States. the United States has promised to combat global warming using its own strategies. provides more fringe benefits. and productive persons. well-connected. This is both a domestic and an international problem. Once again. At this point in time. usually pays better. but it can improve conditions for some persons. social and economic infrastructure. 82 | P a g e . they must rely on governments to control cyber attacks. At one end is an elite class of well-educated. However. MNEs are creating relatively stable and well paying jobs for those who were otherwise unemployed and living below the poverty level. MNEs might be contributing to this disparity by employing the elite class to manage their operations. particularly the United States. At the other end of the spectrum is a very large class of persons living at or below the poverty level. and educates their workforce to allow personnel to advance up the career ladder. Despite being accused of supporting sweatshop conditions. On the other hand. while the economic burden would fall on the most industrialized countries. was ratified by most nations. MNEs are using the same strategies to manage foreign cyber attacks as they use for domestic attacks. MNEs usually compare favorably to their local competitors. Poverty MNEs have located foreign subsidiaries in countries plagued by extremely uneven income distribution. Cyber attacks The rapid growth of the Internet has fostered a whole new generation of scam artists and cranks that disrupt the usefulness of the World Wide Web.reduce global warming. The United States objected to provisions in the worldwide treaty that allowed emerging nations to follow less restrictive standards. Nike cannot manage a country‘s poverty problems overall. and political power. They lack education. For example. Nike. Of course. maintains higher safety standards.

the principle that economic development today should not compromise the ability of future generations to achieve and enjoy similar standards of living. Although sustainable development initially focused on environmental concerns.Governance. 83 | P a g e . it has evolved to include equal concerns which ―incorporate the ambition for a just and caring society.‖Although these debates have typically remained within areas of economic development. the debate in business circles has centered on corporate social responsibility. rights & Future The first years of the twenty-first century have seen a rebirth in society‘s reflections on business. One of the most audible debates has been that regarding sustainable development.

gable. such as a lack of infrastructure. the incentives are intended to offset other disadvantages that investors may face. the incentives may be seen as a counterweight to the investment disincentives inherent in the general tax system. especially in transition countries that have not reformed the socialist tax system. and so tax incentives may provide temporary relief until the more fundamental reforms have been carried out. and bureaucratic complexities and weak administration. tax incentives are introduced after other deficiencies in law and administration are remedied and are directed to areas of economic activity that the country wishes to develop. custom.3. If these are the reasons. More rarely. tall age. In other countries. In some cases. complicated and antiquated laws. and are often directed to foreign investors on the grounds that there is insufficient domestic capital for the desired level of economic development and that international investment brings with it modern technology and management techniques. Although standard international tax policy advice cautions against the use of tax incentives for 84 | P a g e . Developing and transition countries have introduced investment incentives for varying reasons. Countries sometimes introduce incentives to keep up with other countries in competing for international investment. the appropriate solution is to reform the existing laws that create the problems and to build the necessary administrative capacities and infrastructure. aid. This solution is often easier said than done. supply. excise.8 Taxation system To tax is to impose a financial charge or other levy upon a taxpayer an individual or legal by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes consist of direct tax or indirect tax. subsidy. impost. duty. and may be paid in money or as its labor equivalent often but not always unpaid labor. The incentives are most often for direct investors as opposed to portfolio investors. relate to real investment in productive activities rather than investment in financial assets. but an enforced contribution. tribute. Taxes are also imposed by many sub national entities. or other name. A tax "is not a voluntary payment or donation." Many developing and transition countries offer income tax incentives for investment. in the tax area or elsewhere. exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll.

Tax incentives on their own cannot overcome these negative factors. It then considers in more detail the design. drafting. other considerations inhibit large-scale investment. These provisions served purposes different from those of a market economy tax regime. many developing and transition countries. which require clear laws that are stable over time. as well as many industrial countries. these provisions are unfamiliar and anomalous. business expenses. Although the discussion considers investment incentives in general. Tax and Nontax Factors Affecting Investment Investors often emphasize the relative unimportance of the tax system in investment decisions compared with other considerations. In many developing and transition countries.investment. While they are attracted to the potential markets in developing and transition countries and the relatively low-cost labor. and. the general features of the tax system (tax base. They can cause the tax base to diverge from market economy norms (especially in relation to depreciation. Accordingly. many tax laws contain provisions that are held over from the regime that was used under the former socialist economy. this chapter briefly outlines the reasons why such incentives are often found to be unsuccessful and what the more important issues may be for encouraging investment in developing and transition countries. and international taxation issues that such incentives present.) are more important than tax incentives. such as uncertainty in the policy stance of governments. the rudimentary state of the legal framework for a market economy. Relationship between Taxation and Investment A. Firms first examine a country‘s basic economic and institutional situation. and loss carryovers) and impose taxation that is not consistent with reality from the point of view of business investors. political instability. taxpayers expect to be able to predict the tax consequences of their actions. in transition economies. controlling the enterprise‘s budget rather than determining an appropriate tax base. 85 | P a g e . From the point of view of potential foreign investors. continue to operate or introduce them. tax rates. it emphasizes foreign direct investment (FDI). In transition countries. which makes long-term planning difficult for businesses and adds to the perceived risk of undertaking major capital-intensive projects. To prospective investors. Furthermore. the tax laws are not clearly written and may be subject to frequent revision. etc. for example.

and it is clear that tax administrations in developing and transition countries often have difficulty coping with sophisticated investors. whether in providing timely and consistent interpretations of the law or in enforcing the law appropriately. social security taxes applied to the wages of expatriates in transition countries and border charges on the importation of capital equipment in developing and transition countries are seen as obstacles to investment. Because these projects would occur even if there were no tax incentives. This underlines the conclusion that tax incentives cannot overcome the other. Investors may view both income and nonincome taxes as potential problems. However. In particular. especially FDI. Tax incentives introduce complexity into the tax system. more fundamental problems that inhibit investment. Tax incentives have not by and large been successful in attracting investment. Lack of Success of Investment Tax Incentives The experience for developing and transition countries with tax incentives has been consistent with that of the industrial countries. because the rules themselves are complex and because tax authorities react to the tax planning that inevitably results from their introduction by putting into place anti avoidance measures. tax incentives have imposed serious costs on developing and transition countries that need to be considered relative to any modest benefits that they have conveyed. in part. the tax incentive is a pure windfall to them. experience hash own that there is investment in short-term. Investment tax incentives have been subject to serious tax avoidance which has added greatly to their revenue cost. Tax avoidance results.The administration of the law is as important as the law itself. B. At the same time. The revenue forgone in transition countries as a result of the use of tax incentives to shelter domestic income from taxation may well exceed the incentives earned through legitimate FDI. high-profit projects. It is argued that FDI in countries in transition to a market-oriented economy would not occur without the incentive. and so there is no real revenue cost. from the design of the incentives and also from the difficulties tax administrations face in auditing taxpayers. The latter are payable even if no profits are made and often raise the cost of basic inputs. For the most part. this revenue cost is wasted because the incentives go to investments that would have been made in any event. This complexity 86 | P a g e . Tax incentives by their nature represent a revenue cost for the government.

Whether arguments based on advanced markets apply to developing and transition countries may be debated. is much more difficult to observe and measure. and tax incentives may be seen as apolitically easier alternative. The fact that many industrial countries maintain some tax incentives after the tax reforms of the 1980s is less a statement that they are considered to be effective and more a testament to the political difficulty in removing them once they have been introduced.imposes costs on administrators and taxpayers and increases the uncertainty of tax results. Moreover. tax incentives are at least something over which they have control and which they can enact relatively easily and quickly. Further. by causing the after-tax pattern of returns to diverge from the before-tax pattern and thereby leading to an allocation of resources that differs from the efficient equilibrium the market is assumed to generate. As can be seen. Uncertainty can deter the investment the incentives are intended to attract. The classic argument against the use of incentives is that they distort economic activity. some politicians or their advisors may simply disagree with the analysis presented here. some countries may feel under pressure from multinational companies. Alternatives to tax incentives may also involve the expenditure of funds. but there can be no doubt that the more observable costs of tax incentives referred to above do arise in these countries. remain in force long after the conditions that originally led to their introduction have changed. Therefore we focus more on the technical tax issues raised by investment incentives and on ways that such incentives can be designed so as to minimize the damage that they can cause. since subsidies involving expenditure may undergo closer scrutiny as compared with other public expenditure needs. Finally. the introduction of tax incentives creates a clientele for their continuation and spread. Legislators may feel the need to do something to attract investment but may find it difficult to address the chief reasons that discourage investment. It is because of this tendency that many ―temporary‖ measures. These costs can be observed fairly directly. which threaten to locate investment elsewhere if they are not given concessions. Why do countries enact tax incentives despite their drawbacks? There are many factors. the topic is a complicated one and cannot be resolved here. designed to respond to particular perceived disincentives. 87 | P a g e . What may be the primary cost. however.

e. relating to the same income or capital for the same tax year. 1961 than the rate prescribed in the DDTA. Double Taxation Avoidance Agreements between two countries would focus on mitigating the incidence of double taxation. source of income. DTAAs taken care of technical know-how and service fees reduced rates of tax on dividend. the rate which is better to the taxpayer would be applied.3. Double taxation may arise when an individual or an entity has connections with more than one country. Such double taxation is one of the major impediments to the development of inter-country economic relations. As such. When the rate of tax is higher in the Indian Income Tax Act. In order to avoid the hardship of double taxation. Double taxation may be delineated as the imposition of taxes on income or capital in more than one country on the same tax payer. and royalties received by residents of one country from other. Government of India has entered into Double Taxation Avoidance Agreements with several countries. 88 | P a g e . It would promote exchange of goods. then the rate prescribed in the DDTA shall be applied i. Permanent Establishment and so on and so forth. What is DTAAs? An individual who earned income has to pay income tax in the country in which the income was earned and also in the country in which such person was resident. persons. interest. Double tax Avoidance Agreements comprise of consensus between two countries aiming at elimination of double taxation.9 Double Taxation Avoidance Agreement (DTAA) Introduction Every country seeks to tax the income generated within its territory on the basis of aspects like residence of taxable entity. These are bilateral economic agreements wherein the countries concerned assess the sacrifices and advantages which the treaty brings for each contracting nation. services and investment of capital among such countries. the liability to tax on the aforesaid income does arise in the country of source and the country of residence.

Classification of DTAAs Double taxation avoidance agreements may be classified into ‗Comprehensive agreements‘ and ‗Limited agreements‘ based on the scope of such agreements. resolving differences in taxing the income and exchange of information and other details among treaty partners. financial or other activities in other countries. Firstly. The tax treaties must clarify and help the taxpayer to know with certainty of his potential tax liability in other country where he is carrying on industrial or other activities. Treaties are made with the aim of allocation of taxes between treaty nations and the prevention of tax avoidance and/or tax evasion. The treaties must also ensure that equal and fair treatment of tax payers having different residential status. Comprehensive agreements ensure that the taxpayers in both the countries would be treated on equitable manner in respect of the problems relating to double taxation. 89 | P a g e . Comprehensive Double Taxation Avoidance Agreements provide for taxes on income.Aim of DTAAs The need and purpose of tax treaties were indicated by the Organization for Economic Co-operation and Development in the ‗Model Tax Convention on Income and on Capital‘ as standardization and common solutions for cases of double taxation to the taxpayers who are engaged in industrial. treaties must help in avoiding and alleviating the burden of double taxation prevailing in the international arena. Tax Treaties must ensure that there is no discrimination between foreign tax payers who has permanent establishment in the source countries and domestic tax payers of such countries. capital gains and capital investments whereas Limited Double Taxation Avoidance Agreements denote income from shipping and air transport or legacy and gifts.

In such case only the benefits like lower withholding tax would accrue to those tax payers on interest. 1961 explains the term ―Permanent Establishment (PE)‖ as a fixed place of business through which the business of the enterprise is wholly or partly carried out. OECD and UN model conventions also provide 90 | P a g e . Permanent Establishment One of the important terms that transpire in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment (PE)‘. which is liable to tax under the laws of a particular country on account of domicile. However. It was not been defined in the Income Tax Act. Residence Residential status of a person is important in determining tax liability both under domestic tax laws and under international tax laws. dividend or royalty receipts.Treaty Benefits To avail the benefits of tax treaty. Normally. Double taxation avoidance agreements usually restrict the jurisdiction of the contracting states to taxing income of a foreign enterprise only if such enterprise carries on business in another country through permanent establishment. The term ‗resident of contracting state‘ means a person either an individual or a corporate. an individual must be a resident of a contracting country and corporate entity should have a permanent establishment in a contracting state. residence or any other similar criteria. as per the Double Taxation avoidance agreements. A relief from double taxation may be sought only by the resident of that contracting state. 1961. It is a fixed place of business through which business activities of enterprise is wholly or partially conducted in that country for generation of income. tax treaty clarifies how to determine a residential status of a person to tax him as a resident under the respective taxation laws of the contracting state. Permanent Establishment includes a wide variety of arrangements. Section 92F of the Indian Income Tax Act. place of permanent business establishment.

They may offer a 91 | P a g e . finance minister of India had asked the ministry of finance to review all the 77 double taxation avoidance agreements (DTAA) that the government had signed so far. 1961 administrate the taxation of income accrued in India. when it accrues either directly or indirectly. Double taxation avoidance agreements assign jurisdiction with respect to a right to tax a particular income. These include Mauritius. a branch. Only the residents of a contracting state can avail of the benefits of the relevant treaty. terms and conditions of all the treaties entered into by a State are not uniform. Cyprus. By and large. 1961 residents of India are liable to tax on their global income and non-residents are taxed only on income that has its source in India. Pranab Mukherjee. Moreover. Recently. an office. a factory. or source of income or assets located in India or through the transfer of an Indian capital asset. Tax havens allow easy parking of money either through investments or deposits. As per Section 5 of the Income Tax Act. OECD has blacklisted over 25 nations for tax relaxations they offer for parking funds. DTAA . There is an international accord on the attribution of profits earned by Permanent Establishment on the basis of ‗Separate Enterprises‘ concept and the relevance of the ‗arm's length principle‘. through any business connection in India.for definition of the term permanent establishment as it includes a place of management. Switzerland and the Netherlands. The review is being done in order to comply guidelines of Organization for Economic Co-operation and Development (OECD) on sharing information on flow and parking of black money in various countries and to fulfill India‘s commitment at the G-20 Nations summit.Current Scenario in India The Indian Income Tax Act. Business Income The business income of a non-resident is taxable in India under the provisions of Indian Income Tax Act. a workshop etc. The principle underlying tax treaties is to share the revenues between two countries. Mr.

It would promote exchange of goods. DTAAs are obviously an interaction of two tax systems each belonging to different country. By means of Double Taxation Avoidance Agreements. Indian Finance Minister had asked his ministry to review all the 77 double taxation avoidance agreements (DTAA) that the Government of India had signed so far. entire scope of DTAA was analyzed vis-à-vis in the back drop of current scenario prevailing in India. which intend to mitigate the effect of double taxation. Very recently.range of incentives including a nominal capital gains tax for companies to complete financial secrecy of accounts held by individuals and corporate. each country accommodates the claims of other nations within their fiscal arena to develop international trade and investments with minimal barriers. Double taxation is still one of the major obstacles to the development of inter-country economic relations. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors. The review is being done in order to comply guidelines of Organization for Economic Co-operation and Development (OECD) on sharing information on flow and parking of black money in various countries and to fulfill India‘s commitment at the G-20 Nations summit. Double tax Avoidance Agreements comprise of consensus between two countries aiming at elimination of double taxation. In the article. persons. services and investment of capital among such countries. 92 | P a g e .

00% 30. Questions are regarding to the international investment and its obstacles.Chapter No.00% 0.00% 70.4 Collection & Analysis of Data This survey conducted by 40 selected respondents.00% 10.00% 60. 93 | P a g e .00% 50.00% 80.00% 40.63% people admit that they aware about international investment & 9.00% Yes No Yes No Comment – From 40 respondents of survey 90.. 1) Are you familiar with the term „International Investment‟? 100.00% 90.37% people admit that they have no knowledge of international investment.00% 20.

40 % people gave preference for emerging market and remaining 27% a concept that they would prefer both market.00% Yes No Yes No Comment .From 40 respondents of survey the 97% accept that they will consider risk factor in foreign investment and only 3% claimed that they will not consider it.00% 40.00% 20. 3) Will you consider risk factor before investing in foreign market or in securities? 120.00% 80.00% 60. 94 | P a g e .2) If you want to make an investment in foreign market which market will you prefer? Preferance for Investment Developed Market Emerging Market Both 27% 40% 33% Comment .00% 100.From 40 respondents of survey the 33% people agree that they would prefer developed market.00% 0.

4) Suppose if you are an investor then which economic factor do you consider to investing in foreign securities? Economic factor consideration 16% Micro Economic Factor Macro Economic Factor 58% 26% Both Comment .From 40 respondents of survey only 16% people admit that they would consider micro economic factor and 26% will consider for macroeconomic factor while 58% people prefer to give importance both economic factors rather than any one of them while doing an investment. 95 | P a g e .

5) If you are an investor then which type of securities do you prefer in foreign market?

Preference for securities
7% Equity Debentures 52% 7% 4% Commodity Bond All of the above

30%

Comment - From 40 respondents of survey 52% people gave preference to equity ,4% for

debentures,7% for commodities,30% for bond & remaining 7% people give preference to all type of securities. 6) Will you estimate the Foreign Exchange Risk in your investment?
100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Yes No Yes No

Comment - From 40 respondents of survey 90% people admit that they will estimate

forex risk while doing an international investment and remaining 10% will not give importance for forex risk.
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7) Will you take detail information about foreign market before investing in it?
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% Yes No Yes No

Comment - From 40 respondents of survey, There is 100% response by people that they

will take full information before doing an investment in foreign securities. 8) Suppose if you are an investor then what will your decision on securities during recession period in foreign market?

Decision during Recession
15% 47% 38% Buy Hold Sell

Comment - From 40 respondents of survey, 47% people prefer to buy securities in foreign

market and 38% gave preference to hold it remaining 15% chose sell option.

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9) Do you think Foreign Direct Investment is beneficial for Indian Economy?
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Yes No Can't say Yes No Can't say

Comment - From 40 respondents of survey, 75% people accept that Foreign Direct

Investment is beneficial for Indian Economy but 3.13% not admit about this while other 21.88% claimed that they do not sure about beneficiaries of FDI. 10) Will you able to file the tax of foreign countries when you will make investment in there securities?
70.00% 60.00% 50.00% 40.00% Yes 30.00% 20.00% 10.00% 0.00% Yes No No

Comment - From 40 respondents of survey, 59.38% people claimed that they will be able

to file the tax of foreign countries if they are making investment in there securities. remaining 40.62% claimed that they will not able to file the tax.
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12) Suppose if you are an investor then what will your decision for investment depend upon the regulation of market in foreign securities? 100.63% claimed that they would not importance for regulations of foreign market.From 40 respondents of survey. 22% people gave preference for North America for making an investment after that Latin America got 6% preference.00% Yes No No Comment .00% Yes 40.00% 60.00% 80. 2% for Africa.From 40 respondents of survey.11) Which region do you prefer to make an investment outside India? Preference for reigon to make an investment 7% 22% 24% 6% 2% North America Latin America Europe Africa Asia Australia 39% Comment . 90.00% 20. 39% for Europe. 24% for Asia & 7% for Australia.63% people gave importance of regulations of foreign market while they make decisions on investment in foreign securities remaining 9.00% 0. 99 | P a g e .

From 40 respondents of survey.00% 60. 75% agree that Global specific risks make obstacles in international investment and only 3.87% people admit that they do not sure about this.00% Yes No Can't say &Environmental Concerns makes obstacles to international Yes No Can't say Comment .00% 50.00% 0.00% 30.00% 10.13) Do you think Global specific risks like Global Terrorism.00% 20. 100 | P a g e .Globalization movements investment? 80.13% not agree about this remaining 21.00% 70.00% 40. Anti.

19% for government policy and remaining 17% people admit that they will give importance for inflation risk while making investment in foreign market.00% 30.00% 0.14) If you are an investor on which risk do you give more importance while making investment in foreign market Imporatance to several Risks 17% 19% 25% FOREX Risk 20% 19% Interest rate Market risk Change in Government policy Inflation risk Comment . 20% gave importance for forex risk. 68.00% 40.75% people confess that they know about specific risk or experienced it while making an investment remaining 31.From 40 respondents of survey.00% 50.00% 70. 19% for interest rate risk. 25% for market risk.25% didn‘t admit about this 101 | P a g e .00% 60.00% 20. 15) Have you experienced or known the specific risk which affected to your own investment? 80.00% Yes No Yes No Comment .00% 10.From 40 respondents of survey.

00% 40.00% 30. 78.00% 20.00% 60.13% people admit that the risk and investment cannot be separated they are related with each other but 12.00% 0.37% respondents claimed that the they are not sure about this.00% 20.75% respondents do not agree it.00% 0.00% 50.00% 80.From 40 respondents of survey. 17) Do you think “risk and investment cannot be separated”? 90.00% 70.00% 40.00% 10.00% Yes No Can't say Yes No Can't say Comment .00% 10.00% 50.From 40 respondents of survey.00% 70. 102 | P a g e .00% 30.00% Yes No Yes No Comment . 81.00% 60.16) Do you think International Investment is more risky than investment in domestic market? 90.25% people agree for that the international investment is more risky than the domestic investment and other 19.50% people do not admit this and remaining 9.00% 80.

00% 50.88% are not sure.00% 30. can international investment is beneficial for you in the era of Globalization? 80.00% 20.From 40 respondents of survey.75% respondents are not sure about this. 68. 19) Despite risk.25% people accept that there is need to encourage others towards investment in foreign securities while 9.From 40 respondents of survey.37% claimed that there is need to encourage and 21.00% Yes No Can't say Yes No Can't say Comment .00% 60.00% 0.00% 70.25% claimed that it is not beneficial to them and remaining 18.00% 10.00% 20.00% 40.00% 50.00% Yes No Can't say Yes No Can't say Comment . 75%people admit that international investment is beneficial for society in the period of Globalization while 6.00% 40.00% 30.00% 70.18) Do you feel that people should encourage to make investment in foreign securities? 80.00% 60. 103 | P a g e .00% 0.00% 10.

20) Which step do you consider that Government of India should take for increase in Foreign investment? Opinions for several steps 2% DTAA 23% 34% Liberlise economic policies 28% 13% Accept participation in various types of business. 104 | P a g e .13% claimed that the government should accept foreign investment in various types of business and remaining 2% people prefer other options. 34% respondents gave preference for need of good infrastructure and to create business environment for the purpose of increase foreign investment in a country while 28 % claimed that government should apply liberalized economic policies.From 40 respondents of survey. 23% gave preference for Double Taxation Avoidance Agreement (DTAA) . Develop good infrastructure and create business environment Comment .

00% 0.00% 50.00% 40.From 40 respondents of survey.25 % people claimed that there is no need of new policies for safety foreign investment. 105 | P a g e . OECD should undertake new policies that can make foreign investment safe? 100.75% people admit that there is need to undertake new policies by world institutional organization to the provide safety in foreign investment while remaining 6.00% 60.00% Yes No Yes No Comment .00% 20.00% 70.00% 80.00% 10.21) Do you think world institutional organizations like IMF. World Bank.00% 30.00% 90. 93.

Despite all risks & obstacles. In recession period. foreign exchange risk. government policies & inflation risk. investors prefer to buy or hold security rather sell it. Government of India should take appropriate measures that increase foreign investment in a various country. there is need to encourage people towards foreign investment because it can be beneficial for us in this globalization era.5 Interpretation of data In the era Globalization we are familiar with international business. there are some important risks which consider by investors such as. Privatization. As a investor opinions these barriers can make its effects on foreign investment and we can understand that they are aware about barriers & risk.. Along with this there is need to undertake new policies by world institutional organizations like IMF. market risk. Equities are still popular among investors than commodities. 106 | P a g e . bonds & derivatives because easy transfer and knowledge make it more liquid instrument than others. Many emerging & developed markets are located in mainly three continents namely North America. Along with risks investor also consider several barriers such as foreign exchange rates. Emerging markets have potential to make profitable investment but there are many risk factors and barriers both in emerging markets & developed market. interest rate risk.Chapter No.OECD & other which can eliminate obstacles in International Investment. It is effect of LPG (Liberalization. information barriers regulatory barriers & taxation barriers. and Globalization) policy by which we are aware about ‗International Investment‘. From the last two decades emerging markets have been growing rapidly than developed markets. However risk & investment cannot be separated and in case of foreign investment there is much risk than domestic investment. In case of risk. Asia & Europe.

Despite Obstacles. Capital control risk. From the last two decades of globalization.days.. Foreign exchange risk (Exposure). needs. From the last two decades of Globalization this phenomenon made a vast change in people‘s lifestyle. developing countries like India & China consider as a major competitors in world economy but Indian government need to take a positive steps such as Participation of foreign investment. purchasing power and also its effect on infrastructure & financial system of many countries both developed and underdeveloped.6 Conclusion International investment has become a need for every country which wants to develop their economy. Higher costs to investment & Investor‘s psychology of foreign countries. trends. In case of precaution investors have to keep an eye on capital flow. towards increase foreign investment. It is generally considered that If investment is there must be risk. international investment can be beneficial for both developing & developed countries. Develop good infrastructure & business environment etc. new policy & environment in foreign market. financial market has made a sensitive place for investment whether it is domestic or foreign. After the fall of Soviet Union the term International investment has arisen in the world. Now. There are three common risks which considered by investors while doing international investment such as Correlation between International & Domestic markets. 107 | P a g e . They have been facing many hurdles while they are doing investment whether it is foreign direct investment (FDI) or Portfolio investment in foreign markets.a. Regulatory system & Taxation. Apart from this they have to be aware about barriers in investment it will their investment decisions on investment.Chapter No. In case of investor‘s view international investment is not easy as domestic investment. they also faced the Information Asymmetry which includes adverse selection & moral hazard. Apart from that. Other than investor Multinational companies (MNC‘s) also faced barriers in foreign direct investment such as Political risk.

World Bank have to undertake new policies that cam make safety in foreign investment.  Government should minimize tariff and subsidies in international trade along they have to maintain political instability that enables foreign investment in a country.  World institutional organizations like IMF. UNCTAD.  Investors have to update their information about investment.  Along with risk awareness. Investors and MNC‘s should study about various risks which arise in a foreign market. OECD.  There is need of accounting system and law for international investment at a global level. Foreign exchange risk management..  Investors have to keep detail information about foreign market by various mediums such as.Chapter No.  Countries should minimize capital control and accept foreign participation in various types of business along with that they have to eliminate corruption & other related problems. investors and MNC‘s both have to aware about new trends in foreign investment. news channels & Internet. Taxation & Regulatory risk 108 | P a g e . Assessment of Political. -Following are some of the recommendations in order to eliminate obstacles in international investment:  In case of India. FII‘s & MNC‘s.7 Suggestions & Recommendations . government should develop good infrastructure & create business opportunities for foreign investors along with that they have to signed DTAA agreement with many countries. As a sensitive place for investment. investors and MNC‘s have to undertake risk management techniques such as.Following are some of the suggestions in order to remove barriers in international investment:  Investors have to take precaution & knowledge before making investment in foreign securities. It will prevent information asymmetry between two parties.  Countries should give tax benefits to foreign investors. newspapers.

Appendices Questionnaire Name: Occupation: 1) Are you familiar with the term ‗International Investment‘? Yes No 2) If you want to make an investment in foreign market which market will you prefer? Developed Market Emerging market Both 3) Will you consider risk factor before investing in foreign market or in securities? Yes No 4) Suppose if you are an investor then which economic factor do you consider to investing in foreign securities? Micro economic factor Macro economic factor Both 5) If you are an investor then which type of securities do you prefer in foreign market? Equity Debentures Commodity Bond All of the above 6) Will you estimate the Foreign Exchange Risk in your investment? Yes No 7) Will you take detail information about foreign market before investing in it? Yes No 109 | P a g e .

Environmental Concerns makes obstacles to international investment? Yes No Can‘t say 14) If you are an investor on which risk do you give more importance while making investment in foreign market Foreign Exchange Risk Interest Rate Risk Market Risk Change in government economic policy Inflation Risk 15) Have you experienced or known the specific risk which affected to your own investment? 110 | P a g e .Globalization movements. Anti.8) Suppose if you are an investor then what will your decision on securities during recession period in foreign market? Buy Hold Sell 9) Do you think Foreign Direct Investment is beneficial for Indian Economy? Yes No Can‘t say 10) Will you able to file the tax of foreign countries when you will make investment in there securities? Yes No 11) Which region do you prefer to make an investment outside India? North America Australian continent 12) Suppose if you are an investor then what will your decision for investment depend upon regulation of market in foreign countries? Yes No Latin America Europe Africa Asia 13) Do you think Global specific risks like Global Terrorism.

can international investment is beneficial for you in the era of Globalization? Yes No Can‘t say 20) Which step do you consider that Government of India should take for increase in foreign investment? Double tax avoidance agreement with many countries Liberalize economic policy Accept participation in various types of business Develop good infrastructure and create business environment Other 21) Do you think world institutional organizations like IMF. OECD should undertake new policies that can make foreign investment safe? Yes No 111 | P a g e .Yes No 16) Do you think International Investment is more risky than investment in domestic market? Yes No 17) Do you think ―risk and investment cannot be separated‖? Yes No Can‘t say 18) Do you feel that people should encourage to make investment in foreign securities? Yes No Can‘t say 19) Despite risk. World Bank.

2011  Economic Times - 112 | P a g e .gdr.com http://www. 5) Global Capital Market. 4) Global Business – Himalaya Publishing House. PitbusMohanty.V.Bibliography Books:1) Investments (second edition) – Tata Mcgraw Hill –Jack Clark Francis.Avdhani. Alan J Marcus.wikipedia.com www.co. Websites:1) 2) 3) 4) 5) www.A. 2) Foreign Exchange Practice. Taylor. Concepts & Control – Sultan Chand & Sons – C. Alex Kane.2011 June 23.2011 September 28.Vipul Prakashan – Dipak Abhyankar.org www2.in/ Newspaper: Mint  Times of India June 19. Richard . wikicfo.goldmansachs.org www.imf.Jeevanandam.w. 3) Investments (eigth edition) –Special Indian Edition – ZviBodie.

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