Chapter : 1 Introduction

A sound knowledge of international financial systems is a pre-requisite for the following reasons :

Global trade have been on the steady increase

Global opportunities have to be exploited

It helps in avoiding delays in handling global trade

There are a number of financial intermediaries and institutions that facilitate global trade

Technology is a great enabler in fostering international trade and scaling up of operations

Globally, there is a trend towards elimination of all trade barriers and facilitate uninterrupted global trade

Loss due to exchange fluctuations if not prevented or attended immediately would erode the fortunes of the company.

What, Why and How Globalization is ? Globalization is not a new concept. In past people use to travel to other places

for gaining control on others lands, for finding out the better living style, for finding out the new places and to earn profits by selling in different regions.

Globalization is a contested concept that refers to shrinkage of time and space (Steger, 2009).

According to another definition “globalization is the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result (Palmer, 2002).

Globalization is affecting the World Economic Development? Effects of globalization can be discussed in the following different ways:

Global Markets Global Market refers to the “Merging of Historically Distinct and separate

National Markets into one huge global market place.” With the expansions of global markets liberalize the economic activities of

exchange of goods and funds. Removal of Cross-Border Trades barriers has made formation of Global

Markets more feasible.

International Institutions Some of the forces in the world are in the favor of a government that governs the

entire world.

Now the institutions like United Nations Organization, International Monetary Fund, World Trade Organization and World Bank are near to the concepts of those groups because they are regulating the relationship between different countries and governing issues of Justice, Human relations or political factors (IMF Center, 2005).

Changes in World Trade Picture Before the phase of Globalization, United States of America was dominant in

world export. After the advent of globalization, Germany, Japan, South Korea and China have seriously challenged the position of America.

Changes in Foreign Direct Investment Foreign Direct Investment is considered as signification indicator of economic

development. investment in form of lands, capital good, inventories and factories are the real

investments. Direct investment is in shape of when one firm is controlling a firm or

establishing a subsidiary. Foreign direct investment must be strong enough to control parent company

and foreign host company. Corporation Changes

In the present global competitive environment it is a necessary to use the information technology innovatively and skillfully.

Globalization has increased the trend of Multi National Companies in all over the world. Before the Globalization phase USA was dominant in MNCs.

Technological Effects By the development of technologies specifically related to Telecom as internet,

telephones, wireless technologies ect. has been developed so information can be moved more smoothly across the borders.

Laws regarding Copyrights, patents and international agreements can be easily applied.

Through information technology, awareness and application of criminal laws have become easier.

Frauds in International Trade and in society can be easily detected .

Effect on the Standard of Living:

Effect on Employment After theadvent of globalization, it was an apprehension that the job will shift to

developing countries form developed and advanced countries.

Industrial Effects Globalization has also affected the Industrial sector of the world. Now in this era of globalization, the focus of industries is to produce foreign

commodities and to facilitate the consumers in all over the World.

Cultural Changes Through the development of Globalization world is getting into an identical

culture that is understood by every nation, we may call it intermixing of the cultures

Globalization has resulted in increasing the diversity and boosting telecom and tourism sector of the world

Hurdle Of Globalisation : Industrial unit:

Local Socio- economic benefits

Political and Ethnic Factors

A large component of SSI production Reservation for Them

Govt. Policy Changes and uncertainty

Local Competition, small domestic market inefficient units, low productivity and high cost.

Hurdle of technology adaptation from trade unions and vested interests.

Socio- geographical forces

Reservation and Monopoly element within India

Strategic Planning and Recent Environmental Changes : FERA Relaxation and Introduction of a new law of FEMA.

Increasing FDI and Portfolio Investment.

Greater Autonomy to Banks and Authorised Dealers and restructuring of banking system and their practices and greater FDI in Banks .

Reduction of customs and excise duties and rationalisation and simplification of tax structure.

Import liberalization in the direction of eliminating the negative list.

Increase role of MNCs from Abroad and opening up the economy to multinationals

Improved quality and acceptance standards of ISO 9000/ ISO 14000.

Rapid changes in emerging technological standards and growth of international competition in the domestic market as well as foreign markets.

Freer import of technology and open invitation to foreign collaborators, with both foreign finance foreign technology.

Increasing access to foreign currency market by both banks and corporate.

Exporters allowed to keep some funds abroad and forward cover allowed to exporters and NRIs for their foreign currency deposits.

Indian Joint ventures are allowed to take funds abroad, without RBI’s prior permission subject to some limit.

Indian Mutual Funds are allowed to invest abroad up to a limit.

Free Inflows of funds and limited outflow of funds are allowed under reforms.

RBI policy acted as a facilitator to integrate domestic financial markets with foreign markets.

Globalization a Models : No unique solution suitable for all organizations or even of those in the same business

or activity can be prescribed. The model suitable may undergo change of environment from time to time. Two Basic questions the management has to face in this process may be :

1) Have the investor member of the company a role.2) Have the employees of the company a choice in the techniques to be adopted.

Some models for adaptation to globalization are :1) Re orientation and HRD Plan :

This is the normal retraining and Retraining Scheme for staff on a voluntary basis. The existing staff is retrained to meet new challenges and new idea. Incentive packages for some to retire on voluntary basis.

2) Managerial Adaptative Model: In this model, the managerial talents are used to build a strong organization to become a global

players. This depends on the ability and willingness of the top management to meet the challenges of

globalization, through strategic planning process.3) Open Entry and Exit Model:

In iIndia open entry and freedom to enter into many industries without a licence and raise funds freely from the capital market .

But the exit policy is difficult and time consuming. If government is willing to have an exit policy also, the model can be applied.

4) Indigenous Adaption of Foreign Technology: This is Like something the import substitution in technology which is adjusted and change

to make it Indian and suitable for Indian conditions. It also involves development of India’s own technology as in the case of Satellite

Telecommunication system which India has developed on her own.

5) Quality Up gradation Model on R&D : Under this model the manager and his staff have to plan a strategy, both short term and

long term, to improve the quality to international standards and bring about a cost reduction through greater efficiency and productivity.

6) Collaboration for Foreign Technology Model: Indian and foreign companies join and joint venture to manufacture product or provide

service for global markets. Now Govt. is freely allowing inflow of foreign technology in most of industries, where

Indian Technology is not well developed.7) Merger and Acquisitions:

To meet this competition and to be able to operate on level playing ground with MNCs and foreign companies, Indian corporate can strengthen themselves by mergers acquisition to improve their resource base, achieve economies of scales and increase their assets size, and scale of operation.

8) Consolidation or Market Sharing Agreement: The objective of consolidation is achieved by agreements with competitors or related

companies. ICICI Bank is strategic alliance with South Indian Bank to share business.

9) Expand to go Global through Joint Ventures Abroad : With the permission given for mutual funds to invest abroad, many export- oriented

Companies are planning to operate abroad.

Environmental Adaption for Globalisation : Globalization involves adaption to environment forces. The manager has to face the competitors, input suppliers and output marketing outlets,

distributors and consumers etc. Managing change is a management task and involves the following steps:

1) Inform the staff and work force of the current situation and create a dissatisfaction with it, by finding and pointing its weakness, faults and hurdles to progress.

2) Prepare the attitudes of staff to one of positive reception to change.3) Create a vision and demonstrate how they will benefit from it.4) Prepare a plan and priorities in the scheme of adaptation to change.5) Create a positive attitude to the new scheme of things and adaption to change.

6) Use training, work shop and seminars to help them acquire the necessary attitudes, skills and technique to change.

Financial Environment: The foreign exchange reserve are growing and moves to capital account convertibility

have added a new dimension to corporate activity in the recent past. The environmental factors which showed some negative impact are sluggish demand,

lower capital investment expenditure, recession abroad and continued high trade deficits and current account deficit.

On export front, corporate can get hedging product from ADs who are permitted to offer cost effective and risk reduction option strategies.

ADs have been authorized to approved the release of funds not only from current account remittances or outflows but also capital account flows for joint ventures, subsidiaries and foreign offices for corporate etc.

Policy Changes : Globalisation requires a market oriented economy and towards this ,some policy

changes need to be initiated. Fiscal Reforms initiated since 1992 were continued. RBI credit to Govt. borrowing is at declining and that of bank is increasing, the

GOVT. borrowing is at market rates. The Central Budgets during the recent years aimed at fiscal consolidation by

reducing the gross fiscal deficit, reduction of reliance on RBI to limit the monetization on govt. debt.

Voluntary disclosure of income and wealth Scheme was implemented to garner more revenue by legalization the black money or hidden wealth by payment of 30% of the declared hidden income. But it was no success.

Peak import duties and excise duties was reduced . There is a regular change in service tax. Etc. The Central Budget aimed at simplification of the tax structure . The Central Govt. want to introduce GST.

Monetary and Credit Trends : In the banking and credit area, the latest RBI credit policy announced during the recent

years carried further the reforms towards liberalization, initiated since 1992. Reforms moved towards flexible interest rates, freer banking operation, removal of

restrictions on deposit rates and lending rates of bank. Further step is taken in integrated various financial markets in the domestic field and

those domestic markets with the global financial markets.

To integrated the domestic market with the foreign markets, banks are allowed to borrow abroad and invest up to a certain limit.

With a view to moving towards capital account convertibility, exporters and exchange earners are allowed to retain their earning up-to a certain limit abroad.

Mutual Funds can invest some of their funds abroad. Banks are authorized to grant the exporters, foreign currency for a variety of purposes

without the permission of RBI. Corporate are allowed to open offices abroad. The money market is linked to govt. debt market and these links are now strength by

financial reforms. Move to Capital Account Convertibility was strengthened by allowing exporters to leave

funds abroad and corporates to have foreign offices and spend for both current and capital expenditure.

Joint Venture undertaking are now allowed to finance by ADs without reference to RBI upto certain limit.

Indian Banks have started internet banking and electronic transfer of funds. Trade Policy and Trends :

SEBI control on all players and procedures in the stock and capital market and in trade policy and financial reforms.

There are many changes in industrial licensing , freeing of capital issue etc. T he EXIM policy announced for ninth plan provides for some major changes . Introduction of new duty entitlement pass book scheme over the value based Advance

Licence Scheme and Quality based Advance Licence Scheme ( VABAL and QABAL). Payment of duty of maximum level is brought down. Deemed export status is widened and exports of agro sector, hi tech exports and of SSI

products are given special incentives. Deemed exports status is extended to oil and gas sectors to encourage domestic

sourcing of input. WTO organization of which India is a member aims at freer exports of Agro product

textiles, ready -made fabrics , services etc. The export obligation under advance licence has been increased from 12 to 18 months. Export credit is now cheaper and ADs are now permitted to provide to exporters

cheaper and larger funds to promote their export trade, particularly to SEZs etc.

Liberalised Access to Foreign Borrowing : All infrastructural projects, Telecom and Greenfield projects are permitted access to

external commercial borrowing up-to 35% of their project cost since june 1996. Banks, FIIs and NBFCs registered with RBI are also allowed to raise funds through GDRs

which will help their lending to corporates. The lendable resources of bank are expanded and the cost of funds to corporates lowered.

The Banks operational efficiency and profitability should improve with with their freedom to borrow anywhere in India or abroad and face competitiveness both at home and abroad.

Capital and Stock Market : The operations of FFIs FIIs and foreign security firm led to large inflow for FDI and

portfolio investment. The stability in Rupee is a important task for growth. The inflow and outflows also affect the Domestic market and FOREX market.

Emerging Trends in Global Trade : Capital Items :

There are transactions of capital nature affecting the foreign assets and liabilities of the various countries. These transactions take the form of short –term capital investment to take advantages of interest rate differentials or exchange rate discrepancies.

Investments in physical (long term) assets like plant, machinery etc. The investments from abroad can also take the form of purchases of

financial assets at home by non- resident individuals, companies or foreign govt.

The investments may be in the form of shares, debentures, bonds etc. The combined Account of current and capital transactions constitute the

balance of payments between one country and rest of the world. The change in foreign assets and foreign liabilities on account of foreign

receipts and payments are reflected in the international financial markets and recorded in the balance of payments of a country.

Components of International Financial System: International financial system relates to management of and trading in international

money and monetary assets. These monetary assets are claims on foreign currency, foreign assets and/or foreign

assets. The claims may be denominated in various foreign currencies purchased and sold and

involve exchange as between various currencies. These transactions give rise to