An explanation is drawn to understand international trades, finance and investment aspects.
- Evaluation of working in financial markets for apportioning their capital for trade in various markets.
- Critical evaluation of major challenges of the economy which are associated with trade aspect.
International trade is an exchange of products, services and capital across global boarders. In some of the countries, this type of trade represents significant Gross Domestic Product (GDP) share. Each business firm require financial resources in order to run business in a better or proper manner. There are different norms which are related with an international trade which each organisations need to follow during conducting business. Financial market assess in platform where communities as well as securities trading happen.
International trade refers to the process of exchanging product, services or capital between two countries. In modern era, most of the companies prefer to expand their business activities and operation in other country in order to increase their overall profitability and valuation of the company (Czinkota, Ronkainen and Moffett, 2011). Legal & General is a UK based multinational financial services. It mainly deal in providing product and services including general insurance, life insurance, investment management and pension. The company is mainly operating in United States and United Kingdom. The report brief basic detail of financial markets. Capital allocation in both international and domestic market has also been discussed in this report. In addition to that, various challenges faced by nation due to industrialization and trade policies has also been discussed.
A) Evaluation of Financial Market
Background of Financial markets
Financial market refers to market under which individuals trade, commodities, financial securities and also value at the minimum cost which reflect demand as well as supply. Securities consist bonds and stocks involve the agricultural goods and metal. Financial market is broad concept which explaining any marketplace where sellers and also buyers participate in trade of assets like for an instance currencies, derivatives, equities and bond. The costs of financial market many not show real intrinsic value of inventory because of macroeconomic forces such as taxes. Financial market is available in each nation. In context to this, securities costs are reliant on the informational transparency through issuing an organisation to assure effective cost which are set through market. Financial market is helpful in identifying cost of securities. Frequent interaction among investors are helpful in fixing securities cost. It gives liquidity to the tradable assets. In context to this, financial market enables investors to purchase as well as sell of publicly traded organisation shares. Investors have access to many financial markets and also exchanges of representing vast array of the financial goods (Antras and Foley, 2015).
The main role of financial market brings sellers as well as purchasers together in context to trade in the financial assets like for an instance bonds, derivates etc. Its main role is to set costs for increase capital, transfer risk, set cost for international trade etc. Financial market appears in context to raise capital allocation. Around 65 countries, developed financial sectors enhance investment more in developing industries and reduce more investment in reducing industries as comparison to the undeveloped country. Effectiveness of allocation of capital is negatively related with extent of the state ownership in an economy of United Kingdom, positivity correlated with an amount of company particular information in the domestic returns and also correlated with legal protection of the minority investors (Ahn, 2011). Financial development impact on the economic development.
Capital allocation within domestic economy
Cost allocation is a procedure of allocating the financial resources to various sources for increasing efficiency and profit. Under this, main role of management is to optimize allocation of capital for generating wealth and shareholders. Now, financial market is considered as bet place to invest money. When firm began business at small level, then in this case they earn more money from the financial institutions and after some time this small scale business will convert in to large. Domestic capital markets plays necessary role in order to mobilizing private capital fort the domestic development. Through providing organisations ability for borrow domestically in markets of domestic markets, local currencies which can minimize mismatches of currency for the borrowers for minimizing systematic risks. At same time, bond markets of government develop tools for managing fiscal risk and also macroeconomic and give significance to costing benchmarks. In addition to this, domestic determinants of the cash flows to assessing actions of emerging markets of countries in regards to take to increase advantages of inflows while reducing threatened related to the financial stability. Domestic capital markets plays vital role of sustainable finance, stable source and also underpin in private sector which is related with the economic development as well as employment. Financial markets compromises all the financial markets, institutions and also instruments. In context to this, bank loans and also bonds for bulk of development in the capital flows. In addition to this, financial markets became enhancing integrated and capital inflows which are matched through an emerging markets for outward investment. It is a complicated process. Under this, there is a need to management of an organisation not to loose power of decision making and otherwise it will face many pressure regarding loan and interest (ABodie, 2013). Firms such as Legal and general is assess in invest its funds in proper manner. Form guide about the right field where one should make investment of their funds. United Kingdom country is not in the good shape after Brexit. Many of economists failing to search whether leaving of European Union is better for United Kingdom economy or not. Some of main players which plays necessary role in capital allocation given below as above:
Small private investment firm- People which do not have time to search effective investment field (Manova, 2012). Small firms do not have effective knowledge regarding key areas from where they can earn money. The investment of small companies are small and their revenues is not good.
Government- It plays necessary role in capital allocation. Government has some power for make some norms and also decide which kind of sector requires more capital in order to aching development in upcoming time.
Banks- They are regarded as main finance source for different entities. Banks allocate the finds for the commercial firms but at same time, banks provide loan to the authorises of government or various purposed such as development of the public places and also modern infrastructure. Some of necessary points given below:
- Capital market is that market where debts for long term are buy or sell. They plays a necessary role in allocation of capital due to long term also.
- Money market is concerned with the short term borrowings and liquidity is very crucial for each sector.
Some advantages of the capital allocation
Growth of an economy- If a single sector will get increase capital and others will not get the needed funds then in this case country can not be achieving decent economic development rate. If banks will give loan to specific sector then the other will get necessary funds an d get effective outcomes in economic development.
Private sector growth- This sector is helpful in providing employment opportunities top more people and also revenue to government in tax form. Effective allocation of capital is helpful in minimising different types of issues related to funds. In addition to this, they can increase their business in some of the other countries through invest proper capital allocation (Ohlin, 2011).
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Capital allocation within international markets
International market is impacted through various number of components. Many of successful organisations expand their business in some of the other nations in order to earn more profit. These types of firms allocate their for increase their business operations it is necessary that they should follow different norms which are made through foreign nations and also WTO (World Trade Organisation). Some parties which play necessary role in allocation of capital:
International entities- World bank, IMF and ADB, these are some of the financial institutions which try to control as well as manage capital in a systematic manner. Their motive is to bring some smoothness in international trade and their policies related to capital allocation also varied from country to country (Vernon, 2011). These types of entities do not provide loan to the private organisation, their work is to lend money for preparing of effective projects of different nations. Many of the global entities provide funds for infrastructural or social development.
Large private equity organisations- Private firms seek assess of different private companies because they interpret that financial institutions which can provide loan on decided amount. The private organisations have large capital amount and also invest firm through purchasing shares. Under this, companies invest in financial market of one country then other country face problems related to lack investors.
In addition to Legal and General organisation contain different rules which assess in money circulation. Under this rules are related to FDI is easier to get in countries like for an instance India. Generally firms prefer to invest their capital in the European countries due to the developed market but in this present time period, they allocating capital in the markets of Asia and India. In addition to this regulation made through SAARC nation assess more sectors in order to archiving the necessary capital. An agreement of WTA plays a necessary role in money circulation at important areas. These all countries are facing many issues concerned with requirement of capital for different work like for an instance infrastructural growth but after the effective capital allocation they notice remarkable for long time period.
B) Evaluation of emerging economy
An emerging market refers to a country that has some specific characteristics or features of developed market but does not meet the standards to be a developed market. Basically in include such countries that are going to developed in near future or that was developed in the past but presently they are developing (Bergstrand, 2011). The four largest developing and emerging economies are Brazil, India, China and Russia. Normally such type of economies are towards becoming more advance which help them in gaining high competitive edge in overseas market usually by means of rapid industrialisation and growth. From past 25 years, India is considered as an emerging market due to its rapid reform process. Emerging counties are moving towards an market economy where they get ample of opportunities in order to become developed. India possess some of the key characteristics of an emerging economy in terms of strong financial service sector, privatization, billions of customers and increased growth.
Growth rate of India is slow but still it is considers as the largest growing economy. In 2017, the growth rate was 6.9% which was 5.7% in 2016. In-fact India is considered as the second largest market in the world in terms of size of stock market (Posner, 2011). The country is having plenty of room to grow and develop that gives extensive opportunities to other companies which assist them in growing themselves in an emerging market. Some of the advantage of doing business in India are discussed below:
A strong financial services sector: India financial sector has evolved to fulfil the needs and wants of a modern economy with global trade. Along with this, Indian are refereed as savers in terms of their banks are having good track record that signify their lending capacity, their national government has no debt and their local residents or consumers keep saving their money so that banks have adequate funds to lend out money to new business.
One billion customers: India is having strong customer and market base because of their large number of population. Most Indian have a decent money by emerging market standards. Indian people make money and then save it. They unnecessarily do not spend on other things.
Privatization: Most of the India's companies have been privatized and even their government is putting more efforts towards to converting more businesses to private ownership structure.
There is constant increase that been seen in India's foreign investment. Before 1992, the country was not developed. There were no roads, auto-mobiles, communication services etc. but gradually all these sectors are changing and experiencing impressive growth in terms of foreign investment and liberal policies. Earlier, India was not considered as the best place to invest funds but now there are plenty of options that are available for investing money. Asian markets like India have high growth rate among all other developing nation. In-fact their economy is substantially growing among other nations. Their economy is constantly improving and so does their problems associated with doing business is also getting resolved day by day (Helpman, 2011). Now it has become much easier for other company to grow and develop their business activities and operation in India as there are large number of opportunities prevails in Indian market. The main focus of India is to maximise their exports. They import oil from different countries and this makes adverse impact on their balance of payment. Their foreign exchange reserve is also improving. Private players in India are earning huge profits and revenues in the market of European countries and USA (Eaton, Kortum and Kramarz, 2011). Further they send this money to their domestic nation that help in making country a better place to live. Some of the major problem that Indian Economy is facing are discussed below:
Inflation: In India, the cost of basic commodities are high as compared to other developing nation. In 2016, the inflation rate of country was 12% which is quite high. Presently, Indian Government is working on decreasing inflation rate but still this figure last near about 4-5%. Normally consumer think that there is high demand of goods and services but this is not true. The main reason behind this is cost plus inflationary factors.
Education: It has been figured out that, almost 25% of India's population is below poverty line. After knowing the fact, they still don't care to provide basic education to them because they mainly emphasize on providing one time food to domestic population. The literary rate of India is 74.04% but there is big question mark on their quality of education that exist in the country. Although Indians are having various kinds of degrees but they do not have knowledge regarding the same.
Positives of Indian Economy:
Young Workforce: Almost 70% of India's population is below the age of 35. This factor help in increasing the ratio of productivity and investment. The significance of human resource is immensely increasing and rest of the world will look towards this nation for recruiting quality workers in upcoming time period.
Positive Growth Forecast: When most of the nation are working hard for attaining a economic growth of 7%, India is easily getting the growth rate of 10% and even they have enough potential to grow with 15%. According to Goldman Sachs, India can grow with a rate of 12% till 2020.
Challenges due to industrialisation and trade policy
India has a population of near about 1.25 billion. One of the main issue that they are facing is in terms of unemployment. After 1992, there was a tremendous increase in private sector as they believe on the concept of self-development which means government cannot provide job to every single person. Industrialization has introduced new methods of working and as result, lots of people loose their job because their skills and qualification does not match with their job (Wagner, 2012). Moreover they do not have necessary knowledge and education to work on modern tools. The policies formulated by Government of India was bad which creates negative impact on the entire economy.
There is a big difference that lay down in economic policies of two different countries one is China and other is India. Initially they focuses on manufacturing sector but later on they much emphasize service sector (Crawford, 2011). Trade policies of India is not effective as they are providing jobs to millions of people but their ignorance towards manufacturing industry is now hampering their long term growth. If businesses do fixed investment in nation then it become much easier fir the nation to attain organic growth and development as compared to others. Following is the evaluation of various challenges:
Poor Infrastructure: During the period of 1970-80, India has not opened up their gate for foreign investment. Most of the Asian countries like Singapore, Hong-Kong developed their capital infrastructure by effectively using foreign capital. However in 1992, India have opened their economy but somehow they failed to hold this golden opportunity and now the nation is struggling to get adequate amount of investment from foreign countries.
Issues relating to Balance of Payment: Trade Policies formulated by Government of India is very weak that the economy is still having trade deficit of near around 14 billion dollars. Their exports are rising but simultaneously their imports are also increasing in-fact with higher rate. For the long time, they do not focus on exporting and this made adverse impact on the debt ratio of the company. Still most of the policies of formulated by Indian Government is not correct as they are imposing much restriction on imports which is not good in today's era. The nation needs to focus in promoting new technology that gives them high competitive edge in overseas market.
Bad-debts: Trade policies of India adversely impact the country as the nation is facing huge loss due to this. There are various nationalized banks who gives loans to many aviation company. Government take the guarantee as they knows that aviation industry is the fastest growing industry among other sector (EcHill, Cronk and Wickramasekera, 2013). This industrialisation posses negative impact on Indian economy. Hardly one out of two aviation firm is generating profit rest all are facing losses. They are trying to to survive in the market for longer period but somehow they fail and as result they all got shut down.