Emerging markets

Role of Foreign Business Finance in Balance of Payments

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Countries like India could face a balance of payments issue with incessant foreign direct investments. In business finance, an unfavorable balance of payments situation is when a country’s external debt exceeds its income. Profitability is not an option for India, since it has to repay its debt, and also post an operating profit. Going on break-even mode for long, holds no value for any overseas business finance investments.

Balance of payments problems might surface directly or indirectly. When there is a large pool of foreign equity presence in Indian companies, then the balance of payment problem is direct. Also, if revenues after exports are not great, then the country has a negative business finance condition. Sometimes, emerging countries like India will buy international export licenses. Costing a lot, these licenses have to be renewed periodically and are subject to lots of terms and conditions. In situations where the basic raw materials are not available within the country, import has to take place. When all this gets out of hand, the business finance potential tilts in the other direction. A direct balance of payments deficit is indicated in these circumstances. Indirect balance of payments happen, when exports from emerging economies are not wanted, because a substitute was found for it in the importing country.

Nowadays, multinational companies invest in other countries by setting up subsidiaries, or branches. By doing this they are ensuring that they deal with the same products and services. What they also achieve is a reduction in operating business finance expenses. Looking at an export perspective, this does not offer a great business finance impetus to the host country. If the FDI is driven by reduction of operating costs, then more exports do not necessarily mean more money for the host country. If the FDI is driven by the reduction of production costs, then more exports will automatically take place from the host country.

Empirical evidences do not however substantiate the direct involvement of FDI in creating unfavorable business finance conditions in a country. However, over a long-term, self-sufficiency to a certain degree is always advised.

Foreign Direct Investment in Emerging Economies

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Multilateral institutions like the World Bank, International Monetary Fund, and the Asian Development Bank indicate an enormous increase of business finance investment by way of foreign direct investment (FDI). Foreign direct investment has been growing at more than twenty percent every year. 2004 was the year of revival of business finance influxes from foreign shores into emerging economies. In 2000, the FDI in US stood at nearly over a trillion dollars. After 2000, there was a steady decline in FDI. Now the situation looks stable again for a revival of business finance through FDI.

Emerging markets have given a lease of life to FDI. Countries like India are one of the emerging markets. India has absorbed FDI investment with glee. By the year 2004, almost 40 percent of business finance through FDI was targeted at emerging markets. It is predicted that FDI investment in emerging economies will grow at over four hundred billion US dollars every year. Research agencies like Standard and Poor have predicted robust business finance investments through FDI. Retaining its position as a foreign investment behemoth, the US is predicted to attract more than one-fourth of the global FDI.

Emerging markets have a lot of sectors that are fast growing and need more business finance to fuel their needs. Also, the size of the market is huge, when compared to developed countries. Expectations of high profits are feasible in these markets. Statistics indicates that the countries with the largest inflow of foreign business finance are also among the top ten exporters in the emerging markets category.

Contributing factors of FDI in recent times are the slow industrial growth of developed economies. Not knowing avenues to invest their business finance, foreign investors are solely looking at emerging economies. For emerging economies, foreign investments are nothing but additional business finance. As capital expands, more and more growth happens. Although debts increase, emerging economies have no other go but to grow on debt, and after sometime grow over their debt. If more venture capital comes in, emerging economies like India need not resort to other dangerous external finance methods.

Role of Foreign Business Finance in Balance of Payments

Foreign Direct Investment in Emerging Economies

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