Over to you:

1. Classify the problems faced by developed and developing countries in terms of foreign and trade economic relations. Suggest your own ways of solving them.

2. Analyze Russia’s pattern of foreign trade. Give your idea of its pluses and minuses.

UNIT II

Movement of capital. Portfolio and Direct Investments

Text 1

The world capital market — is the market in which different nations deal in assets, securities, liability commitments.

Commercial banks, corporations, specialized credit and financial institutions are the participants of the world capital market. The international flow of capital is the capital export.

The causes of the capital export:

• relative, absolute capital surplus in the national market;

• the difference in costs of production in different nations;

• a strive for getting a free acpess to the sources of raw materials abroad;

• approaching the consumers;

• the capital export as a foreign trade expansion to the developing nations for creating favourable conditions for the export of goods

It is necessary to note that a high cost of capital is considered detrimental to investment.

The forms of the capital export:

• export of loan capital as international borrowing (issues), lending, bank loans (borrowing), bank deposits, etc. One should bear in mind that the term of capital export is of great significance: short-term (up to one year) and long-term (over a year);

• export of entrepreneur’scapital

What is the loan?

A loan is the borrowing of a sum of money by one person, company, government or other organization from another. Loans may be secured or unsecured (securities), interest-bearing or interest- free, redeemable or irredeemable. Loans may be made by individuals and companies, banks, insurance and hire-purchase companies, building societies and other financial intermediaries, pawnbrokers, or by the issue of securities.

What is the essence of a bank loan and how is it realized?

A bank loan is a sum borrowed from a bank, normally for a fixed period of two to three years or more for a specific purpose, usually by a commercial concern. The phrase “bank loan” is also loosely used to include overdrafts and personal loans. In this broader sense bank loans are more commonly known as bank advances, while total bank lending includes commercial paper (promissory note) and acceptances. In Europe over 70 per cent of bank lending to European residents by value is for business purposes, although the commercial banks now make mortgage loans for enterprise shares (stocks) and house purchase on a large scale.

Bank loans are normally secured (collateral security), repaid in regular instalmentsand with interest charged at rates which vary with the bank’s base rate. European banks have been compared unfavourably with banks in other countries in the extent to which they provide long-term loans to industry. It is true that until about twenty-five years ago the bulk of bank advances were in the form of overdrafts, which are repayable on demand. This was partly because the banks in Europe have not, in general, been able to attract long-term deposits, and it is regarded as bad banking practice “to borrow short and lend long.” However, commercial customers of the banks in Europe have also preferred overdraft finance, which is cheaper and more flexible than other types of borrowing, provided the banks were willing to renew over- draft facilities and allow, as they have done, much overdraft borrowing to become “hard core.” In recent years the European Banks have greatly increased contractual medium-term lending (term loan), and this type of advance now accounts for over half the bank advances to foreign customers.

Export of entrepreneur's capital.

It takes place by means of constructing foreign enterprises (subsidiaries) and purchasing a block of shares (stocks) of acting foreign enterprises.

There are two kinds of entrepreneur's capital depending upon the investment verification (control) — direct foreign investments and portfolio (indirect) foreign investments.

Loan capital differs from entrepreneur’s capital in the following: in the first case an investor receives an interest (when lending money), while in the second case an investor makes a profit.

It is also usual to take into account a national export of capital, mainly as international loans, and a private export of capital (large industrial companies, transcontinental corporations, commercial banks), mainly as loans (lending).

Foreign direct investment.Foreign investment that establishes a lasting interest in or effective management control over an enterprise. Foreign direct investment can include buying shares of an enterprise in another country, reinvesting earnings of a foreign — owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates. International Monetary Fund (IMF) guidelines consider an investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm’s voting stock of shares. However, many countries set a higher threshold because 10 percent is often not enough to establish effective management control of a company or demonstrate an investor’s lasting interest.

Foreign Portfolio Investment (FPI) is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise.

These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-term interest.