Theoretical Framework Of International Finance

Theoretical Framework of International Finance “International trade is treated as a different subject because of tradition, because of urgent and important problems presented by international economic questions in the real world, because it follows different laws from domestic trade and because it studies , illuminates and enriches our understanding of economics as a whole.” - KINDLEBERGER

Reasons for the increasing importance of International Finance

2) 3) 4) 5) 6) 7)

There are broadly six aspects of world economy which have provided importance to international finance, viz. Specialization of nation and trade Opening of economies Globalization of firms Emergence of new forms of business organizations Growth of world trade Need of development process of nations.

1). Specializations of nation and trade a) b) c) d)

e)

f)

Mercantilist’s view Absolute advantage theory Comparative advantage theory Hecksher-ohlin-samuelson model/ Factor endowment Newer explanations of comparative advantages Strategic trade theories.

2).Opening of economies Most of the developed nations opened up because of the state of the art technologies in the production process which increased their production capacities. Thus, they globalized in search of new markets. The developing nations globalize as a result of economic pressures being generated by deficient resources. As a consequence of opening up, the world is integrating and is becoming smaller and intedependent.

3). Globalization of firms Why do firms globalize: A firm may globalize as a raw material seeker.  As a technology seeker  To obtain a competitive edge over its domestic counterparts.  As a knowledge seeker.

Three main explanations

1).The theory of competitive advantage      

Research and development Innovation in production Specialization in management style Technological development The firm’s location Strategic policy of government

2).Theory of imperfect market. 3).The product life cycle theory.

4).Emergence of new forms business organizations      

International Trade Licensing Franchising Joint ventures Acquisitions of existing operations Establishing foreign subsidiaries

5). Growth of world trade > Increased production capacities of nations (developed economies) > Necessity of .. (developing nations)

6).Development process of Nations. (i) Internalized – economy totally depends on internal resources , internal R&D, development of indigenous technology and input substitution. (ii) Externalized – large investment – saving in economy, external borrowings, foreign investments and foreign trade promoted, foreign technology sought to enhance production and lower the cost.