How to Expand Business Through International Trade

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QUESTION 1

Background of Financial market

Financial institution: It is the place where financial instruments are traded and buyers can buy or sell them as per their preference. The financial market includes the various securities traded in the market such as stocks, bonds, commodities etc. These securities have a risk which can be high or low but they also provide returns which are not fixed. Financial institutions majorly classified into two categories such as debt and equity market (Bussin and Van Rooy, 2014)

• Debt market: It is the market where debt instruments are traded and it is the assets that are required by the company to pay a fixed amount to the holder along with interest. It includes government or corporate bonds and mortgages (Berger, 2015). It is a less risky market where the return on investments is also low in comparison to the equity market.      
• Equity market: Under this market, people trade in equity instruments where stocks are considered as security and claim on earnings and assets of a corporation. Stocks should be registered in the listed stock exchange (Carr and Stone, 2017). For example: In the UK, the London Stock Exchange (LSE), New York Stock Exchange (NYSE) etc. This market has high risk but also provides a huge return and the rate of return can be changed due to various reasons.        

Domestic economy and capital allocation

Capital allocation is the distribution process of resources in the organization as per the requirement of business operations. The purpose of capital allocation is to maximise the shareholder's return because it maintains the interest of people in the business. In the UK, the allocation of capital will be done by the banking system, money market and the last stock market. UK's economy uses the micro or macro mode to allocate capital (Chuluun, 2017). At the macro level, the UK's government and other institutions assign funds to the economy through issuing currency. On the other side, at the micro level, organizations issue shares and other securities to get finance through trading in the domestic market and stock market. All the capital allocation systems mentioned below provide money to the UK's economy:

Banking  system:

• Regulations governing the financial system: Other than monetary policy, the government also governs another financial system in the UK. They make sure to protect the rights of shareholders and other investors by making rules regarding trading (Damijan, Kostevc and Polanec, 2015). So they restrict insider trading, motivate transparency in financial statements etc.
• Role of the central bank: In the UK, the central bank of the country is the Bank of England (BoE), here they have to manage finances and the monetary authority regarding currency, money supply, interest rate etc (Fooks and Gilmore, 2014). The main role of the central bank is to manage all the monetary policies, issuing currency in the market as per the demand of the economy and maintaining the flow of money in the country. 
• Monitory policy: It is one of the government policies which is used to balance the flow of money in the economy. This policy was developed by the central bank that is Bank of England (Chirambo, 2014). Here they have to maintain the liquidity in the country through maintaining mortgage rates and other interest rates as well. Authorised people have to follow all the rules & regulations in order to maintain liquidity in the UK.

Domestic money market:

• Savings: In the country, people save their money in banks by depositing and earning a minimal rate of interest. The deposited amount is known as capital allocation which is further used to help the organizations in terms of loans and it will be provided against a guarantee on the high rate of interest (Henriques-de-Brito, 2018). Individual saving helps in maintaining liquidity and fulfilling their needs. 
• Loans: In this domestic money market, individuals saving used to give loans to financial institutions (Herrera-Echeverri, Haar and Estevez-Breton, 2014). It is beneficial for organizations to fulfil their needs or perform their operational activities in a good manner.     

Stock markets:

• London Stock Exchange: It is the primary stock exchange index of the UK, the Financial Times Stock Exchange (FTSE) 100. It enables the company to raise funds by selling shares from outside investors. This market includes the companies, investors, stockholders, intermediators etc.    
• AIM (London Stock Exchange for small business): It is the Alternative Investment Market (AIM) which is a sub-market of the London Stock Exchange where they trade between small businesses (Dass, Kale and Nanda, 2014). AIM allow small business to raise money through entering in the public listing exchange.     

International economy and capital allocation

International capital market:

Capital allocation in the international economy is a procedure where nations are allowed to allocate finances without any interference from domestic territory. Allocation of capital in the international market is different from the domestic market because of changes in the rules and regulations of the financial market. This market also includes the various markets where countries as well as their citizens can invest in foreign country's markets. For example: NYSE (New York Stock Exchange), Shanghai Stock Exchange (SSE) etc. are the international money market. There are various ways which help the United Kingdom's investors to invest in the international market. Some of the ways are discussed below:

• Commercial bank: It is a type of bank which provides various services such as accepting deposits, providing loans, offering investments etc. Domestic people can deposit money and earn interest (Iamsiraroj, 2016). They provide loans to the organizations against security, both ways used to allocate the capital in the international market. Commercial banks provide short-term as well as long-term period loans where they charge high interest on the basis of period.
• Bond market:  Here bonds are traded between two parties and the government of the country regulates it, to make sure that they follow all the rules and regulations (Ighobor and Bafana, 2014). Bonds are traded in the international market which helps in allocating the capital for the organizations. 
• Foreign exchange market: It is also called the counter market for the trading of currencies (Kerr and Nanda, 2015). Banks will turn into dealers who are involved in foreign exchange trading in a large volume.      
• Global stock market: It is the collection of markets and exchanges where regular activities are performed such as buying, selling and issuing shares for public dealing (Del Prete and Federico, 2014). There are multiple stocks traded across the countries in terms of securities.   
• Derivatives: It is similar to the stock exchange but they also trade options and futures. In the UK, investors can be individual or corporate and can invest in future options which are based on foreign countries (Martínez-Sola, García-Teruel and Martínez-Solano, 2014). It is highly profitable as well as risky so investment will done after a huge analysis.   
• Non-bank financial institutes: These include the insurance institutions venture capitalists and other institutes where people can invest to maximise their returns (Milner, 2014). To allocate capital in the international market they have to encourage investors by providing attractive interest rates.

With the help of the above markets international economy can allocate capital which is further used to complete the requirement of finances.

Discuss any two theories which are related to trade, finance and investment.

Ricardian trade theory is one of the economic theory which was given by David Ricardio in 1817. By using this theory, the UK's economy can acquire resources such as labour and materials. Cheap labourers are available in international markets such as China, India etc.

Opportunity cost: It is the cost which is lost because of choosing an alternative option. The country must analyse all the options and then finally select the most suitable one but sometimes it happens that another option will be more beneficial for the person (Demirgüç-Kunt and Levine, 2018). For example: the United Kingdom is a developed country where labour rates around 19 pounds per hour. Organizations have an option they use the UK's labourers or China's labourers which are available at 5 pounds per hour. It is cost effective but another cost is the opportunity cost for the organizations. 

Comparative advantage: It is the ability of a nation where manufacturing costs are less than other countries because developed countries acquire employees from developing countries such as China or India where cheap labourers are easily available which provides a comparative advantage.

Above mention theories of the Ricardian trade approach are used to rent resources in the international market which provides various benefits.

Contribution of the following organizations in the international trade

World Trade Organization (WTO): It is the most powerful organisation which controls international trade and investment. It plays an important role in liberalization where organizations have to follow regulations and reduce trade barriers which is beneficial for the trade countries (Foley and Manova, 2015). With the help of WTO, countries can trade internationally and invest in various sectors which is beneficial as well as in the interest of the nation. This organisation also protect the countries and their interests as well.

Regional trade agreement: The European Free Trade Association (EFTA) is the platform through which different countries member can freely trade without any restrictions or trade barriers. It was established in 1960 and its main role is to assist member countries which can increase profitability and reduce the customs (Özdemir and Serin, 2016). It includes four countries such as Iceland, Norway, Switzerland and Liechtenstein. These countries have the right to freely trade with each other without any restrictions.

Investment treaties between stages: Foreign direct investment (FDI) is an investment made by an individual or firm and allows the countries as well as people to freely trade with pre-determined rates. This treaty has benefited the countries which can trade freely without restrictions where countries can export or import manufactured products as per the requirement.

Above mention association has a separate contribution to the international market where both countries are involved and get the free trade benefits.

QUESTION 2

Evaluation of emerging economy

Introduction of BRICS:

BRICS is the combination of countries from the crowd Brazil, Russia, India, China and South Africa. It was developed for the purpose of enhancing market conditions or creating opportunities for the countries (Hall, B.H. And et.al., 2016). It helps them to industrialise and provide various facilities regarding trade. BRICS promote mutual trade and other investments between the member countries and maintain friendly relations. It plays a major role where they globally trade without any restrictions and trade barriers. In this report, China is selected because of their rapid growth in industrialisation and impressive development of financial markets.

Consider the 4 points to evaluate the growth:

China is a developing country where various factors affect its GDP or overall growth. There are some factors mentioned below which represent the reason why China has rapidly grown in the market:

• Agriculture: In Chain, agriculture activities total contributed 9.25% against China's total Gross Domestic Product in 2011 which further increased in 2012 and brought 9.40% (China: distribution of the gross domestic product (GDP) across economic sectors from 2008 to 2018, 2018).
• Services (IT, finance, insurance, business services, personal services etc.): In the service sector of China, it contributed a total of 51.9% against the GDP of China in 2017. It will further increase in 2018 and contribute 52.2% to the total GDP of China (China: distribution of gross domestic product (GDP) across economic sectors from 2008 to 2018, 2018).
• Production/Manufacturing: This sector total contributed 40.5% of total GDP in 2017 which increased and became 40.7% of total GDP in 2018 (China: distribution of gross domestic product (GDP) across economic sectors from 2008 to 2018, 2018).
• Inflation: The inflation rate of China in 2018 was 2.07 % which increased from 2017 to around 0.48% (China inflation rate, 2019). Critical evaluation of challenges that the country faces due to industrialization and trade policy

Challenges faced by the country due to industrialisation: 

China is a developing country which focuses on industrialisation to achieve huge growth and improve its GDP. With the help of it, the country gets various benefits which can be achieved with the help of international trade (Helpman, 2014). In the whole process of a developing country, China faced a lot of issues and challenges which are mentioned below:

(Source: China's Economy, 2019)

Infrastructure: At the time of industrialisation, infrastructure was the common challenge faced by developing countries such as China. Infrastructure includes the various components which provide the facilities to the individuals or organizations. It includes the linkage of roads, communication networks, sewage, water, electric systems etc. These are the basic requirements which can enhance the trade of a country. Because China is a most populated country it has rapid growth opportunities (Hufbauer, 2014). Because of poor infrastructure in the cities it become barrier to transport the resources from one place to another place.

Corruption: It is also one of the issues which issue faced due to industrialization because people abuse their power because China is a developing country, so corruption is very high due to the huge population and it also increases the competition in the market (Paravisini and et.al., 2014). The government of China demand the bribery from general public to complete their work. Bribery enhances trade which is challenging for China which impacts industrialisation and generates issues as well.            &n

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