5. International finances
Foreign Direct Investment
Investment is growing more than trade.
Cumulative annual average rates in real and dollar terms
Source: UNCTAD, Naciones Unidas
FDI- decission capacity on firms (10% of capital)
Theories
- Neoclassical (factor endowments, relative prices) Trade would be enought, then why ¿flows between developed countries?
- OLI - Ownership, Location e Internalization - Eclectic theory
Dunning "Multinational enterprises and the global economy" & "Globalization, Trade and Foreign Direct Investments"
- New theory of internnational trade - Firm heterogenity - Melitz
Effects:
- Economic growth
- Job creation
- Trade relations
- Innovation
Depends on politics and devlopment.
Effects of FDI
Depends
Growth: Positive traditionally (investment) in
Technology: Multinationals are more technology intensive, but not in destiny markets. Problems with absortion of technology
Employment: Increase productivity, but also lower standard than in home country
Trade: Domestic market vs international. Long term, more openness
BoP effects – Imports, services (technology), rent (repatriation of profits)
Fiscality:
Tax havens (even in UE 27)
Base erosion and profit shifting
In general, depends on firms strategy and country conditions and economic policies. It is an oportunity.
Needed a global policy. eg. UE 15% tax rate for multinational (based in 2021 OECD agreement on Global Minimun Tax)
Distribution FDI
Entradas IED Milliones US$
Stock IED Milliones US$
Increasing weight of FDI in services
Mainly among developed countries
TNI, the Transnationality Index, is calculated as the average of the following three ratios:
foreign assets to total assets,
foreign sales to total sales and
foreign employment to total employment.
Finantial markets
Characteristics
Financial markets are different from other markets:
Improve resource allocation:
o Allows funds to go where they are most needed (profitable, productive)
Intertemporal character. Deadline Transformation
o Allocation over time.
Risk transfer. Diversification, variety (risk and diversification)
Effects on the real economy
o Speed, volatility. Increase the risk of contagion
Others (payment services, treasury, information, …)
Defining characteristics of financial markets.
· Efficient (liquid – no one affects the price)
· Deep (many buy and sell orders) Market depth is an indicator that measures the number of sellers and buyers for the same security.
· Breadth: a financial market is very broad the greater the number of assets that are traded in it and the greater the number of investors who come to it.
· Volume traded
Developed vs. emerging markets (more fragile institutions and markets: developing country markets are shallower, more liquid, and smaller)
Financial globalization (banks, investment funds...) benefits developed countries the most.
Difference between developed and developing financial markets: Depth (number of orders) and liquidity (brokers do not affect the price) and size (volume) are higher in developed countries
Less competition -> greater volatility
Agentes - Mercados - Productos
Agentes: Intermediarios, prestamistas y prestatarios.
Los intermediarios pueden ser:
· Bancarios (bancos, cajas de ahorros, cooperativas de crédito)
· No bancarios (fondos de pensiones, compañías de seguros, instituciones inversión colectiva)
Mercados
· En función del momento de negociación de los activos
o Primarios o de emisión
o Secundarios o de negociación
· Tipo de los activos
o Monetarios
§ Interbancario
§ Deuda pública a corto plazo
o Capital
§ Renta fija
§ Renta variable
Productos: Activos para los tenedores y pasivos para los emisores.
Las características son: liquidez, rentabilidad y riesgo.
Agents - Markets - Products
Agents: Intermediaries, lenders and borrowers.
The intermediaries can be:
Banking (banks, savings banks, credit cooperatives)
Non-banking (pension funds, insurance companies, collective investment institutions)
Markets
Depending on the moment of trading of the assets
o Primary or emission
o Secondary or negotiation
Type of assets
o Monetary
§ Interbank
§ Short-term public debt
o Capital
§ Fixed rent
§ Variable income
Products: Assets for holders and liabilities for issuers.
The characteristics are: liquidity, profitability and risk.
Stages
1970 first stage of financial globalization. Deregulated. Financial companies Banks seeking better regulation. International banking
- Liberalization
- Growth
- Search for profitability (low profits in developed markets)
Oil crisis of 1973 and 1979. Oil producers finance the surplus of developed countries.
1990 global banking
Technological development has contributed to financial globalization: faster and more secure transactions (registration)
Institutional investors (pension funds, sovereign funds, insurance funds,…)
Institutions
International
- Microeconomic factors. Lower administrative barriers BIS -Bank for International Settlements. BIS: Basel II (1997) and III (capital requirements)
- Macro capital flows - Lender of last resort of the IMF (International Monetary Fund) - Special drawing rights
European
· ECB (European Central Bank)
· Eurosystem - Eurozone monetary authority. ECB+BC countries in the Euro
· ESCB - ECB and the ECBs of the EU members
Banking union:
· Single regulatory code (same legislation)
· Unique supervisory mechanism
· Single resolution mechanism
Fiscal union missing: European deposit insurance, European treasury/debt
Spain
- BdE (Banco de España)
- CNMV
- Dirección general de seguros
Rating agencies
Reduce information requirements
Being evaluated is a requirement to be considered by the market
Problems with rating agencies:
Search for the most lax agency in its evaluations
Assesses only non-payment risk (solvency), without liquidity risk
Requires historical data and reliable series
Procyclical behavior
Oligopoly
Finantial crisis
Especificidades
- Externalidades
- Velocidad de transmisión
- Incompleto - información asimétrica
Tipos de crisis
- Deuda (privada - soberana)
- Bancarias
- Tipo de cambio. Cambio de divisas
Riesgo de liquidez y solvencia
1982 México
1994 México
1997 Asia
1998 Rusia
2001Argentina
2008 crisis
(financiera (hipotecaria y bancaria) + deuda + comercio)
Fase 1a. Hipoteca (alto riesgo - subprime) Freddie Mac - Fannie Mae - Seguros AIG - Titulización. Deuda privada
Supervisión
Banca en la sombra: innovaciones financieras
Medidas anticíclicas tradicionales
Fase 1b.- Crisis bancaria
Quiebra de Lehman Brother () Riesgo moral.
Crisis sistémica
Colapso del mercado interbancario
AIG (American International Group) 180.000 millones $
Merry Lynch
Fase 2.- Crisis de la deuda soberana
Rescate
BCE (prestamista de último recurso)
Fase 3.- Comercio
I
Mecanismo de transmisión:
- Financiero (principalmente en países desarrollados)
- Comercio (principalmente países en desarrollo)
Nuevo consenso
Principios
- No siempre es bueno más desregulación
- Los mercados financieros no son perfectos (falta de precios de mercado durante la crisis y evaluación de riesgos incorrecta)
- Papel de los bancos centrales
- Relación entre sector público y privado
- Mecanismo multilateral - coordinación internacional
Riesgo sistémico
Regulación integral y flexible
Informe del BdE https://www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPublicaciones/Fich/InformeCrisis_Completo_web_en.pdf
The world after 2008 - Lasting consequences of the international financial crisis
Own ellaboration using AMECO
En elaboración - Work in progress
Tipos de cambio
TC directo - Tipo de cambio directo (o europeo), cuantas unidades de divisa nacional (base €) necesitamos para comprar una de una divisa extranjera
1.1€ = 1$ => $/€ = 1,1/1
TC inverso – cuantas unidades divisas extranjeras nos dan por una nacional
1€ = 0,9$ => €/$ = 0,99/1
Finantial crisis
