Funding for Foreign Transactions

Foreign Investments involves capital flows from one country to another, granting extensive ownership
stakes in domestic companies and assets.

Two types:

-Foreign Direct Investments- (FDIs) are the physical investments and purchases made by a company in a
foreign country, typically by opening plants and buying buildings, machines, factories and other
equipment in the foreign country. These types of investments find a far greater deal of favor, as they are
generally considered long-term investments and help bolster the foreign country’s economy.

-Foreign Portfolio Investments- also known as Indirect Investments. This involve corporations, financial
institutions and private investors buying stakes or positions in foreign companies that trade on a foreign
stock exchange.Indirect investments include not only equity instruments such as stocks, but also debt
instruments such as bonds.

Foreign investments are funded by:

 Parent company resources

 Common stock sales in the foreign country
 Bond sales in the foreign country
 Borrowing in world financial market

A. Parent company resources

Parent Company- is created when a company purchases a controlling amount of voting stock in another
company. Usually, a parent company is a large company that owns a smaller company. Parent companies
can be directly involved in the operations of the subsidiary company.

Subsidiary Company- In the corporate world, a subsidiary is a company that belongs to another company.

Parent company can share its resources to its subsidiary company. By doing so, parent company can
provide cash flow and investment to the subsidiary company located to a foreign country. It also give
access to a new market for the parent company. This will generate revenue that will help for the
economic growth of the host country.

B. Common stock sales in the foreign country

Generally, buying stock will give investors a chance to grow their money in a long run. It offers
international opportunities but also gives international risks like exchange rates, political or
economic instability, and differences in reporting and tax regulations.

Investors buy stocks to another country like in U.S. for the expected higher rate of return. This is
also related to the exchange amount of peso in dollar; that whenever the economy of U.S will
grow, then the amount of peso in dollar will also increase in value. However, when the economy
of U.S will fall, then the value will also decrease. Also, when another country will invest to our
country, then exposure to financial markets are possible, and will increase the revenue and
eventually the economic growth of the host country.

C. Bond sales in the foreign country

The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy,
sell, and transfer Eurobonds. The popularity of eurobonds as a financing tool reflects their high
degree of flexibility as they offer issuers the ability to choose the country of issuance based on
the regulatory market, interest rates and depth of the market. They are also attractive to
investors because they usually have small par values and high liquidity. The term eurobond
refers only to the fact the bond is issued outside of the borders of the currency's home country;
it does not mean the bond was issued in Europe or denominated in the euro currency.

D. Borrowing in world financial markets

International Finance Corporation is an organization dedicated to helping the private sector
within developing countries to have access in markets and financing. It provides investment and
asset management services to encourage the development of private enterprise in nations.

Example:

In 2017, the IFC invested in Pakistan’s dairy industry. Although Pakistan is the fourth-largest
milk-producing country in the world, demand has consistently outpaced supply. Coupled with
poor infrastructure and an outdated supply chain, Pakistan’s dairy increasingly falls short of its
ability to deliver what’s expected. The IFC’s contributed $145 million to one of the world’s
largest dairy producers, FrieslandCampina, to help it acquire 51 percent of Engro Foods,
Pakistan’s leading dairy processor.