This paper will identify and discuss various factors that will Impact global finance over the next 10 years by researching the risk associated with domestic capital budgeting: business risk, political risk, and financial risk In business. Global Finance Global balance is that branch of economics that deals with the dynamics of exchange rates and foreign investment. Global finance occurs when the following takes place: when a country wants to improve its economy, when the number of multinational corporations increases, and when the foreign trade increases.
Besides, hen global level of international portfolio and direct investment rises, global finance rises. The Future of Global Finance The next 10 years of global finance may bring a shift to the current International monetary system. Over the last century the International monetary system has been at the apex of several financial crisis, Including the Great Depression, the 1997 financial crisis and the global financial meltdown in 2009 (Mohamed, 2009).
Although the current financial crisis has not resulted in a repeat of the Great Depression, the current lack of confidence in the global financial system mimics the conditions that rough about the depression. The next 10 years of financial globalization will therefore, rely on three major scenarios. In the first scenario, Americans tighten their budgets and reduce credit purchases while foreign markets, largely Asian markets, restructure their economies to rely more on domestic consumption versus exports (Mohamed, 2009). International banks would decrease In size due to the lowered flow of U. S. Liars and reduce the chances for poor Investments. The other two scenarios result In a continued global crisis, as countries such as China may remain focused on exports and foreign Investors holding the U. S. Dollar may lose confidence In the American financial system causing a rise in the cost of capital. These situations are likely based on the Mohamed, “The risk of such a situation is clearly on the minds of Chinese policy makers. Chou Cinchona, the Governor of the People’s Bank of China, explicitly referred to Traffic’s dilemma in a speech this March on the need for reform of the international monetary system” (2009).
Direct Foreign Investments Tradeoff (2001) stated that, direct foreign investments refer to the particular countries and kinds of countries toward which a country’s exports are sent, and from which its imports are brought, in contrast to the commodity composition of its exports and imports. Besides, direct foreign investments also can be defined as the situation in which a foreign investor owns% or more of the ordinary shares or voting power of a local company. Thus, the pattern that the direct foreign investments follow is that of a bilateral trade.
Business risk An organization who wishes to invest its capital in other countries has additional risks to consider. When investing in foreign projects, an organization should focus on projects, which will add value to the Parent Company. Risks to consider include exchange rate risk and hyper-inflation. When analyzing exchange rates and the risks involved for a project, an organization must keep in mind that the discounted cash flows become the discounted cash flows of the foreign subsidiary, which are converted to the currency of the Parent Company at the prevailing exchange rate (Kola).
Another risk to consider is the stability of the foreign government. With emerging markets in countries like Brazil, China, and India the next 10 years are set to bring greater investing opportunities for Domestic organizations with an International presence. Political Risk Recently and in the next 10 years, the political risks of doing business in global finance have dramatically increased. With failing economies around the globe many countries are unstable and the people often unruly. Many examples exist of countries with citizens who are unhappy enough to hold demonstrations that carry out into the streets. Bulgaria, Greece, and Latvia are all examples of countries once seen as stable that have experienced widespread unruly demonstrations recently. Even Russia and China have had scattered protests, signs that citizens are unhappy enough to risk reprisal repressive authorities” (Ewing, 2010). In the next 10 years it will be interesting to see how the global economy deals with uncertainty. Financial Risk With the ongoing decline of the global finical market, many companies are thinking twice before making any financial commitments.
Global financial risk is “affected by the currency exchange and the government’s flexibility in allowing firms to repatriate profits or funds outside the country’ (Kola). In addition the firm’s ability to operate at a profitable level while remaining stable when devaluation and inflation are on the rise will be difficult. Many countries make it hard for foreign less productive method. Many times a government may choose to seize or confiscate a company’s assets, which also can contribute too loss.
With all the uncertainty many companies may choose to exclusively do business in their home country. In conclusion, the business arena has limitless opportunities for companies to participate in globally. Global business partners have become comfortable with uniting business entities to leverage corporate risk and increase shareholder equity. The next several years is patterned to mirror the most recent years of global commerce. Risk analysis initiatives are a major concern for all companies doing business in the marketplace.
