Since the end of World War II, international finance has grown rapidly in line with international economic growth. Even “capital” or “money” not only functions as a means of payment for foreign trade but also an asset that is traded in a large volume. As such, international finance is becoming increasingly important in world economic activity. Aren’t the crises that hit the Asian economy and the world economy respectively in 1997 and 2008 and had to be paid handsomely by declining output, economic depression and the bankruptcy of large-scale corporations full of financial problems?
The development of finance with the growth of international capital markets clearly has a multiplier effect on world economic growth. However, developments have created interconnections between capital markets that pose risks and are behind the world financial crisis, in addition to the mistakes of capital market players in managing risky finances. For this reason, international business players need to have financial and economic insight as well as international economics. Without this insight, it would be difficult for corporations to face financial exposure and at the same time take advantage of international capital market opportunities. We hope that the financial, business and international economic perspectives are the key words.
International Economic Perspectives
During its development, it has become increasingly clear that finance is closely related to international business and economics. The international economy includes international trade activities, foreign investment and international loans which are full of financial transactions. The linkages between finance and international trade that cross national borders are reflected in:
The effect of international trade on the balance of payments in terms of income, prices, interest rates and monetary, which are important economic and financial elements. This effect is based on several mechanisms, namely the income mechanism, the price mechanism and the monetary mechanism which refers to the “price-specie-flow mechanism” pioneered by David Hume. With this mechanism, the money supply can decline in deficit countries and increase in surplus countries. This mechanism can drop prices in deficit countries and raise prices in surplus countries. Historically, trade was carried out by a country in an effort to accumulate “capital” or wealth.
International payment system in conducting trade or export-import transactions (cash in advance, open accounts, credit, etc.).
The effects of foreign exchange fluctuations that are difficult to avoid in international payments and can be beneficial or otherwise detrimental to exporters or importers.
Foreign investment is also full of financial transactions. Foreign investment, either in the form of foreign direct investment or portfolio investment, allows international companies to move capital to other countries. Foreign direct investment emphasizes management’s participation in factories, capital goods or land accompanied by transfers of capital, meanwhile, the form of portfolio investment is in the form of transfers of financial assets such as bonds and stocks. The expansion of foreign investment is driven by economic motivation to get profit or return more profitably abroad than investment at home or profits obtained through foreign trade. In addition, companies make foreign investments to reduce business risks by diversifying their businesses. But theoretically, the transfer of capital through foreign investment can increase the output and welfare of the host country community.
Moreover, trade liberalization has resulted in the growth and integration of the world economy. The world community is connected to one another due to advances in telecommunications and economic openness. From this perspective, presumably economic openness provides opportunities for several countries in the world, particularly in Asia, to strengthen the economy. We witness the growth of the world economy as a result of the progress of countries that were previously based on agriculture, turning to industrial-based economic forces with an open economic system. This transition was spearheaded by Japan, followed by South Korea, Singapore, China, India, etc. The economic progress of these countries contributes to world economic growth.
The inter-connections that integrate the world economic community are reflected in trade liberalization, foreign investment and international lending. Many countries, especially Japan, South Korea and recently China, which is now ranked 2nd as the main exporter country, have succeeded in advancing the economy by implementing trade or export policies. China in economic modernization has built industry / manufacturing by opening up to foreign investment.
International Financial Perspectives
In line with economic globalization, there has been a growing international capital market linking capital markets between countries. Financial globalization reflects the interconnection between capital markets. The growth of international capital markets facilitates foreign exchange trading and the transfer of capital or assets between countries under portfolio investment activities.
Capital channeling from several countries, such as oil-rich countries in the Middle East, Japan and then China to international banks, has contributed to the growth of the capital market. These countries have channeled the income obtained from exports to foreign countries. Japan, for example, in the 1980s transferred some of its capital from developing countries in Southeast Asia to the United States and Europe. Foreign banks also channel loans to various countries in the world. Advances in communication / telecommunications accelerate the flow of capital or assets between countries connecting the networks of world financial centers. The development of the capital market now allows corporations and even individuals to trade assets in large amounts.
The integration and interconnection of global finance in the form of international capital markets facilitates financial transactions including international loans. The international capital market increases opportunities for corporations or governments to owe both directly from banks and debt in the form of bonds or securities, in addition to owning shares of companies through the capital market.
Unfortunately, with the integration and interconnection of global finance, the financial crisis faced by a country, such as Thailand and the United States, has spread and led to the Asian crisis in 1997 and the global crisis in 2008. The Asian crisis originated from the Thai financial crisis in connection with the Thai Government’s policy to do so. currency devaluation in 1997.Paul Krugman in his book The Return of Depression Economics and the Crisis of 2008 reveals a vicious circle behind Thailand’s financial crisis, namely
Loss of confidence / panic
Financial problems for companies, banks and households
A fall in the exchange rate, rising interest rates and a collapse in the Thai economy.
Thailand’s financial crisis has spread to neighboring countries in Asia, particularly Malaysia, Indonesia and South Korea. From various theories on the causes of the Asian financial crisis, including moral issues concerning collusion and nepotism among the Thai business community, Krugman believes that the main cause of the Thailand and Asian financial crises is panic. However, his analysis shows that business speculation and weakening exports are linked to financial issues. The weakening of exports was caused, among others, by the fall in the yen exchange rate against the USD which reduced the competitiveness of Japanese exports in Asian markets
The Asian crisis, with the effects of the economic recession in several Asian countries, did not hinder the growth of international capital markets. After Asia and Latin America, the crisis hit Uncle Sam’s country where in the 2000s banks and financial institutions provided many conveniences to the public, including people who were actually not eligible for low interest mortgage loans at first (subprime mortgage) . The debtors turned out to apply for loans to finance home loans which were then sold for profit without considering the prospect of real estate sales. At first the transactions were profitable as demand for housing soared but with the saturation of the real estate market, house prices “plummeted” resulting in defaults among borrowers.
The credit facilities provided with speculative guarantee instruments had fatal consequences with the collapse of the US capital market. Banks, financial institutions and companies engaged in the real sector, especially automotive (because they have bank loans) in the United States were affected. With the interconnectedness of the capital market, the financial crisis in the United States quickly caused economic turmoil in many countries in the European Union and Asia.