KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

UNIT III
International Financial Environment and International Accounting Practices:

Foreign investments-Pattern, Structure and effects; Movements in foreign exchange and

interest rates and then impact on trade and investment flows.
Introduction, International Accounting Standards, Accounting for International Business,
International Regulatory Bodies, International Financial Reporting Standards

Foreign investment

Foreign investment is when a domestic investor decides to purchase ownership of an asset in a

foreign country. It involves cash flows moving from one country to another to execute the
transaction. If the ownership stake is large enough, the foreign investor may be able to influence
the entity's business strategy.

Foreign investment refers to the investment made by individuals, companies, or governments

from one country in assets or projects located in another country. These investments can take
various forms, including buying stocks or bonds in foreign companies, establishing subsidiaries
or joint ventures abroad, or acquiring real estate or infrastructure projects.

Foreign investment plays a significant role in the global economy, as it promotes economic
growth, fosters international trade, and facilitates the transfer of technology, skills, and know-
how across borders. It allows countries to access capital, expertise, and new markets,
contributing to job creation, infrastructure development, and innovation.

Governments often welcome foreign investment through policies and incentives designed to
attract investors, such as tax breaks, streamlined regulations, and investment protection
agreements. However, foreign investment can also raise concerns about national sovereignty,
economic dependency, and potential negative impacts on local industries, labor standards, and
the environment. Thus, managing foreign investment requires a balance between maximizing
its benefits and mitigating its risks.

Foreign Investment - Pattern

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Foreign investments can follow various patterns, influenced by factors such as economic
conditions, market opportunities, government policies, and investor preferences. Some
common patterns include:

Portfolio Investment: Investors purchase stocks, bonds, or other financial assets in foreign
markets without seeking to control or manage the companies in which they invest. Portfolio
investments offer diversification benefits and can be more liquid than direct investments. They
are often driven by factors such as interest rates, exchange rates, and market sentiment.

Foreign Direct Investment (FDI): This involves establishing or acquiring a lasting interest in
a foreign enterprise with the intent of exerting significant control over its management. FDI
can take the form of greenfield investments (building new facilities), mergers and acquisitions
(buying existing businesses), or joint ventures (partnerships with local companies). FDI is
driven by factors such as market access, cost advantages, technology transfer, and regulatory
environment.

Strategic Investments: Investors target specific industries or sectors in foreign markets based
on their long-term growth prospects, technological advancements, or synergies with existing
operations. These investments often aim to gain a competitive advantage, expand market share,
or access critical resources or capabilities.

Infrastructure Investments: Foreign investors may focus on developing or acquiring

infrastructure projects such as transportation, energy, telecommunications, and utilities in
foreign countries. These investments typically require significant capital and involve long-term
commitments but offer stable returns and contribute to economic development and
connectivity.

Resource Investments: Investors may target countries rich in natural resources such as oil,
gas, minerals, or agricultural land, seeking to secure access to raw materials, diversify their
resource base, or capitalize on commodity price fluctuations. These investments can be subject
to geopolitical risks, environmental concerns, and regulatory challenges.

Market Entry Strategies: Companies adopt various entry strategies when expanding into
foreign markets, including exporting, licensing, franchising, contract manufacturing, and

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

setting up wholly-owned subsidiaries. The choice of strategy depends on factors such as market
size, competition, regulatory barriers, and distribution channels.

Global Value Chains (GVCs): Foreign investments are often part of global value chains,
where different stages of production are located in different countries to maximize efficiency
and cost savings. Companies may invest in foreign operations to access inputs, leverage
comparative advantages, or serve regional markets more effectively.

Understanding these patterns helps policymakers, businesses, and investors navigate

the complexities of global investment flows and capitalize on opportunities while managing
risks and challenges associated with cross-border investments.

The structure and effects of foreign investment

The structure and effects of foreign investment can vary significantly depending on factors
such as the type of investment, the sector involved, the scale of investment, and the
characteristics of the countries involved. However, some general structures and effects can be
identified:

Structure of Foreign Investment:

Ownership Structure: Foreign investment can take the form of direct ownership (e.g., acquiring
a controlling stake in a company), portfolio investment (e.g., buying stocks or bonds), or other
financial instruments.

Sectoral Focus: Foreign investment can target various sectors, including manufacturing,
services, natural resources, infrastructure, and technology, depending on factors such as market
conditions, regulatory environment, and investor preferences.

Modes of Entry: Foreign investment can be made through greenfield investments (building
new facilities), mergers and acquisitions (acquiring existing companies), joint ventures
(partnerships with local firms), or other entry strategies.

Geographical Distribution: Foreign investment flows can be concentrated in specific regions

or countries based on factors such as market size, growth potential, political stability, and
proximity to home markets.

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Effects of Foreign Investment:

Economic Growth: Foreign investment can stimulate economic growth by increasing capital
formation, productivity, employment, and income levels. It can also promote technology
transfer, knowledge spillovers, and innovation, contributing to long-term economic
development.

Trade and Competitiveness: Foreign investment can enhance a country's trade

competitiveness by improving access to foreign markets, integrating into global value chains,
and upgrading local industries and infrastructure. However, it may also lead to trade imbalances
or competition with domestic firms.

Infrastructure Development: Foreign investment in infrastructure projects such as

transportation, energy, telecommunications, and utilities can improve connectivity, efficiency,
and quality of life, benefiting both local communities and businesses.

Human Capital Development: Foreign investment can facilitate skills development and
capacity building through training programs, technology transfer, and knowledge sharing,
enhancing the quality of the local workforce and supporting sustainable development.

Income Distribution: Foreign investment can affect income distribution within a country,
leading to disparities between regions, sectors, and social groups. It may exacerbate inequalities
if benefits are unevenly distributed or if local communities are marginalized.

Environmental and Social Impacts: Foreign investment can have environmental and social
impacts, including changes in land use, resource depletion, pollution, displacement of
communities, and cultural disruptions. Responsible investment practices and regulatory
frameworks are essential to mitigate these risks and promote sustainable development.

Political and Strategic Considerations: Foreign investment can have geopolitical

implications and shape diplomatic relations between countries. It may raise concerns about
national security, sovereignty, and dependency, leading to debates over regulatory frameworks
and investment policies.

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Understanding the structure and effects of foreign investment is crucial for policymakers,
businesses, and communities to maximize its benefits while addressing potential risks and
challenges. Balancing economic development objectives with social and environmental
considerations is essential to ensure that foreign investment contributes to inclusive and
sustainable growth

Movements in foreign exchange rates and interest rates.

Movements in foreign exchange rates and interest rates can significantly impact trade and
investment flows, both domestically and internationally. Here's how:

Foreign Exchange Rates:

Export Competitiveness: A depreciation of a country's currency can make its exports cheaper
in foreign markets, boosting export competitiveness and increasing export volumes.
Conversely, an appreciation can make exports more expensive and less competitive.

Import Costs: Currency depreciation can raise the cost of importing goods and services,
leading to higher import prices. Conversely, currency appreciation can lower import costs,
benefiting consumers and businesses reliant on imported inputs.

Trade Balances: Changes in exchange rates can influence a country's trade balance by
affecting the relative attractiveness of exports and imports. A weaker currency may improve
the trade balance by stimulating exports and reducing imports, while a stronger currency may
have the opposite effect.

Foreign Direct Investment (FDI): Exchange rate movements can impact the attractiveness of
foreign investment opportunities. A depreciating currency may make foreign assets cheaper for
foreign investors, encouraging FDI inflows. Conversely, an appreciating currency may reduce
the attractiveness of foreign investments.

Interest Rates:

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Borrowing Costs: Changes in domestic interest rates affect borrowing costs for businesses and
consumers. Higher interest rates can discourage borrowing and investment, leading to slower
economic growth and reduced demand for imports. Lower interest rates, on the other hand, can
stimulate borrowing and investment, boosting economic activity and import demand.

Capital Flows: Interest rate differentials between countries influence capital flows and
exchange rates. Higher interest rates in one country relative to another may attract capital
inflows, leading to currency appreciation. Conversely, lower interest rates may lead to capital
outflows and currency depreciation.

Investment Decisions: Interest rate changes can impact investment decisions by altering the
cost of capital and expected returns on investment. Higher interest rates may dampen
investment activity, particularly in interest-sensitive sectors such as real estate and
construction. Lower interest rates may stimulate investment and economic growth.

Foreign Investment: Changes in domestic interest rates relative to those in other countries can
affect the attractiveness of foreign investment opportunities. Higher domestic interest rates may
attract foreign capital inflows, leading to currency appreciation and increased investment
activity. Lower domestic interest rates may have the opposite effect.

Overall, movements in foreign exchange rates and interest rates play a crucial role in shaping
trade and investment flows by influencing the relative costs and returns of engaging in
international transactions. Understanding these dynamics is essential for policymakers,
businesses, and investors to anticipate and respond effectively to changes in the global
economic environment.

Introduction to International Accounting Standards (IAS)

Introduction to International Accounting Standards (IAS) and International Financial

Reporting Standards (IFRS):

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

International Accounting Standards (IAS) and International Financial Reporting Standards

(IFRS) are a set of accounting principles and standards developed by the International
Accounting Standards Board (IASB). They provide a common framework for the preparation
and presentation of financial statements, ensuring consistency, comparability, and transparency
in financial reporting across countries and industries.

The adoption of IAS and IFRS promotes harmonization of accounting practices worldwide,
facilitating international investment, trade, and economic integration. These standards are used
by companies operating in diverse industries and jurisdictions, ranging from multinational
corporations to small and medium-sized enterprises (SMEs).

Key features of International Accounting Standards and International Financial

Reporting Standards include:

Principles-Based Approach: IAS and IFRS are based on principles rather than rules, allowing
flexibility in application while ensuring the faithful representation of financial performance
and position. This principles-based approach promotes professional judgment and requires
companies to consider the substance of transactions rather than their legal form.

Global Convergence: The IASB works towards convergence with other standard-setting
bodies, such as the Financial Accounting Standards Board (FASB) in the United States, to
develop a single set of high-quality, globally accepted accounting standards. This convergence
reduces complexity, costs, and inconsistencies in financial reporting for multinational
companies operating across borders.

Comprehensive Coverage: IAS and IFRS cover various aspects of financial reporting,
including the recognition, measurement, presentation, and disclosure of assets, liabilities,
equity, income, expenses, and cash flows. They address complex accounting issues such as
business combinations, financial instruments, revenue recognition, leases, and fair value
measurement.

Disclosure Requirements: IAS and IFRS emphasize the importance of providing relevant,
reliable, and timely information to users of financial statements. They require companies to

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

disclose significant accounting policies, judgments, estimates, and risks, enabling stakeholders
to make informed decisions about investments, lending, and resource allocation.

Continual Evolution: The IASB regularly updates and revises International Accounting
Standards and International Financial Reporting Standards in response to changes in business
practices, regulatory requirements, and stakeholder feedback. This ongoing process ensures
that the standards remain relevant, responsive, and of high quality in a dynamic and evolving
global environment.

Adopting International Accounting Standards and International Financial Reporting Standards

offers numerous benefits, including enhanced comparability, transparency, and credibility of
financial information, improved access to global capital markets, reduced compliance costs,
and increased investor confidence. However, implementation challenges such as training,
system upgrades, and regulatory complexities may arise, requiring careful planning and
coordination by companies and regulatory authorities.

Overall, International Accounting Standards and International Financial Reporting Standards

play a vital role in promoting financial stability, accountability, and trust in the global economy,
contributing to sustainable economic growth and development.

Accounting for International Business

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Accounting for International Business involves managing financial transactions and reporting
requirements across borders to facilitate operations, comply with regulations, and provide
stakeholders with accurate and relevant information. Here are key aspects of accounting for
international business:

Currency Conversion: Companies engaged in international business must deal with multiple
currencies. Accounting systems need to handle currency conversion accurately to consolidate
financial statements and report results in a common currency, usually the reporting currency of
the company.

Foreign Exchange Risk Management: Fluctuations in exchange rates can impact the financial
performance of international businesses. Accounting practices may involve hedging strategies
to manage foreign exchange risk, including forward contracts, options, and currency swaps.

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

International Taxation: Accounting for international business includes compliance with tax
laws and regulations in multiple jurisdictions. Companies must navigate complex tax regimes,
transfer pricing rules, and tax treaties to optimize tax efficiency while ensuring compliance
with legal requirements.

Transfer Pricing: Intra-company transactions between subsidiaries of multinational

corporations must adhere to transfer pricing regulations to ensure that prices for goods,
services, and intellectual property are set at arm's length. Accounting practices must accurately
reflect these transactions in financial statements to comply with tax regulations and reporting
standards.

Cross-Border Investments: Accounting for cross-border investments, including mergers,

acquisitions, and joint ventures, involves evaluating and reporting the financial impact of these
transactions. This includes assessing the fair value of assets and liabilities acquired, goodwill,
and any associated intangible assets.

International Financial Reporting Standards (IFRS): Many countries have adopted IFRS,
a set of accounting standards issued by the International Accounting Standards Board (IASB),
for financial reporting. Companies engaged in international business must comply with IFRS
or local Generally Accepted Accounting Principles (GAAP) and reconcile differences between
accounting standards when operating in multiple jurisdictions.

Regulatory Compliance: International businesses must comply with various regulations,

including financial reporting requirements, disclosure rules, and corporate governance
standards, in each country where they operate. Accounting practices must ensure compliance
with local regulations while maintaining consistency with global standards.

Cultural and Legal Differences: Accounting for international business involves navigating
cultural differences, language barriers, and legal systems in different countries. Accounting
practices may need to be adapted to accommodate these differences while maintaining accuracy
and transparency in financial reporting.

Cross-Border Transactions: Accounting for cross-border transactions, such as exports,

imports, and foreign investments, requires tracking and reporting financial flows accurately.

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

This includes recording revenue, expenses, assets, and liabilities related to international
transactions in accordance with accounting principles and standards.

Overall, accounting for international business requires a deep understanding of global financial
markets, regulatory frameworks, and cultural differences. Effective accounting practices ensure
that international businesses can manage financial risks, comply with regulations, and provide
stakeholders with transparent and reliable financial information.

International Regulatory Bodies

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

Several international regulatory bodies play significant roles in overseeing various aspects of
global commerce, finance, trade, and standards. Here are some prominent ones:

International Monetary Fund (IMF): The IMF promotes international monetary

cooperation, exchange rate stability, and balanced economic growth. It provides financial
assistance, conducts economic surveillance, and offers policy advice to member countries.

World Bank Group: Comprising the International Bank for Reconstruction and Development
(IBRD) and the International Development Association (IDA), the World Bank provides
financial and technical assistance to developing countries for development projects, poverty
reduction, and infrastructure development.

World Trade Organization (WTO): The WTO facilitates international trade by establishing
rules, resolving trade disputes, and negotiating trade agreements among its member countries.
It aims to promote free and fair trade while addressing trade barriers and discriminatory
practices.

Financial Stability Board (FSB): The FSB coordinates and monitors the implementation of
international financial regulatory reforms to enhance financial stability. It assesses
Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE
 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

vulnerabilities in the global financial system, develops policy recommendations, and promotes
regulatory consistency across jurisdictions.

International Accounting Standards Board (IASB): The IASB develops and issues
International Financial Reporting Standards (IFRS) to harmonize accounting practices and
improve the transparency and comparability of financial reporting worldwide.

International Organization of Securities Commissions (IOSCO): IOSCO brings together

securities regulators from around the world to promote investor protection, market integrity,
and efficient capital markets. It develops international standards for securities regulation and
facilitates cooperation among regulators.

Basel Committee on Banking Supervision (BCBS): The BCBS sets global standards for
banking regulation, particularly in areas such as capital adequacy, risk management, and
liquidity requirements. Its Basel Accords provide a framework for prudential supervision of
banks and aim to strengthen the stability of the international banking system.

International Labour Organization (ILO): The ILO sets international labor standards and
promotes decent work and social justice globally. It develops conventions and
recommendations on labor rights, employment, social protection, and workplace conditions.

International Maritime Organization (IMO): The IMO regulates international shipping to

ensure safety, security, and environmental protection. It develops and adopts regulations and
standards for the prevention of marine pollution, maritime safety, and the efficient operation of
vessels.

These international regulatory bodies collaborate with governments, businesses, and other
stakeholders to address global challenges, promote sustainable development, and facilitate
cooperation in various fields of international governance.

International Financial Reporting Standards (IFRS)

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

International Financial Reporting Standards (IFRS) are a set of accounting standards developed
by the International Accounting Standards Board (IASB). They are designed to provide a
common global language for financial reporting, allowing companies to produce transparent
and comparable financial statements across borders and industries. Here's an overview of IFRS:

Global Adoption: IFRS are used by over 140 countries, including members of the European
Union, Australia, Canada, Japan, and many emerging economies. While some countries adopt
IFRS as their primary accounting standards, others allow or require the use of IFRS for listed
companies or specific industries.

Principles-Based Approach: IFRS are based on principles rather than detailed rules, allowing
for flexibility in application while ensuring the faithful representation of financial performance
and position. This principles-based approach promotes professional judgment and requires
companies to consider the substance of transactions rather than their legal form.

Comprehensive Coverage: IFRS cover various aspects of financial reporting, including the
recognition, measurement, presentation, and disclosure of assets, liabilities, equity, income,
expenses, and cash flows. They address complex accounting issues such as business
combinations, financial instruments, revenue recognition, leases, and fair value measurement.

Consistency and Comparability: IFRS aim to improve the consistency and comparability of
financial statements by providing standardized guidelines for accounting treatment. This

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE

 KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE

Class: III BCOM PA Course Name: INTERNATIONAL BUSINESS

Course Code: 22PAU504B Semester V Year: 2022Batch

facilitates decision-making for investors, creditors, regulators, and other stakeholders by

ensuring that financial information is reliable, relevant, and easily understandable.

Disclosure Requirements: IFRS emphasize the importance of providing relevant, reliable, and
timely information to users of financial statements. They require companies to disclose
significant accounting policies, judgments, estimates, and risks, enabling stakeholders to make
informed decisions about investments, lending, and resource allocation.

Convergence Efforts: The IASB works towards convergence with other standard-setting
bodies, such as the Financial Accounting Standards Board (FASB) in the United States, to
develop a single set of high-quality, globally accepted accounting standards. This convergence
reduces complexity, costs, and inconsistencies in financial reporting for multinational
companies operating across borders.

Ongoing Development: The IASB continually updates and revises IFRS in response to
changes in business practices, regulatory requirements, and stakeholder feedback. This ongoing
process ensures that the standards remain relevant, responsive, and of high quality in a dynamic
and evolving global environment.

Overall, IFRS play a vital role in promoting financial stability, accountability, and trust in the
global economy, contributing to sustainable economic growth and development. They provide
a framework for transparent and comparable financial reporting, enhancing investor confidence
and facilitating cross-border investment and trade.

Prepared by Dr. M.P. PRATHIBA, Assistant Professor, Dept of Commerce, KAHE