Summary
Wendy Jeffus wrote the article “International Capital Markets, Asset Pricing and Financing the Firm.” The article focuses on international diversification (Jeffus, 2005). With respect to the international asset pricing and portfolio theory, the author centers on the diversification benefits and cost. The author asserts that Harry Markowitz pioneered the concept of diversification in the mid 20th century. Markowitz’s concepts were supported by modern portfolio theory. In the article, two differing views on the value of international diversification have been highlighted. The initial view agrees that international diversification decreases risk. On the other hand, the second view suggests that diversification is essential to every organization; however, the extra qualitative risks of investing out of the country overrides the prospective returns. The major challenges linked with investing overseas are the diversification cost, which is comprised of currency risks, information costs, legal fees, and political risks.
With entrance to international markets, companies can decrease their capital cost (Jeffus, 2005). Behaviors such as mergers, acquisitions, and foreign direct investments that reduce the capital cost are realized with entry into the international markets. Equally, the article asserts that market liberalization is realized when diversification occurs. With diversification, more markets will be opened up, leading to market deregulation. Before the early 1990s, several emerging markets had not been opened up to foreign investors. However, deregulation of various emerging markets took place after the period. Another attribute associated with liberalization in the article is the reduction of systematic risk.
According to the article, there are numerous ways of getting involved in the global markets (Jeffus, 2005). One of these ways is by investing in foreign shares. Another means of entering the international market is through international depository receipts. Under the contagion section, the author asserts that cross-country transmission of shock can occur regardless of the economic times. Similarly, in the section, financial, real, and political links are mentioned (Jeffus, 2005). Financial link occurs when a number of economies are coupled via the global financial structures. On the other hand, the real link is realized when an economic relationship between two countries exists.
Opinion
In recent days, globalization has made multinational transactions possible. Through this, it is feasible for a local company conducting business globally to benefit from both monetary and non-monetary capital provided by the cross-border provider. This section focuses on how such a company can fulfill its goals by tapping into the available momentary capital provided by a cross-border source.
Monetary capital provided by a cross-border source can enhance a domestic firm doing business globally in a number of ways. Through the above, the target firm can expand its operations because foreign investments come with new technologies and innovations enabling it to diversify the ownership of capital. With foreign investments such as equity investment, loans, and grants, a domestic company can invest in more complex and riskier businesses, which could not have been possible without the external funds. Through this diversification, the target firm can increase its output and returns. Through cross-border monetary capital flows, a local farm in developing countries doing business globally can receive foreign financial investment enabling it to diversify its operations and adopt modern farming methods. By doing so, it would be able to increase its farm outputs and consequently the returns. Based on the above illustrations, it is apparent that domestic companies greatly benefit from cross-border capital flows.
Reference
Jeffus, W. (2005). International Capital Markets, Asset Pricing and Financing the Firm. New York: Routledge.