International Sources of Finance – 10 Major Sources Explained in Detail | Financial Management
The development and growth of economies around the world are facilitated in large part by international sources of finance. Funds from these sources can be used for a variety of purposes, including infrastructure development, trade financing, foreign direct investment (FDI), and poverty reduction.
We will examine ten major international sources of finance in this article, highlighting key examples and illustrating their significance with key examples.
International Sources of Finance
1) Multilateral Development Banks (MDBs):
International financial institutions such as the World Bank Group (WBG), the International Monetary Fund (IMF), and the Asian Development Bank (ADB) offer financial assistance to member countries for development projects. The World Bank Group has committed $47.9 billion to development projects worldwide by 2021, while the International Monetary Fund has disbursed $157 billion in response to the COVID-19 outbreak.
2) Official Development Assistance (ODA):
Governments of developed countries provide financial resources to developing nations in order to help them develop economically and reduce their poverty. According to the Organisation for Economic Co-operation and Development (OECD), ODA will total $161.2 billion in 2020, with the United States, Germany, and the United Kingdom among the top donors.
3) Foreign Direct Investment (FDI):
The foreign direct investment industry involves establishing or expanding business operations in foreign countries by investing capital. The United States, China, and the European Union are major sources of foreign direct investment. FDI inflows contribute to economic growth, job creation, and technology transfer.
As a result of the COVID-19 pandemic, global FDI flows contracted by 35% in 2020, reaching $1 trillion.
4) Sovereign Wealth Funds (SWFs):
Natural resource revenues, trade surpluses, or foreign exchange reserves are used to fund sovereign wealth funds, which are state-owned investment funds. There are a number of SWFs in the world, including the Government Pension Fund of Norway, the Abu Dhabi Investment Authority, and the Kuwait Investment Authority. By 2021, SWFs will manage more than $9 trillion in assets.
5) Export Credit Agencies (ECAs):
International trade and investment are facilitated through export credit agencies. They mitigate the risks associated with international transactions by offering financing, guarantees, and insurance. An ECA is an organization that provides financing, guarantees, and insurance to exporters. In 2020, the global commitments for ECAs will amount to $203 billion.
Examples include the Export-Import Bank of the United States, the Export Credit Insurance Corporation of South Africa, and Euler Hermes.
6) International Capital Markets:
Governments, corporations, and financial institutions use international capital markets to raise long-term funds. These markets include debt and equity markets, where entities sell bonds and shares to investors globally. International capital markets are found in major financial centers like New York, London, and Tokyo.
In 2021, global debt issuance reached a record $13.6 trillion, with the United States and China being the biggest issuers.
7) Remittances:
Individuals working abroad send funds to their home countries as remittances. Global remittance flows are estimated to total $702 billion in 2020, with the top recipients being India, China, and Mexico. They support the well-being of families in many developing nations. In addition to consumption, education, healthcare, and investment, remittances are commonly used to fund investments.
8) Impact Investing:
The purpose of impact investing is to generate positive social, environmental, and financial returns along with financial returns. A number of prominent impacts investors participate in this program, including the Global Impact Investing Network (GIIN) and Triodos Bank.
It targets sectors like renewable energy, microfinance, affordable housing, and sustainable agriculture. Approximately $715 billion will be under management in impact investments by 2020.
9) Bilateral Aid:
A bilateral aid program is a form of financial assistance given directly by one country to another, usually in support of diplomatic relations or development initiatives. The United States Agency for International Development (USAID), for instance, provides bilateral assistance to a range of countries in order to promote health, education, and democracy.
The United States will disburse approximately $25 billion in bilateral aid in 2020.
10) Philanthropic Foundations:
In philanthropy, funds are provided for social and developmental initiatives by nonprofit foundations. A number of prominent foundations, including the Bill & Melinda Gates Foundation, Ford Foundation, and Rockefeller Foundation, support a wide range of causes, such as education, healthcare, poverty alleviation, and environmental conservation.
The Bill & Melinda Gates Foundation alone had more than $50 billion in endowment by 2020.
Conclusion:
In order to promote economic development and deal with global challenges, international sources of finance play an important role. In order to facilitate trade and investment, multilateral development banks, official development assistance, foreign direct investment, and sovereign wealth funds provide significant financial resources.
International capital markets and export credit agencies facilitate trade and investment, while remittances contribute to the well-being of developing nations’ families. Understanding and leveraging these diverse sources of finance can foster sustainable and inclusive growth worldwide. Impact investing, bilateral aid, and philanthropic foundations contribute to social and environmental causes.
Key Points:
- IMF and World Bank Group are examples of multilateral development banks that provide financial assistance to development projects.
- In order to reduce poverty and promote economic development, developed countries provide financial assistance to developing countries.
- The inflow of foreign direct investment in recipient countries contributes to economic growth and job creation.
- Governments manage surplus funds and investments through sovereign wealth funds.
- Through financing and guarantees, Export Credit Agencies assist international trade.
- Through debt and equity instruments, international capital markets facilitate the raising of long-term funds.
- A remittance is a money sent home from abroad by individuals working abroad, supporting their economies and well-being.
- Along with financial returns, impact investing aims to improve the environment and social conditions.
- A bilateral aid program involves direct financial assistance between two countries.
- Social and developmental causes are supported by philanthropic foundations.
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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