International finance may sound like a complex, grandiose concept to some but it's quite the opposite. The phrase simply refers to any financial transaction that takes place across national borders. If money leaves one country and arrives in another, for whatever reason, the transaction falls under international finance.
International finance is any transaction where money is transmitted and received in two different countries.
What Is International Finance?
International finance is a monetary transaction that occurs between two or more countries. This sounds simple enough but in reality, transacting across national borders raises issues of currency exchange rates and the exploitation of developing economies. International finance is a way to analyze the economic status of the countries you may wish to do business with, judge the foreign markets, compare inflation rates and pay bills in a foreign currency. Without international finance, for example, you would not be able to compare currency exchange to figure out the cost of doing business abroad.
Why Do We Have International Finance?
In a nutshell, we have international finance because we live in an era of globalization. Businesses buy and sell goods abroad, countries often borrow money from each other and organizations increasingly operate on an international scale. An international system of finance helps to keep the peace between nations in this globalized world. Without a system of regulating cross-border financial transactions, each nation would act in its own self-interest. The chance of international conflict is high. Much of the economics underpinning international finance is concerned with keeping the flow of money in a disciplined state.
Who's Involved in International Finance?
The International Finance Corporation, the World Bank, the National Bureau of Economic Research and the International Monetary Fund play pivotal roles in the mediation of international finance. The World Bank, for example, provides finance and advice to assist middle-and-poor-income countries, while the IMF provides advice, policy recommendations and loans to its 189 member countries to promote economic stability. If a country needs a precautionary loan to stop it from falling into an economic crisis, it would approach the IMF.
In the private sector, the Institute of International Finance helps the international financial industry to manage risks prudently, and advocates for the type of regulation that fosters global financial stability and sustainable economic growth. Members of the institute include investment and commercial banks, insurance companies and hedge funds.
What Does International Finance Mean for Small Businesses?
If you have a branch in another country, then it's likely you'll be conducting international finance. An example would be sending money from your U.S.-based head office to your factory in Mexico City. Even though the money never changes hands – it still belongs to the company – it did cross borders. So, it's a form of international finance. Buying your raw materials abroad or selling your inventory abroad also requires an international finance transaction in the form of buying and selling. Exchange rates are mission-critical in these examples. International finance lets you discover the relative values of currencies and strike the right balance of trade.