Question

1. What are the reasons for international capital markets? Explain each reason.

2. What is an offshore center? Why do you think that attracts a lot of business activities?

Answer 1

ANSWER 1 - International capital markets are beneficial in following ways -

1. Cheaper borrowing costs coupled with high returns - encourage companies to tap into foreign markets and access new sources of funds. Many domestic markets prove too costly for companies to borrow money. By using the international capital markets, companies can borrow or invest in other countries for higher rates of return as well as lower borrowing costs.
2. Diversification of associated risk - international capital markets allow companies to access more opportunities in different countries to borrow / invest, which in turn reduces risk by diversification. It is unlikely that all economies of different countries enter a rough phase simultaneously.
3. Technology advancements - expansion of technology into global finance has opened new opportunities to investors and companies around the world. Communications technology like Internet have provided efficient and cheaper means of trading stocks.
4. Deregulation by governments - has facilitated growth in international capital markets. Restrictions involved in foreign investments have been reduced across the world leading to development of concept of one world one market.

ANSWER 2 - Offshore Centers are situated, or registered abroad (in some country other than country of origin).They attract a lot of business activities because of following reasons –

• Tax Advantages - Some countries try to attract foreign business investors by offering them very low corporate tax rates. Hence, investors end up paying out lesser tax and saving more of the revenue the business generates.
• Increased Confidentiality - Its not mandatory for non-resident companies to disclose financial information or the details of directors and shareholders in some countries. As long as no criminal/ terrorist activity is suspected, foreign investors can conduct their business in anonymity.
• Lowers Operating and Maintenance Costs - Since reporting requirements for offshore jurisdictions are relaxed, there is less need to hire staff or office space for compliance reasons. This reduces administration costs for compliance considerably. Investors need not pay too much for auditors, accountants and legal advice.