Threats of the Global Market
With the increase in the pace of the globalization process, the significance of using the global frameworks of operation has increased significantly. Indeed, by adopting a single framework that all subsidiaries have to comply with, an organization provides the set of rules that introduces order to the corporate environment. As a result, the essential processes can be run at a comparatively fast pace and the information analysis remains uninterrupted. However, one must admit that the global capital structure has its problems, and the local one is often preferred as the superior one in the context of the global market. The reasons for the identified phenomenon include the necessity to adapt to the unique characteristics of the legal, political, social, and economic environment of the target country.
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Indeed, when carrying out the essential financial transactions in an unfamiliar environment, a company is likely to find the specifics of the local legal standards rather convoluted. A firm that adopts a flexible “local” approach and can customize its operations of the realm of a particular state is likely to avoid a variety of misconceptions with the representatives of the market, the legal system, the buyers, etc. (Eitemann, Stonehill, & Moffett, 2013). Thus, building the competitive advantage that will help the firm take over the market and attract as many customers as possible will become an opportunity once the organization is not bound by the lack of knowledge of the essential regulations, traditions, communication specifics, etc. Therefore, it is imperative that a local capital structure should be viewed as the priority when aiming at exploring the global economy realm (Dinger, 2013).
Stock Market Issues
By applying the local framework, the leaders of the company will also be able to place their stocks in the specified country successfully. In fact, when carrying out business transactions with multinational corporations, one may prefer the local capital structure as opposed to the global one even when the financial situation is comparatively stable. It should be borne in mind, though, that the choice between the global and the local capital structure hinges on the characteristics of the state in which the financial transactions are carried out to a considerable degree. For instance, even when the global capital structure of the organization under analysis can be deemed as more balanced than the local one, the company may still prefer the latter to the former because of the underdevelopment of the stock market in the identified country (OECD, 2013).
Furthermore, the issues associated with a rise in the exchange rates need to be addressed when choosing between the two options. It is true that when using the local capital structure as the foundation for the trading processes, as well as the associated transactions, one must bear in mind that the identified step exposes the company to a high interest rate on debt. Nevertheless, by borrowing in dollars, one is likely to cause the company to face a huge exchange rate risk. As a result, the organization may suffer impressive losses, which means that the local capital structure is viewed as preferable to the global one (Forssbaeck & Oxelheim, 2014).
Operating in the environment of the global economy is fraught with numerous challenges, the threats associated with the financial transactions being the key ones. Because of the specifics of the finance-related regulations of the target countries, the process of building the local capital as the means of carrying out the associated financial actions can be viewed as rather risky (Eitemann et al., 2013). However, studies point to the fact that companies often tend to choose the local capital structure over the global one because of the opportunities that the identified choice offers when it comes to addressing the issues associated with exchange rates and the related concerns.
Furthermore, by considering the use of the local capital structure as the means of structuring one’s financial framework in the environment of the target market, one creates the opportunities for introducing a better balance in the framework for managing the financial assets of the company (Eitemann et al., 2013). Therefore, while the local capital structure may have disadvantages, especially as far as the issue of state debt is concerned, it definitely helps when addressing the problems related to the exchange rates. As a result, the choice of the local currency as the foundation for the capital structure allows an organization to adjust to the specifics of the target market and establish a stronger presence in it, thus creating prerequisites for successful performance in it.
Dinger, H. (2013). Global strategies in banking and finance. New York, NY: IGI Global.
Eitemann, D. K., Stonehill, A. I., & Moffett, M. H. (2013). Multinational business finance (13th ed.). Upper Saddle River, NJ: Pearson.
Forssbaeck, J., & Oxelheim, L. (2014). The Oxford handbook of economic and institutional transparency. Oxford, UK: OUP.
OECD. (2013). Corporate governance capital markets in Eurasia: Two decades of reform. Paris: OECD Publishing.