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Multinational Corporate Finance Essay


Multinational Corporation (MNC) is a business institution which operates it business activities (selling good o services) in more than one country. Therefore, a multinational corporation plays an important role in globalization. Operations of multinational corporations are stimulated by economical and political factors (Ross, Westerfield, & Jordan, 2008).

Therefore, multinational corporations involve high risks at both domestic and international levels. These issues faced by MNCs at domestic and global levels involve globalization strategies, exchange rate, international market, and taxation policies etc. The aim of this document is to study these issues faced by MCNs. International companies involve higher rate of risks and benefits. Therefore, the document shall also discuss differences between risks and benefits that MNC faces.

Exchange Rate

Multinational companies operate in different regions of the world. Their branches located in different regions face variations in the currency exchange rate. The fluctuation in the currency rate is one of the major challenges a multinational corporation faces. Foreign exchange risk involves unanticipated changes in the exchange rate between different currencies.

Therefore, multinational corporations carefully analyze risks involved in the exchange rate (Chong, 2004). If the company’s home office is situated in the US, and the other branch is in Japan, and if the US dollar rate falls as compared to the Japanese yen, the anticipated profit will proportionately fall.

One of the major exchange rate risks involves the transaction exposure. Every multinational company has contractual cash flows. These involve receivables and payables of the company. The unexpected change in the exchange rates may affect the actual value of the contractual cash flow. The contraction in the domestic value of the currency may affect the foreign denominated cash flows of the company (Chong, 2004). The fluctuation in the domestic and foreign currencies influences the actual cash flow of the company.

Operating Exposure

The degree of change in the market value based on the economical market conditions and presence of competitors is known as operating exposure of exchange rate. This is one of the risks that a multinational company encounters (Ross, Westerfield, & Jordan, 2008). This involves changes in the market position, share value, etc.

Operational exposure affects the present and future values of the cash flow. If the company’s operation has remained effective and the foreign currency fluctuated negatively in comparison to the domestic currency (Ross, Westerfield, & Jordan, 2008) then it may adversely affect the market value of the company’s share in the international market.

Translation Exposure

Multinational corporations prepare consolidated financial statements to determine their overall profitability. According to the international standards, multinational companies are required to prepare consolidated financial reports (Ross, Westerfield, & Jordan, 2008).

This allows companies to entail their foreign assets and liabilities. In the process of preparing consolidated financial statements, the fluctuation in the exchange rates may impact reported earnings and cash flow (Drucker, 2009). It may have significant impact on the firm’s stock prices and market value. Translation expose may result in an excessive income or loss.

Exchange rate risk plays an important role for multinational corporations to evaluate their performance generated by their subsidiaries (Drucker, 2009). Major fluctuation in the domestic or the foreign currency affects profits, operations, present value, and cash flows of the company.

Multinational Corporations and Global Business

With an increased penetration of multinational corporations in the international markets there has been significant liberation of trade in internationally. This has certainly created a confusing and unbalanced scenario for governments and MNC’s as both of them are main players in the game of economic globalization.

t has been evidenced from history that a great part of globalization is steered by multinational corporations. The present century has been termed as the corporate century as the number of different multinationals making entry into the international market has increased enormously.

According to a report conducted by the UN, the number of multinational corporations was 45,000 in 2001, which were monitoring and operating 280,000 foreign associates. A report presented by the UN World Investment indicated that in 2006 77,000 multinationals were working across the globe having more than 770,000 subsidiaries and millions of dealers, suppliers, and employees (Nerisesian, 2004).

Through this, it becomes evident that globalization of the current era economy is still in progress and with it challenges for multinational companies are increasing rapidly. However, issues connected with globalization and multinational corporations are numerous such as cross culture adaption, human rights etc.

It can be undoubtedly said that at present multinationals are the key factor in the global economy. However, these multinationals face a number of issues to operate and keep the global economy stable. A strong relationship and understanding should be developed between the society and businesses. It is necessary because business decisions and social / local policies should be synchronized.

Similarly, the profit and benefits should be shared unequivocally. If there exists a problem in the mutual relationship or understanding then it becomes complicated for multinational corporations to work in that particular society (Drucker, 2009). Other than that here are some other issues which may arise when multinational corporations enter global markets.

Goal of the Multinational Corporations and the Host Country

The goals of a multinational corporation that it set for the home country may have to alter or change at times depending on the policies or the system existing in the host country (Gustavson & Harrington, 1994).

Employees Relationship

Local:

Recruitment and training of the local staff / workforce is a difficult task which multinational corporations have to face when grounding their roots in some other country. Staff training is a complex process as individuals may not be familiar with the equipments installed, language used, and corporate attitudes (Moerel, 2012).

International:

Not only in the case of local employees, but international employees who are sent by the multinational corporation from the home country to the host country also face problems and barriers while settling in the new society and culture. They might face issues with the regional language, culture, and ethics etc. In order to work with the local workforce present there they have to become familiar with them completely (Moerel, 2012).

Stakeholders of Multinational Corporations

While launching operations (business) in another country along with adaptation of goals and policies, multinational corporations also have to focus on their stake holders. As stakeholders play a vital role in the business of any organization / corporation therefore it is very important to stabilize the relationship with them in any case (Drucker, 2009).

Taxation Policy Risks

Multinational corporations typically aim to establish their subsidiary branches in countries where the labor is cheap and tax burden is less (Maginn & Tuttle, 2010). Higher tax burden decreases profit margins of multinational companies. Therefore, the taxation policy of the domestically located branch and foreign branches affect profit margins of corporations.

Political Risks

Multinational companies are stimulated by domestic and international politics. It is therefore clear the international politics scenario does have direct affect on the business and its profitability for MNS’s (Chong, 2004). Political risks that a corporation may face include adverse political decisions made by the host country. This may affect the goals, performance, and profitability of the corporation. Political risks can be classified into 1) macro political risks and 2) Micro political risks.

Macro political risks

The political event occurred in the host company affecting all foreign firms in the country is referred to as macro political risks (Maginn & Tuttle, 2010). All industries and sectors are affected in the country by such an event. This may include ban of a particular country’s business due to the political event occurred in the country.

Micro political risk

Political event in the host country affecting a particular industry or a particular firm is referred to micro political risk. Not all foreign companies are affected, but certain industries in a particular sector are affected (Chong, 2004). These are firm specific risks that a corporation may encounter in the host country.

Systematic Risk

Systematic risks are involuntary risk. They are macro in nature and are incontrollable by the organization (Maginn & Tuttle, 2010). This is because of the reason that these kinds of risks are generated through the system and are influenced by external factors. Therefore, they affect a large number of organizations in the same industry or region. This may involve in:

Interest Rate Risk

The fluctuation in the interest rate policies with the time causes great affect on the interest policies of the company (Drucker, 2009). This affects prices of shares, commodities and investments. Further, it also affects reinvestments of the companies like interest earnings and dividends.

Market Risk

Market risks involve the fluctuation in the trading prices of commodities, securities or shares (Clayman, Fridson, & Troughton, 2011). The corporation may face loss in the trading of securities, stocks and foreign investment.

Purchasing Power / Inflation Rate Risks

Inflation risk has direct implications on the purchasing power of individuals therefore it is also so known as purchasing power risk. This is a type of systematic risk that evolves with the inflation rate under a particular economy. It affects the purchasing power of the raw materials, securities, etc. It greatly affects demand and cost risks of the corporation (Nerisesian, 2004).

Unsystematic Risks

Corporations may also face unsystematic risks. These risks are voluntary are dependent on the functioning of companies. These risks are controllable by organizations and can be controlled. This may involve in the leverage, liquidity, credit and operational risks (Ross, Westerfield, & Jordan, 2008).

Liquidity risks

Liquidity risks refer to the risk evolved by the poor performance of an organization. This risk may arise by the inability of the organization to sell or utilize its assets and resources (Nerisesian, 2004). This risk may arise if the company falls short of funds to meet its expenditures and carry out its operational activities.

Credit risks

Credit risks occur when the capital structure of the organization changes (Chong, 2004). This may arise when the company fails to meet its obligations or to recover against sales and receivables.

Operation risks

Any obstacle or issues arising due to human errors in business activities causes the operations to fail or collapse it is known as operations risk (Ross, Westerfield, & Jordan, 2008). The risk may arise if the employee, employer, policies, and internal system collapse. This may cause the business operation to fail.

Difference between Risks and Benefits for Multi National Corporation

However, MNC’s face less local turnover as compared to companies which are operating in only one country but other risks and threats are far greater and important for MNCs to focus on. When corporations work in more than one country then that automatically generates a pool of large number of customers and thus, increasing their profit. MNC’s also have potential risks which can endanger profits and benefits (Nerisesian, 2004).

Talking about Multinational corporation risks and benefits are two diverse fields to discuss. Risks are those threats and issues which a MNC may face during its operations or launch and they can harm its business in different ways. On the other side, benefits are those advantages which MNC’s may avail as a result of their successful operations and generates revenue.

Risks and benefits are both entirely different and Multi National Corporations focuses on both of them very seriously as either of them are very significant for the corporation. However, risks are catered and addressed more seriously as compared to benefits.

This does not at all mean that benefits are less important, this only means that risks can harm the business and can affect the operations and its benefits therefore it is the first priority of MNC’s to spot any risk and to address them immediately. Risks have a direct impact on the benefits and output of an corporation, therefore MNC’s first avoid risks and then focus on their benefits and ways through which they can increase their benefits and outputs (Gustavson & Harrington, 1994).

The risks are diverse and present in every field as they have already been aforementioned in this paper. However, competition is one of the serious risks in the present corporate world. MNC’s can achieve benefits through their operations and other means.

All these benefits are a form of competitive advantage and they result in better revenues or productivity which ensures stability of the company. Every MNC focuses on to increase its benefits by all means so that they can do business in an effective and successful manner and avoid the risk factor, decrease it to the lowest possible level, or eventually eliminate it (Moerel, 2012).

Thus, it can be said that it is not easy for multinationals to survive and maintain their stability. They have to keep in mind different issues and stay focused on these issues. Measures should be reformed to avoid risk factors to avoid serious threats to MNC’s business and profit. However, risk and profit are important considerations which MNC’s have to address simultaneously at the same time without neglecting either of them.

Reference List

Chong, Y. Y. (2004). Investment Risk Management. Wiltshire: John Wiley & Sons.

Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2011). Corporate Finance: A Practical Approach. New York: John Wiley & Sons.

Drucker, P. (2009). Concept of the Corporation. New Jersey: Transaction Publishers.

Gustavson, S. G., & Harrington, S. E. (1994). Insurance, Risk Management, and Public Policy. New York: Springer.

Maginn, J. L., & Tuttle, D. L. (2010). Managing Investment Portfolios: A Dynamic Process. New Jersey: John Wiley & Sons.

Moerel, L. (2012). Binding Corporate Rules: Corporate Self-Regulation of Global Data Transfers. London: Oxford University Press.

Nerisesian, R. L. (2004). Corporate Financial Risk Management. Westport: Greenwood Publishing Group.

Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of Corporate Finance. New York: Tata McGraw-Hill Education.

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