The paper "International Finance Risks - Multinational Companies" is an exceptional example of a business research paper.
A Multinational Company (MNC) needs to analyze risks not only in the countries where it conducts its businesses but also in countries where it exports its goods and services or establishes subsidiaries. There are many characteristics of a country’s risks that affect its performance and therefore the MNC should be aware of the impacts of each of these (Gitman, 2006).
Firms operating in a multinational arena face risks which are different than those faced by the company’s operating in a domestic market. MNC has to confront both exchange risks and political risks (Madura, 2006).
Political risks faced by an MNC include an attitude of consumers in the host country, actions of the host government, blockage of fund transfers, currency inconvertibility, war, bureaucracy, and corruption (Gitman, 2006).
Hostile Government Takeover
The most extreme form of political risks that an MNC can face in a country is the government takeover of its assets. In some cases, the assets may be confiscated completely without any compensation whereas in other some compensation may be awarded to the subsidiary (Gitman, 2006).
Government takeovers and its effects can be reduced by using short term horizons, relying on unique supplies and technology which cannot be duplicated by the local country, hiring local labor so they can pressurize the government to not take such actions, borrowing local funds, purchasing insurance and using project finance to limit the investment in the project (Fox & Madura, 2007).
War and Terrorism
This is another political risk the MNC are faced with currently. A terrorist attack can affect both the firm and its employees. After the September 11, 2001 attack on the World Trade Center, it is estimated that MNC in more than 50 countries were affected. Similarly, wars such as the war in Iraq in 2003 caused US-based MNC to temporarily shut down in some Middle Eastern countries. The demand for products also went down during this period (Fox & Madura, 2007).
Exchange risks are those concerned with the unexpected change in the exchange rate between the dollar and the currency in which the project’s cash flows are dominated will reduce the market value of that project’s cash flow (Madura, 2006).
Major sources of foreign exchange risks are imperfect correlations in the movement of currency prices and fluctuation in international interest rates. Foreign exchange risk arises from open or imperfectly hedged positions. The volatility of exchange rates can place the business at a disadvantage in comparison to competitors and also cause operation losses and hold back investments (Croughy, Galai & Mark, 2001).
To counter exchange risks MNC has various options. In the long run, MNC would have to work towards reducing and limiting risk by financing the whole project or parts of the project in the local currency (Madura, 2006). To deal with these risks it is important for the management of the MNC to have knowledge of the behavior of domestic and foreign interest rates along with the exchange rates (Croughy, Galai & Mark, 2001).
Other ways to reduce exchange risks is by using exchange exposure through currency netting, proxy hedging, and foreign currency debt, changes in purchasing and processing and transferring the exchange risk (Horcher, 2005).
Croughy, M., Galai, D. & Mark, R. (2001). Risk management. McGraw-Hill Professional.
Fox, R. & Madura, J. (2007). International financial management. Cengage Learning EMEA.
Gitman, L.J. (2006). Principle of managerial finance. Published by Addison Wesley.
Horcher, K.A. ( 2005). Essentials of financial risk management. Volume 32 of Essentials series. John Wiley and Sons.
Madura, J. (2006). International financial management. Cengage Learning.