How Globalization has Changed MNCs' Financial Management

How Globalization Has Changed MNCs' Financial Management
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How Globalization Has Changed MNCs' Financial Management
Introduction
Financial management at the international level has become a significant process that requires a good economic relationship between countries and the global economy in general. International financial activities need active management practices and tools as it entails not just finances, but also financial management processes. Financial management is a process of dealing with both resources and financial operation. Therefore, international financial management is one of the latest concepts being utilized by MNCs, assisting them in cross-disciplinary decision-making processes that include a holistic approach to financial planning, financial control, and financial decision –making processes. With the globalized world, Multinational Corporations currently rely on international financial management to meet their objectives of having the competitive advantage in the global marketplace at the same time maximizing shareholders’ profit (Bhalla, 2011).
Overview of Globalization and MNCs' Financial Management
Owing to the globalization, financial management is changing because of the changing market environment, business, and technological advancement. In the recent past, financial markets have become highly integrated enabling investors to diversify their investment internationally. The US investors have continuously invested in overseas markets as other countries such as the Japanese investors equally investing in the US and other countries (Nauman-Etienne, 2010). Major corporations like Sony and IBM have their share listed at the foreign stock exchange markets. At the same time, rapid internationalization of business has occurred due to increased demand of goods and services facilitated by the open border trade, globally. Everything from technology, capital, and human resource has reached top level with no single country being self-sufficient to assume the availability of the resources provided by the vast and multidimensional global village.
Currently, people are living in the world with major economic functions that are highly globalized. It is vital for multinational corporations to understand the international dimension of financial management. Multinational corporations with their worldwide production and distribution activities need to adjust to the international financial management in the light of changes in the international environment to facilitate the international trading activities (Nauman-Etienne, 2010).
The Nature and Scope of the International Financial Management
Like any other finance function, international finance of multinational corporations have two functions of treasury and control. Treasury is in charge of financial planning analysis, acquiring funds, investment financing decision and risk management, and cash management. Controls deal with functions such as external reporting, tax planning management accounting, budget planning, and information system among others (Rugman and Brewer, 2012). For multinational corporations to maximize returns from investment at the same time minimize the cost of finance, the firms have been forced to take portfolio decision based on analysis of the international markets. Since the firms raise money from various financial markets internationally, multinational corporations have come up with strategies for exploiting market by superior forecasting of the ability to generate financial gains using different strategies (Rugman & Brewer, 2012).
Even though managing international finance is complex because of a wide variety of financial mechanism, funding options, and investment options are always available to manage corporate finances. Multinational corporations are multidisciplinary in nature. Accordingly, at international levels, they need to understand the economic theories and principles in order to estimate and come up with financial decisions, management accounting processes, and financial decisions that will be of benefit to them (Nauman-Etienne, 2010). Due to the changing nature of the business environment at the international level, multinational corporations have prioritized how to gather information related to the latest changes in forex rate, the consumption patterns, the interest rate fluctuations, the export and import trends, the banking sector performance, and competition. Other information pertains to the demand and supply conditions, the volatility of the capital markets, macro level charge, general savings micro-level economic indicator, and inflationary trends to effective financial management at the global level (Nauman-Etienne, 2010).
Some of the Distinguishing Features of International Finance That Multinational Corporation Are Cautious About
International finances have certain features that are different from domestic financial management that multinational corporations need to be aware of. The first one is foreign exchange risks. Multinational corporations have been forced to adjust to the modern day environment of the unforeseen changes in foreign exchange rates (Bhalla, 2011). In the domestic economy, such risks are ignored because one single national currency serves as the main exchange medium. When different national currencies are exchanged, there is a risk of volatility in foreign exchange rates. A multinational corporation has to adopt the present International Monetary Systems floating and exchange rate policies to keep the views of the nation's interest (Bhalla, 2011). This is because exchange rates have been regarded as the most serious international financial problem facing many international corporation and policy makers. For example, presently the exchange rates among the major currencies like the US dollar, Japanese Yen, Euro and the British Pound keep on fluctuating in an unpredictable manner after fixed exchange rate was abolished. The exchange rate can affect the profit margin of the multinational corporation. MNCs have seen the importance of understanding the foreign exchange risks either to anticipate an increase in competition from imports or to value increased opportunities for exports (Strumpf, 2015).
Political risk is a common risk MNCs encounter. It ranges from the risk of loss from unforeseen government action or any other political character like acts of terrorism, which affects assets held by foreigners. One recent example is the incidence that occurred in Paris and San Bernardino, California where terrorist attack complicated efforts by the Federal Reserve to resume shipments to the United Arab Emirates (Glazer, Hilsenrath, & Fitch, 2015).
Most investment decisions by MNCS are made after analyzing the political set up of a particular country that might cause political and country specific risk. Other risks other than terrorism include tax regulation, economic, and financial environments that are mostly the outcomes of the political behavior of any country (Nauman-Etienne, 2010).
MNCs have adopted methods of assessing political risks not only in countries where they are doing business but also where they expect to establish subsidiaries. Extreme political risks can greatly affect business especially when sovereign states change business operation rules because it affects everyone. One of the examples was in 1992 when Enron Corporation that was a subsidiary of Houston Energy Company signed an agreement with India to construct it longest power plant. Unfortunately, the agreement was terminated in 1995 by politicians who argued that India did not necessarily need the power plant (Nauman-Etienne, 2010). This is one of the examples of how MNCs can spend more as Enron spent $ 300 million on the project yet they could not enforce the contract as political decisions were beyond the laws. Enron episode is one of the many episodes of how politics can affect international operations more than just domestic operational. The political risk due to government interference with the business is not easy to predict or asses and manage because the actions are usually done in ill-behaved ways (Nauman-Etienne, 2010).
The current world markets have become imperfect because to the difference in laws, tax systems, business practices, and the general cultural practices among different countries. Such imperfections have restricted diversification because of the risks and costs involved in coping with such markets. Owing to the imperfection, MNCs have been keen in the process of diversification to avoid running into losses even though with the right strategy diversification that have offered these firms abundant opportunities (Nauman-Etienne, 2010).
Some of the Reforms in the Globalized Financial Markets and Their Impact on the MNC
Between 1980 and 1990, there was a rapid integration of the international capital and financial markets (Nauman-Etienne, 2010). Initially, the drive for a globalized financial market came from governments of developed countries who deregulated their foreign exchange and capital markets. One of such examples was in Japan. In 1985, Japan deregulated its foreign exchange market and admitted a limited number of international broke...