Multinational Corporations When Making the Essay

Acquiring ownership of a foreign company exposes the MNC to a wide range of factors and risks, including political risk, operational risk and more. Each of these risks carries costs or potential costs that will impact the profitability of the project.

Another risk that the finance department must consider when expanding internationally is foreign currency risk (BNet, 2010). There are two sides to foreign currency risk -- transactional and translational. Transactional risk is the risk that currency fluctuation will impact the profitability of a transaction. In other words, suppose the MNC has the bulk of its costs in U.S. dollars but has some of its revenues in Japanese yen as a result of its new operations. As the yen fluctuates, the value of those revenues in U.S. dollar terms will fluctuate.

Thus, there is a need to develop adequate hedging strategies. It is difficult to hedge against translational risk -- the value of those revenues when brought back to a U.S. income statement for example. However, the firm can hedge against transactional risk. For example, the firm could develop an operating hedge. An example of this would be Wal-Mart's stores in China, which allows them to bring in Chinese yuan in order to offset the yuan-denominated expenses they occur in the course of their procurement operations in that country. The finance department can advise on operating hedges as part of the mode of entry decision as well.

The finance department can also set up hedges for transactional risk. There are many methods of such hedging, but they all have the same objective of locking in the value, or reducing downside risk of a transaction. Setting up these hedges is one of the most important areas of focus for finance departments at multinational corporations.

One further consideration for finance departments is the impact of the international expansion on the accounting statements. The company may find itself subject to entirely different sets of accounting rules if it moves overseas, even to places like Canada and Europe let alone to Asian or Latin American nations. The company must pay close attention to the differences between domestic rules and reporting and to the rules and reporting to which the firm will be subject in the overseas jurisdiction. Failure to account for the differences in standards could compromise the foreign operation and unduly expose the firm to significant risk.

For a multinational corporation, decisions with regards to international expansion are a key part of the business. No decision is made in a vacuum, however, so financial considerations must be included in the decision-making process along with strategic and marketing-based factors. In particular, decisions with respect to mode of entry are affected by financing and hedging concerns. The finance department must be able to meet local reporting standards, and must be prepared to address the new level of foreign exchange rate risk to which the firm will now be subject. The international expansion will bring in a range of new cash flows, have a number of new expenses, and may bring the firm into collaboration by way of joint venture with a foreign entity, again increasing the firm's financial risk exposure. A merger or acquisition is a common method of market entry and that type of activity can have major financial implications, necessitating the input of the finance department at every step of the international expansion decision-making process.

Works Cited:

No author. (2010). Assessing exchange rate risk. BNet. Retrieved February 11, 2010 from http://www.bnet.com/2410-13239_23-68748.html

Doukas, J. & Travlos, N. (1988). The effects of corporate multinationalism on shareholder wealth: Evidence from international acquisitions. The Journal of Finance. Vol. 43, 5, 1161-1175.