Discussion: International Finance

625 words | 3 page(s)

Foreign direct investment by global multinationals is the key to expansion and growth in a global market where the remaining opportunity for consumer and market growth is in less-developed and emerging economies. The risks that are faced due to currency can be a major challenge in business operations and profitability. Accounting procedures require the values to be certain, and often this requires using the actual currency in which a transaction occurred. One of the main ways of dealing with this is to use strong currencies such as the Euro or US dollar whenever possible, but this is not realistic in the case of a consumer product company in a small country.

When a multinational such as Burger King enters a small country’s market, they can reasonably expect that the consumers will pay for their burgers and fries in local currency. The result of this is that their profits are in local currency, and that currency may have volatility or low demand. The ideal situation is to have the flexibility to wait for opportune times to exchange. There are many strategies to deal with diverse currency cash flows. One is to hedge against currency volatility by prepaying for a currency in the currency that is being received, and another is having sufficient currency reserves to conduct one’s own currency exchange using the most favorable currency. More creative strategies involve the exchange of local currency for goods, and this is sometimes required in economies that are not entirely open (Butler, 2016). In Argentina for example, the revenues which are collected are exchanged for Argentinian wine, which is exported and sold in a non-peso currency, providing a complicated but stable way of ensuring the value of profits (Butler, 2016).

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Capital generated in industrialized countries is finding its way into less-developed and emerging markets because of trade and outsourcing. A look at the OECD data shows that in fact it is the less developed nations who have the highest level of growth, and the influx of capital from industrialized countries is the cause of this growth (Aizenman & Binici, 2016). Labor in industrialized countries is expensive, and today it is far cheaper to use manufacturing centers in China, India, and other Southeast Asian countries or other emerging economies. This provides a competitive advantage to the company while increasing the incomes in that country. Trade is also increasing, and as countries find they have products which have demand on the world market they can profit from extracting those resources, such as the case with Nigeria and petroleum.

While there is no formal distinction, less developed countries that are not emerging economies are apparent, because they are not seeing the influx of trade flows. They are defined by exclusion, because it is easy to note the emerging markets as they have considerable exports to or contracts with industrialized nations. The emerging markets are rapidly increasing standard of living and average incomes, but there is also an increase in disparity between high income and low income households as many do not benefit from the jobs or capital flows into their country’s market and are instead left behind in their less-developed, sometimes subsistence context. Because of the emerging market and rising flows of capital, there can be increased demand which leaves the poor worse off. In a less-developed context that is not an emerging economy there is not sufficient infrastructure, governance, natural resources or skilled labor to participate in the opportunities of the global economy. This can be due to civil or other conflicts which damaged infrastructure and governance and prevented the development and growth of technology and a skilled workforce. An example is Liberia or Rwanda, each of which experienced decades of civil war, resulting in little to offer on the world market.

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