Risks With Being a Multinational Corporation

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Multinational corporations are less affected by localized recessions than companies that only operate in one nation. Additionally, companies that operate in several nations have a wider pool of potential customers which means more opportunity to generate profits. However, multinational corporations also have to contend with a variety of risks that can threaten the profitability and even the continued existence of the business.

Political Risk

  • Every nation has its own government and and establishes its own laws related to business. Multinational corporations have to ensure that company policies are in compliance with local laws, which usually means establishing a different set of operating practices for each nation that the company conducts business in. Changes in the law or the political system can put a business in jeopardy if the controlling government decides to nationalize certain industries or ban the production of certain goods. Political disputes between nations can also lead to increased taxes on imports and exports. This can have an adverse effect on a multinational corporation.

Currency Risk

  • A multinational corporation has to pay wages and taxes in the local currency of each nation that it operates in. Currency valuations are subject to constant change, which means that if the value of the currency in the corporations base country loses value, its costs overseas suddenly rise. Currency fluctuations particularly impact companies that import and export goods as it can suddenly become prohibitively expensive to import goods from a particular nation if its currency rises in value. Multinational corporations try to predict how future currency movements impact business costs. Miscalculations can prove very costly.

Energy

  • Multinational corporations often produce goods in one nation and sell those goods through retailers in other nations. The cost of transporting goods between nations can rise suddenly if the price of oil rises. This often happens when oil production slows or when investors flock to buy oil as a safe haven investment during stock market crashes. The cost of fuel to transport goods by sea or air can severely dent a multinational corporation's profitability. However, companies must balance the risk of energy prices against the cost of producing goods in countries where wages and taxes are high.

Technology

  • Many businesses gain a competitive edge over rivals in a particular industry by embracing technological advancements. However, communications systems vary from nation to nation. Consequently, a multinational corporation cannot necessarily take advantage of technological advancements in a particular nation if that nation does not have the necessary infrastructure in terms of telephone systems and satellite communications systems to support this new technology. A multinational corporation could fall behind its foreign competitors if it cannot keep up with the latest technology.

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