Syllabus A. Role Of The Senior Financial Adviser A5. Strategic business and financial planning for multinationals

A5aii. The mobility of capital across borders 2 / 3

Syllabus A5aii)

a) Advise on the development of a financial planning framework for a multinational organisation taking into account:

ii) The mobility of capital across borders and national limitations on remittances and transfer pricing

The mobility of capital across borders

One of the drivers of globalisation has been the increased level of mobility of capital across borders.

Implications of an increased mobility of capital:

  1. Lower costs of capital.

  2. Ability of MNCs to switch activities between countries.

  3. Ability of MNCs to circumnavigate national restrictions.

  4. Potentially increased exposure to foreign currency risk.

Specific strategic issues for multinational organisations – local risk

Local risk for multinationals includes the following:

  1. Economic risk

    is the possibility of loss arising to a firm from changes in the economy of a country.

  2. Political risk

    is the possibility of loss arising to a firm from actions taken by the government or people of a country.

Political risk

Examples of political risk:

  • Confiscation political risk

    This is the risk of loss of control over the foreign entity through intervention of the local government or other force.

  • Commercial political risk

  • Financial political risk

    This risk takes many forms:

    • Restricted access to local borrowings.

    • Restrictions on repatriating capital, dividends or other remittances. These can take the form of prohibition or penal taxation.

    • Financial penalties on imports from the rest of the group such as heavy interest­free import deposits.

  • Exchange control risk

    One form of exchange control risk is that the group may accumulate surplus cash in the country where the subsidiary operates, either as profits or as amounts owed for imports to the subsidiary, which cannot be remitted out of the country. 

    This can be mitigated by using FOREX hedging.

Specific strategic issues for multinational organisations – control

  • Within the hierarchy of firms (in a group) goal incongruence may arise when divisional managers in overseas operations promote their own self­interest over those of other divisions and of the organisation generally.

  • In order to motivate local management and to obtain the benefit of their local knowledge, decision making powers should be delegated to them. 

    However, given the wide geographical spread of divisions, it is difficult for group management to control the behaviour of the local managers.

  • This gives rise to agency costs, and a difficult balance between local autonomy and effective central control.