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:
Lower costs of capital.
Ability of MNCs to switch activities between countries.
Ability of MNCs to circumnavigate national restrictions.
Potentially increased exposure to foreign currency risk.
Specific strategic issues for multinational organisations – local risk
Local risk for multinationals includes the following:
is the possibility of loss arising to a firm from changes in the economy of a country.
is the possibility of loss arising to a firm from actions taken by the government or people of a country.
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.