Identify and briefly discuss nine major factors that complicate financial management in multinational firms.
Corporations go global with the desire to explore the opportunities existing in the foreign markets. But the management of finances is different in foreign countries, as compared to the domestic country. There are many aspects which create complications in the financial management of companies operating in foreign countries.
The most important is the currency differences. Cash flows of transactions occurring in the foreign country would be in foreign currency; thus, understanding the fluctuations in the foreign exchange rate is important for managing foreign cash flows.
Secondly, the differences in the economic policies of domestic and foreign countries play a vital role in framing financial policies of corporations. Some countries are free markets, which support capitalism, whereas, others might be planned economies, where there might be restrictions on movement of capital.
The next important aspect is the differential legal system. One company may follow common law where it encourages investors and businessmen to invest more, whereas, other countries might follow civil law in order to implement stricter control over the business operations.
Corporate taxation is also a highlighting factor when it comes to managing finances of the same business in multiple companies. Differences in tax structures may lead to variances in the final profits available for the distribution to the shareholders and for reinvestment in the business.
The extent of government interventions in the business matters also determines how the trade policies, terms of competition are to be framed. Certain business policies are to be framed by the consent of government bodies.
Political risk is another factor, where poor political relations between domestic and host countries may not allow free flow of the resources.
Language acts as a barrier when it comes to communication. Employees hired in the foreign countries may not be fluent in a common language, say english, which may lead to delay in communication. Moreover, if investors or creditors in foreign countries are not fluent in the domestic language of the host country, then they may find it difficult to analyse the financial statements.
There are variations in the cultural environment in different countries. Businesses often frame their goals, attitude towards risk, human resource policies based on the country’s cultural trend. Similarly, variations in the business environment affect the financial policies as well.
The foreign business unit of a multinational corporation may be in a country which is prone to terrorist activities and other crimes. Such a type of workplace endangers the safety of the companies’ employees as well as the assets of the company.
Thus, the managers of the multinational firms face these nine challenges while managing the finances.
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