Question

How would inflation in a foreign country affect the value of foreign profits for a U.S investor?

Answer 1

Before going ahead we have to understand what does inflation means?

Understanding inflation is often complicated by the fact that the cause and the effect are often muddled together in people’s minds due to the lazy way we often refer to inflation. The effect of inflation is what people see when they go shopping and see increases in the general price of goods and services. When the individual prices of just a few goods go up, that is not necessarily inflation it could simply be a supply or demand issue. But if many goods and services across the economy are rising in price we have what we call “price inflation”.

How Does Inflation Affect Foreign Exchange Rates?

Inflation affects every consumer, business person and investor in some way or other. Inflation is one of the key factors that affect consumer prices, financial markets including Stocks, Bonds and Forex. As such, it is important for consumers, investors and traders to get a deeper understanding of what is inflation and what causes it.

How would inflation in a foreign country affect the value of foreign profits for a U.S investor?

This can be explained with the help of below mentioned 2 examples of companies like Walmart & IBM.

American multinationals dominate the world stage, and their reach is growing. Ten years ago, almost none of Wal-Mart’s sales came from outside the United States; today, that figure is 14%. In the same period, GE’s foreign sales grew from 16% to 33%, and Procter & Gamble’s grew from under 40% to well over 50%. A host of U.S. companies in industries ranging from shoes to software have registered similarly impressive numbers. But the increased sales in foreign markets, and growing profits from overseas labor, have not been matched by proportionate increases in overseas philanthropy. Few U.S. multinationals allocate more than 10% of their giving to recipients outside the United States.

Not only is this bad corporate citizenship, it doesn’t serve the companies’ best interests. As more of American multinationals’ manufacturing, employee bases, R&D, and sales move offshore, visibly matching the “give” and the “get” is more important than ever. No longer does an American brand automatically command a price premium. In some countries, especially those in Europe, U.S. brands may now actually suffer a price deficit. These multinationals need to win hearts and minds, but they won’t unless they implement their value statements with equal commitment worldwide. Companies that walk their talk internationally improve their ability to attract and retain customers, employees, and investors around the globe.

For many U.S. multinationals, the skewed giving doesn’t so much reflect an aversion to foreign philanthropy as an appreciation for the perks of domestic giving, such as tax breaks and good PR. But when these companies do turn their attention to foreign giving, many seem paralyzed by concerns about implementation. Executives tell us that their country managers, who disperse foreign giving, aren’t trained in public diplomacy. They often prefer to keep a low profile and avoid offending local politicians and businesspeople by flashing too much money. Many executives also argue that the tax breaks, reliable not for profits with sound performance measurement, and the tradition of volunteerism, which encourage higher levels of giving in the United States, don’t exist in other countries.

But such impediments to foreign giving aren’t insurmountable. Consider IBM, a world leader in global strategic philanthropy and a company with half its sales outside the United States. Each year, IBM allocates more than 30% of its corporate giving to non-U.S. recipients. (Its contributions in 2002 exceeded $127 million.) Under Lou Gerstner, IBM strategically focused its philanthropy on technology education programs that now reach ten million children and 65,000 teachers worldwide. The programs build local goodwill but also help IBM learn how consumers in different cultures, especially those from lower socioeconomic strata, interact with computers. The training of local teachers also accelerates technology development in poor countries, helping to open up markets.

Many multinationals lack IBM’s resources, but they can still adopt its strategic approach to global giving. Here’s how.

First, as IBM has done, conduct a global audit of your current charitable giving—not just monetary donations but gifts in kind and the value of employee time donated by the company. Then compare the results against your sales and profits and, possibly, the proportion of your employees in each country. For example, if 30% of your value creation happens overseas but only 3% of your giving flows out of the United States, consider bringing the numbers into closer alignment. (When a company first begins business activities in a developing country, it will need to do more than apply a simple percentage formula to determine its giving. Because the value of work conducted in the early years will be low, multinationals may need to make an up-front contribution of charitable dollars to have a meaningful impact. Later, when the foreign business grows, it can adjust its giving formula to adequately sustain the charitable operations.)

Second, identify a single initiative or class of initiatives that fits with your company’s strategy, image, and capabilities; that can serve to focus your philanthropy worldwide; and that does not duplicate what others are already doing. If you are a small company, collaborate with other companies in your industry or with an international nongovernmental organization. Develop a three- to five-year plan that takes into account the strategic importance of each country and the nature of current philanthropy in the chosen area. (IBM’s technology education program in France, for example, is distinct in thrust and funding from its program in South Africa.) We recommend that you allocate two-thirds of your global giving to the initiative or class of initiatives, leaving the remaining one-third for discretionary spending by local country managers. For example, last year, the Citigroup Foundation allocated $78 million—70% of its worldwide contributions—to three related initiatives: financial education, primary and secondary education, and educational support for entrepreneurs. The foundation then gave the remaining 30% of contributions to local business units to disburse themselves.

The skewed giving doesn’t so much reflect an aversion to foreign philanthropy as an appreciation for the perks of domestic giving, such as tax breaks and good PR.

Finally, after removing philanthropy from the P&L by setting aside a percentage of sales or profits for business unit managers to disburse, train a cadre of line managers in strategic philanthropy and community affairs. Ensure that one manager is assigned to each business unit and evaluated on the effectiveness with which he allocates these funds. This approach helped Citigroup’s business units confidently disburse $19 million in 2002, half of it outside the United States. The Citigroup Foundation also employs four regional grant officers around the world who work with local managers to focus on the foundation’s three core initiatives.

These steps can help multinationals shift their corporate-giving approach from charitable to strategic, and, crucially, from domestic to global.