Question

Please read the statement, identify the problem that a MNC would face in operating in a global environment and make recommendations to remedy the problem

Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Answer 1

Ans) Multi national companies or MNC are the organisations that have businesses around the globe. As It is the span of opeartions is spread on a wide variety of nations. Every multi national organisation performs research on the markets it enters and develop the strength and make an estimate about the weaknesses but this is only a starting phase. The problem of MNC are to maintain operational efficiency as the manufacturing and other services are spread in other countries. The Polital , social and economical factors also has a great impact on the operation of MNC along with the environmetal factors .Here we can take an example of country X which is a MNC and has businesses in Europe and Asia and the company has headquarter in United States. As we know that the culture of Europe is different from the Asian culture ,hence social difference along with political and economical differences are there , the cost of labour is low in Asian countries but due to the political environment setup with high level of complexities adds up to delay in the decision making process , that will hamper the decision regarding the key expansion policies of the company X.Similarly environmental norms are much tougher in European countries along with high cost of labour. Hence each market has certain weaknesses and strenght, hence an MNC should perform the SWOT analysis that is strength , weakness and opportunity and Threat analysis based upon each market and hence develop the corporate strategy for the company as X. The tariffs, cost of operation,business continuity, political unrest,trainning needs are to be kept in mind while developing the corporate strategy. The company should develop a standard value system, also it should focus on corporate social responsibility and to invest in the education and talent in the domestic market. Diversification is the process of reducing the risk by investing in different economical markets which are not correlated with each other so as to reduce the risk of low or negatice returns.In portfolio of international investment which consists of the nvestment in the stock exchange of diiferent geographical markets the diversification is achieved.Few of the examples of international financial diversification are as follows here we need to understand what are emerging markets and developed market and various financial products as bond , equity , debenture as well as derivative products . The emerging markets are those which can provide high rate of return but has high political ,currency risk ,on the other hands there is a large amount of predictability and low returns in Developed market. Here a proper mix of portfolio comprising of risk and safety can be developed which includes investing in equity and bonds in developed and developing markets. On the other hand international operational diversification means not respricting the operational capabilities to a perticular geographical location but taking advantage of economies of scale and cost minimisation and establishing operational units in the suitable area with low cost and high effiencey and keeping in mind the contuinity of the operation. Here operational activies include , production, distribution as well as back office support , here we can take the example of Nike shoe comapny which has manufacturing and assembling in Asia and technologica capabilities development in developed market along with selling and marketing facility.