Question

Why the exchange rate impacts business transactions and decisions.

How to manage cultural risks and other factors related to a foreign operation of a multinational business.

Answer 1

Exchange Rate is a very important aspect of any international or domestic business(dependency on import or export). Reasons:

A devaluation or depreciation of home currency always make export cheaper and exporting companies get benefit.

At the same time, firms dependent of importing raw materials,face issues as higher import cost create various further problems.

However, appreciation of home currency create exactly opposite effect as export become costly, competitive ness of exporting firms face uncertainty. But the importer get the relief in terms of low import cost of raw materials.

However effects of exchange rate in business transactions and decisions also depend on various factors like Elasticity of demand, economic growth in other countries, inflation, contracts nature(like fixed) etc.

Based on which side you are(importer or exporter) and exchange rate fluctuation direction(appreciation or devaluation) decides business direction when cross border trading involved majorly.

Managing cultural risk and other factors related to a foreign operation of a multinational business:

Political risk factors one of the most important factors in MNC operations which can come from natioanl goverments in terms of regulatory or nationaliation issues.War, civil unrest are also similar kind of factors.Legal basis of recourse in the country of operation is the best way to handle this kind of factors. Also purchasing some political risk premium can also be some option.

Various random movements in the economy might affect inflation, interest rate,wages, commodity prices etc.To handle this kind of issues, low cost production site( to handle waages), flexible sourcing strategy, market diversification, hedging to offset exchange rate fluctuation are some solutions.

Competitive concern also a significant factor for any MNC foreign operation as competition uncertainty from other players, advancement in technology really impacts. Lowering price, data theft, cyber attacks etc are various way taken by competitors which may pose serious challenge. To combat them,investment in advance technology research, data security, collaboration with multi-stakeholder network etc can be really helpful.

Cultural risk in terms of working pattern in various countries are different. Local laws related to working hours, labor protection make things really complex in MNC foreign operations. Cultural difference, value, business approaches differences need to be handled carefully by having adequate training and knowledge gain about the curture of the foreign land, setting uniform resource policies and adjustment in it really necessary. Proper recruitment and training of local resources in foreign operations of MNC help to mitigate maximum cultural risk factors.