Question

According to Rivera and Milani (2011), multinational corporations (MNCs) are confronted with a variety of risk factors that must be considered by managers as budgets are planned and implemented. Cash flow considerations are certainly within this list of factors. For example, U.S. based parent companies must address cash outflows from an international business perspective that are used to pay for imports, to comply with its international arrangements, and/or to support the creation or expansion of foreign subsidiaries. Simultaneously, an MNC receives cash flows in the form of payment for its exports, fees for the services it provides within international arrangements, and remitted funds from the foreign subsidiaries. In short, an MNC’s international cash flows result either from paying for imported supplies or from receiving payment in exchange for products that it exports. Thoughts?

Answer 1

Risk Factor Shouls be Consider by MNCs,

• Cashflow Consideration : Export are support in cashflow where as Import are consider as Deficit

1. Overestimating a local market's economic potential
2. Large and frequent economic swings:
3. Currency exchange fluctuations:
4. Basic infrastructure quality and services issues
5. The political climate:
6. Cultural sensitivities and assumptions

How Can an International Business Reduce Risk?

Planning ahead rather than reacting to challenges faced by multinational corporations is key to risk management in multinational corporations. Greg Castello, chief financial officer for Flash Global, which designs and implements service supply chain strategies for rapidly expanding companies, writes in CFO magazine, a publication for corporate financial officers, that there are five ways an international business can reduce risk. They echo and suggest solutions for the risks outlined in the previous section:

Assess the political and business landscape: Political risks can be great even in Western nations; the Brexit vote in the UK proved that even stable, wealthy countries can still deliver huge surprises, says Castello. (This was a vote by the British populace to leave the European Union, or achieve a "British Exit.") Political risk can be even greater in developing nations, where regime change can lead to abrupt transformations in the legal and security environments.

Choose the right business partner: MNCs should partner with experienced local professionals who understand the local culture and business practices. China, for example, requires many foreign companies that want to do business in that country to operate through joint ventures in which Chinese partners have the majority stake. Partnering with a Chinese firm, for example, would give an MNC seeking to do business in China "deep local knowledge," says Professor Cheng-Hua Tzeng of Fudan University’s School of Management – but there are risks. The right business partner can help guide you through the maze of regulations and cultural expectations, but the wrong partner can do significant damage.

Hire experienced local talent

Develop a business model tailored to the local market

Have a backup plan

Can the Decision to Become an MNC Be Seen as Part of a Company's Risk-Management Strategy?

Risk management is a systematic process of identifying and assessing company risks and taking actions to protect a company against them. Risk management refers to a company's effort to predict and enact measures to control or prevent, losses within a company. So the decision to become an MNC can certainly be part of the firm's risk-management strategy. Indeed, the management of MNCs, by nature, depends on being internationally focused.

For example, a company may find that its domestic market is saturated. Suppose Company X makes widgets that are vital to the automobile business and that it has fully supplied all domestic automakers with these parts. It would make sense, then, for the company to expand globally, and indeed develop a global brand. Doing so, expanding into international markets, is the very definition of becoming an MNC. Finding greater and larger markets for its products can actually decrease a company's overall risk, and increase its long-term profitability outlook.

However, becoming an MNC does pose risks. As early as the 1990s, new areas of risk management began to emerge that provided managers with more options to protect their companies against new kinds of exposure. According to the Risk and Insurance Management Society (RIMS), the main trade organization for the risk management profession, among the emerging areas for risk management were operations management, environmental risks and ethics.

One way to minimize the risk of becoming an MNC, and the inherent additional expose that is part of entering foreign markets, is to obtain risk-management insurance, which is widely available through companies like AIG. The other way to minimize risk is to describe how cash flows are used to minimize political risk. Though it may prove difficult, a company needs to have sufficient cash available to deal with the previously discussed risks associated with entering a foreign market, particularly risks based on the political and business climate of the country.

What Does Country Risk Mean?

Country risk is a term for the risks involved when a firm decides to expand beyond its domestic market and become an MNC. Country risk is very similar to the risks discussed, including

• Political risk
• Exchange-rate risk
• Economic risk
• Transfer risk