Question

Multinational Enterprises (MNE) seek to minimise their cost of funding. This has led to the MNEs seeking funding from international markets.

Explain the factors that determine the efficiency of MNEs’ strategies for internationalizing their cost of capital and how such strategies have proven to be beneficial to both global and national economies as well as MNEs.

Answer 1

The factors that determine the efficiency of the MNE's strategies for internationalization of their cost of capital are:

a) Size of the firm: The size of the MNE is larger in size than the domestic firms. The strategy for internationalization of capital is influenced by the size of the firm.

b) Access to international market: The MNEs are spread over a large number of countries so the access to international market is easy. This will influence the strategy for internationalization of capital.

c) Diversification: The diversification of business is eqsy for MNE as they are spread across many countries. It will reduce the risk of the business as they will be spread in various countries.

d) Exchange rate risk: There will be business with different countries in different currencies so the risk of exchange rate and country risk will be high.

The major strategies for the internationalization of cost of capital are:

a) Strategy of increased debt finance and

b) Strategy of increased equity

These strategies will be beneficial as the company can decide based on its financial position and the market condition about whether it should opt for increased dwbt or increased equity financing. If the risk is high then debt financing will be better and vice versa.