Domestic companies tend to restrict their operations to the country of origin, while multinational corporations operate in more than two countries. Companies expand globally for many reasons, mostly to obtain new markets, cheaper resources and reduction in operational costs, all of which significantly affect financial management. These benefits also increase the risks faced by multinational corporations. Multinational financial management differs from domestic financial management in six essential ways.
Legal and Economic Structure
Coordinating and controlling worldwide operations can be complicated by the legal and economic systems specific to each country. Some practices that are routine in one country may be illegal in another. For example, paying an incentive to facilitate licensing in one country could be considered a bribe in another. Multinational corporations must learn how to adapt to differences in financial methods and customs. Unlike domestic firms, these corporations have financial obligations to foreign countries, which complicates tax reporting.
Exchange Rate Risks
For a multinational, cash flows will be denominated in different currencies, and the effects of currency devaluations must be addressed in all financial analyses. Unlike their domestic financial management counterparts, multinationals are subject to exchange rates that differ based on the prevailing inflation rate in the foreign countries where they operate. High inflation will result in currency decline, making it difficult and unpredictable to operate profitably. In addition, the process of changing currencies when transferring money between countries can be expensive and inconvenient.
Role of Government
Although many countries encourage foreign investment by providing incentives, the government's policy isn't the only determinant of competition. Financial management in a multinational corporation can be significantly affected by high levels of corruption, inefficiency and bureaucracy when the company has to deal with some foreign government officials. Unlike financial management in companies that operate domestically, a multinational often has to deal with burdensome and unpredictable regulations governing licensing, tariffs and taxes imposed by the host government.
Multinational corporations may have operations in countries that experience political instability. A change of government may come with new policies that make it impossible to operate profitably. For example, the new government may come up with nationalization programs that restrict money movement from the country. This can be a major challenge for financial management that relies on foreign exchange to ensure the company's continued global operations. Such political risk is typically not experienced on the domestic financial management front.
Multinational financial managers have to deal with global banking institutions that have their own challenges. Some banks experience liquidity problems because of prevailing economic conditions in their countries. Other banks in some emerging economies are heavily regulated by their respective countries' central governments rather than by market forces, which influences interest rates. In addition, many multinationals find themselves operating in countries where the banking industry is subject to the policies of the International Monetary Fund, which many businesses consider unfriendly to their needs.
Excessive debt can ruin the multinational corporation's chances of growth and expansion in the foreign markets. Financial management has to ensure the multinational has ample credit for routine business-to-business operations. If the corporation has to get part of its financing for overseas projects from the countries where it has operations, it will be vulnerable to lending rates dictated by the condition of the economy in those countries.
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