Risk faced by a multinational corporation and how to they manage it

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Go online and find an article that describes how a company overcame the risks outlined in chapter 13 on page 517. For example, what did McDonald’s do to hedge exchange rate risk? What did Apple do to deal with Intellectual Property Risk in China?

  1. Describe the company
  2. Describe the type of risk they encountered – why?
  3. What did they do to deal with the risk
  4. What other options did they have?
  5. In detail discuss the risk faced by multinationals

Solution

Like every other business multinational corporations (MNCs) face high business risk peculiar to their global outsourcing. Such risks are unique and different from risk faced in the domestic market. Business Risk means the possibility of getting reverse outcome of the projected business expectation.

Some of the imminent risk faced by multinationals will be highlighted below:

Exchange rate risk:  This is the risk MNCs like McDonald faces as they try to exchange their domestic currency to the currency of their subsidiary country. Here if the subsidiary firm exchange rate is weak compared to the domestic currency the firm gain if not their profit margin reduces. Hedging becomes the major option here.

Political Risk: MNCs subsidiary firms in another country might face the risk of nationalization, indigenization, or even civil war leading to loss of their property.

Risk of differences in Religion and Culture: Most MNCs (fast foods, beverage industry) faces the challenge of trying to adapt to the culture of the host country. Sometimes the firms have to develop product that suite the host country culture and religion.

Financial Risk: This includes risk associated with high cost of training workers (wages) to be able to handle the firm’s technologies. Other financial risk includes interest rate policies and taxation policies. Here it is advisable that the firm should set up plants in low labor countries (case study of Nike global offshore outsourcing strategy), currency swap etc.

Intellectual Property Risk: Protection of a company invention from been duplicated by local industries or citizens of host country might be very difficult in some countries. Intellectual property like technology, software, chips might not be protected where the government of the host countries is hostile to foreign firms.

How some selected multinationals do managed these risk?

  1. Apple Intellectual Property Risk: Apple is a leading organization in smart phone industry with branches in over 100 counties. The company is known for its unique iPhone, iPad among others. The company is in constant competition with Samsung which it has sued one time imitating its iPhone in Galaxy S5.

Risk faced by Apple in global outsourcing: In 2012 Apple faced an intellectual property risk in China, when the company had a case with one Proview Technology Co. Ltd of Shenzhen. Apple had obtained a license from Proview to use iPad mark in Proview entity in Taiwan, but Proview later sued Apple for trademark infringement, claiming that the license did not cover China. Proview later won the case and Apple paid Proview $60 million to continue in business. Apple resorted into manufacturing iPad in China and then shipped them to the US and other markets. However, Apple might have escaped the pitfall if they had discussed the term explicitly with Proview. Firms can escape such a case by understanding the peculiarity of law governing intellectual property in the country before entering the market.

 

  1. McDonald Financial risk: McDonald remains the leading fast food restaurant operating in over 120 countries across the globe. The organization faces lots of financial risk – exchange rate and interest rate risk. In attempt to manage revenue from fluctuations with exchange rate in various countries it operates. The constant changes in the value of their host countries often impact their business revenue, because whatever they earn from their host company are often not totally spend in the host country thereby exposing them to exchange rate fluctuation risk.

McDonald in attempt to manage this risk developed four financial department to handle this risk which were; cash management, domestic market, financial markets, and international finance.

The firm uses basket option strategies to hedge risk associated with interest and exchange rate risks. Brian Moore noted that this hedging process is managed by adopting the following;

  • Qualitative Analysis – Hedging is based on the peculiarity of each country currency.
  • Quantitative Analysis – Hedging is based on some mathematical model like simulation in analyzing the firm assets and liabilities.

Alternatively, McDonald need to develop more effective strategies like currency swap, developing software to manage their hedging, buying and paying in local currency can be equally adopted as means of managing this risk.

  1. Exxon Mobil Political Risk: Exxon is an American multinational leading firm in the oil and gas industry. The firm venture in both the upstream and downstream sector of oil and has its operation in over 30 oil-producing countries. The firm faces political, civil war and unrest in most countries it operates. In most developing countries as opposition parties take over power, industrial policies often changes which may not be favorable to the MNCs.

The firm engages in an in-depth analysis of the political situation, enters an agreement with the ruling government for protection of their investment while operating in the country.

Alternatively, the firm should increase investment in R&D to understand the political and religion background of their host counties before they venture in.

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