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Economics of multinational enterprise - Admission/Application Essay Example

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10th December 2013 Economics of multinational enterprise Question 1 In efforts to expand their operations and attain a sustainable profits, multinationals (MNEs) are faced with various risk factors for example stiff competition, product failure in new market and obstacles during registration among others…
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Economics of multinational enterprise

Download file to see previous pages... Thus there is need for the firms to emulate affective methods to alleviate the risk of volatility of exchange rates. One of the ways of addressing the risks is by use of operational hedging. This entails introducing a significant degree of flexible in the main operations of a firm. These include the supply chain, channels of distribution, financial positions and marketing activities (Aghion et al 35). The objective of this strategy is to create adaptable operations that can rapidly respond to any change on the currency movement. This ensures that the fluctuations that may affect the revenues and the costs are offset. Firms can increase their profits through hedging by adopting various strategies. First, they can source materials thus lowering the costs of transportation resulting to increased profits. Another imperative way that the MNEs can adopt is use of currency invoicing. This implies that the firm can choose a particular denomination that ensures the firms prices as well as those of the competitors are affected by the exchange rate in the same way. This implies that for any firm to retain a competitive position in the market and attain sustainable profits, it can price its products using a volatile currency as long as the competitors use the same price. According to Grassman’s Law, MNEs should use a vehicle currency by considering their stability, low transaction cost and liquidity. Based on the three aspects, the US dollar has been used as a vehicle currency for a long time by most of the Multinational Enterprises. Question 2 In their efforts to enter the emerging economies, majority of MNEs undergo challenges that are associated with legal process, legislative issues as well as technological factors. As a result the investment flows from the rich countries to the poor countries are adversely affected. However, by initiating strategic economic policies, the investment flows can have similar effects to those of the free trade. One of the strategies that the host countries should emulate is to ensure that the home currency does not depreciate. In this way, the MNE will purchase their assets just the same price as the firms participating in the free trade thus motivating the foreign companies ...Download file to see next pagesRead More
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