Value of Currency and Impact of Globalisation on Financial Management on MNC’s
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Abstract
The value of money is determined by a lot of factors within an economy. Through this research essay, these factors are discussed. One of them is the employment ratio to those that are unemployed. These different policies promote business, such as fiscal and monetary policy, foreign exchange rates, and external investments into the country. Later on, in the essay, we also discuss the impact of globalization on how business processes are conducted globally, affecting its growth and demise of the business. We show how technology has made a huge impact on how capital is transferred across borders to spur and initiate investment in countries with a high return on capital opportunities. Jurisdictional policies also limit the globalization of finance through these financial instruments since the transfer of finances and capital is limited by these regulations.
Value of Currency and Impact of Globalisation on Financial Management on MNC’s
Introduction
The concept of money is based on the performance of an economy. Its purchasing power determines the value of money within the economy. The demand for money in an economy helps to entrust its value because it can be exchanged for goods and services. The value is, therefore, a belief system without which the currency would remain valueless. Similarly, the value of a currency in the global index is also determined by the forex exchange rates with other currencies. As the demand for a currency increases globally, it shows the trust and belief in its value, which helps in growing the value of the currency. However, there are smaller, nearly insignificant factors that affect the value of a specific currency.
Economic Growth
The economic prospects in a country provide a lot of value within a nation. The productivity that a country can create within a specific period helps show how much the country can generate in terms of global domestic product. Should the GDP increase in a specified period, it proves that the economy is growing. This translates into more economic opportunities for citizens and other investors into the country who can generate revenue through the optimal business policies available in the country.
With multiple opportunities fuelling economic growth within a country, it creates unfound value in the country’s currency as more value is created through revenue creation in business. More business opportunities create demand for the local currency in the business as it explores growth to tap into the wealth opportunity. As a result, it creates job opportunities for local people who earn and are paid in the local currency (Misini & Badivuku-Pantina, 2017). Through this transfer of wealth from corporate business, the local citizens take part in the cyclical transfer of value, which ultimately helps grow smaller businesses and put value in the people’s hands.
In a counter scenario, the lack of employment opportunities leads to high unemployment numbers within an economy. This signifies a stagnant economy with very little value in terms of currency exchanging hands. On observing the Dow hones Industrial average market index that monitors the stock performance of 30 large companies listed in the US stock exchanges, the US dollar currency is expected to fall in value as the DOW pierced 30000 average for the first time in two years (Davies, 2020). Without locally available jobs, it keeps currency in the banks instead of it being in the people’s hands to spur investments and local expenditure, which help in the growth of citizens’ economy and better livelihoods. A weak dollar only helps investments overseas and not those within the country’s economy since the value and buying power reduces.
Inflation
There is a direct correlation between inflation, economic growth, and unemployment rates within a country. All these factors have an impact on the currency value within that economy. By definition, inflation within an economy is where the purchasing power of a currency is devalued. Wajid & Kalim, 2013 show the relationship between inflation, unemployment, and economic growth from a case study of the Pakistan global domestic product per capita (Wajid & Kalim, 2013).
For a currency to increase in value, an economy’s strength needs to be boosted through both fiscal and monetary policies. Authorities in the country must design policies and regulations that ensure inflation rates are reduced, such as increased interest rates. A decrease in inflation spurs innovation and employment opportunities for citizens bringing new value to the currency as the economy bounces back from a recession caused by inflation.
Foreign Exchange Rate
As earlier identified, the demand for a currency in the global economy provides a need and therefore creates value for the currency. Collectively, the strength of a currency is determined by its purchasing power of another currency. In most cases, this currency is compared to the dominant and most stable economy, which is the United States Economy.
Through international trade, countries can facilitate external investments in the country, which further increases the relationships between different currencies. External investments into a country create capital flows by increasing the demand for the local currency and, therefore, helping in the economy’s growth through various industries that have been invested in. Banton (2020) states that as the foreign exchange rates fluctuate in value and conversion, a change in the base currency used in an investment can either increase the value of the local currency in terms of assets or reduce the value of the local currency based on the same asset through which the investment is based on.
But the foreign exchange rates for any currency are also affected by multiple factors such as inflation, public debt through foreign cash investments, and trade openness for operating industries in the country. These factors play a part in the fluctuating value of currencies in the global market for floating exchange rates. In markets such as the U.S., the country uses the Foreign Exchange Intervention through the Department of Treasury and Federal Reserve to counter disorderly market conditions from rumors and noise in the forex market. The effect of this department has helped out in stabilizing the dollar especially in economies like Switzerland and Vietnam that were labelled as currency manipulators as they tried to limit the appreciation of their currency (Davidson, 2020). The Foreign Exchange Intervention sterilizes and intervenes in the forex market through monetary policies to stabilize the dollar every calendar quarter.
Fiscal and Monetary Policy in the Country
These are policies that are imposed on trade between countries. Normally taxes are paid on imports as more goods that are available outside the country are bought and sold locally. The same case applies where locally manufactured goods are exported to external markets. The growth of an economy and thus the demand for the local currency entirely depends on the exports made by that country from locally manufactured goods. The local governments are always looking to implement policies with other countries to which these goods have exported that help in making the exported goods available through free trade across borders. This reduces the cost of exporting such goods (Häggqvist, 2018). These goods that face reduced tariffs are mainly from industries that the country depends on, such as the agricultural industry or manufacturing industry.
Tariff rates on imports ensure it discourages importation of locally available goods such that the economic potential is defended. Consumers are always encouraged to buy locally instead of importing goods from external markets. On the other hand, locally unavailable goods bought for sale are tax exempted through lax monetary policies, which spur the need for trade in the local market, boosting businesses and revenue. In all matters, these policies are in place to improve economic growth, which directly relates to the global domestic product and the value of the currency. Tiwari (2020) states that in countries like China that are highly dependent on the export of goods, the country manages its currency to ensure that its products are competitive on the global market, therefore preventing its currency’s appreciation.
While the above factors mentioned have the most sway or effect on values of currencies globally, the local foreign exchange reserves in central banks in an economy play the biggest part in maintaining the stability and value of their currency through monetary and fiscal policies, which help to protect the currency from some of these factors like inflation.
Globalization and Its Effect on Financial Management
Globalization has effectively changed and improved the way business is conducted all over the globe. It can be described as the process of integrating and facilitating organizations and people to indulge in trade and investments all over the globe. Trade can now be conducted between countries through the different avenues that have been sparked due to innovations. Most importantly, the technology influencing the transfer of capital and funds between multiple vendors has grown and advanced to facilitate cross-border financial activity. We can show the proof of globalization through the different innovative avenues that facilitate the transfer of funds and capital, such as the banking and inter-country partnerships. However, the effect of globalization on financial management is complicated while navigating the bureaucratic policies required for regulation as well as developing structures that best outline the processes and performance of the companies involved in the globalization process.
Investment is only made possible when countries present investors’ opportunities through favorable policies and acceptable interest rates in their economies. Through external bonds, other economies can transfer capital that can be used or invested in infrastructure development in countries’ key economic activities. China has effectively provided funding and capital in African countries to boost infrastructure and economic development in these countries (Warsh, 2021). Through these types of funding, these types of funding improve the economic viability of these countries for investment by other shareholders and multinational corporations.
Government policies have also helped make these economies attractive for investment by individuals looking to diversify their investment. This has seen multinational companies entering new markets, especially in Africa. For example, before 2010, very few betting companies were available in Africa for the local punters (Author, 2019). The betting and financial market have ballooned as more opportunities are created for the retail betting individual. Governments have created opportunities for these new businesses to enter their markets through relaxed policies on a larger scale. Similarly, Britain’s I.G. Group plans to buy a U.S. option firm Tasty trade for a lump sum of $1 billion. This type of transaction fuels the global dominance of existing companies not just in the U.S. but other neighboring countries like Australia, Asia, and Europe (Osipovich, 2021).
Scope of Global Financial Management
Before indulging in any investment by a multinational corporation in a new market, the company needs to conduct extensive research to identify the feasibility and viability of conducting the business in that specific market. The company has to minimize the amount of risk they are exposed to while at the same time maximizing the number of returns from the investment decision. From the market research, the business can then use forecasting technologies to best outline a strategy that will be beneficial for the company to undertake to achieve the best return on investment for the company (Rugman & Verbeke, 2004). One of these strategies is the means of transferring the capital across borders to facilitate the investment plan or portfolio in the new market. Diverse regulatory efforts that make the financial transaction completed can be reduced through the use of technology revolution through the internet, which has boosted globalization.
The financial transfer of capital is either achieved through international banking institutions or the increasing popularity feature in cryptocurrency founded through technology innovation. Cryptocurrency has widely been attributed to the globalization of finance between two vendors or individuals at separate parts of the globe in a simple and easy process. This innovation gaining traction worldwide helps users transfer funds in the form of cryptocurrency and effectively get rid of the middle man at nearly 90% of the cost saved in transaction fees. For this reason, investors are jumping on the wagon to reduce the costs of transferring funds and save more funds that would be available for investment upon converting the funds to usable fiat in the country of investment. (Arestis & Basu, 2004) The use of a common currency might help in reducing the costs of transferring capital across borders while at the same time integrating all markets under the same regulation policy. This will therefore help in the globalization effort of business processes. Poleogorgis (2019) states that this technology empowers firms to capitalize on economies of scale and capitalize on their production output and need for revenue growth.
On the other hand, multinational companies can make investments into new markets through mergers, acquisitions, and takeovers. In this strategy, it involves a lot of bureaucratic process and requirements that must be met for the transfer of capital through foreign direct investment. This strategy provides an increase in capital for the domestic business and provides a critical role in the provision of technology of financing. Therefore, management of the domestic business is handled from the macro-level with resources such as technology, financial and real (Lauwers, 2020). The domestic business conducts the management of both micro-level productivity and credit lines. Through separation and resource allocation process like this, can globalization of multinational companies be considered a success.
Through globalization, it makes the globe one huge market place such that business can easily acquire credit from other financial institutions should the local banking system deny them the required resources. Local banking systems may deny additional financing to domestic businesses in situations where the business already has outstanding debts or in cases where the local forex reserves are already strained or burdened by other borrowers in the country. This credit crunch, therefore, calls for the need to outsource funding to uplift the business from its existing financial instability in the country. This can only be resolved by securing financial aid from international markets through the already existing financial tools and technology.
By reaching out to international markets for extra funding or financing, it creates an opportunity for the business to enjoy some of the benefits of globalization in the financial market. For example, the business may enjoy cheaper loans or bonds from other markets compared to the existing lines of credits secured through local bank reserves. These benefits provide a lower risk and strain to the business as they look to generate revenue allowing them to recoup capital in time before repaying some of the lines of credit.
While multinational companies are gaining capital through globalization processes as well as the flow of capital across borders, multiple issues are floating in the process. As these companies are looking to grow and expand their production, consumption, and physical investments in new markets, managing these resources is becoming increasingly difficult in companies that have diversified into different industries and are collectively managed by one parent company. Even though these companies gain by diversifying their investment portfolio and risk across multiple economies, they still have risk in each of the investments (Arestis et al., 2005). These issues that surface, which include management of business processes. While the company is looking for new expansion opportunities, the diversification process might limit the service delivery for existing business processes. Resources might be limited; therefore, the focus might be shifted to new frontiers while the customer service is fluttering from the weight of little attention.
On the other hand, it might be difficult for creditworthy banks to analyze and process the number of economic risks they subject themselves to when providing long term lines of credit to other businesses outside their jurisdiction. By operating under different market conditions and economies, it might present weaknesses in identifying and financial risk that might be faced should the loans collected be defaulted by the loaned business due to unforeseen market conditions. Davis & Ostroff (2021) Market based on the US dollar also experiences such fluctuations from bad monetary policies which explains how the US currency value is signaled to rise from the new US government nominees for treasury under the new Biden administration. In cases like the recent Covid-19 pandemic, businesses and governments already servicing loans in the billions were affected because of the reduced performance and productivity from their markets. As a result, the whole financial market faced a downturn as no more revenue was being generated.
Conclusion
Regulations are still an issue affecting multinational organizations and companies’ globalization, especially with the finance management aspect. On the other hand, the effects of the Covid-19 pandemic also present a lasting impact on globalization services. Both employee management and engagement were affected by the pandemic’s effects, which overall slowed the performance and productivity. As a result, governments have deployed monetary and fiscal policies geared to boost the product ivy of the financial markets and economies. Federal Reserve banks are responsible for the value of an economies currency and they are required to employ regulations and policies that best fall in line with the economies interests and long term goals.
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