Financial Management Individual Work 1 Week 10 - Essay Example

FINANCIAL STRATEGIES FOR MULTINATIONAL AND DOMESTIC FIRMS Exchange rate risks occur differently to the firms. Under multinationals, cash flows are usually realized in different currencies and the effects of currency depreciations and appreciations must be addressed in their financial analysis and strategies. Different inflation rates witnessed in their countries of operations must be factored in when setting financial goals to be realized. Domestic firms on the other hand are only affected by the exchange rates and inflation rates in their own countries hence do not bear heavy risks associated with international money transfers which lead to heavy costs accruing to the firms (Jakhotiya, 2003).

Multinational firms experience economies of scale as part of their financial strategies. This relates to the advantages that accrue to a firm as a result of large-scale production. The large volume of the units produced by the firms, result in a decrease in the cost of producing each individual product. Through the process of rationalization, multinational corporations are able to achieve the advantages of worldwide integration as they are able to manage their resources adequately. It further allows subsidiary firms to adapt to the specific product needs and financial requirements of the countries in which they operate such as taxation and other business regulations.

The subsidiaries are encouraged to operate as national firms through compliance with the specific needs of the nations in which they are located but retaining some advantages such as sharing of financial risks with their affiliated firm. Another advantage of economies of scale is that it reduces the cost of raw materials as well as other overhead costs which lead to huge profits in the long-run (Ogilvie, 2006). World-wide integration strategy allows multinational firms to develop standardized products which bear global appeal thus are able to generate huge profits owing to the fact that they are generally accepted and preferred by many people.

Multinational firms can be adversely affected by the regulations imposed by banking institutions operating globally. Such challenges may be due to liquidity problems and interest rates. As a result, financial managers of the multinational firms must consider the cost of accessing loans in their countries of operation as well as investment opportunities available in those countries. They prefer operating in countries in which the banking sector is subject to international policies which have been set up by the International Monetary Fund.

The domestic firms are in direct dependence on the financial institutions that are operational in their respective countries and must comply to their set terms in relation to funding and interest rates (Moguillansky, 2003). Financial managers of multinational firms must put into consideration the impact of excessive debts towards their operations. Huge debts can derail the opportunities of growth and expansion. The managers must ensure that each subsidiary has sufficient credit for its operations so as to reduce chances of borrowing from financial intermediaries such as banks that attracts huge interests and other unfavorable terms.

Domestic firms are usually protected by their respective nations’ policies that aim at promoting employment opportunities hence they can easily access credit under favorable terms as opposed to multinational firms.ReferencesJakhotiya, G. P. (2003). Strategic financial management. London: Sangam Books Ltd.Moguillansky, G., United Nations., World Institute for Development Economics Research., & United Nations University. (2003). Corporate risk management and exchange rate volatility in Latin America.

Santiago, Chile: ECLAC, Office of the Executive Secretary.Ogilvie, J., & Chartered Institute of Management Accountants. (2006). Management accounting: Financial strategy. Oxford: CIMA/Elsevier.