Money, Banking, and International FinanceReason 1 0 : A company investing in a foreign market today may lead to future investments.
For example, a company opens a subsidiary in Moscow, Russia. After establishing the
subsidiary, the company can open branches in other Russian cities or enter other Russian
speaking countries.
Reason 1 1 : A company that produces in a foreign market reduces economic exposure.
Economic exposure is changes in economic factors, such as inflation, interest rates, and
exchange rates affect a company's profits. One important factor is fluctuating exchange rates. A
company could experience wide swings in profits if it produces in one country and exports to
another. However, if the company produces and sells within the same country, fluctuating
exchange rates would impact less because the company’s revenues and costs are denominated in
the same currency. Thus, a company's profit could remain stable in a foreign market.
Reason 1 2 : Many companies relocate subsidiaries to politically safe and business-friendly
countries, such as the Bahamas, Dubai, and Singapore. These countries have low taxes and few
regulations.
Multinational enterprises are more complicated than businesses that remain in their home
country. First, the businesses transfer resources, such as machines, equipment, and labor
between different countries. Next, they ship products and services to other countries.
Consequently, companies need excellent management in logistics, and specialists who monitors
a country’s different laws and regulations. Second, international enterprises are exposed to
exchange rate risks and credit risks. Thus, a company’s profit can quickly change due to
fluctuations in currency exchange rates, or a company cannot get credit to finance operations in
a specific country. Finally, enterprises have other exposures, such as country risk. For example,
when Hugo Chavez became president of Venezuela, his government began nationalizing
companies. Any international enterprise in Venezuela can experience the seizure of its assets
without compensation.
A country risk is the risk of investing in a particular country as political conditions rapidly
change. For example, the Republic of Kazakhstan was a former state of the Soviet Union that
became an independent country in 1991. Country’s president, Nursultan Nazarbayev, opened its
economy to free markets in early 1990s. Consequently, Kazakhstan made great strides towards a
market economy and attracted billions in international investment because the country contains
vast petroleum and mineral wealth. After the 2008 Financial Crisis, the Kazakh government is
gradually reviving the Soviet rules, practices, and regulations. Unfortunately, the Soviet legal
system is very bureaucratic, slow, and arbitrary, and suffers from corruption and political
favoritism. Moreover, the Kazakh government nationalized several foreign-owned companies,
and international investment began plummeting in 2012.
The Law of Comparative Advantage
Law of Comparative Advantage forms the basis of free trade. David Ricardo, a British
political economist, formulated the law in the 19 century. It states two countries can benefit
from trade by specializing in the production of goods where a country has a relatively cheaper
cost. Thus, governments that instituted free trade between themselves help fuel the rapid growth
of globalization and the rise of the multinational enterprises. Political leaders reduced their