search

Global Financial Crisis/cross-border Capital Flows

Download

Please note! This essay has been submitted by a student.

Download PDF

Abstract

Multinational firms (MNF) face a number of risks such as financial, business and technology related risks, cultural adjustment risks, product acceptance, and several others. They develop several strategies to mitigate these risks. This paper discusses the problems and the actions that a MNF can take to limit the impact of future crises in the global financial system on the ability of the enterprise to raise capital to pay its short-term bills and fund long-term investments.

Introduction

The financial crisis of 2007 placed a great burden on liquidity in the markets, and crippled the ability of MNFs to raise capital and clear their obligations. Many large banks such as Lehman Brothers that were considered as too big to fail collapsed and went bankrupt. Cross-border flows that had peaked to $ 11.8 trillion, crashed to less than $6.2 trillion by 2012. Many European nations went into deflation since the value of assets reduced, crashing the prices. Crude oil that had reached a peak of $146/ barrel started trading at $46/ barrel, plunging many countries with high oil economies into recession (James, McLoughlin and Rankin, 2014). Since the financial system was integrated across the world, the effect of the collapse was felt through Europe, and many banks in UK failed. These failed banks and many other banks and businesses had underwritten several risky housing proposals for several customers who did not have the ability to repay their debts, leading to a systemic collapse. Several measures and solutions are available for firms to avoid such problems (Bekaer and Hodrick, 2017).

Essay due? We'll write it for you!

Any subject

Min. 3-hour delivery

Pay if satisfied

Get your price

Borio, Drehmann and Tsatsaronis (2017 argues that while banks had a large number of mortgages and seized the assets, an oversupply of these assets forced the value down. The effect of the sub-prime US housing market extended to capital markets, and many small and large firms faced severe problems. The unfortunate aspect is that the financial system is still susceptible to such failures. With a deep financial crises and doubts, bankers are not willing to lend funds to businesses and individuals. Banks operate mainly in the unsecured banking process, where they exchange unsecured treasury notes, based on trust. These treasury notes are based on assets and funds the banks have. Once the financial recession set in, banks refused to accept these treasury notes, cutting off access to funds.

Short-term solutions

An MNC can take several other actions and plan for financial crises to survive, grow and raise funds. When a firm demonstrates that it has taken these measures, banks have a positive outlook, and investors are assured that their investment will grow. These are explained as follows.

Financial arrangements: Firms need funds to take care of operating expenses and pay wages and bills. Funds can be raised as loans from banks who would demand to see the financials, balance sheets, order books, and customer list. A firm with a strong balance sheet can obtain funds. A firm with a negative balance sheet will find few takers. In such cases, the MNF needs to reduce loss making units, remove redundant products, develop new products with sufficient potential, and develop a robust marketing channel, and increase sales. It may also be necessary to revamp the production, improve productivity and quality. Investments are needed for these activities, and the firm can draw up a business plan and present it to banks (Casey and O’Toole, 2014).

Financial risk management: One of the important activities is to identify various types of risk events that threaten the financial stability of the firm. Some of these risks are changing interest rates, fluctuating exchange rates, rise in material and product costs that can increase manufacturing costs, demands from banks to settle debts, fall in share value leading to loss of investor confidence, etc (Fink and Schüler, 2015).

Currency variation: Many MNFs, especially those dealing with emerging economies, face problems due to currency and exchange fluctuations. The USD rises and falls by 10-12%, and this can impact remittances and the supply chain partners. A study must be taken to understand the components of the supply chain, and elements that gain or lose from currency fluctuation. The process of currency futures has its own risks, and it must be covered by understanding the market trends, demand and supply, and economic conditions (Schwaab, Koopman and Lucas, 2017).

Financial reconstruction: Financial reconstruction is rather drastic, but necessary for a firm that faces problems. The process can involve splitting a firm into different entities, selling off or closing down toxic assets, selling off other assets, laying off workers, and several other actions, which help the firm to recover. Financial reconstruction is an extreme measure taken up when the firm is on the way to insolvency, and it can involve consultation with the government, investors, workers unions, and banking agencies. When the firm is restructured, it acquires a new identity, with expectations that the same problems will not be repeated (Ausgabe, 2016).

Product portfolio: One of the methods for a firm to reduce the financial burden is to trim the product portfolio. The MNF needs to examine the market and competitor products, identify products that have higher sales with appreciating potential and products that have reached the end of their life, and select products that sell. Costs of maintaining the products will then reduce and the financial situation can improve. The process can help to increase stability, and the firm can save sufficient money to pay short-term payables (Ausgabe, 2016).

Market consolidation: The term refers to taking a rationale view of the market, understand competitor activities and products in demand, and take up activities that provide financial stability. It may be necessary to take up alliances and enter into joint ventures and expand in selected markets with the right products. However, the firm must have the capability to offer something feasible to partners (Ausgabe, 2016).

Long-term solutions to MNFs

Several solutions are available for MNFs to manage the financial risks and to raise capital. Singh and LaBrosse (2012) suggest a framework that can help to mitigate and avert financial crisis, retain financial stability, and encourage investors. The authors suggest that a financial safety net (FSN) must be developed that can help to absorb the insecurities of financial markets. An important aspect is that funds can be raised from the market and from banks, when the firm shows strong financials. Fig 1 illustrates a framework for financial crises management.

The financial risks safety net, covering 10 stages. Depending on the products and markets, an MNF may not have to go through all the stages. However, it is essential to understand important aspects of the safety net. MNFs operate through multiple currencies, political systems, and markets. Therefore, they have exposure to risks and events even in small countries, where they have interests. Small events such as currency fluctuations, policy changes, increase in tariffs and other rules, can impact the finances (Singh and LaBrosse, 2012).

Therefore, in stage 1, the MNF understands the local and global scenario, and in stage 2, it needs to have a dialogue with cross border entities, clients, and review the trends in policy changes. If the trends are favorable, then the firm can consider continuing the activities, and if the trends are not favorable, then the MNF needs to scale back the investments, put expansion plans on hold. These activities can have a global perspective, and unless a product or service is designed to counter systemic events, the MNF should be cautious. In stage 3, based on systemic events and unhealthy trends, the firm needs to refer the development to an internal financial stability committee. Their decisions are formed after an assessment of market viability and institution viability, as indicated in stage 4. Market viability refers to the capability of the market to absorb goods and yield funds. Institution ability refers to the capability of the firm to seize these opportunities (Singh and LaBrosse, 2012).

In stage 5, the firms examines the solvency and the liquidity and in stage 6, market based solutions are developed that have different scenarios such as good, bad, and ugly. Stage 7 is critical since it covers the loss minimization process, when the market conditions are bad. Firms can use funds from ‘lender of last resort’ (LOLR), and these are institutions that lend funds, help to overcome liquidity crises, or raise funds from the market. However, during a financial crisis, the ability to raise funds from the market is limited. Firms can take up other critical functions such as asset purchase, recapitalization and restructuring, and let the investment sink if the costs are high. Stages 9 and 10 cover the stakeholders and the local government (Singh and LaBrosse, 2012). An important aspect of this framework is that it helps to plans for the future and prevents panic reactions when the conditions become negative.

Conclusions

The ability of a firm to gain financial stability, repay debts, limit the impact of future crises, depends on improving the internal structure and the macro environment. Short term debts, and long term growth are possible, when the MNF improves the financial system, manages risks such of currency fluctuation and material costs, and improves the product line. Banks would not lend to financially distressed firms, and investors would not be willing to invest in loss making firms. Therefore, the best method is to take up a market analysis, study the trends and the possible impact on the firm, and take up appropriate actions. The paper examined various solutions along with a framework to address these problems.

75
writers online
to help you with essay
banner clock
Clock is ticking and inspiration doesn't come?
We`ll do boring work for you. No plagiarism guarantee. Deadline from 3 hours.

We use cookies to offer you the best experience. By continuing, we’ll assume you agree with our Cookies policy.