1. Describe the ways in which a MNC can undertake short-term international borrowing.

Financial borrowings, if managed efficiently, can prove to the path to success and prosperity. These days, all MNCs (Multinational Companies) aim to get through the lowest borrowing costs possible, and there are two basic ways for Multinationals to opt for short-term overseas (international) borrowing.

1. Internal Borrowing: Internal borrowing on a short-term basis is possible by obtaining finance from the subsidiary structure of the firm itself. MNCs can utilize internal financing by transferring funds from a subsidiary and/ or by increasing mark-ups on supplies sent to subsidiaries.

2. External Borrowing: Eurocurrency market is an important source of external financing when it comes to the cost-effectiveness of large firms with excellent credit ratings.

Euro notes: Multinational Firms are at the liberty to issue unsecured debts underwritten by commercial banks, which in turn guarantees a selling price.

Euro-commercial paper: Here, the company issues its own debt – similar to Euro notes except that the paper is not underwritten.

Euro bank Loans: In this case, firms opt to take direct loans from Euro banks

What might motivate a company to undertake short-term international borrowing?

One of the greatest motivations for companies to turn to short-term financing is that it comes out cheaper. Many a times, foreign currencies offer lower nominal interest rates than the domestic interest rate. Some of the other benefits are foreign currency is recession resistant i.e. unlike stock markets, and foreign exchange markets are very much immune to recessionary pressures. Nest, short-term financing are liquid investments thus allowing investors to withdraw their money at any point of time; and finally, short-term international financing is extremely convenient.

Risks of short-term International Financing

MNCs into short-term international financing are subject to facing risk factors when they fall into “maturity mismatch” difficulties i.e. assets backing short-term funds are more liquid compared to liabilities; while the second risk factor, is a “bad” equilibrium. Bad equilibrium refers to a scenario where firms undertaking short-term international financing lose their confidence in a nation’s ability to service its outstanding debt obligations.

2. From the point of view of a MNC, what do you consider to be the most significant risks and uncertainties associated with FDI?

Risk factors involved with the Foreign Direct Investments, can be categorized as follows: a) political risks, and b) economic risks

Political risks i.e. perceived risks of war, civil unrest and terrorism, may bring with it a negative impact on the DI decision. And secondly, the concerns of economic risks related to inflations and currency fluctuations too rank fairly high in the risks and uncertainties involved with FDIs.

3. How has foreign direct investment changed and expanded since the growth of the world economy in the nineteenth century.

Even before the World War 1, the Foreign Direct Investment, also known as the portfolio investment was looked upon as the international investment norm. Post World War 2, FDI had all the reasons to grow; a) Transportation and Telecommunications improvement, and b) US assistance was sought after by Japan and some of the European countries.

Changes affected since then:

US became the net debtors around the year 1980. Over the same period, Japan emerged as a major source of FDI.

In the early 1990s, FDI declined only to rebound subsequently of the following reasons: FDI was no longer the copyright of the large firms, the diversity of FDI was broadened, there was a rise in the number of countries involved in FDI and finally, US recovered with a zing from the early 1990s recessionary pressures. During this period, Japan experienced the decline in its importance as the source of FDI, primarily because of the stagnation in domestic economy of the country.

References:

·         Callingham, John J. 2008, ‘3 Excellent Benefits of Foreign Currency Exchange Trading’, [Online] Available at: http://www.articlesbase.com/finance-articles/3-excellent-benefits-of-foreign-currency-exchange-trading-490877.html

·         Spiegel, Mark M. 2000, ‘Short-term International Borrowing and Financial Fragility’, Economic Research And Data, [Online] Available at: http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-26.html#subhead5

·         Esson, A.J, ‘Tax Incentives for Foreign Direct Incentives’, [Online] Available at: http://books.google.co.in/books?id=QdqDqPs1g1gC;pg=PA29;lpg=PA29;dq=FDI+risk+factors;source=web;ots=55N5f1S8lt;sig=RFmEI9Na9R2lZsLsZcrVtNJGCTw;hl=en;sa=X;oi=book_result;resnum=7;ct=result#PPA30,M1

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