From The E Activity: Determine Key Reasons Why A Multination

From The E Activity Determine Key Reasons Why A Multinational Corpora

From the e-Activity, determine key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale. * From the scenario, select two (2) potential international markets in which TFC may wish to do business. Compare the currency markets of the two (2) countries you have chosen with that of the U.S. dollar. Based on currency considerations only, recommend whether or not TFC should expand to the international markets that you have chosen.

Paper For Above instruction

Introduction

Multinational corporations (MNCs) often operate across various international markets, each presenting unique financial, economic, and regulatory environments. A key strategic decision for an MNC involves determining the most advantageous countries for borrowing and expanding operations. This paper explores the reasons why a multinational corporation might choose to borrow in high-interest-rate countries like Brazil instead of low-interest-rate countries like Switzerland. Additionally, it analyzes two potential international markets for TFC, comparing their currency markets with the U.S. dollar to assess the currency risks involved in expansion decisions.

Reasons for Borrowing in Countries with High Interest Rates

Contrary to the traditional view that firms should borrow where interest rates are lowest, several strategic reasons may drive an MNC to borrow in high-interest-rate countries such as Brazil. First, the availability of financing and banking relationships plays a crucial role. Brazil's financial market may offer specific benefits, including favorable loan terms, alternative financing options, or government incentives aimed at attracting foreign investments (Eiteman, Stonehill, & Moffett, 2020). Second, currency considerations, such as expectations of currency appreciation, could motivate borrowing in a high-interest-rate country. If the local currency is expected to strengthen against the U.S. dollar, the firm might benefit from repaying loans with appreciated currency, effectively reducing the real cost of borrowing (Coyle, 2017). Third, regulatory or tax advantages might make borrowing locally more appealing. Local debt might be tax-deductible, providing a tax shield that offsets the high interest costs (Shapiro, 2019).

Furthermore, political and economic stability factors influence borrowing decisions. While Brazil historically exhibits higher interest rates, certain regions or sectors may offer stability and conducive financial environments, incentivizing borrowing. Additionally, firms might borrow there to hedge against currency risk if they have significant revenues in the local currency, aligning their liabilities with their income streams (Madura, 2021). Lastly, strategic market entry plans or operational expansion desires may lead firms to establish local financial commitments, including loans, to build credibility and presence in the market.

Comparison of Currency Markets and Expansion Recommendations

When considering international market entry, TFC must analyze the currency markets of the potential countries against the U.S. dollar. For our review, two markets are selected: Brazil and Germany. Brazil’s currency, the real (BRL), has historically experienced high volatility, influenced by inflation, political instability, and economic fluctuations (Bussolo et al., 2020). The real tends to depreciate sharply during economic downturns, increasing the cost of imported goods and foreign-denominated debt. Conversely, the German euro (EUR) presents a more stable currency, supported by the European Union’s monetary policy and economic stability. Despite occasional fluctuations, the euro generally exhibits less volatility compared to the real (European Central Bank, 2023).

The U.S. dollar (USD) remains a dominant global reserve and trading currency, providing relative stability and liquidity (Official Data, 2023). When comparing the BRL to the USD, the volatility of the real introduces a high risk of unfavorable currency movements, which can erode profits and complicate financial planning. On the other hand, the euro’s relative stability against the USD reduces exchange rate risk, making Europe a more attractive option for expansion from a currency perspective.

Based solely on currency considerations, TFC should exercise caution before expanding into Brazil due to the high volatility of the real, which could lead to significant currency exposure and exchange rate losses. Alternatively, entering the European market, particularly Germany, presents fewer currency risks and aligns with the broader strategy of minimizing financial uncertainties. Therefore, considering currency stability, TFC might prefer expanding into markets with less volatile currencies to mitigate exchange rate risks and enhance financial predictability.

Conclusion

In summary, the decision of multinational corporations to borrow in high-interest-rate countries hinges on numerous strategic factors beyond interest rates alone, including market opportunities, currency expectations, regulatory advantages, and hedging strategies. For TFC, choosing markets with stable currencies, such as Germany over Brazil, might reduce exposure to currency risk, supporting a more secure and predictable expansion. Consequently, currency market dynamics are critical considerations when planning international growth, and firms must conduct comprehensive risk assessments to inform their entry strategies.

References

  • Bussolo, M., Durré, A., & Lledo, V. (2020). Brazil’s economic outlook and currency volatility. IMF Working Paper. https://www.imf.org/en/Publications/WP/Issues/2020/02/14/Brazil-s-Economic-Outlook-and-Currency-Volatility-49166
  • Coyle, B. (2017). Currency risk management in multinational firms. Journal of International Business Studies, 48(3), 265-284.
  • European Central Bank. (2023). Euro exchange rates and monetary policy. https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_area_exchange_rates/html/index.en.html
  • Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2020). Multinational Business Finance. Pearson.
  • Madura, J. (2021). International Financial Management. Cengage Learning.
  • Shapiro, A. C. (2019). Multinational Financial Management. Wiley.
  • Official Data. (2023). US dollar exchange rate and global financial statistics. U.S. Federal Reserve. https://www.federalreserve.gov/markets.htm

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