International Finance: Procter & Gamble

International Finance
Name
Institutional Affiliation
International Finance: Procter & Gamble (P&G)
Introduction
As businesses continue to grow, the ultimate goal for many managers becomes expanding operations outside the domestic market. Businesses that operate outside their mother country are known as multinational companies. Most multinational companies (MNCs) sprout from developed economies are guided by the need to increase operations and hence profit by establishing themselves in foreign markets. This paper aims to analyze foreign exchange markets and the factors and risks influencing exchange rates. In doing this, a case example of Procter and Gamble Inc. (P&G) is used. One of America's Fortune 500 MNCs, P&G offers consumer products particularly related to personal care in over 180 countries worldwide. The company boasts of a well-established brand portfolio and invests heavily in product and market research every year.
Advantages and Disadvantages of MNCs
Expanding business outside the domestic economy or the home country comes with some added advantages for a firm, including increased access to customers, access to cheap labor, the ability to spread risks, lower operations costs, and increased consumer confidence. However, this does not imply that multinational companies are not subject to certain disadvantages when operating in foreign markets. Among other disadvantages, these companies operate under foreign laws and regulations, which may at times turn out to be unfavorable as considered to those existing in the home country (Christensen et al., 2020). Other disadvantages that MNCs may face include complex logistics, cultural barriers, and difficulty monitoring fluctuations in currency, conducting market research, and credit risks. These disadvantages may at times outweigh the advantages of expansion in foreign markets and, if not well handled, may lead to business closures.
One of the benefits that P&G as an MNC enjoys is an increased customer base, which translates into increased profits. As aforementioned, P&G has a presence in over 180 countries around the world and a customer base of over four billion. In addition, the company's brand portfolio has generally been created through acquisitions and joint ventures, which has helped the company venture into new markets easily and faster (Christensen et al., 2020). This has also helped in growing domestic industries. Furthermore, it helps local producers or industries through partnerships where the latter supply some of the raw materials required for production by P&G and its subsidiaries.
Expansion into foreign markets has also helped the company to expand exports. While this helps host economies by increasing foreign currency holding, it also helps the home country through profit repatriation. Like many other MNCs, P&G has good control over research and development, spending about 400 million dollars in research and development every year. This investment has helped the company understand its customers' preferences and boost its profitability. In addition, the company's R&D strategy, which is based on partnerships with local companies and researchers, has seen its productivity grow by over 60 percent while reducing the cost of innovation (Christensen et al., 2020). Arguably, most of the company's products were developed through a partnership with external stakeholders through the "connect + develop" strategy.
One of the major disadvantages facing MNCs such as P&G is their inability to control currency fluctuation. Arguably, the exchange rate keeps on changing, with most changes being unpredictable. For smooth operations, MNCs must keep closure and watch on currency fluctuations as this has major effects on current operations and plans. In addition, most of P&G's foreign operations are based in developing economies whose associated currency is valued much lower than the dollar. This implies that these currencies are undervalued and may impact the company's net returns (Christensen et al., 2020). Another disadvantage that MNCs face is variations in accounting procedures. Most American-based companies rely on GAAP in their accounting practices. However, many countries require MNCs to apply international financial reporting standards instead. While the two accounting principles have some similarities in their application, they have some major differences. For example, the two standards differ in how companies are required to treat extraordinary items or unique events or revenue, for that matter. This implies that an American-based MNC will be required to apply the two accounting standards in reporting, and this practice may lead to discrepancies (Yasuda, 2015). In addition, business rules and regulations differ from one country to another. At times, companies take advantage of these differences to establish operations in foreign countries. For example, a company may choose to establish operations where labor regulations are not overly constraining. However, it is important to note that changes in existing rules and regulations can negatively impact an MNC (Lin, 2019). For example, if tax laws become more stringent, a company's operations in a foreign economy may suddenly become expensive.
Effects of MNCs on their Home Economy
Many MNCs sell much of their products outside their home country, and P&G is no exception. According to Henri et al. (2019), the Fortune 500 companies make over 1.5 trillion dollars, repatriated to home economies. For MNCs such as P&G, a weaker dollar helps as it implies that the company can sell its products at a lower price, but the same would imply more dollars in the domestic economy. As a result, P&G gains the highest percentage of its revenues from developing economies. Thus, it helps add to the GDP of the home economy through the repatriation of profits. In addition, most of the existing MNCs have been known to export talent from their home countries. Generally, most developing countries lack the talent particularly required for top management positions. In mitigating this and ensuring that companies continue to profit before training efforts can bear fruits, MNCs import talent from their home countries, thereby creating jobs while ensuring that their revenue is repatriated back home (Lipsey, 2004). Moreover, MNCs have the power to save regarding labor costs even when strict unionization laws characterize the home country. For example, by moving some or all operations to a country where union laws are not so demanding, an MNC can force law enforcers in the home country to rethink and redesign their union laws to avoid job loss and secure jobs for domestic workers.
Multinational companies can also be instrumental in tapping new technologies otherwise found only in foreign economies. For example, P&G successfully introduced super-concentrated detergents from Japan and is now selling these under the Ariel brand name in the European market and Tide in the home country. However, despite the above advantages to home economies, it has been noted that brand domination is currently dwindling for many MNCs (Yasuda, 2015). With this in mind, most MNCs have opted to produce top-quality products and present them in their host economies instead of creating price competition. On their part, consumers are continually opting for higher quality products regardless of the country of origin, which has had many MNCs rethinking their approach to product development and release to the market.
Foreign direct investment has also been seen as a source of domestic tension. One of the reasons companies undertake foreign direct investment is to take advantage of cheap labor in the new market. This, in turn, destroys jobs in the home country, leading to several issues. These include pay cuts, degradation of the union system, reduced bargaining power, and the inability to find new jobs for employees who have been laid off (Barbopoulos et al., 2018). In addition, FDIs often create a shift in demand for labor as white-collar jobs become more preferred than blue-collar jobs. In essence, FDI means that companies will be exporting their production activities abroad. However, these companies tend to concentrate on management, research, development, and marketing activities in the home country, jobs that are generally referred to as white-collar jobs (Lin, 2019). MNCs which originate from developed economies usually move their labor-intensive activities to develop countries while leaving their skill-intensive and capital-intensive activities at home.
Foreign direct investment has the tendency of increasing import expenses for their home economies. Entrance in new markets implies that part of the entire production line will be relocated in the new market. Consequently, the home country will be forced to import back products that were once produced at home. Moreover, entrance into new markets reduces competition in the home country, leading to monopolization. Companies left to operate in the home country will have increased market power allowing them a better chance to control it. Foreign direct investments also come with some dire economic issues such as decreased exports, tax revenues, and reduced buying power.
Impacts of FDIs on Host Countries
Foreign direct investments can assume different types depending on the expansion needs and opportunities facing a company. One such type of investment is a horizontal investment, where a company invests funds in a foreign company operating in the same industry (Yasuda, 2015). In this scenario, the parent company invests in a firm in another economy and produces t...