1- Hello, good afternoon Professor and classmates,
The capital budgeting structures differ differently from the regular expenditures companies make during their operating cycle. The dissimilarities include the amounts of money spent and how long investments are expected to generate returns. Capital budgeting most often uses periods more significant than a year. Money invested in facilities or revenue-generating equipment requires capital budgeting calculations to be done precisely and precisely (Mubashar & Yasir, 2019). Religious groups and political groups may have a grande impact on the say of such companies which the MNC’s may have capital assets in politically unstable countries, making accurate relocations of assets and decisions with critical conditions on a global standpoint (Eiteman, & Stonehill et el., 2021).
The political upheaval and the political stability of a country depend on and differs on the different impacts of borrowing costs, regulations, taxes for businesses. Kickbacks and other forms of corruption have severe repercussions for MNC’s. For example, Turkey has experienced several economic and political setbacks that raised borrowing for the national government. In corruption allegations, the compressing of the conditions and financial volatility within the country made it more challenging for corporate entities to operate their an effective fashion (Bellamy, & Matteo et al., 2019) In the political risk is the influence of political decisions in which might have risk factors too that the government of in which the multinational companies or located in.
Political risks are inevitable and should be corresponded and acted upon promptly with only the most adequate manners necessary in which in some wide variety of cases causes the government to seize property adequately to seize property and necessary compensating powers in which are instrumental in the distribution of products and the continuing process in which continues to demand more in countries in which do experience less of an economical backup or is suffering recession’s in their midst (Kengatharan, 2018). The political risks such as a way of believing in a way can affect the multinational capital budgeting by acquiring or finding the need to buy certain products because of the sanctions and exportation risks in analyzations from political parties from within the country.
References
Bellamy, R., Matteo, B., Dario, C., Lacey, J., Näsström Sofia, Owen, D., & White, J. (2019). The
Democratic Production of Political Cohesion: Partisanship, Institutional Design, and Life
Form. Contemporary Political Theory, 18(2), 282-310. http://dx.doi.org/10.1057/s41296-
018-00285-w
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2021). Multinational Business Finance. Pearson.
Kengatharan, L. (2018). Corporate Finance Practices in Sri Lanka. Asian Economic and
Financial Review, 8(3), 406-423.
http://dx.doi.org/10.18488/journal.aefr.2018.83.406.423
Mubashar, A., & Yasir, B. T. (2019). Capital budgeting decision-making practices: evidence
from Pakistan. Journal of Advances in Management Research, 16(2), 142-167.
http://dx.doi.org/10.1108/JAMR-07-2018-0055
2-Hi Professor and Classmates,
As companies or multinational corporations there are a few things or variables that can prevented or planned for, or not. Thanks to Globalization and other technologies the world has evolved and MNEs are only left with two options, which are either to plan and mitigate for political risks or buy insurance for it while doing business in risky zones like Venezuela, Cuba, or places dictators have control over their economies. To begin, we can define political risk as actions that can impact a MNE negatively; for example, no revenues made due to a political riot like Latam American countries have experienced since the 50’s. Furthermore, at a higher-level government can seize property without paying its owners a single dime, or a total expropriation (or nationalization) for the MNEs factories. For example, the Turkish government has targeted those domestic companies associated with the Gulen movement, which it claims was behind the attempt back in 2016. The actions have included arbitrary impositions of regulatory requirements up to outright expropriation. The impact to Canadian companies has been that they have needed to add a further level of counterparty due diligence to any business dealings with Turkish companies to determine their relationship with the government (Tobman, 2021).
Moreover, according to Ji and Wang sufficient evidence suggests that MNEs under strong government regulations hurt the economic effects of political connections, which not only leads to competitive disadvantages and loss of innovation, but also less willingness to take risk. For example, back in 2008 the Chinese government proclaimed new policies to regulate government officials concurrently holding the positions of independent directors in firms. State-owned or government related MNEs by nature have political connections. The government not only appoints directors to the board, but also management. Furthermore, the government may have the authority to assign retired officials as independent directors. Consequently, due to strict governmental regulations in industries and high state ownership in firms, Chinese companies tend to establish political connections for the purposes of reducing governmental checkups and getting more government resources. As a result of this, MNEs loss control of their companies, and the Chinese government took over (Ji & Wang, 2018).
Reference
Tobman, I. (2021, August 9). 3 types of political risks and how to manage them. EDC. Retrieved October 12, 2021, from https://www.edc.ca/en/blog/managing-political-risks.html.
Ji, S., & Wang, G. Y. (2018). Political Connections, Government Regulations and Risk-Taking–Evidence From China. Frontiers of Economics in China, 13(4), 655+. https://link.gale.com/apps/doc/A570688705/AONE?u=l…
3- “Capital budget is a financial tool that will help you estimate the value, and the profitability of the projects are compared by the discounting their cash flows by the relative risk factor(Rodeck, 2016).” The risk of the budget can increase the project risk, the current market risk, and any international risk exposure. When you are investing a budget analysis will allow you to compare the present value of each project which is based on the projected cash flows and their timelines. It has been advised that you discount each project’s cash flow with the rate of return. Each project is required to have a rate of return between the combination of your cost of capital plus and the additional return for the riskiness of that project. Keep in mind the risker a project is the higher rate will need to be.
Some risks may be a long-term investments. Project risk weighs the chance that a project may not be as profitable as you would have due to errors from the company or the project itself. If you decide to invest in a company or project that isn’t in your areas of expertise you increase that risk. For example, if you have a business in clothing and decide to invest in a restaurant you are increasing your project risk. This is because you are investing in an unfamiliar area. If you are doing business in a different country, you are increasing your risk and now you have international risk. When you are dealing with the international risk you are dealing with the political and exchange-risk of the project. Depending on the country the project is based in will typically depend on the political structure, civil or political unrest. These factors alone will determine if an investment is worth it or if it would be lost.
The world is constantly changing especially in the global world. “Debenedetti said, “The ever-changing dynamics of the global politics can wreak havoc on economic conditions that are solid investments into financial disasters(DeBenedetti, 2016).” MNC(multinational corporations) have to know and mitigate the political risk to avoid losing any profit. The stability of a country plays a huge role in budgeting. The political stability country would include the borrowing cost, taxes, and regulation of the business. Political risk plays a huge role in capital budgeting. It’s important to understand the risk of the current state of a country and the project risk along with any other risk that may be involved. Each factor is like a chain effect one will affect the other.
Resources
DeBenedetti, J. (2016, September 29). How political risk affects capital budgeting in multinational companies. Your Business. Retrieved October 13, 2021, from com/political-risk-affects-capital-budgeting-multinational-companies-29232.html”>https://yourbusiness.azcentral.com/political-risk-affects-capital-budgeting-multinational-companies-29232.html.
Rodeck, D. (2016, October 26). What factors increase the riskiness of a capital budgeting project? Small Business – Chron.com. Retrieved October 13, 2021, from com/factors-increase-riskiness-capital-budgeting-project-15829.html”>https://smallbusiness.chron.com/factors-increase-riskiness-capital-budgeting-project-15829.html.
0 comments