Relevance of Balance of Payments on Multinational Corporation

Relevance of Balance of Payments on Multinational Corporations

Introduction

The concept of Multinational Companies has gained popularity in recent years. In order to cater to a globalized target market, Organizations are entering new territories. A Multi National company is one which starts operations in its home country. But when it starts expanding to different territories, its called a Multi National company.

Multinational Companies have grown in stature over the years. There has been a massive increase in the Multinational Companies operating now, than say 20 years ago. Multinational Companies exert power and influence. Since they have a larger share of global Market, they compete aggressively with small companies. It has been observed that some Multinational Companies have contributed equivalent of the whole GDP for countries.. As a result Multinational companies can have a profound effect on the countries in which they do business (Anonymous, 2012).

The Balance of Payments

Balance of Payment is an essential document in international trade. It covers all the economic activities a country has with the rest of the world. It helps the Multinational Corporation to make an informed decision regarding the successful venturing into the new country. The competitive nature of industry has forced Organizations to venture into new markets. Since markets have become so much saturated, new markets bright prospects for Multinational Corporations (Bibow, 2012).

In order to fund for their different business needs, Multinationals have to import large amounts of capital. For setting up the office and factories, they have to import enormous amount of capital. In the start they need to pursue heavy business investments, so import of huge amount of capital is necessary. This increase in capital results in the decrease of current account. It signifies that the country is importing more rather than exporting. This creates a negative balance of payment for a country.

If the Multinational Corporation is producing locally which had to be imported, than the ratio of imports would fall. The balance of payment would be in a favorable position. On the other hand, if the Multinational Corporation is playing its part in the increase of exports, the balance of payment would be improved. The Government of that country would encourage that Multinational Corporation and others as well to operate their.

When it comes to felicitating the core competency, the Multinational Corporation would have to import that. If we take the case of technology, the Multinational Corporation would not be willing to compromise. It would want to import the same technology which it operates in its home country. If the technical equipment is not available locally, it would have to import from its home country. Such a situation would have a negative effect on the Balance of Payment.

A condition of no change in balance of payment occurs when the Multinational Corporation re invests its profits. On the other hand, if it sends back the profit to the home country, it has a negative impact in the balance of ...