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Global Financial Strategy

Introduction: Global Financial Strategy

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In today's world businesses are highly connected whether national or international. All these businesses which deal in the international market are expanding and flourishing day by day since globalization was on track to become normal in the world. (Chalyuket. al. 2021). Multinational companies or MNCs are called a messenger of the progress of companies in other countries. A multinational corporation encourages the technological growth of the company and the country. There are various organizational advantages that highlight the importance of international business to become MNCs which are as follows:

  1. Brand recognition, which is highly valued at the international business level 
  2. Risk analyses, It helps the company to spread its risk among the various countries it deals in. If the economy is slow or demand for the product is decreasing in one country, it can be remitted to another country. 
  3. Opportunities, multinational corporations have the opportunity to compete with larger companies and might receive economies of scale.
  4. Target market, for the survival of a multinational company the internet plays a vital role as it provides a market for many products if becoming more global.
  5. Multi-national companies have technology advantages. 
  6. Reduced cost, the establishment of the company in various regions helps in reducing cost and also helps in reducing transportation costs.

For understanding more about the global environment and its impacts on multinational businesses and their working, the report is considering Facebook as the case company. 

Company Background

Facebook is an American social networking service whose parent company is Meta platforms, with headquarters in Menlo Park, California. The company was founded in 2004 by Mark Zuckerberg who was a student at Harvard University (Knautz, and S Katsiaryna, 2016). Facebook is the largest social media platform all across the world, with around 3 billion users according to 2021 data. The company earns most of its profits from advertisements on its websites as it is also used for advertisement purposes for various other companies (Brügger, 2015). 

Facebook

Figure.1 Facebook

Key attractions for the company when investing in foreign countries (FDI)

Foreign direct investment has a very important role in economic development policy and the global business environment. There are so many companies all across the world that have established National Investment Promotion Agencies also known as IPAs which mandate to attract foreign direct investment. Foreign direct investment is also known as investment from one country to another country for growth and economic development (Jonesand Wren, 2016). In today's global environment by investing in FDI the international business and economic relations between countries and companies become strong, this kind of investment is mostly popular in developed countries. Company before investing in foreign countries look for the factors like Adequacy of cash flow, law and contract related to stability and enforcement, regulatory independence, control of investors over investment (Seid, 2018).

The trends of revenues by business

Facebook 5 year trends of revenue

Figure.2 Facebook 5 year trends of revenue

The above figure 2 provides a detailed analysis of the 5-year trends of revenue. To maintain the segments of the business area Facebook covered the demographic age to acquire the smart acquisition by focusing on Instagram and WhatsApp. The total revenue earned from Instagram is of 1$billion and through WhatsApp is $16 billion. In 2021 the company generated $117.9 billion and $40.5 comes from its Facebook App.

Sources of risks and assessment of risks

There is a variability of decisions that governments take which affects individual businesses, the overall economy as well the industry. These effects include taxes, regulation, spending, and currency valuation, labour laws like the minimum wage, trade tariffs, and environmental regulations. Regulations regarding risk mitigation can be set at every level of government which also includes state and local, as well as federal laws and also in other countries.Exchange rate risk is a risk that an effect company’s operations and profitability by bringing change in the exchange rates between various currencies of countries. There are three types of risk produced by currency instability: transaction exposure, economic or operating exposure, and translation exposure (Lloyd, and Marin, 2019). The risks regarding operating exposure can be lightenedby applying currency risk mitigation techniques and operational strategies.

The sources of exchange rate risks and political risks that the company has faced

Exchange rate 

In today's global market, exchange rate risk creates a great impact on multinational businesses as well as businesses that trade in international markets, and also on small and medium enterprises. The types of exchange rate risk are as follows: 

  • Transaction exposure– This risk arises from the effect that exchange rate variation have on a company’s responsibility to receive or make payments in foreign currency denomination. The nature of this exposure is usually short-term. 
  • Translation exposure– This exchange rate risk occurs from the currency fluctuations on a company’s consolidated financial statements, mostly when the corporation has foreign subsidiaries with it. This kind of risk exposure is medium to long-term.
  • Operating or monetary exposure – This risk exposure is not as popular as the above two exposure but have a significant risk. This risk is the outcome of unforeseen currency fluctuations in a company'smarket value and future cash flows (Jayashree and Priya, 2019). This risk exposure is long-term in nature. The effect of this exposure can be extensive, as surprising exchange rate changes have a great impact on a company’s competitive position in the market. 

Exchange rate risk fluctuation have both negative as well a positive effect on a company's market position. The currency rate and economy of the country are directly related to each other which refers to that the company has a great attraction of investors from overseas which also helps the economy of the country to become strong.   

Political risk

Political risk refers to the return on investment which suffer due to political changes and instability in the country. Instability in a countryhas a great effect on investment returns which stem from a fluctuation in government, other foreign policymakers, legislative bodies, and military control in the country. Political risk is also called geopolitical risk. This political risk is also considered a type of jurisdiction risk.

The levels of political risk might be influenced by factors that are related to politics, like fund remittance control, host government expropriation, differences in cultural practices and government, and also onpolitical instability in the country (Kurosawaet. al. 2017). These outcomeshave a great impact on exposure to the political risk for the companies. 

Standard deviation 

Standard deviation is a popular indicator of volatility which measures oscillation of stocks in comparison average. Higher the volatility for the time period, greater will be the price variation during particular period. Below Figure 3 includes table and graph shows 10 years volatility measures of Facebook Inc. 

 10 years volatility measures of Facebook

Figure.3 10 years volatility measures of Facebook

year

Volatility ($)

2012

3.93

2013

10.60

2014

7.31

2015

10.19

2016

8.88

2017

17.34

2018

19.94

2019

16.02

2020

38.49

2021

34.78

2022 (as on 2022-06-27)

49.11

Assess the potential impacts of different types of risks

In the current globalized world, various types of risks have the potential impact to affect the company, these risks are as follows:

  • Geopolitical risk – These risks are focused on the instability that occurs from a relationship with different states and opportunities available for the company in the global market where several different companies from various countries are involved. The matters like diplomatic outreach, conflicts, and internal strife all have a huge impact on international companies like Facebook. 
  • Economical risk – This risk involves a variety of issues and matters which are related to the monetary system and financial system as well, which further have a great impact on trade, bond investments, growth, global politics, and exchange rates as well. 
  • Environmental risk – Comprises dangers that affect the health of humans, plants, and animals and also the chances of weakened natural resources (Aven, 2017). These risks are to be considered vigorous for regulatory compliance and corporate policy and regulatory agreement for the company.
  • Societal risk - This risk takes anextensiveviewpoint on the long-term and wide-ranging effects that causes events like natural disasters, infrastructure collapse, or industrial accidents which have a great impact on the population as well the international companies like Facebook. 
  • Technological risk – This risk isconsidering the significance to governments and companies that might occur from the difficulties of implementing new systems, cooperated data, technical failures, mishandling of resources, and cyberattacks. As we all know one of the biggest drawbacks of Facebook is data leakage and security of user data. 

Evaluation of Risk management strategy

Face book’s strategies regarding the management of risk which were discussed above are as follows:

Exchange rate risk 

As discussed above Exchange rate risk is a risk that cannot be avoided in case of investment in foreign countries and FDI, but this risk could be mitigated significantlywith the use of various strategies that the company uses for mitigating the risk of exchange rate risk company opts for hedging techniques. This is the easiest solution for mitigating exchange rate risk in these investments is done in hedge funds such as hedged ETFs (Zhang et. al. 2020). 

The forex risk is hedged by the fund manager of the hedged ETF at a relatively low cost. However, the company holding foreign-currency bonds or stocks, or even American depository receipts(ADRs) considers hedging exchange rate risk by use of the many paths available like currency, futures, forwards, ETFs, or options. This strategy helps the company to mitigate the risk involved in exchange rate fluctuation. 

Political risk

The company’s political risk management strategies can safeguard and save time, and money, and alsostopdistressing business impacts.  The company's strategy to mitigate political risk is as follows:

  • Analyzing the risk - It is important to research and analyze the local infrastructure of a region in which the company is investing.
  • Consulting with the local partner companies – establishing relationships with local organizations and also small companies to gain knowledge and understand the market, specific risks, and local political system of a particular country or state before investing
  • Banking – to mitigate financial risk employing local banks in a particular country or state is very important, it also helps in reducing political risk.
  • Political risk insurance – companies need to have insurance to protect investments and assets.
  • Constantly monitoring global issues – company actively monitors global issues and stays up-to-date on local issues and policy to prepare and plan for probable risk mitigation.

The effectiveness of the company's risk management policies

Risk management is defined as the classification, prioritization, and assessment of risks that occurred by cost-effective application to monitor and control the impact of uncertain impact on the company. Risk management protect and adds cost to the company's stakeholders by supporting the objectives of the organization. Effective risk management comprises a good risk management process and risk management structure(Hopkin, 2018). 

The risk management policy of the company also play an important role during the global merger and acquisition of the company as it is known that Facebook's parent company is Meta, Meta also owns various other social networking sites like Instagram and WhatsApp and many other. In the case of mergers and acquisitions in global companies, there is a huge risk involved. 

Global M&A activity has practiced the slowest quarter in Q3, 2022 from the pandemic in 2020. The collectiveagreement value for the quarter was $443B, a -50% which further decreased to Q2 and a -58% reduction compared to Q3 in  2021. the companies and investors are struggling tohandle the challenges which are global inflation and the effects of close-fitted financial conditions affecting the financing andglobal market volatility.

Recommendation and Justification

A company like Facebook needs to consider various risk assessment techniques which will assist the business to decreasethe risk and the company should also apply several risk mitigationtools and policies for overcoming the risk it faced. To create a good risk management policy company should consider the following points:

  • Focusing on establishing a risk intelligence framework for the company 
  • The company should consider risk management as an internal part of the company, not as an external part, this helps the workforce to understand the risk and find solutions to it.
  • The company needs to focus decision-making process regarding global challenges and foreign investments (Kezar, 2020). 
  • The company should make sure that all recent risk exposure and expected exposure are properly identified and evaluated. 
  • The company needs to focus on making relevant legal and regulatory requirements and norms regarding global investments and dealing.

Conclusion

The report is made to demonstrate an outstanding knowledge of the company’s business, characteristics, reasons to become MNCs, 5-year trends in geographical location of turnover and profit by business segments and key changes that affect the company. The report also covered the sources of risks including exchange rate risk and political risk with evidence of strong critical thinking.

The key feature of the report is to develop ability for communicating information and articulate complex arguments, convincingly, to influence and persuade stakeholders.

References

 Alexander Martin, 2019. Company Background. Facebook changes logo - to avoid confusion with Facebook. [Online]. Available through :<https://news.sky.com/story/facebook-changes-logo-to-avoid-confusion-with-facebook-11854673>. [Assessed on 5/11/2022]. 

Aven, T., 2017. How some types of risk assessments can support resilience analysis and management. Reliability Engineering & System Safety167, pp.536-543.

Brügger, N., 2015. A brief history of Facebook as a media text: The development of an empty structure. First Monday.

Chalyuk, Y., Dovhanyk, N., Kurbala, N., Komarova, K. and Kovalchuk, N., 2021. The digital economy in a global environment.

ClaireG, 2020. Facebook 5 year trends of revenue. Facebook: more than 98% of its revenue came from advertising in 2019 (Online). https://www.livre-marketingdigital.fr/revenus-facebook/ accessed on 08.11.2022.

Hopkin, P., 2018. Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Jayashree, G. and Priya, I.C.M., 2019. An Empirical Study on the Various Risks in Foreign Exchange Market and its Impact in Global Business Transactions. International Journal of Trend in Scientific Research and Development5(3), pp.2613-2615.

Jones, J. and Wren, C., 2016. Foreign direct investment and the regional economy. Routledge.

Kezar, A.J. ed., 2020. Rethinking leadership in a complex, multicultural, and global environment: New concepts and models for higher education. Stylus Publishing, LLC.

Knautz, K. and S Katsiaryna, B., 2016. Facets of Facebook: Use and users (p. 339). de Gruyter.

Kurosawa, T., Forbes, N. and Wubs, B., 2017. Political risks and nationalism. In The Routledge companion to the makers of global business. Taylor & Francis.

Lloyd, S.P. and Marin, E.A., 2019. Exchange rate risk and business cycles.

Netcials, 2022. Facebook Inc Stock Volatility [Standard Deviation]. (Online). :<https://www.netcials.com/stock-volatility-nasdaq/FB-Facebook-Inc/>. (Accessed on 24.11.2022). 

Pandya, S.S., 2016. Political economy of foreign direct investment: Globalized production in the twenty-first century. Annual Review of Political Science19(1), pp.455-475.

Seid, S., 2018. Global regulation of foreign direct investment. Routledge.

Soltanizadeh, S., Rasid, S.Z.A., Golshan, N.M. and Ismail, W.K.W., 2016. Business strategy, enterprise risk management and organizational performance. Management Research Review.

Tutor2u Limited, 2018. Exchange Rates - Macroeconomic Effects of Currency Fluctuations(Online). <https://www.tutor2u.net/economics/reference/exchange-rates-macroeconomic-effects-of-currency-fluctuations> accessed on 24.11.2022.

Yu, X., Zhang, W.G., Liu, Y.J., Wang, X. and Wang, C., 2020. Hedging the exchange rate risk for international portfolios. Mathematics and computers in simulation173, pp.85-104.

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