The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows
What actions do you think a multinational firm can take to limit the impact of future crises in the global financial system on the ability of the enterprise to raise capital to pay its short-term bills and fund long-term investments?
For multinational companies to know what actions would be needed to avoid such future crises as faced before by the global financial system, it should know what would happen if it does occur. Depositors and investors would be the first ones to be influenced as they would lose large chunks of money with the collapse of the financial institutions. The financial crisis of 2008 showed how the business’s ability to finance would be reduced to zero. With this, the businesses would be forced to close, affecting the work cycle and reducing the loss of work and depositor deposits. The housing market would not be the only one which will get affected; all businesses would suffer. As all Americans would lose personal money, everyone, including the stock market investors would then try to save their money by pulling out the investment. It would cause the stock market to crash, causing millions to lose their investment.
For Multinational companies, they would like to avoid such situations, especially protectionism. The 1980s protectionism movement in the USA was caused because of three reasons; Firstly, the Japanese economic success pressured the trading system of the world, with Japanese markets closed to imports and any type of foreign trade. Secondly, many countries were getting around the GATT regulations quite easily. Lastly, the global trading system was facing pressure from the trade deficit witnessed in the US (Abboushi, 2010).
Multinationals would be needed to avoid the financial crisis by taking these steps. Student debt loans are very common in the USA. It should be looked into. These loans cannot be discharged in case of bankruptcy, and this can be a very risky situation for an investment. Student loan defaults have the influence which can drastically affect the economy and cause a recession (Phillips & Russell, 2018). Secondly, shadow banking is another such thing which is to be avoided. It is something which can easily cause the economy to slip into crisis. It is a phrase which is used for riskier investments, loan-shark operations, pawn shops, and peer to peer lending among businesses. These practices, which are outside the regulations, cause the money to go where it is needed. The giant Ponzi scheme was one such example where the banks need to be aware of their potential and do not get distracted by their size. It enables them to stay far from making any reckless decisions (Luo, 2018).
The recession would cause raising capital to be more difficult. Banks try to deleverage which along with the falling stock prices cause companies to look towards banks for loans, which is not there. Deleveraging causes an increase in government debts, and it creates a downward spiral which causes governments to step in and buy the assets. Interest rates are lowered, banks are encouraged to lend to businesses and consumers and promote spending. It calls for effective policies for economic betterment and banks need to stay away from raising their leverage. The assets which are used as collaterals also do not get the same values. This cause discount factors to be sued for valuation of assets. It is an index of bad financial times (Cochrane & Culp, 2013).
Multinationals can ensure that their company is profitable enough and recession proof by using diversification of their products and entering into sectors which are counter-cyclical to their main business sector. It is shown by the example of the education sector, which blossomed during the financial crisis as more enrollments were filed as more employees wanted to upscale their education to get jobs. Diversification regarding the geographical segment is another important strategy as not depending on one source of supplies, and plant locations and labor would allow it to diversify its risks as well. Certain economies are growing slowing does not mean every economy has the same growth rate. The Chinese and Indian economic growth was not affected by the financial crisis. The company should not be overleveraged as discussed earlier. It should do well to strategize its debt and leverage financing prudently.
Having a healthy balance sheet with an adequate amount of liquid assets always helps in coping in difficult times. This way the company would be able not to raise more leverage and get rid of its liabilities with its cash reserves. Most importantly, becoming aware of the economic conditions and remaining sensitive to all information is very important. Looking for early warnings and signs for the approaching crisis can always help companies to stay ahead and strategize accordingly.
To conclude, it is important to understand that the financial crisis does not happen without reasons. There are certain reasons which happen at the same time to push the economy in such a vicious circle of crisis. Remaining prudent and aware of such causes is the most important strategy to cope with any approaching crisis. Secondly, the operations of the company should be recession-proof. It means that the company should work on diversifying into countercyclical product lines or market segments to reduce its dependency on one product or market segment. Counter-cyclical stocks are the ones which negatively correlate with the economy. These may tend to be nonproductive in better economic conditions. However, it grows in the times of recession reducing the loss of multinational companies. Furthermore, multinationals should work on reducing their leverage and not getting involved in high government lending so that they do not become the victim of the recession.
References
Abboushi, S. (2010). Trade protectionism: reasons and outcomes. Competitiveness Review: An International Business Journal, 20(5), 384-394.
Cochrane, J., & Culp, C. (2013). Equilibrium Asset Pricing and Discount Factors: Overview and Implications for Derivatives Valuation and Risk Management. http://faculty.chicagobooth.edu/john.cochrane
/research/papers/cochrane-culp%20asset%20pricing.pdf
Luo, J. (2018, September 24). Shadow Banking. https://www.bloomberg.com/quicktake
/shadow-banking
Phillips, M., & Russell, K. (2018, September 12). The Next Financial Calamity Is Coming. Here’s What to Watch. https://www.nytimes.com/interactive/2018/09
/12/business/the-next-recession-financial-crisis.html
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