Essay Networks

A corporation that operates in foreign countries must understand globalization and foreign financial risk. When a corporation operates on a global level, there are many financial risk factors that need to be taken into consideration. These risk factors include foreign exchange rates, differing interest rates from country to country, complex accounting methods for foreign operations, and foreign tax rates. To be successful at globalization, corporations must not only understand and recognize these risks but find ways to successfully manage them.

Globalization is the increasing integration of economies around the world, particularly through trade or financial flows. Globalization includes the practice of operating businesses in foreign countries. Over time, this practice has become more common due to technological advances and decreased trade barriers. Globalization permits businesses to reach much larger markets. Globalization allows businesses access to more capital flows, technology, cheaper imports, and larger export markets. While globalization brings about many great opportunities, it also carries the burden of increased financial risk.

One of the biggest financial risks of operating in foreign markets is the exchange rate. The foreign exchange rate is the rate of currency exchange, meaning one country’s currency is traded for another’s. The foreign exchange rate is expressed in two ways. Most commonly, it is expressed in the amount of currency required to buy one U.S. dollar. Or it can be expressed conversely, by how much a U.S. dollar can be exchanged for a foreign currency. This is an important risk in financial management because in order for corporations to invest or purchase globally, they may need to use the necessary foreign currency.

Another risk factor that affects globalization, particularly in international investment, is foreign interest rates. When investing, corporations want the highest interest rate. The global market with the best rate may receive the most investing. Also, foreign interest rates have a distinct impact on foreign exchange rates.

When operating in foreign markets, the organization must take into consideration the necessary accounting methods. These methods are affected by foreign exchange rates and foreign interest rates. Normally, when a corporation performs business transactions in foreign countries, accounting is done in U.S. dollars. Proper accounting methods must be followed when either conducting foreign currency transactions, including purchasing, lending or investing, and when translating financial statements for a foreign company. Accounting principles must be followed in reporting. The financial officer of a global company must have a clear understanding of these principles and the current foreign exchange rates.

When a corporation performs business in foreign country, it may be required to pay taxes to that country. Every country has different tax policies and rates. Some rates will provide a better tax payment then others. For example, in 2004, Ireland was considered the most profitable company for American companies to operate in. This is because of the low tax rates. In global operations, corporations must be aware of the tax rates of the countries they do business in as well as the tax policies.

As with almost all aspects of business, global operations involve financial risk. Risk means the possibility of adverse outcomes. In order for a corporation to successfully operate on a global level, the risks managed effectively. This management can be found in many ways. Corporations can provide managers with education on foreign issues. There are also hundreds of firms that specialize in financial risk management. These companies can be hired on a consulting basis to provide insight and ideas for management operations. Most importantly, business managers must have the ability to identify and measure current financial risks.

Corporations can do business on a global level. To do so productively, key factors and risks must be recognized, calculated, and managed. The financial risks include foreign exchange rates, foreign interest rates, and foreign tax rates. Thorough understanding of this information is important to successful international financial risk management.