Global businesses can be affected by all sorts of systematic economic events. They can find themselves the victim of drops in demand, for example, or a strategic decision to expand to a particular new destination can backfire if it turns out the labour market isn’t as strong as the firm’s leaders had hoped. And there’s always a risk that the financial markets will swing the wrong way. Whether it’s stock markets plummeting, the value of a multinational’s stock going down or a problem with the currency markets hindering high-value cross-border transactions, there’s a lot to worry about. But knowledge is power, and it’s wise for leaders of global businesses to make sure they know what’s happening – and what they can do to mitigate and manage these issues.
The world of stocks can have all sorts of impacts on global businesses. Of course, the most obvious way in which a stock market movement can affect a business is if that business is listed on the stock market itself. If a business has “floated” in this way, then its shares will be available for members of the public or institutional investors to purchase in exchange for cash. An overall slowdown in a stock market, then, can easily lead to individual companies seeing reduced profits. And given that “stock market contagion” as it is known is a common occurrence, this can have brutal consequences for multinationals.
But a decline in the performance of the global stock markets can also have indirect effects on global businesses. It is often interpreted by other economic actors as a sign of low confidence: if fewer people invest in an economy’s stock market, it is often assumed that there is an underlying reason to avoid that economy altogether. Lower investor confidence can have knock-on effects – such as increased company taxes to produce government stimulus packages, or lower consumer confidence and hence less demand. For an international business which is exposed to the whims of governments and economic actors not just in one country but in several, this could end up posing a real problem.
Another financial market which often experiences ups and downs is the global currency market. Converting an amount of cash from one currency to another is not as simple as it may seem: an exchange rate will always apply, and these are for the most part set by market forces. If you have a large amount in pounds which you need to change into, say, dollars, the exact amount of value you’ll gain or lose by carrying out the transaction is determined by all sorts of economic and political forces – and it can change on a daily or even hourly basis.
For a business which needs to make international funds transfers, this sort of fluctuation can be a problem. If you need to get company cash over to a new international branch of your business in a foreign country in order to cover start-up costs, for example, you may have to delay the transaction until the exchange rate is in your favour – or simply accept the value loss. You may also have to pay fees on some currency transactions, so it’s well worth speaking to a professional who can help you decide which route is best.
It’s no secret that many of the world’s most successful companies have been built in part on debt. Arranging finance on agreeable terms in order to buy a building, hire the first few staff and more is a common occurrence in the business world. But how easy you’ll find it to access this sort of debt is dependent in large part on how well the debt markets are operating at the time. If interest rates are set at a high level by a central bank, for example, it may become more expensive to access debt – but if they are low, you might find that borrowing is cheap. For an international business, this could mean that you need to strategically focus your existing resources on countries in which borrowing costs are high, and use debt in places where it is readily available.
Markets of all varieties hold the power to affect international businesses. From a dip in the stock markets to a sudden reversal in the fortunes of the currency markets, there are lots of ways in which global firms can be hit by a market change. Learning about how each of these markets work and what the risks are, then, is essential for a functioning global business to think about.