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MULTINATIONAL COMPANIES CONTEND WITH AN ARRAY OF EXTERNAL FACTORS, INTERNAL CONSIDERATIONS, AND OTHER FORCES THAT INFLUENCE BUDGET POLICIES, COMPOSITION, AND CONTROL AND-ON A MORE GENERAL LEVEL-THEIR STRATEGIC PLANNING. BUDGETING IN A GLOBAL BUSINESS ENVIRONMENT CALLS FOR AN ENHANCED LEVEL OF COORDINATION AND COMMUNICATION BECAUSE OF THE VARIETY OF POWERFUL COMPONENTS THAT IMPACT ORGANIZATIONAL PERFORMANCE. THIS ARTICLE EXAMINES HOW INTERNATIONAL ISSUES INFLUENCE THE BUDGETING PROCESS OF MULTINATIONAL COMPANIES HEADQUARTERED IN THE UNITED STATES THAT CONTROL FOREIGN AFFILIATES AND DESCRIBES HOW THE OUTPUT OF THE BUDGETING EFFORT IMPACTS AND INTEGRATES STRATEGIC PLANNING.1
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Foreign currency exchange rates, interest rates, and inflation are the three major external factors that affect multinationals' budgets. Chief financial officers know they have no influence or control over this "Bermuda Triangle" of outside forces. Nonetheless, these elements must be estimated, evaluated, and examined as part of a multinational's strategic plan. Although these variables are interrelated (for example, higher inflation in a specific country tends to drive down the value of its currency, which impacts the exchange rate, and price inflation would drive up interest rates), the changes in currency exchange rates have the most direct effect on the budgeting process for a multinational corporation.
We will show you 19 company examples so you can see the broad range of issues involved. (Some of the company names are hypothetical.)
Example 1
The uncertainty introduced by the volatility of foreign currency exchange rates has been evident in recent years. In the span of one year, the value of the euro went from $1.48 on February 25, 2008, to $1.27 exactly a year later, a decrease of 14%. A similar significant change was observed in other major currencies (e.g., the value of the British pound went from $1.97 to $1.42, and the Canadian dollar depreciated from $1.00 to $0.80 during the 12 months ending on February 25, 2009). The general strengthening of the U.S. dollar was expected to negatively impact the already weak trading position of U.S. exporters.2 On the other hand, the June 2010 decision of the Chinese government to allow more flexibility to the yuan did provide export opportunities for U.S. companies.3
Changes in these three external factors stem from several sources, including economic conditions, government policies, monetary...