You are the chief executive officer of a multinational’s subsidiary in a developing host country. The subsidiary has been in business
for about eight years, making electric motors for the host country’s domestic market, with mediocre financial results. Before
you left the home country a month ago, you were told to make the subsidiary profitable or consider closing it.
After a month in the host country, you have discovered that it is running a worsening balance of payments (BOP) deficit and
that the government officials are very concerned about the situation. They are considering various measures to stanch or reverse
the deficit flow.
What measures might they adopt? Given that you would prefer to keep the subsidiary open, since it employs locals and contributes
to the country’s economy in other ways also, can you think of some ways your company might profit from or at least minimize
the damage of these potential measures?
Take a shot. what do you think? Hint: list the many kinds of transactions that lead to a worsening balance of payments problem. Of those, list the ones your company contributes to. With each of these, think about what a government could do to mitigate the problem, if anything. Would this government solution help or hurt your company?
i really dont know
A worsening balance of payments deficit can be caused by various types of transactions. Here are some common ones and how your subsidiary might contribute to them:
1. Trade deficit: If your subsidiary imports more raw materials or components than it exports finished products, it could contribute to a trade deficit. This could be due to inefficiencies, high production costs, or lack of competitiveness.
2. Current account deficit: If your subsidiary engages in services like foreign direct investment (FDI) or pays out royalties or dividends to the parent company, it could contribute to a current account deficit.
3. Capital outflows: If the subsidiary repatriates profits or engages in capital-intensive activities, it could lead to capital outflows and contribute to the balance of payments deficit.
Considering these potential measures that a government might adopt to mitigate the balance of payments deficit, here are some possibilities and how they could impact your company:
1. Import restrictions or tariffs: If the government implements import restrictions or imposes higher tariffs on imported goods, it could protect domestic industries, potentially benefitting your subsidiary if it relies largely on the domestic market. However, this could also increase the cost of imported inputs, affecting the profitability of your operations.
2. Export promotion policies: If the government implements policies to boost exports, such as export subsidies or tax incentives, it could help your subsidiary if it can increase its export competitiveness. This could potentially offset the negative impact of a trade deficit.
3. Currency devaluation: If the government devalues the local currency, it could make your subsidiary's products more competitive in foreign markets, potentially boosting exports and reducing the trade deficit. However, this could also increase the cost of imported raw materials or components, impacting profitability.
4. Incentives for FDI: If the government offers incentives for foreign direct investment, it could support your subsidiary's operations and encourage further investment. This could help your subsidiary to remain profitable and contribute to the country's economy.
5. Infrastructure development: If the government invests in infrastructure development, such as improving transportation or logistics networks, it could increase efficiency and reduce production costs for your subsidiary. This could enhance its competitiveness and profitability.
Ultimately, the specific measures adopted by the government and their impact on your company would depend on a range of factors, including the country's economic policies, market conditions, and the competitiveness of your subsidiary's operations. It would be crucial to closely monitor these developments and engage with government officials to understand and influence policies that could affect your subsidiary's profitability.