What Are the Six Key Differences Between Multinational & Domestic

Financial Management?
Domestic companies tend to restrict their operations to the country of origin, while
multinational corporations operate in more than two countries. Companies expand
globally for many reasons, mostly to obtain new markets, cheaper resources and
reduction in operational costs, all of which significantly affect financial
management. These benefits also increase the risks faced by multinational
corporations. Multinational financial management differs from domestic financial
management in six essential ways.
Legal and Economic Structure
Coordinating and controlling worldwide operations can be complicated by the
legal and economic systems specific to each country. Some practices that are
routine in one country may be illegal in another. For example, paying an incentive
to facilitate licensing in one country could be considered a bribe in another.
Multinational corporations must learn how to adapt to differences in financial
methods and customs. Unlike domestic firms, these corporations have financial
obligations to foreign countries, which complicates tax reporting.
Exchange Rate Risks
For a multinational, cash flows will be denominated in different currencies, and the
effects of currency devaluations must be addressed in all financial analyses. Unlike
their domestic financial management counterparts, multinationals are subject to
exchange rates that differ based on the prevailing inflation rate in the foreign
countries where they operate. High inflation will result in currency decline, making
it difficult and unpredictable to operate profitably. In addition, the process of
changing currencies when transferring money between countries can be expensive
and inconvenient.
Role of Government
Although many countries encourage foreign investment by providing incentives,
the government's policy isn't the only determinant of competition. Financial
management in a multinational corporation can be significantly affected by high
levels of corruption, inefficiency and bureaucracy when the company has to deal
with some foreign government officials. Unlike financial management in
companies that operate domestically, a multinational often has to deal with
burdensome and unpredictable regulations governing licensing, tariffs and taxes
imposed by the host government.

Political Risk
Multinational corporations may have operations in countries that experience
political instability. A change of government may come with new policies that
make it impossible to operate profitably. For example, the new government may
come up with nationalization programs that restrict money movement from the
country. This can be a major challenge for financial management that relies on
foreign exchange to ensure the company's continued global operations. Such
political risk is typically not experienced on the domestic financial management
front.
Banking Regulations
Multinational financial managers have to deal with global banking institutions that
have their own challenges. Some banks experience liquidity problems because of
prevailing economic conditions in their countries. Other banks in some emerging
economies are heavily regulated by their respective countries' central governments
rather than by market forces, which influences interest rates. In addition, many
multinationals find themselves operating in countries where the banking industry is
subject to the policies of the International Monetary Fund, which many businesses
consider unfriendly to their needs.
Credit
Excessive debt can ruin the multinational corporation's chances of growth and
expansion in the foreign markets. Financial management has to ensure the
multinational has ample credit for routine business-to-business operations. If the
corporation has to get part of its financing for overseas projects from the countries
where it has operations, it will be vulnerable to lending rates dictated by the
condition of the economy in those countries