A low calorie or healthy option microwavable food is a fresh concept which has gained a lot of interest among consumers. A majority of consumers are evaluating the food products provided in the market and consideration is given to the healthiest diet. Thus, introduction of microwavable products made up of low calorie has gain a high market due to consumer’s health concerns. To cater for the needs of the market, managers must formulate methods that will increase the product’s market share and profitability while increasing value to consumers.
As such, the intention of this paper is to outline a plan for managers in anticipation of rising prices, examine the major effects the government have on production and employment, determine whether government regulations are fair in the food industry, examine the major complexities under expansion via capital projects, and lastly suggest how a company could create convergence between the interests of stock holders and managers. The Company aims to keep the prices of its products as inelastic as possible.
Low calorie dietary is the new form of healthy foods and it has gained a lot of popularity among the consumers. In schools, homes, and restaurants, the concept of healthy feeding is not new. With the emergence of many chronic diseases, people desire to live healthy lives and lifestyles, thus the need for low calorie diets as will be produced and sold by Lean.
The purpose of this paper is to assess the main impacts the government has on production and employment, if government policies and laws facilitate fairness, determine the complications of expansion, and finally, offer recommendation on the merger of a company’s stakeholders and the management. For sustainable growth and profitability, the firm seeks to have the prices of its products as inelastic as it possibly can (Sullivan and Sheffiran 2013).
It therefore means that the strategy used for pricing should have no effect on the way consumers recognize and purchase the commodities. In general, the type of demand occurs only for products that are essential for the normal living of consumers. However, the situation is not the same for food products that are microwavable. Elasticity of demand for low calorie products highly depends on the offered price, availability of substitutes, expenditure on promotions, income level of consumers, and prevailing economic conditions.
Considering the demand function and elasticity, low calorie products are favorable in a monopolistically dominated market. In a monopolistic competitive market, buyers and sellers are usually few. Therefore, if one company raises its prices, consumers shifts to another brand. As thus, firms in this market increase demand for their products through differentiation.
ThProfit (NP) = Total revenue (TR) Total Cost (TC)
According to the FOC of profit maximization,
=Marginal Revenue =Marginal Cost = 0
So Marginal Revenue = Marginal Cost
By applying the elasticity of 1.9, it was stipulated that demand for low calorie microwavable processed products is low. Since the company purposes to keep the prices of the products inelastic, it will strategize on differentiation to obtain a competitive advantage in the market. Differentiation is important since consumers will be able to pick the product from other substitutes hence increasing the sales. More so, it is proved that when product differentiation is noticeable to competitors, a firm’s market power and leadership increases. As such, it is advisable for the firm to strategize on product differentiation to increase the rate of returns.
Globally, the government usually has the mandate of regulating the market to protect consumers and the firms. However, whether markets are regulated or unregulated they are always influenced by the forces of demand and supply. As such, government regulation is critical for stability. For instance, the government handles externalities through provision of public utilities such as roads, contracts enforcements, and supply of currency (Wall and Griffin 2013). All theses aspects are better done by the government compared to private firms whose main aim is profit making.
A lot of discussion has been made on determination of the activities that the government is limited. Though regulations are important, extreme policies and laws are adverse to the growth of an economy. An ideal economic climate is only possible when government regulations are in accordance with the prevailing market conditions. The main reasons that the government involves itself in a market are enactment of policies and rules to facilitate exchange between buyers and sellers, and enforcement of the policies.
In the area of employment government sets rules for employers to follow when selecting, recruiting, and compensation. No employee should be paid below the set minimum wage rate, they are to be treated humanely and allowed to interact and work freely without fear of intimidation. Labor unions and other industrial agencies set regulations for firms follow failure to which employees have the right of suing the firm.
The government also limits production through the taxation rates, production costs, and prices for raw materials (Frank 2013). When terms are favorable, firms are able to produce to full capacity but when there is over production, the government sets higher terms to stabilize the market. As such, the effects the government will have on the company are limitation of production capacity and selling prices, employment, and eventually profitability since regulations are costly to the firm.
It is the mandate of the government to ensure the market is stable and at equilibrium for benefit of all stakeholders (MIT 2012). For instance, without intervention, big mergers and monopolistic conditions would be possible leading to excessive exploitation of the consumers. Thus, the government gets involved by limiting mergers and monopoly situations. It is fair for the government to get involved in the low calorie microwavable commodities to control prices, limit entrants and exit for fair market competition, and avoid emergence of monopolistic powers that would made the firm irrelevant.
When many unregulated firms are in the market, price wars would lead to consistent low prices causing the prices to be unstable. More so, unregulated market causes poor quality goods to be introduced as firms seek to minimize production costs for profits.
Thus, the major reasons for government involved are to control prices, ensure that the market is stable for protection of local firms, and protect consumers from exploitation. For microwavable foods, firms have to correctly label the contents of the products and they should be processed in certain measures to avoid provision of unhealthy contents. Moreover, regulations also assist in protection of the environment where firms are supposed to observe efficient waste management practices, as well as reduce usage of production methods that release poisonous gasses in the environment.
An example of government involvement is the control of industries in China which have the tendency of producing smog that forcing people to wear masks to avoid getting contaminated. These goods are exported to US and other countries and the government has set measures to control the packaging of the products, their distribution and usage. Additionally, the government enforces policies to regulate the banking and finance industry by setting minimum interest rates so that consumers are not exploited and for banks to remain in business.
Some capital projects that the firm could undertake are mergers or acquisitions for expansion purposes. The reason for the projects is to increase market share, share operational risks, and increase market leadership and profitability (Harris et al. 2014). However, these projects bring complexities such as collusion between the shareholders and management. Managers tend to get additional capital from the reserves or by requesting shareholders to top up using their savings.
Shareholders may not be willing to use their reserves or contribute extra capital due to uncertainty of the venture. To avoid the complexity, managers should undertake projects that have high chances of generating returns in the short run by carrying out comprehensive evaluation of the project. For instance, managers should acquire a brand that is already dominating in the market to avoid experiencing losses.
Convergence between managers and shareholders is created through a firm’s strategic decision making process and through the use of financial statements. Whereas the shareholders own the company, they have limited control over the decision making process and the actions of management. On the other hand, managers are responsible for controlling the affairs of the firm.
Managers seek for higher income and allowances irrespective of a firm’s performance while shareholders are usually interested in higher profits for increased dividends. As such, shareholders seek for firm’s growth through mergers. However, mergers may compromise manager’s job security and control leading to divergence between the interests of shareholders and managers.
Therefore, strategic decision making should be done such that managers get allowances and salaries depending on the generate profits. If profits are high, their salaries are high and vice versa. As a result, managers will become productive so as to get high profits and allowances and in the process, the interests of shareholders will be met and both parties will be satisfied. Therefore, convergence of shareholders and managers lead to higher profits since managers become preoccupied in generating high revenues so that they pay is high and when the revenues are high, dividends are also high.
Instances that bring convergence of the interests of managers and shareholders include: managers being employed on contractual terms such that their contracts are renewable if they perform as required, and application of commission terms whereby managers are paid depending on the income generated at a certain period.
It therefore shows that the government should get involved in microwavable food market to ensure products are of high quality, control monopoly activities, and stabilize the market. For better returns, managers and shareholders should have a common vision and the needs of each party considered. The firm is likely to excel and attain market leadership through product differentiation since demand is inelastic, ensure all the needs of stakeholders are met, and follow government conditions as they relate to production and employment.
References
Frank, R. (2013). Microeconomics and Behavior, (7th ed.). New York, NY: McGraw-Hill.
McGuigan, B. P., Moyer, R. C., &Harris, F. H. (2014).Managerial economics: Applications, strategies and tactics, (13th ed.). Stamford, CT: CengageLearning.
Mit. (2012). Government Regulations in the Market. University of Cambridge.
1. • Any legal considerations on social security during your field education experience that you may have had to address or that you might address
2.• An explanation of potential challenges in adhering to legal considerations during your field education experience
I concur with my colleague’s sentiments with regards to social security legal considerations. It’s true that all social security laws must be adhered to avoid possible legal implications of violation. It is even more complicated when serving a client who is legally mandated to have a representative payee. More importantly, many clients do not understand their rights and responsibilities under the social security law (Laureate Education, 2013).
This is challenging when clients pose legal questions since we have to refer them back to social security legal experts. In fact, I should think that the role of helping clients find adequate housing can be a challenging one considering the logistical, financial and legal issues involved. Considering the high attachment that people attach to homes, it can be a daunting task to try to help a client in deciding with regards to a choice of where to live. Notwithstanding the financial aspects, people have other factors for preferring to live in certain neighborhoods and not others.
Therefore my view is that besides the information and the advisory part, it is a challenging endeavor given the emotional aspects involved in choosing a home. It’s even worse when you have to help a family due to multiple conflicting preferences and interests of individual family members. Another legal challenge could arise when assisting a client who has a representative or interpreter given the legal implications involved particularly when information provided turns out to be inaccurate (ASS, 2013).
In my experience, I have learned that most people do not understand the legal requirement on full disclosure of all medical treatment sources and especially for people with disability. Thus there is a need for clients to be allowed to have a legal expert to guide them through the social security application process.
Social Security Retirement Benefits
In addition to Social Security’s retirement benefits, workers earn life insurance and SSDI protection by making payroll tax contributions:
About 96 percent of people aged 20-49 who worked in jobs covered in 2019 have earned life insurance protection .
For a young worker with average earnings, a spouse, and two children, that’s equivalent to a life insurance policy with a face value of over $725,000 in 2018, according to actuaries.
About 89 percent of people aged 21-64 who worked in covered employment in 2019 are insured in case of severe disability.
References
Administration, S. S. (2013). Social Security programs in the United States. Social Security Bulletin, 56(13), 3–82.
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Worth of money
Why is money worth more today than at a point in the future? If someone wants the use of your money, should you lend it or invest it in the company? What kinds of risk apply if you lend it? If you invest it? What moral issues are involved?
Introduction
In determining whether money is worth more today or in future the ‘time value of money’ concept must be considered which states that money received today is worth a lot more that the same amount of money in the near future due to the ability of saving this amount and earning interest . Alignment of financial goals and the investment or lending policy is required in order to ensure the chosen option is beneficial in the long term (Advani, 2006). In determining whether to lend or invest money the risks and benefits of both options must be evaluated and the best option implemented.
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When lending money the lender expects to receive their principle amount and any interest that has arisen from the loan .The major risks possessed in lending may be a default of both the interest payments and refusal to pay even the principal amount .The terms of the lending arrangement ma not also be beneficial due to the interest charges agreed (Advani, 2006).
Worth of money
Before making an investment it is important to evaluate the type of investment that best suits the funds available and the risks involved. The investment idea must match with the individual’s financial objectives. The risk associated with investing is a rapid drop in share prices if one has invested in the stock market a decrease in interest rates if one has invested in bonds and other forms of investment.
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Conclusion
Worth of money
Financial goals of the individual should be the key consideration before they decide whether to lend or invest .A risk analysis is also important as it helps in making a sensible decision on the option that is more suitable. The best option should help the individual increase their asset value.
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Investment Decisions in Economics and Finance
Background
Investment decisions in economics and finance are the decisions made by the investors through investment analysis which is supported by decision tools. Investors use technical and fundamental analysis of the market to achieve satisfactory return against the risk taken. There have been several theories, models and ideas by the scholars and researchers to analyze the market condition and maximize the portfolio expected return while minimizing the risk level.
One of the most common and used theory is the Modern Portfolio Theory or MPT which help to determine lower risks for an investment. In this theory, there are several mathematical models to analysis different factors in an investment like risk and expected return, diversification, efficient frontier with no risk free asset, two mutual fund theorem, capital allocation line and risk free asset. MPT can also help for asset pricing through systematic risk (market risk or portfolio risk), specific risk measurement and capital asset pricing model etc.
In this paper, we are going to calculate expected return, risk premium, standard deviation, covariance, portfolio return and sharp ration for different fractions through case analysis.
Investment Decisions in Economics and Finance
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Case: Pioneer Gypsum
To understand the theories and approaches for investment decisions, we are going to consider the facts of Pioneer Gypsum.
Expected return
Standard deviation
Beta
Stock price
Pioneer Gypsum
10.0%
30%
0.3
$87.50
Table 1: Pioneer Gypsum market status
From these facts, we are going to calculate expected outcome in the market for the company.
Modern Portfolio Theory (MPT)
In investment analysis, MPT is a concept of diversification by using mathematical formula with an aim of finding a set of investment assets that has lower risk all together than any individual asset. The concept behind MPT is that the assets in an investment portfolio should not be selected individually. Instead, it is more significant to consider how each asset changes in price regarding to how every other asset in the portfolio changes in price. Normally, assets with greater expected returns are riskier. For a given amount of risk, MPT shows how to select a portfolio with the maximum promising expected return. Contrary, for a given expected return, MPT describes how to select a portfolio with the lowest possible risk (Elton and Gruber, 1997).
In spite of its theoretical significance, there have been some criticisms on MPT about whether it is a perfect investing strategy, the reason for that is this concept of financial market does not reflect the real world in several ways. Efforts to interpret the theoretical basis into a feasible portfolio structure algorithm have been diseased by technical difficulties from the volatility of the key problems with respect to the data in hand. Recent findings have proven that instabilities disappear when a restriction or penalty is included in the optimization process (Brodie, De Mol, Daubechies, Giannone and Loris, 2009).
Many researchers criticize the Modern Portfolio Theory as: it does not reflect the market in practical sense and it does not take its own effect in account for asset prices.
The Modern Portfolio Theory gives several mathematical models regarding market analysis and calculates risk and return.
Investment Decisions in Economics and Finance
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Expected Return
According to the Modern Portfolio Theory, the mathematical equation of expected return is:
Where Return on the profit
= Return on assed i
wi = Weightingof component asset i
Portfolio return variance:
Here, ρij = the correlation coefficient between the returns on assets i and j
For two asset portfolio,
The portfolio return:
The portfolio variance:
For Pioneer Gypsum, the expected return would be:
CAPM
CAPM or the Capital Asset Pricing Model was introduced by Jack Treynor in 1961 (French, 2003). The model is used to establish a theoretically approach to determine the required rate of return for an asset, if the asset is to be joined in an well diversified portfolio with the fact that the asset is at non diversifiable risk. The theory takes into account the sensitivity of the asset to non diversifiable risk (i.e. market risk or systematic risk) as well as the expected return of theoretical risk free asset and the expected return of the market. It is often symbolized by the quantity beta (β) in the investment analysis.
Searchers have fount quite a few problems in the theory of CAPM. The most notables among them are:
According to this model, asset returns are normally distributed as random variables and potential shareholders uses a quadratic outline of the utility. However, it is often found that returns in equity and other markets are not circulated in general way. Because of that, large swings (3 to 6 standard deviations from the mean) takes place in the market more than the normal distribution theory would anticipate (Mandelbrot and Hudson, 2004)
This model also employs that the guesses of potential and active shareholders on possibilities go with the true distribution of returns. Another possibility tells that the expectations of potential and active shareholders are prejudiced, which causes market prices to be unproductive. This factors is studied in behavioral finance, which takes account of psychological assumptions to bring new alternatives for CAPM like the overconfidence based asset pricing theory (Daniel, Hirshleifer, and Subrahmanyam, 2001)
In theory, a market portfolio should have all types of assets that are held as an investment (i.e. real estate, art works and human capital etc.). In real, such market portfolio is not possible and individuals usually replace the true market portfolio in the place of a stock index. It has been proven that this replacement is not inoffensive and most likely can guide to miss-inferences as to the legality of CAPM. Also, this theory might not be empirically experiment able because of the lack of its potential outcomes in the real market portfolio (Roll, 1977)
Investment Decisions in Economics and Finance
The mathematical formula of CAPM depends on two facts, the security market line and its relation with systematic risk and expected return. From this relationship, we obtain the Capital Asset Pricing Model with the following equation:
Here:
= the expected return on the capital asset
= the risk free rate of interest
= the sensitivity of the expected excess asset returns
= the expected return of the market
= the difference between the expected market rate of return and the risk free rate of return
Beta
The term Beta (β) refers to a number is that describes the relation of its returns for a portfolio with those of the financial market all together (Levinson, 2006). If the return of an asset changes autonomously according to the changes in the return of the market, it has a Beta of zero. A positive beta means that the return of the asset follows the return of the market. On contrary, a negative beta means that the return of the asset follows the opposite movement of the returns of the market. The beta coefficient is a key parameter in the CAPM.
Seth Klarman criticized Beta by saying that it fails to consider specific economic developments and business fundaments (Klarman & Williams, 1991).
Investment Decisions in Economics and Finance
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The mathematical expression of Beta is
Where = beta coefficient
= the rate of return of the asset
= rate of return of the portfolio
= covariance between the rate of the return
Investment Decisions in Economics and Finance
Risk Premium
The term Risk Premium refers to the minimum amount of money which must exceed the confirmed return from a risk free asset comparing to the expected return on a risky asset. This is accounted when an individual is holding a risky asset instead of a risk free asset. The premium is the minimum compensation for the risk that the individual is willing to accept.
Investment Decisions in Economics and Finance
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The mathematical expression for calculating the risk premium is
Where u = concave von Neumann-Morgenstern utility function
= return on the risk free asset
r = random return on the risky asset
x = zero-mean risky component
= hypothetical expected return
Standard Deviation
The standard deviation is used to determine the variation from the average or expected value. A low standard deviation means that the date points are close to the average and a high standard deviation means spread out data points over large array.
Investment Decisions in Economics and Finance
Sharpe Ratio
Sharp ratio is used to measure the risk premium per unit of deviation in an investment asset. Mathematically, it is expressed by the equation:
Here, R = asset return
= return on a benchmark asset
= expected value of the excess of the asset return over the benchmark return
= standard deviation
Covariance Matrix
The covariance matrix is the type of matrix where the elements in the i, j position are the covariance between the ith and jth elements of a random vector. Each element of the covariance vector is a random scalar variable, each with a finite number of experiential empirical values or with an infinite or finite number of possible values précised by a theoretical combined probability distribution of all the random variables.
Investment Decisions in Economics and Finance
Conclusion
Investment decisions as decisions made by the investors assist investors to achieve satisfactory return against the risk taken. One of the most common and used theory is the Modern Portfolio Theory or MPT which help to determine lower risks for an investment MPT can also help for asset pricing through systematic risk (market risk or portfolio risk), specific risk measurement and capital asset pricing model. Through calculating the expected return, risk premium, standard deviation, covariance, portfolio return and sharp ration for different fractions it becomes possible for an investor manage the investment in a professional manner.
References
Edwin J. Elton and Martin J. Gruber (1997) Modern portfolio theory, 1950 to date. Journal of Banking & Finance 21
Brodie, De Mol, Daubechies, Giannone and Loris (2009). Sparse and stable Markowitz portfolios Proceedings of the National Academy of Science 106 (30)
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Foreign direct liability
Critically analyse what you understand by foreign direct liability
And
Critically evaluate the legal obstacles in regulating the activities of multinational companies.
An analysis of Multinational corporation operations and foreign direct liability.
Foreign direct liability
Introduction
Over time, parent companies mostly in developed countries have set their sights on foreign markets. This has led to an increased number of multinational companies. Multinational companies (MNCs) are defined as enterprises that have production and delivery services in more than one country.[1] Thus, the location of the company’s headquarters is referred to as the home country while the host countries are the other countries that it has invested in.
This has been facilitated by increased competition and globalization. Driven by the motivation to maximize profits, these companies have extended their boundaries all over the world. Most of them have even penetrated what would be termed as high risk areas. These are mostly war torn countries or those that have poor governance relating to dictatorial leadership.
In their quest to set base in foreign markets, these companies have to interact with the locals. Foreign direct Investment has experienced exponential growth in developing countries. World trade has exceeded $15 trillion over the last three decades. In the 1990s, a large portion of external finance in developing countries was attributed to foreign direct investment.[2]Their presence in these markets has led to great benefits.
Not only do the people benefit from employment, but impartation of new skills. Moreover, the multinational companies introduce new technology and knowledge[3]. In addition to this, the entry of multinational companies into these markets has put the developing nations on the trade map. Their entry has also contributed to the utilization of a country’s resources.[4]
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In order for these companies to establish themselves, they consider certain factors. These are known as the push and pull factors. The push factors force the companies from their home countries whereas pull factors lure them to new locations. Market based factors consider labor costs, information skills, investment incentives and management prowess. Efficiency based factors include common governance, economy of scope, production incentives and product specialization.
Strategic based factors on the other hand consider market access, distribution of the product, customer access and performance and input quality protection. Lastly, resource based factors are another key consideration. These include availability of capital and natural resources, supply stability and market controls.
In choosing to establish themselves in host countries, the MNCs are forced to adapt to the standards set by the jurisdiction they’ve chosen to operate in. Hence they align their production processes to the demands of the host country. With regards to labor costs, MNCs trend over the years is to pay the workers in the developing countries low wages.
It should be noted that once MNCs establish enter foreign markets, they become vulnerable to arbitrary government actions such as sudden contract renegotiations, being forced to but licenses or arbitrary withdrawal of the same or in some instances, expropriation.
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Nevertheless, MNCs play a major role in any market they enter. They impact government policy significantly. They influence how the government formulates policies regarding the country’s economy. Where the policy does not favor the multinational corporations, they threaten to withdraw from the market.[5] This is especially common with MNCs that have monopoly in a particular sector. Countries like the United States however, have managed to curb this through the presence of domestic market competitors.
Another avenue provided for MNCs to influence government decision is through lobbying. In the United States, an individual or group’s ability to lobby is enshrined in the right of petition contained in the Amendment to the United States Constitution.[6] Lobbying in the United Kingdom is considered as a way of promoting democracy. A statutory register for lobbying and lobbyists was recommended by the House of Commons Public Administration Select Committee.[7]
In the European Union, lobbying is done with the aim of influencing the European Parliament, the Council and the Commission.[8] Multinational corporations lobbying is directed at a range of issues such as the tariff structures and environmental regulations. Their purpose for lobbying on some of these issues is to filter out competitors. For instance, if a multinational company pushes for stringent standards on environmental safety, any other competitor that is unable to meet the requirements is automatically locked out.
Wal-Mart, a multinational corporation in the USA benefited from the zoning laws that created barrier to entry for other companies.[9] The zoning laws spelled out the areas that could be developed and for what purpose, regulating building heights, lot coverage and other aspects pertaining to land use.[10]
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In maintaining monopoly in a given sector, these corporations acquire patents. For instance, Adidas, renowned shoe manufactures, holds a patent to protect its shoe designs whereas Microsoft holds a software patent.[11]
International law and treaties.
Besides the individual national laws that govern sovereign states, the public international law was instituted to govern the relationship among sovereign states.[12] Hence, multinational corporations are affected by the international law. Increased global trade, environmental degradation and human rights violations have increased the importance of international law which is used to govern these issues.
In addition to this, international law is used to solve disputes that arise from the interpretation of and implantation of national laws.[13] The sources of international law are customs and treaties. Treaties result from consent to follow them by a number of countries while customary international law emerge from practices carried out by nations that believe they ought to be part of international law.[14]
Customary law has been used by environmentalists to affirm the need for countries and corporations to take care of the environment. This is clearly outlined in Principle 21 of the Stockholm Declaration and Principle 2 of the Rio Declaration.[15] These principles give the countries the right to exploit their resources but not to the extent of damaging the environment of areas beyond their jurisdiction.
Several treaties have also been established in relation to environmental protection. For instance, 2001 Stockholm Convention on Persistent Organic Pollutants prohibits the use of certain chemicals while putting restrictions on the use of others.[16] Nuclear and air pollution is also regulated by the International Convention on Oil Pollution Preparedness. Voluntary Corporate Codes of Conduct have also been established. The ISO 14000 established by the International Organization for Standardization is a set of environmental management standards that corporations voluntarily adopt to prevent pollution.[17]
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Foreign Direct Liability.
The negative impacts of multinational companies have led to the emergence of the foreign direct liability concept. The negative impacts have driven the locals to seek legal action against the multinational companies in their home countries.[18] The claims often relate to negative environmental and health impacts on the locals caused by a company’s operations in the area. For instance, in the US, cases have been brought forth against Union Carbide, Texaco, Unocal and Freeport McMoRan.
Union Carbide, a US based corporation invested in India. On December 3, 1984, the plant experienced a gas leak that killed 3,787 people and another 8000 that died from gas related diseases. [19] Immediately after the catastrophe, the company, Indian and U.S governments embarked on legal proceedings. The CEO of Union Carbide, Warren Anderson was summoned to the US Congress.
Not satisfied, in March 1985, the Indian government formulated the Bhopal Gas Leak Act that mandated it to be the legal representative of the victims.[20] The case was later transferred to India for hearing. This was challenged by Union Carbide management but was not supported by the US courts. In June 2010, 7 of the former UCC employees were convicted for negligence that caused the deaths.
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This is just one of the cases where foreign citizens have sought litigation in the home countries. As seen in the Bhopal case, due to failure to determine under which law the case was to be heard, there was a lot of back and forth between the Indian and the US government. Consequently, those responsible for the 1984 disaster were convicted sixteen years later. This clearly outlines the need to harmonize the legal systems between the home and host countries. Whenever a multinational company invests in another country, there should be clear guidelines on how cases involving the locals will be handled.
Foreign direct liability may have an impact on corporate performance.[21] Since the litigation process is an expensive course and in the event that the corporation losses against the plaintiffs and are forced to compensate them, then this is a factor that would cause the corporations to rethink their actions in the host country. Therefore, foreign direct liability may push them towards implementing risk management strategies.
In addition to this, the home countries can however play a role in regulating the influence of multinational corporations in the host countries in terms of the foreign direct investment.[22] The home country governments can limit the amount of investments an MNC can have. This will help to reduce their monopoly in foreign markets.
However, the MNCs have devised other means of avoiding foreign direct liability.[23] Among the measures they use is contracting what they view as the risky parts of their activities to subcontractors. Secondly, they insulate the parent company from any claims by separating the day to day management of the parent company from those of its subsidiaries.
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Another factor to be considered is the involvement of the local government in the corporations’ activities. They take part as business partners or beneficiaries. Hence, the host governments are likely to turn a blind eye on the MNCs activities.[24] This makes the victims’ quest for justice a big challenge. Worse yet is that even if the victims win and are to be compensated, the local subsidiaries may not be in a position financially to fulfill their obligations.
When analyzed from a corporate social responsibility (CSR) point of view, it ought to be the responsibility of these corporations to ensure that their workers have favorable working conditions.[25] By this, they should apply the same standards they apply at home in the host country. The issue of different standards at home and abroad should not arise. Hence, the best environmental and health standards should be applied wherever they choose to invest.
On the other hand, foreign direct liability opens up the host country to impositions by the home country.[26] The home country courts are likely to demand to have their way with regards to the host government’s choices. They may demand very high standards that the host government may not be in a position to meet based on the developing countries’ status. In the event that a disaster occurs, then the company together with the home government absolve themselves from any responsibility laying the blame on the host government for failure to implement their recommendations.
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Political, legal and social risks.
Besides this, multinational corporations face a lot of risks in their foreign operations. They are forced to deal with additional costs arising from their unfamiliarity with the foreign market, discrimination from the customers, suppliers or government entities[27]. Moreover, other costs are associated with international operations.
Multinationals also stand the risk posed by political decisions arrived at by a country’s governance.[28] Political changes that alter the expected outcome of a given economic action determine the probability of a company’s prosperity in the given country. These risks may be classified as micro-level political risks and macro-level political risks.
Macro-level political risks do not only refer to country level political risks, rather it is a coupling of local, national and regional political events. These risks may result in confiscation or seizure of a businesses’ property. Micro-level political risks on the other hand may be termed as project-specific risks. These risks tend to favor the local industries compared to multinational companies.
Micro risks arise from prejudicial actions or corruption. A good example of how companies can suffer from political risks is illustrated by Cuba. Following Fidel Castro’s takeover of Cuba in 1959, American owned assets and companies were expropriated as explained by Simon.[29] These companies incurred losses to the tune of hundreds of millions of dollars.
Macro level risks can be mitigated by the company understanding the political uncertainties of the host country. At the micro level, political risks can be mitigated through political risk insurance and hedges. Institutions such as Multilateral Investment Guarantee Agency (MIGA) and Overseas Private investment Corporation (OPIC) are just but a few of the public sector insurers that provide project specific political risk insurance.
Through insuring investors, MIGA promotes foreign direct investment in developing countries[30]. OPIC is an American based agency that mobilizes the private sector to invest in new and emerging markets. Portfolio of investments can be covered by private market insurers. Political risk insurance covers a variety of risks that the investor may face. These are currency inconvertibility, expropriation; loss of an investment due to confiscation by the host government; and political violence.
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In addition to this, legal risks are another challenge for MNCs. This results from a lack of clear guideline on the law applicable when a legal matter arises. For instance, the foreign direct liability cases prove to be a challenge as to which law to apply in determining the cases. The difference in the legal cultures of the host and home countries become barriers to the resolving of such cases.
Social risks on the other hand arise from crimes, violence and racial discrimination.[31] Multinational companies tend to be victims of crimes. This may be attributed to lack of confidence by the locals in their operations.[32] To add to this, people’s perception about a company influences the decisions they make. Multinational companies fall prey to this menace especially from customers who may view a company in a particular way. Wrong perception may also arise from lack of information about a company’s operations.[33]
Wal-Mart Company has faced a series of criticism from labor organizations, human rights activists and other entities.[34] This has given their consumers a negative perception about the company. Apart from this, multinational companies face racial discrimination from locals in the host countries. The domestic markets have a higher tendency of favoring the local industries compared to the foreign companies.
One of the ways of mitigating social risks is through corporate social responsibility.[35] Creating programs that help the MNCs keep in touch with the locals serves a good strategy to deal with the perceptions the locals may have about it. Some of these programs include creating social events where both parties can interact such as fun days for the employees. In addition, some MNCs have gone ahead to engage in programs that meet the needs of the locals such as establishing schools, providing water and other social amenities. Moreover, transparency about the companies’ operations also contributes to mitigating social risks.
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Conclusion.
In conclusion, multinational corporations are companies that have extended their operations from the home countries to foreign markets that are referred to as the host countries. These companies take into consideration the viability of the foreign markets before they establish themselves. Their entry into the host country implies involvement of the locals in the company’s operations. In addition to these, international laws have been put in place to govern the management of resources with respect to health and environmental safety.
Multinational countries tend to have different standards in the home and host countries. This gives rise to foreign direct liability. Access to justice is the underlying issue in foreign direct liability. The victims in most instances seek justice in the home country. However, this is still a foreign concept to many countries. As seen, multinational companies face several risks including legal, political and social. All in all, there is a need to develop a strategy where foreign direct liability is handled amicably and justice is served. Moreover, multinational companies need to not only be driven by the desire to make profits but work towards corporate social responsibility.
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[20]“Chronology”. Bhopal Information Center, UCC. November 2006.
[21] D. Sethi, and S. Guisinger, “Liability of foreignness to competitive advantage: how
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[22] Santoro, M., Should LDCs love MNCs? Foreign Policy, 128, 94-96, 2002.
[23] J.M. Mezias, “Identifying liability of foreignness and strategies to minimize their effects:
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[24] Liesbeth F.H. Enneking , “Crossing the Atlantic? The political and legal feasibility of European Foreign Direct Liability Cases,” The George Washington International Law Review, 2009, p 903.
[25]Y. Luo, O. Shenkar, and M. Nyaw, “Mitigating liabilities of foreignness: defensive versus
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[26] Y. Luo,,“Market-seeking MNEs in an emerging market: how parent-subsidiary links
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pp. 290-309, 2003.
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[29] D.J.,Simon, “A Theoretical Perspective on Political Risk”, (Winter, 1984), Journal of International Business Studies, Vol. 15, No. 3. (pp. 123–143).
[35] Beth Kyle and John G. Ruggie, “Corporate Social Responsibility as Risk Management” Corporate Social Responsibility Initiatice Working Paper, Cambridge MA: John F. Kennedy School of Government, Harvard University, 2005.
