EECS 1019 Lecture 32: EECS 1019 Lecture 32 Notes
15 Jun 2018
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EECS 1019 Lecture 32 Notes
Introduction
Exposure to International Political Risk
• The result is weaker cash flows of the U.S.-based MNCs that sell products either as
exports or through their European subsidiaries to European customers.
• However, there is an additional adverse effect of the weak European economy on U.S.-
based MNCs and even on domestic U.S. firms.
• As the U.S.-based MNCs experience weaker cash flows, they may reduce their workforce
or the number of hours that employees work.
• Furthermore, the profits earned by their owners are reduced.
• Thus not only the employees but also the owners of U.S.-based MNCs have less money
to spend, so all U.S. firms will likewise experience reduced sales and cash flows.
• This means that a weak European economy, in addition to reducing European demand
for the products of U.S.-based MNCs, also weakens the U.S. economy and thus reduces
U.S. demand for those products.
• EXAMPLE Recall from the original example for Austin Co. that it has expected annual
cash flows of $40 million from its U.S. operations.
• If Europe experiences a recession, however, then Austin expects reduced European
demand for many U.S. products, and this will adversely affect the U.S. economy.
• Under these conditions, the U.S. demand for Austi’s oputer gaes ould delie,
reducing its expected annual cash flows due to U.S. operations from $40 million to $38
million.
• A European recession would naturally result also in reduced European demand for
Austi’s oputer gaes, so the opany reduces its expected euro cash flows due to
European operations from 20 million euros to 16 million euros.
• Politial risk i a outr a affet the leel of a MNC’s sales.
• A foreig goeret a irease taes or ipose arriers o the MNC’s subsidiary.
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