According to Dell and Lawrence

7 pages
1749 words
University of California, Santa Barbara
Type of paper: 
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

According to Dell and Lawrence (2013), the balance of payments refers to the measurement of all foreign economic undertakings between residents of a country and foreign residents. However, McCombie and Thirlwall (2016) define it as the statistical record of a countrys international transactions over a given period presented in the form of double entry bookkeeping.  A states balance of payments explains whether the country saves sufficient money to pay for its imports. It also uncovers whether the state produces adequate economic output to pay for its growth. In particular, a balance of payments deficit indicates that a country imports more products, services, and capital than it exports, which means that it must borrow from other countries to cater for its imports (Dell & Lawrence, 2013). On the other hand, a balance of payments surplus arises when the country exports more than it imports since its government and residents are savers. The balance of payments has three elements namely the financial account, the capital account and the current account. The financial statement outlines the change in foreign ownership of assets while the capital account describes any financial transactions that do not affect the economic output. The current account measures international trade, direct payments, and the net income on investments.

These international economic transactions typically happen between residents of a country and multinational enterprises. Meyer (2014) defines a multinational enterprise as a business organization whose activities are located in more than two countries. A multinational company is a product of foreign direct investment that Meyer (2014) defines as the effective control of operations in a country by foreign owners. Multinational corporations vary in the extent of their transnational activities regarding the number of countries in which they operate. Since multinational enterprises are often large, they pose unusual challenges to national and regional governments who strive to maintain political autonomy and yet are often anxious to seek the investment, managerial skills, and technology of the foreign companies.

Managers and investors of multinational enterprises require a balance of payments data to expect changes in host country economic policies that might be driven by a balance of payments events (Meyer, 2014). In particular, the BOP data is an essential indicator of pressure on a countrys foreign exchange rate, and therefore, on the potential of a corporation trading with or investing in that country to experience foreign currency gains or losses (McCombie & Thirlwall, 2016). Similarly, changes in a countrys BOP may signal the removal of controls over payments of dividends and interests, royalty fees, license fees, and other cash disbursements to multinational companies. Additionally, BOP helps to forecast a countrys market potential, especially in the short-run. A state experiencing a trade deficit is not likely to expand imports as it would if it have a surplus, but it may welcome investments that increase its exports. Nevertheless, balance-of payments may lead to particular problems, which may affect the operations of multinational enterprises. Therefore, this paper seeks to explain the implications of balance-of payments problems from the perspective of MNE management.

Implications of Balance of Payments Problems

The balance of payments problems may arise over time and can result from developments such as high and increasing dependency on imports, reducing capital inflows, unsustainable current account deficits, and progressive loss of significant export markets, increasing foreign debt, banking industry weaknesses, and sustained currency overvaluation. Mainly, these problems can become severe where foreign loans become unreachable and international reserves decline to such a low level that they cannot manage with import and export reductions in net capital inflow. Increasing current account deficits are usually a precursor to balance of payments problems. Notably, funding of these deficits needs capital inflows, an or drawdown in foreign currency reserves. Countries facing this deficit are highly dependent on imports and foreign borrowing.

As the balance of payments problems intensify, and the extent of monetary policy action becomes increasingly restricted by the demand to protect foreign currency reserves, states with fixed exchange rates may opt to ration imports or strengthen capital and foreign exchange controls on outflows (Modigliani and La Malfa, 2014). In particular, the country may strengthen controls on limits on profit, capital and dividend remittances abroad. Directives may also be given to repatriating funds and assets held offshore. Mainly, this affects multinational corporations negatively by limiting their business, which is operated across the borders. Therefore, if for instance, the country the MNEs funds and assets held offshore, it would lead to the incurrence of high losses or even closure of business since no profits are being remitted to the mother company. Moreover, aggressive and extensive controls deter foreign investment.

Additionally, the balance of payments problems leads to the low business confidence of MNEs in particular countries because in extreme cases, they lead to currency inconvertibility and devaluation. If these problems persist, the conditions continue to deteriorate, and the exchange rate remains fixed. Then exchange rate pressures may lead to the development of a black market in the currency and an official exchange rate that is out of line with economic basics, which disrupts the demand and supply of foreign currency (McCombie & Thirlwall, 2016). Such an instance makes operations of an international company expensive as the local currency in the country of transactions loses value. Consequently, the MNE makes losses and may decide to close business in that country.

A current account deficit means that a country requires running a surplus on the capital account, which translates to that foreigners have a viable claim in the countrys assets that they could desire to recover at any time (Modigliani and La Malfa, 2014). For example, if a country runs a current account deficit, it could be financed by foreign multinational enterprises investing in the country. A risk is imminent that the countrys best property could be purchased by foreigners, which reduces long term income of the state. Notably, this implies that the state is relying on consumer spending and thus becoming uncompetitive. Consequently, there is a weak growth of the export industry. Mainly, many of multinational companies operating in the export industry or those that manufacture goods for export may are affected by this deficit and may remove their investment due to massive losses and a lack of market for their products. Moreover, they struggle to compete internationally concerning exporting goods and services.

Similarly, a persistent trade deficit caused by balance of payments disequilibrium can often have adverse implications on the interest rates in a country. As seen earlier, downward pressure on a states currency devalues it, making the costs of goods denominated in that currency expensive, which can lead to inflation (Modigliani and La Malfa, 2014). Then, the central bank may be prompted to enact monetary policy techniques that include decreasing financial supply and raising interest rates. Mainly, both high-interest rates and inflation slow the economic growth of a country (McCombie & Thirlwall, 2016). Notably, a slow economic growth hampers the goal of any multinational enterprise. Furthermore, the local consumers spend less money purchasing goods, which often are expensive, which translates to low incomes for the enterprises (Modigliani and La Malfa, 2014). Additionally, high-interest rates may hinder the multinational company from borrowing loans from local banks since it is expensive to service the loan with the reduced revenues.

Nevertheless, big multinational enterprises with vast capital reserves can take advantage of the balance of payments problems in developing countries and invest directly there by buying off cheap assets such as buildings and land. Such property is a source of income for the multinational corporations through rent and leases to other local and foreign companies. In other occasions, such multinationals may benefit from an increase in the value of such assets over time as the economic conditions of such countries improves and probably recover from any deficits. For example, multinational enterprises that invested directly into Russia before 1998 benefited from cheap assets, and after Russia recovered from the debt, it rose to be among the countries that boast of current account surpluses (Cesaratto, 2013).

Additionally, the balance of payments problems in one country may benefit multinational enterprises operating in countries that experience current account surpluses such as China and Japan. Mainly, in such countries, the costs of production are low, which allows multinationals to manufacture cheap and quality goods such as fridges, TV sets, microwaves, and washing machines. The demand for these affordable goods is high in states experiencing balance of payment problems, thus, creating a situation that increases the market for such products (Cesaratto, 2013). Therefore, these multinationals benefit from booming business, high profits, and growth into new markets. Similarly, low production costs mean that the multinational enterprises save a lot of money in the manufacturing process, which translates to higher profits. Consequently, such multinational corporations gain a competitive edge in the world export market.


To conclude, a states balance of payments explains whether the country saves sufficient money to pay for its imports or whether it produces sufficient economic output to pay for its growth. The balance of payments must always net out to zero. However, situations arise where a country imports more products, services, and capital than it exports, which means that it must borrow from other countries to cater for its imports, which leads to a balance of payments deficits, either a trade deficit or a current account deficit. Conversely, a country may experience a balance of payments surplus when it exports more than it imports. The balance of payments data is essential to managers and investors of multinational enterprises since it helps them to expect changes in host country economic policies that might be driven by a balance of payments events.

Often, the balance of payments deficits in a particular country, which comprise its problems, affect multinational enterprises operating in it negatively. In particular, such problems lead to poor economic growth and instability in a country, which translates to little income for the multinationals. Similarly, as the demand for imports rises and the demand for export declines, the countrys currency value declines and, consequently, the competitiveness of the multinationals exports in the world market decline. Additionally, the balance of payments problems lead to deterioration of a countrys banking system, increase in interest rates and inflation, all which affect multinational enterprises negatively. Nevertheless, these problems may be a benefit to multinational corporations operating in other countries that have surpluses. In particular, they benefit from the cheap accumulation of assets through foreign direct investment and high demand for goods. Consequently, the multinationals accumulate wealth, generate high profits, and gain a competitive edge in the export industry. Therefore, the balance of payments problems may affect some...

Have the same topic and dont`t know what to write?
We can write a custom paper on any topic you need.

Request Removal

If you are the original author of this essay and no longer wish to have it published on the website, please click below to request its removal: