Balance of payments
Introduction
Balance of payments (BOP) refers to a statistical statement which systematically summarizes, for a specified period of time, the economic transactions of an economy with the rest of the world (IMF, 1996, p.1). Every country has economic transaction with other countries, in which the country makes payments for imports and receives payments for imports. Thus, a balance of payments is basically a statement of accounts that states the receipts and payments of a country (Jain, 2002, p.325).
Multinational companies or MNC’s have increasingly become large and powerful around the world. In fact, the total worth of some MCN’s is worth more than the GDP of several countries. In particular, the multinational companies have both positive and negative effect on the balance of payment of both home and foreign countries in which they operate in.
Multinational companies are primarily the key agents of foreign direct investment. They are the importers of large amounts of capital that pays for their existing business operations and investments in new businesses. From the accounting perspective, such capital outflow is essentially a debit element in the balance of payments for the reason that it includes money spent out on corporate capital stock, plant purchases, bond purchases, and related investment (Fatemi et al, 2000, p.154). The surplus on the capital accounts results in a deficit on the current account, translating that the country is importing more goods or services as compared to what it is exporting. There is a negative effect on the balance of payment when the MNC repatriates its profits, but no effect when the company re-invests its profits.
Importance of Balance of Payment to Multinational Companies
Business managers and those who invest in multinational companies need balance of payment information to be prepared for any changes in host country’s economic policies drive by events relating to BOP. In this regard, balance of payment data is a significant indicator of pressure on the foreign exchange rate of a country. This has a direct effect on the company trading or investing in the particular country in the form of experiencing foreign exchange gains or losses. Adjustments in the balance of payment thus may predict the removal or imposition of foreign exchange controls. In the same vein, any changes effected on a country’s balance of payment can translate into the removal or imposition of controls over settlement of dividends and interest, royalty fees, license fees, or other cash injection to foreign firms or investors i.e. multinational companies.
Balance of payment data is further of great importance to a multinational company in the sense that it helps in the forecast of a country’s market potential, particularly in the short run. In this regard, a country with a serious trade deficit has low probability of expanding imports as compared to if it was running a surplus. Nonetheless, the country may still attract investment that would grow its exports.
There are always a number of trade flows generated by the direct investment of multinational companies abroad. These include exports of capital equipment and raw materials, semi processed or finished products. The presence of the affiliates based in mother country may also result in indirect demand for products of the company. On the other hand, the parent company’s exports may suffer displacement and imports from affiliates into the mother country may replace the company’s formerly produced goods.
Secondly, there is often an initial outflow of capital generating from the parent company. As such, direct investment by multinational company often results in a stream of earning in the years to follow in the form of branch profits, dividends, and interest. Furthermore, balance of payments also affects other small items such as transportation, travel, interest payments on the company’s foreign borrowings, as well as other services associated with foreign investment.
Another impact of multinational companies on the balance of payments regards to the short-term capital funds moved across international boundaries. The varying interest and exchange rates of different countries render international monetary management a source of likely profit or loss in itself (Fatemi et al, 2000, p.156). On the positive side, the direct investment by multinational companies stimulates the demand for exports of capital goods, further processing, together with the resale of finished goods. Exports for further processing hold a more convincing benefit compared to demand for exports of capital goods. At the start, an affiliate of the company may buy capital goods from the Parent Company but shift to purchasing from third countries or manufacturing it domestically once the affiliate becomes established.
Exports for further processing present a more convincing benefit in the sense that the most important demand for exports by a company’s affiliates is often for resale without the need for further manufacturing (Fatemi et al, 2000, p.156). Multinational companies are able to register positive impact on the balance of payment through reparation of their earnings and fair payment of taxes. The length of period that between the maiden outflow of capital and achievement of positive return on capital investment puts on the balance of payments depends on the assumptions made – whether the particular assumptions abroad substitutes or supplements for investment in the foreign firms; and whether investment abroad reduce or does not reduce domestic investment. Generally, however, time is the key factor as direct investment in the short term is usually a negative effect in the balance of payments while it has positive impact on the balance of payments (Fatemi et al, 2000, p.159).
Issues of Balance of Payment in Multinational Companies
Multinational companies present unique measurement challenges for balance of payments accounts. This is because the MNC’s often allocate their resources, price their intra-company transactions, and bill the transactions in a manner designed to maximize their global net profits besides the aspect that their accounting of transactions and activities may necessarily align well with the prevailing economic behavior which should be expressed in the respective national accounts of the individual countries where the do business. In view of the growing size and influence of multinational companies around the world, these accounting issues present a significant problem to the aspect of determining balance of payments.
The most common problematic areas relating to balance of payments in majority of multinational companies relate to practices of recording and reporting income, which are often inconsistent with international guidelines. For instance, many multinationals that are compliers of balance of payment often report incurring difficulties in gathering statistics pertaining to reinvested earnings. This demonstrates the more pronounced problem of collecting data on activities located entirely outside the country. There is greater danger of some respondents failing to correctly distinguish between the foreign and domestic elements of the firm, which in turn may lead to such errors as counting cross-border exports foreign affiliates’ domestic sales in host countries. Nonetheless, this is often not a cause of concern to MNC’s since they perceive themselves from the perspective of their global activities and thus place little significance on the national boundaries. It is worth noting, however, that they compromise the accuracy of the allocation of incomes and output across a number of nations and geographic regions.
