Economics of Multinational Enterprise Assignment

Economics of Multinational Enterprise - Assignment Example One of the ways of addressing the risks is by use of operational hedging. This entails introducing a significant degree of flexible in the main operations of a firm. These include the supply chain, channels of distribution, financial positions, and marketing activities (Aghion et al 35). The objective of this strategy is to create adaptable operations that can rapidly respond to any change in the currency movement. This ensures that the fluctuations that may affect the revenues and the costs are offset. Firms can increase their profits by hedging by adopting various strategies. First, they can source materials thus lowering the costs of transportation resulting in increased profits. Another imperative way that the MNEs can adopt is the use of currency invoicing. This implies that the firm can choose a particular denomination that ensures the firm's prices, as well as those of the competitors, are affected by the exchange rate in the same way. This implies that for any firm to retain a competitive position in the market and attain sustainable profits, it can price its products using a volatile currency as long as the competitors use the same price. According to Grassman’s Law, MNEs should use a vehicle currency by considering their stability, low transaction cost, and liquidity. Based on the three aspects, the US dollar has been used as a vehicle currency for a long time by most of Multinational Enterprises. In their efforts to enter the emerging economies, the majority of MNEs undergo challenges that are associated with the legal process, legislative issues as well as technological factors. As a result, the investment flows from the rich countries to the poor countries are adversely affected. However, by initiating strategic economic policies, the investment flows can have similar effects to those of the free trade. One of the strategies that the host countries should emulate is to ensure that the home currency does not depreciate.