The Impact of Exchange Rates

In the current global financial environment, many businesses and countries are feeling the pressure brought down from the exchange rates of certain currencies. The economic recession and even depression in some countries has led to fluctuating exchange rates, affecting some companies negatively and others positively. For example, according to Ed Blocher (2010), the Euro has seen its value drop from $1.59 in August 2008 to $1.26 in March 2009. These drastic ups and downs that the world is experiencing in the financial market are affecting global trading and causing multinational corporations to address issues such as loss in profits and higher costs.

The impact of the recession experienced by many countries in the past few years has significantly affected the business done by corporations that export goods and services to businesses in other countries. The falling value of the Euro from 2008 to 2009 created several advantages and disadvantages. For U.S. companies selling products to firms in Europe, this event represented a loss in sales because U.S. products now were more expensive in European countries. This fluctuation in sales proved to be devastating for some U.S. exporters, whose international sales represented a large portion of its business. To combat this problem, cost accountants need to accurately determine the costs of certain goods so these goods can be competitively priced. From the European point of view, when firms based in Europe exported goods to the U.S., higher sales were realized due to the fact that these U.S. buyers were buying at a lower price. For this reason, a multinational corporation in Europe could have, in theory, been doing more business outside of its borders during a recession than it would have normally. This reality has helped some corporations stay afloat during their country’s recession. With the value of the Euro now rising to $1.35 (Bloomberg.com), these situations are being pushed in the other direction. By creating a strategy centered on reducing costs and adjusting to the market, a firm that exports its product to other countries can remain profitable in an unstable financial market.

As firms in the U.S. begin to embark on a strategy of globalization, they must take into account the current financial status of the counties they wish to do business in. These global efforts must be orchestrated so that the firm enters the market when the exchange rates favor its business. If that firm prices their product accurately, the move to a more global market could prove to be very beneficial. This strategy has been successfully employed by many corporations such as McDonalds, General Electric, and Apple. On the other hand, the global market presents a number of obstacles that a firm must overcome if it is to succeed. Not only can the state of the market threaten a firm’s expansion, but so can the culture and the ethical standards of the people. In addition, some countries are plagued with corruption, which should deter corporations from entering that market. For these reasons and more, it is essential that a corporation does a significant amount of research before making a decision to conduct business in a foreign country.

The key to successful expansion lies in the hands of the managers and researchers. The information and research obtained by these people can guide the company to make the correct decisions. For example, to be competitive in a foreign market, a firm must accurately price their product. This is the job of a cost accountant, who uses ABC costing or another method to determine what costs will be incurred during production and where a certain product should be priced. Managers can reduce these costs by determining the necessary number of employees and exploring ways to increase productivity. This is exceedingly difficult in a foreign market, which makes it all the more important.

Overall, the state of the economies of targeted countries can affect the sales of a multinational corporation. When the financial condition in these countries poses a threat to the well-being of a corporation, that corporation must reduce costs and price their products accurately in order to compete with domestic firms. This is difficult, however, and “is more time-consuming, costly, and complicated as compared to budgeting for domestic firms” (Blocher, 391). To succeed in the global market, though, these costs must be incurred. For a successful global firm, these costs are significantly outweighed by the gain in profits that the firm realizes.

Works Cited

Blocher, Ed, David E. Stout, Gary Cokins (2010). Cost Management a Strategic Emphasis. 5th edition.

Bloomberg.com (2010). World Currencies. Retrieved March 20, 2010 from http://www.bloomberg.com/markets/currencies/eurafr_currencies.html

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