MNC INTERNATIONAL PORTFOLIOS

Investment theory tells us that you can reduce risk by diversifying across several investments in different sectors. This idea can be applied to MNCs too, because the returns on operations in different countries vary and do not normally fluctuate in tandem. In other words, when some countries are doing poorly, other countries may be doing well, although there appears to be a trend towards closer correlation of returns.

Calculating the optimal weighting of the "portfolio" of an MNC's businesses is abstruse and based on assumptions that may not prove to be accurate. It can, however, be a useful way of looking at an MNC's overall strategy to answer questions like: "Suppose risks suddenly increase in China – should we reduce our investments there and increase them in Brazil? How might that affect our overall returns?"

KEY LEARNING POINTS

1 Countries are opening up their markets around the world. China and India, with their vast populations, are predicted to become major trading nations by 2020. Look for ways to take advantage of these new opportunities.

2 In the 1990s excitement about the booming tech stocks led some companies to behave as if recessions were a thing of the past. Don't make that mistake – make sure you have a plan of action in place to respond effectively to downturns.

3 "Knowledge workers" are different from the skilled manufacturing workers of the past. They are more mobile and require more autonomy, training, and participation in strategy. Is your company winning the loyalty of its knowledge workers?

4 If your firm is in Europe, it may have trouble seeing the wood for the trees. Freer trade and the prospect of enlargement are creating great uncertainty. Take the trouble to research the issues and try to gain an overall perspective on trends.

5 The anti-globalization movement is a sign of the power of consumers. Are your company's policies in line with the attitudes of people in your markets? Are you publicizing and explaining your policies in a way that people can understand?

6 Is your firm taking full advantage of the global capital markets? Investors in different countries perceive risks differently – you may need to look abroad for the cheapest capital in the amount you require.

7 Foreign trade implies forex risk. Is your company claiming to reduce the risks by hedging while actually increasing them?

8 FDI is the most costly and riskiest method of foreign trade, but offers the most rewards in some cases. FDI only works if you have a transferable competitive advantage. Most firms start out by exporting before making heavier commitments.

9 Buying a foreign firm can be the cheapest andmost cost-effective way of direct investment into a foreign market (FDI). Make sure you don't pay too much and that you fully understand how the host government will behave. How will you get local customers on your side?

10 MNCs are judged by their consolidated returns, which may fluctuate if they are overly reliant on particular markets. International portfolio theory is a way of looking at all the MNC's businesses to see if their relative weighting can be adjusted to reduce the fluctuation in the overall return. This might be done, for instance, by postponing further expansion in certain countries in favor of projects in others.

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