Inflation is explained as rise in general level of prices of goods and services in an economy over a period of time, resulting in money losing its purchasing power. (Wijesekera, 2017). In short, the same amount of money that used to buy a cup of coffee at Starbucks will no longer afford even a donut in the same place. High inflation is harmful to both a country and the businesses available in that particular country, among them being multinational corporations.
Multinational corporation creates employment in every country it sets up its branches. This is only an advantage to both the citizens and the corporation if the inflation rates are low. An increase in inflation will mean that the employees will no longer be able to support themselves with their current salaries, the employees will therefore resort to asking for a raise. In case the company accepts the plea of their employees, they will have to deal with the fact that they dilapidated their profits. Low profits results to angered shareholders who decide to increase the price of their commodity so as to increase their profits. Increasing prices means that the employee will come begging again for a raise, because current salary cannot afford goods and services, and the process repeats.
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If the value of the dollar falls, the cost of making international purchases will definitely increase. (McMahor, 2017). Multinational corporations mostly purchase raw materials from other countries, this implies that the purchases will be made in foreign currencies, the currency of that country. A weak dollar will mean that the cost of purchasing the raw materials per unit will be higher than when the dollar is strong, resulting in a more expensive finished product. But because the corporation cannot switch to local suppliers immediately, the increased cost becomes inexorable. And if the company fears to increase the selling price due to the customer purchasing power, they will have to be satiated with the low profits.
Inflation is about increase in prices of commodities. For a multinational corporation, the process of changing prices of all its commodities every time there is an increase in price is very costly, the process includes printing out new price menus or price tags. But because the prices vary every single hour/day, the corporation will end up printing new price tags daily or even hourly. In short, the company will end up spending more money printing and reprinting the price tags. The final result being a very high menu cost. (Knotek II, 2010)
Although there are many effects of inflation to multinational corporations, the main ones are: reduced profits to the company and employee wages.
References
Wijesekera, L. (2017, July 1) How high inflation rate affects business and economy. Retrieved from https://hubpages.com/education/high-inflation-effects
McMahor, T. (2017, June 7) Effects on inflation on businesses. Retrieved from https://inflationdata.com/articles/2017/06/07/effects-of-inflation-on-businesses/
Knotek II, S. E. (2010, December) The Roles and Prices Points and Menu Cost in Price Rigidity.
