The significance of the single currency for decisions by TNCs to invest in Eurozone countrie

Topic: EconomicsEconomic Concepts
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Last updated: March 29, 2019

TNCs are trans-national corporations who will be looking to invest various amounts of money and capital in the countries in which they invest. The single currency within this zone means that all countries within the area are operating in the same currency with identical monetary value and no exchange rates between the countries. With a single currency between countries, there will be no transaction costs incurred when transferring money from one country to another. For TNCs these savings in costs (i.

e. he cost of changing between different currencies of different countries) will be a great advantage as TNCs operate widely across different countries. This will allow for savings in costs as the TNCs will be able to move money around their operations in various countries (i.

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e. from office to office, or factory to factory) within Europe without incurring any costs. However although there will be savings due to the single currency, it is important to consider how significant these savings will be to a large TNC.Although any savings in costs will be important to a company wanting to make maximum profits, considering the scale of business that a TNC will be conducting, transaction costs will only represent a very small proportion of all costs and may be deeming far less important than other costs such as the costs of land, capital and labour in the Eurozone. If, for example the TNC chose to invest instead in a developing country such as China, though there would be transaction costs between here and other countries, the savings that could be made in other areas could definitely outweigh the transaction costs.

It is also important to consider what volume of trade the TNC shall be doing within the Eurozone and what proportion will be out of the Eurozone. If a far greater proportion is being done outside of the zone there will be very little advantage to be gained from operating in a the “zero-transaction costs” zone and vice versa. A second advantage for a TNC investing in the Eurozone would be the exchange rate stability. As all countries within the single currency have a consistent 1:1 exchange rate with each other (i. e.

o exchange rate) there is long term assurance for a TNC that there will be no changes in costs due to exchange rate fluctuations. Advantages to be gained from this include price competition and import costs from other Eurozone countries. With no exchange rate the price competitiveness of the TNCs goods against all other Eurozone produced goods will be solely dependent on the production process itself. There will be no variation in price dependant on exchange rate, and so this will act as an incentive for TNCs as it ensures security.Also the lack of exchange rates will mean that TNCs will be assured that any resources or imports that they buy from other Eurozone will not be priced depending on exchange rates, but solely on inflation and other cost effecting reasons. This will be very attractive for TNCs as it will make planning far more easy and will allow firms to look further into the future with far less concerns about changes in costs and sales figures that would under other circumstances be exchange rate dependant. However for many firms, although security is important, taking calculated risks is often part of a profit making firm’s strategies.

While constant exchange rates allow for easy planning of costs and sale prices, variable exchange rates between the countries a TNC operates in can often be beneficial to that company. For example is a TNC is operating in a country with a strong exchange rate against a country from which it imports, costs of imports will be cheaper and this can cut costs for a firm. Alternatively if a firm is based in a country with a weak exchange rate it will make the firms products very price competitive and this could be beneficial to the firm.

In this way it may not be beneficial for a firm to be located in a single currency zone if it is importing/exporting with other countries in the zone. However, the Euro still holds an exchange rate against other currencies so there will still be some opportunity for gains to be made through currency strengths and weaknesses. Though it is important to remember that with any exchange rate, a strong currency has both its advantages and disadvantages to a firm as does a weak exchange rate.It is also important to consider that there are a significant number of other factors that influence a TNCs decision to invest as well as costs and sales prices.

Firms also consider the location of the country – if there is suitable demand in the market, the availability of suitable and skilled labour, the incentives offered by governments and the laws in operation in the country (i. e. advantageous labour laws) and also the possibility for future growth and expansion which may not be possible in somewhere like the Eurozone where there is already a very high concentration of TNC investment.

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