Aggravation of instability in exchange rates by transnational corporations

The system of trade and payments and the policies of national governments may have a major influence on the behaviour of transnational corporations as well as on policies of individual host governments. Tariff and trade policies of developed countries affect the level of exports from developing countries. Instability in exchange rates may lead multinational corporations to move funds across national borders in a way which tends to accentuate this instability.

The manipulation of intra-firm trade and transfer pricing by transnational corporations can have an adverse effect on exchange rates. Transnational corporations also effect interest rates and therefore exchange rates by borrowing on local markets.

The international monetary system also has an important bearing on the operations of transnational corporations, in areas such as choice of location and financial flows. Apart from its influence on national and regional policies on production and trade, the degree of stability of exchange rates and the adjustment mechanism provided by the system affects the policies of transnational corporations. Events in recent monetary crises have directed attention to the possible role of transnational corporations in the volatile, short-term movements that have occurred, in addition to the fundamental disequilibria in the balance of payments of several major industrial countries.