International firms can use five techniques to reduce their economic exposure −
● Technique 1 − A company can reduce its manufacturing costs by taking its production facilities to low-cost countries. For example, the Honda Motor Company produces automobiles in factories located in many countries. If the Japanese Yen appreciates and raises Honda’s production costs, Honda can shift its production to its other facilities, scattered across the world.
● Technique 2 − A company can outsource its production or apply low-cost labor. Foxconn, a Taiwanese company, is the largest electronics company in the world, and it produces electronic devices for some of the world’s largest corporations.
● Technique 3 − A company can diversify its products and services and sell them to clients from around the world. For example, many U.S. corporations produce and market fast food, snack food, and sodas in many countries. The depreciating U.S. dollar reduces profits inside the United States, but their foreign operations offset this.
● Technique 4 − A company can continually invest in research and development. Subsequently, it can offer innovative products at a higher price. For instance, Apple Inc. set the standard for high-quality smartphones. When dollar depreciates, it increases the price.
● Technique 5 − A company can use derivatives and hedge against exchange rate changes. For example, Porsche completely manufactures its cars within the European Union and exports between 40% to 45% of its cars to the United States. Porsche financial managers hedged or shorted against the U.S. dollar when the U.S. dollar depreciated. Some analysts estimated that about 50% of Porsche’s profits arose from hedging activities.