Question

Following terrorist attacks in the United States on September 11, 2001, the valuations of many MNCs declined by more than 10%. Explain why the expected cash flows of the MNCs were reduced, even if they were not directly hit by the terrorist attacks.

Answer 1

Terrorist attack hampers all sorts of economic activities; international trade, which is the act of MNC, is a part of it.

An MNC has various branches in different countries. They do business in those countries and expect more business in future if the condition is normal. MNC in the US has higher expectation, since the market is very large and the country is developed. People of the country have higher per-capita income, (National output / National population). After the terrorist attack, such national output should drop because of damaging the trade center; it turns into dropping of per-capita income, which ultimately reduces market demand and MNC’s income. This is the reason why MNCs’ expectation reduces.