Bailout refers to the act of providing financial assistance to save a given business or economy from collapsing. Bailouts can be provided by an individual, government or business. Businesses are often given bailouts with or without reimbursements. The concept of bailout in international business management has always been considered a moral hazard (Roubini & Setser 3). A moral hazard in relation to economic theory is considered as a situation in which a given party takes risk since the cost incurred may not benefit him or her. In bailouts, moral hazard emanate since an institution or individual is not in full responsibility of his or her actions, therefore a tendency of acting less carefully in financial matters exists, thereby leaving another party responsible for those consequences (Dlabay, Scott & Calvert 36).
In India, for instance, bailouts given about 10 years ago to state power utilities after they defaulted on paying their debts to financial institutions and central power utilities, resulted in moral hazard. 10 years later after the bailout, the state power utilities again went into debts creating a cycle (Gary, Stern & Feldman 34). In the United States, bailouts have also been given to financial institutions in the past years to help them from not collapsing. A good example could be the bailout given to financial institutions in 2008 after the economic depression to help them get back to their feet. Bailouts in United States date back to the period of the great economic depression (Gary, Stern & Feldman 44).
There are a number of issues that drive the issuing of bailouts. Bailouts in some countries are affected by political and economic situations, for example, the United States bailout in 2008 to financial institutions was driven by the economic depression at that time and political reasons in a bid for America to continue being a superpower (Gary, Stern & Feldman 67). Due to social reasons, for instance, housing situations, loan debts payment, purchasing powers, unemployment and many others, bailouts are also given. Furthermore, bailouts can be given to protect a given business image that has in the past been bringing a country great economic income, for instance, the bailing out an airline industry in India (Gary, Stern & Feldman 54).
In the events of a bailout being issued, it is upon managers to manage the consequences of the transaction. Bailouts often pose a challenge to managers as it places them in a position to ensure they recover to the financial status they used to be before issuing the bailout (Roubini & Setser 43). Such managers often try to cut off costs in their institutions in order to maintain the company running without losses.
In as much as bailouts pose a moral hazard to the international business management, it can also act as opportunities for these given firms. Bailouts often assure survival of an entity in the face of economic problems. Sometimes a moral hazard can be inhibited by issuing ex ante bailout (Roubini & Setser 57).
International businesses entering the international market should always ensure that they operate their business in an organized way instead of giving bailouts to other institutions in the countries of operation to avoid making loses as such money is usually not reimbursed (Roubini & Setser 68).
In summary, bailouts are often advantageous and disadvantageous. Bailouts can sometime be a moral hazard as a given institution is not guaranteed of repayment thereby bearing the consequences of the given transaction. Furthermore, international businesses should be careful in the issue of bailouts as it might turn out being a moral hazard (Roubini & Setser 78).
Works Cited
Gary H. Stern, Ron J. Feldman. Too Big to Fail: The Hazards of Bank Bailouts. New York:
Brookings Institution Press, 2010. Print.
Les Dlabay, Jim Scott, James Calvert Scott. International Business. New York: Cengage
Learning, 2010. Print.
Nouriel Roubini, Brad Setser. Bailouts Or Bail-Ins?: Responding to Financial Crises in
Emerging Economies. New York: Peterson Institute, 2008. Print.
