Transcript Chapter 1: Globalization and the Multinational Corporation

Chapter 1
Globalization and
the Multinational
Corporation
Slides prepared by
April Knill, Ph.D., Florida State University
1.1
Introduction
• Globalization – increasing connectivity and integration
of countries and corporations and the people within
them in terms of their economic, political, and social
activities
• Multinational corporation – produces and sells goods or
services in more than one nation
– BRIC countries (Brazil, Russia, India and China) offer a lot
of opportunities for expansion
• International scope creates opportunities but also
challenges
– Recent crisis
1-2
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1.2 Globalization and the Growth of
International Trade and Capital Flows
• The growth of international trade
– Trade liberalization so countries can specialize at
production of goods for which they have a comparative
advantage
• 1960s only 20% of countries were open
• By 2000, over 70% of countries were open
• Free Trade agreements
– GATT (1947)
– WTO (1986)
– Regional Trade agreements
» European Union
» NAFTA
» ASEAN
– Outsourcing – shifting of non-strategic functions to
specialist firms
1-3
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1.2 Globalization and the Growth of
International Trade and Capital Flows
• The growth in trade (Exh. 1.1, Panel A, Panel B)
– In Panel A graph, Germany is most open, Japan
is least
– In Panel B graph, China’s trade jumped due to
trade reforms
– Countries that border oceans tend to trade
more
– Large countries tend to trade less than small
1-4
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Exhibit 1.1 (Panel A) International Trade
as a Percentage of GDP
1-5
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Exhibit 1.1 (Panel B) International Trade
as a Percentage of GDP (cont.)
1-6
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Exhibit 1.1 (Panel C) International Trade
as a Percentage of GDP (cont.)
1-7
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1.2 Globalization and the Growth of
International Trade and Capital Flows
• Securitization – repackaging of “pools” of loans or other
receivables to create a new financial instrument
– Pros and cons of development
• Pro – banks (and companies) could hedge against risk
• Cons – smart financiers exploit differences in countryspecific regulations and complexity of instruments created
opaqueness in the financial system
– Global Financial Crisis – 2008 – 2010
» Started in U.S.
» Longest and deepest in the postwar era
» Scale and depth of crisis raises deep issues about the
functioning of the global financial system
1-8
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1.2 Globalization and the Growth of
International Trade and Capital Flows
• Incredible growth in the number of MNCs after WWII
– 37,000 MNCs in 1990
– 82,053 in 2010
• Globalization of financial markets
– Trends in financial openness
• 1980s countries began to allow foreigners to invest in their
markets
• Creation of new asset class – emerging markets
– New financial landscape – derivatives
• Derivative security – an investment whose payoff over time
is derived from the performance of underlying assets
– Examples include futures, forwards, options and swaps
1-9
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1.2 Globalization and the Growth of
International Trade and Capital Flows
Exhibit 1.2 The Workings of a Financial Crisis
• Classic example of a crisis is a bank run
– FDIC protects our deposits so we don’t have to “run”
the bank
1-10
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1.2 Globalization and the Growth of
International Trade and Capital Flows
• Securitization and U.S. government’s quest to allow everyone
to own a home fueled growth in subprime mortgages
between 2000 and 2006
–
–
–
–
–
–
People bought houses they could not afford
Banks securitized those loans and sold them to investors
Once house prices started to fall, many defaulted on mortgages
Banks holding assets backed by those mortgages suffered losses
A bank in the UK faced a bank run in 2007
In March, 2008, JP Morgan Chase bought Bear Stearns due to
its inability to fund itself in the money markets
– Fannie Mae and Freddie Mac were taken over by the
government
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1.2 Globalization and the Growth of
International Trade and Capital Flows
– In September, 2008 Lehman Brothers declared
bankruptcy
– Money markets froze and a flight to quality ensued
• Ramifications of the crisis
– Lot s of debates of who was responsible
– Correction of global imbalances?
• U.S. trade deficit
• China trade surplus
– Regulatory issues
• Central banks pumped money into banks
• Expansionary monetary and fiscal policies
• Policy implications of “too big to fail”
1-12
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1.3
Multinational Corporations
• A parent company in the firm’s originating country and
operating subsidiaries, branches and affiliates abroad
– UN calls these “transnational corporations”
• How they enter foreign markets
– Exporting/Importing
– Licensing – gives local firms right to manufacture their
products in exchange for a fee
– Franchising – the firm provides sales or service strategies
in exchange for fees
– Joint venture – two or more firms form a new legal entity,
jointly owned by all of the firms
– Greenfield – starting company from scratch
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1.3
Multinational Corporations
• Goals of an MNC
– Maximize shareholder wealth
• Australia, Canada, U.K. and U.S.
• Appropriate time horizon is long
– Maximize stakeholder wealth
• Europe and Asia
• Agency Theory – studies problems that arise from the
separation of ownership and control
– Corporate governance – legal/financial structure controlling
relationship
– Corporate fraud
» Enron
» Worldcom
» Tyco
» Parmalat
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Exhibit 1.3 World’s Top Non-Financial Transnational
Corporations, Ranked by Foreign Assets (in billions of
dollars and thousands of employees)
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Exhibit 1.4 Methods of Overcoming Agency Problems
Due to the Separation of Ownership and Control
1-16
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1.3
Multinational Corporations
• FDI – when a company from one country buys at least
10% of a company in another country
– Has grown 30-fold since 1980 to $18 trillion
– M&A play a huge role in this trend
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Exhibit 1.5 Foreign Direct Investment as a
Percentage of GDP
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Exhibit 1.6
Cross-Border
Mergers and
Acquisitions,
1990–2009
(in millions of
dollars)
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1.4
Other Important International Players
• International banks
• International institutions
– International Monetary Funds (IMF) – member
organization whose goal is to ensure the stability of the
international monetary and financial system through
surveillance and technical assistance
– The World Bank – member organization whose goals are
development, poverty alleviation and advising
• IBRD – middle-income countries
• IDA – poorest countries
• IFC – grow private sector of developing nations
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1.4
Other Important International Players
– Multilateral development banks – regional development
banks (including World Bank and regional banks in Africa,
Asia and Europe) who provide financing and grants
– World Trade organization (WTO) – mediates trade
disputes
– Organization for Economic Cooperation and Development
(OECD) – examines, devised and coordinates policies
across 34 relatively wealthy nations to foster sustainable
economic growth and employment, rising standards of
living and financial stability
– Bank for International Settlements (BIS) – fosters
international monetary and financial cooperation – central
banks’ central bank
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1.4
Other Important International Players
– European Union (EU) – Cooperation among countries in
this region and (in most cases) adoption of the same
currency to promise international business and prevent
war
• Economic and monetary union (EMU)
–
–
–
–
Governments
Individual investors
Institutional investors
Sovereign wealth funds – government-run investment
pools
– Hedge funds
– Private equity funds
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1.5 Globalization and the MNC: Benefactor
or Menace?
• Global crisis leading to protectionism
– Increasing tariffs and trade litigation/technical barriers
• Slowing trade liberalization
• Trade openness and economic risk
– Potentially raise need for welfare programs
– Ensure fairness
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1.5 Globalization and the MNC: Benefactor
or Menace?
• Countries who had opened their markets to
foreigners subsequently fell into crisis
• Benefits of openness
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–
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Channels savings to most productive uses
Sharing of risk beyond what is possible domestically
Domestic recessions can be buffered through borrowing
Cost of capital decreases
• Costs of openness
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–
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Sometimes capital is not used wisely
Foreign capital can leave quickly causing financial volatility
Difficulty in taxing profits – MNCs shift to avoid
Capital control effectiveness decreases
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1.5 Globalization and the MNC: Benefactor
or Menace?
• Anti-globalist movement and MNCs
– Movement opposing globalization
– Identifies MNCs as “villains” of globalization
– Criticize global financial institutions such as the World
Bank, IMF and WTO
– They fear that MNC activities will harm the environment
– They argue that globalization is seen as a threat to
employment in their own country
1-25
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1.5 Globalization and the MNC: Benefactor
or Menace?
• Final thoughts on globalization
– Can be valuable
– Some evidence that workers in developed countries have
not benefited
• Globalization destroys some jobs and creates others
– Some believe that government must intervene to better
spread the newly created wealth by helping those that
have been displaced by globalization
• Retraining
1-26
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