Globalization & MNE

Globalization

1. Do we need globalization?2. Yes / No: Why ?3. What is the bottom line?4. Is your country matters?

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Globalization About Creating Values..

How do we measure value creation?

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Access to the capital market

Strategic Management

Market Openness

Comparative advantage

Is Comparative Advantage

a great concern?

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'Eclectic Paradigm‘

A theory that provides a three-tiered framework for a company to

follow when determining if it is beneficial to pursue direct

foreign investment.

The eclectic theory paradigm is based on the assumption that

institutions will avoid transactions in the open market when

internal transactions carry lower costs.

In order for a direct investment in a foreign country to be beneficial, the following advantages must be present:

1. Product or company specific advantage:

2. Location specific advantages: where the company derives greater benefit through a foreign establishment.

3. Market internalization - meaning, it is better for the company to exploit a foreign opportunity itself, rather than

through an agreement with a foreign firm.

Comparative Advantage: Limitations

Comparative advantage anybody?

Maybe in 19th Century !

Not for today?

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Countries do not appear to specialize only in those products that

could be most efficiently produced by that country’s particular

factors of production

At least two of the factors of production (capital and

technology) now flow easily between countries (rather than only

indirectly through traded goods and services)

Modern factors of production are more numerous than this

simple model

Comparative advantage shifts over time

Comparative advantage & Global outsourcing

Comparative advantage is still, however, a relevant theory to explain why particular countries are most suitable for exports of goods and services that support the global supply chain of both MNEs and domestic firms

21st century comparative advantage: Services and cross border facilitation by telecommunications and the Internet

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Market Imperfections:A Rationale for the MNE

Firms become multinational for one or several of the following reasons:

Market seekers – produce in foreign markets either to satisfy local demand or export to markets other than their own

Raw material seekers – search for cheaper or more raw materials outside their own market

Production efficiency seekers – produce in countries where one or more of the factors of production are cheaper

Knowledge seekers – gain access to new technologies or managerial expertise

Political safety seekers – establish operations in countries considered unlikely to expropriate or interfere with private enterprise

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International Financial Management?

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The Potential Limits of Financial Globalization

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The growth in the influence and self-

enrichment of corporate insiders

Financial Goals &

Corporate Governance

Basic issues

Who owns the business?

Do the owners manage the business themselves?

Should we go public?

Should we go back to private?

Myth? Family controlled firms often out-perform publicly listed firms?

Moving from family to public firms brings agency issues

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Goal of management?

Should we choose

Shareholder Wealth Maximization – As characterized by Anglo-American markets

Stakeholder Capitalism Model – As characterized by Continental European and Japanese markets

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The dichotomy

Shareholder Wealth Maximization

A firm should strive to maximize the return to shareholders (those individuals owning equity shares in the firm)

This view defines risk in a very strict financial sense

Risk is defined as the added risk a firm’s shares bring to a diversified portfolio (a fully diversified portfolio represents systematic risk)

The added firm-specific risk is known as unsystematic risk

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Stakeholder Capitalism

A view that all a corporations stakeholders (employees,

management, suppliers, local community, local/national

government and creditors) need to be considered in

addition to the equity holders

The goal is to earn as much as possible in the long run,

but to retain enough to increase the corporate wealth for

the benefit of all

The definition of corporate wealth is much broader than

just financial wealth, it includes technical, market and

human resources as well

Doesn’t make an issue of market efficiency because long-

term loyal SH should be more influential than transient

SH

Agency problem and value max

Long-term versus short-term value maximization

Impatient capitalism focuses on the short-term sometimes at the expense of long-term value

Exacerbated by improper management incentives from SH

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Corporate Governance (CG)

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Objective of corporate governance in the

shareholder wealth model is the optimization

over time of the returns to shareholders

The most widely accepted statement of good

corporate governance (established by the

OECD) focus on the following principles;

The rights and equitable treatment of

shareholders

The role of stakeholders in corporate

governance

Disclosure and transparency

The responsibilities of the board

The need arises from the separation of

ownership from management, and from the

varying views by culture of who the

stakeholders are and of what significance

A governance regime (system) is a function

of;

Financial market development

The degree of separation between

management and ownership

The concept of disclosure and

transparency

The Structure of CG

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The Structure of CG

The Board of Directors The legal body accountable

for the governance of the corporation

Officers and Management Creators and directors of the

firm’s strategic and operational direction

Equity Markets Reflect the market’s constant

evaluation of the promise and performance of the company

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Debt Markets

Provide funding and are interested in the financial

health of the firm

Auditors and Legal Advisors

Provide an external professional opinion as to the

fairness, legality, and accuracy of financial statements

Regulators

Require a regular and orderly disclosure process of

corporate performance

Comparative CG Regimes

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The Value of Good Governance

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Among CG Reform

Board Structure and Compensation Research suggests that compensation for board members is

not a significant problem

Minority Shareholder Rights are still as issue

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Does good governance matter?

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Assignment: Global Risk 2014:

1. Market Risk2. Business Risk

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