Chapter 1 Globalization & the Multinational Firm PDF

the markets for goods and services the w...

the markets for goods and services the world economy is highly globalized and increasingly integrated in... the financial markets Why study International Finance? consumption today, all the major economic functions are production globalized... investment stems from uncertain future exchange rates example: profits made in a foreing currency may disappear once converted into the domestic currency due to unanticipated exchange rate movements exchange rates among major currencies (US dollar, Japanese yen, British pound and euro) fluctuate continuously in an unpredictable manner influence all major economic function, EXCHANGE RATE UNCERTAINTY including consumption, production and investment initial investment in dollars: $1000 Suppose $1 = ¥100 today, and you invest $1,000 to buy 50 shares of Toyota at ¥2,000 per share. One year later, the share price has increased by initial investment in yen: $1000 x (¥100/$) = ¥100 000 FOREIGN EXCHANGE RISK EXAMPLE ten percent, and your investment is worth ¥110,000. If the yen has depreciated to maturity value in yen: ¥110 000 (after 10% increase) $1 = ¥120 by that time, how much is your a firm that is incorporated in 1 country and has investment worth in dollar terms? production & sales operations in other maturity value in dollars: ¥110 000 / (¥120/$) = $916,67 countries supply & demand ↘︎market spreading R&D expenditures & advertising costs over their global sales MULTINATIONAL CORPORATION (MNC) Multinational corporations DEPRECIATION ↗︎ floating exchange rate pooling global purchasing power over suppliers let the market decide ≠ BENEFITS ECONOMY OF SCALE utilizing their technological & managerial know- decision made by monetary authorities how globally with minimum additional costs DEVALUATION fixed exchange rate accessing underpriced labor & special R&D capabilities in certain countries a trading strategy that involves borrowing money in a currency with a low-interest rate and using that borrowed money to invest in a deregulation of financial markets currency or asset that provides a higher return CARRY TRADE currency futures & options a strategy where investors borrow Japanese yen, which has a low interest rate, and use the YEN CARRY TRADE borrowed funds to invest in higher-yielding multi-currency bonds assets or currencies EMERGENCE OF GLOBALIZED FINANCIAL financial innovations such as... MARKETS cross-border stock listings arises from the fact that a sovereign country can change the "rules of the game" and the international mutual funds affected parties may not have effective recourse advances in technology multinational corporations and international momentous event in the history of world investors are exposed to political risks when financial system they operate in certain foreign countries or hold foreign assets POLITICAL RISKS more than 340 million Europeans in 20 countries use the euro as common currency range from unexpected changes in tax rules to outright expropriation of assets held by EMERGENCE OF THE EURO AS A GLOBAL foreigners European Central Bank (ECB) CURRENCY relevant in those countries without a tradition the euro enabled the emergence of of the rule of law, where the rights of continentwide capital market in Europe shareholders and investors may not be protected the transaction domain of the euro may become lager than that of the US dollar in the legal restrictions future if the new EU members adopt the euro eventually frictions and impediments hampering free transaction and transportation costs movements of people, good, services and investors sold off Greek government bond & the ratings agencies downgraded them to "junk" Chapter 1: capital across national boundaries and preventing markets from functioning perfectly information asymmetry What's special about International Globalization & the Finance? discriminatory taxation panic spread to other weak European countries and quickly escalated to a European-wide debt crisis EUROPE'S SOVEREIGN DEBT CRISIS OF 2010 Multinational Firm motivates MNCs to locate production overseas world market are highly imperfect revealed a profound weakness of the euro as restricts the extent to which investors can the common currency diversify their portfolios => Euro-zone countries have achieved monetary integration, but without fiscal Nestlé used to issue 2 different classes of integration common stock 8 AT GLOBAL LEVEL foreigners were only allowed to hold bearer shares includes 27 member states that have eliminated BEARER SHARES barriers to the free flow of goods, capital & EU MARKET IMPERFECTIONS EXAMPLE: NESTLE were more expensive than registered shares people REGISTERED SHARES Swiss residents could buy registered shares phasing out impediments to trade between Canada, Mexico & the US NAFTA AT REGIONAL LEVEL On 18/11/1988, Nestlé lifted restrictions => price spread between the 2 share types narrowed drastically since 1994 political shifts or trade restriction can create US-Mexico-Canada-Agreement GEOPOLITICAL IMPACT regional price disparities USCMA new accord of NAFTA price differences in companies listed on TRADE LIBERALIZATION & ECONOMIC CROSS-LISTING ARBITRAGE multiple exchanges due to varying liquidity and Trans-Pacific Partnership INTEGRATION regulations 11 Pacific Rim countries covering 500 million foreign investor access limited by currency people HOW TO IDENTIFY THE SOURCES OF MARKET EMERGING MARKET BARRIERS controls or regulations, causing price IMPERFECTIONS? TPP disparities (e.g. China's A vs. H-shares) designed to slash tariffs and facilitate trade among members valuation differences for companies with EXCHANGE RATE FLUCTUATIONS foreign operations due to volatile exchange US initially joined then withdrew under rates President Trump new laws (e.g. environmental, digital taxes) African Continental Free Trade Agreement NEW REGULATIONS affect multinational companies differently based on location 49 African countries covering 1.2 billion people AFCFTA firms and investors may benefit from an OTHER REGIONAL FREE TRADE AGREEMENTS expanded opportunity set when they venture aims to stimulate intra-African trade and Globalization of the world into global markets investment by reducing tarrifs, protecting intellectual property rights & lowering barriers economy to migration maximize their performance Regional Comprehensive Economic Partnership FIRMS gain from greater economies of scale 15 Asia-Pacific countries covering 2.5 billion raise funds in any market to lower cost of people EXPANDED OPPORTUNITY SET capital worlds largest free trade agreement RCEP benefit from diversifying internationally due to lower risk or higher return (or both) INVESTORS aims to lower or eliminate tarrifs and set rules on investment, competition & intellectual benefit from international portfolios compared properties to domestic portfolios unlike the TPP, it does not include provisions on "It just doesn't make sense to play in only one labor and environmental standards corner of the sandbox." the act of a country divesting itself of ownership & operation of business ventures by focus on how to maximize the benefits from the turning them over to the free market system global opportunity set denationalization process while controlling political and exchange rate GLOBAL FINANCIAL MANAGERS risks selling state-owned businesses brings in hard- currency foreign reserves to the national and managing various market imperfections treasury the firm makes all business decisions and cure of bureaucratic inefficiency & waste PRIVATIZATION investments with an eye toward making the owners of the firm (= shareholders) better off some economists estimate privatization financially improves efficiency & reduces operating costs by as much as 20% fundamental goal of sound financial management state-owned enterprises have been listed on organized stock exchanges, making them generally accepted as the ultimate goal in eligible for private ownership SHAREHOLDER WEALTH MAXIMIZATION countries like US, UK, Australia & Canada, but CHINESE PRIVATIZATION not really in other parts of the world China launched two stock exchanges, the Shanghai Stock Exchange and the Shenzhen Goals for international financial shareholders are viewed as one among many Stock Exchange, in the early 1990s management CONTINENTAL EUROPE "stakeholders" of the firm, others being employees, suppliers, customers and banks the subprime mortgage crisis in the US led to a severe credit crunch => esclated to a global managers have typically sought to maximize financial crisis JAPAN the value and growth of the keiretsu - a family of firms to which individual firms belong to households & financial institutions borrowed too much & took too much risk managers pursue their own private interests at GLOBAL FINANCIAL CRISIS OF 2008 TO 2009 the expense of shareholders when they are not crisis was amplified and transmitted globally by closely monitored securitization which was heavily incentivized by AGENCY PROBLEM the US federal government through major weakness of the public corporation government-sponsored entities (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae FACTORS THAT DROVE THE CRISIS the financial & legal framework for regulating the relationship between a firm's management “Invisible hands” of free markets failed to self- & its shareholders regulate excesses, CORPORATE GOVERNANCE contributing to the banking crisis, BUT… problems can be especially rife where the legal protection of shareholders is weak or..the major factor was politics which wanted to nonexistent boost homeownership for electoral gains (aiming at a “society of owners” under both Clinton and Bush junior) BREXIT COVID-19 PANDEMIC CLIMATE CHANGE