GLOBALIZATION

MULTINATIONAL
FIRM
AND THE
International Trade
Highly globalized and integrated world
economy
Global trade
Consumers in the US purchase oil imported
from Saudi Arabia and Nigeria, TV sets and
camcorders from Japan, automobiles from
Germany, garments from China and so on

Rest of the world purchase aircrafts, wheat and
so on from the US

This is across countries
Liberalization
Continued liberalization across world economies
has increased international trade (IT)
Each country process of liberalization,
privatization, increasing freedom within
economies
Better trade laws governing world trade

Global Production
Production of goods and services has become
highly globalized.
MNCs relentless efforts to source inputs and
locate production anywhere in the world at
lower costs and higher profits.

E.g. Computers sold the world over might be
assembled in Malaysia with Taiwanese made
monitors, Korean made keyboards, US made
chips, and so on
Consider your typical day:.
You wake up to an alarm clock made in Korea.
You pour yourself orange juice made from Florida
oranges and coffee from beans grown in Brazil (or tea
grown in Sri Lanka)
You put on some clothes made of cotton grown in
Georgia and sewn in factories in Thailand.
You watch the morning news broadcast from New
York on your TV made in Japan (or parts of your TV
are made in China)
You drive to class in a car made of parts
manufactured in a half-dozen different countries.

. . . and you havent been up for more than two
hours yet!

1. Foreign Exchange Risk
2. Political Risk
3. Market Imperfections
4. Expanded Opportunity Set

Explained in the following slides

Whats Special about International Trade?
Foreign Exchange Risk
The risk that foreign currency profits may
evaporate in dollar terms due to unanticipated
unfavorable exchange rate movements.

Political Risk/Change in Govt. Laws
Sovereign governments have the right to regulate
the movement of goods, capital, and people
across their borders. These laws sometimes
change in unexpected ways.
Whats Special about International Trade?
Market Imperfections
Legal restrictions /barriers on movement of
goods, services, people, and money (capital)
Barriers include:
High Transaction costs
Excessive Shipping / transportation costs
Tax arbitrage
Information asymmetry 1 party knows
more than the other (market for lemons)
Whats Special about International Trade?
Expanded Opportunity Set
Firms locate production where costs of
capital are lowest and maximize their
performance and profits
It doesnt make sense to play in only one
corner of the sandbox.
True for corporations as well as
individual investors.
Whats Special about International Trade?
Maximize Shareholder Wealth
Long accepted as a goal in many countries,
but complications arise.
Who are and where are the
shareholders?
In what currency should we
maximize their wealth?
Other Goals
In other countries shareholders are viewed as merely one
among many stakeholders of the firm including:
Employees
Suppliers
Customers
In Japan, managers have typically sought to maximize the
value of the keiretsua family of firms to which the
individual firms belongs.
Other Goals
No matter what the other goals, they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due consideration.

Globalization of the World Economy: Recent
Trends

1. Emergence of Globalized Financial Markets
2. Trade Liberalization and Economic Integration
3. Privatization

Explained in the following slides

Deregulation of Financial Markets coupled with
Deregulation is removal of govt rules that constrain free
markets
Advances in Technology have greatly reduced
information and transactions costs, which has led to..:

Financial Innovations, such as
Currency futures and options
Multi-currency bonds
Cross-border stock listings
International mutual funds
Emergence of Globalized Financial Markets
Economic Integration
Over the past 50 years, international trade
increased about twice as fast as world GDP

Great change in the attitudes of many of the
worlds governments who have abandoned
mercantilist (protectionist) views and embraced
free trade as the surest route to prosperity for
their citizenry.
Liberalization of Protectionist Legislation
The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among
member countries has reduced many barriers
to trade.
The World Trade Organization has the
power to enforce the rules of international
trade.
The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments
to trade between Canada, Mexico and the
United States over a 15-year period.
Privatization

The selling off of state-run enterprises to
investors is also known as Denationalization.
Often seen in socialist economies in transition to
market economies.
By most estimates this increases the efficiency of
the enterprise.
Often spurs a tremendous increase in cross-
border investment.

Multinational Corporations

A firm that has incorporated in one country and has
production and sales operations in other countries.
There were about 60,000 MNCs in the world (2004)
Acc. To the World Investment Report, 2009, UNCTAD,
the total number of parent corporations (PC) and foreign
affiliates (FA) are: Total: 889,416
(PC based in economy) 82,053
(FA based in economy) 807,363
Many MNCs obtain raw materials from one nation,
financial capital from another, produce goods with labor
and capital equipment in a third country and sell their
output in various other national markets.
Worlds Largest Corporations Top 11
Rank 2008 Corporation Country Revenues ($ Million)
1 Royal Dutch/Shell Group Netherlands 458,361.0
2 Exxon Mobil United States 442,851.0
3 Wal-Mart Stores United States 405,607.0
4 BP Britain 367,053.0
5 Chevron United States 263,159.0
6 Total France 234,674.1
7 Conocophilips United States 230,764.0
8 ING Group Netherlands 226,577.0
9 Sinopec China 207,814.5
10 Toyota Motor Japan 204,352.3
11 Japan Post Holdings Japan 198,699.8
Sinopec Govt owned >50%
Japan Post Holdings amalgamation of Japan Post Bank, Japan Post Service & Japan Post Insurance
General Motors Ranked 18
th
Went into Chapter bankruptcy on June 1 2009.
Source: Fortune, July 20, 2009, Asia Pacific Edition