Globalization and the MNC

Globalization is the inexorable integration of markets, transportation systems, and communication systems to a degree never witnessed before -- in a way that is enabling corporations, countries, and individuals to reach around the world farther, faster, deeper, and cheaper than ever before...
Thomas Friedman, The World is Flat (2005)

Beginning Quote

Globalizations Two Main Trends

The contemporary globalization process can be divided into two main trends: (1) The globalization of the markets for goods and non-financial services.
Recent trend began after WWII with GATT rounds (1947) and the WTO (1995 on).

(2) The globalization of financial markets and financial services.

Recent trend began in the 1980s with developed countries liberalizing their capital markets followed by developing countries in the 1990s.

Globalizations Potential Impacts on Business Firms

Expands target markets where companies sell products and services.
consumer goods industrial goods, and financial services

Selling Globaly
McDonalds operates in 118 Countries. - 66% of 2008 sales were from international operations. - 42% of 2008 sales were from Europe. Starbucks in 2008, had 5,115 international retail coffee stores (1,979 company owned and 3,134 licensed stores) operating in 34 countries. - These represented 31% of their stores. - International operations accounted for about 20% of Starbucks 2008 earnings (compared to 16% in 2005). Major markets included Japan, U.K. and Canada

Providing Financial Services Globaly

Citigroup operates in over 100 countries in banking, insurance, and investment services. In 2005, 46% of its revenues from operations resulted from activities outside of the United States.
Mexico is a major foreign market for Citigroup. Cuba expropriated Citigroup branches in Sept 1960 (all US banks were nationalized).

Globalizations Potential Impacts on Business Firms

Expands the possible countries where
companies produce and/or source the factors of production for their enterprises:
capital (where firms raise money), technology, labor

Producing Offshore
Nike: 99% of all its brand apparel is produced outside the United States, in 35 different countries. The 2008 footwear breakdown is as follows: Country Percent China 36% Vietnam 33 Indonesia 21 Thailand 9 Note: 52% of Nike 2008 revenues from outside U.S.

Globalizations Potential Impacts on Business Firms

Impacts on mergers and acquisitions.
Firms can now be the target of or acquirer of foreign firms (cross-border mergers).
Expands the opportunity set for acquiring firms. Buying other firms technology, market share, patents, etc.
Taiwan headquartered ACER Inc acquiring U.S. PC maker Gateway (which was the parent of Packard Bell) for $710 million in August 2007. In doing so, ACER, became the third-largest PC maker in the world, after Dell and Hewlett Packard.

Impacts on types and degree of risk associated with an increasingly global enterprise.
Associated with the unique business and financial risks that confront firms in a global environment.
Exchange rates, global competition, cultural differences, foreign governments (political risk), variations in economic environments.

Globalizations Potential Impacts on Investors

Potential Positive Diversification Impacts.
Investors can construct portfolios consisting of a combination of domestic and foreign securities and in a combination of different currencies. This can have an impact on a Portfolios Systematic Risk (market risk). Through international diversification, investors can reduce a portfolio's systematic risk and increase the portfolio's return. Data for 2009:
Dow Jones: - 5.4% Canada: +CAD12.8% (25.4% in USD) China: +CHY44.6% (44.4% in USD)

Potential Negative Impacts.

Increase portfolio risk associated with exchange rates, country risk, contagion financial market effects.
Switzerland (stock market 2009): -2.1% (CHF) but -4.0% (USD)

Globalizations Potential Impacts on Countries

Globalization has resulted in countries becoming more open.
Exports as a percent of GDP

Imports as a percent of GDP

Germany: 6.2% to 31.3% (1950 to 2003) Mexico: 3.5% to 26.3% (1950 to 2003) United States: 4.9% to 9.3% (1960 to 2007) United States: 4.4% to 14.4% (1960 to 2007)

Consequences:

Countries become increasingly dependent upon foreign markets for their domestic growth (exports) and supplies (imports). Coupling effects
Obvious in the current global recession.