Globalization and the MNC

Beginning Quote

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)

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

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)

Imports as a percent of GDP

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.