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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)
Globalization’s 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.
Globalization’s 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).
Globalization’s 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.
Globalization’s 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 firm’s 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.
Globalization’s 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 Portfolio’s 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)
Globalization’s 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.