View
217
Download
0
Category
Preview:
Citation preview
Financial EnvironmentAlternative types of financial sector organization
(C) 2015 Melvin H Jameson
Functions of a financial system:Payment system - facilitate trade
Link savers and borrowers●Allocation of capital - investment decisions●Corporate governance - control within the enterprise
(C) 2015 Melvin H Jameson
Alternative forms of financial sectorArise from alternative approaches to its tasks for example allocation of investment capital
●Direct government allocation of all resources, =command economy●Examples:
Soviet Union, North Korea, Maoist China
(C) 2015 Melvin H Jameson
Internal effects - command●All production by state-owned enterprises
following the central plan●Banks provide financing where directed by
plan●Payment system not too different from market
systemConsequences
●Money, prices and interest rates viewed only as a means of account, not a means of allocation. Thus they need not reflect relative scarcity.
●Currency is non-convertible.●Governance is a political function (managers
appointed)(C) 2015 Melvin H Jameson
Implications for MNE - command●Very limited opportunities for activity and
tightly controlled by and negotiated with host government●Trade:
● Limited to products deemed essential by host government
●Investment: even more limited
●Problems in realizing revenue or profit●Internal markets controlled, currency non-
convertible● Host government approval of FX for purchases
deemed essential● Barter arrangements [Pepsi in Soviet Union]
(C) 2015 Melvin H Jameson
Alternative: hybrid systemDirected growth but without trying to plan the entire economy●Investment (capital allocation) government directed.●Production left to market forces and private enterprise
Examples:●Japan (post WWII) ●S. Korea ●China today (with both private and SOEs, “dual
track”) (C) 2015 Melvin H Jameson
Internal implications - hybrid●Producers respond to market●Banks lend following government guidanceConsequences
●“Financial repression” – distorted capital markets● Savers offered artificially low interest rates● Non-favored borrowers lack access to capital● Creates pressure for a grey market (shadow
banking)● Requires currency controls to maintain
●Corporate governance can be more lender oriented than shareholder oriented.(C) 2015 Melvin H Jameson
Implications for MNE - hybrid●Trade
●Product market functions normally●Currency convertible for trade purposes
●Investment: ●Limited to highly controlled ventures negotiated
with host government●Capital account cash movements limited and
subject to approval
●Problems in realizing revenue or profit●currency non-convertible for capital acct.
● Host government approval of FX required
(C) 2015 Melvin H Jameson
Alternative: weak market infrastructure
Not policy as much as underdeveloped institutions●Legal system
●Legal rights available●Enforceability of legal rights
●Quality, cost and availability of information●Thin markets/high transaction costs
Examples: many emerging markets
(C) 2015 Melvin H Jameson
Internal implications: weak institutions
Generally limit access to external capital●Legal system
●Weak shareholder rights limit equity●Weak creditor rights limit lending
●Lack of information discourages external investment●High transaction costs do the sameCreate incentive to avoid markets and contracts
●Conglomerate groups, often family controlled●Personal relationships very important
(C) 2015 Melvin H Jameson
Internal implications: weak institutions
Create an incentive to avoid markets and contracts
The financial system adapts in response●Conglomerate groups, often family controlled●Personal relationships very important
(C) 2015 Melvin H Jameson
Some types of market financial systems
Financial market emphasisAnglo-American system
Bank emphasisGerman system
(Family) Group structureJapan: Zaibatsu → KeiretsuKorea: ChaebolLatin America, SE Asia etc.
(C) 2015 Melvin H Jameson
Financial system and legal system
Market system Requires strong legal system, enforceable
contracts- bankruptcy rules- minority shareholder rights
Bank systemLegal system available, but more
relationship based
GroupsAn “internal capital market” substitutes for
enforceable external legal contracts(C) 2015 Melvin H Jameson
Implications for the MNE●Potential Opportunity
Underdeveloped local financial markets can be an advantage for the MNE with (reasonably) open access to world markets.
●Potential ChallengesUnderdeveloped local markets are often combined with financial repression limiting access to world markets or the corporate parent.
(C) 2015 Melvin H Jameson
Quality of legal environmentinfluences the financial system
●General rule of law Enforceability of contracts affects all areas; particularly finance
●Creditor rightsIf weak inhibit banking and all lending
●Shareholder rightsIf weak inhibit equity markets; lead to concentrated ownership
(C) 2015 Melvin H Jameson
Market infrastructure
Rule of Law●Accounting standards●Efficiency of legal system●Corruption●Will the government repudiate contracts
(C) 2015 Melvin H Jameson
Market infrastructure
Creditor rights●Does a reorganization require creditor consent?●Do secured creditors rank first in asset
distribution? ●Does an automatic stay prevent secured
creditors from seizing their security during the bankruptcy process?
●Does debtor control assets during the legal process?
(C) 2015 Melvin H Jameson
Market infrastructure
Shareholder rights●Are all shares entitled to one and only one
vote?●Is proxy voting by mail allowed?●Is cumulative voting (all my votes for one
director) or proportional board representation of minorities allowed
●Do minority shareholders have a judicial venue to challenge board decisions?
●Do existing shareholders have a preemptive right to purchase new stock issues?
(C) 2015 Melvin H Jameson
Alternative: minor interventionIntended to benefit politically favored group or industry, for example “industrial policy”●Taxes or subsidies
Consequences●Relatively minor distortions●Requires only limits on who benefits
(C) 2015 Melvin H Jameson
Alternative: major interventionIntended to benefit politically favored group or industry●Direct government spending●Nationalization of select industriesConsequences
●Price controls●Generally requires currency controls as well●In extreme cases can lead to partial collapse of
the market system.
(C) 2015 Melvin H Jameson
Zimbabwe1994: 25%1998: 48%2002: 199%2006: 1,281%
●August 2006: 1st redenomination ZWD$1,000 → ZWN$12007: 66,212%
●August 2008: 2nd redenomination ZWN$10b → ZWR$1Dec. 2008 (estimate): 6.5x10108 % or 91% per day
●March 2009: Zimbabwe dollar suspended: informal (U.S.) dollarization
(C) 2015 Melvin H Jameson
Discussion: Venezuela
●Price controls●Currency controls●Rampant
smuggling
(C) 2015 Melvin H Jameson
Implications for MNE – intervention
●Interference in domestic market such as price controls
●Currency blockage
●MNE may better placed to meet resulting funds transfer challenge than other firms.
(C) 2015 Melvin H Jameson
Recommended