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 PercentChina 36%Vietnam 33Indonesia 21Thailand 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.