Globalization and the Multinational Firm

7/25/2019 Globalization and the Multinational Firm

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Globalization and the

Multinational FirmDr. Himanshu Joshi


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Whats Special About InternationalFinance?

Ho is international corporate!nance di"erent #rom purel$domestic or corporate !nance?


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%hree ma&or dimensions setinternational corporate !nance apart#rom domestic !nance'

(. Forei)n *+chan)e and ,olitical -is.

/. Maret Imper#ections.

0. *+panded 1pportunit$ Set.


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Wh$ these di"erences?

%hese ma&or dimensions o# international!nance lar)el$ stem #rom the #act that

so2erei)n nations ha2e the ri)ht and poerto'

Issue currencies

Formulate their on economic policies

Impose ta+es

And re)ulate mo2ement o# people3 )oods3and capital across the )lobe.


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(. Forei)n *+chan)e and ,olitical-is

Suppose Me+ico is a ma&or e+port maret#or a 4S based manu#acturin) compan$and the Me+ican peso depreciates

drasticall$ a)ainst the 4.S dollar3 as it didin December (556.

What ill happen to 7os sales and pro!ts?

Ans. 4.S. 7o.s products can be price out o#the Me+ican maret3 as the peso price o#American imports ill rise #olloin) thepesos #all.


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What i# the compan$ mentioned inthe abo2e e+ample is an Indiancompan$ e+portin) to Me+ico?

,eso8dollar

Dollar8rupee


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What i# the compan$ mentioned inthe abo2e e+ample is an 4.Ssubsidiar$ manu#acturin) in India?

peso8dollar

Dollar8rupee

Suppose peso depreciates a)ainst 4SDand rupee appreciates a)ainst the4SD in the same 9uantum?


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Suppose the 4S subsidiar$ in India isre)istered in India as compan$ andlisted on :S* and cross listed in ;.


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%he precedin) e+amples su))est thathen !rms and indi2iduals are en)a)ed incross border transactions3 the$ are

potentiall$ e+posed to #orei)n e+chan)eris that the$ ill not normall$ encounterin domestic transactions.

;o the important 9uestion is hat is the

#re9uenc$ o# F @uctuations? Since (5B3 hen !+ed e+chan)ed rates

ere abandoned..


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-upee C 4SD -ate /B((..


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,olitical -is..

,olitical ris arises #rom the #act that aso2erei)n countr$ can chan)e the rules o# the)ameE and the a"ected parties ma$ not ha2ee"ecti2e recourse.

(55/3 *nron De2elopment 7orporation3 asubsidiar$ o# Houston based ener)$ compan$3si)ned a contract to build Indias lar)est poer

plant. A#ter *nron had spent nearl$ 0BBmillion3 the pro&ect as cancelled in (55 b$the then Maharashtra Go2ernment3 ar)uin)that India didnt need the poer plant.


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,olitical -is..

%he meltdon o# hodoro2s$3 thema&orit$ oner and a critic o# the )o2ernment3 on

#raud and ta+ e2asion char)es3 the -ussianauthorities sued the compan$ #or more than /Bbillion bac ta+es and auctioned o" its assets toco2er the alle)ed ta+ arrears.

%his )o2ernment action a)ainst


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Maret Imper#ections..

ariet$ o# barriers hamper #ree mo2ements o#people3 )oods3 ser2ices3 and capital acrossnational boundaries. %hese include le)alrestrictions3 e+cessi2e transaction andtransportation costs3 in#ormation as$mmetr$3and discriminator$ ta+ation.

%hese maret imper#ections3 hich represent

2arious #rictions and impediments pre2entin)marets #rom #unctionin) per#ectl$3 pla$ animportant role in moti2atin) M;7s to locateproduction o2erseas.


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Imper#ections in the FinancialMarets..

;estle 7orporation3 a ell non SissM;73 used to issue to di"erent classes o#common stoc3 bearer shares and

re)istered shares. %he #orei)ners erealloed to hold onl$ bearer shares. :earershares o# ;estle had the same claims ondi2idends but di"erential 2otin) ri)hts.

. hich t$pe o# share should commandhi)her price in the maret?

A. :earer :. -e)istered ?


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:earer shares ere used to trade #or abouttice the price o# re)istered shares3 hichere e+clusi2el$ reser2e #or Siss residents.

1n ;o2ember (3 (53 hoe2er3 ;estleli#ted restrictions imposed on #orei)ners3alloin) them to hold re)istered as ell asbearer shares?

. as it a #a2orable decision #or #orei)nin2estors?

A.


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A#ter this announcement3 the price spreadbeteen the to t$pes o# ;estle sharesnarroed drasticall$.

%he price o# bearer shares declined sharpl$3hereas that o# re)istered shares rose sharpl$.

%his implies that3 there as ma&or trans#er o#ealth #rom #orei)n shareholders to domesticshareholders.

Forei)ners holdin) ;estlKLs bearer Shares eree+posed to political ris in a countr$ that isidel$ 2ieed as a hea2en #rom such ris.


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%he ;estle 7rash..

Althou)h3 the price increase #or there)istered stoc does not appear to ha2esurprised an$one3 the decline o# bearer

stoc price shoced the maret obser2ers'*+planations'

(. A)enc$ ,roblem.

/. %a+ *2asion and Wealth 7oncealment.

0. Si)nalin).

6. Finite ,rice elasticit$ o# demand #or Stocs.


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A)enc$ ,roblem

Maret corrected ;estlKLs and other!rms : stoc prices in anticipationo# antitaeo2er amendments3 hich

could ha2e made taeo2er morediNcult3 alloin) mana)ement toentrench itsel# and hei)htenin)

concerns about #uture dissipation o#shareholder ealth.


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%a+ *2asion and Wealth7oncealment

:ecause ;estlKLs decision to allo #orei)nonership o# re)istered O-P stocs madebearer stocs more #un)ible3 the decisioncould ha2e been seen as e2idence that the!rm intended to abolish its bearer share3somethin) ;estle did later3 in (550.

I# #orei)n shareholders held ;estlKLs bearer

stoc to e2ade ta+es or to conceal theirealth3 these shares ould ha2e becomemuch less attracti2e3 hen ;estle si)naled itsintentions to eliminate them.


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Si)nalin)..

A third possibilit$ is that ;estlKLs decision to mae -stoc more #un)ible ith : stoc is e9ui2alent to asale o# stoc b$ insiders.

assumin) that insiders held - soc3 the$ could ha2e

#orced the polic$ chan)e hen the$ realize that the: stoc as o2er2alued.

A rational capital maret ould ha2e understoodthis lo)ic and slashed the : price o# ;estle and all

other !rms in hich corporate insiders had theoption o# #olloin) suit.

-esult is si)ni!cant ealth trans#er to insiders at thee+pense o# #orei)n in2estors.


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Finite ,rice *lasticit$

%he obser2ed price reaction could ha2eoccurred because the demand #unction #orthe indi2idual stocs slopes donard.

Oi.e.3 its price elasticit$ is !nite.P 4nder this h$pothesis3 ;estlKLs decision to

allo #orei)ners to hold its re)isteredshares essentiall$ increased the number

o# : shares in international maretsanda lar)er suppl$ should depress the maretprice.


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0. *+panded 1pportunitiesSet

Firms can locate production in an$ countr$ orre)ion o# the orld to ma+imize theirper#ormance.

-aise #unds in capital maret here the cost o#capital is the loest.

Firms can )ain #rom )reater economies o# scalehen their tan)ible and intan)ible assets aredeplo$ed on )lobal basis.

International in2estors can also bene!t )reatl$ i#the$ in2est internationall$ rather thandomesticall$.


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. *+panded 1pportunities Set' An*+ample

%he Wall Street Journal OApril 53 (55QP'

Another #actor bindin) bond maret e2er closer is lar)ecompanies @e+ibilit$ to issue bonds around the orld at ill3thans to )lobal sap maret. At the 2an)uard are thecompanies such as G* o# the 4S.

Mar enderGriend3 ho runs the !nancin) des at :en9ue,aribas3 sa$s it too about ( minutesE to put to)ether a#our billion #ranc O5(.Q millionP deal #or G*. :$ raisin)mone$ in #rancs and sappin) into dollars instantl$3 G* illsa2e !2e hundredths o# a percenta)e point or about

63BB3BBB annuall$ on the nine$ear deal. %he$ ha2e such ahu)e re9uirement o# capital that the$ are constantl$ looin)#or arbitra)ers3E adds Mr. enderGriend. and the$ dont caremuch ho the$ )et there.E


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Goals #or International 7orporateFinance

*+chan)e rate ris mana)ement

*+plorin) maret imper#ectionsR.

%here must be an underl$in) )oalR. Fundamental )oal o# sound !nancial

mana)ement is Shareholders WealthMa+imization.


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Whereas shareholder ealth ma+imization is )enerall$accepted as the ultimate )oal o# !nancial mana)ementin An)loSa+onE countries3 such as Australia3 7anada3the 4nited >in)dom3 and especiall$ the 4nited States3

it is not idel$ embraced a )oal in other parts o# theorld.

In France and German$ shareholders are 2ieed as oneo# the other staeholdersE o# the !rm3 others bein)emplo$ees3 customers3 suppliers3 bans3 and so #orth.

*uropean mana)ers tend to consider the promotion o#!rms staeholders o2erall el#are as the mostimportant corporate )oal.


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In Japan and >orea3 man$ compan$ #orm asmall number o# interlocin) business )roupscalled eiretsu is Japan and 7haebol in >orea3such as Mitsubishi3 Mitsui3 and Sumitomo3hich arose #rom consolidation o# #amil$onedbusiness enterprises.

Mana)ers in these )roups tend to re)ard theprosperit$ and )roth o# their )roups as thecritical )oal.

%he$ stri2e to ma+imize maret share ratherthan shareholder ealth.


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As 7apital marets are becomin)more liberalized and internationall$in France3 German$3 and Japan and

other nonAn)loSa+on countries arebe)innin) to pa$ serious attention toshareholder ealth ma+imization.

In man$ o# these countries Share-epurchase is not alloed.


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Globalization and the Multinational Firm

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