Globalization and the MNC Beginning Quote Globalization is

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 1980 s with developed countries liberalizing their capital markets followed by developing countries in the 1990 s.

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 • Mc. Donalds 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 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: +CAD 12. 8% (25. 4% in USD) • China: +CHY 44. 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.