Globalization & MNE

1. Do we need globalization? 2. Yes / No: Why ? 3. What is the bottom line? 4. Is your country matters?

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How do we measure value creation?

Access to the capital market Strategic Management Market Openness

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Is Comparative Advantage a great concern?

'Eclectic Paradigm A theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment. The eclectic theory paradigm is based on the assumption that institutions will avoid transactions in the open market when internal transactions carry lower costs.

In order for a direct investment in a foreign country to be beneficial, the following advantages must be present: 1. Product or company specific advantage: 2. Location specific advantages: where the company derives greater benefit through a foreign establishment. 3. Market internalization - meaning, it is better for the company to exploit a foreign opportunity itself, rather than through an agreement with a foreign firm.
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Comparative advantage anybody? Maybe in 19th Century ! Not for today?

Countries do not appear to specialize only in those products that could be most efficiently produced by that countrys particular factors of production
At least two of the factors of production (capital and technology) now flow easily between countries (rather than only indirectly through traded goods and services) Modern factors of production are more numerous than this simple model Comparative advantage shifts over time

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Comparative advantage is still, however, a relevant theory to explain why particular countries are most suitable for exports of goods and services that support the global supply chain of both MNEs and domestic firms 21st century comparative advantage: Services and cross border facilitation by telecommunications and the Internet

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Firms become multinational for one or several of the following reasons:

Market seekers produce in foreign markets either to satisfy local demand or export to markets other than their own Raw material seekers search for cheaper or more raw materials outside their own market Production efficiency seekers produce in countries where one or more of the factors of production are cheaper Knowledge seekers gain access to new technologies or managerial expertise Political safety seekers establish operations in countries considered unlikely to expropriate or interfere with private enterprise

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The growth in the influence and self-enrichment of corporate insiders

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Financial Goals & Corporate Governance

Who owns the business? Do the owners manage the business themselves? Should we go public? Should we go back to private?

Myth?

Family controlled firms often out-perform publicly listed firms?

family to public firms brings agency issues

Moving from

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Should we choose
Shareholder Wealth Maximization As characterized by Anglo-

American markets
Stakeholder Capitalism Model As characterized by Continental

European and Japanese markets

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Shareholder Wealth Maximization

A firm should strive to maximize the

Stakeholder Capitalism
A view that all a corporations stakeholders

return to shareholders (those individuals owning equity shares in the firm)

This view defines risk in a very strict

(employees, management, suppliers, local community, local/national government and creditors) need to be considered in addition to the equity holders
The goal is to earn as much as possible in

financial sense
Risk is defined as the added risk a firms

the long run, but to retain enough to increase the corporate wealth for the benefit of all
The definition of corporate wealth is much

shares bring to a diversified portfolio (a fully diversified portfolio represents systematic risk)
The added firm-specific risk is known as

broader than just financial wealth, it includes technical, market and human resources as well
Doesnt make an issue of market efficiency

unsystematic risk

because long-term loyal SH should be more influential than transient SH

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Long-term versus short-term value maximization

Impatient capitalism focuses on the short-term sometimes at the expense of long-term value
Exacerbated by improper management incentives from SH

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Objective of corporate governance in the shareholder wealth model is the optimization over time of the returns to shareholders The most widely accepted statement of good corporate governance (established by the OECD) focus on the following principles;

The need arises from the separation of ownership from management, and from the varying views by culture of who the stakeholders are and of what significance A governance regime (system) is a function of;

The rights and equitable treatment of shareholders The role of stakeholders in corporate governance Disclosure and transparency The responsibilities of the board

Financial market development The degree of separation between management and ownership The concept of disclosure and transparency

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The Board of Directors The legal body accountable for the governance of the corporation
Officers and Management Creators and directors of the firms strategic and operational direction Equity Markets Reflect the markets constant evaluation of the promise and performance of the company

Debt Markets Provide funding and are interested in the financial health of the firm

Auditors and Legal Advisors Provide an external professional opinion as to the fairness, legality, and accuracy of financial statements
Regulators Require a regular and orderly disclosure process of corporate performance 2-17

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Board Structure and Compensation Research suggests that compensation for board members is not a significant problem Minority Shareholder Rights are still as issue

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1. 2.

Market Risk Business Risk

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