Globalization & the

Multinational Firm
Chapter Objectives:

•Understand why it is important to study international finance.

•Distinguish international finance from domestic finance.

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 Chapter One Outline
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 What’s Special about “International” Finance?

 Goals for International Financial Management
 Globalization of the World Economy
 Multinational Corporations

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 What’s Special about
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“International” Finance?
 Foreign Exchange Risk
 Political Risk
 Market Imperfections
 Expanded Opportunity Set

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 What’s Special about
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“International” Finance?
 Foreign Exchange Risk
 The risk that foreign currency profits may evaporate
in dollar terms due to unanticipated unfavorable
exchange rate movements.
 Political Risk
 Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpected
ways.

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 What’s Special about
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“International” Finance?
 Market Imperfections
 Legal restrictions on movement of goods,
people, and money
 Transactions costs
 Shipping costs
 Tax arbitrage

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 What’s Special about
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“International” Finance?
 Expanded Opportunity Set
 Itdoesn’t make sense to play in only one
corner of the sandbox.
 True for corporations as well as individual
investors.

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 Goals for International Financial
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Management
 What goal should this effective global manager be
working toward?
 Maximization of shareholder wealth?
or
 Other Goals?

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 Maximize Shareholder Wealth
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 Long accepted as a goal in the Anglo-Saxon countries,

but complications arise.
 Who are and where are the shareholders?
 In what currency should we maximize their
wealth?

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 Other Goals
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 In other countries shareholders are viewed as merely one

among many “stakeholders” of the firm including:
 Employees
 Suppliers
 Customers
 In Japan, managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.

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 Other Goals
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 No matter what the other goals, they cannot be

achieved in the long term if the maximization of
shareholder wealth is not given due consideration.

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 Globalization of the World Economy: Recent
Trends
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 Emergence of Globalized Financial Markets

 Trade Liberalization and Economic Integration
 Privatization

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 Emergence of Globalized
Financial Markets
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 Deregulation of Financial Markets

coupled with
 Advances in Technology
have greatly reduced information and
transactions costs, which has led to:
 Financial Innovations, such as
 Currency futures and options
 Multi-currency bonds
 Cross-border stock listings
 International mutual funds
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 Economic Integration
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 Over the past 50 years, international trade

increased about twice as fast as world GDP.
 There has been a sea change in the attitudes of
many of the world’s governments who have
abandoned mercantilist views and embraced free
trade as the surest route to prosperity for their
citizenry.

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 Liberalization of
Protectionist Legislation
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 The General Agreement on Tariffs and Trade

(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
 The World Trade Organization has the power to
enforce the rules of international trade.
 The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to trade
between Canada, Mexico and the United States
over a 15-year period.

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 Privatization
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 The selling off state-run enterprises to investors is

also known as “Denationalization”.
 Often seen in socialist economies in transition to
market economies.
 By most estimates this increases the efficiency of the
enterprise.
 Often spurs a tremendous increase in cross-border
investment.

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 Multinational Corporations
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 A firm that has incorporated on one country and

has production and sales operations in other
countries.
 There are about 60,000 MNCs in the world.
 Many MNCs obtain raw materials from one nation,
financial capital from another, produce goods with
labor and capital equipment in a third country and
sell their output in various other national markets.

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 Top 10 MNCs
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1 General Electric United States

2 Ford Motor Company United States
Netherlands/ UK
3 Royal Dutch/Shell Group
Netherlands/U.K.
4 General Motors United States
5 Exxon Corporation United States
6 Toyota Japan
7 IBM United States
8 Volkswagen Group Germany
9 Nestlé SA Switzerland
10 Daimler-Benz AG Germany
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 Top Ten Richest MNCs
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Exxon Mobil, Oil and Gas
1 Revenue 2012: $486.4 Billion
Irving, Texas, US

Royal Dutch Shell, Oil and Gas The Hague, Netherlands and London, United
2 Revenue 2012: $470Billion Kingdom

3 Walmart, Revenue 2012: $446Billion Bentonville, Arkansas, United States

4 BP, Revenue 2012: $386.4 Billion London, England, United Kingdom

5 Vitol, Rawmaterials, Revenue 2012: $297 Billion Rotterdam, Netherlands, Geneva, Switzerland

6 Sinopec, Oil and Gas, Revenue 2012: $273.4Billion Beijing, China

Chevron, Oil and Gas, Revenue 2012: $253.7
7 Billion
San Ramon, California, United States

ConocoPhillips, Oil and Gas, Revenue 2012: $251 Houston Energy Corridor, Houston, Texas,
8 Billion U.S

9 Toyota, Revenue 2012: $235.8 Billion Toyota, Aichi, Japan

State Grid Corporation of China, Oil and Gas,
10 ctskDistrict, Beijing, China
Xicheng
Revenue: $226.2 Billion