1. © 2012 Pearson Education, Inc. All rights reserved.1-1 1.1 Introduction Globalization – increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities Multinational corporation – produces and sells goods or services in more than one nation –BRIC countries (Brazil, Russia, India and China) offer a lot of opportunities for expansion International scope creates opportunities but also challenges –Recent crisis

2. © 2012 Pearson Education, Inc. All rights reserved.1-2 1.2 Globalization and the Growth of International Trade and Capital Flows The growth of international trade –Trade liberalization so countries can specialize at production of goods for which they have a comparative advantage 1960s only 20% of countries were open By 2000, over 70% of countries were open Free Trade agreements –GATT (1947) –WTO (1986) –Regional Trade agreements »European Union »NAFTA »ASEAN –Outsourcing – shifting of non-strategic functions to specialist firms

3. © 2012 Pearson Education, Inc. All rights reserved.1-3 1.2 Globalization and the Growth of International Trade and Capital Flows The growth in trade (Exh. 1.1, Panel A, Panel B) –In Panel A graph, Germany is most open, Japan is least –In Panel B graph, China’s trade jumped due to trade reforms –Countries that border oceans tend to trade more –Large countries tend to trade less than small

4. © 2012 Pearson Education, Inc. All rights reserved.1-4 Exhibit 1.1 (Panel A) International Trade as a Percentage of GDP

5. © 2012 Pearson Education, Inc. All rights reserved.1-5 Exhibit 1.1 (Panel B) International Trade as a Percentage of GDP (cont.)

6. © 2012 Pearson Education, Inc. All rights reserved.1-6 Exhibit 1.1 (Panel C) International Trade as a Percentage of GDP (cont.)

7. © 2012 Pearson Education, Inc. All rights reserved.1-7 1.2 Globalization and the Growth of International Trade and Capital Flows Securitization – repackaging of “pools” of loans or other receivables to create a new financial instrument –Pros and cons of development Pro – banks (and companies) could hedge against risk Cons – smart financiers exploit differences in country- specific regulations and complexity of instruments created opaqueness in the financial system –Global Financial Crisis – 2008 – 2010 »Started in U.S. »Longest and deepest in the postwar era »Scale and depth of crisis raises deep issues about the functioning of the global financial system

8. © 2012 Pearson Education, Inc. All rights reserved.1-8 1.2 Globalization and the Growth of International Trade and Capital Flows Incredible growth in the number of MNCs after WWII –37,000 MNCs in 1990 –82,053 in 2010 Globalization of financial markets –Trends in financial openness 1980s countries began to allow foreigners to invest in their markets Creation of new asset class – emerging markets –New financial landscape – derivatives Derivative security – an investment whose payoff over time is derived from the performance of underlying assets –Examples include futures, forwards, options and swaps

9. © 2012 Pearson Education, Inc. All rights reserved.1-9 1.2 Globalization and the Growth of International Trade and Capital Flows Classic example of a crisis is a bank run –FDIC protects our deposits so we don’t have to “run” the bank Exhibit 1.2 The Workings of a Financial Crisis

10. © 2012 Pearson Education, Inc. All rights reserved.1-10 1.2 Globalization and the Growth of International Trade and Capital Flows Securitization and U.S. government’s quest to allow everyone to own a home fueled growth in subprime mortgages between 2000 and 2006 –People bought houses they could not afford –Banks securitized those loans and sold them to investors –Once house prices started to fall, many defaulted on mortgages –Banks holding assets backed by those mortgages suffered losses –A bank in the UK faced a bank run in 2007 –In March, 2008, JP Morgan Chase bought Bear Stearns due to its inability to fund itself in the money markets –Fannie Mae and Freddie Mac were taken over by the government

11. © 2012 Pearson Education, Inc. All rights reserved.1-11 1.2 Globalization and the Growth of International Trade and Capital Flows –In September, 2008 Lehman Brothers declared bankruptcy –Money markets froze and a flight to quality ensued Ramifications of the crisis –Lot s of debates of who was responsible –Correction of global imbalances? U.S. trade deficit China trade surplus –Regulatory issues Central banks pumped money into banks Expansionary monetary and fiscal policies Policy implications of “too big to fail”

12. © 2012 Pearson Education, Inc. All rights reserved.1-12 1.3 Multinational Corporations A parent company in the firm’s originating country and operating subsidiaries, branches and affiliates abroad –UN calls these “transnational corporations” How they enter foreign markets –Exporting/Importing –Licensing – gives local firms right to manufacture their products in exchange for a fee –Franchising – the firm provides sales or service strategies in exchange for fees –Joint venture – two or more firms form a new legal entity, jointly owned by all of the firms –Greenfield – starting company from scratch

13. © 2012 Pearson Education, Inc. All rights reserved.1-13 1.3 Multinational Corporations Goals of an MNC –Maximize shareholder wealth Australia, Canada, U.K. and U.S. Appropriate time horizon is long –Maximize stakeholder wealth Europe and Asia Agency Theory – studies problems that arise from the separation of ownership and control –Corporate governance – legal/financial structure controlling relationship –Corporate fraud »Enron »Worldcom »Tyco »Parmalat

14. © 2012 Pearson Education, Inc. All rights reserved.1-14 Exhibit 1.3 World’s Top Non-Financial Transnational Corporations, Ranked by Foreign Assets (in billions of dollars and thousands of employees)

15. © 2012 Pearson Education, Inc. All rights reserved.1-15 Exhibit 1.4 Methods of Overcoming Agency Problems Due to the Separation of Ownership and Control

16. © 2012 Pearson Education, Inc. All rights reserved.1-16 1.3 Multinational Corporations FDI – when a company from one country buys at least 10% of a company in another country –Has grown 30-fold since 1980 to $18 trillion –M&A play a huge role in this trend

17. © 2012 Pearson Education, Inc. All rights reserved.1-17 Exhibit 1.5 Foreign Direct Investment as a Percentage of GDP

18. © 2012 Pearson Education, Inc. All rights reserved.1-18 Exhibit 1.6 Cross-Border Mergers and Acquisitions, 1990–2009 (in millions of dollars)

19. © 2012 Pearson Education, Inc. All rights reserved.1-19 1.4 Other Important International Players International banks International institutions –International Monetary Funds (IMF) – member organization whose goal is to ensure the stability of the international monetary and financial system through surveillance and technical assistance –The World Bank – member organization whose goals are development, poverty alleviation and advising IBRD – middle-income countries IDA – poorest countries IFC – grow private sector of developing nations

20. © 2012 Pearson Education, Inc. All rights reserved.1-20 1.4 Other Important International Players –Multilateral development banks – regional development banks (including World Bank and regional banks in Africa, Asia and Europe) who provide financing and grants –World Trade organization (WTO) – mediates trade disputes –Organization for Economic Cooperation and Development (OECD) – examines, devised and coordinates policies across 34 relatively wealthy nations to foster sustainable economic growth and employment, rising standards of living and financial stability –Bank for International Settlements (BIS) – fosters international monetary and financial cooperation – central banks’ central bank

21. © 2012 Pearson Education, Inc. All rights reserved.1-21 1.4 Other Important International Players –European Union (EU) – Cooperation among countries in this region and (in most cases) adoption of the same currency to promise international business and prevent war Economic and monetary union (EMU) –Governments –Individual investors –Institutional investors –Sovereign wealth funds – government-run investment pools –Hedge funds –Private equity funds

22. © 2012 Pearson Education, Inc. All rights reserved.1-22 1.5 Globalization and the MNC: Benefactor or Menace? Global crisis leading to protectionism –Increasing tariffs and trade litigation/technical barriers Slowing trade liberalization Trade openness and economic risk –Potentially raise need for welfare programs –Ensure fairness

23. © 2012 Pearson Education, Inc. All rights reserved.1-23 1.5 Globalization and the MNC: Benefactor or Menace? Countries who had opened their markets to foreigners subsequently fell into crisis Benefits of openness –Channels savings to most productive uses –Sharing of risk beyond what is possible domestically –Domestic recessions can be buffered through borrowing –Cost of capital decreases Costs of openness –Sometimes capital is not used wisely –Foreign capital can leave quickly causing financial volatility –Difficulty in taxing profits – MNCs shift to avoid –Capital control effectiveness decreases

24. © 2012 Pearson Education, Inc. All rights reserved.1-24 1.5 Globalization and the MNC: Benefactor or Menace? Anti-globalist movement and MNCs –Movement opposing globalization –Identifies MNCs as “villains” of globalization –Criticize global financial institutions such as the World Bank, IMF and WTO –They fear that MNC activities will harm the environment –They argue that globalization is seen as a threat to employment in their own country

25. © 2012 Pearson Education, Inc. All rights reserved.1-25 1.5 Globalization and the MNC: Benefactor or Menace? Final thoughts on globalization –Can be valuable –Some evidence that workers in developed countries have not benefited Globalization destroys some jobs and creates others –Some believe that government must intervene to better spread the newly created wealth by helping those that have been displaced by globalization Retraining