Chapter 1 - Globalization and the Multinational Corporation

If it allows foreigners to invest in its capital markets and allows its citizens to invest abroad

When is a country financially open?

1. channels funds to most productive uses 2. resident can pool risks internationally, achieving better insurance 3. a country suffering from a recession, natural disaster, or lack of capital can borrow aborad

3 Benefits of financial openness.

1. financial volatility turns into real volatility 2. increases financial sector vulnerability 3. loss of fiscal autonomy 4. effectiveness of capital controls is decreased

4 costs of financial openness

Multinational Corporation (MNC)

A ________________________ produces and sells goods or services in more than one nation and consists of a parent company in the firm's originating country and the operating subsidiaries, branches, and affiliates it controls both at home and abroad.

International mergers and acquisitions (M&A)

An important part of FDI involves __________________________________________, in which a corporation in one country merges with or acquires a corporation in another country.

The World Trade Organization (WTO)

An institutional body created by members of GATT, this organization expanded its scope from traded goods to trade within the service sector and intellectual property rights. The agreements set the legal ground rules for international commerce to hopefully ensure that the multilateral trading system operates smoothly

The International Monetary Fund (IMF)

An international organization that ensures the stability of the international monetary and financial system (system of international payments and exchange rates among national currencies that enables trade to take place between countries) to help resolve crisis when they occur and to promote growth and alleviate poverty.

Decreases, Increases

Because risks are shared in financial openness, the cost of capital _____________________, leading firms to invest more, which ___________________ growth.

Comparative Advantage

Countries gain from trade if each nation specializes in the production of those goods in which it has a _______________________________.

Economic and Monetary Union (EMU)

In 1992, the EU decided to go for _________________________________________, involving the introduction of a single European currency managed by a European central bank. (came to be known as the euro)

The World Bank

Is an international financial institution that provides loans to developing countries for capital programs

Licensing, Royalties

Is when an MNC gives local abroad firms the right to manufacture the company's products or provide its services in return for fees, typically called ______________________.

International Development Association (IDA)

Over time the IBRD's focus shifted toward poverty reduction and in 1960, the _____________________________________________ was established as an integral part of the World Bank who focus was now on the poorest countries in the world.

True

T/F: More open countries tend to grow faster

International Bank for Reconstruction and Development (IBRD)

The World Bank was an institution was created in 1944 originally as the __________________________________________________, whose goal was to facilitate postwar reconstruction and development for middle-income countries.

International Finance Corporation (IFC)

The ____________________________ is one of the best known members of the World Bank and is a global investor and advisory committed to promoting private-sector development in developing countries.

Sarbanes-Oxley Act

The _________________________________ covers issues such as auditor independence, corporate governance, and enhanced financial disclosure.

The Bank of International Settlements (BIS)

The __________________________________ fosters international monetary and financial cooperation to promote stability and serves as a bank for central banks.

The Organization for Economic Cooperation and Development (OECD)

The _____________________________________ provides a setting to examine, devise, and coordinate policies that foster sustainable economic growth and employment, rising standards of living, and financial stability in member countries and beyond.

General Agreement on Tariffs and Trade (GATT)

The _____________________________________________, signed in 1947, was designed to encourage free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes.

Agency Theory

The economic field of _________________________ explores the problems that arise from the separation of ownership and control and devises ways to resolve them.

Corporate Governance

The legal and financial structure that controls the relationship between a company's shareholders and its management is called __________________________.

The European Union (EU)

The member states of the ____________________________ seek to create a common market in which goods, services, people, and capital can move around freely and to achieve economic and political integration. (Grew after WWII with a desire to prevent such wars from ever happening again)

Mitigate the principal-agency problem

The role of corporate governance is to ________________________________________.

Multilateral Development Banks (MDBs)

These institutions provide financial support and professional advice for economic and social development activities in developing countries. They provide financing for development in three ways: First, they provide long-term loans at market interest rates. Second, they provide long-term loans w/ rates set well below market rates. Third, they sometimes offer grants for technical assistance, etc.

Institutional investors (ex. banks, insurance companies, pension funds, mutual funds, etc.)

These organizations invest pools of money on behalf of individual investors or other organizations

Individual investors

They are the company's shareholders, the ultimate owners of the company, and they also, together with institutional investors, determine bond and stock prices

Franchising

This is when an MNC provides a specialized sales or service strategy, offers support at various levels, and may even initially invest in the franchise in exchange for periodic fees.

Surveillance and Technical Assistance

To meet its objectives, the International Monetary Fund (IMF) must have what two things?

1. Independent BOD 2. Partial Concentration of ownership and control in the hands of a large shareholder 3. Executive compensation with options or bonuses related to performance 4. Clearly define duties for CEOs with class-action law suits 5. Hostile takeovers and proxy contests

What are the 5 methods for overcoming the agency problem due to the separation of ownership and control?

1. countries continue to expand their trade in goods and services 2. countries continue to reduce their barriers to capital flows

What are the two main trends of globalization?

1. Start out by importing/exporting, then use licensing and royalties 2. Franchising 3. Joint Venture 4. Setting up production and distribution facilities abroad either by acquiring or merging with foreign companies or by simply establishing new operations in the countries (greenfield investments).

What are the ways that a MNC can enter a foreign market?

Maximize shareholder wealth

What is the appropriate goal of the management of any corporation, including MCN?

The World Trade Organization (WTO)

What organization replaced the GATT?

1. harm environment 2. "sweatshop" argument 3. threat to employment in home countries

Why do anti-globalists hate MNC's so much? 3 reasons

Hedge funds

____________________ pool investor's money and invest in financial instruments to make a positive return, mostly seeking to profit in all kinds of markets by pursuing speculative investment practices that may increase the risk of loss.

Private Equity Firms

_____________________________ raise money from rich individual investors and institutions and invest in a number of individual companies, and often control the management of their companies.

Joint Venture

a company that is jointly owned and operated by two or more firms

Sovereign wealth funds

are state-owned investment funds, managing a global portfolio much like a pension fund would do.

Ponzi Scheme

is an investment fraud that tricks investors into believing they are earning fabulous returns from good investments, whereas actual payouts use funds contributed by new investors.

Derivative Securitiy

is an investment whose payoff over time is derived from the performance of some underlying asset

Anti-Globalization

is an umbrella term encompassing separate social movements, united in their opposition to the globalization of corporate economic activity and the free trade with developing nations that results from such acitivity

Surveillance

is the regular dialogue about a country's economic condition and policy advice that the IMF offers to each of its members

Outsourcing

is the shifting of non-strategic functions to specialist firms to reduce costs

Foreign Direct Investment (FDI)

occurs when a company from one country makes a significant investment that leads to at least a 10% ownership interest in a firm in another country.

Globalization

the increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities

Securitization

the repackaging of "pools" of loan or other receivables to create a new financial instrument that can be sold to investors