ari-sinsin(et.rgeleir)nal)ffi-jingom.t.docx

ari-
sin
sin
(et.
rge
leir
)nal
)ffi-
jing
om.
ter-
this
and
lhat
eto
)ay-
the
isa
and
cHAPTER 1 current Multinational challenges andthe Global
Economy
U.S. Dollar-Denominated lnterest Rates
1-Month Maturities

U.S. Prime Rate 6 00%
Certificate of Deposit Rate 0 400%
LIBOR 0.260%
London lnterbank Offer Rate
London interbank rates apply to the buying
and'selling of eurodollar deposits between
banks in the international markets.
Notes:
Average rates for MaY 201 1.
U.S. Federal Funds target rale = o O"/"4 25"/"
Eurodollar DePosit
Offer Rate
I
) Eurodollar SPread
)
Eurodollar DePosll
Bid Bate
0.275%
o.255%rii*:.
ig'
t,
*
d!

iri
l:n
e
::
.
;l:
Eurodollar deposits are dollar-denominated
accounts in financial institutions oulside of
the united states.
rter-
dely
)riv-
For
)S AS
the
ein
:stic
Iese
sred
)ank
Ioan
/een
rket
isa
90n
that

ze is
rnks
Deposit rates are higher in the eulocurrency malkets than in
most
domesti:c currency
markets because the finicial institutions offering eurocurrency
activities are not subject
to
murry of the regulations and reserve requiremen-ts imposed on
traditional
domestic banks
and banking activities. with these costs removed, raies are
subject to mole competitive
pressures, d*eposit rates are higher, and loan rates are lower. A
second majol area of
cost
avoided in the eurocurrency niarkets is the payment of deposit
insurance
fees (such as the
Federal Deposit lnsurance" Corporation, FDIb, and assessments
paid on deposits
in the
United States). Exhibit 1.3 illustrates how eurodollar deposit
and loan rates'
including dollar
LIBOR and LIBID rates, compare with traditionai domestic

interest rates'
The Theory of Comparative Aclvantage
The theory of comparative advantage provides a basis for
explaining and
justifying interna-
tional trade in a model world assumed to enjoy free trade,
perfect competition'
no uncer-
tainty, costless information, and no gou"rn*".ri interference'
The theory's origins
lie in the
work of Adam Smith, anJ particutarly with his seminal book
TheWealth
of Nations published
in 1776-Smith sought io explain why the division of labor in
productive activities' and
subse-
quently international trade of those goods, increased the quality
of life
for all citizens' Smith
based his work on ihe concept ol abiolute advantage,wheie
every country
should specialize
in the production of that good it was uniquely suited for' More
would be
produced for less'

10 PAfil" 1 Global Financial Environment
Thus. by each country specializing in products for which it
possessed absolute ad,vantage,
countries could produce more in total and exchange products-
trade-for goods that were
cheaper in price than those produced at home.
David Ricardo, in his work On the Principles of Politicat
Econonzy anrl Taxotion pub-
lished in 18i7, sought to take the basic ideas set down by Adam
Smith a ferv iogical steps
further. Ricardo noted that even if a country possessed absolute
advantage in the produc-
tion of two products, it might still be relatively more efficient
than the other country in
one good's product than the other. Ricardo termed this
comparative aclt,antctge. Each
country would then possess comparative advantage in the
production of one of the two
products, and both countries would then benefit by specializing
completely in one product
and trading for the other.
Although international trade might have approached the
comparative advantage model
during the nineteenth century, it certainly does not today, for
avariety ofreasons. Countries
do not appear to specialize only in those products that could be
most efficiently produced by
that country's particuiar factors of production. Instead,
governments interfere rvith compara-
tive advantage for a variety of economic and political reasons,
such as to achieve full employ-

ment, economic development, national self-sufficiency in
defense-related industries, and
protection of an agricultural sector's way of life. Government
interference takes the form of
tariffs, guotas, and other non-tariff restrictions.
At least two of the factors of production, capital and
technology, now flow directly and
easily between countries, rather than only indirectly through
traded goods and services. This
direct flow occurs between related subsidiaries and affiliates of
multinational firms, as well as
between unrelated firms via loans, and license and management
contracts. Even labor flows
between countries such as immigrants into the United States
(legal and illegal), immigrants
within the European Union, and other unions.
Modern factors of production are more numerous than in this
simple model. Factors
considered in the location of production facilities worldwide
include local and managerial
skills, a dependable legal structure for settling contract
disputes, research and develop-
ment competence, educational levels of available workers,
energy resources, consumer
demand for brand name goods, mineral and raw material
availability, access to capital, tax
differentials, supporting infrastructure (roads, ports, and
communication facilities), and
possibly others.
Although the terms of trade are ultimately determined by supply
and demand, the
process by which the terms are set is different from that
visualized in traditional trade theory.

They are determined partly by administered pricing in
oligopolistic markets.
Comparative advantage shifts over time as less developed
countries become more devel-
oped and reahze their latent opportunities. For example, over
the past 150 years comparative
advantage in producing cotton textiles has shifted from the
United Kingdom to the United
States, to Japan, to Hong Kong, to Taiwan, and to China. The
classical model of comparative
advantage also did not really address certain other issues such
as the effect of uncertainty and
information costs, the role of differentiated products in
imperfectly competitive markets, and
economies of scale.
Nevertheless, although the world is a long way from the
classical trade model, the gen-
eral principle of comparative advantage is still valid. The closer
the world gets to true
international specialization, the more world production and
consumption can be
increased, provided the problem of equitable distribution of the
benefits can be solved to
the satisfaction of consumerq producers, and political leaders.
Complete specialization,
however, remains an unrealistic limiting case, just as perfect
competition is a limiting case
in microeconomic theory.
I
:.
!a

.ri
cHAFTERlCurrentMultinationalChallengesandtheGlobalEconom
y
rb-
rps
uc-
'in
rch
.wo
uct
'del
ries
tbv
1ra-
,oY-
and
rof
and
this
11 as
ows
ants
tors
:rial
lop-
mer

, tax
and
the
)ory.
:vel-
rtive
rited
rtive
and
, and
gen-
true
Lbe
:d to
tion,
case
Supply ehain CIutsour*ing: Ccmparative Adv*ntage
Tcday
comparative advantage is still a relevant theory to explain
why particular countries are most
suitable for exporrs
"t
gr.a, and services that suppori the global supply chain of
b::1MNEs
and domestic firms. fft"" "o*p-ative
advantug"-of the twenty-first century' howevet' ls one

that is based more on services, and their "roSS
iord"' facilitation by telecommunications and
the Internet. The source of a nation's comparative
advantage,however'
still is created from
the mixture of its own labor skills, access to capital, and
technology'
Many locations for supply chain outsourcing exist today'
Exhibit 1'4 presents a geograph-
ical overview of this -odein'reincarnation of tlde-based
comparative advantage' To prove
that these countries ,h;;i;;p""ialize in the activities shown you
would need to know how
costly the same activities would be in the countries that
are importing these services com-
pared to their own other industries. Remember that it takes
a relative advantage in costs' not
lurt ut cbsolute advantage,to create
comparative advantage'
For example, India iu, d"o"topea a trignty efficient ind low-cost
software
industry' This
inOurtry supplies not o"fy,n" "r"uiion
of custlm software, but also call centers for customer
support, and other information technology r"rui""t.lt" Indian

software
industry is co*posed
of subsidiaries of MNEs and independent companies'
If you own.a Hewlett-Packard computer
and call the customet *pp"" ""nt", "u*t*
Ioi help, you are likely to reach a call center in
India. Answering your cati witt be a knowledgeable Indian
software engineer or programmer
who will ,.walk you ,fr*"gh" your probleti. tnOlu has a large
number
of well-educated'
English-speaking technical-experts *^to urtfuid only a.fraction
of
the salary and overhead
earned by their IJ.S. counterparts. The overcapacity and
low cost of international telecommu-
nication networks today furiher enhances ttre comparative
advantage of an Indian location'
Eastern Europe
China London
I
Philippines"/
Manila
,",,"J

'/lun''*''"'""
FX.-
*on,"'.,"u/ !::",::"" soutnnt'ic"
irndia'
t San Jose
t
BorL,uy
1
' "n?'t
1l'7vg
,.CtOfS
/ Budapest
Berlin
shanghai -
,/ -
t
Russia
Guadalajara Johannesburg Hyderabad
Bangalore
MNEs based in many industrial countries are outsourcing
intellectual
functlons to providers based in tradiiionai emetging market
countries

12 FAfi'f i Global Financial Environment
The extent of global outsourcing is already reaching out to
every corner of the globe.
From financial back-offices in Manila, to information
technology engineers in Hungary, mod-
ern telecommunications now take business activities to labor
rather than moving labor to the
places of business.
1#i:at ls Different aE:mat{ Gl*bal Financi;e[
l'4anagcffineilg?
Exhibit 1.5 details some of the main differences between
international and domestic financial
management. These component differences include institutions,
foreign exchange and poiiti-
cai risks, and the modifications required of financial theory and
financial instruments.
International financial management requires an understanding of
cultural, historical, and
institutional differences such as those affecting corporate
governance. Although both domes-
tic firms and MNEs are exposed to foreign exchange risks,
MNEs alone face certain unique
risks, such as political risks, that are not normaliy a threat to
domestic operations.
MNEs also face other risks that can be classified as extensions
of domestic finance the-

ory. For example, the normal domestic approach to the cost of
capital, sourcing debt and
equity, capital tudgeting, working capital management, taxation,
and credit analysis needs to
be modified to accommodate foreign complexities. Moreover, a
number of financial instru-
ments that are used in domestic financial management have
been modified for use in interna-
tional financial management. Examples are foreign currency
options and futures, interest
rate and currency swaps, and letters of credit.
The main theme oi this book is to analyze horv a multinational
enterprise's financial man-
agement evolves as it pursues global strategic opportunities and
new constraints emerge. In this
cilapter, we will take a brief look at the challenges and risks
associated with Tiident Corpora-
tio; (Tiident), a company evolving from domestic in scope to
being truly multinational.The dis-
cussion wiil include ihe constraints that a company will face in
terms of managerial goals and
governance as it becomes increasingiy involved in multinational
operations. But first we need
io clarify the unique value proposition and advantages that the
MNE was created to exploit.

And as noted by bUnA Fiianie in Practice 1.2,the objectives and
responsibilities of the mod-
ern multinational have grown significantly more complex in the
twenty-first century'
@
CcrBt
and c
Su
fut
What it
accept,
create
sibility ,
costs (
globali:
poratic
leaders
TI
to dat€
corpor,
corpor,
a few.
ing prir
isanc
the mt

ment,
T
text o1
mary
"suste
the c,
securi
rower
ity, thr
a cult
The'1
i
Concept
What ls Different about lnternational Financial Management?
lnternational Domestic
Culture, history and
insUtutions
Corporate governance
Foreign exchange risk
Political risk
Modification of domes-
tic finance theories
Modiflcation of domes-

tic financial instruments
Each foreign country is unique and not always
understood by MNE management
Foreign countries' regulations and rnstrtutional
practices are all uniquely different
MNEs face foreign exchange risks due to their
subsidiaries, as well as impod/expod and foreign
competitors
MNEs face poliiical risks because of their foreign
subsidiaries and high Prollle
MNEs must modiiy finance theories like capital budget-
ing and cost of capital because of foreign complexities
MNEs utilize modified financial instruments such as
options, futures, swaps, and letters of credit
Each country has a known base case
Regulations and institutions are well known
Foreign exchange risks from import/expod and
foreign competition (no subsidiaries)
Negligible political risks
Traditional financial theory applies

Limited use of financial instrurnents and derivatives
because of fewer foreign exchange and political risks
c H A P T E l? 1 current Multinational challenges and the
Global Economy
be.
rd-
.he
rnd
reS-
lue
he-
rnd
sto
.ru-
na-
'est
eorporate HesPonsibilitY
and eorporate $ustainabilitY
Sustainable development is development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs,

-Brundttand Report, 1987, P.54.
What is the purpose of the corporation? lt is increasingly
accepted that the purpose of the corporation is to certainly
create profits and value for its stakeholders, but the respon-
sibility of Ihe corporation is to do so in a way that inflicts no
costs on society, including the environment. As a result of
globalization, this growing responsibility and role of the cor-
poration in society has added a level of complexity to the
leadership challenges faced by the twenty-first ceniury firm'
This developing debate has been somewhat hampered
to date by conflicting terms and labels-corporate goodnxs'
corporate responsibility, corporate social respons/b//ly (CSR)'
corporate philanthropy, and corporate sustainability, to list but
a few. Much of the confusion can be reduced by using a guid-
lng principle-that susfarnability is a goal, while responsibility
is an obligation. lt follows that the obligation of leadership in
the modern multinational is to pursue profit, social develop-
ment, and the environment, all along sustainable principles'
The term sustainable has evolved greaily within the con-
text of global business in the past decade. A traditional pri-

mary objective of the family-owned business has been the
"sustainability of the organization"-the long-term ability of
the company to remain commerclally viable and provide
security and income ior future generations. Although nar-
rower in scope than the concept of environmental sustainabil-
ity, there is a common core thread-the ability of a company'
a culture, or even the earth, to survive and renew over time'
The Triple Bottom-Line
, . . batancing economic growth, social development'
and environmental protection, so that future generations
are not compromised by actions taken today
- 2OOB S u stai n ab ility Report, ExxonMobil Corporation.
Nearly two decades ago a number of large corporations
began to refine their publicly acknowledged corporate
objective as "the pursuit of the triple bottom line'" This tripte
bottom line - profitability, sociat responsibility,
and environ -
mental sustainability-was considered an enlightened
development of modern capitalism. What some critics
referred to as a softer and gentler form of market capital-
ism, was a growing acceptance on the pad of the corpora-
tion for doing something more than generating a financial

profit.
There have been a variety of theoretical rationalizations
for this more expanded view of corporate responsibilities, one
of which divides the argurnents along tvvo channels, the
economic channeland the moral channel'
Q The economic channel argues that by pursuing corpo-
rate sustainability obiectives the corporation is actually
still pursuing profitability, bui is doing so with a more intel-
ligent longer-term perspective-sometimes refened to as
"enlightened self-interest." lt has realized that a responsi-
ble organization must assure that its actions over time'
whether or not required by law or markets, conducts its
business in a way which does not reduce future choices'
* The moral channelargues that since the corporation has
all the rights and responsibilities of a citizen, it also has
the moral responsibility to act in the best interests of
society and society's future, regardless of its impacts on
profitability. This argument assumes that in some
instances, doing the 'right thing' may have explicit costs'
even to shareholders

Our Commitment to corporate respansibility is unwa-
vering, even during economic downturns' Taking a
proactive, integrated approach to managing our impact
on local communities and the environment not only
benefits people and our planet, but is good for our busi-
ness. Making corporate responsibility an integral parl of
lntet's strategy heips us mitigate risk, build strong rela-
tionships with our stakeholders, and expand our market
oPPortunities.
-Letter from our CEO,
lntet 20AB Corp;sr67s Responsibitity Report, p' 3
.an-
this
)ra-
dis-
and
eed
loit.
Lod-
:!l
I
j
:.

risks
h€aerE<c€ Xxmp:erfee€i*als: A Raei*t?ags fl'or tE:e frxis€enec
qlf tEa* &deaEtimati*s:al Fie"era
MNEs strive to take advantage of imperfections in national
markets for products, factors
of
production, and financial ass""tr. Impeifections in the market
for products translate into
mar-
Let opportunities {or MNEs. Large international firms are better
able to expioit such compet-
itive factors as economies of scale, managerial and
technological expertise, product
differentiation, and financial strength than arJtheir local
competitors' In fact, MNEs thrive
best in markets characterized by international oligopolistic
competition, where these factors
14 PART i Global Financial Environment
are particularly critical. In addition, once MNEs have
established a physical presence abroad,
they are in a better position than purely domestic firms to
identify and implement market
opportunities through their own internai information network.
Why ** Firms becom* fl"{ultinati*nal?
Strategic motives drive the decision to invest abroad and

become an MNE. These motives
can be summarized under the following categories:
1. Market seekers produce in foreign markets either to satisfy
local demand or to expoil to
markets other than their home market. U.S. automobile firms
manufacturing in Europe
for local consumption are an example of market-seeking
motivation.
2. Raw material seekers extract raw materials wherever they can
be found, either for export
or for further processing and sale in the country in which they
are found-the host coun-
try. Firms in the oil, mining plantation, and forest industries fall
into this category.
3. Production efficiency seekers produce in countries where one
or more of the factors of
production are underpriced relative to their productivity. Labor-
intensive production of
electronic components inTaiwan, Malaysia, and Mexico is an
example of this motiyation.
4. Knowledge seekers operate in foreign countries to gain
access to technology or manage-
rial expertise. For example, German, Dutch, and Japanese firms
have purchased U.S.-
located electronics firms for their technology.
5. Political safety seekers acquire or establish new operations in
countries that are consid-
ered unlikely to expropriate or interfere with private enterprise.
For example, Hong
Kong firms invested heavily in the United States, United
Kingdom, Canada, and Aus-

tralia in anticipation of the consequences of China's 1997
lakeover of the British colony.
These five types of strategic considerations are not mutually
exclusive. Forest products
firms seeking wood fiber in Brazil, for example, may also find a
large Brazilian market for a
portion of their output.
In industries characterized by worldwide oligopolistic
competition, each of the above
strategic motives should be subdivided into proactive and
defensive investments. Proactive
investments are designed to enhance the growth and
profitability of the firm itself. Defensive
investments are designed to deny growth and profitability to the
firm's competitors. Exam-
ples of the latter are investments that try to preempt a market
before competitors can get
established in it, or capture raw material sources and deny them
to competitors.
The G!*balizaticn Frereess
Tiident is a hypothetical U.S.-based firm that will be used as an
illustrative example through-
out the book to demonstrate the globalization process -the
structural and managerial changes
and challenges experienced by a firm as it moves its operations
from domestic to global.
&l*bal Transitisrx l: Trident fuloves from the *sntestie Fhase
t* the Er:ternationei Trade Pha*e
Tiident is a young firm that manufactures and distributes an
array of telecommunication
devices. Its initial strategy is to develop a sustainable
competitive advantage in the U.S. mar-

ket. Like many other young firms, it is constrained by its small
size, competitors, and lack of
access to cheap and plentiful sources of capital. The top half of
Exhibit 1.6 shows Tiident in its
early domestic phase.Tiident sells its products in U.S. dollars to
U.S. customers and buys its
manufacturing and service inputs from U.S. suppliers, paying
U.S. dollars. The creditworth of
CHAPTER 1 Current Multinational Challenges and the Global
Economy
d,
et
ii
.:
ffiltrxtrf Trident Corporation: tnitiation of the Gtobatization
process
US Suppliers
(domestic)
Phase One: Bomestic Operations
All payments in US dollars.
All credit risk under US law.
US Buyers :.
(domestic)
iii##=.Fiw;:E

Canadian Buyers,
Are Canadian buyers creditworthy?
WiLt payment be made in US$ or C$?
to
)e
rrt
n-
of
of
n.
Mexican Suppliers,
;_i :: r i:i.?:i;:r:,:q,iit:a*,:iii3:ir::j
Are Mexican suppliers dependable?
Will Trident pay US$ or Mexican pesos?
Phase Two: Expansion into lnternalional Trade
Triclent Corporation
).-
d-
1g
.s-
ry.

:ts
a
{e
r'e
r/e
n-
et
all suppliers and buyers is established under domestic U.S.
practices and procedures. A poten-
tial issue for Tiident at this time is that although Tiident is not
international or global in its
operations, some of its competitors, suppliers, or buyers may
be. This is often the impetus to
push a firm like Tiident into the first transition of the
globalization process, into international
trade.
Tiident was founded by James and Edgar Winston in Los
Angeles in 1948 to make
'telecommunications equipment. The family-owned business
expanded slowly but steadily
over the following 40 years. The demands of continual
technological investment in the
1980s, however, r'equired that the firm raise additional equity
capital in order to compete.
This need led to its initial public offering (IPO) in 1988. As a
U.S.-based publicly traded
company on the New York Stock Exchange, Tiident's
management sought to create value
for its shareholders.

As Tiident became a visible and viable competitor in the U.S.
market, strategic opportu-
nities arose to expand the firm's market reach try exporting
product and services to one or
more foreign markets. The North American Free Tiade Area
(NAFTA) made trade with
Mexico and Canada attractive. This second phase of the
globalization process is shown in the
lower-half of Exhibit 1.6. Tiident responded to these
globalization forces by importing inputs
from Mexican suppliers and making export sales to Canadian
buyers. We define this stage of
the globalization process as the International Trade Phase.
Exporting and importing products and services increases the
demands of financial man-
agement over and above the traditional requirements of the
domestic-only business. First,
direct foreign exchange risks are now borne by the firm. Tiident
may now need to quote
prices in foreign currencies, accept payment in foreign
currencies, or pay suppliers in foreign
currencies. As the value of currencies change from minute to
minute in the global market-
place, Tiident will now experience significant risks from the
changing values associated with
these foreign currency payments and receipts.
Second, the evaluation of the credit quality of foreign buyers
and sellers is now more
important than ever. Reducing the possibility of non-payment
for exports and non-delivery
of imports becomes one of two main financial management
tasks during the international

h-
ES
)n
.r-
of
ts
tS
of
76 Global Financial Environment
Trident's Foreign Direct lnvestment Sequence
/lZ/fVlzr 2l-
rzzz/zlzzgzzzzzzzzgzzzzzzZ.tat))stzzr)zaredjlJicdilz)z/ezza/iozd
banzesS
as bu1-ers and suppliet's are new, suuiect to differing business
practices and
legal systems, and
generallr, more chalienging to assess.
i:-*::-i ir':;ll:,::ii:-rl: t.' ,:'.,. l:ti,l: :-' -:.;- ' ' ': j j ii::-i:: i:i':,:::+
:''.':
If Tridentis successful in its international trade activities, the
time will come v'hen the global'
ization process wiil progress to the next phase' Trident rvili
soon need to establish foreign

sales and service affiiiates. This step is often followed by
estabiishing manufacturing
opera-
tions abroad or by licensing foreignfirms to produce and service
Tiident's products'
The mul-
titude of issues and activitls associated rvith this second larger
global transition is the real
focus of this book.
Tiident,s continued giobalization will require it to identify the
sources of its competi-
tive advantage, and with that knowledge, expand its intellectual
capital and
physical pres-
ence globail-y. A variety of strategic alternatives are available
to Tiident-lhe foreign
direct investment seqttence-as shorvn in Exhibit 1.7. These
alternatives include
the cre-
ation of foreign sales offices, the licensing of the company
name and everything
associated
with it, and the manufacturing and distiibution of its products to
other firms in
foreign
markets.AsTi.ident moves farther dorvn and to the right in
Exhibit 1.7,lhe degree

of its
physical presence in foreign markets increases. It may now own
its own distribution and
proOu.tion facilities, and ultimately, may want to acquire other
companies'
Once Tiident
owns assets and enterprises in foreign countries it has entere d
the multinational
phase of
its globalization.
Trident and lts
Competitive Advantage Greater
Foreign
Presence
Change
Competitive Advantage
,::i:j::i.r"::.i.:i :i:. r:'r:.*i:i:t::1-;p'?:::M :., rri: ;.n
Greater
Foreign
lnvestment
Exploit Existing ComPetitive
Advantage Abroad
I
Production at Home:
Exporiing

Licensing
Management Contract
Joint Venture
Wholly Owned
SubsidiarY
Greenlield
lnvesiment
Acquisition ol a
Foreign EnterPrise
,t |;:|:'ii.:i
ls,
rd
i, I' j A i )-f i,, ili i Current Multinational Challenges and the
Global Economy 77
Th* i-irriit* t* Fir:***i*l *l*t**iie*ti*n
The theories of international business and international finance
introduced in this chapter
have long argued that with an increasingly open and transparent
global marketplace in which
capital may flow freely, capital will increasingly flow and
support countries and companies
based on the theory of comparative advantage. Since the mid-
twentieth century, this has
indeed been the case as more and more countries have pursued

more open and competitive
markets. But the past decade has seen the growth of a new kind
of limit or impediment to
financial globalization: the growth in the influence and self-
enrichment of organizational
insiders.
One possible representation of this process can be seen in
Exhibit 1.8. If influential insid-
ers in corporations and sovereign states continue to pursue the
increase in firm value, there
will be a definite and continuing growth in financial
globalization. But, if these same influen-
tial insiders pursue their own personal agendas, which may
increase their personal power and
influence or personal rvealth, or both, then capital will not flow
into these sovereign states
and corporations. The result is the growth of financial
inefficiency and the segmentation of
globalization outcomes-creating winners and iosers. As we will
see throughout this book,
this barrier to international finance may indeed be increasingly
troublesome.
This growing dilemma is also something of a composite of what
this book is about. The
three fundamental elements-financial theory, global business,
and management beliefs antl
actions-combine to present either the problem or the solution to
the growing debate over
the benefits of globalization to countries and cultures
worldwide. The Mini-Case sets the
stage for our debate and discussion. Are the controlling famiiy
members of this company cre-
ating value for themselves or their shareholders?

ine potentiai Liritr or Financial Globalization
There is a growing debate over whether many of the insiders
and ruiers of organizations
with enierprises globally are taking actions consistent with
creating firm value or consistent
with increasing their own personal stakes and power.
i1-
ln
'a-
rl-
:al
ti-
ls-
gn
ed
.gn
its
.nd
rnt
'of
Actions of Rulers
of Sovereign States
I
Lower Firm Value
(possibly higher

insider value)
: : (PossiblY lower
.i inslder value)
TheTwin Agency
Problems Limiting
Financial Globalization
Y
Actions of
Corporate Insiders
e
lf these influential insiders are building personal wealth over
that of the firm, it will indeed
result in preventing the flow of capital across borders,
currencies, and institutions to create
a more open and integrated global financial community.
Soulce: Constructed by authors based on "The Limits of
Financial Globaiization," Rene M. Stulz,
Journal of Applied Corporate Finance, Volume 19, Number 1,
Winter 2002, pp. B-15.

ari-sinsin(et.rgeleir)nal)ffi-jingom.t.docx

Recommended

Recommended

More Related Content

Similar to ari-sinsin(et.rgeleir)nal)ffi-jingom.t.docx

Similar to ari-sinsin(et.rgeleir)nal)ffi-jingom.t.docx (20)

More from fredharris32

More from fredharris32 (20)

Recently uploaded

Recently uploaded (20)

ari-sinsin(et.rgeleir)nal)ffi-jingom.t.docx