FINS3616 Lecture Notes - Lecture 1: Foreign Direct Investment, Securitization, Joint Venture
Week 1 – Globalisation and Multinational Corporations
Globalisation: Increasing connectivity and integration of countries and corporations and
the people within them
Trade liberalization
• Eales free trade etee outries
• Leads to specialisation, comparative advantages and outsourcing (goods, labour)
Free Trade Agreements:
• 1947 – General Agreement on Tariffs and Trade (GATT)
• 1986-1994 – WTO (123 nations in 1994)
• Regional: EU, NAFTA, ASEAN, ChAFTA
Securitisation: ‘epakagig of pools of loas or other reeiales to reate a e
financial instrument
• Long history, much more widespread in 80s and 90s
Globalisation and securitisation occurring simultaneously:
• Positives – Banks could hedge against risk
• Negatives – complex instruments led to opaqueness in financial system
• GFC – started in the US, longest and deepest recession/financial crisis in postwar era
Incredible growth in number of MNCs post WWII
• 37,000 MNCs in 1990, 80,000 today
Globalisation of financial markets
• Trends in financial openness – 1980s foreigners allowed to invest in foreign markets
• New financial landscape – derivatives
Payoff over time derived from performance of underlying assets
MNCs
• Paret opay i firs operatig outry ad operatig susidiaries, rahes ad
affiliates abroad
• How they enter foreign markets:
Exporting / importing
Licensing – gives local firms right to manufacture their products in exchange for a
fee
Franchising – firm provides sales or services 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
Goals of an MNC
• Maximise shareholder wealth – Australia, Canada, U.K. and U.S.
• Maximise stakeholder wealth (customers, suppliers, employees) – Europe and Asia
• How do owners and stakeholders make sure this happens?
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2
Agency theory – studies problems that arise from separation of ownership and
control
(a) Corporate governance: legal / financial structure controlling the principal-
agent relationship
(b) Corporate fraud: Enron, Worldcom, Tyco, Parmalat
Foreign Direct Investment
• Company buys at least 10% of a company in another country
• Has grown 30-fold since 1980 to $18tn
• M&A plays huge role in this trend
Other International Players
• International banks
• International institutions
IMF – Goal to ensure the stability of international monetary and financial system
(a) Through surveillance and technical assistance
World Bank – development, poverty alleviation and advising
Multilateral development banks – regional development banks (i.e. World bank
and regional banks in Africa, Asia and Europe)
(a) Provide financing and grants
WTO – mediates trade disputes
Organisation for Economic Cooperation and Development (OECD) – examines,
devised and coordinates policies across 34 relatively wealthy nations
(a) Foster sustainable economic growth and employment, rising standards of
living and financial stability
Bank for International Settlements (BIS) – fosters international monetary and
financial cooperation
(a) Think of it as the central bank of central banks
EU – cooperation among countries in this region
(a) Adopt same currency to promise international business and prevent war
(b) Economic and monetary union (EMU)
Governments, individual investors, institutional investors, sovereign wealth funds
(government-run investment pools), hedge funds, private equity funds
Is Globalisation worth it?
• Rise of protectionism, slowing trade liberalization
Increasing tariffs and trade litigation / technical barriers
Why might it be politically beneficial to reduce openness
• Countries who had opened their markets to foreigners subsequently fell into crisis
• Benefits of openness:
Channels savings to most productive uses
Sharing 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 widely
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Globalisation: increasing connectivity and integration of countries and corporations and the people within them. Trade liberalization: e(cid:374)a(cid:271)les (cid:858)free(cid:859) trade (cid:271)et(cid:449)ee(cid:374) (cid:272)ou(cid:374)tries, leads to specialisation, comparative advantages and outsourcing (goods, labour) Free trade agreements: 1947 general agreement on tariffs and trade (gatt, 1986-1994 wto (123 nations in 1994, regional: eu, nafta, asean, chafta. Securitisation: epa(cid:272)kagi(cid:374)g of (cid:858)pools(cid:859) of loa(cid:374)s or other re(cid:272)ei(cid:448)a(cid:271)les to (cid:272)reate a (cid:374)e(cid:449) financial instrument: long history, much more widespread in 80s and 90s. Globalisation and securitisation occurring simultaneously: positives banks could hedge against risk, negatives complex instruments led to opaqueness in financial system, gfc started in the us, longest and deepest recession/financial crisis in postwar era. Incredible growth in number of mncs post wwii: 37,000 mncs in 1990, 80,000 today. Globalisation of financial markets: trends in financial openness 1980s foreigners allowed to invest in foreign markets, new financial landscape derivatives. Payoff over time derived from performance of underlying assets.
