Topic 1: Finance and Global Competition
Purpose:
To integrate major concepts of macro
finance and business strategy on a
global scale
How should we think about corporations?
•  Consider the corporation as an intermediary between
investors and the basic activities of the firm.
•  The securities issued by the corporation represent income
from a package of activities.
•  To the investors, any particular corporation represents a
small part of a diversified portfolio.
•  Corporation is part of a webwork of interactions among
various economic sectors.
Highlights of Macro-Finance Theory
•  Efficient money and capital markets are essential to assure
adequate capital formation and economic growth.
•  Capital is created when resources used to make tools for
future use
•  Since antiquity, cultures have devised means to share the
ownership of major capital assets (such as ships) in order
to diversify the risk of loss
Highlights of Macro-Finance Theory
•  Money is something accepted as a means of exchange,
–  allowing values of different things to be expressed in terms of
money (money is a unit of accounting)
–  thus, money can be used to store value.
•  Eurocurrency
–  Examples: Eurodollars, Euro-Yen
–  Regulatory Issues
–  Role in international markets
Highlights of Macro-Finance Theory
•  Primary securities:
–  economic unit adds financial liabilities
•  Indirect securities:
–  issued by financial intermediaries, which in turn hold primary
securities
–  examples: bank deposits and insurance policies
Highlights of Macro-Finance Theory
•  Derivative securities:
–  value derived through contractual relationship with primary
securities
–  examples: forward contracts, futures, options, and swaps
•  Price discovery process:
–  mechanism by which savings-surplus economic units come into
equilibrium with savings-deficit units
–  market is pricing efficient if there are no persistent arbitrage
opportunities
Questions for discussion:
•  In a primitive barter economy, each economic unit must
always be in balance with respect to savings and
investment, and no economic unit could invest more that it
saved. How would that lead to inefficiencies?
•  How does the establishment of money lead to greater
efficiency?
Questions for discussion:
•  How do state and local governments keep their budgets in
balance when spending exceeds revenue, even though they
lack the power to create money?
•  Does the federal government actually achieve a balanced
budget in a similar way?
•  What is the difference between investment and
consumption in the government sector?
Questions for discussion:
•  How might forcing a balanced federal budget lead to
inefficienies?
•  Within financial theory, what role is played by federal
government debt obligations, and what assumptions are
made about the amount of such debt?
Questions for discussion:
•  If the government is unresponsive to market conditions,
how likely is it that government decisions will result in
efficient capital formation?
•  What is the ultimate measure of a country’s economic
efficiency?
Roles of financial intermediaries:
•  Reduce transaction costs and enhance convenience
•  Resolve informational assymetries
•  Provide divisibility and flexibility
•  Facilitate diversification and risk spreading (for example,
by underwriting, investment bankers bear the risk of
selling an issue of primary securities)
•  Transform maturities
•  Apply expertise
Disintermediation and securitization
•  Financial innovation (new products or new processes)
–  Resolve operational inefficiencies
–  Make markets more complete
•  Catalysts for change
–  Tax law changes
–  Technology changes
–  Volatility of interest rates, exchange rates, or economic activity
–  Regulatory change
How Do Multi-National Organizations Create
Value?
•  Earn economic rents through international commerce
–  Example: Fossil, Inc.
–  MNCs may be large or small
•  Exploit product and factor market imperfections
–  trademarks
–  patents
–  marketing skills
•  Organizational competencies or capabilities
The Net Present Value Rule:
•  Undertake a venture if and only if the value of the
securities issued as claims against it exceeds the cost of the
resources committed to it.
–  That is, do it if there is a profit for the entrepreneur.
–  In case of a conflict, choose the project with the biggest profit.
•  Practical aspect: following this rule is the only way to gain
unanimous approval from all shareholders.
The Rate of Return Corollary:
•  Undertake an investment only if return > competitive rate,
at same level of risk.
–  That is, do an investment if there are good prospects for earning an
above-average rate of return on the capital invested.
The Basic Idea Behind NPV
•  Almost a century ago, the argument was made that the
pursuit of profits via the NPV Rule leads to optimal
resource allocation
–  and best possible standard of living for society as a whole
•  The basic idea is to achieve the optimal pattern of
consumption over time
–  makes most efficient use of available investment opportunities.
Source of positive NPVs
•  Positive NPV results from improved resource allocation
through cooperation—or through innovation
•  There would be no positive NPV if many individuals could
accomplish the same actions on their own
–  Economic rents would be competed away
Innovation-Based Multinationals
•  Introduce new products
•  Differentiate existing products
•  Achieve economies of scope in distribution
•  Achieve information dominance
Mature Multinationals
•  Economies of scale
•  Brand identity (i.e., Coca-Cola)
•  Culture identity (i.e., Levi jeans, Marlboro)
Multinational Network Organizations
•  Network Organizations
–  Dynamic networks
–  Static networks
•  Strategic Alliances
–  Equity alliances
–  Non-equity alliances
•  Joint Ventures
Porter’s Generic Product/Market Strategies
Porter’s method for analyzing competitive
environment
New Entrants!
Suppliers!
Industry Rivals!
Substitutes!
Customers!
Support!
Activities!
The Generic Value Chain for a firm:
Firm Infrastructure!
Procurement!
Technology Development!
Human Resources Development!
Inbound!
Logistics!
Operations!
Outbound!
Logistics!
Marketing &!
Sales!
Service!
Primary Activities!
The Physical Value Chain from a Global Perspective
Support Activities:
• Technology Development
• Human Resources
Development
Service
Distribution&
Marketing
Fabrication
Refining
Basic Extraction
Virtual Value Chain & Information Operations
GATHER AND APPLY IN THE PHYSICAL REALM
STORE AND TRANSFORM IN THE INFORMATION REALM
APPLY
PRESENT
DISTRIBUTE
SYNTHESIZE
SELECT
ORGANIZE
Infosphere!
GATHER