Uploaded by Muhammad Shoaib Abdul Shakoor

6eCh13

advertisement
Chapter 13
The
Multinational Corporation
and
Globalization
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
1
Overview
Globalization
Is globalization good or bad?
Risks faced by a multinational
corporation
Exchange rate hedging
Foreign direct investment
Multinational capital budgeting
Multinational transfer pricing
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
2
Learning objectives
describe the meaning of globalization and
discuss the arguments for and against it
define the exchange rate and identify
several methods of hedging
understand multinational capital budgeting
show how changing transfer prices can
benefit a corporation
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
3
Globalization

Multinational corporations face the
same opportunities and problems as a
domestic corporation, but also face
additional challenges:
 currencies
 rules and regulations of different
countries
 different tax systems
 tariffs and other restrictions
 different costs of production
 different cultures
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
4
Globalization

The term ‘globalization’

a transition process
 at beginning, a corporation transacts
in the home country
 begins to import inputs to
production and exports final products
 company establishes a presence in a
foreign country
 company establishes operations in a
foreign country
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
5
Globalization

The term ‘globalization’

an outcome: closer integration of the
countries of the world – especially the
increased level of trade and movements
of capital – brought on by lower costs of
transportation and communication
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
6
Proglobalization arguments

consumers benefit when globalization opens new
markets and thus offers greater choice

consumers benefit when competition due to the
expansion of markets tends to lower prices

advances in communication allow goods,
services, and capital to flow more freely, and thus
contribute to growth and productivity

the quality of products and services is enhanced
due to the increased worldwide competition
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
7
Proglobalization arguments

the globalization of financial markets leads to a
more efficient allocation of resources worldwide

globalization can improve the living conditions in
poorer developing nations when production is
moved from highly developed countries

MNCs pay higher wages than are paid locally and
create new employment opportunities

with the improvement in wages in poorer
countries, new demand for goods is generated
and may create export opportunities for more
developed countries
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
8
Antiglobalization arguments
by operating in foreign countries, MNCs create
competition for their home country work forces
large international corporations stand accused of
social injustice, unfair labor practices – including
slave labor wages, living and working conditions
– as well as mismanagement of natural resources
and ecological damage
technological advances in industrial countries
decrease the demand for workers, thus causing
insecurity in the work force
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
9
Antiglobalization arguments
capitalism ignores social welfare of individuals
and destroys cultures
companies shift operations to countries where
they can produce at lowest costs, thus achieving
higher corporate profits worldwide
companies shift operations to countries where
taxes are low, eroding the tax base worldwide
globalization tends to weaken national
sovereignty and national identity
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
10
Globalization and the future
Issue: lagging developing countries not
fully sharing in the benefits
 for developing countries to be included,
certain conditions have to be present
 an effective government that will
encourage governance and stability
through responsible fiscal policies
 policies to encourage foreign investment
 progress towards domestic competition
 improvements in health, education, and
training

Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
11
Globalization and the future
Issue: developing countries cannot
accomplish advances by themselves
 developed countries must assist
 encourage free trade, not hide behind
trade barriers and export subsidies
 encourage flow of private capital to
developing countries
 promote good governance practices in
their own organizations
 must address environment and social
problems

Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
12
Globalization and the future

Issue: transfer of white-collar jobs known
as ‘offshoring’. Benefits:
 decrease in costs leading to greater
competitiveness
 lower prices
 lost jobs are of a more routine nature
 greater flexibility, 24/7 schedules,
access to more expertise
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
13
Globalization and the future

Offshoring drawbacks:
 additional costs to manage facilities
 productivity may be lower
 communication is more difficult
 cultural differences
 misunderstanding in the transmission of
information
 risk of security breaches and
appropriation of trade secrets
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
14
Risks faced by MNCs

Multinational corporation risk: risks that
are present only because it transacts
business across national borders

Exchange rate risk: results from
changes in exchange rates
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
15
Risks faced by MNCs

Other risks faced by the MNC
 blockage of funds and capital controls
 differences in cultural and religious
philosophies
 ownership restrictions
 human resource restrictions
 intellectual property
 discrimination
 red tape and corruption
 internal and external wars
 changes in government
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
16
Exchange rates

Exchange rate: price of one country’s
currency in terms of another country’s
May be quoted in terms of the domestic or
foreign currency
eg.
Є1/$1.40
or
$1/ Є0.714

Hedging: various ways that companies
can protect themselves from a potential
loss from currency fluctuation
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
17
Exchange rates

Hedging techniques:
• Offsetting Transactions: export goods of
the same amount to the same country
from which it imported, in the same period
of time
• Forward Market: permits a company to
buy or sell currency at a specific rate at a
specific time, customized to its needs
• Futures Market: similar to forwards, but
on a standardized public exchange (set
amounts, maturing on certain days)
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
18
Exchange rates

Hedging techniques:
• Currency Options: give the holder the
right to buy or sell an amount of currency
at a specified price during a certain period
of time
• Currency Swaps: companies swap
currencies when they expect a offsetting
cash flow from other sources in their
respective countries
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
19
Foreign direct investment

Foreign direct investment (FDI):
acquiring ownership rights in foreign fixed
assets or existing firms, or establishing
foreign subsidiaries with their own
infrastructure
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
20
Foreign direct investment

Reasons for FDI

foreign country may impose import
restrictions

take advantage of economies of scale,
as well as lower production and
transportation costs
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
21
MNC capital budgeting

Similar process as for a domestic
company, but must take into consideration
several extra variables
intercompany fund flows: cash flows
between parent to subsidiary
 inflation rates: may differ in the country
of the parent and of the subsidiary
 exchange rates: exchange rate between
the parent and subsidiary country will
change during the project period

Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
22
MNC capital budgeting

tax differences: many types can differ
between countries
 income tax rates
 tax on remittances to the parent’s
country
 double taxation on subsidiary profit
and remittance to parent, offset by
foreign tax credit
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
23
MNC capital budgeting

cash flows: cash flows received and
recorded by the parent may differ
substantially from those in the
subsidiary’s country
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
24
MNC capital budgeting

cost of capital: difference in cost of
capital for parent and subsidiary
• final project valuation: differences are
so significant that a project is
acceptable in one country and not in the
other
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
25
Repositioning of funds

Examples:
• royalties and license fees can be used to channel
funds to those areas of the company where they
may be used most profitably
• dividend payments to the parent
• tax rates on distributed and undistributed
earnings
• taxes levied on dividends transmitted to the
parent
• re-invoicing centers
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
26
MNC transfer pricing

Multinational transfer pricing: prices
for products or services that are
transferred from the parent company to
the subsidiary or among subsidiaries
Can affect a transfer of funds by charging
high or low prices
Can affect a company’s profitability
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
27
MNC transfer pricing

Tax liability due to a change in transfer
price
DT = (Q · DP · te) – (Q · DP · tm)
DT = change in total tax bill
Q = quantity of products shipped by E
(exporter) to M (importer)
DP = change in the price of the product
te = tax rate in the exporting country
tm = tax rate in the importing country
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
28
MNC transfer pricing

Internal Revenue Code section 482 gives
IRS authority to ‘shift around income and
expense figures to arrive at what the
government considers a more equitable
result’
IRS requires transfer pricing to be done
on an ‘arm’s length’ relationship.
Developing countries are becoming more
active in the area of regulating transfer
pricing
Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
29
Global application

Global staff
long hours spent travelling
 high cost to the firm
 staff health impacts

Chapter Thirteen
Copyright 2009 Pearson Education, Inc.
Publishing as Prentice Hall.
30
Download
Random flashcards
State Flags

50 Cards Education

Countries of Europe

44 Cards Education

Art History

20 Cards StudyJedi

Sign language alphabet

26 Cards StudyJedi

Create flashcards