“Globally giant financial firms are better able than local financial firms to provide good corporate governance and efficient financial resource allocation for developing countries”. Discuss.
Globalization has given rise to the appearance of the global corporation. This has been a natural development from the national to the international then multinational or transnational and now global corporation. A global corporation is different from other corporate forms in that it operates with a single global approach with a worldwide system and plan for products, marketing, manufacturing, logistics, research and development, accounting, and human resource management. The global economy and society describe the global corporation’s competitive environment. The global corporation has no geographical boundaries but carries out its operations and management functions holistically in the framework of a unified worldwide system. It balances its global compulsions with local needs in order to give excellent customer service both globally and locally. It locates its operations, including corporate headquarters, where in the world, despite of nationality. It recruits and selects the best people accessible as management or knowledge workers despite of their nationality. Examples of global corporations include IBM, General Electric, Coca-Cola, McDonald’s, Phillips, Time-Warner (CNN), Shell, General Motors, Siemens, Toyota, Microsoft, Alcatel, and Nortel Networks. Almost all global corporations work in the English language.
Global corporations are the main players and drivers of global trade and investment. They control global trade, finance and investment, research and development, technology transfer, and product chains that infuse the world economy. By the end of the year 2000, global corporations employed over 60 million people worldwide, of whom about 22 million, or almost 40 percent, were in developing countries. They get most of their revenue (about 60 percent) from outside their original home country, and trade goods and services among themselves. They work on the basis of global strategic alliances, competing and collaborating with other corporate entities in the global economy. In all aspects, global corporations are the most significant force in the control and acceleration of global trade and globalization(Neff J. P. 1995).
I completely agree that Globally giant financial firms are better able than local financial firms to provide good corporate governance and efficient financial resource allocation for developing countries.
As it is not probable to strengthen the world’s banking and financial systems without the active participation of international financial institutions.
Professor Galbraith has concluded, “the burden of reputable economic advice
was invariably on the side of measures that would make things worse.” John Kenneth Galbraith, 1955, pp. 187-188).
The debate over the causes of the Great Depression of 1929-1940 has been not only theoretically difficult but also highly charged with political feeling. There is as yet no full conformity on the subject, but incontestably the clearest and wittiest treatment has been offered by Harvard economist John Kenneth Galbraith. John Kenneth Galbraith In excerpt from his book, The Great Crash, 1929 ( 1955), Galbraith makes the significant distinction between the causes of the stock market crash and the sources of the depression. Market disintegration does not necessarily reflect staid flaws in a nation’s economy, as President Hoover insisted. Such a collapse is chiefly a matter of investor psychology. The crash of October-November, 1929, concerned a devastating drop in
market values, as the speculative mania that preceded it had reached astounding proportions and was almost unchecked by the accountable officials. But market slumps are not perpetually followed by depressions, as observer the dramatic collapse of May, 1962. The depression that followed the crash of 1929, in Galbraith’s view, was caused mainly by structural flaws much more substantial than the greed that produced the stock market’s problems. In contrast to Hoover’s modern view, Galbraith believes that the economy of the 1920s was not sound, and he isolates five main structural weaknesses which turned the stock market disaster into an eleven-year depression of unparalleled severity.
Though, two of the most main lessons from the financial crises of the 1980s, and more so in the 1990s, in Asia, Latin America, and elsewhere are that as these institutions were part of the solution (and perhaps part of the problem) they were nowhere to be seen when they were needed. It has been suggested that at the height of the Asian crisis the international financial institutions did not know what to do and how to respond. It has also been pointed out that informed, firm, and more expeditious reaction from these institutions would have considerably reduced the severity and costs of these crises.
“It is with this background in mind that it is important to understand why the 2000s started a frantic search for the proper international financial institutional architecture to bring about financial stability in the global economy and to try to tame the excesses of “casino capitalism.” In 1995, the Halifax Summit of the G7 leaders called for a review and update of the global financial institutions and rules to deal with the growing and increasingly complex and highly integrated world of capital markets. This was followed by various search activities by the G10, G22, and G26—all groupings of countries dominated by industrial countries and looking for ways to strengthen the international financial institutional architecture. At the same time the three leading international financial institutions—the World Bank, the IMF, and the BIS—were busy redefining their changing roles in the context of emerging global financial and capital markets challenges. Likewise, regional organizations such as the OECD, the European Monetary Union, the ASEAN, and regional development banks in Asia and Latin America have become deeply involved in the search for improved and locally more acceptable institutional arrangements. Many proposals have been put forward, some radical and others moderate, but to date, few practical and universally acceptable solutions have been found” Managing Banking and Financial Crises http://sprott.carleton.ca/faculty_and_research/kiggundubook/Chapter7.pdf.
Thus, historical experience lends credibility to each of the alternatives we put forward. This is barely a consolation for someone looking for a clear answer. Theories of business cycle are though to blame. Despite decades of theorizing we cannot say with any self-confidence that we have a theory that generates sustained (non-damped), endogenous (or if not endogenous with reliably regular exogenous shocks), transnational or global cycles linking financial and real variables, which has a convincing empirical record. Like in the story of the blind men and the elephant, each supporter of a solution can point to one aspect and simplify from that. What we need is some theory that can include the varied experience of local damped or undamped cycles or global cycles, cycles of diverse lengths and amplitudes with financial and real variables correctly articulated with systematic influences overlaid with stochastic shocks. (Collins J., and Porras J. 1996, pp. 65-77)
But in the meantime, any planning of global economic governance has to take a bet on which of the numerous stories is correct. Throughout the 1997/98 crisis, two views competed for attention. One view was that of invasive failure and need for global governance as put forward, for instance, by Taylor and Eatwell. They proposed a World Financial Authority. The other view was that several local tinkering of interest rates and some trivial improvements to IMF will suffice since the financial system was well functioning in the main. The alteration of interest rates by the Fed and the resolution of the crisis or as a minimum non-occurrence of a massive crash on Wall Street meant that the milder lesson of the subsequent alternative was adopted. The G7 decision in November 1998 was to push back any drastic restructuring of the international financial system. In February 1999, the Financial Stability Forum was recognized by the G7 to attain ‘a better understanding of the sources of complete risk…ensure that international rules and standards of best practice are developed…make sure consistent global rules…and a continuous flow of information among authorities having accountability for financial stability’ (Eatwell and Taylor, p. 26).
Held et al. (2002) in their ‘Global Transformations’ writes in their final chapter: ‘What is especially notable about contemporary globalization, however, is the confluence of globalizing tendencies within all key domains of social interaction. Thus, it is the particular conjuncture of developments – within the political, military, economic, migratory, cultural and ecological domains – and the complex interaction among these which reproduce the distinctive form and dynamics of contemporary globalization’ (p. 437).
They reject the hyperglobalist view of the demise and redundancy of the nation-state. They write on this point: ‘The distinctive attributes of contemporary globalization, … by no means simply prefigure the demise of the nation-state or even the erosion of state power. Indeed, in all the domains surveyed, it is evident that in key respects many states … have become more active, although the form and modalities of this activism differ from those of previous eras’ (p. 436).
According to them,
‘… a democratic political community for the new millennium necessarily describes a world where citizens enjoy multiple citizenships. Faced with overlapping communities of fate they need to be not only citizens of their own communities, but also of the wider regions in which they live, and of the wider global order. Institutions will certainly need to develop in order to reflect the multiple issues, questions and problems that link people together regardless of the particular nation-states in which they were born or brought up’ (p. 449).
A different perspective and transformation thesis is put forward by Chesnais (1997), who writes (ch. 2:48): ‘At the end of the twentieth century, the analysis of globalization of capital must start with finance. The financial sphere is the one in which the internationalization of markets is most advanced; the one in which the operations of capital have reached the highest degree of mobility’.
Chesnais and Simonetti (2000) also write with reference to globalization. ‘… the term is also being increasingly used to refer to the fabric and mode of operation of contemporary capitalism at a world level. Globalization builds on channels and mechanisms, which originated in earlier phases of internationalization. But it incorporates them into a qualitatively new mode of working of the international economy marked inter alia by the continually increasing empowerment of finance’ (p. 11).
Thus, for globalizing developing countries and transition economies, global corporations are a mixed bag. They are beneficial in that they ease economic openness and competitiveness, bring in giant financial firms that strongly associated with foreign direct investment (FDI), technology, management know-how, and facilitate create jobs for the local labor market. They also bring with them corporate goodwill as global corporations tend to go where other global corporations have decided to go. They train local staff to become knowledge workers, managers, and entrepreneurs, and they give a private sector–driven environment for private sector development. They provide a local market for SMEs and help the expansion of local entrepreneurs (Donaldson T. 1996). For instance, Coca-Cola provides business opportunities for local bottlers, distributors, wholesalers, and retailers. McDonald’s provides business opportunities for poultry farmers, potato growers, and other agri-food entrepreneurs. Perhaps one of the enduring advantages that global corporations bring to globalizing developing countries is the development of a global state of mind not only among the employees but the whole host society.
Financial institution is capable and willing to allocate resources to that investment product by virtue of its origin. Numerous financial institutions are capable and willing to take positions on transparent international equity products like stock market indexes (including the Standard and Poor’s 500) because there is enough information in observed price movements to make a logical bet about future performance, even at a distance (Newton L. 1992, pp. 357-365). Translucent products are more frequently national in scope because they need detailed knowledge of local companies, their performance and prospective. Notice, though, these are simply national products in the sense of the costs of information collection and verification. To the degree that such information can be produced, bundled, and sold on the global market at a competitive price (compared to local products), then international financial institutions can be willing to cross over boundaries to buy these products. In a sense, this is what is happen with the rise or significance of “emerging markets” for international investment companies. At the same time, we would argue that once financial products rely upon belief and enduring relationships then it is expected that the probable market for such products is local. This does not mean that all consumers should be “local” in the sense of being situated in a particular city. Rather, “local” means that it is produced at a particular site relying upon transaction-specific clients (Micheal Keeley, ” 1983, pp. 120-125).
Given foreign exchange control and the limit on the access of insurance companies to the rising capital markets in China, it would not be practicable to apply Moshirian’s approach in the framework of China’s insurance markets. The scope of the econometric analysis is further vulnerable by the limited number of observations. Hence, a simple linear failure is used to test whether the accessibility of business opportunities and reducing political risks are accountable for the growth of foreign life insurers in China throughout the period 1992 to 2000.
Foreign firms have comparative advantages over Chinese firms in diverse aspects of their insurance operations, a point borne out by the following extract from Nolan (2001):
The relatively small scale of the China’s financial services [insurance] sector means large competitive disadvantage with the large global firms [operating in China] in terms of unit costs, expenditure on R&D, IT systems and brand building, risk management, product development and diversification, and ability to attract the best staff and to provide services for global clients. (p.826).
TNCs are responsible for a fifth to a quarter of world production and are the single most significant agent in creating global shifts in economic life (Dicken, 1992). TNC starts as a domestic firm having one centre of activities. It serves the global market through exports and licensing (ethnocentric stage). Over time, it grows beyond its national boundaries and sets up multiple centers of activities (polycentric stage). At this stage, however, its different centers of activities are not incorporated with the headquarters and are mainly decentralized. Each foreign subsidiary is run as a stand-alone operation. It is only at the final stage that the local and global operations of the TNC are integrated within coordinated networks. There is no longer any trace of parent-subsidiary relationships. The TNC is now completely integrated globally and is equipped with global scanning abilities and intra-firm synchronization and control of international production (Dicken, 1992).
In order to struggle for growth over time, Chinese firms must pursue certain control strategies that ease globalization. One key nexus of these managerial strategies in Chinese firms is the control and synchronization of their overseas subsidiaries. Control and coordination are significant in sustaining the competitive advantage of TNCs and their overseas operations since of the difficulties in transferring their competitive advantage from home countries to host countries. If proper control and coordination are not exercised in the management of foreign affiliates, a TNC may ultimately find its firm-specific advantages being tough in an era of global competition.
Thus, the developing countries usually suffer from a lack of capital, as well as from a recurrent acute shortage of foreign exchange. A large number of factors give to this state: basic financial markets, the accumulation of foreign debts when interest rates were low (that now need burdensome interest payments), barriers to trade in developed countries, imperfections in global capital markets that lead to credit rationing, unsound macro-economic policies in developing countries which themselves give rise to overvalued exchange rates etc(John Ladd, 1983, pp. 125-136). As labor is copious and capital scarce relative to the industrialized countries, there must in many instances be a high rate of return on foreign investment.
Developing countries also lean to encounter other forms of factor shortage which are essential for development: technology, human capital, entrepreneurial skills etc. Attracting foreign direct investment is ever more viewed as a favorable means of obtaining capital as well as these other balancing factors of production. The prospective for mutual gains for a multinational firm and a host country as its point of departure. Given completely informed countries and firms that act to maximize their social and financial gains from direct investment, there is no prospect that any party would lose from its undertaking. Again, we do not recognize under what circumstances these assumptions actually apply, and therefore it cannot be argued that countries must always welcome foreign direct investment. The only potential advice in this context is for a host country regime to endeavor towards the maximization of its social gains, and to obtain the best possible information as a base for its design of adequate policies. Given that a regime in fact has other objectives than to favor social welfare, opposition groups should seek to reveal what these objectives really are and how they marked themselves, rather than putting the blame for damage on financial firms.
As the multiplicity of host country gains shows, there are ways for countries to gain from direct investment without harming the activities of financial firms. The most observable channel is that of optimistic spillovers, which must not be against the interests of financial firms as long as they do not raise direct competition. There are numerous instances in which it is probable to stimulate such spillovers in, for example, human capital or technology for pollution abatement without causing great harm to financial firms.
In conclusion I must say that, as a first best choice host countries must stimulate mutual gains for themselves and financial firms. At the same time, they should be expected to act in a way that enables them to earn as much tax as possible, from direct investment without dejecting it from coming in, or from leaving. Financial firms, on the other hand, act to reduce host countries’ ability to tax. This suggests that countries must seek to become more remote substitutes for direct investment, while firms would desire them to become more similar.
By getting special quotas in trade with developed country markets, for instance, an individual country may lessen its substitutability as a location compared with others.
On the other hand, such quotas will in numerous instances have the most undesirable effect of preventing a country from intensifying its exports. For import-substituting investments, a country might make it harder to reach its market from other alternative host countries. However, if the investment opportunities of a country are better to those of its neighbors, it must strive for liberalized trade regimes in order to attract investments that aim those other markets as well as its own. Since more trade enables greater profits to be shared, and the obligation of trade restrictions can be expected to result in retaliation, a general ingenuousness which allows investments to exploit opportunities in both ways seems to be the most reasonable option.
Rather than advising the individual agents in the market for direct investment, however, the findings accessible here mainly lend themselves to policy implications for intrusion by the international community in the market for direct investment. A raison d’être for such interference entails that it is in the interest of both firms and countries.
It is well recognized that efficient capital markets should make the marginal rate of return in different countries equal to the global interest rate. It is equally accepted that imperfections in the international capital markets may put off portfolio investment from achieving this goal and make countries subject to credit rationing. A simple motivation of capital flows from developed to developing countries is not at all certain to remedy the situation, as demonstrates by many misused loans as well as aid projects. In the event that political risk prevents a transfer of capital, however, this is very unfortunate. Indeed, Lucas (1990:96) concludes that ‘only in so far as political risk is an important factor in limiting capital flows can we expect transfers of capital to speed the international equalization of factor prices’.
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