Value Creation in Multinational Enterprise: Volume 7

M. Adler, Columbia University, NY, USA

In a fundamental sense, creation of value is the purpose of a firm. Values – measured by profits, cash flows, stock prices, or some strategic objectives – are the ultimate reasons why a firm exists. The ongoing and ever-expanding discussion of globalization, whether based on trade flows or financial flows, draws attention to the value of multinational enterprise. Existing empirical work on the impact of multinational firms, however, is inconclusive. Some observers point to the valuation discount with international operations due to the costs of agency and control and the difficulty of coordinating complex organizations and cultures. Others emphasize the value of a multinational network and the operational efficiency of a multinational enterprise (MNE). Thus, issues related to value creation are important and lively areas of business and finance. In fact, value creation is now at the frontier between the functional areas of finance and strategy. In international finance, the topic also interacts with economics in the areas of strategic trade policy and exchange rate behavior, as well as business strategy, as it relates to the management of an MNE. The role of government policy is also part of the debate, because the importance of public policy and the behavior of policymakers are elevated when finance and business become international, as evidenced by consistent attention to political risk.

Conventional foreign direct investment (FDI) theories regard FDIs as strategic moves based on operational or industrial organization considerations. We demonstrate that financial factors are also important in corporate FDI decisions. The financial factors concern internal capital market strength and corporate governance and include exchange rate changes, internal and external financing cost, risk diversification, and agency costs. There is variability in the significance of financial variables depending on industries and destinations. The integrated model with both strategic and financial factors is superior to either component model in explaining FDIs. However, financial factors are no less important in explaining the prevailing FDI phenomena than strategic or operational variables.

This paper contributes to the literature on foreign direct investment under uncertainty and underscores the importance of modeling the evolutionary sequence pattern of foreign market entry. The model presented helps to refine the application of real options in the international joint venture context by providing a closed-form solution in continuous time to value their overall strategic flexibility. Moreover, the analysis provides a novel perspective on existing empirical results and generates a number of new testable predictions.

This paper analyzes new outward foreign direct investment (OFDI) patterns, OFDI performance after the financial crisis in Korea, and the anticipated impact of these changes in OFDI on the Korean economy. This paper examines current trends in Korean OFDI activities from various viewpoints, including the geographical distribution of investments, industry, size, and investors’ equity share. This paper also verifies the relationship between OFDI and the Korean economy through an in-depth analysis of motives, performance, and prospects of Korean OFDI. Finally, two emerging issues regarding Korean OFDI are discussed.

This paper applies the concept of value creation to examine the strategic management of multinational enterprises. “International strategic management” is first defined as the process through which value is created by managers operating across a national border. The domain of international strategic management is thus determined by activities that distinguish international management from domestic management in the process of value creation. This perspective on value creation is used to answer three questions pertaining to international strategic management. First, how important is international strategic management? Simple statistics presented here demonstrate that the international component of value creation is important in the U.S. economy. Second, what is the domain of international strategic management? The paper presents a framework in which international strategic management is the aggregation of value created through international production, marketing, and financial activities, and reveals that the domain of international management is vast. Third, does international strategic management make the whole multinational enterprise worth more than the sum of its parts? Empirical evidence suggests that the answer is yes, at least for U.S. multinationals in the early 1990s.

The purpose of this study is to provide an integrated framework that conceptualizes multifaceted antecedents pertaining to international expansion of emerging market businesses in relation to firm performance. This paper develops multiple-item measures of multiple dimensions to clarify ownership structure and three diversification strategy relationships to performance. We test how ownership structure and diversification strategy affect emerging market multinational enterprises’ financial performance. The result shows that the relationship between ownership structure and firm performance is a nonlinear relationship (S shape). We also found that excessive international diversification, product diversification, and geographic scope of the expansion process negatively moderate the impact of Asia Pacific multinational enterprises’ performance.

The paper explores strategies of adaptation to the environment as employed by multinational corporations in Central and Eastern Europe. Organizations are treated as adaptive systems that have to match the complexity of their environments. The justification of the research lies in the complex nature of the market institutions emerging from transition that emphasizes the need for new managerial frameworks. Adaptive approaches such as vertical integration and/or value-chain development, leveraging autonomy and integration, local knowledge acquisition, and embedding in the social and political environment are explored in their relationship to success in the region.

This paper investigates the relationship between organizational structures and the performance of FORTUNE 500 companies, which have always been among the most profitable and admired in the world. After a discussion of whether companies should organize regionally, nationally, or globally, the important assumption is made that each structural type utilizes resources differently in generating profit. Performance is conceptualized as Return on Capital Employed (RoCE) and Return per Employee (RpE). A sample of 50 companies was randomly selected. Testing revealed that structural types are positively related to financial performance, calculated as RoCE, with Multidivisional-structured companies outperforming Functional-structured ones; structural types are not related to human resource performance, calculated as RpE.

We provide an overview of the Australian and New Zealand telecommunications markets through Telecom Corporation New Zealand's (TCNZ) acquisition of AAPT Ltd in 2000, which amounted to more than NZ$2 billion. A few years later and after writing off approximately NZ$1 billion, TCNZ is considering a sell-off at a considerable loss. We discuss the strategic reasons behind the acquisition and explain how smaller telcos are struggling to compete with the incumbent telecom in Australia. We further conduct an event study to assess the impact of the acquisition on both TCNZ's and AAPT's share prices and look at some of the post-acquisition issues.

We investigate global competitors’ reaction to the Citicorp–Travelers mega merger announcement and find that global competitors, especially banks in Europe and the US, reacted positively to the Citicorp and Travelers’ merger announcement. The uncertainties created by the investigations into the merger proposal had significant impact on the competitors’ stock price. The announcement that the merger had been consummated also elicited a significantly positive reaction from the rivals following the resolution of uncertainties emanating from the regulatory challenges. The positive reaction by competitors suggests that the merger was a wealth-creating event for the large firms in the financial services industry. The expected benefits outweighed any competitive effects resulting from the merger. The competitors’ reaction was, however, not homogenous. Our cross-sectional analysis shows that the abnormal returns earned by the competitors were higher the larger the competitor. In addition, the abnormal returns were greater for the US rivals. That the global competitors reacted positively to the Citicorp–Travelers mega merger announcement is consistent with our assertion that the merger had ramifications that go beyond regulatory concerns in the US.

Expansion through mergers and acquisitions (M&As) continues to be a viable international strategy utilised by industrial firms. A striking feature of this is that global giant firms lead the M&A wave and generate an unimaginable impact on relatively small and weak firms across sectors and even nations. There seems to be a kind of ‘cascade effect’ between the industrial consolidations in these areas. A combined cascade model developed in this paper explains that, the power imbalance caused by the degree of consolidation of the players within a firm's value system determines the movement and direction of the ‘cascade effect’. With the existence of such effect, M&A will be a mutually interdependent, dynamic, reversible and endless process among industries.

This paper explores the sensitivity of Chinese stock returns to changes in trade-weighted indexes of the renminbi (RMB) and the currencies of China's trading partners from 1999 to 2003. It analyses this exposure elasticity cross-sectionally using accounting variables to proxy for size and costs of financial distress. It finds that internationally oriented Chinese companies have experienced exchange exposure particularly against the yen. It also finds that, against a trade-weighted index, there is no empirical evidence that Chinese firms are engaged in hedging activities. However, when exposures are measured in yen terms, it finds that Chinese firms, particularly exporters, engage in active currency hedging.

Investors often have much of their portfolios invested in equities that are exposed to interest rate risk. Hedging underlying exposures are not easy; whereas fixed income investors have duration to immunize bond portfolios from small fluctuations in interest rates. US equity duration estimates from dividend discount models result in long durations – often in excess of 50 years. Based on the UK data, we develop an alternative approach to generate equity duration as a by-product of asset pricing. Our analysis suggests that the equity premium puzzle may comprise an important element in reconciling this approach to equity duration, with traditional DDM alternatives.

We examine the impact of multinational firms (MNEs) on exchange rate pass-through when an MNE engages in Cournot competition with domestic and foreign rivals. The MNE can locate its production for the foreign market domestically — intra-firm trade (IT) — or in the foreign country — international production (IP). In addition to incomplete exchange rate pass-through, we show that an MNE increases the sensitivity of domestic market prices and reduces the sensitivity of foreign market prices to exchange rate movements. Finally, IT prices are more sensitive to exchange rate movements than their IP counterparts and react in the opposite direction.

The present study focuses on the timeliness of financial reporting, which is an element of transparency. Specifically, it looks at the telecommunications industry in Russia and computes the number of days it takes companies to receive an audit opinion, then compares the time lag to the number of days it takes non-Russian companies in the telecommunications industry to receive an audit opinion. The study concludes that Russian companies take longer to report financial results than do non-Russian companies. Larger Russian companies take less time to report their financial condition than do small Russian firms, but the difference is not significant. The same was true for the non-Russian companies included in the sample. Companies using Russian Accounting Standards took significantly less time to report financial results than did companies using either International Financial Reporting Standards (IFRS) or US generally accepted accounting principles (GAAP). Companies using IFRS took significantly longer to report financial results than did companies using US GAAP. The dominant auditor in the Russian telecommunications industry did not complete audits in significantly less time than did nondominant auditors. Although Russian companies take far less time to issue financial statements now than they did a few years ago, it is premature to definitively conclude that the improvement is significant due to the limited data set.

The financial services industry is experiencing rapid consolidation globally. Consolidation has proceeded not only in the same market but also across different market segments and across national boundaries. In this paper, we (a) outline the general trend of the mergers and acquisitions (M&As) and consolidation of the financial service industry in the U.S. and in the global economy; (b) identify and analyze the reasons that contribute to the consolidation of the financial service industry; (c) examine some cases of successful and unsuccessful financial service M&As; and (d) arrive at some strategic implications.

Cross-border investment has been a large part of merger and acquisition activity in the Latin American banking sector. Spain and the United States have been the largest investors, participating in almost 70% of the total transaction value. After an explanation of the importance of foreign direct investment and implications for cross-border investment, this paper focuses on the largest investor in the region's banking sector and attempts to find an explanation for the increasing participation of Spanish banks. The paper alludes to a potential new reality: Latin America could be the geographical location where major contenders in banking will be engaged in battles for global dominance.

Political risk should be seen as arising from renegotiation of implicit or explicit contract under which foreign investors enter a host country. Governments will legitimately enter into renegotiation to increase the share of rents earned by the society. Corrupt political leaders, however, will use their powers to extract rents from foreign investors for personal gains rather than for the good of the society. Political risk assessment, therefore, should assess the intentions of government as well as the strengths of political and social institutions that keep leaders under control. Firms should also understand that their own actions may contribute to creating political risk.

Much of the literature on strategic trade policy deals with industries and sectors characterized by international rivalry for market shares, and the struggle to capture “rents” over and above normal factor rewards. The present paper explores the validity and implications of strategic trade policy for small “states” and small firms that are not major players in international markets. The smallness of the firms may, in fact, be an advantage rather than a hindrance. The implications of smallness for strategic behavior are examined in the framework of a simple game-theoretic framework. These insights become sharper when extended to intra-industry trade in differentiated products. The desirable policy interventions for small countries and firms are quite different from those for large firms.

Initial public offering (IPO) underpricing remains a puzzle after decades of investigation. The stock markets in emerging economies are attractive to international investors but their unique characteristics need to be examined. Chinese stock markets experienced much more significant IPO underpricing than most other stock markets in the world. This paper offers a two-period wealth maximum model to explain the strategic IPO underpricing by state owners. Given the fact that the entire IPO procedure, including IPO price, is regulated and controlled by state owners, we argue that state owners strategically underprice the IPO, because they care less about the IPO proceeds but more about the wealth gain after IPO. The empirical finding of a positive relationship between IPO underpricing and state ownership in Chinese stock market is consistent with the wealth maximization hypothesis of IPO pricing. The paper offers better understanding for IPO procedure of state-owned enterprises in emerging markets.

There are two leading paradigms about the power balance between multinational corporations (MNCs) and states. The MNCs in Command approach takes the perspective that MNCs dominate states. The States in Command perspective assumes that states lord over MNCs. Each perspective suffers from noteworthy flaws. I advocate a modified bargaining power (MBP) approach to understanding the relative power of MNCs and states. I test the value of this approach by examining Microsoft's experience in China between 1987 and 2004. My study shows that that a MBP approach sheds considerable light on the aforementioned case, whereas the two leading paradigms do not.

This study examines the internationalization process within the textiles and apparel industry in two countries: Lithuania and Moldova. In particular, this study shows how the evolution by an industry toward greater internationalization is intricately linked to its ability to move up its specific value chain. This analysis compares and contrasts the ability of this industry in a Western European (Lithuania) and a nonaccession Eastern European country (Moldova) to move up the textiles and apparel value chain and so achieve higher levels of internationalization. In examining and relating the relevant factors, this analysis provides insights into – and suggests important modifications to – important concepts and themes such as the stage theory of internationalization, the role of “inward-outward” linkages in the value creation process, the mechanism of the internationalization of small and medium-sized enterprises, and the part played by the European Union in the internationalization (and thus globalization) process.

Discussions about the elimination of apparel quotas have focused on countries that obviously benefit or are harmed by their demise. Little attention has been paid to countries for which the post-quota environment is uncertain – and vital. As quotas were lifted in January 2005, uncertainty loomed particularly large for Turkey, the world's fourth largest apparel exporting nation. This paper utilizes secondary data and a survey to chronicle Turkish apparel exporters’ strategic expectations, preparations, and responses to the post-quota environment. The case details the unexpected consequences of quota elimination for the industry, including how the new competitive environment catalyzed many manufacturers to locate production in foreign lands.