ISBN: 0-03-028931-9

Chapter 19 Multinational Financial Management

U.S. Firms Look Overseas To Enhance Shareholder Value

From the end of World War II until the 1970's, the United States dominated the world economy. However, that situation no longer exists. Raw materials, finished goods, services, and money flow freely across most national boundaries, as do innovative ideas and new technologies. World-class U.S. companies are making breakthroughs in foreign labs, obtaining capital from foreign investors, and putting foreign employees on the fast track to the top. Dozens of top U.S. manufacturers, including Dow Chemical, Colgate-Palmolive, Gillette, Hewlett-Packard, and Xerox, sell more of their products outside the United States than they do at home. Service firms are not far behind, as Citicorp, Disney, McDonald's, and Time Warner all receive more than 20 percent of their revenues from foreign sales.
The trend is even more pronounced in profits. In recent years, Coca-Cola and many other companies have made more money in the Pacific Rim and Western Europe than in the United States. However, like other companies, Coke has found that global investing also presents unique challenges and risks. Recent weakness in the Asian economy, along with a contamination scare in Belgium, have hurt the bottom line and put Coke on the defensive. Still, most analysts believe that these are only temporary setbacks and that Coke will continue to generate huge profits from its overseas operations in the years ahead.
Successful global companies such as Coca-Cola must conduct business in different economies, and they must be sensitive to the many subtleties of different cultures and political systems. Accordingly, they find it useful to blend into the foreign landscape to help win product acceptance and avoid political problems.
At the same time, foreign-based multinationals are arriving on American shores in ever greater numbers. Sweden's ABB, the Netherlands's Philips, France's Thomson, and Japan's Fujitsu and Honda are all waging campaigns to be identified as American companies that employ Americans, transfer technology to America, and help the U.S. trade balance. Few Americans know or care that Thomson owns the RCA and General Electric names in consumer electronics, or that Philips own Magnavox.
The emergence of "world companies" raises a host of questions for governments. For example, should domestic firms be favored, or does it make no difference what a company's nationality is as long as it provides domestic jobs? Should a company make an effort to keep jobs in its home country, or should it produce where total production costs are lowest? What nation controls the technology developed by a multinational corporation, particularly if the technology can be used in military applications? Must a multinational company adhere to rules imposed in its home country with respect to its operations outside the home country? And if a U.S. firm such as Xerox produces copiers in Japan and then ships them to the United States, should they be reflected in the trade deficit in the same way as Toshiba copiers imported from Japan? Keep these questions in mind as you read this chapter. When you finish it, you should have a better appreciation of both the problems facing governments and the difficult but profitable opportunities facing managers of multinational companies.

DISCUSSION QUESTIONS

1. Ethnocentrocism in business can be described as a tendency for people of a certain country to prefer products and companies of the home country. To what degree do you think this situation exists in America? In foreign countries? Where do you think ethnocentracism is strongest?
2. In the vignette, the question is posed, "Must a multinational company adhere to rules imposed in its home country with respect to its operations outside the home country?" What is your opinion on this matter?

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