Global Finance Environment Paper
The ultimate goal of any company is to maximize value and shareholder wealth; therefore, many companies have started entering international markets to create new growth and cash flow for once stagnate companies. This new business trend is lead by at least three drivers: the comparative advantage theory, the imperfect market theory, and the product cycle theory (Madura, 2006). In the following paragraphs, I will be analyzing these three drivers, as well as discussing the risks associated with global investing and the role of ethics in global finance. Drivers of Globalization
Although there could be many reasons why a company would want to become global, there are at least three main drivers that are widely recognized. The first is the comparative advantage theory. This theory is when a country specializes in producing the goods and services it can efficiently produce. For example, a country with very rich soil and cheap labor would focus on producing agricultural products, while a country that is very technical would focus on electronics. This theory makes it possible for foreign companies to enter the local markets through imports and trade (Madura, 2006).
Another driver for globalization is the imperfect market theory. This theory is defined as “an economic environment in which the costs of labor and other resources used for production encourage firms to use substitute inputs that are less costly” (MoneyGlossary. com, 2008). In other words, the resources of a particular foreign market may be better suited for a company to produce a product at a lower cost than in its home country. For example, the materials may be cheaper and/or the labor force is broader and will work for lower wages (Madura, 2006). A third driver for globalization is the product cycle theory.
This is probably the most popular driver among companies. The product cycle theory basically states that a company will establish itself in its local market, and then move into foreign markets; first through exports and eventually through the establishment of a branch or division of the company located in the foreign country (Madura, 2006). The Walt Disney Company is a company that has great success in globalization. It began its globalization process through the imperfect market theory by exporting its many products from movies to merchandise to nearly every country in the world.
Next, it moved into the product cycle theory by entering foreign markets through international theme parks and resorts in Tokyo, France, and Hong Kong, as well as cruises around the world. Its comparative advantage is that no other company can produce the quality of films, parks, resorts, media, and fun like Disney; therefore, it earnings of more than $28 million by the end of June 2008 shows its great success in globalization (Disney, 2008). However, Disney like any other global company must be aware of the risks associated with global investing.