Money, Banking, and International Financestructure separates the managers from the owners (i.e. stockholders). Stockholders select
managers, who maximize profits, maximize the return to the shareholders and/or increase
shareholder value. However, managers may not act in the best interest to the owners. They want
high salaries, generous benefits, luxurious offices, and access to private planes and Limousines,
reducing the return to the stockholders.
The U.S. investment banks, for example, were partnerships before the 1990s, and the
managers handled money carefully. They were both the principal and agent. Then the managers
converted the investment banks to corporations during the 1990s, and the managers gambled
and took high risks while the shareholders owned the corporations. Investment banks became
involved in the mortgage market in the early 2000s and were caught in the mania of the U.S.
housing bubble. When the bubble deflated, the shareholders lost their stock value during the
2008 Financial Crisis. Finally, for one perverse example, GM cancelled its stock, and the
shareholders lost everything during 2008. Remember, the corporate managers represent the
shareholders and run the corporation on their behalf.
A family who dominates a corporation could reduce the principal-agent problem. For
example, the Walton family is the majority shareholders who actively manage the Wal-Mart
Corporation. Microsoft was similar, when Bill Gates was both the CEO and majority
shareholder. Consequently, they become both the agent and principal, and they have one united
interest - to earn profits. Thus, these companies earned high returns, and managers have better
vision and oversight over their corporations.
Expanding into Foreign Countries
A multinational corporation is a company incorporates itself in one country and operates
in one or more foreign countries. For example, British Petroleum, General Electric, Toshiba, and
Wal-Mart are multinational corporations with extensive business activities that span across the
globe. Sometimes financial analysts use the term, multinational enterprise because a
government could form a joint venture with a corporation, and the definition of an enterprise
implies a broader meaning.
A multinational enterprise’s goal is to earn profits. Therefore, they enter the international
markets and foreign countries in the pursuit of profits. Every international enterprise has a
choice. It could export to another country or relocate production outside their home country. For
instance, many U.S. corporations relocated manufacturing outside the United States, although
the U.S. suffers from a high unemployment rate since the beginning of the Great Recession.
Financial analysts and economists divide the world’s markets into mature economies and
emerging markets. Mature economies are competitive, and a company entering this market
would face narrow profit margins. Some examples include the United States and Europe. On the
other hand, the emerging-market economies are countries that recently opened their markets to
international trade and finance. They can be very profitable but entail greater risk. For example,
China, India, and Mexico are removing their government controls of their markets, and they
allow international investors and corporations to invest in their economies.
A government that attracts foreign investment must change its laws to reflect three
requirements. First, a government establishes an open-market place that means a government