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Multinational Enterprises Lecture 1
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Forms of Business Organizations |
Goal of a business is to earn profits
Sole Proprietorship - one person owns / operates business
Business is dissolved when owner dies
Most numerous business in the U.S.
Farms, restaurants, hotels, grocery stores, etc.
Partnership - two or more people own a business
General Partnership - other partners are liable for the actions of any partner, such as stealing, fraud, etc.
Creditors can go after other partners
Example - a partner secretly applies for a bank loan, steals the money, and leaves the country
Limited liability partnership - creditors cannot go after the personal assets of the partners
Corporations
Approximately 20% of businesses are corporations, and they dominate businesses activity
Shareholders own the corporation through stock
Corporate managers should
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Corporations |
Initial Public Offer (IPO) - a private company transforms into a corporation
Charter - legal document that establishes a corporation as a legal person
Three parties
Benefits of a corporation
Raise substantial amount of financial capital
Enter foreign countries and dominate international trade
Have special departments that handle operations in a foreign country
Requires many specialists in laws, taxes, etc. for different countries
Has limited liability
Stockholders are not liable for a corporation's debt
They can only lose the value of stock, i.e. their investment
Can easily transfer ownership
Have continuity of life; they can live forever theoretically
Do not have mutual agency relationship
Problems of corporations
Types of stock
Types of preferred stock
Cumulative preferred stock - stockholders receive all past due dividends before common stockholders
Protective preferred stock - corporation must deposit part of its profits into a fund to pay preferred stockholders
Redeemable stock - corporation has the right to buy back the stock in the future
Convertible stock - a preferred stockholder can convert their stock into common stock on a specific date
Bond - a standardized loan to a corporation
Investors can easily buy / sell bonds in a market
Bondholder has two rights
If a corporation bankrupts and is dissolved
Must pay taxes first
Bondholders and other loans come second
Preferred shareholders come third
Common shareholders are last
Corporations create complex structures
Reason - regulations, taxes, and lawsuits
If lawyers sue a corporations subsidiary, then the parent corporation can spin off the subsidiary, and let the legal sharks eat it
Example - a judge sued a dry cleaner's for $65 million for losing his pants
Example - Halliburton owned Brown and Root
Corporations establish headquarters in tax havens
Bahamas and Cayman Islands - low taxes, little regulations, and strong confidentiality laws
Corporation moves assets and liabilities around to reduce tax burden
Tax evasion
A business or person did an activity that generates a tax
If he or she does not pay, then this is tax evasion
The punishment is fines and prison
Greece has a severe tax evasion problem
Tax avoidance
A business or person structures an activity to avoid legally paying a tax
Since the 2007 Great Recession - tax authorities are becoming aggressive at collecting for tax avoidance
Example - tax inspectors in Italy board yachts as the dock in Italian ports
Stockholders want a good return on their investment
shareholder return = dividend yield + capital gains
Managers can influence dividend yield
Managers have little influence on capital gains
Usually 12% per year
Severe stock market declines can cause capital losses
Examples - many stocks took a beating in 2000 and 2008
capital gains = 100*(stock price2 - stock price1)/stock price1
Example
Apple's currently stock price is $669.72
Apple paid a $266 per share dividend, which is the first since 1995
Apple's stock price was $381.32 a year ago
Dividend yield is 0.397%
Capital gain is 75.63%
Total return is 76.0%
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Corporate Fraud |
1. Enron bankrupted in 2001
Special Purpose Entities (SPE)
Shell company - exists only on paper, or office has one desk and filing cabinet
Off-balance sheet companies
Enron used SPEs to improve its financial statements artificially
Enron invested in many power plants around the world
Some investments went bad, and Enron sold its bad investments to its SPEs
Enron hid $25 billion in debt
SPE
Most overlooked the SPEs, including the following:
U.S. government passed the new law, Sarbanes-Oxley Act in 2002
Transparency - outsiders can accurately assess a firm's true finances
Did the new federal law fix any thing?
The scale of fraud became much larger during the 2008 Financial Crisis
The United States experienced a real estate housing bubble, 2000 - 2007
Lehman Brothers used exotic derivatives and bought expensive real estate at the peak of the bubble
Bank and bond debt was $768 billion
Assets were $639 billion, but falling fast as the property bubble deflated
Lehman Brothers closed its door after 158 years of business
2. Countries differ in corporate structure and planning
U.S. corporations focus on short-term profits
Japanese Keiretsu - tend to focus on long-term profits and market shares
Keiretsu - a conglomerate of many companies with a bank as a member
Bank grants low interest loans to partner companies
Similar in South Korea, Germany, and Russia
Popular in the former communistic countries
Government forms a joint venture company with foreign companies
Foreign companies bring technology and management expertise
Government retains control over company
Prone to corruption - if company cannot compete, then government uses its power to protect company
3. Principal-Agent Problem - two related parties have different incentives which conflict with each other
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Law of Comparative Advantage |
1. Multinational corporations
Multinational corporation - corporation is incorporated in one country, and has one or more operations and offices in foreign countries
Multinational enterprise - includes businesses where government forms a joint venture with a corporation
Enterprises go international to make profits
2. Markets are defined as two types
3. Multinational firms are more complicated
Businesses transfer resources like machines, equipment, and labor and transfers products and services between different countries
Enterprises are exposed to exchange rate risks and credit risks
Enterprises have other exposures too like country risk (or political risk)
Example 1 - Hugo Chavez in Venezuela nationalized foreign companies
Example 2 - Kazakhstan - former communistic country
President Nazarbayev opened the economy up to free markets in early 1990s
After 2008, Kazakhstan is reverting to Soviet rules and practices
Kazakh government nationalized a petroleum company
International investment plummeted
4. Comparative advantage - how two countries can benefit from trade, even though one country could be large and produce everything

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