Globalization and Financial Decisions for Managers

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Introduction

In today’s society, the role that management plays in all facets of life cannot be overstated. Man’s ability to plan for the present and future is purely based on the fundamentals of management. As such, management in whatever capacity is the key determinant to the success or failure of any proposed venture or activity. In the business world, management is divided into various capacities all of which contribute to the smooth running and success of the business. However, due to the dynamicity and rapid change in interactions, technology, and overall development, there have emerged various factors that subject the management system adopted to change. Such factors include but are not limited to politics, the environment, society, culture and technology among others. This paper shall discuss financial management as a key concept in the development and survival of any business entity. It shall focus on globalization as one of the major factors that influence the financial decisions made by managers as relating to global competition, investments and market share. Also, the roles of financial managers under globalization shall be mentioned and the effects of globalization on the financial decisions made highlighted. An analysis of the various sectors which have over the years been affected by globalization shall be carried out in a bid to further provide insight as to the importance of globalization to the financial stability of any given organization.

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Brief Summary of Globalization

According to Inda and Rosaldo (2008), globalization refers to the political, social and economic systems of interactions held between different countries in a bid to create a global community. Man’s desire for knowledge and success has over the years expanded beyond the restrictions of localities and regional boundaries. As such, business mergers and other agreements have been made between countries in search of a larger market base, resources, and human capital.

According to Shmukler & vesperoni (2004) globalization plays a vital role especially in emerging economies. This can be seen through the hold that it creates between firms with the ability to integrate and those that rely on domestic financing. However, financial liberalization a product of globalization increases the risk of a financial crisis due to the rise of short-term debt structure common among most of these emerging firms which are domestically financed.

The occurrences of such interactions have over the years brought the human race closer to each other than ever before despite their varied differences in cultures, goals and objectives. Consequently, the advantages realized from globalization in terms of social and economic wellness have been great to say the least.

Whenever a company or institution wants to go global or rather expand its operations beyond the area of origin, there are bound to be some ramifications accrued from such a move. As such, it is the job of the finance manager to make decisions as to how best the company can utilize its financial resources to expand and survive in the global scene as well as find new sources of finance that can be used to supplement and increase the capital base of such an organization. To effectively and objectively choose a suitable capital structure, the average long-term debt to equity ratios and short-term debt to total debt ratios can be used to measure the risks or benefits of a proposed structure. The results from these ratios are often good indicators as to whether globalization has significant effects on long term debts and debt maturity structures in the various countries or firms and can consequently be used to determine whether any large and competitive organization should float its shares and bonds to the international or domestic markets Shmukler & vesperoni (2004). According to statistics, international firms possess a higher long-term debt over equity ratio by a 0.2 margin while using the equity markets. The case is different when it comes to the use of bonds that have a longer maturity period and therefore reduce the short-term debt to total debt ratio. In addition to this, the ratios differ in regards to the size of the firm, their capital structure and their profit margins.

. After analyzing these ratios, the financial managers may then decide to float the number of shares that present the least risks or that are equivalent to the monetary value required to meet those needs. The sales of shares is one among the many financial strategies adopted by firms both local and international in a bid to provide the much-needed funds for expansion and development as well as build the reputation of the company to both the prospective clients (public) and other firms as well.

Critical Evaluation and Analysis

Financial globalization has had significant effects on the various debt structures adopted by economies. For example, due to globalization, many firms have been able to increase their long-term debts and the maturity structures of the same. In addition to this, economies that are financially underdeveloped have over the years been able to join more mature markets which offer long-term financial options and at the same time develop their domestic markets. On the same note, the risk levels incurred by creditors are also reduced significantly upon globalization due to improved contract formulating institutions offered by different economies. At the same time, it has led to liberalization and segmentation of markets which in turn has improved the chances of debtors integrating into international stock and bond markets obtaining long-term financing systems (Shmukler & vesperoni, 2004).

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Apart from the positive impacts of financial globalization, it is always important for a financial analyst or manager to understand how the markets are divided and the different packages that are offered by each type of market. Consequently, depending on the level of segmentation, globalization of firms in different markets will only be financially beneficial to firms that have gained access to the global stock and bond markets as opposed to the firms that rely mostly on domestic sources of finance. In addition to this, domestic markets have shorter maturity structures on their debts and are less likely to get long-term debts in comparison to those firms integrated into the international markets.

Shmukler & vesperoni (2004), states that the incorporation of countries with global financial systems can be of many benefits. Such integrations may assist in developing the domestic financial systems thereby decreasing the overall cost of capital as well as relaxing the financial restrictions that a firm may be experiencing. As such, the most important question the financial managers should ask themselves should evolve around the capital structure of the firm in terms of debts and equity capital management and how the structure will affect the firm’s competitiveness, profitability and survival in the global context.

To measure the effects of globalization on various economies and selected firms, Shmukler & vesperoni (2004) have applied the use of two very important variables. The first variable is the assimilation and access of the various economies and firms into the international bond and equity markets and the second variable is by using the dates on which the specific economies liberalized their stock markets. A report on the specific years of stock market liberalization for various economies can be found in Bekaert & Harvey (2000).

.Pratt &Niculita (2007) define capital structure as the long-term methods used by a firm to finance its assets and development through retained earnings, debts, equities and securities (bonds and shares).as is the case in all businesses, the first and last stages in the growth cycle are often the toughest. In the first stage, it is always because of low profitability and high costs of production. Many business entities often fail before they start due to poor financial decision-making structures and as a result they always end up incurring high overhead costs and consequently end up in liquidation.

However, there are considerations that if made, would avoid this unwarranted situation from ever happening. The first and most important consideration should be the maturity structure offered by the proposed system of financing. Over the years, gathered statistics have shown that firms that depend on domestic financing shorten their maturity structure after liberalization while those with access to international bonds and equity markets attain long-term debts and lengthen their maturity structure (Shmukler & vesperoni, 2004).

In addition to this, the firm may decide to plow back profits instead of giving it to shareholders (dividends), using internal sources of capital accumulation instead of borrowings, working on sales maximization instead of profit maximization would in the first stage of growth ensure the survival of the firm and foresee the growth limits rise to the second stage. In addition to this, the financial managers should always consider the effects of the employed capital structure on the shareholders and bondholders respectively. This is because these parties incur different risks and rewards in accordance with the various circumstances that may affect the business.

Temple (2002), describes a Bond as long-term loans borrowed by firms from the public to supplement the capital base of the entity. Shares on the other hand, refer to the partial ownership of a business by the public according to the amount of money invested. Shares are rewarded by dividends which are subtracted from the profits earned within an agreed period of time while bonds are rewarded by a fixed interest rate accumulated within the period used to service the loan. Before a business decides to use these forms of capital structure especially in the stock market, the financial managers must first do a thorough investigation about the interest rates offered to bonds, the speculated levels of dividends expected by shareholders and the overall competition presented by the rivals in the same industry. This is because, the higher the debts the organization has, the higher the risk of insolvency to the firm. A good example that proves this statement would be the Wall Street saga during the 2007-2009 global economic recessions. Some of the major international financial institutions were placed under receivership and others foreclosed due to poor financial management in terms of debts. With this in mind, much consideration should be given to such aspects before the organization decides to use external sources of funding its operations.

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.Apart from the capital structure, other factors may affect the financial decisions made by managers in both the international and local scene. These factors mainly apply to organizations that have developed an interest in other regions and therefore wish to expand their operations in the targeted vicinities. For example Coca Cola industry, Michelin tires among other internationally renowned organizations.

Due to rapid industrialization and development, many a firm have in the past decades sought ways and channels through which they can further tap the market and scarce resources to satisfy their monetary and developmental needs. As a result, they are always looking for new markets and sources of such resources. This has consequently led to investments and the establishment of new branches in other countries and regions all over the world. According to Ellis (2002), it is prudent that an organization seeking to invest in a new territory consider the economic policies that govern the new market and later analyze and weigh the benefits that can be accrued from investing in such regions.

In such circumstances, the financial managers are tasked with the duty of carrying out a cost-benefit analysis (CBA) and feasibility studies to evaluate whether the investment is worth their while or should be abolished altogether. Liberalization of the markets should also be considered as core to the survival of the firm as well as an indicator of the capital structure that should be adopted (Shmukler & vesperoni, 2004). It has been known to lower the probability of acquiring long-term finances and shorten the maturity structure to domestically financed firms on one side while prolonging the maturity structure and ability to attract long-term debt to those firms that have gained entry into the international markets. In evaluating the market liberalization and tax policies of the host country, managers can be able to determine the capital structure to implement and the market through which they can place their investments (domestic or international).

According to Jaffe, Westerfield and Ross (2009), corporate finance is a sea of options, tools and techniques used to understand modern finance more elaborately. As an example, they have in detail highlighted aspects of efficient markets as a key concept towards the management and monitoring of financial resources. The target market is by far the most important feature in the business cycle. The bigger the market size, the higher the profits. The level of domestic financial development can be used to indicate the strength of the market. To measure the level of domestic financial development financial managers may use the totals of stock market capitalization and liabilities of the banking sector as a percentage of the GDP (Shmukler & vesperoni, 2004). In light of this statement, financial managers should at all times keep an eye on these percentages as well as the market trends and how they affect their business, this is because the market is the lifeline of any business and if unchecked it may lead to huge losses to the firm. To capture a bigger market base, various tools may be implemented. The managers may decide to use external sources of finance to increase their capital base and then use the proceedings to buy out the weak competition (amalgamation). In so doing, they are also able to consume the market base of the smaller company plus they acquire the resources and technology used by that company. This reduces the marketing costs, improves reputation especially in the stock markets, and at the same time the bigger firm acquires more assets that may be used as collateral when borrowing loans.

In addition to this, the managers may decide to franchise their name to smaller investors at a fee. Franchising refers to a marketing tool whereby a large corporation such as MacDonald’s sells off the rights to use its name (copyrights) to various investors of similar products in various countries. The deal is mostly in form of a contract of agreement which dictates the period allowed and the remunerations accrued from the same. This would be a great move as it presents the parent firm with a larger market base without using its own resources thus reducing costs and at the same time, increasing the internal capital base and profits to both the firm and the various stakeholders involved in the business.

Finally, globalization presents various economies and organizations with new financial opportunities. To measure the impact of this, financial and business analysts may use the financial balance sheets of such firms to gain more insight into the market environment they are about to venture into. also, these balance sheets reflect on how the firm’s access to international stock and bond markets affect their debt ratios Shmukler & vesperoni (2004).

Conclusion

Financial decisions play a pivotal role in the development and survival of any business. It is therefore important that all organizations employ efficient and proactive financial managers who are capable of making sound judgments about the acquisition and redistribution of financial resources. The effects of globalization on such decisions may be detrimental or beneficial to any organization. Consequently, an organization should adopt a financial management structure that is flexible and possesses less risk in case of any changes in circumstances.

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Throughout the discussion, we have described and analyzed globalization and its impact on financial decisions made by managers. Also, techniques and tools that can be used to check on the negative aspects of globalization have been mentioned and ways to capitalize from the same address. It is therefore important that the same be adopted in the business world especially now the world is heading nearer to becoming one global community. Such initiatives if implemented will give even the smaller firms a chance and the required knowledge to effectively compete for their share of the market and resources in the global context thereby developing an equitable society for future generations.

References

Allison, M, J & Kaye, J. (2005). Strategic planning for nonprofit organizations: a practical guide and workbook. John Wiley and Sons

Ellis, C, D. (2002). Winning the loser’s game: timeless strategies for successful investing. McGraw-Hill Professional

Pratt, S, P & Niculita, A, V. (2007). Valuing a business: the analysis and appraisal of closely held companies. McGraw-Hill Professional

Ross, S, A & Westerfield, R, W. (2009). Corporate Finance with S&P Card. McGraw-Hill

Temple, P. (2002). First steps in bonds: successful strategies without the rocket science. Financial Times Prentice Hall

Shmukler, S, L & vesperoni, E. (2004).Financial Globalization and Debt Maturity in Emerging Economies. Web. 

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BusinessEssay. "Globalization and Financial Decisions for Managers." February 26, 2022. https://business-essay.com/globalization-and-financial-decisions-for-managers/.