Global Corporate Finance
With the breakdown of the Soviet Union and the apparition of new states on the world map, correlated with strong economic developments in countries formerly categorized as developing, new corporations from countries like Kazakhstan, Hungary, Vietnam or Poland began to play an important role on the international financial markets. The strong economic growth in their countries of origin and the underlying profitable economic returns that could be obtained pushed companies from developing countries to seek sources of finance outside their own countries in order to finance their businesses and speculate the current profitable economic conditions.
On the other hand, before the globalization phenomenon, their access to foreign and international capital would have been most likely either impossible or extremely difficult. However, globalization, besides encouraging a liberal movement of goods and services, also encouraged the move of capital from country to country and towards businesses that could afford the interest rates and still remain profitable. In the current conjuncture, the favorable economic conditions in the countries of origin are also in line with the access and availability of international capital, either in the form of foreign credits, international bank loans, international bond emissions and, even more and more in the last years, listing on foreign stock exchanges.
While this is certainly spurring the capacity of these companies to develop at this point, risks still remain in terms of their capacity to regulate their cost of capital and to remain not only profitable, but also solvable. Additionally, these companies are more vulnerable to global crisis, especially financial crisis.
Summary
The article starts with interesting statistics on the corporations based in developing countries, on their level of foreign investments and their capacity to raise capital on international markets. As such, in 2006, companies from developing countries have raised $156 billion through international offerings of corporate debt and equity, as well as $245 billion in syndicated bank loans. Further more, capital was raised through direct listings on foreign stock exchanges as well, with 394 developing countries companies being listed on foreign exchanges (World Bank, 2007).
On the other hand, these companies have also been involved in important investments overseas, translating the loans and capital attracted on the international markets. The figures show bids for foreign companies amounting $100 billion in 2006, a figure which sustains the global participation of these companies on the foreign markets, not only as receivers of capital, but also as distributors of capitals and full players in the globalization process.
The access of these companies on the financial markets has not been made immediately, but through a process that involved their adaptation to corporate governance requirements on the international markets. These include complying with issues such as standards for financial accounting and transparency in accounting processes and corporate governance control mechanisms.
Not all companies can afford this and the article draws general characteristics of companies in developing countries that do have access to international financial markets. These are generally large companies, with current high growth, but also high potential in further development. In some countries, they are based on the value of the national resources and they have developed in sectors such as mining or oil exploitation, but in others they are in the banking, trade or infrastructure sectors.
On the other hand, the article also points out towards a current shift in the geographical origin of the players of the international financial markets. While in the 1990s, these generally were players from Latin America or from the countries in East Asia, now corporations in Eastern Europe and Central Asia (notably Kazakhstan) are beginning to take the forefront as the most important players. The growth of these corporations is stimulated by the high levels of growth in the countries of origin, by the availability of resources and also by the diversification of the financial markets in order to allow for different crediting and investing instruments for emerging markets in these areas.
Important risks remain, both for the creditors and the investors, especially given the current openness towards risk on the international markets. This, correlated with potential poor governance or poor governmental supervision, could lead to excessive borrowing levels from companies in developing countries and, in the case of an economic recession or of potential bankruptcy threats for these companies, to affecting the financing capacity of such companies in the long-term.
The local governments might be affected as well, because the private corporate financial problems might reflect on the governmental capacity to borrow on international market and to issue bonds at lower interest rates. In this sense, the corporate activity and corporate governance of companies in developing countries is closely related with the governmental macroeconomic measures and the capacity of the local governments to stimulate a credible and sustainable growth, while ensuring that norms are respected.
The conclusions that the article draws are directed towards several coordinates. First of all, the article proposes the idea that the “pace of the globalization of corporations in the development world is likely to intensify” (World Bank, 2007), along with the presence of these companies on international financial markets. Arguments for this rely on the estimation on increased share from developing countries companies into the overall global output that will need sources of financing available on international markets.
On the other hand, the increasing incomes and revenues from exports will also lead to increased borrowing from capital markets. This will increase not only the company’s creditworthiness on international markets, but also the country’s, with higher access on financial markets. Smaller borrowers from developing countries are also likely to appear on the financial market and become important players once the initial expenses are overcome. Finally, internal economic reforms are likely to make way for future borrowing potential. For example, the countries in Eastern Europe have recently joined the European Union and have implemented the EU acquis, which imposes several accounting and business-related regulations. Their internal markets have also become more regulated which has impacted the activity of the local corporations.
The article also recommends that risk management instruments become more wide-spread in the developing countries companies, as a natural consequence of an increasing exposure to risk, due to the presence on international markets. These types of hedging instruments may minimize losses in the case of international financial crisis, as the ones occurring in the late 1990s in East Asia or Russia that affected the development of companies in developing countries.
The effects of those crises have increased risk awareness. Some of the financial indicators show this. For example, the debt to equity ratio in developing countries companies has decreased from 60% in 1997 to 40% in 2005 (World Bank, 2007), coming to show that, despite greater access to international financial markets, the companies are also more prudent in contracting debt.
The article also shows the improvements that the presence of these corporations in the globalization framework can bring about. These include an improvement of corporate governance and imposing the need to bring about more rules and regulations on the internal markets as well, along with the need to have a sustainable macroeconomic policy in all these countries.
Analysis/critical evaluation
The article does an excellent job of presenting the current trend of the impact of globalization on corporations in developing countries and emerging markets, as well as in evaluating the challenges that affect the developing countries corporate finances today and the potential development in the future. The idea that globalization was the most important factor that opened the financial markets to developing countries companies is not new. It explains, on one hand, the increase in revenues and growth of companies in developing countries: they afforded to borrow more on the open international markets than before as they presented credentials in the form of assets.
On the other hand, it became more than that. The access to international financial markets was also an access to the corporate governance rules that governed these markets, along with the necessity to adapt to those rules. The article is keen in pointing this out several times as perhaps the most important advantage that derived from globalization of the financial markets into the developing countries. The capacity to obtain a syndicated bank loan would imply that a number of prestigious international financial entities forming the loan would need to analyze the company’s business and activity and evaluate its capacity to pay its debt. This also meant that transparency and proper corporate governance were encouraged and that these needed to be in line with international requirements. In fact, these become “key constraints to better access market – based sources of funding.” (Mathieson, 2004)
The tendency of companies in developing countries and emerging markets to deleverage after the Asian Crisis was emphasized in other studies as well (IMF, 2005). The article here presented showed a drop in the debt to equities assets from 60% to 40% in 2005. This is in line with a natural tendency to reduce risk after a large global financial crisis, but also to be more aligned to the requirements of the international markets.
It is also interesting to comment on the article’s evaluation of the potential future trends for the companies in developing countries. The article evaluates a closer integration of these companies in the global market. This is something that is potentially bound to happen. Indeed, these companies are already playing a more important role on a regional level by investing in neighbor economies. Recently, a Kazakh corporation purchased a Romanian fuel processing company, which, in turn, had operations in the entire Balkan Peninsula. Mol, from Hungary, was another corporation that had bid on the deal. This is all possible not because of the financial assets that these companies possess at a certain point, but because they are able to access capital on the international markets in order to grow their businesses.
However, the future is also likely to bring about a more rational approach to risk and risk management. At this point, companies in developing countries are still not fully using risk management instruments to hedge their risks. With all risks, ranging from credit to market and operational risk, potentially affecting the companies’ businesses, risk management instruments become a necessity.
Finally, the future access of the companies in developing countries to international markets is also likely to go hand in hand with the macroeconomic reforms in their countries of origin. In my opinion, it is interesting to point out that, in many ways, the internal corporate finance reforms that these companies had to make, have also produced and generated change at the macroeconomic level. Indeed, financial requirements that corporations needed to adapt to reflected in the macroeconomic reforms and structural reforms that these countries had to make.
Conclusions
Corporations in the developing countries have started to become important participants in the global circuits. While initially this may have included global trade and outsourcing services, more and more these companies gain access to international financial markets, are able to increase their capital, develop their business and, in turn, invest overseas.
Globalization’s impact in corporate finance in developing countries has thus been enormous, guiding the corporations into the adoptions of new financial and accounting standards, in the increase of their transparency and corporate governance standards, as well as in adopting risk management instruments in order to hedge their commitments on the financial markets. Further more, they are decreasing their financial leverage so as to decrease their debt to equity ratios and develop a more prudent approach. The future participation of corporations in developing countries on international financial markets will most likely increase in trend, as well as in approach.
Bibliography
1. World Bank. 2007. The Globalization of Corporate Finance in Developing Countries. Global Development Finance 2007.
2. International Monetary Fund. 2007. Global Financial Stability Report.
3. Mathieson, Donald J., Jorge E. Roldos, Ramana Ramaswamy, and Anna Ilyina, 2004, Emerging Local Securities and Derivatives Markets, World Economic and Financial Surveys (Washington: International Monetary Fund).
4. King, Robert G., and Ross Levine, 1993, “Finance and Growth: Schumpeter Might Be Right,” Quarterly Journal of Economics, Vol. 108, No. 3, pp. 717-37
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