International capital market integration has facilitated the rise of a new kind of ‘financially enhanced’ transnational. The mode of operation of the financially enhanced transnational corporation is compared with that of the more traditional production-orientated multinational company. The paper discusses the breakdown of globalisation into a new regionalisation in the international financial system, and the spreading macroeconomic crisis in the major industrialised economies. It argues that new financing constraints will freeze the current structure of international business. The crisis reveals finance as the key enabler and feature of international business.
The inflation of capital markets in the world's main financial centres, and the growing integration of capital markets since the 1980s have given rise to a new kind of transnational company. This is the ‘financially enhanced’ transnational, whose rapid growth has less to do with the dynamism of their productive and commercial activities, and more to do with the ability of companies to expand their balance sheets rapidly in inflating capital markets. When those balance sheets expand across the borders of sovereign states, multinational companies may extend cross-border activities through financial transactions, rather than decisions about how and where to produce abroad.
The circumstances in the financial markets that have fed this rapid growth have now come to an end, with the largest capital markets in the U.S. depressed by the financial crisis and the refinancing needs of the banking sector, a new international regionalism emerging out of the concentration of global foreign currency reserves in Asia, and the proliferation of bilateral swap arrangements between central banks in particular regions. This will leave the ‘financially enhanced’ transnational company still in a dominant position in international trade and production, but weakened by the increased illiquidity of its balance sheet.
The paper is structured as follows. The first section explores the distinctive mode of operation of the ‘financially enhanced’ transnational and its dependence on capital market inflation and international capital market integration. The second section examines the consequences for the ‘financially enhanced’ transnational of the current financial crisis. The third section outlines a key factor that will influence the progress of transnational companies in future, namely the emergence of a new regionalism in the international financial system. A final section remarks on some conclusions that may be drawn from this analysis for international business.
Capital controls will tend to freeze the present hierarchy of multinational companies, if only because competitors, or potential competitors will find it more difficult to finance mergers and acquisitions in a declining capital market. It is a staple of business school research that most mergers and acquisitions do not improve the financial results of the companies being combined in this way [13]. In fact profits were rarely the motivation for business takeovers. In recent years the rationale for mergers and acquisitions has been provided by capital market inflation, which made buying companies for resale at a higher price in an inflating market a profitable business proposition. This possibility no longer exists because of the reduced liquidity in the main stock markets of the world.
The prospects for the financially enhanced transnational business, that made money from restructuring its balance sheets in different countries, are not good. With a less liquid balance sheet, and little to offer in the way of economic efficiency to its subsidiaries, the financially enhanced transnational faces a future of trying to make money in the old way out of production, rather than balance sheet operations. But the prospects for the more traditional transnational are, if anything, even worse. The financially enhanced transnational can survive because of its size and because its production units in different countries can operate autonomously. Internationally integrated production renders the whole transnational vulnerable to the problems in its weakest market. This is very apparent in the fate of maquiladora production (assembly plants exporting to foreign markets). In Mexico, which pioneered this kind of production, gross domestic product has fallen by nearly 10 per cent since 2008, in large part because of the difficulties of this kind of multinational operation [14].
It is important too not to overlook the consequences of the crisis for the way in which the business of transnational corporations is understood and discussed. Inflating asset markets dominated by investment bankers earning pro rata fees for balance sheet restructuring has provided a very congenial ambience for international business theories that can provide some managerial rationale for such restructuring. Declining asset markets will be correspondingly uncongenial to such theories. Falling profits will reduce the supply of successful companies providing case studies of the ‘excellence’ attributed to alleged ‘competitiveness’, ‘capability’, ‘internal advantage’, ‘synergy’, ‘competences’, ‘culture’ or some other mystical source. Furthermore, financial austerity will make it much more difficult to secure financial backing for management strategies driven by speculative theoretical projections. The present crisis reveals, perhaps too vividly, the financial asset inflation behind much of the financial success of international business and the most common means by which international business could emerge and thrive. For those researching the problems of international business, the only effective approach to understanding the subject, the crisis provides an unrivalled opportunity to uncover the true constraints that determine the character and dynamics of cross-border capitalism.
For the management of international business the future is not so much bleak, as boring. A generation of business managers has been conditioned by a continuous diet of financial market news and ‘statsbabble’ (the stream of data shorn of context and significance) masquerading as vital information for the decisions of everyday life, without which they are supposed to suffer from ‘informational asymmetries’ and other ailments of post-modernity. This conditioning has resulted in a business leadership that regards balance sheet restructuring as the final solution to all business problems. But the age of the corporate ‘supermen’ (women do not play power games like this), who could construct and reconstruct large balance sheets incorporating assets and liabilities in different countries, and claim as their achievement the financial benefits accruing to their companies from conveniently inflating asset markets, is now over. Those markets are not inflating any more; it is much more difficult to turn over financial capital in less liquid markets; and banks will not provide foreign credits so easily. The business of producing and selling real goods and services is constrained by stagnant demand in the main markets of the world. Success in that business requires much more mundane and long-term commitment to excellence in production and sales, from which the leadership of the key decision-makers of today's transnational companies are usually far removed, geographically and organisationally. Japan showed us the way: At the end of the 1980s its industrial corporations started making more profits from financial engineering than from production. But this was the prelude to the 1990s when those corporations succumbed to losses on both accounts.
For the foreseeable future the successful transnational corporation must use its financial resources to support production and sales, rather than asset management, reducing the finance director to the ancillary function he held through the middle part of the twentieth century. The Crash of 2007–2009 destroyed the mystique that finance acquired through its apparent ability to generate more profits without more production and sales. The romance of finance is history again.
