Globalization and the Multinational Firm

Vocabulary flashcards focusing on key concepts, institutions, trade agreements, and historical economic events in international finance.

Foreign exchange risk

Risk stemming from uncertain future exchange rates, where profits made in a foreign currency may disappear once converted into domestic currency due to unanticipated exchange rate movements.

Political risk

The risk that sovereign governments will use their right to regulate cross-border movements to unexpectedly change tax rules or carry out outright expropriation of foreign-held assets.

Geopolitical risk

Risk arising from cross-border political conflict, strategic rivalry, and security-related events, such as wars, sanctions, tariffs, and military threats.

Market imperfections

Frictions and impediments—such as legal restrictions, transaction and transportation costs, information asymmetry, and discriminatory taxation—that hamper the free movement of goods, capital, services, and people.

Expanded opportunity set

The enhanced set of operational and investment choices available in global markets, enabling firms to lower their cost of capital and investors to gain diversification benefits.

Keiretsu

A family of firms in Japan to which individual firms belong, where management focuses on maximizing the value and market share of the collective group.

Agency problem

A weakness of the public corporation where managers pursue their own private interests at the expense of shareholders when they are not closely monitored.

Corporate governance

The financial and legal framework for regulating the relationship between a firm's management and its shareholders.

Global portfolio holding network

A network structure representing globalized financial markets, where a connection exists between two countries when residents of one country hold securities of another.

Eurocurrencies

Domestic currencies of one country on deposit in a second country, used as a money market device for corporate liquidity and short-term bank loans.

European Central Bank (ECB)

The central banking institution located in Frankfurt that formulates the common monetary policy for 21 countries in the eurozone.

Theory of comparative advantage

The economic principle formulated by David Ricardo stating that countries benefit when specializing in the production of goods in which they have a relative cost advantage.

General Agreement on Tariffs and Trade (GATT)

A multilateral agreement among member countries aimed at reducing barriers to trade, which was later replaced by the World Trade Organization (WTO).

World Trade Organization (WTO)

An international organization that replaced GATT with broader powers to enforce international trade rules, joined by China in 2001.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

A free trade agreement signed in 2018 among 11 Pacific Rim countries covering 500 million people, created to slash tariffs and facilitate trade.

African Continental Free Trade Agreement (AfCFTA)

A trade agreement among 49 African countries covering 1.2 billion people, aimed at stimulating intra-African trade and investment by reducing tariffs and migration barriers.

Regional Comprehensive Economic Partnership (RCEP)

The world's largest free trade agreement, signed in 2020 among 15 Asia-Pacific countries covering 2.5 billion people.

Privatization

Also known as denationalization, the process of selling state-run enterprises to private investors to increase efficiency.

Great Recession

The severe, synchronized global economic downturn from 2008 to 2009 triggered by the U.S. subprime mortgage crisis and credit crunch.

Exhibit 1.5: U.S. Unemployment Rate and Dow Jones Industrial Average

A chart depicting the inverse relationship between the DJIA Index and the U.S. unemployment rate (%) during the period surrounding the Great Recession.

Brexit

The outcome of the June 23, 2016 referendum where 52% of Britons voted to leave the European Union, leading to the UK officially exiting the EU on January 31, 2020.

Multinational Corporation (MNC)

A company that produces and sells goods and services in more than one country.

Paris Climate Agreement of 2015

An international agreement designed to facilitate climate change mitigation and adaptation, setting a target to limit global temperature increase to 1.5 degrees Celsius by the end of the century.