Question

1. Why is the basic goal of corporations in free-market competitive economies to maximize shareholders' wealth rather than alternative goals, such as maximizing and why do we observe deviations from this goal in countries where industries are less competitive and there is more government intervention in economic activities? Give some examples based on evidence from other countries. 2. What is the definition of a multinational corporation (MNC) and what are the major benefits from becoming a multinational corporation, rather than focusing only on domestic transactions? Give some evidence based on the list of the most major MNC and those in the Forbes 2000. 3. Discuss the growing trends toward increased free trade (abandoning of mercantilism) and global financial markets and some of their challenges/vulnerabilities over the last 3 decades, based on the evidence discussed in class 4. Discuss any of the major similarities and differences between free trade, bilateral trade and investment agreements, and trade blocks (e.g., NAFTA, USMCA, European Common Market = EU). What are the pros and cons of each of these trade arrangements?

Answer 1

1) In free market competitive economies, price of goods and services are self regulated by the open market and by consumers. There are no government interventions.

Focusing on increasing shareholders wealth optimises economic and social benefits for society as a whole. Increasing shareholders value leads to increase in the value of firm.

Free markets focus on long terms. They go on the thought that if they are cautious regarding increasing the shareholders wealth then it will attract more. They are highly competitive and to compete with other they have a thinking of maintaining high value of their firm which is possible when shareholders wealth increases.

Increasing shareholders wealth leads to increase in the stock price of the company. As the stock price increases, the value of firm increases, and so the shareholders wealth.

Shareholders wealth is the appropriate goal of any business firm where there is private ownership of goods and services by individuals. Those individuals own the means of production by the business to make money. The profit from business in the economy accrue to the individuals.

If the firm will not focus on increasing wealth of shareholders, a dispute can arise between Stockholders and managers. Firm is arranging the source of finances from these shareholders who are investing their money in the company and if they won't be benefited, they will be no more interested in buying or holding the shares of the company.

These are the reasons why why corporations in free market competitive economies, focus on maximizing shareholders wealth.

The industries which are less competitive and have government interventions in the economic activities, they have a different belief.

Contary to the popular belief, howerever, and particularly public companies, the reverse is more true.

Shareholders not always hold a preffered claims to a company's profits or assets. The rights of debt holders, employees and large customers can supersede those of equity holders. Here management is more focused on running a company and its growth.

Its not good but executives of companies in free market are under pressure to maximize the return for investors or for activist shareholders looking to cash in quickly on some perceived opportunity, which can lead to hasty business decisions, poor strategic planning, and acquisition or divestiture that backfire later.

Most important, they are compensated based on short term business feasibility, which can misaligned the interest of both management and current shareholders with the true welfare of the company.

This is not to say that the CEOs of the company and Boards prioritize equity holders over other stakeholders and the best interests of the company in every case but the obssession with shareholder value can sometimes compromise a company's innovation and strategic directions in favor of immediate profits.

Example: Blockbusters lost opportunity to transition to digital and J CPenny's failed makeover as a substitute for business strategy.