The Firm and Its Goals

Ch. 2 The Firm and Its Goals

GLOBAL APPLICATION

The model of a firm’s goals discussed in this chapter applies predominantly to firms operating in the United States and possibly the United Kingdom. However, one must ask whether profit maximization or shareholder wealth maximization is also valid for other countries. It is often said that for many reasons (e.g., political, cultural, legal, and institutional), firms in other countries pursue goals that include the interests of other groups, such as labor, community, government, and so on, in addition to interests of stockholders. In some countries, for instance, labor unions are represented on the board of directors. Thus, it may be necessary to consider such interests in our discussions. However, even if such considerations are important, it is possible for us to treat them as constraints on the actions of a firm. Even if profit or shareholder wealth maximization is not the only objective, as long as firms attempt to take actions that will improve their earnings—within specific constraints—our maximization model can still be used.22

 It is important to recognize, however, that multinational firms (e.g., a U.S. parent corporation operating in many different countries through subsidiaries or branches) will encounter restrictions and complications, which they must consider in doing business abroad. We list these and explain them briefly:23

 1.  Foreign currencies and their exchange rates must be considered. Thus, revenues, costs, and other cash flows that are denominated in other currencies must be translated into domestic currencies, and their potential changes must be analyzed for their impact on the business. Under certain circumstances, a profitable activity abroad can become un-profitable from the viewpoint of the domestic parent corporation.

 2.  Legal differences must be taken into account. Dissimilarities in tax laws can have important consequences on results of transactions between the domestic parent corporation and its foreign subsidiary. Differences in legal systems make the tasks of executives considerably more complex.

 3. Most Americans have in the past mastered only their own language, and thus, are often at a disadvantage when dealing with their multilingual counterparts in other countries.

 4. The differences in cultural environments influence the defining of business goals and attitudes toward risk. Thus, such differences can greatly affect the way business is conducted.