Geographic Diversification On Malaysias Risk Return Finance Essay

Issues of MNCs

In today ‘s planetary universe, there have increasing tendencies of international geographic variegation which can be define as a concern enlargement across the boundary lines of planetary parts into different geographic location with many subordinates in a big Numberss of countries- Multinational Corporations ( MNCs ) .

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MNCs have taken on an increasing function and go the cardinal constituent in the universe economic system as a whole and in globalisation of market. International concern bookmans have argued that international variegation is critical because it is based on working imperfectnesss and foreign market chances through internalisation ( Rugman, 1979, 1981 ) .

Today planetary was become more challenges ; as a consequence, many transnational companies ( MNCs ) seek to spread out their concern in the international geographic part through sharply set uping subordinates and direct foreign investing to increase the return and lower the hazard every bit good as enhance the value of stockholders ‘ equity.

By looking at the past and more recent study, it seems that the figure of MNCs that are bases in Malaysia have increased significantly over the twelvemonth ( Bala & A ; UNCTAD, 1999 ; Annuar et al. , 1996 and Heenan & A ; Keegan, 1979 ) . Bala ( 1999 ) points out as of 1997 ; half of the house that is listed on KLSE is MNCs. This mean over the twelvemonth to twelvemonth, Malaysia has increased on the international variegation. Many MNCs from developing states such as Malaysia besides build up their operation in oversea. For illustration, the company in Malaysia that operates abroad is PETRONAS and IOI.

Have MNCs or international variegation truly convey benefits to the concern. As shown by David and Qian ( 1997 ) , houses anticipate positive returns on the foreign investings or else they will non affect in the activities. Therefore if the old public presentation of Malaysia MNCs on investings overseas is good, it will promote more of such investings.

However, MNCs is besides exposure to some international hazard that house must pay more attending. Those hazards are exchange rate motion exposure foreign economic system exposure and political hazard exposure.

Problem Statement

This survey focuses on Multinational Corporations ( MNCs ) in Malaya that listed in the KLSE. In antecedently treatment, some of the research workers found that international geographic variegation by MNCs will convey benefits to company. However, sometime MNCs may lend less and no important consequence through international geographic variegation.

Firm seeks to put in foreign state due to many factors. Is n’t international geographic variegation will convey benefits to the house? If foreign investing no brings any advantages to the house, no points to tauten diversify in outside state. This survey will concentrate on the impact of diversify in other geographic part.

Furthermore, a batch of research workers are most likely to look at outside state position comparison to look at Malaysia position on MNCs. In Malaysia, more research workers are seldom focal points on analyze the impact of Malaysia MNCs to the hazard and return public presentation. That is a ground for this survey to analyse the influence of MNC in Malaysia hazard and return public presentation.


This survey is to find the impact of international variegation on Malaysia ‘s hazard and return public presentation.

Chapter 2

Literature Review

2.1 Define of MNCs

Multinational Corporations ( MNCs ) is a corporation that has operation and production of fixed assets or other installations in at least one abroad state and makes its major direction determinations in a planetary context. Sometimes it besides called as “ multinational corporation ” ( Vernon, 1971 ) .

Harmonizing to the Eun & A ; Resnick ( 2004 ) , transnational corporation ( MNC ) is a concern house incorporated in one state that has gross revenues operations and production in several other states those in abroad states. This mean a house obtains the natural stuffs from one geographic market from other, after that, produces the goods with capital equipment in 3rd state, and eventually sell the finished merchandise in other international markets.

Furthermore, harmonizing to Dunning ( 1993 ) , a transnational corporation is “ an endeavor that engages in activities such as foreign direct investing ( FDI ) and owns or controls value adding in more than one state ” .

2.2 The Advantage and Disadvantage of MNC

There have some advantages of MNCs. An increasing of the geographic range of operation may heighten a house ‘s ability to organize or portion its international geographic activities ( Kimet al. 1989, Qian 1997 ) . It enables a house to recognize about the economic systems of graduated table and range ( Caves, 1996 ) . For illustration, house can acquire cheaper labour in certain states compared with their parent company and used engineering to cut down costs. It helps it to decrease fluctuations in net income by distributing its investing hazards over other different states ( Kim, Hwang, & A ; Burgers, 1993 ) . It helps cut down costs and increase grosss by enhance a house ‘s market power over its distributers, providers and clients ( Kogut, 1985 ) .

Although these are the major development benefits of MNCs, the initial drift to a house ‘s internationalisation comes from the chance to work market imperfectnesss in the cross-border usage of its intangible assets ( Caves, 1971 ) . A house can derive above-normal returns by working its firm-specific assets, particularly intangible 1s, in international markets ( Buckley, 1988 ) . Recently, bookmans have drawn attending to the geographic expedition benefits of internationalisation utilizing an organisational acquisition position. This position emphasizes that a house ‘s subordinates in disparate host states can assist to heighten its cognition base, capablenesss, and fight through experiential acquisition ( Barkema and Vermeulen, 1998 ; Delios and Henisz, 2000 ; Zahra, Ireland and Hitt, 2000 ) .

In add-on, each host state has its ain alone resource gifts and location specific advantages, which might non be available in the place state. Such host state specific advantages can actuate a house to set up subordinates at that place to research these advantages and augment its fight in both its place and host markets ( Kogut & A ; Chang, 1991 ) . Finally, Technology transportation can in bend generate important positive outwardnesss with wider deductions for development ( Graham, 1996 ) .In Malaysia, for illustration, Motorola Malaysia transferred the engineering required to bring forth a peculiar type of printed circuit board to a Malayan house, which so developed the capacity to bring forth these circuit boards on its ain ( Moran, 1999 ) .

However, these have some disadvantages of MNCs. When doing a foreign investing, a house ‘s directors contend with many challenges related to a new operation, such as buying and installation installations, staffing, and set uping internal direction systems and external concern webs. These challenges can set a new subordinate in a disadvantageous place, as compared to an established house in the mark market, and can diminish its fight. These liabilities, nevertheless, tend to diminish as a house ‘s subordinates build and better reputes and legitimacy in the host state in which they operate ( Barkema, Bell, & A ; Writings, 1996 ) .

Challenges can be experienced by any new subordinate, but there are troubles specific to new subordinates established in foreign states. A foreign subordinate has a liability of strangeness ( Hymer, 1976 ) that can take to it holding higher costs because it can non carry on concern activities every bit efficaciously as a local house. Being foreign means errors in assorted concern determinations are more likely ( Barkema & A ; Vermeulen, 1998 ; Vermeulen & A ; Barkema, 2002 ) .

Hoskisson and Turk ( 1990 ) argued that internal capital markets have administration and control bounds. Markides ( 1992, 1995 ) reported value creative activity from corporate refocusing for houses in the 1980-88 periods. Bergh and Lawless ( 1998 ) found in a panel of 164 Fortune 500 houses that there were bounds in the efficiency of hierarchal administration and that environmental uncertainness heightened its costs. Many of the costs associated with merchandise variegation such as coordination troubles, information dissymmetry, and incentive misalignment between central offices and divisional directors in multidivisional houses can be besides manifest in transnational endeavors between central offices and subordinate directors ( Denis et al. , 2002 ; Harris, Kriebel, & A ; Raviv, 1982 ) .

As the figure of internal minutess increases with the figure of foreign subordinates established by a house, administration costs can lift quickly to a point at which the administration costs exceed any internalisation benefits ( Hitt et al. , 1997 ; Tallman & A ; Li, 1996 ) . The administration costs and coordination costs associated with increasing multinationality are compounded if these additions take topographic point by a house ‘s spread outing the figure of host states in which it operates.

2.3 Background of Malaysia MNCs

Harmonizing to Madura ( 2000 ) , there have three signifier of foreign investing which are acquisitions of bing companies in foreign states, a joint venture with companies in foreign states and opening up a company ‘s subordinate in foreign states. Companies that conduct any of above signifier of investing are known as MNCs.

Bala ( 1999 ) conducted a study of foreign investings conducted by houses listed at KLSE in orger to place MNCs arising from Malaysia. From 436 listed house ( as at October 1997 ) , he discovers that 207 houses are actively involved in foreign investing activities and they can be considers as MNCs. In the study, it was besides discovered that 17 companies have more than 20 ongoing foreign investing undertakings in assorted states. Top of the list is Sime Darby with 110 ongoing foreign investing activities crossing in 19 states ( Bala, 1999 ) . As a consequence, we known Malaysia has extremely engages in foreign investing.

Above tabular array show the companies in Malaysia that have diversify in foreign state in twelvemonth 2008. The higher the variegation the lower the hazard is. For illustration, Tanjong PLC has higher variegation which is 2.3667 and has a lower hazard which is 1.691 for standard divergence ROA and 1.762 for standard divergence ROE. In contrast, Ireka Corp Bhd has lower variegation which is 0.6931 will has a comparative higher hazard in which 10.411 for standard divergence ROA and 33.472 for standard divergence ROE.

Above tabular array show the companies in Malaysia that have diversify in foreign state in twelvemonth 2009. The higher the variegation the lower the hazard is. For illustration, Insas Bhd has higher variegation which is 1.3778 and has a lower hazard which is 2.009 for standard divergence ROA and 2.990 for standard divergence ROE. In contrast, Selangor Dredging Bhd has lower variegation which is 0.5004 will has a comparative higher hazard in which 3.835 for standard divergence ROA and 8.024 for standard divergence ROE as comparison with Insas Bhd.

2.4 Evidence of Effect on International Diversification on Firms Performance

As shown in many surveies, the consequences towards international variegation were uncertainness. Some surveies showed benefits of a concern by variegation and sometime, some research workers showed that was no benefit on international variegation.

In add-on, Kim et Al. ( 1989 ) argue that the house has more subordinates in outside state, its chances to leverage strategic resources is greater while at the same time diversifying market hazards, therefore raising its public presentation. As a consequence, many houses seek to acquire this benefits by diversify in abroad.

One of the surveies found that horizontal S-curve between geographic variegation and houses public presentation ( Lu and Beamish, 2004 ) . This mean which at first showed an increasing internationalisation and the public presentation is decline, followed by a positive relationship between increasing steadfast public presentation and geographic variegation, and after that declined at really high degrees of multinationality. This relationship in bend was moderated by intangible plus advantages that accrued with enlargement of the geographic range of a house. Firms achieved higher returns to geographic enlargement by strong engineering or advertisement plus advantages.

However, there are besides some statements showed the consequence is negative effects and no relationship of houses ‘ international geographic variegation negative relationship. Denis, Denis & A ; Yost ( 2002 ) and Geringer, Tallman, & A ; Olsen ( 2000 ) found a negative relationship between geographic variegation and houses ‘ public presentation. It mean that variegation on abroad does n’t ensue in high return or lower hazard to the houses. Furthermore, some surveies ( Hitt et al. , 1997 ; Gomes and Ramaswamy, 1999 ; Capar and Kotabe, 2003 ) found an inverted-U relationship between the extent of geographic spread and public presentation. Kumar ( 1984 ) and Yoshihara ( 1985 ) found that there is no important relationship between variegation and houses ‘ public presentation. Many research workers have different consequence on whether MNCs addition benefits to the houses ‘ public presentation.

Chapter 3


3.1 Data Collection

The information of MNCs is cod from the Kuala Lumpur Stock Exchange ( KLSE ) and obtain by utilizing the beginning like cyberspace. From the KLSE, we have chosen 27 companies ‘ one-year study in which 14 MNCs in twelvemonth 2008 and 13 MNCs in twelvemonth 2009 that all is listed at KLSE. After find the one-year study of each company, we calculate the subordinates of each company that incorporated in foreign state that outside Malaysia. Furthermore, we besides calculate the ROA and ROE in twelvemonth 2008 and 2009 for each company toward one-year studies. We use Microsoft Excel to cipher our informations such as ROA, ROE, and Standard Deviation.

3.2 Measurement of International Diversification

During last decennaries, the measurings of the steadfast variegation seem to hold significantly increased. Entropy is one of the methods which have remained usage for over two decennaries ( Sankaran P. Raghunathan, 1995 ) . Recently, the information step has been found to bask more cogency than the other steps of houses ‘ variegation ( Hoskisson, Hitt, Johnson & A ; Moesel, 1993 ) .

International variegation is calculated as the information of each house ‘s comparative to the state or part retentions:

D= Siloge ( 1/S )

Where D is variegation, Si is the ratio of a house ‘s retentions ( figure of subordinates ) in the state or part I to the entire figure of foreign subordinates.

Harmonizing to the market imperfectness and dealing costs theories, the ability of a house to gain net incomes upon its intangible assets and to minimise its costs of managing is affected by differences and similarities between the states in which it was operated ( Vachani, 1991 ) . The relevant geographic units have close similarities in fluctuation of demand ; external limitation and form of general economic conditions.

Five geographic part are usage to mensurate international variegation. These market countries are Asia, America, Europe, Asian and other ocean. These five international parts provide with the basic for geographic specification. Each of the house is assigned a value in term of both the figure of its subordinates in each part and the figure of geographic parts in which it is involved.

3.3 Measurement of Performance

Many research workers prefer accounting variables as public presentation steps such as return on equity ( ROE ) and return on assets ( ROA ) , along with their variableness as steps of hazard ( Anil M. Pandya and Narendar V. Rao, 1998 ) .

Tax return on entire plus ( ROA ) . This is the most often used public presentation step in old surveies of variegation ( Pandya and Rao, 1998 ) . ROA is defined as the ratio of net income ( income available to common shareholders ) to the book value of entire assets it is expressed as:

Tax return on Equity ( ROE ) . This is the ratio of net income ( income available to common shareholders ) to shareholders equity. It is a step of company public presentation from the point of view of stockholders. It is indispensable in the computation of the ROE to utilize the net income for ordinary stockholders, which is the net income after revenue enhancement and after involvement charges ( Weetman, 2003 ) . It is expressed as:

3.4 Measurement of Profit and Risk

In add-on to these fiscal steps, the hazard profile of the different variegation groups was besides compared. This was achieved by calculating the variableness and hazard per unit of return of the fiscal ratios. Variability could be measured by the standard divergence while hazard per unit of return measured by the coefficient of fluctuation ( CV ; Pandya and Rao, 1998 ) . The CV is the ratio of the standard divergence to the arithmetic mean. It is expressed as ( Frankfort-Nachmias and Nachmias, 1992 ) :

Where SD is standard divergence and is arithmetic mean. Standard divergence is a map to cipher the hazard for a house. High standard divergence shows the houses have high hazard and similarities low standard divergence shows houses have lower hazard.


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