Just how does globalisation benifit the stockholders?

Great Debates
1

In neraly every single thread about globalisation, the assertion that globalisation only benifits the stockholders is tossed out, yet never substantiated. I would like to understand by exactly what mechanism globalism benifits these stockholders.

It seems to me that, at least under a theoretical approach, globalisation can be demonstrated to be of little benifit to the producer. Globalisation leads to decreased production costs which pushes the supply curve to the right. This means that the equilibrium is now at a greater quantity with lower prices. Total Revenue can either go up or down depending on the shape of the demand curve but seems to be largely unaffected.

Now, the obvious objection is that the theoretical model breaks down and real economies aren’t perfect. And the obvious way that they break down is that companies will engage in monopolistic behaviours, dropping costs while keeping prices steady to stiff the average joe while pocketing the cash.

Now, here is where I get into the meat of the matter. It seems to me that a lot of economic reasoning is done on case studies and examples. Now, these may be an effective tool but they contain several subtle flaws. Examples are primarily drawn from circumstances you are familiar with and, for the majority of people, this is from companies directly dealing with consumers; Walmart, Nike, Starbucks etc. However, the bulk of business is businesses dealing with businesses; steel workers deeling with assembly plants dealing with distrbutors. Now, we come to the apparent paradox, it seems to me that any block of companies that can get co-ordinated enough to act as a monopoly when selling can also act as a monopsony when buying. That is, acting as a single until when buying in order to force a lower than equilibrium price. Walmart would be the textbook example of this, squeezing lower and lower prices out of all it’s suppliers.

Now, unless I’m missing another argument for shareholder profits, it seems a bit odd to me that somehow companies have this monopolistic power, which enables them to earn undeserved profits, yet lack this monopsonic power which prevents them from doing so. I would assume that one would come with the other and that the end result ultimately benifits the consumer through lower prices, as conventional economic theory suggest. Did I miss anything?

2

I don’t see what your argument has to do w/ free trade. Whether companies can behave monopolistically or monopsonistically doesn’t seem to really tie into the gains from trade.

3

Because, rather than assuming that companies are moving towards globalisaton because they can make a quick buck off the American public’s back, this shows that companies are largely moving towards globalisation because, if they dont, other companies will undercut them in price and go out of buisness.

At least to me, it puts a radically different spin on the entire issue.

4

Shalmanese there isn’t a single thing in your post that makes sense. The economic reasoning is virtually completely backward. Outsourcing is just a source of cheaper labor and is no different in evaluating profit margins than any other variable cost. If what you said is true, then General Mills would try to pay more for oats with which to make more Cheerios so the price wouldn’t go down. You can’t apply a S/D graph to an individual company. The graphs will change as a course of ALL individuals trying to maximize profits. Companies buying enough to lower the price?? Doesn’t that smack you as unintuitive? If you rework your question/thinking I can help you but it sounds like you need to take about 10 steps back.

5

I don’t see anywhere where I’ve made the claim that companies want prices raised. I’m basically arguing that, on the assumption that stockholders benifit from the economic inefficiencies in globalisation, there seems to be no place for these inefficiencies to lie, thus, globalisation follows the standard economic model (of the S/D graph) and that in the end, the main benificiary is the consumer through lower prices, not the companies through greater profits.

It just seemed to me that a lot of the globalisation debate was predicated on the fact that corporations were greedy and would do anything to seek extra profits. I’m trying to demonstrate that this is untrue and the real reason is that if they don’t globalise, then they will lose profits. Two vastly different motivations in my mind.

6

Upon re-reading, I think I see where the confusion lies. I failed to make it clear in my OP but what I was trying to say was that if, for example, the car making industry had the monopolistic power neccesary to profit as a block from cheaper labour prices, then it would also have the neccesary monopsonistic powers neccesary to prevent all of it’s suppliers from acting in the same way. Similarly, up and down the chain, every monopoly is balanced by a monopsony so that, while some industries might fare better than others out of the entire thing, there certainly doesn’t seem to be a way for there to be an overall gain in market inefficiency which is what is implied in anti-globalisation threads.

7

For now, let’s get rid of all the arguments/theories except for one–what you call the “standard theoretical economic model.” Once again, there is absolutely no difference between seeking lowering variable costs in labor versus materials. The argument for “Why would a company outsource?” is no different than “Why would a company try and get lower prices for it’s raw materials?” I think the problem you’re having is that you are assuming that the change in the supply curve happens instantaneously and effects all producers equally. There is a lot of profit to be made between P1 and
P2 and some producers will take better advantage of that opportunity than others.
Can you imagine if a stock investor reasoned that he shouldn’t buy stocks because the Fed is going to lower interest rates which will eventually lead to inflation which will eventually lead to higher rates which will eventually lead to decreased corporate profits? There is a lot of money to be made between those “eventuallys.”

8

  1. You are exagerating the number of companies with monopolistic/monopsonic power. Being large does not necessarily make a company a monoploly and it also does not mean it can necessarily lord over it’s suppliers.

  2. You are mixing Macro and Finance together.

  3. I think you might be using the Perfect Competition S/D chart to describe a Monopoly.

  4. Assuming that it could do 1, what part of a company reducing it’s expenses by a) outsourcing labor and b) running a more cost effective supply chain (resulting in an improved bottom line) would not be good for shareholders?

9

I don’t think you have to get into demand curves, monopolistic behavior, perfect competition, etc… to understand why globalization benefits stockholders.

Let’s use the example of something common and in everyday use by most people; a bar of soap.

Let’s also say that here in the US, that bar of soap is priced at $1.50. Furthermore, the total cost of that bar of soap, including labor, distribution, materials, overhead, etc… is $1.00

That bar of soap has a 50cent profit margin. Let’s say that our soap company sells 20 million bars of soap this year. They just made $10,000,000 in profits.

Let’s go ahead and say that the company has 5 million shares outstanding, and that they do pay dividends. Earnings per share this time around are $2. If I personally own 10,000 shares, I just made $20,000 in dividends.
(10,000,000 / 5,000,000 = 2.0 , 2.0 * 10,000 = 20,000)
Now… for the globalization part.
Let’s say that our soap company can buy cheaper fat in Poland, lye in Russia and locate the soap factory in Bangladesh for cheaper labor. Let’s say that our total cost including transporting all the materials to the factory only comes to $0.85 per bar of soap.

If we keep the price the same, and assume the demand is the same, then the company just made $3 million more that year, and EPS goes to $2.60. My personal profit rose to $26,000 (13,000,000 / 5,000,000 = 2.60, 2.60 * 10,000 = 26,000)

Or, we could keep our 50 cent profit margin, and drop our price to $1.35, which might stimulate our sales(assuming consumers are price-sensitive). ANY increase in sales will translate into more money, since our profit margin per unit remained the same.

Basically the big deal with globalization is the ability to lower production costs, and that almost always translates into more profits, which benefit shareholders by either increasing the value of the company (raising stock price) and/or by increasing dividends.