Investing in globalization: effects and implications

Investing/Globalization

Stock splits will not directly change the true value of a company as reflected by its market capitalization. However, these splits do have important implications for the psychology of the firm as well as the investor and are, therefore, are used to increase or decrease the number of outstanding shares.

From a firm's point-of-view, stock splits are advantageous for several reasons as explained by Hobbss (n.d.). A high stock price may discourage investment, particularly for the small investor. Therefore, the company will use a stock split to reduce the price so that it appears more affordable. Conversely, firms can use a reverse stock split when a stock price is too low and it makes the stock look like a poor investment. Companies may also use reverse stock splits to try to avoid being delisted on a stock exchange, to push out minority stock holders who would hold even fewer shares than before or as a way to go private.

Investors may also see a stock split as beneficial (Hobbss, n.d.). From an investor's perspective, lower prices per share can result in greater liquidity, so that the stocks are easier to buy and there is less of a bid/ask spread (the different between buying and selling prices). Investors typically view a stock split as a bullish indicator that the company is doing well financially. Thus, there is usually a short-term rally around a stock with splits. Some investors may like the idea of having more stocks to trade if they believe that the price will increase (Understanding stock splits).

On the downside, stock splits may cause investors to increase expectations for corporate performance (Hobbss, n.d.). If these expectations are not met investor confidence may be shaken and the result could be a drop in share prices which harms both the company's market capitalization and the investor's profit.

Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology (What is globalization?). The most noted international trade theories that support the concept of globalization are the laws of comparative advantage and absolute advantage (Comparative advantage and absolute advantage). Comparative advantage states that mutually beneficial exchange is possible whenever relative production costs differ prior to trade. Nations gain by producing goods at relatively low costs and exchanging their outputs for different goods produced by others at relatively low cost. Thus, all potential trading partners can gain enormously through appropriate specialization and exchange. A country has an absolute advantage in producing a good if production of the good absorbs fewer resources than are required in other countries or by other individuals or firms.

Globalization drivers over the last decade include market drivers (common customer needs, global customers, global market channels), cost drivers (global scale economies, sourcing efficiencies, factor of production differences), government drivers (unrestrictive trade and investment policies, compatible technical standards, common marketing regulations) and competitive drivers (high degree of cross-border trade, global competitors, and interdependence among countries in policy, trade/investment and management) (Industry globalization).