Are Large Multinational Companies Undervalued? Emerging Markets Perspective

The relationship between emerging economies and developed economies via multinational corporations is investigated. Using newly constructed database, it is shown that corporate expansion during the past decade has been dominated by M&As and characterized by developed countries financial institutions' penetration into the emerging economies. European financial companies have experienced the fastest growth rates and together with US firms account for about 80% of the world's largest enterprises. This expansion has resulted in cheap financing for small enterprises with local knowledge of the market in emerging economies that has resulted in their stocks' outperformance since the beginning of the previous credit easing cycle (2001). As banking industry as a funding source is no longer available for small enterprises in emerging markets, this trend is expected to reverse. On the contrary, large multinational companies have access to cheap financing at home (where securitization markets are more developed) and internationally (economies of scale). This should allow large multinational enterprises to expand further in size by increasing their market share. Implications for the US economy are presented in Appendix