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International Business Essay

1626 words - 7 pages

1. What are the key exposures to international risk that MNCs have to consider? P. 13-17

- international economic conditions … if conditions weaken, income of consumers becomes relatively low, consumer purchases of products decline and an MNC’s sales in that country may be lower than expected … results in reduction in cash flows and valuation

- international political risk … foreign government may increase taxes or impose barriers, consumers may boycott if friction between countries

- exchange rate risk … foreign currencies to be received suddenly weaken against dollar, MNC will receive lower cash flows, cash outflows in foreign currencies are exposed to movements but in ...view middle of the document...

How firms engage in international business? Discuss each with specific emphasis on its risk and return characteristics. p. 8-11

- international trade … penetrate markets by exporting or obtain supplies by importing

o conservative approach, entails minimal risk because the firm does not place any of its capital at risk … if firm experiences a decline in its exporting or importing, it can reduce or discontinue this part of the business at a low cost

o cash outflows associated with international business are to pay for imports, comply with international arrangements or to support the creation of expansion of foreign subsidiaries

o cash inflows in form of payment for exports, fees for services provided with arrangements and remitted funds from the foreign subsidiaries

- licensing … obligates a firm to provide its technology (copyrights, patents, trademarks) in exchange for fees or some other specified benefits (low investment, difficult to ensure quality control)

o conservative approach without major investment and without transportation costs resulting from exporting … disadvantage is the difficulty of quality control

- franchising … specialized sales or service strategy, support assistance and initial investment in the franchise for periodic fees

o conservative approach without major investment … recent relaxation of barriers

- joint ventures … jointly owned and operated by two or more firms, applying comparative advantages in a given project

o cash outflows include expenses incurred from transferring technology or partial investment

o cash inflows include fees for services

- acquisitions of existing operations … firms buying out other firms in foreign countries as a means of penetrating foreign markets

o risk large losses since large investment is required, difficult to sell operations at reasonable price if performs poorly

o operations are not tailor made

- establishing new foreign subsidiaries … new operations

o large investment, thought operations are tailored to specific needs

o cash outflows include invested funds to help finance operations

o cash inflows include earnings and fees for services provided

4. In order to correct a balance of trade deficit, a country may weaken its home currency. However, this strategy does not necessarily improve its balance of trade. Why? Please discuss in detail identifying at least four reasons. p. 41-43

- counter pricing by competitors … when a country’s currency weakens, its prices become more attractive to foreign customers, so many foreign companies lower their prices to remain competitive with the country’s firms

- impact of weak currencies … does not necessarily weaken against all currencies at same time – dollar’s weakness in certain areas causes change in international trade behavior but does not eliminate trade deficit

- prearranged international transactions … cannot be immediately adjusted, committed to...

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