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International Finance Essay

9003 words - 37 pages

Chapter 1

Multinational Financial Management: An Overview

Lecture Outline

Managing the MNC
Agency Problems
Management Structure of an MNC

Why Firms Pursue International Business
Theory of Comparative Advantage
Imperfect Markets Theory
Product Cycle Theory

How Firms Engage in International Business
International Trade
Licensing
Franchising
Joint Ventures
Acquisitions of Existing Operations
Establishing New Foreign Subsidiaries
Summary of Methods

Valuation Model for an MNC
Domestic Model
Multinational Model
Uncertainty Surrounding an MNC’s Cash Flows
How Uncertainty Affects the MNC’s Cost of Capital

Organization of the Text
Chapter ...view middle of the document...

If the payoffs are bigger in some foreign countries, the MNC can compete only by matching the payoffs provided by its competitors.

COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to any country, even if it is at a disadvantage in a foreign country that allows activities that might be viewed as unethical. In this way, the MNC establishes more credibility worldwide.

WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.

ANSWER: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For example, even if it submits the lowest bid on a specific foreign government project, it will not receive the bid without a payoff to the foreign government officials. The issue is especially a concern for large projects that may generate substantial cash flows for the firm that is chosen to do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be selected. If there is just one decision-maker with no oversight, an MNC can not ensure that the decision will be ethical. But if the decision-maker must be accountable to a department who oversees the decision, the MNC may be able to prompt the department to ensure that the process is ethical.

Answers to End of Chapter Questions

1. Agency Problems of MNCs.

a. Explain the agency problem of MNCs.

ANSWER: The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the best interest of the owners.

b. Why might agency costs be larger for an MNC than for a purely domestic firm?

ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems.

2. Comparative Advantage.

a. Explain how the theory of comparative advantage relates to the need for international business.

ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international business.

b. Explain how the product cycle theory relates to the growth of an MNC.

ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to capitalize on its perceived advantages in markets other than where it was initially established.

3. Imperfect Markets.

a. Explain how the existence of imperfect markets...

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