Chapter 1
. .
Multinational Financial Management: An Overview
. . . .
Lecture Outline
.
Managing.the.MNC
How.Business.Disciplines.Are.Used.to.Manage.the.MNC.Agen
cy.Problems
Management.Structure.of.an.MNC
Why.Firms.Pursue.International.Business.T
heory.of.Comparative.Advantage. Imperfect.
Markets.Theory
Product.Cycle.Theory
Methods.to.Conduct.International.Business
International.Trade.L
icensing.Franchising
Joint.Ventures
Acquisitions.of.Existing.Operations.Esta
blishing.New.Foreign.Subsidiaries.Sum
mary.of.Methods
Valuation.Model.for.an.MNC.Domestic.
Valuation.Model.Multinational.Valuatio
n.Model
Uncertainty.Surrounding.an.MNC’s.Cash.Flows.How.
Uncertainty.Affects.the.MNC’s.Cost.of.Capital
Organization.of.the.Text
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.2
Chapter Theme .
This.chapter.introduces.the.multinational.corporation.as.having.similar.goals.to.the.purely.domestic.corporation,.b
ut.a.wider.variety.of.opportunities.. With.additional.opportunities.come.potential.increased.returns.and.other.forms.
of.risk.to.consider.. The.potential.benefits.and.risks.are.introduced.
Topics to Stimulate Class Discussion
. . . .
1. What.is.the.appropriate.definition.of.an.MNC?
2. Why.does.an.MNC.expand.internationally?
3. What.are.the.risks.of.an.MNC.which.expands.internationally?
4. Why.must.purely.domestic.firms.be.concerned.about.the.international.environment?
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
. . . . . . . . .
POINT:.Yes.. When.a.U.S.-
based.MNC.competes.in.some.countries,.it.may.encounter.some.business.norms.there.that.are.not.allowed.in.t
he.U.S..For.example,.when.competing.for.a.government.contract,.firms.might.provide.payoffs.to.the.governm
ent.officials.who.will.make.the.decision..Yet,.in.the.United.States,.a.firm.will.sometimes.take.a.client.on.an.exp
ensive.golf.outing.or.provide.skybox.tickets.to.events..This.is.no.different.than.a.payoff..If.the.payoffs.are.bigg
er.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.i
n.a.foreign.country.that.allows.activities.that.might.be.viewed.as.unethical..In.this.way,.the.MNC.establishes.m
ore.credibility.worldwide.
WHO.IS.CORRECT?.Use.the.Internet.to.learn.more.about.this.issue..Which.argument.do.you.support?.Offer.y
our.own.opinion.on.this.issue.
ANSWER:.The.issue.is.frequently.discussed..It.is.easy.to.suggest.that.the.MNC.should.maintain.a.standard.cod
e.of.ethics,.but.in.reality,.that.means.that.it.will.not.be.able.to.compete.in.some.cases..For.example,.even.if.it.sub
mits.the.lowest.bid.on.a.specific.foreign.government.project,.it.will.not.receive.the.bid.without.a.payoff.to.the.fo
reign.government.officials..The.issue.is.especially.a.concern.for.large.projects.that.may.generate.substantial.ca
sh.flows.for.the.firm.that.is.chosen.to.do.the.project..Ideally,.the.MNC.can.clearly.demonstrate.to.whoever.over
sees.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.dep
artment.to.ensure.that.the.process.is.ethical.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.3
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.ac
t.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.. S
econd,.foreign.subsidiary.managers.raised.in.different.cultures.may.not.follow.uniform.goals,.and.some.
managers.may.focus.on.satisfying.respective.employees.. 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.busi
ness.
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.has.led.to.the.establishment.of.subsidiaries.in.forei
gn.markets.
ANSWER:. Because.of.imperfect.markets,.resources.cannot.be.easily.and.freely.retrieved.by.the.MN
C.. Consequently,.the.MNC.must.sometimes.go.to.the.resources.rather.than.retrieve.resources.(such.as.l
and,.labor,.etc.).
b. If.perfect.markets.existed,.would.wages,.prices,.and.interest.rates.among.countries.be.more.simi
lar.or.less.similar.than.under.conditions.of.imperfect.markets?. Why?
ANSWER:.If.perfect.markets.existed,.resources.would.be.more.mobile.and.could.therefore.be.transferred
.to.those.countries.more.willing.to.pay.a.high.price.for.them.. As.this.occurred,.shortages.of.resources.in.an
y.particular.country.would.be.alleviated.and.the.costs.of.such.resources.would.be.similar.across.countries.
4. International.Opportunities.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.4
a. Do.you.think.that.either.the.acquisition.of.a.foreign.firm.or.licensing.will.result.in.greater.growth.for.an.
MNC?.Which.alternative.is.likely.to.have.more.risk?
ANSWER:. An.acquisition.will.typically.result.in.greater.growth,.but.it.is.riskier.because.it.normally.requires.a.
larger.investment.and.the.decision.can.not.be.easily.reversed.once.the.acquisition.is.made.
b. Describe.a.scenario.in.which.the.size.of.a.corporation.is.not.affected.by.access.to.international.oppor
tunities.
ANSWER:.Some.firms.may.avoid.opportunities.because.they.lack.knowledge.about.foreign.markets.or.e
xpect.that.the.risks.are.excessive.. Thus,.the.size.of.these.firms.is.not.affected.by.the.opportunities.
c. Explain.why.MNCs.such.as.Coca.Cola.and.PepsiCo.still.have.numerous.opportunities.for.inter
national.expansion.
ANSWER:.Coca.Cola.and.PepsiCo.still.have.new.international.opportunities.because.countries.are.at.various.s
tages.of.development.. Some.countries.have.just.recently.opened.their.borders.to.MNCs.
Many.of.these.countries.do.not.offer.sufficient.food.or.drink.products.to.their.consumers.
5. International.Opportunities.Due.to.the.Internet.
a. What.factors.cause.some.firms.to.become.more.internationalized.than.others?
ANSWER:.The.operating.characteristics.of.the.firm.(what.it.produces.or.sells).and.the.risk.perception.of.int
ernational.business.will.influence.the.degree.to.which.a.firm.becomes.internationalized.. Several.other.fact
ors.such.as.access.to.capital.could.also.be.relevant.here.. Firms.that.are.labor-
intensive.could.more.easily.capitalize.on.low-
wage.countries.while.firms.that.rely.on.technological.advances.could.not.
b. Why.might.the.Internet.have.resulted.in.more.international.business.
ANSWER:.The.Internet.allows.for.easy.and.low-
cost.communication.between.countries,.so.that. firms.could.now.develop.contacts.with.potential.customer
s.overseas.by.having.a.website..Many.firms.use.their.website.to.identify.the.products.that.they.sell,.along.wi
th.the.prices.for.each.product.. This.allows.them.to.easily.advertise.their.products.to.potential.importers.any
where.in.the.world.without.mailing.brochures.to.various.countries.. In.addition,.they.can.add.to.their.produ
ct.line.and.change.prices.by.simply.revising.their.website,.so.importers.are.kept.abreast.of.the.exporter’s.pr
oduct.information.by.monitoring.the.exporter’s.website.periodically..Firms.can.also.use.their.websites.to.a
ccept.orders.online.. Some.firms.with.an.international.reputation.use.their.brand.name.to.advertise.product
s.over.the.internet.. They.may.use.manufacturers.in.some.foreign.countries.to.produce.some.of.their.produc
ts.subject.to.their.specification
6. Impact.of.Exchange.Rate.Movements..Plak.Co..of.Chicago.has.several.European.subsidiaries.that.remi
t.earnings.to.it.each.year..Explain.how.appreciation.of.the.euro.(the.currency.used.in.many.European.coun
tries).would.affect.Plak's.valuation.
ANSWER:. Plak’s.valuation.should.increase.because.the.appreciation.of.the.euro.will.increase.the.dollar.
value.of.the.cash.flows.remitted.by.the.European.subsidiaries.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
. .
Multinational Financial Management: An Overview
. . . .
Lecture Outline
.
Managing.the.MNC
How.Business.Disciplines.Are.Used.to.Manage.the.MNC.Agen
cy.Problems
Management.Structure.of.an.MNC
Why.Firms.Pursue.International.Business.T
heory.of.Comparative.Advantage. Imperfect.
Markets.Theory
Product.Cycle.Theory
Methods.to.Conduct.International.Business
International.Trade.L
icensing.Franchising
Joint.Ventures
Acquisitions.of.Existing.Operations.Esta
blishing.New.Foreign.Subsidiaries.Sum
mary.of.Methods
Valuation.Model.for.an.MNC.Domestic.
Valuation.Model.Multinational.Valuatio
n.Model
Uncertainty.Surrounding.an.MNC’s.Cash.Flows.How.
Uncertainty.Affects.the.MNC’s.Cost.of.Capital
Organization.of.the.Text
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.2
Chapter Theme .
This.chapter.introduces.the.multinational.corporation.as.having.similar.goals.to.the.purely.domestic.corporation,.b
ut.a.wider.variety.of.opportunities.. With.additional.opportunities.come.potential.increased.returns.and.other.forms.
of.risk.to.consider.. The.potential.benefits.and.risks.are.introduced.
Topics to Stimulate Class Discussion
. . . .
1. What.is.the.appropriate.definition.of.an.MNC?
2. Why.does.an.MNC.expand.internationally?
3. What.are.the.risks.of.an.MNC.which.expands.internationally?
4. Why.must.purely.domestic.firms.be.concerned.about.the.international.environment?
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
. . . . . . . . .
POINT:.Yes.. When.a.U.S.-
based.MNC.competes.in.some.countries,.it.may.encounter.some.business.norms.there.that.are.not.allowed.in.t
he.U.S..For.example,.when.competing.for.a.government.contract,.firms.might.provide.payoffs.to.the.governm
ent.officials.who.will.make.the.decision..Yet,.in.the.United.States,.a.firm.will.sometimes.take.a.client.on.an.exp
ensive.golf.outing.or.provide.skybox.tickets.to.events..This.is.no.different.than.a.payoff..If.the.payoffs.are.bigg
er.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.i
n.a.foreign.country.that.allows.activities.that.might.be.viewed.as.unethical..In.this.way,.the.MNC.establishes.m
ore.credibility.worldwide.
WHO.IS.CORRECT?.Use.the.Internet.to.learn.more.about.this.issue..Which.argument.do.you.support?.Offer.y
our.own.opinion.on.this.issue.
ANSWER:.The.issue.is.frequently.discussed..It.is.easy.to.suggest.that.the.MNC.should.maintain.a.standard.cod
e.of.ethics,.but.in.reality,.that.means.that.it.will.not.be.able.to.compete.in.some.cases..For.example,.even.if.it.sub
mits.the.lowest.bid.on.a.specific.foreign.government.project,.it.will.not.receive.the.bid.without.a.payoff.to.the.fo
reign.government.officials..The.issue.is.especially.a.concern.for.large.projects.that.may.generate.substantial.ca
sh.flows.for.the.firm.that.is.chosen.to.do.the.project..Ideally,.the.MNC.can.clearly.demonstrate.to.whoever.over
sees.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.dep
artment.to.ensure.that.the.process.is.ethical.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.3
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.ac
t.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.. S
econd,.foreign.subsidiary.managers.raised.in.different.cultures.may.not.follow.uniform.goals,.and.some.
managers.may.focus.on.satisfying.respective.employees.. 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.busi
ness.
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.has.led.to.the.establishment.of.subsidiaries.in.forei
gn.markets.
ANSWER:. Because.of.imperfect.markets,.resources.cannot.be.easily.and.freely.retrieved.by.the.MN
C.. Consequently,.the.MNC.must.sometimes.go.to.the.resources.rather.than.retrieve.resources.(such.as.l
and,.labor,.etc.).
b. If.perfect.markets.existed,.would.wages,.prices,.and.interest.rates.among.countries.be.more.simi
lar.or.less.similar.than.under.conditions.of.imperfect.markets?. Why?
ANSWER:.If.perfect.markets.existed,.resources.would.be.more.mobile.and.could.therefore.be.transferred
.to.those.countries.more.willing.to.pay.a.high.price.for.them.. As.this.occurred,.shortages.of.resources.in.an
y.particular.country.would.be.alleviated.and.the.costs.of.such.resources.would.be.similar.across.countries.
4. International.Opportunities.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
, Multinational.Financial.Management:.An.Overview.❖.4
a. Do.you.think.that.either.the.acquisition.of.a.foreign.firm.or.licensing.will.result.in.greater.growth.for.an.
MNC?.Which.alternative.is.likely.to.have.more.risk?
ANSWER:. An.acquisition.will.typically.result.in.greater.growth,.but.it.is.riskier.because.it.normally.requires.a.
larger.investment.and.the.decision.can.not.be.easily.reversed.once.the.acquisition.is.made.
b. Describe.a.scenario.in.which.the.size.of.a.corporation.is.not.affected.by.access.to.international.oppor
tunities.
ANSWER:.Some.firms.may.avoid.opportunities.because.they.lack.knowledge.about.foreign.markets.or.e
xpect.that.the.risks.are.excessive.. Thus,.the.size.of.these.firms.is.not.affected.by.the.opportunities.
c. Explain.why.MNCs.such.as.Coca.Cola.and.PepsiCo.still.have.numerous.opportunities.for.inter
national.expansion.
ANSWER:.Coca.Cola.and.PepsiCo.still.have.new.international.opportunities.because.countries.are.at.various.s
tages.of.development.. Some.countries.have.just.recently.opened.their.borders.to.MNCs.
Many.of.these.countries.do.not.offer.sufficient.food.or.drink.products.to.their.consumers.
5. International.Opportunities.Due.to.the.Internet.
a. What.factors.cause.some.firms.to.become.more.internationalized.than.others?
ANSWER:.The.operating.characteristics.of.the.firm.(what.it.produces.or.sells).and.the.risk.perception.of.int
ernational.business.will.influence.the.degree.to.which.a.firm.becomes.internationalized.. Several.other.fact
ors.such.as.access.to.capital.could.also.be.relevant.here.. Firms.that.are.labor-
intensive.could.more.easily.capitalize.on.low-
wage.countries.while.firms.that.rely.on.technological.advances.could.not.
b. Why.might.the.Internet.have.resulted.in.more.international.business.
ANSWER:.The.Internet.allows.for.easy.and.low-
cost.communication.between.countries,.so.that. firms.could.now.develop.contacts.with.potential.customer
s.overseas.by.having.a.website..Many.firms.use.their.website.to.identify.the.products.that.they.sell,.along.wi
th.the.prices.for.each.product.. This.allows.them.to.easily.advertise.their.products.to.potential.importers.any
where.in.the.world.without.mailing.brochures.to.various.countries.. In.addition,.they.can.add.to.their.produ
ct.line.and.change.prices.by.simply.revising.their.website,.so.importers.are.kept.abreast.of.the.exporter’s.pr
oduct.information.by.monitoring.the.exporter’s.website.periodically..Firms.can.also.use.their.websites.to.a
ccept.orders.online.. Some.firms.with.an.international.reputation.use.their.brand.name.to.advertise.product
s.over.the.internet.. They.may.use.manufacturers.in.some.foreign.countries.to.produce.some.of.their.produc
ts.subject.to.their.specification
6. Impact.of.Exchange.Rate.Movements..Plak.Co..of.Chicago.has.several.European.subsidiaries.that.remi
t.earnings.to.it.each.year..Explain.how.appreciation.of.the.euro.(the.currency.used.in.many.European.coun
tries).would.affect.Plak's.valuation.
ANSWER:. Plak’s.valuation.should.increase.because.the.appreciation.of.the.euro.will.increase.the.dollar.
value.of.the.cash.flows.remitted.by.the.European.subsidiaries.
©.2021.Cengage.Learning..All.Rights.Reserved..May.not.be.copied,.scanned,.or.duplicated,.in.whole.or.in.part,.except.for.use.as. permitt
ed.in.a.license.distributed.with.a.certain.product.or.service.or.otherwise.on.a.password-protected.website.for.classroom.use.
