Questions and Applications
3. Imperfect Markets
a. Explain how the existence of imperfect markets has led to the establishment of
subsidiaries in foreign markets. If each country’s markets were closed to all other
countries, then there would be no international business. At the other extreme, if
markets were perfect and thus the factors of production (such as labor) easily
transferable, then labor and other resources would flow wherever they were in
demand. Such unrestricted mobility of factors would create equality in both costs
and returns and thus would remove the comparative cost advantage, which is the
rationale for international trade and investment (Madura, J., 2018)
b. If perfect markets existed, would wages, prices, and interest rates among
countries be more similar or less similar than under conditions of imperfect
markets? More similar. Why? Under perfect market conditions companies would
be able to easily transfer laborers / production and resources to other countries
removing the comparative cost advantage.
7. Benefits and Risks of International Business As an overall review of this chapter,
identify possible reasons for growth in international business. Then list the various
disadvantages that may discourage international business. Possible reasons for growth
international business could be cheaper labor, or lower cost of goods; savings from
logistics (import / export of goods); broader customer base; and access to foreign markets.
The disadvantages could be large capital expenditure commitment; foreign governments /
politics; and foreign exchange rates.
11. Exposure to Exchange Rates McCanna Corp., a U.S. firm, has a French subsidiary that
produces wine and exports to various European countries. All of the countries where it
sells its wine use the euro as their currency, which is the same currency used in France. Is
McCanna Corp. exposed to exchange rate risk? The French subsidiary would not be
exposed to exchange rates as they are using the same currency as its’ customers. If
McCanna Corp. did not have a French subsidiary it would be exposed to exchange rate risk.
13. Methods Used to Conduct International Business Duve, Inc., desires to penetrate a
foreign market with either a licensing agreement with a foreign firm or by acquiring a
foreign firm. Explain the differences in potential risk and return between a licensing
agreement with a foreign firm and the acquisition of a foreign firm. The differences
between acquiring a foreign firm and licensing agreement with a foreign firm is 1)
acquiring a foreign firm will require a large capital expenditure. Obviously with any CapEx
there is inherent risk. Likewise, your goal is to get a return on your investment in a timely
manner; and 2) a licensing agreement with a foreign firm does not generate as much of a
return as an acquisition might. In a licensing agreement the bulk of the revenue would go
to the foreign firm.
1. Balance of Payments
a. What are the main components of the current account? The main components of the
current account are payments between two countries for (1) merchandise (goods)
3. Imperfect Markets
a. Explain how the existence of imperfect markets has led to the establishment of
subsidiaries in foreign markets. If each country’s markets were closed to all other
countries, then there would be no international business. At the other extreme, if
markets were perfect and thus the factors of production (such as labor) easily
transferable, then labor and other resources would flow wherever they were in
demand. Such unrestricted mobility of factors would create equality in both costs
and returns and thus would remove the comparative cost advantage, which is the
rationale for international trade and investment (Madura, J., 2018)
b. If perfect markets existed, would wages, prices, and interest rates among
countries be more similar or less similar than under conditions of imperfect
markets? More similar. Why? Under perfect market conditions companies would
be able to easily transfer laborers / production and resources to other countries
removing the comparative cost advantage.
7. Benefits and Risks of International Business As an overall review of this chapter,
identify possible reasons for growth in international business. Then list the various
disadvantages that may discourage international business. Possible reasons for growth
international business could be cheaper labor, or lower cost of goods; savings from
logistics (import / export of goods); broader customer base; and access to foreign markets.
The disadvantages could be large capital expenditure commitment; foreign governments /
politics; and foreign exchange rates.
11. Exposure to Exchange Rates McCanna Corp., a U.S. firm, has a French subsidiary that
produces wine and exports to various European countries. All of the countries where it
sells its wine use the euro as their currency, which is the same currency used in France. Is
McCanna Corp. exposed to exchange rate risk? The French subsidiary would not be
exposed to exchange rates as they are using the same currency as its’ customers. If
McCanna Corp. did not have a French subsidiary it would be exposed to exchange rate risk.
13. Methods Used to Conduct International Business Duve, Inc., desires to penetrate a
foreign market with either a licensing agreement with a foreign firm or by acquiring a
foreign firm. Explain the differences in potential risk and return between a licensing
agreement with a foreign firm and the acquisition of a foreign firm. The differences
between acquiring a foreign firm and licensing agreement with a foreign firm is 1)
acquiring a foreign firm will require a large capital expenditure. Obviously with any CapEx
there is inherent risk. Likewise, your goal is to get a return on your investment in a timely
manner; and 2) a licensing agreement with a foreign firm does not generate as much of a
return as an acquisition might. In a licensing agreement the bulk of the revenue would go
to the foreign firm.
1. Balance of Payments
a. What are the main components of the current account? The main components of the
current account are payments between two countries for (1) merchandise (goods)
