Created By: A Solution
Solution Manual For International Financial Management, 14th Edition by Jeff Madura |
Complete Verified Chapter’s 2024 A+
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC Agency Problems
Management Structure of an MNC
Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets
Theory
Product Cycle Theory
Methods to Conduct 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 Valuation Model Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Flows How Uncertainty Affects the MNC’s Cost of
Capital
Organization of the Text
Chapter Theme
A+ Page 1
,Created.By:.A.Solution
This chapter introduces the multinational corporation as having similar goals to the purely
domestic corporation, but 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 the U.S. For example, when competing for a
government contract, firms might provide payoffs to the government officials who will make the
decision. Yet, in the United States, a firm will sometimes take a client on an expensive golf
outing or provide skybox tickets to events.
This.is.no.different.than.a.payoff..If.the.payoffs.are.bigger.in.some.foreign.countries,.the.MNC.can.c
ompete.only.by.matching.the.payoffs.provided.by.its.competitors.
A+ Page.2
,Created.By:.A.Solution
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.dis
advantage.in.a.foreign.country.that.allows.activities.that.might.be.viewed.as.unethical..In.this.way,.t
he.MNC.establishes.more.credibility.worldwide.
WHO.IS.CORRECT?.Use.the.Internet.to.learn.more.about.this.issue..Which.argument.do.you.suppo
rt?.Offer.your.own.opinion.on.this.issue.
ANSWER:.The.issue.is.frequently.discussed..It.is.easy.to.suggest.that.the.MNC.should.maintain.a.st
andard.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.receiv
e.the.bid.without.a.payoff.to.the.foreign.government.officials..The.issue.is.especially.a.concern.for.l
arge.projects.that.may.generate.substantial.cash.flows.for.the.firm.that.is.chosen.to.do.the.project..Id
eally,.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.pro
mpt.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.manag
ers.act.in.the.best.interest.of.the.owners.
b. Why.might.agency.costs.be.larger.for.an.MNC.than.for.a.purely.domestic.firm?
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, Created.By:.A.Solution
ANSWER:.The.agency.costs.are.normally.larger.for.MNCs.than.purely.domestic.firms.for.the.follo
wing.reasons..First,.MNCs.incur.larger.agency.costs.in.monitoring.managers.of.distant.foreign.subs
idiaries..Second,.foreign.subsidiary.managers.raised.in.different.cultures.may.not.follow.uniform.go
als,.and.some.managers.may.focus.on.satisfying.respective.employees..Third,.the.sheer.size.of.the.la
rger.MNCs.would.also.create.large.agency.problems.
2. Comparative.Advantage.
a. Explain.how.the.theory.of.comparative.advantage.relates.to.the.need.for.international.bu
siness.
ANSWER:.The.theory.of.comparative.advantage.implies.that.countries.should.specialize.in.produc
tion,.thereby.relying.on.other.countries.for.some.products..Consequently,.there.is.a.need.for.internat
ional.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.capi
talize.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.su
bsidiaries.in.foreign.markets.
ANSWER:.Because.of.imperfect.markets,.resources.cannot.be.easily.and.freely.retrieved.by.the.M
NC..Consequently,.the.MNC.must.sometimes.go.to.the.resources.rather.than.retrieve.resources.(suc
h.as.land,.labor,.etc.).
b. If.perfect.markets.existed,.would.wages,.prices,.and.interest.rates.among.countries.be.m
ore.similar.or.less.similar.than.under.conditions.of.imperfect.markets?.Why?
A+ Page.4
Solution Manual For International Financial Management, 14th Edition by Jeff Madura |
Complete Verified Chapter’s 2024 A+
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC Agency Problems
Management Structure of an MNC
Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets
Theory
Product Cycle Theory
Methods to Conduct 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 Valuation Model Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Flows How Uncertainty Affects the MNC’s Cost of
Capital
Organization of the Text
Chapter Theme
A+ Page 1
,Created.By:.A.Solution
This chapter introduces the multinational corporation as having similar goals to the purely
domestic corporation, but 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 the U.S. For example, when competing for a
government contract, firms might provide payoffs to the government officials who will make the
decision. Yet, in the United States, a firm will sometimes take a client on an expensive golf
outing or provide skybox tickets to events.
This.is.no.different.than.a.payoff..If.the.payoffs.are.bigger.in.some.foreign.countries,.the.MNC.can.c
ompete.only.by.matching.the.payoffs.provided.by.its.competitors.
A+ Page.2
,Created.By:.A.Solution
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.dis
advantage.in.a.foreign.country.that.allows.activities.that.might.be.viewed.as.unethical..In.this.way,.t
he.MNC.establishes.more.credibility.worldwide.
WHO.IS.CORRECT?.Use.the.Internet.to.learn.more.about.this.issue..Which.argument.do.you.suppo
rt?.Offer.your.own.opinion.on.this.issue.
ANSWER:.The.issue.is.frequently.discussed..It.is.easy.to.suggest.that.the.MNC.should.maintain.a.st
andard.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.receiv
e.the.bid.without.a.payoff.to.the.foreign.government.officials..The.issue.is.especially.a.concern.for.l
arge.projects.that.may.generate.substantial.cash.flows.for.the.firm.that.is.chosen.to.do.the.project..Id
eally,.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.pro
mpt.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.manag
ers.act.in.the.best.interest.of.the.owners.
b. Why.might.agency.costs.be.larger.for.an.MNC.than.for.a.purely.domestic.firm?
A+ Page.3
, Created.By:.A.Solution
ANSWER:.The.agency.costs.are.normally.larger.for.MNCs.than.purely.domestic.firms.for.the.follo
wing.reasons..First,.MNCs.incur.larger.agency.costs.in.monitoring.managers.of.distant.foreign.subs
idiaries..Second,.foreign.subsidiary.managers.raised.in.different.cultures.may.not.follow.uniform.go
als,.and.some.managers.may.focus.on.satisfying.respective.employees..Third,.the.sheer.size.of.the.la
rger.MNCs.would.also.create.large.agency.problems.
2. Comparative.Advantage.
a. Explain.how.the.theory.of.comparative.advantage.relates.to.the.need.for.international.bu
siness.
ANSWER:.The.theory.of.comparative.advantage.implies.that.countries.should.specialize.in.produc
tion,.thereby.relying.on.other.countries.for.some.products..Consequently,.there.is.a.need.for.internat
ional.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.capi
talize.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.su
bsidiaries.in.foreign.markets.
ANSWER:.Because.of.imperfect.markets,.resources.cannot.be.easily.and.freely.retrieved.by.the.M
NC..Consequently,.the.MNC.must.sometimes.go.to.the.resources.rather.than.retrieve.resources.(suc
h.as.land,.labor,.etc.).
b. If.perfect.markets.existed,.would.wages,.prices,.and.interest.rates.among.countries.be.m
ore.similar.or.less.similar.than.under.conditions.of.imperfect.markets?.Why?
A+ Page.4
