INSTRUCTOR'S MANUAL
MULTINATIONAL FINANCIAL MANAGEMENT
11TH EDITION
CHAPTER 1: INTRODUCTION
SUGGESTED ANSWERS TO “GENERAL ELECTRIC
GLOBALIZES”
1. What advantages does General Electric seek to attain from its international business activities?
ANSWER. Aside from gaining access to markets worldwide, GE focuses on taking advantage of its global
reach to find less expensive materials abroad and intellectual capital, thereby lowering its cost of designing
and manufacturing products.
2. What actions is it taking to gain these advantages from its international activities?
ANSWER. GE is acquiring companies abroad, and setting up joint ventures with other foreign companies, to
gain their assets and ability to service local customers. It is setting up manufacturing facilities abroad to
access lower cost labor and materials and also sourcing more purchases abroad for the same reasons. It also
is identifying and hiring engineering and scientific talent from around the world to boost its intellectual
capital and is setting up R&D facilities where this talent can work.
3. What risks does GE face in its foreign operations?
ANSWER. Potential increased risks from global operations include, among other things, currency risks,
higher receivables delinquencies and bad debts, delays or cancellation of sales and orders, higher local
currency financing costs, and a slowdown in established financial services activities.
4. What profit opportunities for GE can arise out of these risks?
ANSWER. New profit opportunities for GE include, among other things, lower costs of goods sourced from
countries with weakened currencies, more opportunities for lower cost outsourcing, expansion of industrial
and financial services activities through purchases of companies or assets at reduced prices and lower U.S.
debt financing costs.
,SUGGESTED ANSWERS TO “THE DEBATE OVER OUTSOURCING”
1. What are the pros and cons of outsourcing?
ANSWER. PROS: Outsourcing allows Americans to buy services less expensively abroad, increases U.S.
productivity, and enables U.S. companies to cut their costs while improving quality, time-to-market, and
capacity to innovate. It also allows the United States to utilize its comparative advantage in financial,
managerial, and technical services by specializing in and exporting such services as higher-end computer
programming, management consulting, engineering, banking, telecommunications, and legal work.
CONS: As with any kind of trade, imports of services through outsourcing results in the loss of jobs for
Americans previously employed in providing those services. Outsourcing may also put out of business U.S.
companies that provide these services.
2. How does outsourcing affect U.S. consumers? U.S. producers?
ANSWER. As the answer to part a) points out, outsourcing allows companies to buy services less
expensively abroad. Competitive pressures force companies to pass these savings along to consumers in the
form of lower priced goods and services.
U.S. producers are able to boost productivity and cut costs while improving quality, time-to-market, and
capacity to innovate. As such, American companies are better able to compete. This competition, however,
forces companies to pass most of their savings from outsourcing through to their customers.
3. Longer term, what is the likely impact of outsourcing on American jobs?
ANSWER. The longer-term effect of outsourcing on U.S. jobs should be insignificant. Trade has little, if
anything, to do with the quantity of jobs in an economy but rather the nature and distribution of those jobs
in various occupations. Outsourcing should lead to higher average productivity of those jobs that
Americans work at and, hence, to higher wages and benefits.
4. Several states are contemplating legislation that would ban the outsourcing of government work to
foreign firms. What would be the likely consequences of such legislation?
ANSWER. Such legislation would result in less efficient and more expensive government. The end result
would be higher taxes or, if taxpayers balk, fewer government services.
SUGGESTED ANSWERS TO “ARCO CHEMICAL DEVELOPS A
WORLDWIDE STRATEGY”
,1. What was ARCO Chemical’s rationale for globalizing?
ANSWER. ARCO Chemical went global because its customers are now worldwide. For example, the
company's engineering resins are sold to the auto industry. In the past, that meant selling exclusively to
Detroit's Big Three in the U.S. market. Today, ARCO Chemical sells to Nissan, Toyota, Honda, Peugeot,
Renault, and Volkswagen in Japan, the United States, and Europe. It also deals with Ford and General
Motors in the United States and Europe. ARCO must be able to deliver a product anywhere in the world or
lose the business.
2. What advantages has ARCO Chemical realized from its global operations?
ANSWER. ARCO Chemical has been able to sell to customers worldwide, thereby expanding its sales.
Operating overseas also yields competitive intelligence, enabling ARCO to keep track of its competitors’
moves and figuring out how to counteract them.
3. What threats have arisen from ARCO Chemical’s globalizing efforts? What are some ways in which
ARCO Chemical has responded to these threats?
ANSWER. Global operations have exposed ARCO Chemical to increasingly stiff competition from abroad
in addition to its traditional U.S. competitors such as Dow Chemical. European companies have expanded
operations in America, and Japanese competitors also began to attack ARCO Chemical's business lines. In
response, ARCO Chemical set up production facilities around the world and entered into joint ventures and
strategic alliances, thereby gaining access to competitive and market intelligence.
4. How has globalization affected, and been affected by, industry consolidation?
ANSWER. Globalization has forced companies to take fuller advantage of economies of scale in order to be
more competitive, thereby resulting in greater industry consolidation worldwide. At the same time, industry
consolidation, by allowing companies to spread overhead, distribution and research and development costs
over a larger asset base, has enabled those companies in the consolidation vanguard to be lower-cost
producers and to be more competitive in foreign as well as domestic markets. To realize similar low costs,
competitors are forced to go overseas to spread their fixed costs over a larger sales volume.
SUGGESTED ANSWERS TO “DEMOCRATS TURN PROTECTIONIST”
1. What might explain the candidates’ and Democratic Party’s reversal of position on free trade? Which
, voting constituencies would be most likely to reject free trade? Why?
ANSWER. The Democratic Party is heavily reliant on union votes and money. And unions, particularly the
industrial unions that make up the core of the union movement is against free trade because it subjects their
members to competition from foreign labor embodied in foreign goods and services. The candidates
themselves are trying to appeal to the unions as they are among the best organized segment of the
Democratic Party and have the ability to turn out votes in primaries where few voters go to the polls. Given
the low turnout, a primary is often determined by the most committed voters, who are often union members
threatened with job losses from free trade.
2. What leverage do the trade unions have in persuading Al Gore and other Democratic candidates to pay
attention to their anti-free -trade position? Explain why these particular unions might be particularly
powerful.
ANSWER. The unions’ leverage stems from the fact that their membership is concentrated in six large
industrial states that are crucial swing states in presidential elections. Al Gore needs these states with their
large vote totals to win a national election. There are enough industrial union members in these six states
that they could tip a close race. If the union membership were dispersed throughout the United States, their
leverage would be greatly diminished since they couldn’t concentrate their votes to deliver key states.
3. What trade-offs do Al Gore and other Democrats face in accommodating labor? Explain.
ANSWER. If Al Gore gives in to protectionist sentiment to accommodate these industrial unions, he risks
losing states like California (Silicon Valley), Washington (Boeing), New York (Wall Street), and New
Jersey (pharmaceutical firms) that depend on foreign trade for their livelihood. For example, Gore has
made a particular push to gain money and votes from Silicon Valley, which is highly dependent on exports.
Pushing protectionist policies could lead to a backlash against Gore from Silicon Valley executives who
understand that foreign countries would likely retaliate against U.S. products. Moreover, a protectionist
stance could cost Gore farm state votes as well because farmers are highly dependent on exports. Gore also
has to be concerned that he will lose the votes of middle-of-the-road Democrats and independents if he is
viewed–as Walter Mondale was–as a tool of labor.
4. How can U.S. manufacturers compete with foreign producers? Are they doomed, as suggested by the
president of the United Steelworkers of America?. Explain.
ANSWER. The objective evidence shows that U.S. manufacturers can compete against foreign producers,
although not across the board. Rather, U.S. firms have a comparative advantage in a number of high
technology industries and industries where close coordination between customer and producer is key (such
as fashion design). In fact, U.S. industrial output is up but the number of manufacturing jobs has not risen;
it’s just that higher productivity means that companies don’t have to hire as many new workers to produce
the higher output. U.S. companies also have a comparative advantage in many service industries, such as
financial services, consulting, and telecommunications.
MULTINATIONAL FINANCIAL MANAGEMENT
11TH EDITION
CHAPTER 1: INTRODUCTION
SUGGESTED ANSWERS TO “GENERAL ELECTRIC
GLOBALIZES”
1. What advantages does General Electric seek to attain from its international business activities?
ANSWER. Aside from gaining access to markets worldwide, GE focuses on taking advantage of its global
reach to find less expensive materials abroad and intellectual capital, thereby lowering its cost of designing
and manufacturing products.
2. What actions is it taking to gain these advantages from its international activities?
ANSWER. GE is acquiring companies abroad, and setting up joint ventures with other foreign companies, to
gain their assets and ability to service local customers. It is setting up manufacturing facilities abroad to
access lower cost labor and materials and also sourcing more purchases abroad for the same reasons. It also
is identifying and hiring engineering and scientific talent from around the world to boost its intellectual
capital and is setting up R&D facilities where this talent can work.
3. What risks does GE face in its foreign operations?
ANSWER. Potential increased risks from global operations include, among other things, currency risks,
higher receivables delinquencies and bad debts, delays or cancellation of sales and orders, higher local
currency financing costs, and a slowdown in established financial services activities.
4. What profit opportunities for GE can arise out of these risks?
ANSWER. New profit opportunities for GE include, among other things, lower costs of goods sourced from
countries with weakened currencies, more opportunities for lower cost outsourcing, expansion of industrial
and financial services activities through purchases of companies or assets at reduced prices and lower U.S.
debt financing costs.
,SUGGESTED ANSWERS TO “THE DEBATE OVER OUTSOURCING”
1. What are the pros and cons of outsourcing?
ANSWER. PROS: Outsourcing allows Americans to buy services less expensively abroad, increases U.S.
productivity, and enables U.S. companies to cut their costs while improving quality, time-to-market, and
capacity to innovate. It also allows the United States to utilize its comparative advantage in financial,
managerial, and technical services by specializing in and exporting such services as higher-end computer
programming, management consulting, engineering, banking, telecommunications, and legal work.
CONS: As with any kind of trade, imports of services through outsourcing results in the loss of jobs for
Americans previously employed in providing those services. Outsourcing may also put out of business U.S.
companies that provide these services.
2. How does outsourcing affect U.S. consumers? U.S. producers?
ANSWER. As the answer to part a) points out, outsourcing allows companies to buy services less
expensively abroad. Competitive pressures force companies to pass these savings along to consumers in the
form of lower priced goods and services.
U.S. producers are able to boost productivity and cut costs while improving quality, time-to-market, and
capacity to innovate. As such, American companies are better able to compete. This competition, however,
forces companies to pass most of their savings from outsourcing through to their customers.
3. Longer term, what is the likely impact of outsourcing on American jobs?
ANSWER. The longer-term effect of outsourcing on U.S. jobs should be insignificant. Trade has little, if
anything, to do with the quantity of jobs in an economy but rather the nature and distribution of those jobs
in various occupations. Outsourcing should lead to higher average productivity of those jobs that
Americans work at and, hence, to higher wages and benefits.
4. Several states are contemplating legislation that would ban the outsourcing of government work to
foreign firms. What would be the likely consequences of such legislation?
ANSWER. Such legislation would result in less efficient and more expensive government. The end result
would be higher taxes or, if taxpayers balk, fewer government services.
SUGGESTED ANSWERS TO “ARCO CHEMICAL DEVELOPS A
WORLDWIDE STRATEGY”
,1. What was ARCO Chemical’s rationale for globalizing?
ANSWER. ARCO Chemical went global because its customers are now worldwide. For example, the
company's engineering resins are sold to the auto industry. In the past, that meant selling exclusively to
Detroit's Big Three in the U.S. market. Today, ARCO Chemical sells to Nissan, Toyota, Honda, Peugeot,
Renault, and Volkswagen in Japan, the United States, and Europe. It also deals with Ford and General
Motors in the United States and Europe. ARCO must be able to deliver a product anywhere in the world or
lose the business.
2. What advantages has ARCO Chemical realized from its global operations?
ANSWER. ARCO Chemical has been able to sell to customers worldwide, thereby expanding its sales.
Operating overseas also yields competitive intelligence, enabling ARCO to keep track of its competitors’
moves and figuring out how to counteract them.
3. What threats have arisen from ARCO Chemical’s globalizing efforts? What are some ways in which
ARCO Chemical has responded to these threats?
ANSWER. Global operations have exposed ARCO Chemical to increasingly stiff competition from abroad
in addition to its traditional U.S. competitors such as Dow Chemical. European companies have expanded
operations in America, and Japanese competitors also began to attack ARCO Chemical's business lines. In
response, ARCO Chemical set up production facilities around the world and entered into joint ventures and
strategic alliances, thereby gaining access to competitive and market intelligence.
4. How has globalization affected, and been affected by, industry consolidation?
ANSWER. Globalization has forced companies to take fuller advantage of economies of scale in order to be
more competitive, thereby resulting in greater industry consolidation worldwide. At the same time, industry
consolidation, by allowing companies to spread overhead, distribution and research and development costs
over a larger asset base, has enabled those companies in the consolidation vanguard to be lower-cost
producers and to be more competitive in foreign as well as domestic markets. To realize similar low costs,
competitors are forced to go overseas to spread their fixed costs over a larger sales volume.
SUGGESTED ANSWERS TO “DEMOCRATS TURN PROTECTIONIST”
1. What might explain the candidates’ and Democratic Party’s reversal of position on free trade? Which
, voting constituencies would be most likely to reject free trade? Why?
ANSWER. The Democratic Party is heavily reliant on union votes and money. And unions, particularly the
industrial unions that make up the core of the union movement is against free trade because it subjects their
members to competition from foreign labor embodied in foreign goods and services. The candidates
themselves are trying to appeal to the unions as they are among the best organized segment of the
Democratic Party and have the ability to turn out votes in primaries where few voters go to the polls. Given
the low turnout, a primary is often determined by the most committed voters, who are often union members
threatened with job losses from free trade.
2. What leverage do the trade unions have in persuading Al Gore and other Democratic candidates to pay
attention to their anti-free -trade position? Explain why these particular unions might be particularly
powerful.
ANSWER. The unions’ leverage stems from the fact that their membership is concentrated in six large
industrial states that are crucial swing states in presidential elections. Al Gore needs these states with their
large vote totals to win a national election. There are enough industrial union members in these six states
that they could tip a close race. If the union membership were dispersed throughout the United States, their
leverage would be greatly diminished since they couldn’t concentrate their votes to deliver key states.
3. What trade-offs do Al Gore and other Democrats face in accommodating labor? Explain.
ANSWER. If Al Gore gives in to protectionist sentiment to accommodate these industrial unions, he risks
losing states like California (Silicon Valley), Washington (Boeing), New York (Wall Street), and New
Jersey (pharmaceutical firms) that depend on foreign trade for their livelihood. For example, Gore has
made a particular push to gain money and votes from Silicon Valley, which is highly dependent on exports.
Pushing protectionist policies could lead to a backlash against Gore from Silicon Valley executives who
understand that foreign countries would likely retaliate against U.S. products. Moreover, a protectionist
stance could cost Gore farm state votes as well because farmers are highly dependent on exports. Gore also
has to be concerned that he will lose the votes of middle-of-the-road Democrats and independents if he is
viewed–as Walter Mondale was–as a tool of labor.
4. How can U.S. manufacturers compete with foreign producers? Are they doomed, as suggested by the
president of the United Steelworkers of America?. Explain.
ANSWER. The objective evidence shows that U.S. manufacturers can compete against foreign producers,
although not across the board. Rather, U.S. firms have a comparative advantage in a number of high
technology industries and industries where close coordination between customer and producer is key (such
as fashion design). In fact, U.S. industrial output is up but the number of manufacturing jobs has not risen;
it’s just that higher productivity means that companies don’t have to hire as many new workers to produce
the higher output. U.S. companies also have a comparative advantage in many service industries, such as
financial services, consulting, and telecommunications.
