InternationalFinancialManagement,10thEditionEUNChapter j
j 1-21
CHAPTER1 j
GLOBALIZATION ANDTHEMULTINATIONALFIRM j j
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
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QUESTIONS
1. Whyisitimportanttostudyinternationalfinancialmanagement?
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Answer: We are now living in a world where all the major economic functions, such as consumption,
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production, investment, and financing, are highly globalized.
j j j j j j j j It is thus essential for financial
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j managers tofully understand vital internationaldimensions of financialmanagement. This global shift
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j is in marked contrast to a situation that existed when the authors of this book were learning finance a
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few decades ago. At that time, most professors customarily (and safely, to some extent) ignored
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j international aspects of finance. This mode of operation has become untenable since then.
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2. Howisinternationalfinancialmanagementdifferent fromdomestic financialmanagement? j b j b
Answer: Therearethreemajordimensionsthatsetapartinternationalfinancefromdomestic finance.
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They are:
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1. foreignexchangeandpoliticalrisks,
2. marketimperfections,and j j
3. expandedopportunityset. j
3. Discussthemajortrendsthathaveprevailedininternationalbusinessduringthelasttwo
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j decades.
Answer: The2000sbroughtarapidintegrationofinternationalcapitalandfinancialmarkets. Impetus
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forglobalizedfinancialmarketsinitiallycamefromthegovernmentsofmajorcountriesthat hadbegunto
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deregulatetheirforeignexchangeandcapitalmarkets. Theeconomic
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,integrationandglobalizationthatbeganintheeightiesandninetiesarepickingupspeedinthe 2000s.
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Tradeliberalizationandeconomicintegrationcontinuedtoproceedatboththeregional andglobal
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levels.DespitesovereigndebtcrisisinEurope,moreEUmembercountrieshave adoptedthecommon
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currency,theeuro,thateffectivelybecamethesecondglobalcurrencyafter theU.S.dollar.Inthelastfew
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years,however,economicnationalismhasbeengainingsome popularity,asexemplifiedbytheBrexit
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decision oftheUnitedKingdom andtheso-called
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―America First‖ policies of the Trump Administration. Totheextent that economic nationalism is a
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j populist response to the global financial crisis and Great Recession, it may subside as the world
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economy continues to recover.
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4. Howisacountry‘seconomicwell-beingenhancedthroughfreeinternationaltradeingoods and
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j services?
Answer: AccordingtoDavidRicardo,withfreeinternationaltrade,itismutuallybeneficialfortwo
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j countriestoeachspecializeintheproductionofthegoodsthatitcanproducerelativelymost efficiently
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andthentradethosegoods. Bydoingso,thetwocountriescanincreasetheircombined production,
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whichallowsbothcountriestoconsumemoreofbothgoods.Thisargumentremains validevenifa
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countrycanproducebothgoodsmoreefficiently inabsolutetermsthantheother country.
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j Internationaltradeisnota‗zero-sum‘gameinwhichonecountrybenefitsattheexpense ofanother j j j j j j j j j j j j j j
country.Rather,internationaltradecouldbean‗increasing-sum‘gamefromwhichall playersbecome
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winners.
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5. Whatconsiderationsmight limit theextenttowhichthetheoryofcomparativeadvantageis
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j realistic?
Answer: Thetheoryofcomparativeadvantagewasoriginallyadvancedbythenineteenthcentury
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j economistDavidRicardoasanexplanationforwhynationstradewithoneanother.Thetheory claims
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thateconomicwell-beingisenhancedifeachcountryproduceswhatithasacomparative advantagein
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producingrelative to othercountries,and thentradeproducts.
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Underlyingthetheoryaretheassumptionsoffreetradebetweennationsandthatthefactorsof
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j production(labor,technologicalknow-how,andcapital)arerelativelyimmobile. Totheextentthat
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j theseassumptionsdonothold,thetheoryofcomparativeadvantagemaynotrealisticallydescribe
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j internationaltrade. Inaddition,freetradeproduceswinnersandlosersandifthelosersarenot j j j j j j j j j j j j j j j
j compensated,freetrademay faces political opposition from them. j j j j j j j j
6. Whataremultinationalcorporations(MNCs)andwhateconomicrolesdotheyplay?
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,Answer: Amultinationalcorporation(MNC)canbedefinedasabusinessfirmincorporatedinone j j j j j j j j j j j j j j
j countrythathasproductionandsalesoperationsinmanyothercountries.Indeed,someMNCs have
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operationsinafewdozensofdifferentcountries. MNCsobtainfinancingfrommajormoney centers
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aroundtheworldinmanydifferentcurrenciestofinancetheiroperations.Globaloperations forcethe
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treasurer‘sofficetoestablishinternationalbankingrelationships,toplaceshort-term fundsinseveral
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currencydenominations,andtoeffectivelymanageforeignexchangerisk. By circumventingand
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alsotakingadvantageofvariousmarketimperfections,suchasbarrierstotrade andbarrierstoflowof
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peopleandcapitalacrosscountries,MNCscontributetogreaterintegration oftheworldeconomyand
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ingmoreperfectfunctioningofglobalmarkets.
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7. RossPerot,aformerPresidentialcandidateoftheReformParty,whichwasathirdpolitical party
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j intheUnitedStates,hadstronglyobjectedtothecreationoftheNorthAmericanTrade Agreement
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(NAFTA),whichnonethelesswasinauguratedin1994.Perotfearedthelossof Americanjobsto
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Mexicowhereitismuchcheapertohireworkers.Whatarethemeritsand demeritsofPerot‘sposition
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onNAFTA?ConsideringtherecenteconomicdevelopmentsinNorth America, how would you
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assess Perot‘s position on NAFTA?
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Answer:SincetheinceptionofNAFTA,manyAmericancompaniesindeedhaveinvestedheavily in
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Mexico,sometimesrelocatingproductionfromtheUnitedStatestoMexico.Althoughthismight have
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temporarilycausedunemployment ofsomeAmericanworkers,theywereeventuallyrehired byother
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industriesoftenforhigherwages.Atthesametime,Mexicohasbeenexperiencinga majoreconomic
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boom.ItseemsclearthatbothMexicoandtheU.S.havebenefitedfromNAFTA. Perot‘s concern
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appears to have been ill founded.
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8. In1995,aworkinggroupofFrenchchiefexecutiveofficerswassetupbytheConfederationof
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j FrenchIndustry(CNPF)andtheFrenchAssociationofPrivateCompanies(AFEP)tostudythe
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j Frenchcorporategovernancestructure.Thegroupreportedthefollowing,amongotherthings:
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―TheboardofdirectorsshouldnotsimplyaimatmaximizingsharevaluesasintheU.K.andthe
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U.S.Rather,itsgoalshouldbetoservethecompany,whoseinterestsshouldbeclearly distinguished
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fromthoseofitsshareholders,employees,creditors,suppliersandclientsbutstill equatedwiththeir
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generalcommoninterest,whichistosafeguardtheprosperityandcontinuityof the company‖.Evaluate
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theaboverecommendation oftheworkinggroup.
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Answer:TherecommendationsoftheFrenchworkinggroupclearlyshowthatshareholder wealth
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maximizationisnotauniversallyacceptedgoalofcorporatemanagement,especially
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, outsidetheUnitedStatesandpossiblyafewotherAnglo-SaxoncountriesincludingtheUnited Kingdom
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andCanada.Tosomeextent,thismayreflectthefactthatshareownershipisnotwide spread in most
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other countries.
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9. Emphasizingtheimportanceofvoluntarycompliance, asopposedtoenforcement, inthe j j j j j j j j j j j
j aftermathofsuchcorporatescandalsasthoseinvolvingEnronandWorldCom,U.S.President
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j GeorgeW.Bushstatedthatwhiletougherlawsmighthelp,―ultimately,theethicsofAmerican j j j j j j j j j j j j j
j businessdependsontheconscienceofAmerica‘sbusinessleaders.‖ Describeyourviewonthis
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j statement.
Answer: There can be different answers to this question. If business leaders always behave with a high
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j ethical standard, many of the corporate scandals we have seen lately might not have happened.
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Since we cannot fully depend on the ethical behavior on the part of individual business leaders, the
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society should protect itself by adopting the rules/regulations and governance structure that would
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induce business leaders to behave in the interest of the society at large. But at the same time, we need to
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make sure that excessive regulations do not stymy free enterprises, an important engine of economic
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growth.Itisimportanttostriketherightbalance.
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10. SupposeyouareinterestedininvestinginsharesofSamsungElectronicsofKorea,which isa j j j j j j j j j j j j j j j
j worldleaderinmobilephones,TVs,andhomeappliances.Butbeforeyoumakeinvestment decision,
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youwouldliketolearnaboutthecompany.VisitthewebsiteofYahoo (http://finance.yahoo.com)and
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collect informationabout SamsungElectronics, including the recentstock pricehistoryandanalysts‘
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viewsofthecompany.Discusswhatyoulearnaboutthe company.Alsodiscusshowtheinstantaneous
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accesstoinformationviainternetwouldaffect the nature and workings of financial markets.
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Answer:Asstudentsmighthavelearnedfromvisitingthewebsite,informationisreadilyavailable even
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forforeigncompanieslikeSamsungElectronics.Readyaccesstointernationalinformation helps
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integratefinancialmarkets,dismantlingbarrierstointernationalinvestmentandfinancing. Integration,
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however,mayhelpafinancialshockinonemarkettobequicklytransmittedtoother markets.
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11. Most companies make corporate decisions to maximize their profits, without taking into
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consideration the possibly negative effects of corporate activities on the environments, thereby
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