Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 1
MULTINATIONAL FINANCIAL MANAGEMENT:
OPPORTUNITIES AND CHALLENGES
ALL CHAPTERS
1. Globalization Risks for MNEs. Was globalization responsible for the slowdown of MNE business
during the financial crisis of 2008?
In today’s global economy, the process that integrates world trade, links financial markets, and
propels cross-border capital flows is called financial globalization. In our globalized world, €4–5
trillion in foreign exchange transactions are made daily, and around €20 trillion of goods and services
are traded globally. As much as financial globalization has produced many opportunities for MNEs, it
has also introduced new threats. Irresponsible bank lending and credit excesses led to failures of
highly leveraged banks and large businesses. The bust credit and sharp economic downturn rapidly
spread from the United States and Europe to the rest of the world. Consequently, global purchasing
power and consumer confidence dropped round the world, severely impacting sales revenues. MNEs
were especially hit, not only because their global sales dropped, but also because much of their excess
funds were invested in risky assets.
2. MNEs and Operation in Global Markets. What are the factors that affect the decisions of
multinational enterprises to operate in global markets?
The main determining factor for operating in a new market is the comparative advantage in terms of
cost and rate of productivity of factors of production, better regulations, lower taxation,
protectionist trade barriers, stable foreign exchange, and larger markets. Other factors that
incentivize foreign investors are savings on transportation costs and the need to regularly adapt to
changing local demand.
3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a
Eurocurrency market?
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 2
A eurocurrency is a freely tradable foreign currency deposited in a domestic bank of a nation that is
not the native country issuing this currency. The main eurocurrencies are the US dollar, the euro, the
British pound, and the Japanese yen. A eurocurrency market is a money market where financial
institutions provide banking services to a variety of individual, corporate, and sovereign customers in
eurocurrencies.
4. Fragility of the Global Financial Marketplace. How has the global financial crisis exposed the fragility
of assets and institutions of the global system?
In the interlocked financial global system, the fragility of assets and institutions led to the eruption of
the global financial sector. High risk assets such as derivatives were traded. While initially generated
to hedge against risks and create liquidity, many of these derivatives were multi-tiered and highly
opaque, making it difficult to assess the inherent risks associated with them. The institutional
framework for deregulation and lapse supervision left many financial institutions and instruments
unregulated. Moreover, the lack of a global regulatory framework left interbank transactions highly
unsupervised. All of these factors—ranging from irresponsible issuance and trading in high risk
assets, poor domestic supervision, and the lack of global regulation of interbank transactions—
exposed the fragility of the global financial framework when the global financial crisis erupted.
5. MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue eurobonds with a floating
coupon rate tied to the LIBOR. Explain how MNEs were affected by the LIBOR scandal.
A few large banks were fined and penalized for rigging the benchmark LIBOR rate. While large banks
borrowed funds (as was the case during the global financial crisis), they made their quotes below the
fair market rate. Regulators often assumed that banks were also trying to benefit their corporate
customers, allowing MNEs to issue new eurobonds at lower rates, hence substantially reducing the
purchasing power of those holding their bonds.
6. Post-LIBOR Scandal. Why do you think the UK government has resolved against the total elimination
of LIBOR benchmarks after the scandal?
The London Interbank Offered Rate (LIBOR) is widely used as a benchmark interest rate for hundreds
of billions of dollars in financial contracts, corporate loans, and adjustable rate home mortgages and
consumer loans. In 2012, the LIBOR scandal was exposed, revealing collusion between and
inaccurate interest rate quotes by a dozen large British banks, some of which fraudulently reported
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 3
their short-term borrowing costs so as to profit from deals. Following the LIBOR scandal, many have
called for the total elimination of LIBOR. However, as it remains the one and only pervasive interest
rate benchmark, the British government decided against abandoning it and resolved to take
measures to save and reform it. The number of LIBOR quotes would drop from 150 to the 20 most
important ones. Among the currencies to be phased out are the Australian dollar, Canadian dollar,
New Zealand dollar, Danish kroner, and Swedish kroner. Moreover, four of the longer-term maturities
would be eliminated. Additionally, all reporting banks are required to submit documentation proving
the sources of the rates they are quoting. However, the caveat is that many of the rates would
remain unsupported by actual interbank transactions, raising doubts about the accuracy of longer-
term LIBOR quotes.
7. Limitations of Comparative Advantage. Key to understanding most theories is what they say and
what they don’t. Name four or five key limitations to the theory of comparative advantage.
Although international trade might have approached the comparative advantage model during the
nineteenth century, it certainly does not today, for the following reasons:
▪ Countries do not appear to specialize only in those products that could be most efficiently
produced by that country’s particular factors of production. Instead, governments interfere with
comparative advantage for a variety of economic and political reasons, such as to achieve full
employment, economic development, national self-sufficiency in defense-related industries, and
protection of an agricultural sector’s way of life. Government interference takes the form of
tariffs, quotas, and other non-tariff restrictions.
▪ At least two of the factors of production, capital and technology, now flow directly and easily
between countries, rather than only indirectly through traded goods and services. This direct flow
occurs between related subsidiaries and affiliates of multinational firms, as well as between
unrelated firms via loans and license and management contracts. Even labor flows between
countries, such as immigrants into the United States (legal and illegal), immigrants within the
European Union and other unions.
▪ Modern factors of production are more numerous than in this simple model. Factors considered in
the location of production facilities worldwide include local and managerial skills, a dependable
legal structure for settling contract disputes, research and development competence, educational
levels of available workers, energy resources, consumer demand for brand name goods, mineral
and raw material availability, access to capital, tax differentials, supporting infrastructure (roads,
ports, communication facilities), and possibly others.
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 4
▪ Although the terms of trade are ultimately determined by supply and demand, the process by
which the terms are set is different from that visualized in traditional trade theory. They are
determined partly by administered pricing in oligopolistic markets.
▪ Comparative advantage shifts over time as less developed countries become more developed and
realize their latent opportunities. For example, during the past 150 years, comparative advantage
in producing cotton textiles has shifted from the United Kingdom to the United States to Japan to
Hong Kong to Taiwan and to China.
▪ The classical model of comparative advantage did not really address certain other issues, such as
the effect of uncertainty and information costs, the role of differentiated products in imperfectly
competitive markets, and economies of scale.
Nevertheless, although the world is a long way from the classical trade model, the general principle
of comparative advantage is still valid. The closer the world gets to true international specialization,
the more world production and consumption can be increased, provided the problem of equitable
distribution of the benefits can be solved to the satisfaction of consumers, producers, and political
leaders. Complete specialization, however, remains an unrealistic limiting case, just as perfect
competition is a limiting case in microeconomic theory.
8. Comparative Advantage in the Twenty-First Century. With reference to the theory of comparative
advantage, explain how MNEs outsource some services to emerging market economies.
The theory of comparative advantage explains that specific firms or nations may, in comparison to
others, have an advantage in producing a particular good or service at a lower relative opportunity
cost. This advantage may arise due to differences in factor endowments, technological progress,
favorable real exchange rate, protectionism, import controls, etc. Some emerging market economies
have shown comparative advantage in the production of low-cost manufactured tangible
commodities, hence attracting MNEs’ capital inflows. But in the more developed emerging nations
that allocate substantial funds to research and innovation, such as India and Malaysia, trade in
services has increased five-fold over the last five decades. Accordingly, MNEs have stepped into
these nations in order to manufacture high-value and high-tech manufactured goods, and provide IT-
knowledge services.
9. Ganado’s Globalization. After reading the chapter’s description of Ganado’s globalization process,
how would you explain the distinctions between international, multinational, and global companies?
MULTINATIONAL FINANCIAL MANAGEMENT:
OPPORTUNITIES AND CHALLENGES
ALL CHAPTERS
1. Globalization Risks for MNEs. Was globalization responsible for the slowdown of MNE business
during the financial crisis of 2008?
In today’s global economy, the process that integrates world trade, links financial markets, and
propels cross-border capital flows is called financial globalization. In our globalized world, €4–5
trillion in foreign exchange transactions are made daily, and around €20 trillion of goods and services
are traded globally. As much as financial globalization has produced many opportunities for MNEs, it
has also introduced new threats. Irresponsible bank lending and credit excesses led to failures of
highly leveraged banks and large businesses. The bust credit and sharp economic downturn rapidly
spread from the United States and Europe to the rest of the world. Consequently, global purchasing
power and consumer confidence dropped round the world, severely impacting sales revenues. MNEs
were especially hit, not only because their global sales dropped, but also because much of their excess
funds were invested in risky assets.
2. MNEs and Operation in Global Markets. What are the factors that affect the decisions of
multinational enterprises to operate in global markets?
The main determining factor for operating in a new market is the comparative advantage in terms of
cost and rate of productivity of factors of production, better regulations, lower taxation,
protectionist trade barriers, stable foreign exchange, and larger markets. Other factors that
incentivize foreign investors are savings on transportation costs and the need to regularly adapt to
changing local demand.
3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a
Eurocurrency market?
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 2
A eurocurrency is a freely tradable foreign currency deposited in a domestic bank of a nation that is
not the native country issuing this currency. The main eurocurrencies are the US dollar, the euro, the
British pound, and the Japanese yen. A eurocurrency market is a money market where financial
institutions provide banking services to a variety of individual, corporate, and sovereign customers in
eurocurrencies.
4. Fragility of the Global Financial Marketplace. How has the global financial crisis exposed the fragility
of assets and institutions of the global system?
In the interlocked financial global system, the fragility of assets and institutions led to the eruption of
the global financial sector. High risk assets such as derivatives were traded. While initially generated
to hedge against risks and create liquidity, many of these derivatives were multi-tiered and highly
opaque, making it difficult to assess the inherent risks associated with them. The institutional
framework for deregulation and lapse supervision left many financial institutions and instruments
unregulated. Moreover, the lack of a global regulatory framework left interbank transactions highly
unsupervised. All of these factors—ranging from irresponsible issuance and trading in high risk
assets, poor domestic supervision, and the lack of global regulation of interbank transactions—
exposed the fragility of the global financial framework when the global financial crisis erupted.
5. MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue eurobonds with a floating
coupon rate tied to the LIBOR. Explain how MNEs were affected by the LIBOR scandal.
A few large banks were fined and penalized for rigging the benchmark LIBOR rate. While large banks
borrowed funds (as was the case during the global financial crisis), they made their quotes below the
fair market rate. Regulators often assumed that banks were also trying to benefit their corporate
customers, allowing MNEs to issue new eurobonds at lower rates, hence substantially reducing the
purchasing power of those holding their bonds.
6. Post-LIBOR Scandal. Why do you think the UK government has resolved against the total elimination
of LIBOR benchmarks after the scandal?
The London Interbank Offered Rate (LIBOR) is widely used as a benchmark interest rate for hundreds
of billions of dollars in financial contracts, corporate loans, and adjustable rate home mortgages and
consumer loans. In 2012, the LIBOR scandal was exposed, revealing collusion between and
inaccurate interest rate quotes by a dozen large British banks, some of which fraudulently reported
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 3
their short-term borrowing costs so as to profit from deals. Following the LIBOR scandal, many have
called for the total elimination of LIBOR. However, as it remains the one and only pervasive interest
rate benchmark, the British government decided against abandoning it and resolved to take
measures to save and reform it. The number of LIBOR quotes would drop from 150 to the 20 most
important ones. Among the currencies to be phased out are the Australian dollar, Canadian dollar,
New Zealand dollar, Danish kroner, and Swedish kroner. Moreover, four of the longer-term maturities
would be eliminated. Additionally, all reporting banks are required to submit documentation proving
the sources of the rates they are quoting. However, the caveat is that many of the rates would
remain unsupported by actual interbank transactions, raising doubts about the accuracy of longer-
term LIBOR quotes.
7. Limitations of Comparative Advantage. Key to understanding most theories is what they say and
what they don’t. Name four or five key limitations to the theory of comparative advantage.
Although international trade might have approached the comparative advantage model during the
nineteenth century, it certainly does not today, for the following reasons:
▪ Countries do not appear to specialize only in those products that could be most efficiently
produced by that country’s particular factors of production. Instead, governments interfere with
comparative advantage for a variety of economic and political reasons, such as to achieve full
employment, economic development, national self-sufficiency in defense-related industries, and
protection of an agricultural sector’s way of life. Government interference takes the form of
tariffs, quotas, and other non-tariff restrictions.
▪ At least two of the factors of production, capital and technology, now flow directly and easily
between countries, rather than only indirectly through traded goods and services. This direct flow
occurs between related subsidiaries and affiliates of multinational firms, as well as between
unrelated firms via loans and license and management contracts. Even labor flows between
countries, such as immigrants into the United States (legal and illegal), immigrants within the
European Union and other unions.
▪ Modern factors of production are more numerous than in this simple model. Factors considered in
the location of production facilities worldwide include local and managerial skills, a dependable
legal structure for settling contract disputes, research and development competence, educational
levels of available workers, energy resources, consumer demand for brand name goods, mineral
and raw material availability, access to capital, tax differentials, supporting infrastructure (roads,
ports, communication facilities), and possibly others.
, Chapter 1 Multinational Financial Management: Opportunities and Challenges ▪ 4
▪ Although the terms of trade are ultimately determined by supply and demand, the process by
which the terms are set is different from that visualized in traditional trade theory. They are
determined partly by administered pricing in oligopolistic markets.
▪ Comparative advantage shifts over time as less developed countries become more developed and
realize their latent opportunities. For example, during the past 150 years, comparative advantage
in producing cotton textiles has shifted from the United Kingdom to the United States to Japan to
Hong Kong to Taiwan and to China.
▪ The classical model of comparative advantage did not really address certain other issues, such as
the effect of uncertainty and information costs, the role of differentiated products in imperfectly
competitive markets, and economies of scale.
Nevertheless, although the world is a long way from the classical trade model, the general principle
of comparative advantage is still valid. The closer the world gets to true international specialization,
the more world production and consumption can be increased, provided the problem of equitable
distribution of the benefits can be solved to the satisfaction of consumers, producers, and political
leaders. Complete specialization, however, remains an unrealistic limiting case, just as perfect
competition is a limiting case in microeconomic theory.
8. Comparative Advantage in the Twenty-First Century. With reference to the theory of comparative
advantage, explain how MNEs outsource some services to emerging market economies.
The theory of comparative advantage explains that specific firms or nations may, in comparison to
others, have an advantage in producing a particular good or service at a lower relative opportunity
cost. This advantage may arise due to differences in factor endowments, technological progress,
favorable real exchange rate, protectionism, import controls, etc. Some emerging market economies
have shown comparative advantage in the production of low-cost manufactured tangible
commodities, hence attracting MNEs’ capital inflows. But in the more developed emerging nations
that allocate substantial funds to research and innovation, such as India and Malaysia, trade in
services has increased five-fold over the last five decades. Accordingly, MNEs have stepped into
these nations in order to manufacture high-value and high-tech manufactured goods, and provide IT-
knowledge services.
9. Ganado’s Globalization. After reading the chapter’s description of Ganado’s globalization process,
how would you explain the distinctions between international, multinational, and global companies?
