International Finance Chapter 1

Eva Diaz

Chapter 1 Questions and applications

#1,2,3,5,6,7,10,15,16

1.

a. Some of the agency problems encountered with the MNC come with the conflict of goals between a firm's managers and shareholders when making decisions. Agency costs are larger for an MNC than for a purely domestic firm because managers of foreign subsidiaries may be tempted to focus on making decisions to serve their subsidiaries rather than the overall MNC.

b. MNC's with subsidiaries scattered around the world may experience more agency costs because it is much more difficult to monitor managers in foreign countries, foreign subsidiaries may not follow the same uniform goals, the size of the subsidiaries themselves leads to more conflicts, as well as the beliefs that employees should come first in decision making prior to shareholders.

2.

a. Explain how the theory of comparative advantage relates to the need for international business. The theory of comparative advantage relates to the need for international business because it suggests that each country should use its comparative advantage to specialize in its production and rely on other countries to meet other needs. Therefore all countries would need to trade with each other competitively for the products they are not able to produce.

b. Explain how the product cycle theory relates to the growth of the MNC. The product cycle theory suggests that after firms are established in their home countries, they commonly expand their product specialization in foreign countries. This would therefore lead to the growth of the MNC.

3.

a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets. The existence of imperfect markets has led to the establishment of subsidiaries in foreign markets because due to the cost of transferring labor and other resources used for productions, firms are use foreign factors of production when the costs are less then local factors.

b. If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar then under conditions of imperfect markets? Why? If perfect markets existed, wages, prices, and interest rates among countries would be more similar because this would remove the comparative cost advantage and rationale for international trade and investment.

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5.

a. What Factors cause some firms to become more internationalized than others?

The operating characteristics of the firm and the risk perception of international business will influence the degree to which a firm becomes internationalized.

b. Offer your opinion on why the internet may result in more international trade.

The internet allows for easy and low cost communication between different countries. This allows firms to now have contact with potential customers overseas by simply creating a webpage. The webpage can display all products and services that they have available and this makes it much easier to buy and sell things overseas. The cost is significantly lower because you do not have to print brochures or postcards and pay any mailing rates to put your product out all over the world.

6. IMPACT OF EXCHANGE RATE MOVEMENTS - Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro would affect Plak's valuation.

Plak's