International Financial Management: Key Answers
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 managers act in the best interest of the owners. b. Why might agency costs be larger for an MNC than for a purely domestic firm? ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems. 2. Comparative Advantage. a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international 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 capitalize on its perceived advantages in markets other than where it was initially established. 5. International Opportunities Due to the Internet. a. What factors cause some firms to become more internationalized than others? ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception of international business will influence the degree to which a firm becomes internationalized.Several other factors such as access to capital could also be relevant here. Firms that are labor-intensive could more easily capitalize on low-wage countries while firms that rely on technological advances could not. b. Offer your
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 managers act in the best interest of the owners. b. Why might agency costs be larger for an MNC than for a purely domestic firm? ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems. 2. Comparative Advantage. a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international 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 capitalize on its perceived advantages in markets other than where it was initially established. 5. International Opportunities Due to the Internet. a. What factors cause some firms to become more internationalized than others? ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception of international business will influence the degree to which a firm becomes internationalized.Several other factors such as access to capital could also be relevant here. Firms that are labor-intensive could more easily capitalize on low-wage countries while firms that rely on technological advances could not. b. Offer your