Solution Mamual to Multinational Financial Management Chapter1
INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9TH ED.
SUGGESTED ANSWERS TO CHAPTER 1 QUESTIONS
1.a. What are the various categories of multinational firms? ANSWER. Raw materials seekers, market seekers, and cost minimizers. b. What is the motivation for international expansion of firms within each category?
ANSWER. The raw materials seekers go abroad to exploit the raw materials that can be found there. It just happens that nature didn't place all natural resources domestically. Market seekers go overseas to produce and sell in foreign markets. The cost minimizers invest in lower-cost production sites overseas in order to remain cost competitive both at home and abroad. In all cases, the firms involved recognize that the world is larger than the home country and provides opportunities to gain additional supplies, sell more products or find lower cost sources of production. 2.a. How does foreign competition limit the prices that domestic companies can charge and the wages and benefits that workers can demand? ANSWER. As domestic producers raise their prices, customers begin substituting less expensive goods and services supplied by foreign producers. The likelihood of losing sales limits the prices that domestic firms can charge. Foreign competition also acts to limit the wages and benefits that workers can demand. If workers demand more money, firms have two choices. Acquiesce in these demands or fight them. Absent foreign competition, the cost of acquiescence is relatively low, particularly if the industry is unionized. Since all firms will face the same higher costs, they can cover these higher costs by all of them simultaneously raising their prices without fear of being undercut or of being placed at a competitive disadvantage relative to their peers. Foreign competition changes the picture since foreign firms' costs will be unaffected by higher domestic wages and benefits. If domestic firms give in on wages and benefits, foreign firms will
SUGGESTED ANSWERS TO CHAPTER 1 QUESTIONS
1.a. What are the various categories of multinational firms? ANSWER. Raw materials seekers, market seekers, and cost minimizers. b. What is the motivation for international expansion of firms within each category?
ANSWER. The raw materials seekers go abroad to exploit the raw materials that can be found there. It just happens that nature didn't place all natural resources domestically. Market seekers go overseas to produce and sell in foreign markets. The cost minimizers invest in lower-cost production sites overseas in order to remain cost competitive both at home and abroad. In all cases, the firms involved recognize that the world is larger than the home country and provides opportunities to gain additional supplies, sell more products or find lower cost sources of production. 2.a. How does foreign competition limit the prices that domestic companies can charge and the wages and benefits that workers can demand? ANSWER. As domestic producers raise their prices, customers begin substituting less expensive goods and services supplied by foreign producers. The likelihood of losing sales limits the prices that domestic firms can charge. Foreign competition also acts to limit the wages and benefits that workers can demand. If workers demand more money, firms have two choices. Acquiesce in these demands or fight them. Absent foreign competition, the cost of acquiescence is relatively low, particularly if the industry is unionized. Since all firms will face the same higher costs, they can cover these higher costs by all of them simultaneously raising their prices without fear of being undercut or of being placed at a competitive disadvantage relative to their peers. Foreign competition changes the picture since foreign firms' costs will be unaffected by higher domestic wages and benefits. If domestic firms give in on wages and benefits, foreign firms will