International Finance-Ch.1
1. Agency Problems of MNCs
a. Explain the agency problem of MNCs.
a. MNC tend to experience greater agency problems than domestic firms because managers of foreign subsidiaries might be tempted to focus on making decisions to serve their subsidiaries rather than serving the overall MNC. Proper incentives and communication from the parent may help to ensure that subsidiary mangers focus on serving the overall MNC.
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
a. International business is the most common method firms conduct business. MNCs incur large 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 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.
i. It suggests that each country should use it’s 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 that they are not able to produce.
b. Explain how the product cycle theory relates to the growth of an MNC.
i. The product cycle suggests that after firms are established in their home countries, they commonly expand their product specialization in foreign countries, leading to the growth of the MNC.
3. Imperfect Markets
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
i. Establishment of subsidiaries in foreign markets was due to the cost of transferring labor and other resources used for production and the cost of production in foreign factories being significantly less than local factories.
b. If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar
a. Explain the agency problem of MNCs.
a. MNC tend to experience greater agency problems than domestic firms because managers of foreign subsidiaries might be tempted to focus on making decisions to serve their subsidiaries rather than serving the overall MNC. Proper incentives and communication from the parent may help to ensure that subsidiary mangers focus on serving the overall MNC.
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
a. International business is the most common method firms conduct business. MNCs incur large 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 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.
i. It suggests that each country should use it’s 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 that they are not able to produce.
b. Explain how the product cycle theory relates to the growth of an MNC.
i. The product cycle suggests that after firms are established in their home countries, they commonly expand their product specialization in foreign countries, leading to the growth of the MNC.
3. Imperfect Markets
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
i. Establishment of subsidiaries in foreign markets was due to the cost of transferring labor and other resources used for production and the cost of production in foreign factories being significantly less than local factories.
b. If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar