CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM

SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS

QUESTIONS
1. Why is it important to study international financial management?
ns!er" We are no! li#ing in a !orld !here all the ma$or economic functions% i.e.%
consumption% production% and in#estment% are highly glo&ali'ed. It is thus essential for financial
managers to fully understand #ital international dimensions of financial management. This glo&al
shift is in mar(ed contrast to a situation that e)isted !hen the authors of this &oo( !ere learning
finance some t!enty years ago. t that time% most professors customarily *and safely% to some
e)tent+ ignored international aspects of finance. This mode of operation has &ecome untena&le
since then.
,. -o! is international financial management different from domestic financial management?
ns!er" There are three ma$or dimensions that set apart international finance from domestic
finance. They are"
1. foreign e)change and political ris(s%
,. mar(et imperfections% and
.. e)panded opportunity set.
.. /iscuss the three ma$or trends that ha#e pre#ailed in international &usiness during the last t!o
decades.
ns!er" The 1012s &rought a rapid integration of international capital and financial mar(ets.
Impetus for glo&ali'ed financial mar(ets initially came from the go#ernments of ma$or countries
that had &egun to deregulate their foreign e)change and capital mar(ets. The economic
integration and glo&ali'ation that &egan in the eighties is pic(ing up speed in the 1002s #ia
pri#ati'ation. 3ri#ati'ation is the process &y !hich a country di#ests itself of the o!nership and
operation of a &usiness #enture &y turning it o#er to the free mar(et system. 4astly% trade
li&erali'ation and economic integration continued to proceed at &oth the regional and glo&al
le#els.
5. -o! is a country6s economic !ell7&eing enhanced through free international trade in goods
and ser#ices?
ns!er" ccording to /a#id 8icardo% !ith free international trade% it is mutually &eneficial for
t!o countries to each speciali'e in the production of the goods that it can produce relatively most
efficiently and then trade those goods. 9y doing so% the t!o countries can increase their
com&ined production% !hich allo!s &oth countries to consume more of &oth goods. This
argument remains #alid e#en if a country can produce &oth goods more efficiently than the other
country. International trade is not a :'ero7sum6 game in !hich one country &enefits at the
e)pense of another country. 8ather% international trade could &e an :increasing7sum6 game at
!hich all players &ecome !inners.
;. What considerations might limit the e)tent to !hich the theory of comparati#e ad#antage is
realistic?
ns!er" The theory of comparati#e ad#antage !as originally ad#anced &y the nineteenth century
economist /a#id 8icardo as an e)planation for !hy nations trade !ith one another. The theory
claims that economic !ell7&eing is enhanced if each country6s citi'ens produce !hat they ha#e a
comparati#e ad#antage in producing relati#e to the citi'ens of other countries% and then trade
products. Underlying the theory are the assumptions of free trade &et!een nations and that the
factors of production *land% &uildings% la&or% technology% and capital+ are relati#ely immo&ile. To
the e)tent that these assumptions do not hold% the theory of comparati#e ad#antage !ill not
realistically descri&e international trade.
<. What are multinational corporations *=N>s+ and !hat economic roles do they play?
ns!er" multinational corporation *=N>+ can &e defined as a &usiness firm incorporated in
one country that has production and sales operations in se#eral other countries. Indeed% some
=N>s ha#e operations in do'ens of different countries. =N>s o&tain financing from ma$or
money centers around the !orld in many different currencies to finance their operations. ?lo&al
operations force the treasurer6s office to esta&lish international &an(ing relationships% to place
short7term funds in se#eral currency denominations% and to effecti#ely manage foreign e)change
ris(.
@. =r. 8oss 3erot% a former 3residential candidate of the 8eform 3arty% !hich is a third political
party in the United States% had strongly o&$ected to the creation of the North merican Trade
greement *NAT+% !hich nonetheless !as inaugurated in 1005% for the fear of losing
merican $o&s to =e)ico !here it is much cheaper to hire !or(ers. What are the merits and
demerits of =r. 3erot6s position on NAT? >onsidering the recent economic de#elopments in
North merica% ho! !ould you assess =r. 3erot6s position on NAT?
ns!er" Since the inception of NAT% many merican companies indeed ha#e in#ested hea#ily
in =e)ico% sometimes relocating production from the United States to =e)ico. lthough this
might ha#e temporarily caused unemployment of some merican !or(ers% they !ere e#entually
rehired &y other industries often for higher !ages. >urrently% the unemployment rate in the U.S.
is Buite lo! &y historical standard. t the same time% =e)ico has &een e)periencing a ma$or
economic &oom. It seems clear that &oth =e)ico and the U.S. ha#e &enefited from NAT. =r.
3erot6s concern appears to ha#e &een ill founded.
1. In 100;% a !or(ing group of Arench chief e)ecuti#e officers !as set up &y the >onfederation of
Arench Industry *>N3A+ and the Arench ssociation of 3ri#ate >ompanies *AE3+ to study the
Arench corporate go#ernance structure. The group reported the follo!ing% among other things
CThe &oard of directors should not simply aim at ma)imi'ing share #alues as in the U.D. and the
U.S. 8ather% its goal should &e to ser#e the company% !hose interests should &e clearly
distinguished from those of its shareholders% employees% creditors% suppliers and clients &ut still
eBuated !ith their general common interest% !hich is to safeguard the prosperity and continuity of
the companyE. E#aluate the a&o#e recommendation of the !or(ing group.
ns!er" The recommendations of the Arench !or(ing group clearly sho! that shareholder !ealth
ma)imi'ation is not a uni#ersally accepted goal of corporate management% especially outside the
United States and possi&ly a fe! other nglo7Sa)on countries including the United Dingdom and
>anada. To some e)tent% this may reflect the fact that share o!nership is not !ide spread in most
other countries. In Arance% a&out 1;F of households o!n shares.
0. Emphasi'ing the importance of #oluntary compliance% as opposed to enforcement% in the
aftermath of corporate scandals% e.g.% Enron and World>om% U.S. 3resident ?eorge W. 9ush
stated that !hile tougher la!s might help% Cultimately% the ethics of merican &usiness depends
on the conscience of merica6s &usiness leaders.E /escri&e your #ie! on this statement.
ns!er" There can &e different ans!ers to this Buestion. If &usiness leaders al!ays &eha#e !ith
a high ethical standard% many of the corporate scandals !e ha#e seen lately might not ha#e
happened. Since !e cannot fully depend on the ethical &eha#ior on the part of &usiness leaders%
the society should protect itself &y adopting the rulesGregulations and go#ernance structure that
!ould induce &usiness leaders to &eha#e in the interest of the society at large.
12. Suppose you are interested in in#esting in shares of No(ia >orporation of Ainland% !hich is a
!orld leader in !ireless communication. 9ut &efore you ma(e in#estment decision% you !ould
li(e to learn a&out the company. Hisit the !e&site of >NN Ainancial net!or( *!!!.cnnfn.com+
and collect information a&out No(ia% including the recent stoc( price history and analysts6 #ie!s
of the company. /iscuss !hat you learn a&out the company. lso discuss ho! the instantaneous
access to information #ia internet !ould affect the nature and !or(ings of financial mar(ets.
ns!er" s students might ha#e learned from #isiting the !e&site% information is readily
a#aila&le e#en for foreign companies li(e No(ia. 8eady access to international information helps
integrate financial mar(ets% dismantling &arriers to international in#estment and financing.
Integration% ho!e#er% may help a financial shoc( in one mar(et to &e transmitted to other
mar(ets.