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 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.
Thus, 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 say that a product in domestic market will go
through growth and then mature stages. At some point, the firm will attempt to
sale in other markets where the product could go through new growth stage
again.
3. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of
subsidiaries in foreign markets.
ANSWER: Because of imperfect markets, resources cannot be easily and freely
regain by the MNC. Thus, the MNC must sometimes go to the resources rather
than regain resources (such as land, labor, etc.).
b. If perfect markets existed, would wages, prices, and interest rates among
countries be more similar or less similar than under conditions of imperfect
markets? Why?
ANSWER: If perfect markets existed, resources would be more mobile and could
therefore be transferred to those countries more willing to pay a high price for
them. As this occurred, shortages of resources in any particular country would
be alleviated and the costs of such resources would be similar across countries
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. Many other factors such as access to
capital could also be relevant. 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 opinion on why the Internet may result in more international
business.
ANSWER: The Internet allows for easy and low-cost communication between
countries, so that firms could now develop contacts with potential customers
overseas by having a website. Many firms use their website to identify the
products that they sell, along with the prices for each product. This allows them
to easily advertise their products to potential importers anywhere in the world
without mailing brochures to various countries. In addition, they can add to their
product line and change prices by simply revising their website, so importers are
kept abreast of the exporter’s product information by monitoring the exporter’s
