CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
QUESTIONS
1. Why is it important to study international financial management?
Answer: We are now living in a world where all the major economic functions, i.e.,
consumption, production, and investment, are highly globalized. It is thus essential for financial
managers to fully understand vital international dimensions of financial management. This
2. How is international financial management different from domestic financial management?
Answer: There are three major dimensions that set apart international finance from domestic
finance. They are:
1. foreign exchange and political risks,
3. Discuss the major trends that have prevailed in international business during the last two
decades.
Answer: The 1990s brought a rapid integration of international capital and financial markets.
Impetus for globalized financial markets initially came from the governments of major countries
that had begun to deregulate their foreign exchange and capital markets. The economic
integration and globalization that began in the eighties is picking up speed in the 1990s via
4. How is a country’s economic well-being enhanced through free international trade in goods
and services?
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for
two countries to each specialize in the production of the goods that it can produce relatively
most efficiently and then trade those goods. By doing so, the two countries can increase their
combined production, which allows both countries to consume more of both goods. This
5. What considerations might limit the extent to which the theory of comparative advantage is
realistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth
century economist David Ricardo as an explanation for why nations trade with one another. The
theory claims that economic well-being is enhanced if each country’s citizens produce what they
have a comparative advantage in producing relative to the citizens of other countries, and then
6. What are multinational corporations (MNCs) and what economic roles do they play?
Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in
one country that has production and sales operations in many other countries. Indeed, some
MNCs have operations in dozens of different countries. MNCs obtain financing from major
money centers around the world in many different currencies to finance their operations. Global
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
party in the United States, had strongly objected to the creation of the North American Trade
Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of
American jobs to Mexico where it is much cheaper to hire workers. What are the merits and
demerits of Perot’s position on NAFTA? Considering the recent economic developments in
North America, how would you assess Perot’s position on NAFTA?
Answer: Since the inception of NAFTA, many American companies indeed have invested
heavily in Mexico, sometimes relocating production from the United States to Mexico. Although
this might have temporarily caused unemployment of some American workers, they were
8. In 1995, a working group of French chief executive officers was set up by the Confederation
of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study
the French corporate governance structure. The group reported the following, among other
things: “The board of directors should not simply aim at maximizing share values as in the U.K.
and the U.S. Rather, its goal should be to serve the company, whose interests should be clearly
distinguished from those of its shareholders, employees, creditors, suppliers and clients but still
equated with their general common interest, which is to safeguard the prosperity and continuity
of the company”. Evaluate the above recommendation of the working group.
Answer: The recommendations of the French working group clearly show that shareholder
wealth maximization is not a universally accepted goal of corporate management, especially
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the
aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President
George W. Bush stated that while tougher laws might help, “ultimately, the ethics of American
business depends on the conscience of America’s business leaders.” Describe your view on
this statement.
Answer: There can be different answers to this question. If business leaders always behave
with a high ethical standard, many of the corporate scandals we have seen lately might not have
happened. Since we cannot fully depend on the ethical behavior on the part of individual
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is
a world leader in mobile phones, TVs, and home appliances. But before you make investment
decision, you would like to learn about the company. Visit the website of Yahoo
(http://finance.yahoo.com) and collect information about Samsung Electronics, including the
recent stock price history and analysts’ views of the company. Discuss what you learn about the
company. Also discuss how the instantaneous access to information via internet would affect the
nature and workings of financial markets.
Answer: As students might have learned from visiting the website, information is readily
available even for foreign companies like Samsung Electronics. Ready access to international
MINI CASE: NIKE AND SWEATSHOP LABOR
Nike, a company headquartered in Beaverton, Oregon, is a major force in the sports
footwear and fashion industry, with annual sales exceeding $ 12 billion, more than half of which
now come from outside the United States. The company was co-founded in 1964 by Phil Knight,
Nike has no production facilities in the United States. Rather, the company manufactures
athletic shoes and garments in such Asian countries as China, Indonesia, and Vietnam using
subcontractors, and sells the products in the U.S. and international markets. In each of those
Asian countries where Nike has production facilities, the rates of unemployment and under-
employment are relatively high. The wage rate is very low in those countries by U.S. standards
Initially, Nike denied the sweatshop charges and lashed out at critics. But later, the
company began monitoring the labor practice at its overseas factories and grading the factories
Discussion points
1. Do you think the criticism of Nike is fair, considering that the host countries are in dire
needs of creating jobs?
2. What do you think Nike’s executives might have done differently to prevent the
sensitive charges of sweatshop labor in overseas factories?
3. Do firms need to consider the so-called corporate social responsibilities in making
investment decisions?
Suggested Solution to Nike and Sweatshop Labor
Obviously, Nike’s investments in such Asian countries as China, Indonesia, and Vietnam
were motivated to take advantage of low labor costs in those countries. While Nike was
criticized for the poor working conditions for its workers, the company has recognized the
problem and has substantially improved the working environments recently. Although Nike’s
workers get paid very low wages by the Western standard, they probably are making
APPENDIX 1A. GAIN FROM TRADE: THE THEORY OF COMPARATIVE ADVANTAGE
PROBLEMS
1. Country C can produce seven pounds of food or four yards of textiles per unit of input.
Compute the opportunity cost of producing food instead of textiles. Similarly, compute the
opportunity cost of producing textiles instead of food.
Solution: The opportunity cost of producing food instead of textiles is one yard of textiles per
2. Consider the no-trade input/output situation presented in the following table for Countries X
INPUT/OUTPUT WITHOUT TRADE
_______________________________________________________________________
Country
X Y Total
________________________________________________________________________
I. Units of Input (000,000)
_______________________ ______________________________
________________________________________________________________________
II. Output per Unit of Input (lbs or yards)
____________________________________________________
________________________________________________________________________
III. Total Output (lbs or yards) (000,000)
____________________________________________________
________________________________________________________________________
IV. Consumption (lbs or yards) (000,000)
___________________________________________________
________________________________________________________________________
Solution:
Examination of the no-trade input/output table indicates that Country X has an absolute
advantage in the production of food and textiles. Country X can “trade off” one unit of
production needed to produce 17 pounds of food for five yards of textiles. Thus, a yard of
textiles has an opportunity cost of 17/5 = 3.40 pounds of food, or a pound of food has an
opportunity cost of 5/17 = .29 yards of textiles. Analogously, Country Y has an opportunity cost
When there are no restrictions or impediments to free trade the economic-well being of
the citizens of both countries is enhanced through trade. Suppose that Country X shifts
20,000,000 units from the production of textiles to the production of food where it has a
comparative advantage and that Country Y shifts 60,000,000 units from the production of food
to the production of textiles where it has a comparative advantage. Total output will now be
(90,000,000 x 17 =) 1,530,000,000 pounds of food and [(20,000,000 x 5 =100,000,000) +
INPUT/OUTPUT WITH FREE TRADE
__________________________________________________________________________
Country
X Y Total
__________________________________________________________________________
I. Units of Input (000,000)
_______________________________________________________
__________________________________________________________________________
II. Output per Unit of Input (lbs or yards)
______________________________________________________
__________________________________________________________________________
III. Total Output (lbs or yards) (000,000)
_____________________________________________________
__________________________________________________________________________
IV. Consumption (lbs or yards) (000,000)
_____________________________________________________
__________________________________________________________________________