978-0078021770 Chapter 15 Solution Manual

Suggested answers to case study discussion questions

CEMEX: A Model Multinational from an Unusual Place: CEMEX saw sufficient

internalization advantages to conclude that CEMEX wanted to own its operations in Spain,

Colombia, and the Philippines, rather than licensing local independent producers. Negotiating

such licenses probably would have been costly, and the local firms would try to make low

payments with few restrictions on how they use CEMEX’s operations technologies. The licensed

local firms could attempt to use the CEMEX technologies to grow and eventually to become

stronger rivals that could challenge CEMEX in other countries. The licensed local firms may not

guard secret aspects of the technologies as carefully as CEMEX does, so that the technologies

are more likely to leak to other cement firms who are not licensed by CEMEX. There are some

advantages to licensing local firms rather than undertaking direct investment into the country.

These include lower financial investment and avoiding the inherent disadvantages of being a

foreign firm operating in the country. CEMEX concluded that the internalization advantages—

avoiding the shortcomings of licensing by using ownership of the local operations to control and

safeguard the technologies and to receive all the profits earned on the local operations—were

larger.

Are Immigrants a Fiscal Burden?:These characteristics matter for the (current) fiscal effects of

the immigrants. Because they are young, immigrants will pay relatively large amounts of social

security taxes while drawing few social security (pension) benefits. Because they have low wage

rates, they will tend to pay low income taxes (and similar taxes like sales or value added taxes).

Because they are healthy (and young), they will tend to receive little medical care. Because they

have a large number of children, they will tend to make substantial use of public education (and

possibly also receive large amounts of family and child benefits). The net effect of all of these

characteristics could go either way. The immigrants bring a net fiscal benefit if their large social

security payments (and low pensions) and low medical care are dominant. They bring a net fiscal

cost if their low income (and similar) taxes and their large use of education (and other family and

child benefits) are dominant.

Suggested answers to end of chapter questions and problems

1. Disagree. Most FDI is in industrialized countries, especially the United

States and Europe. Wages are not low in these countries. This FDI

2. Disagree. Industrialized countries do have large amounts of financial capital that they

want to invest. Even if they want to invest part of this capital in other countries, this does

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3. Agree. One exposure is to exchange-rate risk. The home-currency value

of the assets of foreign a)liates will vary as exchange rates vary. If

foreign-currency borrowings and other liabilities are used to +nance the

4. We can guess that there are two possible types of reasons. One is that Japan is not

attractive as a host country, based on its economic and business characteristics. The

second is that Japanese government policy artificially limits FDI into Japan. First, the low

level of FDI into Japan could be the result of economic and business conditions. Foreign

5. There are inherent disadvantages of FDI arising from lack of knowledge

about local customs, practices, laws, and policies and from the costs of

managing across borders. Therefore, +rms that undertake FDI

successfully generally have some +rm-speci+c advantages that allow

them to compete successfully with local +rms in the host country.

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6. a. Not FDI, assuming that the U.S. investor ends up owning less than 10 percent of the

b. FDI. A flow of lending to a foreign affiliate that is more than 10 percent owned by the

c. FDI. Additional purchases of ownership of a foreign company by the U.S. investor that

d. The $100,000 is FDI, because the Brazilian affiliate is owned by the U.S. firm. The loan

7. a. To maximize global after-tax pro+t, the controller should try to show as

much pro+t as possible in Ireland and as little pro+t as possible in Japan,

because Ireland’s tax rate of 15 percent is lower than Japan’s tax rate of

40 percent. If possible, the controller should choose the third

b. Ireland’s government may be pleased with this change in transfer

price. More pro+ts are shown in the country, so its tax revenues are

8. Labor groups seek restrictions on the flow of direct investment out of the United States

because outward FDI tends to lower labor income. The income reduction may occur for

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9. Key points that should be included in the report:

(1)FDI brings new technologies into the country.

(2)FDI brings new managerial practices into the country.

10. Agree or disagree, depending on whether you think the

import-reducing e:ects or the import-increasing e:ects are larger. As

Chinese companies expand their FDI into the United States, the

growing operations of Chinese companies in the United States are

likely to have several e:ects on U.S. imports from China. On the one

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11. First, in 1924, the United States passed a law that severely restricted

immigration, using a system of quotas by national origin. Second, the

12. Agree. For the sending country, the basic economic analysis indicates

that local employers lose more than the remaining workers gain. In

addition, it is likely that the sending country government loses more in

13. a. A rise in labor demand in the North.

14. The reduction in the annualized cost of migration would lead to more migration (the

number of migrants would be greater than 20 million). In the new equilibrium, with a

15. The migrants don’t gain the full Southern wage markup from $2.00 to

$3.20 because some of their extra labor was supplied only at a

marginal cost of their own time that rose from $2.00 to $3.20. That’s

shown in Figure 15.4 by the fact that the curve Sr+Smig leans further out

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16. This statement is probably false. The migrants do improve their economic well-being.

But once they leave they are no longer part of the sending country. The sending country

can lose in two ways. First, analysis of the labor-market effects of emigration indicates

17. Here are several arguments. First, standard economic analysis shows

that there are net economic gains to the Japanese economy, even if the

gains to the immigrants are not counted. Japanese employers gain from

access to a larger pool of workers, and these gains are larger than any

losses to Japanese workers who must compete with the new immigrants

(see Figure 15.4). Second, some of the immigrants will take on work that

18. Here are several arguments. First, Japan is already a crowded place, with many Japanese

living in densely populated metropolitan areas (especially Tokyo). Allowing more

immigrants will add to the external costs of congestion, because most immigrants will

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19. The greatest net contributors were probably (b) electrical engineers

arriving around 1990, whose high average salaries made them pay a lot

of U.S. taxes and draw few government bene+ts. As for who contributed

least, one could make a case for either (a) the political refugees or (c)

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