CHAPTER 1
MULTINATIONAL FINANCIAL MANAGEMENT:
OPPORTUNITIES AND CHALLENGES
1. Globalization Risks in Business. What are some of the risks that come with the growing
globalization of business?
2. Globalization and the MNE. The term globalization has become widely used in recent years. How
would you define it?
3. Assets, Institutions, and Linkages. Which assets play the most critical role in linking the major
institutions that make up the global financial marketplace?
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securities—derivatives, whose value is based on market value changes in the underlying securities.
The health and security of the global financial system relies on the quality of these assets.
4. Currencies and Symbols. What technological change is even changing the symbols we use in the
representation of different country currencies?
5. Eurocurrencies and LIBOR. Why have eurocurrencies and LIBOR remained the centerpiece of the
global financial marketplace for so long?
6. Theory of Comparative Advantage. Define and explain the theory of comparative advantage.
7. Limitations of Comparative Advantage. Key to understanding most theories is what they say and
what they don’t. Name four or five key limitations to the theory of comparative advantage.
Chapter 1 Multinational Financial Management: Opportunities and Challenges 3
© 2016 Pearson Education, Inc.
protection of an agricultural sector’s way of life. Government interference takes the form of
tariffs, quotas, and other non-tariff restrictions.
At least two of the factors of production, capital and technology, now flow directly and easily
between countries, rather than only indirectly through traded goods and services. This direct flow
occurs between related subsidiaries and affiliates of multinational firms, as well as between
unrelated firms via loans and license and management contracts. Even labor flows between
countries, such as immigrants into the United States (legal and illegal), immigrants within the
European Union and other unions.
Modern factors of production are more numerous than in this simple model. Factors considered in
the location of production facilities worldwide include local and managerial skills, a dependable
legal structure for settling contract disputes, research and development competence, educational
levels of available workers, energy resources, consumer demand for brand name goods, mineral
and raw material availability, access to capital, tax differentials, supporting infrastructure (roads,
ports, communication facilities), and possibly others.
Although the terms of trade are ultimately determined by supply and demand, the process by
which the terms are set is different from that visualized in traditional trade theory. They are
determined partly by administered pricing in oligopolistic markets.
Comparative advantage shifts over time as less developed countries become more developed and
realize their latent opportunities. For example, during the past 150 years, comparative advantage
in producing cotton textiles has shifted from the United Kingdom to the United States to Japan to
Hong Kong to Taiwan and to China.
The classical model of comparative advantage did not really address certain other issues, such as
the effect of uncertainty and information costs, the role of differentiated products in imperfectly
competitive markets, and economies of scale.
Nevertheless, although the world is a long way from the classical trade model, the general principle of
comparative advantage is still valid. The closer the world gets to true international specialization, the
more world production and consumption can be increased, provided the problem of equitable
distribution of the benefits can be solved to the satisfaction of consumers, producers, and political
leaders. Complete specialization, however, remains an unrealistic limiting case, just as perfect
competition is a limiting case in microeconomic theory.
8. International Financial Management. What is different about international financial management?
9. Ganado’s Globalization. After reading the chapter’s description of Ganado’s globalization process,
how would you explain the distinctions between international, multinational, and global companies?
The difference in definitions for these three terms is subjective, with different writers using different
terms at different times. No single definition can be considered definitive, although as a general
10. Ganado, the MNE. At what point in the globalization process did Ganado become a multinational
enterprise (MNE)?
11. Role of Market Imperfections. What is the role of market imperfections in the creation of
opportunities for the multinational firm?
MNEs strive to take advantage of imperfections in national markets for products, factors of
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Once MNEs have established a physical presence abroad, they are in a better position than purely
domestic firms are to identify and implement market opportunities through their own internal
information network.
12. Why Go. What do firms become multinational?
13. Multinational Versus International. What is the difference between an international firm and a
multinational firm?
14. Ganado’s Phases. What are the main phases that Ganado passed through as it evolved into a truly
global firm? What are the advantages and disadvantages of each?
a. International trade. Two advantages are finding out if the firms’ products are desired in the
foreign country and learning about the foreign market. Two disadvantages are lack of control
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country. The major disadvantages are that the firm might lose control of valuable proprietary
technology to its joint venture partner, and that the goals of the foreign owners might differ from
those of the home country firm.
e. Direct ownership of a foreign, incorporated, subsidiary. If fully owned, the advantage is that the
foreign operations may be fully integrated into the global activities of the parent firm, with
products resold to other units in the global corporate family without questions as to fair transfer
prices or too great specialization. (Example: the Ford transmission factory in Spain is of little use
as a self-standing operation; it depends on its integration into Ford’s European operations.) The
disadvantage is that the firm may come to be identified as a “foreign exploiter” because
politicians find it advantageous to attack foreign-owned businesses.
15. Financial Globalization. How do the motivations of individuals, both inside and outside the
organization or business, define the limits of financial globalization?
If influential insiders in corporations and sovereign states continue to pursue the increase in firm