978-1259717789 Chapter 1

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, such as

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:

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

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currency, the euro, that effectively became the second global currency after the U.S. dollar. In

the last few years, however, economic nationalism has been gaining some popularity, as

exemplified by the Brexit decision of the United Kingdom and the so-called “America First”

policies of the Trump Administration. To the extent that economic nationalism is a populist

response to the global financial crisis and Great Recession, it may subside as the world

economy continues to recover.

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

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.

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

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?

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

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wealth maximization is not a universally accepted goal of corporate management, especially

outside the United States and possibly a few other Anglo-Saxon countries including the United

Kingdom and Canada. To some extent, this may reflect the fact that share ownership is not wide

spread in most other countries. In France, about 15% of households own shares.

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

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

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 $ 30 billions, more than half of

which now come from outside the United States. The company was co–founded in 1964 by Phil

Knight, a CPA at Price Waterhouse, and Bill Bowerman, college track coach, each investing $

500 to start. The company, initially called Blue Ribbon Sports, changed its name to Nike in 1971

and adopted the “Swoosh” logo—recognizable around the world—originally designed by a

college student for $35. Nike became highly successful in designing and marketing mass-

appealing products such as the Air Jordan, the best selling athletic shoe of all time.

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—the hourly wage rate in the manufacturing sector is less than $ 2 in each of those

countries, compared with about $ 35 in the United States. In addition, workers in those countries

often operate in poor and unhealthy environments and their rights are not particularly well

protected. Understandably, host countries are eager to attract foreign investments like Nike’s to

develop their economies and raise the living standards of their citizens. Recently, however, Nike

came under worldwide criticism for its practice of hiring workers for such a low rate of pay—

“next to nothing” in the words of critics—and overlooking poor working conditions in host

countries.

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

in order to improve labor standards. Nike also agreed to random factory inspections by

disinterested parties.

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

substantially more than their local compatriots who are either under– or unemployed. While

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.

2. Consider the no-trade input/output situation presented in the following table for Countries X

and Y. Assuming that free trade is allowed, develop a scenario that will benefit the citizens of

both countries.

INPUT/OUTPUT WITHOUT TRADE

_______________________________________________________________________

Country

X Y Total

________________________________________________________________________

I. Units of Input (000,000)

_______________________ ______________________________

Food 70 60

Textiles 40 30

________________________________________________________________________

II. Output per Unit of Input (lbs or yards)

____________________________________________________

Food 17 5

Textiles 5 2

________________________________________________________________________

III. Total Output (lbs or yards) (000,000)

____________________________________________________

Food 1,190 300 1,490

Textiles 200 60 260

________________________________________________________________________

IV. Consumption (lbs or yards) (000,000)

___________________________________________________

Food 1,190 300 1,490

Textiles 200 60 260

________________________________________________________________________

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

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

INPUT/OUTPUT WITH FREE TRADE

__________________________________________________________________________

Country

X Y Total

__________________________________________________________________________

I. Units of Input (000,000)

__________________________________________________________________________

III. Total Output (lbs or yards) (000,000)

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Food 1,200 330 1,530

Textiles 210 70 280

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