POINT/COUNTER-POINT:
Should MNCs Avoid DFI in Countries without Child Labor Laws?
POINT: Yes. An MNC should maintain its hiring standards, regardless of what country it is in. Even if a
foreign country allows children to work, an MNC should not lower its standards. Although the MNC
forgoes the use of low-cost labor, it maintains its global credibility.
COUNTER-POINT: No. An MNC will not only benefit its shareholders, but will create employment for
some children who need support. The MNC can provide reasonable working conditions and perhaps may
even offer educational programs for its employees.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: This is a well–documented controversy which generates interesting discussion. Some students
will likely support the point while others will support the counter-point. There are some obvious issues that
an MNC would need to consider, such as:
How old does an employee have to be?
Should it attempt to hire older workers first?
What wage is reasonable for a child?
Are there any child labor laws enforced by the country?
Answers to End of Chapter Questions
1. Motives for DFI. Describe some potential benefits to an MNC as a result of direct foreign investment
(DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to
expand its footwear production in Latin America?
ANSWER: See the text exhibit in this chapter for a complete summary of the potential benefits.
2. Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of tablet computers,
plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s
executives believe that the Mexican peso’s value is relatively strong and will weaken against the dollar
over time. If their expectations about the peso value are correct, how will this affect the feasibility of
the project? Explain.
3. DFI to Achieve Economies of Scale. Bear Co. and Viking, Inc., are automobile manufacturers that
desire to benefit from economies of scale. Bear Co. has decided to establish distributorship
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Direct Foreign Investment 2
subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing
subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
4. DFI to Reduce Cash Flow Volatility. Raider Chemical Co. and Ram, Inc., had similar intentions to
reduce the volatility of their cash flows. Raider implemented a long-range plan to establish 40 percent
of its business in Canada. Ram, Inc., implemented a long-range plan to establish 30 percent of its
business in Europe and Asia, scattered among 12 different countries. Which company will more
effectively reduce cash flow volatility once the plans are achieved?
5. Impact of Import Restrictions. If the United States imposed long-term restrictions on imports, would
the amount of DFI by non-U.S. MNCs in the United States increase, decrease, or be unchanged?
Explain.
6. Capitalizing on Low-Cost Labor. Some MNCs establish a manufacturing facility where there is a
relatively low cost of labor, but they sometimes close the facility later because the cost advantage
dissipates. Why do you think the relative cost advantage of these countries is reduced over time?
(Ignore possible exchange rate effects.)
7. Opportunities in Less Developed Countries. Offer your opinion on why economies of some less
developed countries with strict restrictions on international trade and DFI are somewhat independent
from economies of other countries. Why would MNCs desire to enter such countries? If these
countries relaxed their restrictions, would their economies continue to be independent of other
economies? Explain.
8. Effects of Potential Terrorism Ohio, Inc., considers establishing a manufacturing plant in central
Asia, which would be used to cover its exports to Japan and Hong Kong. If Ohio was concerned
about possible terrorism, how might this affect the estimated expenses of the plant?
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Direct Foreign Investment 3
9. DFI Strategy. Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce MP3
players and sell them there. It expects that its cost of producing these MP3 players will be one-third
the cost of producing them in the United States. Assuming that its production cost estimates are
accurate, is Bronco’s strategy sensible? Explain.
10. Risk Resulting from International Business. This chapter concentrates on possible benefits to a firm
that increases its international business.
a. What are some risks of international business that may not exist for local business?
b. What does this chapter reveal about the relationship between an MNC’s degree of international
business and its risk?
11. Motives for DFI. Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by
professional sports teams. It recently decided to expand in Europe. What are the potential benefits for
this firm from using DFI?
12. Disney’s DFI Motives. What potential benefits do you think were most important in the decision of the
Walt Disney Co. to build a theme park in France?
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Direct Foreign Investment 4
c. French labor may not necessarily be less costly than U.S. labor, but there may be a cost advantage
to the land in France (due to land subsidies provided by the French government).
d. Exploit monopolistic advantages—there are other theme parks in Europe. Yet, some tourists may
feel that no other theme park is an adequate substitute for Disney. Thus, Disney can now attract
tourists who are unwilling to travel to the U.S.
e. Diversification—the Disney theme parks in the U.S. have experienced reduced sales when the
dollar is strong because foreign tourism in the U.S. declines. A theme park in France may appeal
to tourists who decide not to travel to the U.S. when the dollar is strong (euro is weak). In fact, it
may even attract more tourists from the U.S. when the dollar is strong.
13. DFI Strategy. Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does
this statement mean?
14. Host Government Incentives for DFI. Why would foreign governments provide MNCs with
incentives to undertake DFI there?
Advanced Questions
15. DFI Strategy. JCPenney has recognized numerous opportunities to expand in foreign countries and has
assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand.
It has opened new stores in Europe, Asia, and Latin America. In each case, the firm was aware that it
did not have sufficient understanding of the culture of each country that it had targeted. Consequently,
it engaged in joint ventures with local partners who knew the preference of the local customers.
a. What comparative advantage does JCPenney have when establishing a store in a foreign country,
relative to an independent variety store?
b. Why might the overall risk of JCPenney decrease or increase as a result of its recent global
expansion?
ANSWER: Its risk may decrease because it has a strategy that allows it to utilize its expertise, while
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Direct Foreign Investment 5
c. JCPenney has been more cautious about entering China. Explain the potential obstacles associated
with entering China.
16. DFI Location Decision. Decko Co. is a U.S. firm with a Chinese subsidiary that produces
smartphones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese
yuan, which is stable against the dollar. The smartphones sold to Japan are denominated in Japanese
yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the
dollar. The subsidiary’s main goal is to generate profits for itself and it reinvests the profits. It does not
plan to remit any funds to Decko, the U.S. parent.
a. Assume that the Japanese yen strengthens against the U.S. dollar over time. How would this be
expected to affect the profits earned by the Chinese subsidiary?
b. If Decko Co. had established its subsidiary in Tokyo, Japan instead of in China, would the
subsidiary’s profits be more exposed or less exposed to exchange rate risk?
c. Why do you think that Decko Co. established the subsidiary in China instead of Japan? Assume no
major country risk barriers.
d. If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its
exchange rate risk, should it borrow U.S. dollars, Chinese yuan, or Japanese yen?
ANSWER:
a. If the yen appreciates against the dollar, it appreciates against the yuan (assuming the yuan is
17. MNC’s Investment Decision. Trak Co. (of the U.S.) presently serves as a distributor of products by
purchasing them from other U.S. firms and selling them in Japan. It wants to purchase a manufacturer
in India that could produce similar products at a low cost (due to low labor costs in India) and export
the products to Japan. The operating expenses would be denominated in Indian rupees. The products
would be invoiced in Japanese yen. If Trak Co. can acquire a manufacturer, it will discontinue its
existing distributor business. If the yen is expected to appreciate against the dollar, and the rupee is
expected to depreciate against the dollar, how would this affect Trak’s direct foreign investment?
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Direct Foreign Investment 6
18. MNC’s Investment Strategy. Myzo Co. (based in the U.S.) sells basic household products that many
other U.S. firms produce at the same quality level and these other U.S. firms have about the same
production cost as Myzo. Myzo is considering direct foreign investment. It believes that the market in
the U.S. is saturated and wants to pursue business in a foreign market where it can generate more
revenue. It decides to create a subsidiary in Mexico that will produce household products and sell its
products only in Mexico. This subsidiary would definitely not export its products to the U.S. because
exports to the U.S. could reduce the parent’s market share and Myzo wants to ensure that its U.S.
employees remain employed. The labor costs in Mexico are very low. Myzo will comply with some
international labor laws. By complying with the laws, the total costs of Myzo’s subsidiary will be 20
percent higher than other Mexican producers of household products in Mexico that are of similar
quality. However, Myzo’s subsidiary will be able to produce household products at a cost that is 40
percent lower than its cost of producing household products in the U.S. Briefly explain whether you
think Myzo’s strategy for DFI is feasible.
ANSWER: The difference in costs against local manufacturers in Mexico will be a disadvantage to
CRITICAL THINKING
Motives for Facebook’s International Expansion Facebook has expanded its business internationally, as
described by various web links (based on online search terms “Facebook” and “international expansion”).
Write a short essay to explain Facebook’s motivation for its international expansion? Explain the possible
risks of international expansion by Facebook.
ANSWER
Solution to Continuing Case Problem: Blades, Inc.
1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI.
2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the tradeoff if
Blades undertakes the DFI now?
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Direct Foreign Investment 7
3. Do you think Blades should renew its agreement with the Thai retailer for another three years? What is
the tradeoff if Blades renews the agreement?
4. Assume a high level of unemployment in Thailand and a unique production process employed by
Blades, Inc. How do you think the Thai government would view the establishment of a subsidiary in
Thailand by firms such as Blades? Do you think the Thai government would be more or less supportive
if firms such as Blades acquired existing businesses in Thailand? Why?
ANSWER: Given a high level of unemployment in Thailand and a unique production process employed
Solution to Supplemental Case: Blues Corporation
Some possible answers are provided below, although there is no perfect solution to the issues introduced.
The main objective of this case is to stimulate discussion and force students to create their own concerns
about entering Eastern Europe. Students must learn that some ventures could easily backfire.
a. Blues Corporation should not immediately jump at the opportunity unless it considers the following
information. First, while the labor cost is low today, it may increase over time as East and West
German economies become more integrated. Second, while the East German facility is inefficient, the
potential to remove the inefficiencies may be limited by the government. For example, the government
may require that all workers at the facility remain employed. Third, there may be much uncertainty
about the restrictions that could be enforced as conditions of ownership in East Germany, such as high
taxes and environmental restrictions. These factors must be accounted for.
b. While the competition appears overpriced, Blues Corp. must consider how that may change in the long
run. Some of the government-owned businesses may be privatized over time, which would likely
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Direct Foreign Investment 8
increase efficiency and reduce prices. Therefore, competition could become more intense in the near
future. Blues Corp. could attempt to capitalize on the East European markets by exporting from its
West German subsidiary. However, it may not be worthwhile to use a heavy promotion program unless
it believes that it can attain a reasonable market share even when some of the competition may reduce
prices in the future.
c. Blues Corp. should not forgo its established U.S. business as a means of pursuing business in East
Germany. The risks are high. Blues Corp. could test the East German market by exporting without
requiring a major amount of funds. If it decides to make a major investment in an East German facility
or promotion program, it should wait until it can raise funds by some means other than divesting U.S.
assets.
Small Business Dilemma
Direct Foreign Investment Decision by the Sports Exports Company
1. Given the information provided here, what are the advantages to Logan of establishing the firm in the
United Kingdom?
2. Given the specific information provided here, what are the disadvantages to Logan of establishing the
firm in the United Kingdom?
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