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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 2000s brought a rapid integration of international capital and financial markets.
Impetus for globalized financial markets initially came from the governments of major countries
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.
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
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
Nike has no production facilities in the United States. Rather, the company manufactures
athletic shoes and garments in such Asian countries as India, Indonesia, and Vietnam using
subcontractors, and sells the products in the U.S. and international markets. In each of those
Initially, Nike denied the sweatshop charges and lashed out at critics. But later, the
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
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
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)
_____________________________________________________
