Chapter 1
Globalization and the Multinational
Corporation
QUESTIONS
1. Define globalization. How has it proceeded in trade in goods and services versus
capital markets?
2. Describe fours ways that a company can supply its products to a foreign country.
How do they differ?
3. What is a greenfield investment?
4. What percentage ownership typically defines FDI?
5. What is agency theory? How does corporate governance the issues raised by agency
theory?
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Answer: Agency theory explores the problems that arise because the owners of the firm
do not typically manage the firm, and it devises ways to resolve these problems. This is
often called the separation of owneship and control. A manager of a firm, in particular
the chief executive officer (CEO), is viewed as an agent who contracts with various
principals—most importantly the firm’s shareholders but also the firm’s creditors,
suppliers, clients, and employees. The principals must design contracts that motivate the
agent to perform actions and make decisions that are in the best interests of the principals.
6. Why is ownership more concentrated in developing countries than in developed
countries?
7. What is the IMF? What is its role in the world economy?
8. What is the World Bank? What is its role in the world economy?
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9. What are the major Multilateral Development Banks?
10. What is the WTO? What is its role in the world economy?
11. What is an institutional investor? Along with individual investors, what do they
detemine?
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Answer: Institutional Investors are organizations that invest pools of money on behalf of
individual investors or other organizations. Examples include banks, insurance
companies, pension funds, mutual funds, and university endowments. Institutional
investors, together with individual investors, determine the prices of bonds and stocks
implicitly determining the expected rates of return on these assets thereby setting the
MNC’s cost of capital. The cost of capital, in turn, affects project valuations, which
determines a company’s investments.
12. What are Anti-globalists?
13. Who are Ante and Freedy Handel? How do their views on the world economy
differ?
PROBLEMS
1. Go to the Web site of your favorite multinational firm and determine where it
operates thoughout the world. How many employees does it have worldwide? Has
it done any interesting cross-border mergers and acquisitions during the last year?
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2. Go to UNCTADstat at http://unctadstat.unctad.org. Update the data in Exhibit 1.6
on cross-border mergers and acquisitions for the most recent years.
3. Go to the IMF’s Web site at www.imf.org and download the 2016 World Economic
Outlook. Pick your favorite country and determine if this is a good time to invest in
it or not.
4. Go to the WTO’s Web site at www.wto.org and determine which goods or services
are the sources of trade disputes between countries this year.