Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing the MNC
Agency Problems
Management Structure of an MNC
Why Firms Pursue International Business
Theory of Comparative Advantage
Imperfect Markets Theory
Product Cycle Theory
How Firms Engage in International Business
International Trade
Licensing
Franchising
Joint Ventures
Valuation Model for an MNC
Domestic Model
Multinational Model
Uncertainty Surrounding an MNC’s Cash Flows
How Uncertainty Affects the MNC’s Cost of Capital
Organization of the Text
Multinational Financial Management: An Overview ❖ 2
Chapter Theme
This chapter introduces the multinational corporation as having similar goals to the purely domestic
corporation, but a wider variety of opportunities. With additional opportunities come potential increased
returns and other forms of risk to consider. The potential benefits and risks are introduced.
Topics to Stimulate Class Discussion
1. What is the appropriate definition of an MNC?
2. Why does an MNC expand internationally?
3. What are the risks of an MNC which expands internationally?
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some business
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to
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: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a
standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For
Multinational Financial Management: An Overview ❖ 3
Answers to End of Chapter Questions
1. Agency Problems of MNCs.
a. Explain the agency problem of MNCs.
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
2. Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the need for international business.
b. Explain how the product cycle theory relates to the growth of an MNC.
3. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in
foreign markets.
b. Suppose perfect markets existed.Would If perfect markets existed, would wages, prices, and
interest rates among countries be more similar or less similar than under conditions of imperfect
markets? Why?
ANSWER: If perfect markets existed, resources would be more mobile and could therefore be
4. International Opportunities.
a. Do you think that either the acquisition of a foreign firm or licensing will result in greater growth
for an MNC? Which alternative is likely to have more risk?
b. Describe a scenario in which the size of a corporation is not affected by access to international
opportunities.
c. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities for
international expansion.
5. International Opportunities Due to the Internet.
a. What factors cause some firms to become more internationalized than others?
ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception
b. Offer your opinion on why the Internet may result in more international business.
ANSWER: The Internet allows for easy and low-cost communication between countries, so that firms
6. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries that
remit earnings to it each year. Explain how appreciation of the euro (the currency used in many
European countries) would affect Plak’s valuation.
7. Benefits and Risks of International Business. As an overall review of this chapter, identify possible
reasons for growth in international business. Then, list the various disadvantages that may discourage
international business.
8. Valuation of an MNC. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has
recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed.
However, its valuation has declined as a result of the increase in political risk. Explain.
9. Centralization and Agency Costs. Would the agency problem be more pronounced for Berkley
Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland
Corp., which uses a decentralized approach?
ANSWER: The agency problem would be more pronounced for Oakland because of a higher
10. Global Competition. Explain why more standardized product specifications across countries can
increase global competition.
11. Exposure to Exhange Rates. McCanna Corp., a U.S. firm, has a French subsidiary that produces
wine and exports to various European countries. All of the countries where it sells its wine use the
euro as their currency, which is the same as the currency used in France. Is McCanna Corp. exposed
to exchange rate risk?
12. Macro versus Micro Topics. Review the table of contents and indicate whether each of the chapters
from Chapter 2 through Chapter 21 has a macro or micro perspective.
13. Methods Used to Conduct International Business. Duve, Inc., desires to penetrate a foreign market
with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the
differences in potential risk and return between licensing with a foreign firm, and acquiring a foreign
firm.
ANSWER: A licensing agreement has limited potential for return, because the foreign firm will
14. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in
the U.S., wants to expand internationally by selling the same golf clubs in Brazil.
a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign
investment, etc.) that Snyder could use to achieve its goal.
ANSWER: Snyder can export the clubs, but the transportation expenses may be high. If could
b. Which method of international method would you recommend for this firm? Justify your
recommendation.
15. Impact of Political Risk. Explain why political risk may discourage international business.
16. Impact of September 11. Following the terrorist attack on the U.S., the valuations of many MNCs
declined by more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even
if they were not directly hit by the attacks.
ANSWER: An MNC’s cash flows could be reduced in the following ways. First, a decline in travel
Multinational Financial Management: An Overview ❖ 7
Advanced Questions
17. International Joint Venture. Anheuser-Busch, (which is now part of AB InBev due to a merger), the
producer of Budweiser and other beers, has engaged in a joint venture with Kirin Brewery, the largest
brewery in Japan. The joint venture enables Anheuser-Busch to have its beer distributed through
Kirin’s distribution channels in Japan. In addition, it could utilize Kirin’s facilities to produce beer
that would be sold locally. In return, Anheuser-Busch provided information about the American beer
market to Kirin.
a. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of maximizing
shareholder wealth.
b. Explain how the joint venture limited the risk of the international business.
c. Many international joint ventures are intended to circumvent barriers that normally prevent
foreign competition. What barrier in Japan did Anheuser-Busch circumvent as a result of the
joint venture? What barrier in the United States did Kirin circumvent as a result of the joint
venture?
d. Explain how Anheuser-Busch could have lost some of its market share in countries outside Japan
as a result of this particular joint venture.
18. Impact of Eastern European Growth. The managers of Loyola Corp. recently had a meeting to
discuss new opportunities in Europe as a result of the recent integration among Eastern European
countries. They decided not to penetrate new markets because of their present focus on expanding
market share in the United States. Loyola’s financial managers have developed forecasts for earnings
based on the 12 percent market share (defined here as its percentage of total European sales) that
Loyola currently has in Eastern Europe. Is 12 percent an appropriate estimate for next year’s Eastern
European market share? If not, does it likely overestimate or underestimate next year’s actual Eastern
European market share next year?
Multinational Financial Management: An Overview ❖ 8
19. Valuation of an MNC. Birm Co., based in Alabama, is considering several international
opportunities in Europe that could affect the value of its firm. The valuation of its firm is dependent
on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately
converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm’s weighted
average cost of capital. For each opportunity, identify the factors that would be affected.
a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3,000,000;
the payment is invoiced in dollars, and this project has the same risk level as its existing
businesses.
b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
c. Birm plans to discontinue its relationship with a U.S. supplier so that can import a small amount
of supplies (denominated in euros) at a lower cost from a Belgian supplier.
d. Birm plans to export a small amount of materials to Ireland that are denominated in euros.
ANSWER:
Opportunity
Dollar CF
Euro CF
Exchange rate at
which Birm Co.
converts euros to
dollars
Birm’s weighted
average cost of
capital
a. joint venture
X
b. acquisition
X
X
20. Assessing Motives for International Business. Fort Worth Inc. specializes in manufacturing some
basic parts for sports utility vehicles that are produced and sold in the U.S. Its main advantage in the
U.S. is that its production is efficient, and less costly than that of some other unionized
manufacturers. It has a substantial market share in the U.S. Its manufacturing process is labor-
intensive. The company pays relatively low wages compared to U.S. competitors, but it has
guaranteed the local workers that their positions will not be eliminated for the next 30 years. It hired
a consultant to determine whether it should set up a subsidiary in Mexico, where the parts would be
produced. The consultant suggested that Forth Worth expand for the following reasons. Offer your
opinion on whether the consultant’s reasons are logical:
a. Theory of Competitive Advantage: There are not many SUVs sold in Mexico; hence, Fort Worth
Inc. would not face much competition there.
b. Imperfect Markets Theory: Fort Worth Inc. can not easily transfer workers to Mexico, but it can
establish a subsidiary there in order to penetrate a new market.
c. Product Cycle Theory: Fort Worth Inc. has been successful in the U.S. It has limited growth
opportunities because it already controls much of the U.S. market for the parts it produces. Thus,
the natural next step is to conduct the same business in a foreign country.
Multinational Financial Management: An Overview ❖ 9
d. Exchange Rate Risk. The exchange rate of the peso has weakened recently, so this would allow
Fort Worth Inc. to build a plant at a very low cost (by exchanging dollars for the cheap pesos to
build the plant).
e. Political Risk. The political conditions in Mexico have stabilized in the last few months, so Fort
Worth should attempt to penetrate the Mexican market now.
21. Valuation of Wal-Mart’s International Business. In addition to all of its stores in the United States,
Walmart Inc., Stores has 13 stores in Argentina, 302 stores in Brazil, 289 stores in Canada, 73 stores
in China, 889 stores in Mexico, and 335 stores in the United Kingdom. Overall, it has 2,750 stores in
foreign countries. Consider the value of Walmart as being composed of two parts, a U.S. part (due to
business in the United States) and a non-U.S. part (due to business in other countries). Explain how to
determine the present value (in dollars) of the non-U.S. part assuming that you had access to all the
details of Walmart businesses outside the United States.
ANSWER: The non-U.S. part can be measured as the present value of future dollar cash flows
22. Impact of International Business on Cash Flows and Risk. Nantucket Travel Agency specializes in
tours for American tourists. Until recently, all of its business was in the U.S. It just established a
subsidiary in Athens, Greece, which provides tour services in the Greek islands for American tourists.
It rented a shop near the port of Athens. It also hired residents of Athens, who could speak English
and provide tours of the Greek islands. The subsidiary’s main costs are rent and salaries for its
employees and the lease of a few large boats in Athens that it uses for tours. American tourists pay for
the entire tour in dollars at Nantucket’s main U.S. office before they depart for Greece.
a. Explain why Nantucket may be able to effectively capitalize on international opportunities such
as the Greek island tours.
b. Nantucket is privately-owned by owners who reside in the U.S. and work in the main office.
Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece.
How can Nantucket attempt to reduce these agency costs?
Multinational Financial Management: An Overview ❖ 10
ANSWER: The employees of the subsidiary in Athens are not owners, and may have no incentive to
c. Greece’s cost of labor and rent are relatively low. Explain why this information is relevant to
Nantucket’s decision to establish a tour business in Greece.
d. Explain how the cash flow situation of the Greek tour business exposes Nantucket to exchange
rate risk. Is Nantucket favorably or unfavorably affected when the euro (Greece’s currency)
appreciates against the dollar? Explain.
e. Nantucket plans to finance its Greek tour business. Its subsidiary could obtain loans in euros from
a bank in Greece to cover its rent, and its main office could pay off the loans over time.
Alternatively, its main office could borrow dollars and would periodically convert dollars to euros
to pay the expenses in Greece. Does either type of loan reduce the exposure of Nantucket to
exchange rate risk? Explain.
f. Explain how the Greek island tour business could expose Nantucket to country risk.
23. Valuation of an MNC. Yahoo! has expanded its business by establishing portals in numerous
countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the U.K. It has cash
outflows associated with the creation and administration of each portal. It also generates cash inflows
from selling advertising space on its website. Each portal results in cash flows in a different currency.
Thus, the valuation of Yahoo! is based on its expected future net cash flows in Argentine pesos after
converting them into U.S. dollars, its expected net cash flows in Australian dollars after converting
them into U.S. dollars, and so on. Explain how and why the valuation of Yahoo! would change if
most investors suddenly expected that that the dollar would weaken against most currencies over
time.
24. Uncertainty Surrounding an MNC’s Valuation. Carlisle Co. is a U.S. firm that is about to
purchase a large company in Switzerland for $20 million. This company produces furniture and sells
it locally (in Switzerland), and it is expected to earn large profits every year. The company will
become a subsidiary of Carlisle and will periodically remit the excess cash flows from to its profits to
Carlisle Co. Assume that Carlisle Co. has no other international business. Carlisle has $10 million
that it will use to pay for part of the Swiss company and will finance the rest of its purchase with
borrowed dollars. Carlisle Co. can obtain supplies from either a U.S. supplier or a Swiss supplier (in
which case the payment would be made in Swiss francs). Both suppliers are reputable and there
would be no exposure to country risk when using one supplier. Is the valuation of the total cash flows
of Carlisle Co. more uncertain if it obtains its supplies from a U.S. firm or a Swiss firm? Explain
briefly.
ANSWER: The valuation of Carlisle Co. is more uncertain if it uses a U.S. supplier because it will
25. Impact of Exchange Rates on MNC Value. Olmsted Co. has small computer chips assembled in
Poland and transports the final assembled products to the parent, where they are sold by the parent in
the U.S. The assembled products are invoiced in dollars. It uses Polish currency (the zloty) to produce
these chips, and assembles them in Poland. The Polish subsidiary pays the employees in the local
currency (zloty). Olmsted Co. finances its subsidiary operations with loans from a Polish bank (in
zloty). The parent of Olmsted will send sufficient monthly payments (in dollars) to the subsidiary in
order to repay the loan and other expenses incurred by the subsidiary. If the Polish zloty depreciates
against the dollar over time, will that have a favorable, unfavorable, or neutral effect on the value of
Olmsted Co.? Briefly explain.
26. Impact of Uncertainty on MNC Value. Minneapolis Co. is a major exporter of products to
Canada. Today, an event occurred that has increased the uncertainty surrounding the Canadian
dollar’s future value over the long term. Explain how this event can affect the valuation of
Minneapolis Co.
27. Exposure of MNCs to Exchange Rate Movements. Arlington Co. expects to receive 10 million
euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next
10 years. The euro is presently valued at $1.38 and is expected to depreciate by 2 percent each year.
The peso is valued at $.13 and is expected to depreciate by 2 percent each year. Review the valuation
equation for an MNC. Do you think that the exchange rate movements will have a favorable or
unfavorable effect on the MNC?
28. Impact of the Credit Crisis on MNC Value. Much of the attention to the credit crisis was
focused on its adverse effects on financial institutions, but many other types of firms were also
affected. Explain why the numerator of the MNC valuation equation was affected during the period of
October 6-10. Explain how the denominator of the MNC valuation equation was affected during that
period.
ANSWER: The numerator of the MNC valuation equation represents cash flows. In October, 2008,
the credit crisis intensified. Investors were concerned that the economic conditions in the U.S. and in
29. Exposure of MNCs to Exchange Rate Movements. Because of the low labor costs in Thailand,
Melnick Co. (based in the United States) recently established a major research and development
subsidiary there. The wholly-owned subsidiary was created to improve new products that the parent
of Melnick can sell in the United States (denominated in dollars) to U.S. customers. The subsidiary
pays its local employees in baht (the Thai currency). The subsidiary has a small amount of sales
denominated in baht, but its expenses are much larger than its revenue. It has just obtained a large
baht-denominated loan that will be used to expand its subsidiary. The business that the parent of
Melnick Co. conducts in the United States is not exposed to exchange rate risk. If the Thai baht
weakens over the next 3 years, will the value of Melnick Co. be favorably affected, unfavorably
affected, or unaffected? Briefly explain.
30. Shareholder Rights of Investors in MNCs. MNCs tend to expand more when they more easily
access funds by issuing stock. In some countries, shareholder rights are very limited and so the MNCs
are less able to raise funds by issuing stock. Explain why access to funding is more severe for MNCs
based in countries where shareholder rights are limited.
31. MNC Cash Flows and Exchange Rate Risk. Tuscaloosa Co. is a U.S. firm that assembles phones in
Argentina and transports the final assembled products to the parent, which sells them in the U.S.. The
assembled products are invoiced in dollars. The Argentine subsidiary obtains some material from
China, and the Chinese exporter is willing to accept Argentine pesos as payment for these exported
materials. The Argentine subsidiary pays its employees in the local currency (pesos), and finances its
operations with loans from an Argentine bank (in pesos). Tuscaloosa Co. has no other international
Multinational Financial Management: An Overview ❖ 13
business. If the Argentine peso depreciates against the dollar over time, will that have a favorable,
unfavorable, or neutral effect on Tuscaloosa Co.? Briefly explain.
32. MNC Cash Flows and Exchange Rate Risk. Asheville Co. has a subsidiary in Mexico that
develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to
work in the facility. Ashville Co. has no other international business. All operations are presently
funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and is
invoiced in U.S. dollars.
a. If the Mexican peso appreciates against the dollar, does this have a favorable effect, an unfavorable
effect, or no effect on Asheville’s value?
b. Asheville Co. plans to borrow funds to support its expansion in the U.S. The Mexican interest rates
are presently lower than U.S. interest rates, so Asheville obtains a loan denominated in Mexican
pesos in order to support its expansion in the U.S. Will the borrowing of pesos increase, decrease, or
have no effect on its exposure to exchange rate risk? Briefly explain.
ANSWER:
33. Estimating an MNC’s Cash Flows. Biloxi Co. is a U.S. firm with a subsidiary in China. The
subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Biloxi Co.
has expected cash flows of $10,000,000 from domestic business and the Chinese subsidiary is
expected to generate 100 million Chinese yuan at the end of the year. The expected value of yuan at
the end of the year is $.13. What are the expected dollar cash flows of the parent of Biloxi Co. in one
year?
ANSWER
34. Uncertainty Surrounding an MNC’s Cash Flows.
a. Assume that Bangor Co. (a U.S. firm) knows that it will have cash inflows of $900,000 from
domestic operations, cash inflows of 200,000 Swiss francs resulting from exports to Swiss operations,
and cash outflows of 500,000 Swiss francs at the end of the year. Although the future value of the
Swiss franc is uncertain, your best guess is that it will be worth $1.10 at the end of this year. What are
the expected dollar cash flows of Bangor Co?
Multinational Financial Management: An Overview ❖ 14
b. Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co. There is no political
risk that could have any impact on the cash flows of either firm. Concord Co. knows that it will have
cash inflows of $900,000 from domestic operations, cash inflows of 700,000 Swiss francs from
exports to Swiss operations, and cash outflows of 800,000 Swiss francs at the end of the year. Is the
valuation of the total cash flows of Concord Co. more uncertain or less uncertain than the total cash
flows of Bangor Co.? Explain briefly.
35. Valuation of an MNC. Odessa Co., Midland Co., and Roswell Co. are U.S. firms in the same
industry and have the same valuation as of yesterday, based on the present value of future cash flows
of each company. Odessa Co. obtains a large amount of its supplies invoiced in euros from European
countries, and all of its sales are invoiced in dollars. Midland has a large subsidiary in Europe that
does all of its business in euros and remits profits to the U.S. parent every year. Roswell Co. has no
international business. Suppose an event occurs that you believe will cause a substantial depreciation
of the euro against the dollar over time, but assume this event will not change the business operations
of the firms mentioned. Which firm will have the highest valuation based on your expectations?
Briefly explain.
ANSWER
36. Impact of Uncertainty on an MNC’s Valuation. Assume that Alpine Co. is a U.S. firm that has
direct foreign investment in Brazil as a result establishing a subsidiary there. Political conditions have
changed in Brazil, but the best guess by investors regarding the future annual cash flows for Alpine
Co. has not changed despite the uncertainty surrounding those estimates. In other words, the
distribution of possible outcomes above and below the best guess has widened. Would this change in
uncertainty cause the prevailing value of Alpine Co. to increase, decrease, or remain unchanged?
Briefly explain.
37. Exposure of MNC Cash Flows.
a. Rochester Co. is a U.S. firm that has a language institute in France. This institute attracts
Americans who want to learn the French language. Rochester Co. charges tuition to the American
students in dollars. It expects that its dollar revenue from charging tuition will be stable over each of
the next several years. Rochester’s total expenses for this business project are as follows. It rents a
facility in Paris, and makes a large rent payment each month in euros. It also hires several French
citizens as full-time instructors, and pays their salary in euros. Rochester Co. expects that its euro-
denominated expenses will be stable over each of the next several years. If the euro appreciates
against the dollar over time, should this have a favorable effect, unfavorable effect, or no effect on the
value of Rochester Co.? Briefly explain.
Multinational Financial Management: An Overview ❖ 15
ANSWER ; It should have an unfavorable effect, because it will take more dollars to cover the euro
expenses over time. Thus, the net cash flows in dollars generated by Rochester should decrease over
time.
b. Rochester considers a new project in which it would also attract people from Spain, and the
institute in France would teach them the French language; tuition would be charged in euros. The
expenses for this project would be about the same as those for the one just described for American
students. Assume that euros to be generated by this project would be stable over the next several
years. Assume that this project is about the same size as the project for American students. For either
project, the expected annual revenue is just slightly larger than the expected annual expenses. Is the
valuation of net cash flows subject to a higher degree of exchange rate risk for this project or for the
project for American students? Briefly explain.
Solution to Continuing Case Problem: Blades, Inc.
1. What are the advantages Blades could gain from importing from and/or exporting to a foreign country
such as Thailand?
ANSWER: The advantages Blades, Inc. could gain from importing from Thailand include potentially
lowering Blades’ cost of goods sold. If the inputs (rubber and plastic) are cheaper when imported
2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In
the long run?
ANSWER: There are several potential disadvantages Blades, Inc. should consider. First of all, Blades
3. Which theories of international business described in this chapter apply to Blades, Inc. in the short
run? In the long run?
ANSWER: There are at least three theories of international business: the theory of comparative
advantage, the imperfect markets theory, and the product cycle theory. In the short run, Blades would
4. What long-range plans other than establishing a subsidiary in Thailand are possible for Blades?
Would these other options be more suitable for the company?
ANSWER: Since Ben Holt is very unfamiliar with international business, and since Blades has never
operated outside the United States, establishment of a subsidiary in Thailand is probably not the best
Solution to Supplemental Case: Ranger Supply Company
This case is simply intended to force students to think about reasons for or against international business.
As with most cases, there are no perfect solutions, but there are some general conclusions that can be
drawn.
a. Some of the more obvious factors to consider are:
1. Competition. There are similar distributors in Canada, whereas Eastern Europe may not have an
3. Export Barriers. Either country could impose tariffs or quotas on the exports. Canada is less
4. Marketing Characteristics. Ranger would have an easier time adapting to the Canadian market.
The information about Eastern Europe firms would be more limited. Thus, Ranger would be
5. Exchange Rates. The future exchange rates of the Canadian dollar and currencies of Eastern
European countries could be relevant. Even if Ranger plans to invoice the exports in dollars, the
Overall, most of the factors would favor Canada as the more reasonable market to pursue.
b. Recall that the reason for Ranger to expand overseas was to offset the anticipated U.S. demand for its
Small Business Dilemma
In every chapter of this text, some of the key concepts are illustrated with an application to a small
sporting goods firm that conducts international business. The “Small Business Dilemma” in each
chapter allows students to recognize the dilemmas and possible decisions that firms (such as this sporting
goods firm) may face in a global environment. For this chapter, the application is on the development of
the sporting goods firm that would conduct international business.
Developing a Multinational Sporting Goods Corporation
1. Is Sports Exports Company a multinational corporation?
2. Why are the agency costs lower for Sports Exports Company than for most MNCs?
3. Does Sports Exports Company have any comparative advantage over potential competitors in foreign
countries that could produce and sell footballs there?
Multinational Financial Management: An Overview ❖ 18
ANSWER: The Sports Exports Company has a comparative advantage of applying an idea that has
been successful in the U.S. to other countries. If football becomes a popular idea in foreign countries,
4. How would Jim Logan decide which foreign markets he would attempt to enter? Should he initially
focus on one or many foreign markets?
ANSWER: Jim would need to consider various factors, such as the potential demand for footballs in
each country and the potential degree of competition in that country. He may also consider the
5. The Sports Exports Company has no immediate plans to conduct direct foreign investment.
However, it might consider other less costly methods of establishing its business in foreign markets.
What methods might the Sports Exports Company use to increase its presence in foreign markets by
working with one or more foreign companies?
ANSWER: The Sports Exports Company may consider a licensing agreement whereby it has a
foreign firm produce its footballs and sell them; this would avoid the cost of exporting, but would
International Investing Project
This project is provided in Appendix D in the back of the text. It may be used as a project assignment
that is to be completed by the end of the semester.
Discussion in the Board Room
This exercise is provided in Appendix E in the back of the text. It may be used as a project
assignment that is to be completed by the end of the semester. Possible answers to the discussion
