SOLUTIONV MANUALV FOR
InternationalVFinancialVManagement,V10thVEditionVEUNVChap
terV1-21
CHAPTERV1
GLOBALIZATIONVANDVTHEVMULTINATIONALVFIRM
ANSWERSV&VSOLUTIONSVTOVEND-OF-CHAPTERVQUESTIONSVANDVPROBLEMS
QUESTIONS
1. WhyVisVitVimportantVtoVstudyVinternationalVfinancialVmanagement?
Answer:V WeVareVnowVlivingVinVaVworldVwhereVallVtheVmajorVeconomicVfunctions,VsuchVasVc
onsumption,Vproduction,Vinvestment,VandVfinancing,VareVhighlyVglobalized.V ItVisVthusVessenti
alV forVfinancialVmanagersVtoVfullyVunderstandVvitalVinternationalVdimensionsVofVfinancialVman
agement.V ThisVglobalVshiftVisVinVmarkedVcontrastVtoVaVsituationVthatVexistedVwhenVtheVauth
orsVofVthisVbookVwereVlearningVfinanceVaVfewVdecadesVago.V AtVthatVtime,VmostVprofessorsV
customarilyV(andVsafely,VtoVsomeVextent)VignoredVinternationalVaspectsVofVfinance.V ThisVmo
deVofVoperationVhasVbecomeVuntenableVsinceVthen.
2. HowVisVinternationalVfinancialVmanagementVdifferentVfromVdomesticVfinancialVmanagement?
Answer:V ThereVareVthreeVmajorVdimensionsVthatVsetVapartVinternationalVfinanceVfromVdome
sticVfinance.VTheyVare:
1. foreignVexchangeVandVpoliticalVrisks,
2. marketVimperfections,Vand
3. expandedVopportunityVset.
3. DiscussVtheVmajorVtrendsVthatVhaveVprevailedVinVinternationalVbusinessVduringVtheVla
stVtwoVdecades.
Answer:V TheV2000sVbroughtVaVrapidVintegrationVofVinternationalVcapitalVandVfinancialVmark
ets.VImpetusVforVglobalizedVfinancialVmarketsVinitiallyVcameVfromVtheVgovernmentsVofVmajor
VcountriesVthatVhadVbegunVtoVderegulateVtheirVforeignVexchangeVandVcapitalVmarkets.V The
Veconomic
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
,integrationVandVglobalizationVthatVbeganVinVtheVeightiesVandVninetiesVareVpickingVupVspeed
VinVtheV2000s.VTradeVliberalizationVandVeconomicVintegrationVcontinuedVtoVproceedVatVboth
VtheVregionalVandVglobalVlevels.VDespiteVsovereignVdebtVcrisisVinVEurope,VmoreVEUVmemb
erVcountriesVhaveVadoptedVtheVcommonVcurrency,VtheVeuro,VthatVeffectivelyVbecameVtheVs
econdVglobalVcurrencyVafterVtheVU.S.Vdollar.VInVtheVlastVfewVyears,Vhowever,VeconomicVnat
ionalismVhasVbeenVgainingVsomeVpopularity,VasVexemplifiedVbyVtheVBrexitVdecisionVofVtheV
UnitedVKingdomVandVtheVso-called
―AmericaVFirst‖VpoliciesVofVtheVTrumpVAdministration.VToVtheVextentVthatVeconomicVnational
ismVisVaVpopulistVresponseVtoVtheVglobalVfinancialVcrisisVandVGreatVRecession,VitVmayVsub
sideVasVtheVworldVeconomyVcontinuesVtoVrecover.
4. HowVisVaVcountry‘sVeconomicVwell-
beingVenhancedVthroughVfreeVinternationalVtradeVinVgoodsVandVservices?
Answer:V AccordingVtoVDavidVRicardo,VwithVfreeVinternationalVtrade,VitVisVmutuallyVbeneficial
VforVtwoVcountriesVtoVeachVspecializeVinVtheVproductionVofVtheVgoodsVthatVitVcanVproduceVr
elativelyVmostVefficientlyVandVthenVtradeVthoseVgoods.V ByVdoingVso,VtheVtwoVcountriesVcan
VincreaseVtheirVcombinedVproduction,VwhichVallowsVbothVcountriesVtoVconsumeVmoreVofVbo
thVgoods.VThisVargumentVremainsVvalidVevenVifVaVcountryVcanVproduceVbothVgoodsVmoreV
efficientlyVinVabsoluteVtermsVthanVtheVotherVcountry.V InternationalVtradeVisVnotVaV‗zero-
sum‘VgameVinVwhichVoneVcountryVbenefitsVatVtheVexpenseVofVanotherVcountry.VRather,Vinte
rnationalVtradeVcouldVbeVanV‗increasing-
Vsum‘VgameVfromVwhichVallVplayersVbecomeVwinners.
5. WhatVconsiderationsVmightVlimitVtheVextentVtoVwhichVtheVtheoryVofVcomparativeVadvant
ageVisVrealistic?
Answer:V TheVtheoryVofVcomparativeVadvantageVwasVoriginallyVadvancedVbyVtheVnineteenth
VcenturyVeconomistVDavidVRicardoVasVanVexplanationVforVwhyVnationsVtradeVwithVoneVanot
her.VTheVtheoryVclaimsVthatVeconomicVwell-
beingVisVenhancedVifVeachVcountryVproducesVwhatVitVhasVaVcomparativeVadvantageVinVpro
ducingVrelativeVtoVotherVcountries,VandVthenVtradeVproducts.
UnderlyingVtheVtheoryVareVtheVassumptionsVofVfreeVtradeVbetweenVnationsVandVthatVtheVfa
ctorsVofVproductionV(labor,VtechnologicalVknow-
how,VandVcapital)VareVrelativelyVimmobile.V ToVtheVextentVthatVtheseVassumptionsVdoVnotVh
old,VtheVtheoryVofVcomparativeVadvantageVmayVnotVrealisticallyVdescribeVinternationalVtrade
.V InVaddition,VfreeVtradeVproducesVwinnersVandVlosersVandVifVtheVlosersVareVnotVcompensa
ted,VfreeVtradeVmayVfacesVpoliticalVoppositionVfromVthem.
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
,6. WhatVareVmultinationalVcorporationsV(MNCs)VandVwhatVeconomicVrolesVdoVtheyVplay?
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
, Answer:V AVmultinationalVcorporationV(MNC)VcanVbeVdefinedVasVaVbusinessVfirmVincorporate
dVinVoneVcountryVthatVhasVproductionVandVsalesVoperationsVinVmanyVotherVcountries.VIndee
d,VsomeVMNCsVhaveVoperationsVinVaVfewVdozensVofVdifferentVcountries.V MNCsVobtainVfina
ncingVfromVmajorVmoneyVcentersVaroundVtheVworldVinVmanyVdifferentVcurrenciesVtoVfinance
VtheirVoperations.VGlobalVoperationsVforceVtheVtreasurer‘sVofficeVtoVestablishVinternationalVb
ankingVrelationships,VtoVplaceVshort-
termVfundsVinVseveralVcurrencyVdenominations,VandVtoVeffectivelyVmanageVforeignVexchang
eVrisk.V ByVcircumventingVandValsoVtakingVadvantageVofVvariousVmarketVimperfections,Vsuch
VasVbarriersVtoVtradeVandVbarriersVtoVflowVofVpeopleVandVcapitalVacrossVcountries,VMNCsVc
ontributeVtoVgreaterVintegrationVofVtheVworldVeconomyVandVingVmoreVperfectVfunctioningVofV
globalVmarkets.
7. RossVPerot,VaVformerVPresidentialVcandidateVofVtheVReformVParty,VwhichVwasVaVthirdV
politicalVpartyVinVtheVUnitedVStates,VhadVstronglyVobjectedVtoVtheVcreationVofVtheVNorthVAm
ericanVTradeVAgreementV(NAFTA),VwhichVnonethelessVwasVinauguratedVinV1994.VPerotVfea
redVtheVlossVofVAmericanVjobsVtoVMexicoVwhereVitVisVmuchVcheaperVtoVhireVworkers.VWhat
VareVtheVmeritsVandVdemeritsVofVPerot‘sVpositionVonVNAFTA?VConsideringVtheVrecentVecon
omicVdevelopmentsVinVNorthVAmerica,VhowVwouldVyouVassessVPerot‘sVpositionVonVNAFTA?
Answer:VSinceVtheVinceptionVofVNAFTA,VmanyVAmericanVcompaniesVindeedVhaveVinvested
VheavilyVinVMexico,VsometimesVrelocatingVproductionVfromVtheVUnitedVStatesVtoVMexico.VAlt
houghVthisVmightVhaveVtemporarilyVcausedVunemploymentVofVsomeVAmericanVworkers,Vthe
yVwereVeventuallyVrehiredVbyVotherVindustriesVoftenVforVhigherVwages.VAtVtheVsameVtime,V
MexicoVhasVbeenVexperiencingVaVmajorVeconomicVboom.VItVseemsVclearVthatVbothVMexico
VandVtheVU.S.VhaveVbenefitedVfromVNAFTA.VPerot‘sVconcernVappearsVtoVhaveVbeenVillVfou
nded.
8. InV1995,VaVworkingVgroupVofVFrenchVchiefVexecutiveVofficersVwasVsetVupVbyVtheVConfed
erationVofVFrenchVIndustryV(CNPF)VandVtheVFrenchVAssociationVofVPrivateVCompaniesV(AFE
P)VtoVstudyVtheVFrenchVcorporateVgovernanceVstructure.VTheVgroupVreportedVtheVfollowing,V
amongVotherVthings:V ―TheVboardVofVdirectorsVshouldVnotVsimplyVaimVatVmaximizingVshareVv
aluesVasVinVtheVU.K.VandVtheVU.S.VRather,VitsVgoalVshouldVbeVtoVserveVtheVcompany,Vwhos
eVinterestsVshouldVbeVclearlyVdistinguishedVfromVthoseVofVitsVshareholders,Vemployees,Vcred
itors,VsuppliersVandVclientsVbutVstillVequatedVwithVtheirVgeneralVcommonVinterest,VwhichVisVt
oVsafeguardVtheVprosperityVandVcontinuityVofVtheVcompany‖.VEvaluateVtheVaboveVrecommen
dationVofVtheVworkingVgroup.
Answer:VTheVrecommendationsVofVtheVFrenchVworkingVgroupVclearlyVshowVthatVshareholde
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
InternationalVFinancialVManagement,V10thVEditionVEUNVChap
terV1-21
CHAPTERV1
GLOBALIZATIONVANDVTHEVMULTINATIONALVFIRM
ANSWERSV&VSOLUTIONSVTOVEND-OF-CHAPTERVQUESTIONSVANDVPROBLEMS
QUESTIONS
1. WhyVisVitVimportantVtoVstudyVinternationalVfinancialVmanagement?
Answer:V WeVareVnowVlivingVinVaVworldVwhereVallVtheVmajorVeconomicVfunctions,VsuchVasVc
onsumption,Vproduction,Vinvestment,VandVfinancing,VareVhighlyVglobalized.V ItVisVthusVessenti
alV forVfinancialVmanagersVtoVfullyVunderstandVvitalVinternationalVdimensionsVofVfinancialVman
agement.V ThisVglobalVshiftVisVinVmarkedVcontrastVtoVaVsituationVthatVexistedVwhenVtheVauth
orsVofVthisVbookVwereVlearningVfinanceVaVfewVdecadesVago.V AtVthatVtime,VmostVprofessorsV
customarilyV(andVsafely,VtoVsomeVextent)VignoredVinternationalVaspectsVofVfinance.V ThisVmo
deVofVoperationVhasVbecomeVuntenableVsinceVthen.
2. HowVisVinternationalVfinancialVmanagementVdifferentVfromVdomesticVfinancialVmanagement?
Answer:V ThereVareVthreeVmajorVdimensionsVthatVsetVapartVinternationalVfinanceVfromVdome
sticVfinance.VTheyVare:
1. foreignVexchangeVandVpoliticalVrisks,
2. marketVimperfections,Vand
3. expandedVopportunityVset.
3. DiscussVtheVmajorVtrendsVthatVhaveVprevailedVinVinternationalVbusinessVduringVtheVla
stVtwoVdecades.
Answer:V TheV2000sVbroughtVaVrapidVintegrationVofVinternationalVcapitalVandVfinancialVmark
ets.VImpetusVforVglobalizedVfinancialVmarketsVinitiallyVcameVfromVtheVgovernmentsVofVmajor
VcountriesVthatVhadVbegunVtoVderegulateVtheirVforeignVexchangeVandVcapitalVmarkets.V The
Veconomic
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
,integrationVandVglobalizationVthatVbeganVinVtheVeightiesVandVninetiesVareVpickingVupVspeed
VinVtheV2000s.VTradeVliberalizationVandVeconomicVintegrationVcontinuedVtoVproceedVatVboth
VtheVregionalVandVglobalVlevels.VDespiteVsovereignVdebtVcrisisVinVEurope,VmoreVEUVmemb
erVcountriesVhaveVadoptedVtheVcommonVcurrency,VtheVeuro,VthatVeffectivelyVbecameVtheVs
econdVglobalVcurrencyVafterVtheVU.S.Vdollar.VInVtheVlastVfewVyears,Vhowever,VeconomicVnat
ionalismVhasVbeenVgainingVsomeVpopularity,VasVexemplifiedVbyVtheVBrexitVdecisionVofVtheV
UnitedVKingdomVandVtheVso-called
―AmericaVFirst‖VpoliciesVofVtheVTrumpVAdministration.VToVtheVextentVthatVeconomicVnational
ismVisVaVpopulistVresponseVtoVtheVglobalVfinancialVcrisisVandVGreatVRecession,VitVmayVsub
sideVasVtheVworldVeconomyVcontinuesVtoVrecover.
4. HowVisVaVcountry‘sVeconomicVwell-
beingVenhancedVthroughVfreeVinternationalVtradeVinVgoodsVandVservices?
Answer:V AccordingVtoVDavidVRicardo,VwithVfreeVinternationalVtrade,VitVisVmutuallyVbeneficial
VforVtwoVcountriesVtoVeachVspecializeVinVtheVproductionVofVtheVgoodsVthatVitVcanVproduceVr
elativelyVmostVefficientlyVandVthenVtradeVthoseVgoods.V ByVdoingVso,VtheVtwoVcountriesVcan
VincreaseVtheirVcombinedVproduction,VwhichVallowsVbothVcountriesVtoVconsumeVmoreVofVbo
thVgoods.VThisVargumentVremainsVvalidVevenVifVaVcountryVcanVproduceVbothVgoodsVmoreV
efficientlyVinVabsoluteVtermsVthanVtheVotherVcountry.V InternationalVtradeVisVnotVaV‗zero-
sum‘VgameVinVwhichVoneVcountryVbenefitsVatVtheVexpenseVofVanotherVcountry.VRather,Vinte
rnationalVtradeVcouldVbeVanV‗increasing-
Vsum‘VgameVfromVwhichVallVplayersVbecomeVwinners.
5. WhatVconsiderationsVmightVlimitVtheVextentVtoVwhichVtheVtheoryVofVcomparativeVadvant
ageVisVrealistic?
Answer:V TheVtheoryVofVcomparativeVadvantageVwasVoriginallyVadvancedVbyVtheVnineteenth
VcenturyVeconomistVDavidVRicardoVasVanVexplanationVforVwhyVnationsVtradeVwithVoneVanot
her.VTheVtheoryVclaimsVthatVeconomicVwell-
beingVisVenhancedVifVeachVcountryVproducesVwhatVitVhasVaVcomparativeVadvantageVinVpro
ducingVrelativeVtoVotherVcountries,VandVthenVtradeVproducts.
UnderlyingVtheVtheoryVareVtheVassumptionsVofVfreeVtradeVbetweenVnationsVandVthatVtheVfa
ctorsVofVproductionV(labor,VtechnologicalVknow-
how,VandVcapital)VareVrelativelyVimmobile.V ToVtheVextentVthatVtheseVassumptionsVdoVnotVh
old,VtheVtheoryVofVcomparativeVadvantageVmayVnotVrealisticallyVdescribeVinternationalVtrade
.V InVaddition,VfreeVtradeVproducesVwinnersVandVlosersVandVifVtheVlosersVareVnotVcompensa
ted,VfreeVtradeVmayVfacesVpoliticalVoppositionVfromVthem.
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
,6. WhatVareVmultinationalVcorporationsV(MNCs)VandVwhatVeconomicVrolesVdoVtheyVplay?
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
, Answer:V AVmultinationalVcorporationV(MNC)VcanVbeVdefinedVasVaVbusinessVfirmVincorporate
dVinVoneVcountryVthatVhasVproductionVandVsalesVoperationsVinVmanyVotherVcountries.VIndee
d,VsomeVMNCsVhaveVoperationsVinVaVfewVdozensVofVdifferentVcountries.V MNCsVobtainVfina
ncingVfromVmajorVmoneyVcentersVaroundVtheVworldVinVmanyVdifferentVcurrenciesVtoVfinance
VtheirVoperations.VGlobalVoperationsVforceVtheVtreasurer‘sVofficeVtoVestablishVinternationalVb
ankingVrelationships,VtoVplaceVshort-
termVfundsVinVseveralVcurrencyVdenominations,VandVtoVeffectivelyVmanageVforeignVexchang
eVrisk.V ByVcircumventingVandValsoVtakingVadvantageVofVvariousVmarketVimperfections,Vsuch
VasVbarriersVtoVtradeVandVbarriersVtoVflowVofVpeopleVandVcapitalVacrossVcountries,VMNCsVc
ontributeVtoVgreaterVintegrationVofVtheVworldVeconomyVandVingVmoreVperfectVfunctioningVofV
globalVmarkets.
7. RossVPerot,VaVformerVPresidentialVcandidateVofVtheVReformVParty,VwhichVwasVaVthirdV
politicalVpartyVinVtheVUnitedVStates,VhadVstronglyVobjectedVtoVtheVcreationVofVtheVNorthVAm
ericanVTradeVAgreementV(NAFTA),VwhichVnonethelessVwasVinauguratedVinV1994.VPerotVfea
redVtheVlossVofVAmericanVjobsVtoVMexicoVwhereVitVisVmuchVcheaperVtoVhireVworkers.VWhat
VareVtheVmeritsVandVdemeritsVofVPerot‘sVpositionVonVNAFTA?VConsideringVtheVrecentVecon
omicVdevelopmentsVinVNorthVAmerica,VhowVwouldVyouVassessVPerot‘sVpositionVonVNAFTA?
Answer:VSinceVtheVinceptionVofVNAFTA,VmanyVAmericanVcompaniesVindeedVhaveVinvested
VheavilyVinVMexico,VsometimesVrelocatingVproductionVfromVtheVUnitedVStatesVtoVMexico.VAlt
houghVthisVmightVhaveVtemporarilyVcausedVunemploymentVofVsomeVAmericanVworkers,Vthe
yVwereVeventuallyVrehiredVbyVotherVindustriesVoftenVforVhigherVwages.VAtVtheVsameVtime,V
MexicoVhasVbeenVexperiencingVaVmajorVeconomicVboom.VItVseemsVclearVthatVbothVMexico
VandVtheVU.S.VhaveVbenefitedVfromVNAFTA.VPerot‘sVconcernVappearsVtoVhaveVbeenVillVfou
nded.
8. InV1995,VaVworkingVgroupVofVFrenchVchiefVexecutiveVofficersVwasVsetVupVbyVtheVConfed
erationVofVFrenchVIndustryV(CNPF)VandVtheVFrenchVAssociationVofVPrivateVCompaniesV(AFE
P)VtoVstudyVtheVFrenchVcorporateVgovernanceVstructure.VTheVgroupVreportedVtheVfollowing,V
amongVotherVthings:V ―TheVboardVofVdirectorsVshouldVnotVsimplyVaimVatVmaximizingVshareVv
aluesVasVinVtheVU.K.VandVtheVU.S.VRather,VitsVgoalVshouldVbeVtoVserveVtheVcompany,Vwhos
eVinterestsVshouldVbeVclearlyVdistinguishedVfromVthoseVofVitsVshareholders,Vemployees,Vcred
itors,VsuppliersVandVclientsVbutVstillVequatedVwithVtheirVgeneralVcommonVinterest,VwhichVisVt
oVsafeguardVtheVprosperityVandVcontinuityVofVtheVcompany‖.VEvaluateVtheVaboveVrecommen
dationVofVtheVworkingVgroup.
Answer:VTheVrecommendationsVofVtheVFrenchVworkingVgroupVclearlyVshowVthatVshareholde
©MCGRAWVHILLVLLC.VALLVRIGHTSVRESERVED.VNOVREPRODUCTIONVORVDISTRIBUTIONVWITHOUTVTHEVPRIORVWRITTENVCONSENTVOF
VMCGRAWVHILLVLLC
