Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j1
MULTINATIONAL FINANCIAL MANAGEMENT: OPPORTUNITIE
J J J
S AND CHALLENGES
J J
ALL CHAPTERS
J
1. GlobalizationjRisksjforjMNEs.jWasjglobalizationjresponsiblejforjthejslowdownjofjMNEjbusinessjd
uringjthejfinancialjcrisisjofj2008?
Injtoday’sjglobaljeconomy,jthejprocessjthatjintegratesjworldjtrade,jlinksjfinancialjmarkets,jandjpropelsjc
ross-borderjcapitaljflowsjisjcalledjfinancialjglobalization.jInjourjglobalizedjworld,j€4–
5jtrillionjinjforeignjexchangejtransactionsjarejmadejdaily,jandjaroundj€20jtrillionjofjgoodsjandjservicesja
rejtradedjglobally.jAsjmuchjasjfinancialjglobalizationjhasjproducedjmanyjopportunitiesjforjMNEs,jitjhas
jalsojintroducedjnewjthreats.jIrresponsiblejbankjlendingjandjcreditjexcessesjledjtojfailuresjofjhighlyjleve
ragedjbanksjandjlargejbusinesses.jThejbustjcreditjandjsharpjeconomicjdownturnjrapidlyjspreadjfromjthej
UnitedjStatesjandjEuropejtojthejrestjofjthejworld.jConsequently,jglobaljpurchasingjpowerjandjconsumerj
confidencejdroppedjroundjthejworld,jseverelyjimpactingjsalesjrevenues.jMNEsjwerejespeciallyjhit,jnotj
onlyjbecausejtheirjglobaljsalesjdropped,jbutjalsojbecausejmuchjofjtheirjexcessjfundsjwerejinvestedjinjris
kyjassets.
2. MNEsjandjOperationjinjGlobaljMarkets.jWhatjarejthejfactorsjthatjaffectjthejdecisionsjofjm
ultinationaljenterprisesjtojoperatejinjglobaljmarkets?
Thejmainjdeterminingjfactorjforjoperatingjinjajnewjmarketjisjthejcomparativejadvantagejinjtermsjofjcos
tjandjratejofjproductivityjofjfactorsjofjproduction,jbetterjregulations,jlowerjtaxation,jprotectionistjtra
dejbarriers,jstablejforeignjexchange,jandjlargerjmarkets.jOtherjfactorsjthatjincentivizejforeignjinvesto
rsjarejsavingsjonjtransportationjcostsjandjthejneedjtojregularlyjadaptjtojchangingjlocaljdemand.
3. EurocurrenciesjandjEurocurrencyjMarkets.jWhatjarejthejmajorjeurocurrencies?jWhatjisjmeantjbyjajE
urocurrencyjmarket?
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j2
Ajeurocurrencyjisjajfreelyjtradablejforeignjcurrencyjdepositedjinjajdomesticjbankjofjajnationjthatjisjnotj
thejnativejcountryjissuingjthisjcurrency.j ThejmainjeurocurrenciesjarejthejUSjdollar,jthejeuro,jthejBritish
jpound,jandjthejJapanesejyen.jAjeurocurrencyjmarketjisjajmoneyjmarketjwherejfinancialjinstitutionsjpr
ovidejbankingjservicesjtojajvarietyjofjindividual,jcorporate,jandjsovereignjcustomersjinjeurocurrencies.
4. FragilityjofjthejGlobaljFinancialjMarketplace.jHowjhasjthejglobaljfinancialjcrisisjexposedjthejfragilityjofj
assetsjandjinstitutionsjofjthejglobaljsystem?
Injthejinterlockedjfinancialjglobaljsystem,jthejfragilityjofjassetsjandjinstitutionsjledjtojthejeruptionjofjth
ejglobaljfinancialjsector.jHighjriskjassetsjsuchjasjderivativesjwerejtraded.jWhilejinitiallyjgeneratedjtojhe
dgejagainstjrisksjandjcreatejliquidity,jmanyjofjthesejderivativesjwerejmulti-
tieredjandjhighlyjopaque,jmakingjitjdifficultjtojassessjthejinherentjrisksjassociatedjwithjthem.jThejinstit
utional
frameworkjforjderegulationjandjlapsejsupervisionjleftjmanyjfinancialjinstitutionsjandjinstrumentsjunr
egulated.jMoreover,jthejlackjofjajglobaljregulatoryjframeworkjleftjinterbankjtransactionsjhighlyjunsupe
rvised.jAlljofjthesejfactors—rangingjfromjirresponsiblejissuancejandjtradingjinjhighjrisk
assets,jpoorjdomesticjsupervision,jandjthejlackjofjglobaljregulationjofjinterbankjtransactions—
jexposedjthejfragilityjofjthejglobaljfinancialjframeworkjwhenjthejglobaljfinancialjcrisisjerupted.
5. MNEsjandjLIBOR.jMostjMNEsjeitherjtakejloansjinjeurocurrenciesjorjissuejeurobondsjwithjajfloatingjco
uponjratejtiedjtojthejLIBOR.jExplainjhowjMNEsjwerejaffectedjbyjthejLIBORjscandal.
AjfewjlargejbanksjwerejfinedjandjpenalizedjforjriggingjthejbenchmarkjLIBORjrate.jWhilejlargejbanksjbo
rrowedjfundsj(asjwasjthejcasejduringjthejglobaljfinancialjcrisis),jtheyjmadejtheirjquotesjbelowjthejfairj
marketjrate.jRegulatorsjoftenjassumedjthatjbanksjwerejalsojtryingjtojbenefitjtheirjcorporatejcustomer
s,jallowingjMNEsjtojissuejnewjeurobondsjatjlowerjrates,jhencejsubstantiallyjreducingjthejpurchasingjp
owerjofjthosejholdingjtheirjbonds.
6. Post-
LIBORjScandal.jWhyjdojyoujthinkjthejUKjgovernmentjhasjresolvedjagainstjthejtotaljeliminationjofjLIBO
Rjbenchmarksjafterjthejscandal?
ThejLondonjInterbankjOfferedjRatej(LIBOR)jisjwidelyjusedjasjajbenchmarkjinterestjratejforjhundredsjofj
billionsjofjdollarsjinjfinancialjcontracts,jcorporatejloans,jandjadjustablejratejhomejmortgagesjandjcons
umerjloans.jInj2012,jthejLIBORjscandaljwasjexposed,jrevealingjcollusionjbetweenjand
inaccuratejinterestjratejquotesjbyjajdozenjlargejBritishjbanks,jsomejofjwhichjfraudulentlyjreported
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j3
theirjshort-
termjborrowingjcostsjsojasjtojprofitjfromjdeals.jFollowingjthejLIBORjscandal,jmanyjhavejcalledjforjthejt
otaljeliminationjofjLIBOR.jHowever,jasjitjremainsjthejonejandjonlyjpervasivejinterestjratejbenchmark,j
thejBritishjgovernmentjdecidedjagainstjabandoningjitjandjresolvedjtojtake
measuresjtojsavejandjreformjit.jThejnumberjofjLIBORjquotesjwouldjdropjfromj150jtojthej20jmostjim
portantjones.jAmongjthejcurrenciesjtojbejphasedjoutjarejthejAustralianjdollar,jCanadianjdollar,
NewjZealandjdollar,jDanishjkroner,jandjSwedishjkroner.jMoreover,jfourjofjthejlonger-
termjmaturitiesjwouldjbejeliminated.jAdditionally,jalljreportingjbanksjarejrequiredjtojsubmitjdocument
ationjprovingjthejsourcesjofjthejratesjtheyjarejquoting.jHowever,jthejcaveatjisjthatjmanyjofjthejratesjw
ould
remainjunsupportedjbyjactualjinterbankjtransactions,jraisingjdoubtsjaboutjthejaccuracyjofjlonger-
jtermjLIBORjquotes.
7. LimitationsjofjComparativejAdvantage.jKeyjtojunderstandingjmostjtheoriesjisjwhatjtheyjsayjandjw
hatjtheyjdon’t.jNamejfourjorjfivejkeyjlimitationsjtojthejtheoryjofjcomparativejadvantage.
Althoughjinternationaljtradejmightjhavejapproachedjthejcomparativejadvantagejmodeljduringjthejni
neteenthjcentury,jitjcertainlyjdoesjnotjtoday,jforjthejfollowingjreasons:
▪ Countriesjdojnotjappearjtojspecializejonlyjinjthosejproductsjthatjcouldjbejmostjefficientlyjproduce
djbyjthatjcountry’sjparticularjfactorsjofjproduction.jInstead,jgovernmentsjinterferejwithjcomparati
vejadvantagejforjajvarietyjofjeconomicjandjpoliticaljreasons,jsuchjasjtojachievejfulljemployment,je
conomicjdevelopment,jnationaljself-sufficiencyjinjdefense-
relatedjindustries,jandjprotectionjofjanjagriculturaljsector’sjwayjofjlife.jGovernmentjinterferencejt
akesjthejformjofjtariffs,jquotas,jandjotherjnon-tariffjrestrictions.
▪ Atjleastjtwojofjthejfactorsjofjproduction,jcapitaljandjtechnology,jnowjflowjdirectlyjandjeasilyjbetwe
enjcountries,jratherjthanjonlyjindirectlyjthroughjtradedjgoodsjandjservices.jThisjdirectjflowjoccursjb
etweenjrelatedjsubsidiariesjandjaffiliatesjofjmultinationaljfirms,jasjwelljasjbetweenjunrelatedjfirmsj
viajloansjandjlicensejandjmanagementjcontracts.jEvenjlaborjflowsjbetweenjcountries,jsuchjasjimmi
grantsjintojthejUnitedjStatesj(legaljandjillegal),jimmigrantsjwithinjthejEuropeanjUnionjandjotherjun
ions.
▪ Modernjfactorsjofjproductionjarejmorejnumerousjthanjinjthisjsimplejmodel.jFactorsjconsideredjinjth
ejlocationjofjproductionjfacilitiesjworldwidejincludejlocaljandjmanagerialjskills,jajdependablejlegalj
structurejforjsettlingjcontractjdisputes,jresearchjandjdevelopmentjcompetence,jeducationaljlevelsjof
javailablejworkers,jenergyjresources,jconsumerjdemandjforjbrandjnamejgoods,jmineraljandjrawjmat
erialjavailability,jaccessjtojcapital,jtaxjdifferentials,jsupportingjinfrastructurej(roads,jports,jcommun
icationjfacilities),jandjpossiblyjothers.
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j4
▪ Althoughjthejtermsjofjtradejarejultimatelyjdeterminedjbyjsupplyjandjdemand,jthejprocessjbyjw
hichjthejtermsjarejsetjisjdifferentjfromjthatjvisualizedjinjtraditionaljtradejtheory.jTheyjarejdeter
minedjpartlyjbyjadministeredjpricingjinjoligopolisticjmarkets.
▪ Comparativejadvantagejshiftsjoverjtimejasjlessjdevelopedjcountriesjbecomejmorejdevelopedjandjre
alizejtheirjlatentjopportunities.jForjexample,jduringjthejpastj150jyears,jcomparativejadvantagejinjpr
oducingjcottonjtextilesjhasjshiftedjfromjthejUnitedjKingdomjtojthejUnitedjStatesjtojJapanjtojHongj
KongjtojTaiwanjandjtojChina.
▪ Thejclassicaljmodeljofjcomparativejadvantagejdidjnotjreallyjaddressjcertainjotherjissues,jsuchjasjth
ejeffectjofjuncertaintyjandjinformationjcosts,jthejrolejofjdifferentiatedjproductsjinjimperfectlyjcom
petitivejmarkets,jandjeconomiesjofjscale.
Nevertheless,jalthoughjthejworldjisjajlongjwayjfromjthejclassicaljtradejmodel,jthejgeneraljprinciplejofjc
omparativejadvantagejisjstilljvalid.jThejcloserjthejworldjgetsjtojtruejinternationaljspecialization,jthejmo
rejworldjproductionjandjconsumptionjcanjbejincreased,jprovidedjthejproblemjofjequitablejdistributio
njofjthejbenefitsjcanjbejsolvedjtojthejsatisfactionjofjconsumers,jproducers,jandjpoliticaljleaders.jComp
letejspecialization,jhowever,jremainsjanjunrealisticjlimitingjcase,jjustjasjperfectjcompetitionjisjajlimiti
ngjcasejinjmicroeconomicjtheory.
8. ComparativejAdvantagejinjthejTwenty-
FirstjCentury.jWithjreferencejtojthejtheoryjofjcomparativejadvantage,jexplainjhowjMNEsjoutsourcej
somejservicesjtojemergingjmarketjeconomies.
Thejtheoryjofjcomparativejadvantagejexplainsjthatjspecificjfirmsjorjnationsjmay,jinjcomparisonjtojothe
rs,jhavejanjadvantagejinjproducingjajparticularjgoodjorjservicejatjajlowerjrelativejopportunityjcost.jThis
jadvantagejmayjarisejduejtojdifferencesjinjfactorjendowments,jtechnologicaljprogress,jfavorablejrealje
xchangejrate,jprotectionism,jimportjcontrols,jetc.jSomejemergingjmarketjeconomiesjhavejshownjcomp
arativejadvantagejinjthejproductionjofjlow-
costjmanufacturedjtangiblejcommodities,jhencejattractingjMNEs’jcapitaljinflows.jButjinjthejmorejdeve
lopedjemergingjnationsjthatjallocatejsubstantialjfundsjtojresearchjandjinnovation,jsuchjasjIndiajandjM
alaysia,jtradejin
servicesjhasjincreasedjfive-foldjoverjthejlastjfivejdecades.jAccordingly,jMNEsjhavejsteppedjinto
thesejnationsjinjorderjtojmanufacturejhigh-valuejandjhigh-techjmanufacturedjgoods,jandjprovidejIT-
jknowledgejservices.
9. Ganado’sjGlobalization.jAfterjreadingjthejchapter’sjdescriptionjofjGanado’sjglobalizationjprocess,jho
wjwouldjyoujexplainjthejdistinctionsjbetweenjinternational,jmultinational,jandjglobaljcompanies?
MULTINATIONAL FINANCIAL MANAGEMENT: OPPORTUNITIE
J J J
S AND CHALLENGES
J J
ALL CHAPTERS
J
1. GlobalizationjRisksjforjMNEs.jWasjglobalizationjresponsiblejforjthejslowdownjofjMNEjbusinessjd
uringjthejfinancialjcrisisjofj2008?
Injtoday’sjglobaljeconomy,jthejprocessjthatjintegratesjworldjtrade,jlinksjfinancialjmarkets,jandjpropelsjc
ross-borderjcapitaljflowsjisjcalledjfinancialjglobalization.jInjourjglobalizedjworld,j€4–
5jtrillionjinjforeignjexchangejtransactionsjarejmadejdaily,jandjaroundj€20jtrillionjofjgoodsjandjservicesja
rejtradedjglobally.jAsjmuchjasjfinancialjglobalizationjhasjproducedjmanyjopportunitiesjforjMNEs,jitjhas
jalsojintroducedjnewjthreats.jIrresponsiblejbankjlendingjandjcreditjexcessesjledjtojfailuresjofjhighlyjleve
ragedjbanksjandjlargejbusinesses.jThejbustjcreditjandjsharpjeconomicjdownturnjrapidlyjspreadjfromjthej
UnitedjStatesjandjEuropejtojthejrestjofjthejworld.jConsequently,jglobaljpurchasingjpowerjandjconsumerj
confidencejdroppedjroundjthejworld,jseverelyjimpactingjsalesjrevenues.jMNEsjwerejespeciallyjhit,jnotj
onlyjbecausejtheirjglobaljsalesjdropped,jbutjalsojbecausejmuchjofjtheirjexcessjfundsjwerejinvestedjinjris
kyjassets.
2. MNEsjandjOperationjinjGlobaljMarkets.jWhatjarejthejfactorsjthatjaffectjthejdecisionsjofjm
ultinationaljenterprisesjtojoperatejinjglobaljmarkets?
Thejmainjdeterminingjfactorjforjoperatingjinjajnewjmarketjisjthejcomparativejadvantagejinjtermsjofjcos
tjandjratejofjproductivityjofjfactorsjofjproduction,jbetterjregulations,jlowerjtaxation,jprotectionistjtra
dejbarriers,jstablejforeignjexchange,jandjlargerjmarkets.jOtherjfactorsjthatjincentivizejforeignjinvesto
rsjarejsavingsjonjtransportationjcostsjandjthejneedjtojregularlyjadaptjtojchangingjlocaljdemand.
3. EurocurrenciesjandjEurocurrencyjMarkets.jWhatjarejthejmajorjeurocurrencies?jWhatjisjmeantjbyjajE
urocurrencyjmarket?
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j2
Ajeurocurrencyjisjajfreelyjtradablejforeignjcurrencyjdepositedjinjajdomesticjbankjofjajnationjthatjisjnotj
thejnativejcountryjissuingjthisjcurrency.j ThejmainjeurocurrenciesjarejthejUSjdollar,jthejeuro,jthejBritish
jpound,jandjthejJapanesejyen.jAjeurocurrencyjmarketjisjajmoneyjmarketjwherejfinancialjinstitutionsjpr
ovidejbankingjservicesjtojajvarietyjofjindividual,jcorporate,jandjsovereignjcustomersjinjeurocurrencies.
4. FragilityjofjthejGlobaljFinancialjMarketplace.jHowjhasjthejglobaljfinancialjcrisisjexposedjthejfragilityjofj
assetsjandjinstitutionsjofjthejglobaljsystem?
Injthejinterlockedjfinancialjglobaljsystem,jthejfragilityjofjassetsjandjinstitutionsjledjtojthejeruptionjofjth
ejglobaljfinancialjsector.jHighjriskjassetsjsuchjasjderivativesjwerejtraded.jWhilejinitiallyjgeneratedjtojhe
dgejagainstjrisksjandjcreatejliquidity,jmanyjofjthesejderivativesjwerejmulti-
tieredjandjhighlyjopaque,jmakingjitjdifficultjtojassessjthejinherentjrisksjassociatedjwithjthem.jThejinstit
utional
frameworkjforjderegulationjandjlapsejsupervisionjleftjmanyjfinancialjinstitutionsjandjinstrumentsjunr
egulated.jMoreover,jthejlackjofjajglobaljregulatoryjframeworkjleftjinterbankjtransactionsjhighlyjunsupe
rvised.jAlljofjthesejfactors—rangingjfromjirresponsiblejissuancejandjtradingjinjhighjrisk
assets,jpoorjdomesticjsupervision,jandjthejlackjofjglobaljregulationjofjinterbankjtransactions—
jexposedjthejfragilityjofjthejglobaljfinancialjframeworkjwhenjthejglobaljfinancialjcrisisjerupted.
5. MNEsjandjLIBOR.jMostjMNEsjeitherjtakejloansjinjeurocurrenciesjorjissuejeurobondsjwithjajfloatingjco
uponjratejtiedjtojthejLIBOR.jExplainjhowjMNEsjwerejaffectedjbyjthejLIBORjscandal.
AjfewjlargejbanksjwerejfinedjandjpenalizedjforjriggingjthejbenchmarkjLIBORjrate.jWhilejlargejbanksjbo
rrowedjfundsj(asjwasjthejcasejduringjthejglobaljfinancialjcrisis),jtheyjmadejtheirjquotesjbelowjthejfairj
marketjrate.jRegulatorsjoftenjassumedjthatjbanksjwerejalsojtryingjtojbenefitjtheirjcorporatejcustomer
s,jallowingjMNEsjtojissuejnewjeurobondsjatjlowerjrates,jhencejsubstantiallyjreducingjthejpurchasingjp
owerjofjthosejholdingjtheirjbonds.
6. Post-
LIBORjScandal.jWhyjdojyoujthinkjthejUKjgovernmentjhasjresolvedjagainstjthejtotaljeliminationjofjLIBO
Rjbenchmarksjafterjthejscandal?
ThejLondonjInterbankjOfferedjRatej(LIBOR)jisjwidelyjusedjasjajbenchmarkjinterestjratejforjhundredsjofj
billionsjofjdollarsjinjfinancialjcontracts,jcorporatejloans,jandjadjustablejratejhomejmortgagesjandjcons
umerjloans.jInj2012,jthejLIBORjscandaljwasjexposed,jrevealingjcollusionjbetweenjand
inaccuratejinterestjratejquotesjbyjajdozenjlargejBritishjbanks,jsomejofjwhichjfraudulentlyjreported
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j3
theirjshort-
termjborrowingjcostsjsojasjtojprofitjfromjdeals.jFollowingjthejLIBORjscandal,jmanyjhavejcalledjforjthejt
otaljeliminationjofjLIBOR.jHowever,jasjitjremainsjthejonejandjonlyjpervasivejinterestjratejbenchmark,j
thejBritishjgovernmentjdecidedjagainstjabandoningjitjandjresolvedjtojtake
measuresjtojsavejandjreformjit.jThejnumberjofjLIBORjquotesjwouldjdropjfromj150jtojthej20jmostjim
portantjones.jAmongjthejcurrenciesjtojbejphasedjoutjarejthejAustralianjdollar,jCanadianjdollar,
NewjZealandjdollar,jDanishjkroner,jandjSwedishjkroner.jMoreover,jfourjofjthejlonger-
termjmaturitiesjwouldjbejeliminated.jAdditionally,jalljreportingjbanksjarejrequiredjtojsubmitjdocument
ationjprovingjthejsourcesjofjthejratesjtheyjarejquoting.jHowever,jthejcaveatjisjthatjmanyjofjthejratesjw
ould
remainjunsupportedjbyjactualjinterbankjtransactions,jraisingjdoubtsjaboutjthejaccuracyjofjlonger-
jtermjLIBORjquotes.
7. LimitationsjofjComparativejAdvantage.jKeyjtojunderstandingjmostjtheoriesjisjwhatjtheyjsayjandjw
hatjtheyjdon’t.jNamejfourjorjfivejkeyjlimitationsjtojthejtheoryjofjcomparativejadvantage.
Althoughjinternationaljtradejmightjhavejapproachedjthejcomparativejadvantagejmodeljduringjthejni
neteenthjcentury,jitjcertainlyjdoesjnotjtoday,jforjthejfollowingjreasons:
▪ Countriesjdojnotjappearjtojspecializejonlyjinjthosejproductsjthatjcouldjbejmostjefficientlyjproduce
djbyjthatjcountry’sjparticularjfactorsjofjproduction.jInstead,jgovernmentsjinterferejwithjcomparati
vejadvantagejforjajvarietyjofjeconomicjandjpoliticaljreasons,jsuchjasjtojachievejfulljemployment,je
conomicjdevelopment,jnationaljself-sufficiencyjinjdefense-
relatedjindustries,jandjprotectionjofjanjagriculturaljsector’sjwayjofjlife.jGovernmentjinterferencejt
akesjthejformjofjtariffs,jquotas,jandjotherjnon-tariffjrestrictions.
▪ Atjleastjtwojofjthejfactorsjofjproduction,jcapitaljandjtechnology,jnowjflowjdirectlyjandjeasilyjbetwe
enjcountries,jratherjthanjonlyjindirectlyjthroughjtradedjgoodsjandjservices.jThisjdirectjflowjoccursjb
etweenjrelatedjsubsidiariesjandjaffiliatesjofjmultinationaljfirms,jasjwelljasjbetweenjunrelatedjfirmsj
viajloansjandjlicensejandjmanagementjcontracts.jEvenjlaborjflowsjbetweenjcountries,jsuchjasjimmi
grantsjintojthejUnitedjStatesj(legaljandjillegal),jimmigrantsjwithinjthejEuropeanjUnionjandjotherjun
ions.
▪ Modernjfactorsjofjproductionjarejmorejnumerousjthanjinjthisjsimplejmodel.jFactorsjconsideredjinjth
ejlocationjofjproductionjfacilitiesjworldwidejincludejlocaljandjmanagerialjskills,jajdependablejlegalj
structurejforjsettlingjcontractjdisputes,jresearchjandjdevelopmentjcompetence,jeducationaljlevelsjof
javailablejworkers,jenergyjresources,jconsumerjdemandjforjbrandjnamejgoods,jmineraljandjrawjmat
erialjavailability,jaccessjtojcapital,jtaxjdifferentials,jsupportingjinfrastructurej(roads,jports,jcommun
icationjfacilities),jandjpossiblyjothers.
, Chapterj1jMultinationaljFinancialjManagement:jOpportunitiesjandjChallengesj▪j4
▪ Althoughjthejtermsjofjtradejarejultimatelyjdeterminedjbyjsupplyjandjdemand,jthejprocessjbyjw
hichjthejtermsjarejsetjisjdifferentjfromjthatjvisualizedjinjtraditionaljtradejtheory.jTheyjarejdeter
minedjpartlyjbyjadministeredjpricingjinjoligopolisticjmarkets.
▪ Comparativejadvantagejshiftsjoverjtimejasjlessjdevelopedjcountriesjbecomejmorejdevelopedjandjre
alizejtheirjlatentjopportunities.jForjexample,jduringjthejpastj150jyears,jcomparativejadvantagejinjpr
oducingjcottonjtextilesjhasjshiftedjfromjthejUnitedjKingdomjtojthejUnitedjStatesjtojJapanjtojHongj
KongjtojTaiwanjandjtojChina.
▪ Thejclassicaljmodeljofjcomparativejadvantagejdidjnotjreallyjaddressjcertainjotherjissues,jsuchjasjth
ejeffectjofjuncertaintyjandjinformationjcosts,jthejrolejofjdifferentiatedjproductsjinjimperfectlyjcom
petitivejmarkets,jandjeconomiesjofjscale.
Nevertheless,jalthoughjthejworldjisjajlongjwayjfromjthejclassicaljtradejmodel,jthejgeneraljprinciplejofjc
omparativejadvantagejisjstilljvalid.jThejcloserjthejworldjgetsjtojtruejinternationaljspecialization,jthejmo
rejworldjproductionjandjconsumptionjcanjbejincreased,jprovidedjthejproblemjofjequitablejdistributio
njofjthejbenefitsjcanjbejsolvedjtojthejsatisfactionjofjconsumers,jproducers,jandjpoliticaljleaders.jComp
letejspecialization,jhowever,jremainsjanjunrealisticjlimitingjcase,jjustjasjperfectjcompetitionjisjajlimiti
ngjcasejinjmicroeconomicjtheory.
8. ComparativejAdvantagejinjthejTwenty-
FirstjCentury.jWithjreferencejtojthejtheoryjofjcomparativejadvantage,jexplainjhowjMNEsjoutsourcej
somejservicesjtojemergingjmarketjeconomies.
Thejtheoryjofjcomparativejadvantagejexplainsjthatjspecificjfirmsjorjnationsjmay,jinjcomparisonjtojothe
rs,jhavejanjadvantagejinjproducingjajparticularjgoodjorjservicejatjajlowerjrelativejopportunityjcost.jThis
jadvantagejmayjarisejduejtojdifferencesjinjfactorjendowments,jtechnologicaljprogress,jfavorablejrealje
xchangejrate,jprotectionism,jimportjcontrols,jetc.jSomejemergingjmarketjeconomiesjhavejshownjcomp
arativejadvantagejinjthejproductionjofjlow-
costjmanufacturedjtangiblejcommodities,jhencejattractingjMNEs’jcapitaljinflows.jButjinjthejmorejdeve
lopedjemergingjnationsjthatjallocatejsubstantialjfundsjtojresearchjandjinnovation,jsuchjasjIndiajandjM
alaysia,jtradejin
servicesjhasjincreasedjfive-foldjoverjthejlastjfivejdecades.jAccordingly,jMNEsjhavejsteppedjinto
thesejnationsjinjorderjtojmanufacturejhigh-valuejandjhigh-techjmanufacturedjgoods,jandjprovidejIT-
jknowledgejservices.
9. Ganado’sjGlobalization.jAfterjreadingjthejchapter’sjdescriptionjofjGanado’sjglobalizationjprocess,jho
wjwouldjyoujexplainjthejdistinctionsjbetweenjinternational,jmultinational,jandjglobaljcompanies?
