IBUS 401 - CHAPTER 1 Questions and Answers.
1.a. Explain the agency problem of MNCs. CORRECT ANSWER: The agency problem reflects
a conflict of interests between decision-making managers and the owners of the MNC. Agency
costs occur in an effort to assure that managers act in the best interest of the owners.
1.b. Why might agency costs be larger for an MNC than for a purely domestic firm? CORRECT
ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
following reasons. First, MNCs incur larger agency costs in monitoring managers of distant
foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not
follow uniform goals, and some managers may focus on satisfying respective employees. Third,
the sheer size of the larger MNCs would also create large agency problems.
2.a. Explain how the theory of comparative advantage relates to the need for international
business. CORRECT ANSWER: The theory of comparative advantage implies that countries
should specialize in production, thereby relying on other countries for some products.
Consequently, there is a need for international business.
2.b. Explain how the product cycle theory relates to the growth of an MNC. CORRECT
ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to
capitalize on its perceived advantages in markets other than where it was initially established.
3.a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
in foreign markets. CORRECT ANSWER: Because of imperfect markets, resources cannot be
easily and freely retrieved by the MNC. Consequently, the MNC must sometimes go to the
resources rather than retrieve resources (such as land, labor, etc.).
3.b. Suppose perfect markets existed. 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? CORRECT ANSWER: If perfect markets existed, resources would be more
mobile and could therefore be transferred to those countries more willing to pay a high price for
them. As this occurred, shortages of resources in any particular country would be alleviated
(decrease) and the costs of such resources would be similar across countries.
, 4.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? CORRECT ANSWER: An
acquisition will typically result in greater growth, but it is more risky because it normally
requires a larger investment and the decision cannot be easily reversed once the acquisition is
made.
4.b. Describe a scenario in which the size of a corporation is not affected by access to
international opportunities. CORRECT ANSWER: Some firms may avoid opportunities because
they lack knowledge about foreign markets or expect that the risks are excessive. Thus, the size
of these firms is not affected by the opportunities.
4.c. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities
for international expansion. CORRECT ANSWER: Coca Cola and PepsiCo still have new
international opportunities because countries are at various stages of development. Some
countries have just recently opened their borders to MNCs. Many of these countries do not offer
sufficient food or drink products to their consumers.
What factors cause some firms to become more internationalized than others? CORRECT
ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk
perception of international business will influence the degree to which a firm becomes
internationalized.Several other factors such as access to capital could also be relevant here. Firms
that are labor-intensive could more easily capitalize on low-wage countries while firms that rely
on technological advances could not.
Offer your opinion on why the Internet may result in more international business. CORRECT
ANSWER: The Internet allows for easy and low-cost communication between countries, so that
firms could now develop contacts with potential customers overseas by having a website. Many
firms use their website to identify the products that they sell, along with the prices for each
product. This allows them to easily advertise their products to potential importers anywhere in
the world without mailing brochures to various countries. In addition, they can add to their
product line and change prices by simply revising their website, so importers are kept abreast of
the exporter's product information by monitoring the exporter's website periodically. Firms can
also use their websites to accept orders online. Some firms with an international reputation use
their brand name to advertise products over the internet. They may use manufacturers in some
foreign countries to produce some of their products subject to their specification
1.a. Explain the agency problem of MNCs. CORRECT ANSWER: The agency problem reflects
a conflict of interests between decision-making managers and the owners of the MNC. Agency
costs occur in an effort to assure that managers act in the best interest of the owners.
1.b. Why might agency costs be larger for an MNC than for a purely domestic firm? CORRECT
ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
following reasons. First, MNCs incur larger agency costs in monitoring managers of distant
foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not
follow uniform goals, and some managers may focus on satisfying respective employees. Third,
the sheer size of the larger MNCs would also create large agency problems.
2.a. Explain how the theory of comparative advantage relates to the need for international
business. CORRECT ANSWER: The theory of comparative advantage implies that countries
should specialize in production, thereby relying on other countries for some products.
Consequently, there is a need for international business.
2.b. Explain how the product cycle theory relates to the growth of an MNC. CORRECT
ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to
capitalize on its perceived advantages in markets other than where it was initially established.
3.a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
in foreign markets. CORRECT ANSWER: Because of imperfect markets, resources cannot be
easily and freely retrieved by the MNC. Consequently, the MNC must sometimes go to the
resources rather than retrieve resources (such as land, labor, etc.).
3.b. Suppose perfect markets existed. 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? CORRECT ANSWER: If perfect markets existed, resources would be more
mobile and could therefore be transferred to those countries more willing to pay a high price for
them. As this occurred, shortages of resources in any particular country would be alleviated
(decrease) and the costs of such resources would be similar across countries.
, 4.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? CORRECT ANSWER: An
acquisition will typically result in greater growth, but it is more risky because it normally
requires a larger investment and the decision cannot be easily reversed once the acquisition is
made.
4.b. Describe a scenario in which the size of a corporation is not affected by access to
international opportunities. CORRECT ANSWER: Some firms may avoid opportunities because
they lack knowledge about foreign markets or expect that the risks are excessive. Thus, the size
of these firms is not affected by the opportunities.
4.c. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities
for international expansion. CORRECT ANSWER: Coca Cola and PepsiCo still have new
international opportunities because countries are at various stages of development. Some
countries have just recently opened their borders to MNCs. Many of these countries do not offer
sufficient food or drink products to their consumers.
What factors cause some firms to become more internationalized than others? CORRECT
ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk
perception of international business will influence the degree to which a firm becomes
internationalized.Several other factors such as access to capital could also be relevant here. Firms
that are labor-intensive could more easily capitalize on low-wage countries while firms that rely
on technological advances could not.
Offer your opinion on why the Internet may result in more international business. CORRECT
ANSWER: The Internet allows for easy and low-cost communication between countries, so that
firms could now develop contacts with potential customers overseas by having a website. Many
firms use their website to identify the products that they sell, along with the prices for each
product. This allows them to easily advertise their products to potential importers anywhere in
the world without mailing brochures to various countries. In addition, they can add to their
product line and change prices by simply revising their website, so importers are kept abreast of
the exporter's product information by monitoring the exporter's website periodically. Firms can
also use their websites to accept orders online. Some firms with an international reputation use
their brand name to advertise products over the internet. They may use manufacturers in some
foreign countries to produce some of their products subject to their specification
