1: Chapter Managing Finance in Foreign Subsidiaries
1. Motives of an MNC. Describe constraints that interfere with a MNCs objective.
ANSWER: The constraints faced by financial managers attempting to maximize shareholder wealth are:
a. Environmental constraints - countries impose environmental regulations such as building codes and pollution controls, which
increase costs of production.
b. Regulatory constraints - host governments can impose taxes, restrictions on earnings remittances, and restrictions on currency
convertibility, which may reduce cash flows to be received by the parent.
c. Ethical constraints - U. S.-based MNCs may beat a competitive disadvantage if they follow a worldwide code of ethics, because
other firms may use tactics that are allowed in some foreign countries but considered illegal by U. S. standards.
2. International Opportunities.
a. How does access to international opportunities affect the size of corporations?
ANSWER: Additional opportunities will often cause a firm to grow more than if it did not have access to such opportunities. Thus, a
firm that considers international opportunities has greater potential for growth.
b. Describe a scenario in which the size of a corporation is not affected by access to international opportunities.
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.
c. Explain why MNCs such as Coca Cola and Pepsi Co, Inc., still have numerous opportunities for international expansion.
ANSWER: Coca Cola and Pepsi Co 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.
3. Impact of the Euro on U.S. Subsidiaries. McCanna Corp. has a French subsidiary that produces wine and exports to various
European countries. Explain how the subsidiary’s business may have been affected since the conversion of many European currencies
into a single European currency (the euro) in 1999.
ANSWER: The subsidiary and its customers based in countries that now use the euro as their currency would no longer be exposed to
exchange rate risk.
4. Agency Problems of MNCs. Explain the agency problem of MNCs.
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.
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 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. Third, the sheer size of the larger MNCs would also create large agency problems.
5. 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 establish a subsidiary in Brazil to
produce and sell the clubs, but this may require a large investment of funds. It could use licensing, in which it specifies to a Brazilian
firm how to produce the clubs. In this way, it does not have to establish its own subsidiary there.
b. Which method would you recommend for this firm? Justify your recommendation.
ANSWER: If the amount of golf clubs to be sold in Brazil is small, it may decide to export. However, if the expected sales level is
high, it may benefit from licensing. If it is confident that the expected sales level will remain high, it may be willing to establish a
subsidiary. The wages are lower in Brazil, and the large investment needed to establish a subsidiary may be worthwhile.
6. 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 the actual Eastern European market share next year?
ANSWER: It would likely overestimate its market share because the competition should increase as competitors penetrate the
European countries.
1
,8. Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the need for international business.
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.
b. Explain how the product cycle theory relates to the growth of an MNC.
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.
9. Impact of Political Risk. Explain why political risk may discourage international business.
ANSWER: Political risk increases the rate of return required to invest in foreign projects. Some foreign projects would have been
feasible if there was no political risk, but will not be feasible because of political risk.
10. Valuation of Wall-Marts International Business. In addition to all of its stores in the U.S., Wal-Mart has 11 stores in Argentina,
24 stores in Brazil, 214 stores in Canada, 29 stores in China, 92 stores in Germany, 15 stores in South Korea, 611 stores in Mexico,
and 261 stores in the U.K. Consider the value of Wal-Mart as being composed of two parts, aU.S. part (due to business in the U.S.)
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 Wal-Mart businesses outside the U.S.
ANSWER: The non-U.S. part can be measured as the present value of future dollar cash flows resulting from the non-U.S. businesses.
Based on recent earnings data for each store and applying an expected growth rate, you can estimate the remitted earnings that will
come from each country in each year in the future. You can convert those cash flows to dollars using a forecasted exchange rate per
year. Determine the present value of cash flows of all stores within one country. Then repeat the process for other countries. Then add
up all the present values that you estimated to derive a consolidated present value of all non-U.S. subsidiaries.
11. Valuation of an MNC. Birm Co., based in Alabama, considers 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) Birms 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:
Exchange rate at
Birmingham’s
which Birm Co.
Opportunity Dollar CF Euro CF weighted average
converts euros to
cost of capital
dollars
a. joint venture X
b. acquisition X X
c. imported
X
supplies
d. exports to
X
Ireland
12. Centralization and Agency Costs. Would the agency problem be more pronounced for Berkley Corp., which has its parent
company make 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 probability that subsidiary decisions
would conflict with the parent. Assuming that the parent attempts to maximize shareholder wealth, decisions by the parent should be
compatible with shareholder objectives. If the subsidiaries made their own decisions, the agency costs would be higher since the
parent would need to monitor the subsidiaries to assure that their decisions were intended to maximize shareholder wealth.
13. International Opportunities Due to the Internet.
2
,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 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.
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 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.
14. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by the MNC. Consequently, the MNC must
sometimes go to their sources rather than retrieve resources (such as land, labor, etc.).
b. 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 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 and the
costs of such resources would be similar across countries.
15. International Joint Venture. Anheuser-Busch, the producer of Budweiser and other beers, has recently expanded into Japan by
engaging 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 can utilize Kirin’s facilities to produce beer that will be
sold locally. In return, Anheuser-Busch provides information about the American beer market to Kirin.
a. Explain how the joint venture can enable Anheuser-Busch to achieve its objective of maximizing shareholder wealth.
ANSWER: The joint venture creates away for Anheuser-Busch to distribute Budweiser throughout Japan. It enables Anheuser-Busch
to penetrate the Japanese market without requiring a substantial investment in Japan.
b. Explain how the joint venture can limit the risk of the international business.
ANSWER: The joint venture has limited risk because Anheuser-Busch does not need to establish its own distribution network in
Japan. Thus, Anheuser-Busch may be able to use a smaller investment for the international business, and there is a higher probability
that the international business will be successful.
c. Many international joint ventures are intended to circumvent barriers that normally prevent foreign competition. What barrier in
Japan is Anheuser-Busch circumventing as a result of the joint venture? What barrier in the United States is Kirin circumventing as a
result of the joint venture?
ANSWER: Anheuser-Busch is able to benefit from Kirin distribution system in Japan, which would not normally be so accessible.
Kirin is able to learn more about how Anheuser-Busch expanded its product across numerous countries, and therefore breaks through
an information barrier.
d. Explain how Anheuser-Busch could lose some of its market share in countries outside Japan as result of this particular joint venture.
ANSWER: Anheuser-Busch could lose some of its market share to Kirin as a result of explaining its worldwide expansion strategies to
Kirin. However, it appears that Anheuser-Busch expects the potential benefits of the joint venture to outweigh any potential adverse
effects.
18. 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 mainU.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.
3
, ANSWER: It already has established credibility with American tourists, but could penetrate a new market with some of the same
customers that it has served on tours in the U.S.
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?
ANSWER: The employees of the subsidiary in Athens are not owners, and may have no incentive to manage in a manner that
maximizes the wealth of the owners. Thus; they may manage the tours inefficiently. Nantucket could attempt to allow the employees a
portion of the ownership of the company so that they benefit more directly from good performance. Alternatively, Nantucket may
consider having one of its owners transfer to Athens to oversee the subsidiary’s operations.
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.
ANSWER: The low cost of rent and labor will be beneficial to Nantucket, because it enables Nantucket to create the subsidiary at a
low cost.
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.
ANSWER: Nantucket’s tour business in Greece results in dollar cash inflows and euro cash outflows. It will be adversely affected by
the appreciation of the euro because it will require more dollars to cover the costs in Athens if the euros value rises.
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 dollar sto euros to pay the expenses in Greece. Does either type of loan reduce the exposure of Nantucket to exchange rate
risk? Explain.
ANSWER: No. The euro loans would be used to cover euro expenses, but Nantucket would need dollars to pay off the
loans. Alternatively, the U.S. dollar loans would still require conversion of dollars to euros. With either type of loan, Nantucket is still
adversely affected by the appreciation of the euro against the dollar.
f. Explain how the Greek island tour business could expose Nantucket to country risk.
ANSWER: The subsidiary could be subject to government restrictions or taxes in Greece that would place it at a disadvantage relative
to other Greek tour companies based in Athens.
19. 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.
ANSWER: Growth in international business can be stimulated by:
(1) Access to foreign resources which can reduce costs, or
(2) Access to foreign markets which boost revenues.
Yet, international business is subject to risks of exchange rate fluctuations, foreign exchange restrictions, a host government takeover,
tax regulations, etc.
20. 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 a licensing
agreement with a foreign firm, and the acquisition of a foreign firm.
ANSWER: A licensing agreement has limited potential for return, because the foreign firm will receive much of the benefits as a result
of the licensing agreement. Yet, the MNC has limited risk, because it did not need to invest substantial funds in the foreign country. An
acquisition by the MNC requires a substantial investment. If this investment is not a success, the MNC may have trouble selling the
firm it acquired for a reasonable price. Thus, there is more risk. However, if this investment is successful, all of the benefits accrue to
the MNC.
21. Impact of the Euro. Explain how the adoption of the euro as the single currency by European countries could be beneficial to
MNCs based in Europe and to MNCs based in the U.S.
ANSWER: There is now no exchange rate risk between the countries participating in the euro. This makes it easier to compare prices
across countries and to compete for MNCs based in Europe. The advantages are the same for MNCs based in the U.S.
22. 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 terrorist attacks.
ANSWER: A MNCs cash flows could be reduced in the following ways. First, a decline in travel would affect any MNCs that have
business in travel-related industries. The airline, hotel, and tourist-related industries were expected to experience a decline in business.
Layoffs were announced immediately by many of these MNCs. Second, these effects on travel-related industries can carry over to
4
1. Motives of an MNC. Describe constraints that interfere with a MNCs objective.
ANSWER: The constraints faced by financial managers attempting to maximize shareholder wealth are:
a. Environmental constraints - countries impose environmental regulations such as building codes and pollution controls, which
increase costs of production.
b. Regulatory constraints - host governments can impose taxes, restrictions on earnings remittances, and restrictions on currency
convertibility, which may reduce cash flows to be received by the parent.
c. Ethical constraints - U. S.-based MNCs may beat a competitive disadvantage if they follow a worldwide code of ethics, because
other firms may use tactics that are allowed in some foreign countries but considered illegal by U. S. standards.
2. International Opportunities.
a. How does access to international opportunities affect the size of corporations?
ANSWER: Additional opportunities will often cause a firm to grow more than if it did not have access to such opportunities. Thus, a
firm that considers international opportunities has greater potential for growth.
b. Describe a scenario in which the size of a corporation is not affected by access to international opportunities.
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.
c. Explain why MNCs such as Coca Cola and Pepsi Co, Inc., still have numerous opportunities for international expansion.
ANSWER: Coca Cola and Pepsi Co 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.
3. Impact of the Euro on U.S. Subsidiaries. McCanna Corp. has a French subsidiary that produces wine and exports to various
European countries. Explain how the subsidiary’s business may have been affected since the conversion of many European currencies
into a single European currency (the euro) in 1999.
ANSWER: The subsidiary and its customers based in countries that now use the euro as their currency would no longer be exposed to
exchange rate risk.
4. Agency Problems of MNCs. Explain the agency problem of MNCs.
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.
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 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. Third, the sheer size of the larger MNCs would also create large agency problems.
5. 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 establish a subsidiary in Brazil to
produce and sell the clubs, but this may require a large investment of funds. It could use licensing, in which it specifies to a Brazilian
firm how to produce the clubs. In this way, it does not have to establish its own subsidiary there.
b. Which method would you recommend for this firm? Justify your recommendation.
ANSWER: If the amount of golf clubs to be sold in Brazil is small, it may decide to export. However, if the expected sales level is
high, it may benefit from licensing. If it is confident that the expected sales level will remain high, it may be willing to establish a
subsidiary. The wages are lower in Brazil, and the large investment needed to establish a subsidiary may be worthwhile.
6. 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 the actual Eastern European market share next year?
ANSWER: It would likely overestimate its market share because the competition should increase as competitors penetrate the
European countries.
1
,8. Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the need for international business.
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.
b. Explain how the product cycle theory relates to the growth of an MNC.
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.
9. Impact of Political Risk. Explain why political risk may discourage international business.
ANSWER: Political risk increases the rate of return required to invest in foreign projects. Some foreign projects would have been
feasible if there was no political risk, but will not be feasible because of political risk.
10. Valuation of Wall-Marts International Business. In addition to all of its stores in the U.S., Wal-Mart has 11 stores in Argentina,
24 stores in Brazil, 214 stores in Canada, 29 stores in China, 92 stores in Germany, 15 stores in South Korea, 611 stores in Mexico,
and 261 stores in the U.K. Consider the value of Wal-Mart as being composed of two parts, aU.S. part (due to business in the U.S.)
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 Wal-Mart businesses outside the U.S.
ANSWER: The non-U.S. part can be measured as the present value of future dollar cash flows resulting from the non-U.S. businesses.
Based on recent earnings data for each store and applying an expected growth rate, you can estimate the remitted earnings that will
come from each country in each year in the future. You can convert those cash flows to dollars using a forecasted exchange rate per
year. Determine the present value of cash flows of all stores within one country. Then repeat the process for other countries. Then add
up all the present values that you estimated to derive a consolidated present value of all non-U.S. subsidiaries.
11. Valuation of an MNC. Birm Co., based in Alabama, considers 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) Birms 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:
Exchange rate at
Birmingham’s
which Birm Co.
Opportunity Dollar CF Euro CF weighted average
converts euros to
cost of capital
dollars
a. joint venture X
b. acquisition X X
c. imported
X
supplies
d. exports to
X
Ireland
12. Centralization and Agency Costs. Would the agency problem be more pronounced for Berkley Corp., which has its parent
company make 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 probability that subsidiary decisions
would conflict with the parent. Assuming that the parent attempts to maximize shareholder wealth, decisions by the parent should be
compatible with shareholder objectives. If the subsidiaries made their own decisions, the agency costs would be higher since the
parent would need to monitor the subsidiaries to assure that their decisions were intended to maximize shareholder wealth.
13. International Opportunities Due to the Internet.
2
,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 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.
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 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.
14. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by the MNC. Consequently, the MNC must
sometimes go to their sources rather than retrieve resources (such as land, labor, etc.).
b. 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 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 and the
costs of such resources would be similar across countries.
15. International Joint Venture. Anheuser-Busch, the producer of Budweiser and other beers, has recently expanded into Japan by
engaging 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 can utilize Kirin’s facilities to produce beer that will be
sold locally. In return, Anheuser-Busch provides information about the American beer market to Kirin.
a. Explain how the joint venture can enable Anheuser-Busch to achieve its objective of maximizing shareholder wealth.
ANSWER: The joint venture creates away for Anheuser-Busch to distribute Budweiser throughout Japan. It enables Anheuser-Busch
to penetrate the Japanese market without requiring a substantial investment in Japan.
b. Explain how the joint venture can limit the risk of the international business.
ANSWER: The joint venture has limited risk because Anheuser-Busch does not need to establish its own distribution network in
Japan. Thus, Anheuser-Busch may be able to use a smaller investment for the international business, and there is a higher probability
that the international business will be successful.
c. Many international joint ventures are intended to circumvent barriers that normally prevent foreign competition. What barrier in
Japan is Anheuser-Busch circumventing as a result of the joint venture? What barrier in the United States is Kirin circumventing as a
result of the joint venture?
ANSWER: Anheuser-Busch is able to benefit from Kirin distribution system in Japan, which would not normally be so accessible.
Kirin is able to learn more about how Anheuser-Busch expanded its product across numerous countries, and therefore breaks through
an information barrier.
d. Explain how Anheuser-Busch could lose some of its market share in countries outside Japan as result of this particular joint venture.
ANSWER: Anheuser-Busch could lose some of its market share to Kirin as a result of explaining its worldwide expansion strategies to
Kirin. However, it appears that Anheuser-Busch expects the potential benefits of the joint venture to outweigh any potential adverse
effects.
18. 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 mainU.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.
3
, ANSWER: It already has established credibility with American tourists, but could penetrate a new market with some of the same
customers that it has served on tours in the U.S.
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?
ANSWER: The employees of the subsidiary in Athens are not owners, and may have no incentive to manage in a manner that
maximizes the wealth of the owners. Thus; they may manage the tours inefficiently. Nantucket could attempt to allow the employees a
portion of the ownership of the company so that they benefit more directly from good performance. Alternatively, Nantucket may
consider having one of its owners transfer to Athens to oversee the subsidiary’s operations.
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.
ANSWER: The low cost of rent and labor will be beneficial to Nantucket, because it enables Nantucket to create the subsidiary at a
low cost.
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.
ANSWER: Nantucket’s tour business in Greece results in dollar cash inflows and euro cash outflows. It will be adversely affected by
the appreciation of the euro because it will require more dollars to cover the costs in Athens if the euros value rises.
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 dollar sto euros to pay the expenses in Greece. Does either type of loan reduce the exposure of Nantucket to exchange rate
risk? Explain.
ANSWER: No. The euro loans would be used to cover euro expenses, but Nantucket would need dollars to pay off the
loans. Alternatively, the U.S. dollar loans would still require conversion of dollars to euros. With either type of loan, Nantucket is still
adversely affected by the appreciation of the euro against the dollar.
f. Explain how the Greek island tour business could expose Nantucket to country risk.
ANSWER: The subsidiary could be subject to government restrictions or taxes in Greece that would place it at a disadvantage relative
to other Greek tour companies based in Athens.
19. 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.
ANSWER: Growth in international business can be stimulated by:
(1) Access to foreign resources which can reduce costs, or
(2) Access to foreign markets which boost revenues.
Yet, international business is subject to risks of exchange rate fluctuations, foreign exchange restrictions, a host government takeover,
tax regulations, etc.
20. 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 a licensing
agreement with a foreign firm, and the acquisition of a foreign firm.
ANSWER: A licensing agreement has limited potential for return, because the foreign firm will receive much of the benefits as a result
of the licensing agreement. Yet, the MNC has limited risk, because it did not need to invest substantial funds in the foreign country. An
acquisition by the MNC requires a substantial investment. If this investment is not a success, the MNC may have trouble selling the
firm it acquired for a reasonable price. Thus, there is more risk. However, if this investment is successful, all of the benefits accrue to
the MNC.
21. Impact of the Euro. Explain how the adoption of the euro as the single currency by European countries could be beneficial to
MNCs based in Europe and to MNCs based in the U.S.
ANSWER: There is now no exchange rate risk between the countries participating in the euro. This makes it easier to compare prices
across countries and to compete for MNCs based in Europe. The advantages are the same for MNCs based in the U.S.
22. 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 terrorist attacks.
ANSWER: A MNCs cash flows could be reduced in the following ways. First, a decline in travel would affect any MNCs that have
business in travel-related industries. The airline, hotel, and tourist-related industries were expected to experience a decline in business.
Layoffs were announced immediately by many of these MNCs. Second, these effects on travel-related industries can carry over to
4
