Created By: Irfan Ali
Solution Manual for International Financial Management,
14th Edition by Jeff Madura Complete Verified Chapter’s
2024 A++
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC Agency Problems
Management Structure of an MNC
Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets
Theory
Product Cycle Theory
Methods to Conduct International Business
International Trade Licensing Franchising
Joint Ventures
Acquisitions of Existing Operations Establishing New Foreign Subsidiaries Summary of
Methods
Valuation Model for an MNC Domestic Valuation Model Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Flows How Uncertainty Affects the MNC’s Cost of
Capital
Organization of the Text
Chapter Theme
A+ Page 1
,Created By: Irfan Ali
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?
4. Why must purely domestic firms be concerned about the international environment?
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 norms there that are not allowed in the U.S. For example, when competing for a
government contract, firms might provide payoffs to the government officials who will make the
decision. Yet, in the United States, a firm will sometimes take a client on an expensive golf
outing or provide skybox tickets to events. This is no different than a payoff. If the payoffs are
bigger in some foreign countries, the MNC can compete only by matching the payoffs provided
by its competitors.
A+ Page 2
,Created By: Irfan Ali
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that
applies to any country, even if it is at a disadvantage in a foreign country that allows activities
that might be viewed as unethical. In this way, the MNC establishes more credibility worldwide.
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 example, even if it submits the lowest bid on a specific foreign government project, it
will not receive the bid without a payoff to the foreign government officials. The issue is
especially a concern for large projects that may generate substantial cash flows for the firm that
is chosen to do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the
decision process that it deserves to be selected. If there is just one decision-maker with no
oversight, an MNC can not ensure that the decision will be ethical. But if the decision-maker
must be accountable to a department who oversees the decision, the MNC may be able to prompt
the department to ensure that the process is ethical.
Answers to End of Chapter Questions
1. Agency Problems of MNCs.
a. 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?
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, Created By: Irfan Ali
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. 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.
3. 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 the resources 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?
A+ Page 4
Solution Manual for International Financial Management,
14th Edition by Jeff Madura Complete Verified Chapter’s
2024 A++
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC Agency Problems
Management Structure of an MNC
Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets
Theory
Product Cycle Theory
Methods to Conduct International Business
International Trade Licensing Franchising
Joint Ventures
Acquisitions of Existing Operations Establishing New Foreign Subsidiaries Summary of
Methods
Valuation Model for an MNC Domestic Valuation Model Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Flows How Uncertainty Affects the MNC’s Cost of
Capital
Organization of the Text
Chapter Theme
A+ Page 1
,Created By: Irfan Ali
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?
4. Why must purely domestic firms be concerned about the international environment?
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 norms there that are not allowed in the U.S. For example, when competing for a
government contract, firms might provide payoffs to the government officials who will make the
decision. Yet, in the United States, a firm will sometimes take a client on an expensive golf
outing or provide skybox tickets to events. This is no different than a payoff. If the payoffs are
bigger in some foreign countries, the MNC can compete only by matching the payoffs provided
by its competitors.
A+ Page 2
,Created By: Irfan Ali
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that
applies to any country, even if it is at a disadvantage in a foreign country that allows activities
that might be viewed as unethical. In this way, the MNC establishes more credibility worldwide.
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 example, even if it submits the lowest bid on a specific foreign government project, it
will not receive the bid without a payoff to the foreign government officials. The issue is
especially a concern for large projects that may generate substantial cash flows for the firm that
is chosen to do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the
decision process that it deserves to be selected. If there is just one decision-maker with no
oversight, an MNC can not ensure that the decision will be ethical. But if the decision-maker
must be accountable to a department who oversees the decision, the MNC may be able to prompt
the department to ensure that the process is ethical.
Answers to End of Chapter Questions
1. Agency Problems of MNCs.
a. 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?
A+ Page 3
, Created By: Irfan Ali
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. 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.
3. 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 the resources 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?
A+ Page 4
