CHAPTER j1
GLOBALIZATION jAND jTHE jMULTINATIONAL jFIRM
ANSWERS j& jSOLUTIONS jTO jEND-OF-CHAPTER jQUESTIONS jAND jPROBLEMS
QUESTIONS
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,1. Why jis jit jimportant jto jstudy jinternational jfinancial jmanagement?
Answer: j We jare jnow jliving jin ja jworld jwhere jall jthe jmajor jeconomic jfunctions, jsuch jas
jconsumption, jproduction, jinvestment, jand jfinancing, jare jhighly jglobalized. j It jis jthus
jessential j for jfinancial jmanagers jto jfully junderstand jvital jinternational jdimensions jof jfinancial
jmanagement. j This jglobal jshift jis jin jmarked jcontrast jto ja jsituation jthat jexisted jwhen jthe
jauthors jof jthis jbook jwere jlearning jfinance ja jfew jdecades jago. j At jthat jtime, jmost jprofessors
jcustomarily j(and jsafely, jto jsome jextent) jignored jinternational jaspects jof jfinance. j This jmode
jof joperation jhas jbecome juntenable jsince jthen.
2. How jis jinternational jfinancial jmanagement jdifferent jfrom jdomestic jfinancial jmanagement?
Answer: j There jare jthree jmajor jdimensions jthat jset japart jinternational jfinance jfrom
jdomestic jfinance. jThey jare:
1. foreign jexchange jand jpolitical jrisks,
2. market jimperfections, jand
3. expanded jopportunity jset.
3. Discuss jthe jmajor jtrends jthat jhave jprevailed jin jinternational jbusiness jduring jthe jlast
jtwo jdecades.
Answer: j The j2000s jbrought ja jrapid jintegration jof jinternational jcapital jand jfinancial jmarkets.
jImpetus jfor jglobalized jfinancial jmarkets jinitially jcame jfrom jthe jgovernments jof jmajor
jcountries jthat jhad jbegun jto jderegulate jtheir jforeign jexchange jand jcapital jmarkets. j The
jeconomic
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,integration jand jglobalization jthat jbegan jin jthe jeighties jand jnineties jare jpicking jup jspeed jin
jthe j2000s. jTrade jliberalization jand jeconomic jintegration jcontinued jto jproceed jat jboth jthe
jregional jand jglobal jlevels. jDespite jsovereign jdebt jcrisis jin jEurope, jmore jEU jmember
jcountries jhave jadopted jthe jcommon jcurrency, jthe jeuro, jthat jeffectively jbecame jthe jsecond
jglobal jcurrency jafter jthe jU.S. jdollar. jIn jthe jlast jfew jyears, jhowever, jeconomic jnationalism
jhas jbeen jgaining jsome jpopularity, jas jexemplified jby jthe jBrexit jdecision jof jthe jUnited
jKingdom jand jthe jso-called
―America jFirst‖ jpolicies jof jthe jTrump jAdministration. jTo jthe jextent jthat jeconomic jnationalism
jis ja jpopulist jresponse jto jthe jglobal jfinancial jcrisis jand jGreat jRecession, jit jmay jsubside jas
jthe jworld jeconomy jcontinues jto jrecover.
4. How jis ja jcountry‘s jeconomic jwell-being jenhanced jthrough jfree jinternational jtrade jin
jgoods jand jservices?
Answer: j According jto jDavid jRicardo, jwith jfree jinternational jtrade, jit jis jmutually jbeneficial
jfor jtwo jcountries jto jeach jspecialize jin jthe jproduction jof jthe jgoods jthat jit jcan jproduce
jrelatively jmost jefficiently jand jthen jtrade jthose jgoods. j By jdoing jso, jthe jtwo jcountries jcan
jincrease jtheir jcombined jproduction, jwhich jallows jboth jcountries jto jconsume jmore jof jboth
jgoods. jThis jargument jremains jvalid jeven jif ja jcountry jcan jproduce jboth jgoods jmore
jefficiently jin jabsolute jterms jthan jthe jother jcountry. j International jtrade jis jnot ja j‗zero-sum‘
jgame jin jwhich jone jcountry jbenefits jat jthe jexpense jof janother jcountry. jRather, jinternational
jtrade jcould jbe jan j‗increasing- jsum‘ jgame jfrom jwhich jall jplayers jbecome jwinners.
5. What jconsiderations jmight jlimit jthe jextent jto jwhich jthe jtheory jof jcomparative jadvantage
jis jrealistic?
Answer: j The jtheory jof jcomparative jadvantage jwas joriginally jadvanced jby jthe jnineteenth
jcentury jeconomist jDavid jRicardo jas jan jexplanation jfor jwhy jnations jtrade jwith jone janother.
jThe jtheory jclaims jthat jeconomic jwell-being jis jenhanced jif jeach jcountry jproduces jwhat jit
jhas ja jcomparative jadvantage jin jproducing jrelative jto jother jcountries, jand jthen jtrade
jproducts.
Underlying jthe jtheory jare jthe jassumptions jof jfree jtrade jbetween jnations jand jthat jthe jfactors
jof jproduction j(labor, jtechnological jknow-how, jand jcapital) jare jrelatively jimmobile. j To jthe
jextent jthat jthese jassumptions jdo jnot jhold, jthe jtheory jof jcomparative jadvantage jmay jnot
jrealistically jdescribe jinternational jtrade. j In jaddition, jfree jtrade jproduces jwinners jand jlosers
jand jif jthe jlosers jare jnot jcompensated, jfree jtrade jmay jfaces jpolitical jopposition jfrom jthem.
6. What jare jmultinational jcorporations j(MNCs) jand jwhat jeconomic jroles jdo jthey jplay?
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, Answer: j A jmultinational jcorporation j(MNC) jcan jbe jdefined jas ja jbusiness jfirm jincorporated
jin jone jcountry jthat jhas jproduction jand jsales joperations jin jmany jother jcountries. jIndeed,
jsome jMNCs jhave joperations jin ja jfew jdozens jof jdifferent jcountries. j MNCs jobtain jfinancing
jfrom jmajor jmoney jcenters jaround jthe jworld jin jmany jdifferent jcurrencies jto jfinance jtheir
joperations. jGlobal joperations jforce jthe jtreasurer‘s joffice jto jestablish jinternational jbanking
jrelationships, jto jplace jshort-term jfunds jin jseveral jcurrency jdenominations, jand jto jeffectively
jmanage jforeign jexchange jrisk. j By jcircumventing jand jalso jtaking jadvantage jof jvarious
jmarket jimperfections, jsuch jas jbarriers jto jtrade jand jbarriers jto jflow jof jpeople jand jcapital
jacross jcountries, jMNCs jcontribute jto jgreater jintegration jof jthe jworld jeconomy jand jing jmore
jperfect jfunctioning jof jglobal jmarkets.
7. Ross jPerot, ja jformer jPresidential jcandidate jof jthe jReform jParty, jwhich jwas ja jthird
jpolitical jparty jin jthe jUnited jStates, jhad jstrongly jobjected jto jthe jcreation jof jthe jNorth
jAmerican jTrade jAgreement j(NAFTA), jwhich jnonetheless jwas jinaugurated jin j1994. jPerot
jfeared jthe jloss jof jAmerican jjobs jto jMexico jwhere jit jis jmuch jcheaper jto jhire jworkers. jWhat
jare jthe jmerits jand jdemerits jof jPerot‘s jposition jon jNAFTA? jConsidering jthe jrecent jeconomic
jdevelopments jin jNorth jAmerica, jhow jwould jyou jassess jPerot‘s jposition jon jNAFTA?
Answer: jSince jthe jinception jof jNAFTA, jmany jAmerican jcompanies jindeed jhave jinvested
jheavily jin jMexico, jsometimes jrelocating jproduction jfrom jthe jUnited jStates jto jMexico.
jAlthough jthis jmight jhave jtemporarily jcaused junemployment jof jsome jAmerican jworkers,
jthey jwere jeventually jrehired jby jother jindustries joften jfor jhigher jwages. jAt jthe jsame jtime,
jMexico jhas jbeen jexperiencing ja jmajor jeconomic jboom. jIt jseems jclear jthat jboth jMexico
jand jthe jU.S. jhave jbenefited jfrom jNAFTA. jPerot‘s jconcern jappears jto jhave jbeen jill
jfounded.
8. In j1995, ja jworking jgroup jof jFrench jchief jexecutive jofficers jwas jset jup jby jthe
jConfederation jof jFrench jIndustry j(CNPF) jand jthe jFrench jAssociation jof jPrivate jCompanies
j(AFEP) jto jstudy jthe jFrench jcorporate jgovernance jstructure. jThe jgroup jreported jthe
jfollowing, jamong jother jthings: j ―The jboard jof jdirectors jshould jnot jsimply jaim jat jmaximizing
jshare jvalues jas jin jthe jU.K. jand jthe jU.S. jRather, jits jgoal jshould jbe jto jserve jthe jcompany,
jwhose jinterests jshould jbe jclearly jdistinguished jfrom jthose jof jits jshareholders, jemployees,
jcreditors, jsuppliers jand jclients jbut jstill jequated jwith jtheir jgeneral jcommon jinterest, jwhich jis
jto jsafeguard jthe jprosperity jand jcontinuity jof jthe jcompany‖. jEvaluate jthe jabove
jrecommendation jof jthe jworking jgroup.
Answer: jThe jrecommendations jof jthe jFrench jworking jgroup jclearly jshow jthat jshareholder
jwealth jmaximization jis jnot ja juniversally jaccepted jgoal jof jcorporate jmanagement, jespecially
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GLOBALIZATION jAND jTHE jMULTINATIONAL jFIRM
ANSWERS j& jSOLUTIONS jTO jEND-OF-CHAPTER jQUESTIONS jAND jPROBLEMS
QUESTIONS
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
,1. Why jis jit jimportant jto jstudy jinternational jfinancial jmanagement?
Answer: j We jare jnow jliving jin ja jworld jwhere jall jthe jmajor jeconomic jfunctions, jsuch jas
jconsumption, jproduction, jinvestment, jand jfinancing, jare jhighly jglobalized. j It jis jthus
jessential j for jfinancial jmanagers jto jfully junderstand jvital jinternational jdimensions jof jfinancial
jmanagement. j This jglobal jshift jis jin jmarked jcontrast jto ja jsituation jthat jexisted jwhen jthe
jauthors jof jthis jbook jwere jlearning jfinance ja jfew jdecades jago. j At jthat jtime, jmost jprofessors
jcustomarily j(and jsafely, jto jsome jextent) jignored jinternational jaspects jof jfinance. j This jmode
jof joperation jhas jbecome juntenable jsince jthen.
2. How jis jinternational jfinancial jmanagement jdifferent jfrom jdomestic jfinancial jmanagement?
Answer: j There jare jthree jmajor jdimensions jthat jset japart jinternational jfinance jfrom
jdomestic jfinance. jThey jare:
1. foreign jexchange jand jpolitical jrisks,
2. market jimperfections, jand
3. expanded jopportunity jset.
3. Discuss jthe jmajor jtrends jthat jhave jprevailed jin jinternational jbusiness jduring jthe jlast
jtwo jdecades.
Answer: j The j2000s jbrought ja jrapid jintegration jof jinternational jcapital jand jfinancial jmarkets.
jImpetus jfor jglobalized jfinancial jmarkets jinitially jcame jfrom jthe jgovernments jof jmajor
jcountries jthat jhad jbegun jto jderegulate jtheir jforeign jexchange jand jcapital jmarkets. j The
jeconomic
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,integration jand jglobalization jthat jbegan jin jthe jeighties jand jnineties jare jpicking jup jspeed jin
jthe j2000s. jTrade jliberalization jand jeconomic jintegration jcontinued jto jproceed jat jboth jthe
jregional jand jglobal jlevels. jDespite jsovereign jdebt jcrisis jin jEurope, jmore jEU jmember
jcountries jhave jadopted jthe jcommon jcurrency, jthe jeuro, jthat jeffectively jbecame jthe jsecond
jglobal jcurrency jafter jthe jU.S. jdollar. jIn jthe jlast jfew jyears, jhowever, jeconomic jnationalism
jhas jbeen jgaining jsome jpopularity, jas jexemplified jby jthe jBrexit jdecision jof jthe jUnited
jKingdom jand jthe jso-called
―America jFirst‖ jpolicies jof jthe jTrump jAdministration. jTo jthe jextent jthat jeconomic jnationalism
jis ja jpopulist jresponse jto jthe jglobal jfinancial jcrisis jand jGreat jRecession, jit jmay jsubside jas
jthe jworld jeconomy jcontinues jto jrecover.
4. How jis ja jcountry‘s jeconomic jwell-being jenhanced jthrough jfree jinternational jtrade jin
jgoods jand jservices?
Answer: j According jto jDavid jRicardo, jwith jfree jinternational jtrade, jit jis jmutually jbeneficial
jfor jtwo jcountries jto jeach jspecialize jin jthe jproduction jof jthe jgoods jthat jit jcan jproduce
jrelatively jmost jefficiently jand jthen jtrade jthose jgoods. j By jdoing jso, jthe jtwo jcountries jcan
jincrease jtheir jcombined jproduction, jwhich jallows jboth jcountries jto jconsume jmore jof jboth
jgoods. jThis jargument jremains jvalid jeven jif ja jcountry jcan jproduce jboth jgoods jmore
jefficiently jin jabsolute jterms jthan jthe jother jcountry. j International jtrade jis jnot ja j‗zero-sum‘
jgame jin jwhich jone jcountry jbenefits jat jthe jexpense jof janother jcountry. jRather, jinternational
jtrade jcould jbe jan j‗increasing- jsum‘ jgame jfrom jwhich jall jplayers jbecome jwinners.
5. What jconsiderations jmight jlimit jthe jextent jto jwhich jthe jtheory jof jcomparative jadvantage
jis jrealistic?
Answer: j The jtheory jof jcomparative jadvantage jwas joriginally jadvanced jby jthe jnineteenth
jcentury jeconomist jDavid jRicardo jas jan jexplanation jfor jwhy jnations jtrade jwith jone janother.
jThe jtheory jclaims jthat jeconomic jwell-being jis jenhanced jif jeach jcountry jproduces jwhat jit
jhas ja jcomparative jadvantage jin jproducing jrelative jto jother jcountries, jand jthen jtrade
jproducts.
Underlying jthe jtheory jare jthe jassumptions jof jfree jtrade jbetween jnations jand jthat jthe jfactors
jof jproduction j(labor, jtechnological jknow-how, jand jcapital) jare jrelatively jimmobile. j To jthe
jextent jthat jthese jassumptions jdo jnot jhold, jthe jtheory jof jcomparative jadvantage jmay jnot
jrealistically jdescribe jinternational jtrade. j In jaddition, jfree jtrade jproduces jwinners jand jlosers
jand jif jthe jlosers jare jnot jcompensated, jfree jtrade jmay jfaces jpolitical jopposition jfrom jthem.
6. What jare jmultinational jcorporations j(MNCs) jand jwhat jeconomic jroles jdo jthey jplay?
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, Answer: j A jmultinational jcorporation j(MNC) jcan jbe jdefined jas ja jbusiness jfirm jincorporated
jin jone jcountry jthat jhas jproduction jand jsales joperations jin jmany jother jcountries. jIndeed,
jsome jMNCs jhave joperations jin ja jfew jdozens jof jdifferent jcountries. j MNCs jobtain jfinancing
jfrom jmajor jmoney jcenters jaround jthe jworld jin jmany jdifferent jcurrencies jto jfinance jtheir
joperations. jGlobal joperations jforce jthe jtreasurer‘s joffice jto jestablish jinternational jbanking
jrelationships, jto jplace jshort-term jfunds jin jseveral jcurrency jdenominations, jand jto jeffectively
jmanage jforeign jexchange jrisk. j By jcircumventing jand jalso jtaking jadvantage jof jvarious
jmarket jimperfections, jsuch jas jbarriers jto jtrade jand jbarriers jto jflow jof jpeople jand jcapital
jacross jcountries, jMNCs jcontribute jto jgreater jintegration jof jthe jworld jeconomy jand jing jmore
jperfect jfunctioning jof jglobal jmarkets.
7. Ross jPerot, ja jformer jPresidential jcandidate jof jthe jReform jParty, jwhich jwas ja jthird
jpolitical jparty jin jthe jUnited jStates, jhad jstrongly jobjected jto jthe jcreation jof jthe jNorth
jAmerican jTrade jAgreement j(NAFTA), jwhich jnonetheless jwas jinaugurated jin j1994. jPerot
jfeared jthe jloss jof jAmerican jjobs jto jMexico jwhere jit jis jmuch jcheaper jto jhire jworkers. jWhat
jare jthe jmerits jand jdemerits jof jPerot‘s jposition jon jNAFTA? jConsidering jthe jrecent jeconomic
jdevelopments jin jNorth jAmerica, jhow jwould jyou jassess jPerot‘s jposition jon jNAFTA?
Answer: jSince jthe jinception jof jNAFTA, jmany jAmerican jcompanies jindeed jhave jinvested
jheavily jin jMexico, jsometimes jrelocating jproduction jfrom jthe jUnited jStates jto jMexico.
jAlthough jthis jmight jhave jtemporarily jcaused junemployment jof jsome jAmerican jworkers,
jthey jwere jeventually jrehired jby jother jindustries joften jfor jhigher jwages. jAt jthe jsame jtime,
jMexico jhas jbeen jexperiencing ja jmajor jeconomic jboom. jIt jseems jclear jthat jboth jMexico
jand jthe jU.S. jhave jbenefited jfrom jNAFTA. jPerot‘s jconcern jappears jto jhave jbeen jill
jfounded.
8. In j1995, ja jworking jgroup jof jFrench jchief jexecutive jofficers jwas jset jup jby jthe
jConfederation jof jFrench jIndustry j(CNPF) jand jthe jFrench jAssociation jof jPrivate jCompanies
j(AFEP) jto jstudy jthe jFrench jcorporate jgovernance jstructure. jThe jgroup jreported jthe
jfollowing, jamong jother jthings: j ―The jboard jof jdirectors jshould jnot jsimply jaim jat jmaximizing
jshare jvalues jas jin jthe jU.K. jand jthe jU.S. jRather, jits jgoal jshould jbe jto jserve jthe jcompany,
jwhose jinterests jshould jbe jclearly jdistinguished jfrom jthose jof jits jshareholders, jemployees,
jcreditors, jsuppliers jand jclients jbut jstill jequated jwith jtheir jgeneral jcommon jinterest, jwhich jis
jto jsafeguard jthe jprosperity jand jcontinuity jof jthe jcompany‖. jEvaluate jthe jabove
jrecommendation jof jthe jworking jgroup.
Answer: jThe jrecommendations jof jthe jFrench jworking jgroup jclearly jshow jthat jshareholder
jwealth jmaximization jis jnot ja juniversally jaccepted jgoal jof jcorporate jmanagement, jespecially
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