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1Chapter 1 Multinational Financial Management: Opportunities and Challenges 2. MNEs and Operation in Global Markets. What are the factors that affect the decisions of multinational enterprises to operate in global markets? The main determining factor for operating in a new market is the comparative advantage in terms of cost and rate of productivity of factors of production, better regulations, lower taxation, protectionist trade barriers, stable foreign exchange, and larger markets. Other factors that incentivize foreign investors are savings on transportation costs and the need to regularly adapt to changing local demand. 3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a Eurocurrency market? A eurocurrency is a freely tradable foreign currency deposited in a domestic bank of a nation that is not the native country issuing this currency. The main eurocurrencies are the US dollar, the euro, the British pound, and the Japanese yen. A eurocurrency market is a money market where financial institutions provide banking services to a variety of individual, corporate, and sovereign customers in eurocurrencies. 7. Limitations of Comparative Advantage. Key to understanding most theories is what they say and what they don’t. Name four or five key limitations to the theory of comparative advantage. Although international trade might have approached the comparative advantage model during the nineteenth century, it certainly does not today, for the following reasons: Countries do not appear to specialize only in those products that could be most efficiently produced by that country’s particular factors of production. Instead, governments interfere with comparative advantage for a variety of economic and political reasons, such as to achieve full employment, economic development, national self-sufficiency in defense-related industries, and protection of an agricultural sector’s way of life. Government interference takes the form of tariffs, quotas, and other non-tariff restrictions. At least two of the factors of production, capital and technology, now flow directly and easily between countries, rather than only indirectly through traded goods and services. This direct flow occurs between related subsidiaries and affiliates of multinational firms, as well as between unrelated firms via loans and license and management contracts. Even labor flows between countries, such as immigrants into the United States (legal and illegal), immigrants within the European Union and other unions. Modern factors of production are more numerous than in this simple model. Factors considered in the location of production facilities worldwide include local and managerial skills, a dependable legal structure for settling contract disputes, research and development competence, educational levels of available workers, energy resources, consumer demand for brand name goods, mineral and raw material availability, access to capital, tax differentials, supporting infrastructure (roads, ports, communication facilities), and possibly others. Although the terms of trade are ultimately determined by supply and demand, the process by which the terms are set is different from that visualized in traditional trade theory. They are determined partly by administered pricing in oligopolistic markets. Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities. For example, during the past 150 years, comparative advantage in producing cotton textiles has shifted from the United Kingdom to the United States to Japan to Hong Kong to Taiwan and to China. The classical model of comparative advantage did not really address certain other issues, such as the effect of uncertainty and information costs, the role of differentiated products in imperfectly competitive markets, and economies of scale. Nevertheless, although the world is a long way from the classical trade model, the general principle of comparative advantage is still valid. The closer the world gets to true international specialization, the more world production and consumption can be increased, provided the problem of equitable distribution of the benefits can be solved to the satisfaction of consumers, producers, and political leaders. Complete specialization, however, remains an unrealistic limiting case, just as perfect competition is a limiting case in microeconomic theory. 8. Comparative Advantage in the Twenty-First Century. Wit

h reference to the theory of comparative advantage, explain how MNEs outsource some services to emerging market economies. The theory of comparative advantage explains that specific firms or nations may, in comparison to others, have an advantage in producing a particular good or service at a lower relative opportunity cost. This advantage may arise due to differences in factor endowments, technological progress, favorable real exchange rate, protectionism, import controls, etc. Some emerging market economies have shown comparative advantage in the production of low-cost manufactured tangible commodities, hence attracting MNEs’ capital inflows. But in the more developed emerging nations that allocate substantial funds to research and innovation, such as India and Malaysia, trade in services has increased five-fold over the last five decades. Accordingly, MNEs have stepped into these nations in order to manufacture high-value and high-tech manufactured goods, and provide IT-knowledge services. 9. Ganado’s Globalization. After reading the chapter’s description of Ganado’s globalization process, how would you explain the distinctions between international, multinational, and global companies? The difference in definitions for these three terms is subjective, with different writers using different terms at different times. No single definition can be considered definitive, although as a general matter the following probably reflect general usage. International simply means that the company has some form of business interest in more than one country. That international business interest may be no more than exporting and importing, or it may include having branches or incorporated subsidiaries in other countries. International trade is usually the first step in becoming “international,” but the term also encompasses foreign subsidiaries created for the single purpose of marketing, distribution, or financing. The term international is also used to encompass what are defined as multinational and global in the following two paragraphs. Multinational is usually taken to mean a company that has operating subsidiaries and performs a full set of its major operations in a number of countries, i.e., in “many nations.” “Operations” in this context includes both manufacturing and selling, as well as other corporate functions, and a multinational company is often presumed to operate in a greater number of countries than simply an international company. A multinational company is presumed to operate with each foreign unit “standing on its own,” although that term does not preclude specialization by country or supplying parts from one country operation to another. Global is a newer term that essentially means about the same as “multinational,” i.e., operating around the globe. Global has tended to replace other terms because of its use by demonstrators at the international meetings (“global forums?”) of the International Monetary Fund and World Bank that took place in Seattle in 1999 and Rome in 2001. Terrorist attacks on the World Trade Center and the Pentagon in 2001 led politicians to refer to the need to eliminate “global terrorism.” 12. Why Go. What do firms become multinational? Entry into new markets, not currently served by the firm, which in turn allow the firm to grow and possibly to acquire economies of scaleAcquisition of raw materials, not available elsewhereAchievement of greater efficiency, by producing in countries where one or more of the factors of production are underpriced relative to other locationsAcquisition of knowledge and expertise centered primarily in the foreign locationLocation of the firms’ foreign operations in countries deemed politically safe 15. Financial Globalization. Explain the twin agency problems. How do the twin agency problems limit financial globalization? Despite the reduction in barriers to global investment activity, the twin agency problems have limited the impact of financial globalization. The twin agency problems arise because corporate insiders and the rulers of some nations may pursue their own interests at the expense of outside investors. When these twin agency problems escalate, corporate insiders tend to retain substantial equity (either directly if domestic laws allow or indirectly through collusion with other owners). This could not only lead to capital flight but also to financial crises. This limits economic growth, financial development, and the ability of a country to take advantage of financial globalization.