Suggested solutions for week 7 workshop questions.pdf

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1 BFF2341 INTERNATIONAL FINANCIAL MANAGEMENT Suggested solutions for week 7 workshop question Foreign Direct Investment and Country Risk Analysis Question 1: Motives for DFI Describe some potential benefits to an MNC as a result of direct foreign investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to expand its footwear production in Latin America? ANSWER: See the text exhibit in this chapter for a complete summary of the potential benefits. Regarding Nike’s motives, Latin America offers additional sources of demand, as Latin American consumers have shown an interest in Nike footwear (this is partially due to increased marketing targeted to Latin American markets). Second, Nike may be able to produce their athletic footwear at relatively low costs in some Latin American countries, as the production is labor-intensive and wages are low. Third, Nike may benefit from economies of scale by producing a large amount and exporting the additional shoes for sale to nearby countries. Fourth, the expansion into Latin America allows Nike to further diversify its business internationally. Question 2: DFI to Achieve Economies of Scale Bear Co and Viking Inc, are automobile manufacturers that desire to benefit from economies of scale. Bear Co has decided to establish distributorship subsidiaries in various countries, while Viking, Inc, has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale? ANSWER: Bear Company is likely to benefit because it is maintaining all of its manufacturing in one area. If Viking Inc. spreads its production facilities, it will incur higher fixed costs of
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