1Moore School of Business Spring 2012 University of South Carolina IBUS 401 – INTERNATIONAL FINANCIAL MANAGEMENT Answers to selected end-of-chapters problems Chapter 1 Multinational Financial Management: An Overview Problems assigned: 1, 2, 3, 4, 6, 7, 8, 11, 16, 21 Case: Blades, Inc.: Decision to expand internationally1.Agency Problems of MNCs. a. The agency problem reflects a conflict of interests between decision-making managers (agent) and the owners of the MNC (principal). Agency costs occur in an effort to assure that managers act in the best interest of the owners. b. 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. 2.Comparative Advantage. a.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. See examples provided in class. b. 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.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 labor, capital, etc.). b. 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.
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