1 - Intro to Multinational finance management

Question 1

The theory of comparative advantage

Answer 1

Countries should specialise in producing those goods of which they are relatively more efficient producers

• these countries should then trade with the rest of the world to obtain needed commodities
• if countries specilise this way, total world production will be greater

Question 2

Absolute advantage

Answer 2

Cheaper absolute cost of production in one country as compared with another

Question 3

MNC definition

Answer 3

A company with production and distribution facilities in more than one country

• parent company located in the home company
• at least five or sex foreign subsidiaries

Question 4

Four reasons for a company to go global

Answer 4

1. Seek raw materials
2. New markets
3. Minimise costs of production
4. Knowledge seeking

Question 5

Reasons for going global: Raw Material Seekers

Answer 5

• Exploit markets in other countries
• Historically first to appear
• E.g. British Petroleum, Exxon

Question 6

Reasons for going global: Market Seekers

Answer 6

-Produce and sell in foreign markets
-Foreign direct investors
-Seek economies of scale
E.g. IBM, McDonald’s, Nestle

Question 7

Reasons for going global: Cost minimisers

Answer 7

• Seek lower-cost production abroad
• Motive: to remain cost competitive
• Outsourcing
• E.g. Texas instruments, Intel

Question 8

Pros and cons of outsourcing

Answer 8

Pros: buy services less expensively abroad, cost cutting, increase productivity and innovative capacity
Cons: loss of domestic jobs and business

Question 9

Reasons for going global: Knowledge seekers

Answer 9

• MNCs enter foreign markets in order to gain information and experience that is proven useful elsewhere
• E.g. Ford in Europe source of design and engineering ideas on how to build small and fuel efficient cars

Question 10

Process of overseas expansion: 1 - exporting

Answer 10

• Capital requirement and start up costs are minimum
• Risks are low
• Profits are immediate but relatively low
• Get to know the market (i.e. present and future supply and demand conditions)

Question 11

Process of overseas expansion: 2 - Sales subsidiaries and creation of distribution system

Answer 11

• Local office
• Great customer service
• Increased communication with customers, which reduces uncertainty
• Marketing activities with a company’s own distribution system

Question 12

Process of overseas expansion: 3 - Overseas production

Answer 12

-Realise full sales potential
-Keep abreast of market developments
-Fill orders faster
-Some MNCs create research development overseas
(Overseas production has the greatest risk the greatest potential return)

Question 13

Process of overseas expansion: 4 - Licensing a local firm in exchange for royalties

Answer 13

• Less risk than setting up local production
• Relatively lower cash flow
• Faster market entry time
• Maintaining quality standards may be a problem

Question 14

Globalisation

Answer 14

Increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, services, technology and capital

Question 15

Globalisation: protectionist view

Answer 15

• Causes unemployment: draining jobs to the developing world
• Brain drain from poor countries to rich
• Distressed work conditions abroad
• The inflow of foreign investments is a threat to sovereignty

Question 16

The net effect of globalisation

Answer 16

Although globalisation has positives and negatives, in the end there are more winners than losers
-It unleashes the forces of “creative destruction”: continuous change, out with the old, in with the new