GLOBALIZATION AND THE MULTINATIONAL FIRM
QUESTIONS
1. Why is it important to study international financial management?
Answer: We are now living in a world where all the major economic functions, i.e., consumption,
production, and investment, are highly globalized. It is thus essential for financial managers to fully
understand vital international dimensions of financial management. This global shift is in marked
contrast to a situation that existed when the authors of this book were learning finance some twenty
years ago. At that time, most professors customarily (and safely, to some extent) ignored
international aspects of finance. This mode of operation has become untenable since then.
2. How is international financial management different from domestic financial management?
Answer: There are three major dimensions that set apart international finance from domestic finance.
They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
3. Discuss the three major trends that have prevailed in international business during the last two
decades.
Answer: The 1980s brought a rapid integration of international capital and financial markets. Impetus
for globalized financial markets initially came from the governments of major countries that had
begun to deregulate their foreign exchange and capital markets. The economic integration and
globalization that began in the eighties is picking up speed in the 1990s via privatization.
Privatization is the process by which a country divests itself of the ownership and operation of a
business venture by turning it over to the free market system. Lastly, trade liberalization and
economic integration continued to proceed at both the regional and global levels.
4. How is a country’s economic well-being enhanced through free international trade in goods and
services?
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
countries to each specialize in the production of the goods that it can produce relatively most
efficiently and then trade those goods. By doing so, the two countries can increase their combined
production, which allows both countries to consume more of both goods. This argument remains
valid even if a country can produce both goods more efficiently than the other country. International
trade is not a ‘zero-sum’ game in which one country benefits at the expense of another country.
Rather, international trade could be an ‘increasing-sum’ game at which all players become winners.
5. What considerations might limit the extent to which the theory of comparative advantage is
realistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth century
economist David Ricardo as an explanation for why nations trade with one another. The theory
claims that economic well-being is enhanced if each country’s citizens produce what they have a
comparative advantage in producing relative to the citizens of other countries, and then trade
products. Underlying the theory are the assumptions of free trade between nations and that the factors
of production (land, buildings, labor, technology, and capital) are relatively immobile. To the extent
that these assumptions do not hold, the theory of comparative advantage will not realistically describe
international trade.
6. What are multinational corporations (MNCs) and what economic roles do they play?
Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
country that has production and sales operations in several other countries. Indeed, some MNCs have
operations in dozens of different countries. MNCs obtain financing from major money centers around
the world in many different currencies to finance their operations. Global operations force the
treasurer’s office to establish international banking relationships, to place short-term funds in several
currency denominations, and to effectively manage foreign exchange risk.
7. Mr. Ross Perot, a former Presidential candidate of the Reform Party, which is a third political party
in the United States, had strongly objected to the creation of the North American Trade Agreement
(NAFTA), which nonetheless was inaugurated in 1994, for the fear of losing American jobs to
Mexico where it is much cheaper to hire workers. What are the merits and demerits of Mr. Perot’s
position on NAFTA? Considering the recent economic developments in North America, how would
you assess Mr. Perot’s position on NAFTA?
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily in
Mexico, sometimes relocating production from the United States to Mexico. Although this might have
temporarily caused unemployment of some American workers, they were eventually rehired by other
industries often for higher wages. Currently, the unemployment rate in the U.S. is quite low by
historical standard. At the same time, Mexico has been experiencing a major economic boom. It
seems clear that both Mexico and the U.S. have benefited from NAFTA. Mr. Perot’s concern appears
to have been ill founded.
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the
French corporate governance structure. The group reported the following, among other things “The
board of directors should not simply aim at maximizing share values as in the U.K. and the U.S.
Rather, its goal should be to serve the company, whose interests should be clearly distinguished from
those of its shareholders, employees, creditors, suppliers and clients but still equated with their
general common interest, which is to safeguard the prosperity and continuity of the company”.
Evaluate the above recommendation of the working group.
Answer: The recommendations of the French working group clearly show that shareholder wealth
maximization is not a universally accepted goal of corporate management, especially outside the
United States and possibly a few other Anglo-Saxon countries including the United Kingdom and
Canada. To some extent, this may reflect the fact that share ownership is not wide spread in most
other countries. In France, about 15% of households own shares.
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath
of corporate scandals, e.g., Enron and WorldCom, U.S. President George W. Bush stated that while
tougher laws might help, “ultimately, the ethics of American business depends on the conscience of
America’s business leaders.” Describe your view on this statement.
Answer: There can be different answers to this question. If business leaders always behave with a
high ethical standard, many of the corporate scandals we have seen lately might not have happened.
Since we cannot fully depend on the ethical behavior on the part of business leaders, the society
should protect itself by adopting the rules/regulations and governance structure that would induce
business leaders to behave in the interest of the society at large.
10. Suppose you are interested in investing in shares of Nokia Corporation of Finland, which is a
world leader in wireless communication. But before you make investment decision, you would like to
learn about the company. Visit the website of CNN Financial network (www.cnnfn.com) and collect
information about Nokia, including the recent stock price history and analysts’ views of the company.
Discuss what you learn about the company. Also discuss how the instantaneous access to information
via internet would affect the nature and workings of financial markets.
Answer: As students might have learned from visiting the website, information is readily available
even for foreign companies like Nokia. Ready access to international information helps integrate
financial markets, dismantling barriers to international investment and financing. Integration,
however, may help a financial shock in one market to be transmitted to other markets.
MINI CASE: NIKE’S DECISION
Nike, a U.S.-based company with a globally recognized brand name, manufactures athletic
shoes in such Asian developing countries as China, Indonesia, and Vietnam using subcontractors, and
sells the products in the U.S. and foreign markets. The company has no production facilities in the
United States. In each of those Asian countries where Nike has production facilities, the rates of
unemployment and underemployment are quite high. The wage rate is very low in those countries by
the U.S. standard; hourly wage rate in the manufacturing sector is less than one dollar in each of those
countries, which is compared with about $18 in the U.S. In addition, workers in those countries often
are operating in poor and unhealthy environments and their rights are not well protected.
Understandably, Asian host countries are eager to attract foreign investments like Nike’s to develop
their economies and raise the living standards of their citizens. Recently, however, Nike came under a
world-wide criticism for its practice of hiring workers for such a low pay, “next to nothing” in the
words of critics, and condoning poor working conditions in host countries.
Evaluate and discuss various ‘ethical’ as well as economic ramifications of Nike’s decision to
invest in those Asian countries.
Suggested Solution to Nike’s Decision
Obviously, Nike’s investments in such Asian countries as China, Indonesia, and Vietnam were
motivated to take advantage of low labor costs in those countries. While Nike was criticized for the
poor working conditions for its workers, the company has recognized the problem and has
substantially improved the working environments recently. Although Nike’s workers get paid very
low wages by the Western standard, they probably are making substantially more than their local
compatriots who are either under- or unemployed. While Nike’s detractors may have valid points, one
should not ignore the fact that the company is making contributions to the economic welfare of those
Asian countries by creating job opportunities.
