International-Financial-Management---Bekaert-2e---Solutions---Ch01.doc

International-Financial-Management---Bekaert-2e---Solutions---Ch01.doc

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Chapter1GlobalizationandtheMultinationalCorporation5

Chapter 1

GlobalizationandtheMultinationalCorporation

QUESTIONS

1.Defineglobalization.Howhasitproceededintradeingoodsandservicesversuscapitalmarkets?

Answer:

Globalizationreferstotheincreasingconnectivityandintegrationofcountriesandcorporationsandthepeoplewithinthemintermsoftheireconomic,political,andsocialactivities.Becauseofglobalization,multinationalcorporationsdominatethecorporatelandscape.

2.Describefourswaysthatacompanycansupplyitsproductstoaforeigncountry.Howdotheydiffer?

Answer:

AnMNCcansupplyaforeignmarketthroughexports,bylicensinglocalfirmsabroadtomanufacturethecompany’sproducts,bysettingupajointventurewithaforeigncompany,orbyforeigndirectinvestment.

3.Whatisagreenfieldinvestment?

Answer:

MNCsengageingreenfieldinvestmentswhentheyenterforeignmarketsbysimplyestablishingnewoperationsinthesecountrieswithouthavingalocalpartnerandwithoutacquiringalocalcompany.

4.WhatpercentageownershiptypicallydefinesFDI?

Answer:

Foreigndirectinvestment（FDI）occurswhenacompanyfromonecountrymakesasignificantinvestmentthatleadstoatleasta10%ownershipinterestinafirminanothercountry.

5.Whatisagencytheory?

Howdoescorporategovernancetheissuesraisedbyagencytheory?

Answer:

Agencytheoryexplorestheproblemsthatarisebecausetheownersofthefirmdonottypicallymanagethefirm,anditdeviseswaystoresolvetheseproblems.Thisisoftencalledtheseparationofowneshipandcontrol.Amanagerofafirm,inparticularthechiefexecutiveofficer（CEO）,isviewedasanagentwhocontractswithvariousprincipals—mostimportantlythefirm’sshareholdersbutalsothefirm’screditors,suppliers,clients,andemployees.Theprincipalsmustdesigncontractsthatmotivatetheagenttoperformactionsandmakedecisionsthatareinthebestinterestsoftheprincipals.

6.Whyisownershipmoreconcentratedindevelopingcountriesthanindevelopedcountries?

Answer:

Inmanydevelopedcountries,theruleoflawisstrongenoughtodisciplinemanagersthroughlegalmeans,forexamplebytakeoversandproxycontestsorthroughcontractualcompensationplans.Concentratedownershipisonewayinwhichagencyproblemsaremitigatedindevelopingcountries.Ablockofstockisheldbyeitherawealthyinvestor,afamily,orafinancialintermediary,whichmightbeabank,aholdingcompany,ahedgefundorapensionfund.Thelargeshareholderclearlyhasavestedinterestinmonitoringmanagementandhasthepowertoimplementchangesinmanagement.Negativeaspectsofthisapproachincludepossiblecollusionbetweenthelargeshareholderandthemanagementtoexpropriatewealthfromsmallershareholdersandthefactthatthestockmaybemoredifficulttotradeonthestockmarketifasubstantialblockofsharesiswithdrawnfromthemarketbutisstillavailabletobesoldshouldthelargeshareholderwanttosell.

7.WhatistheIMF?

Whatisitsroleintheworldeconomy?

Answer:

TheInternationalMonetaryFund（IMF）isaninternationalorganizationof187membercountries,basedinWashington,DC,whichwasconceivedataUnitedNationsconferenceconvenedinBrettonWoods,NewHampshire,in1944.ThemaingoaloftheIMFistoensurethestabilityoftheinternationalmonetaryandfinancialsystem—thesystemofinternationalpaymentsandexchangeratesamongnationalcurrenciesthatenablestradetotakeplacebetweencountries,tohelpresolvecriseswhentheyoccur,andtopromotegrowthandalleviatepoverty.Tomeettheseobjectives,theIMFofferssurveillanceandtechnicalassistance.Surveillanceistheregulardialogueaboutacountry’seconomicconditionandpolicyadvicethattheIMFofferstoeachofitsmembers.Technicalassistanceandtrainingareofferedtohelpmembercountriesstrengthentheircapacitytodesignandimplementeffectivepolicies,includingfiscalpolicy,monetaryandexchangeratepolicies,bankingandfinancialsystemsupervisionandregulation,andstatistics.

8.WhatistheWorldBank?

Whatisitsroleintheworldeconomy?

Answer:

TheWorldBankisaninternationalinstitutioncreatedin1944,astheInternationalBankforReconstructionandDevelopment（IBRD）tofacilitatepostwarreconstructionanddevelopment.Overtime,theIBRD’sfocusshiftedtowardpovertyreduction,andin1960,theInternationalDevelopmentAssociation（IDA）wasestablishedasanintegralpartoftheWorldBank.WhereastheIBRDfocusesonmiddle-incomecountries,theIDAfocusesonthepoorestcountriesintheworld.Togethertheyprovidelow-interestloans,interest-freecredits,andgrantstodevelopingcountriesforinvestmentsineducation,health,infrastructure,communications,andotheractivities.TheWorldBankalsoprovidesadvisoryservicestodevelopingcountriesandisactivelyinvolvedwitheffortstoreduceandcanceltheinternationaldebtofthepoorestcountries.

9.Whatarethemajormultilateraldevelopmentbanks?

Answer:

ThetermtypicallyreferstotheWorldBankGroupandfourregionaldevelopmentbanks:

theAfricanDevelopmentBank,theAsianDevelopmentBank,theEuropeanBankforReconstructionandDevelopment,andtheInter-AmericanDevelopmentBank.Thesebankshaveabroadmembershipthatincludesbothdevelopingcountries（borrowers）anddevelopedcountries（donors）,andtheirmembershipisnotlimitedtocountriesfromtheregionoftheregionaldevelopmentbank.Whileeachbankhasitsownindependentlegalandoperationalstatus,theirsimilarmandatesandaconsiderablenumberofjointownersleadtoahighlevelofcooperationamongMDBs.TheMDBsprovidefinancingfordevelopmentinthreeways.First,theyprovidelong-termloansatmarketinterestrates.Tofundtheseloans,theMDBsborrowontheinternationalcapitalmarketsandre-lendtoborrowinggovernmentsindevelopingcountries.Second,theMDBsofferlong-termloans（oftentermedcredits）withinterestratessetwellbelowmarketrates.Thesecreditsarefundedthroughdirectcontributionsofgovernmentsindonorcountries.Finally,grantsaresometimesofferedmostlyfortechnicalassistance,advisoryservices,orprojectpreparation.

10.WhatistheWTO?

Whatisitsroleintheworldeconomy?

Answer:

TheWorldTradeOrganization（WTO）wasfoundedin1995.ItisheadquarteredinGeneva,Switzerland,andhad153membercountriesin2010.WhereasGATTwasasetofrules,theWTOisaninstitutionalbody.TheWTOexpandeditsscopefromtradedgoodstotradewithintheservicesectorandintellectualpropertyrights.VariousWTOagreementssetthelegalgroundrulesforinternationalcommercetohopefullyensurethatthemultilateraltradingsystemoperatessmoothly.Theyarenegotiatedandsignedbyalargemajorityoftheworld’stradingnations,andtheagreementsareratifiedintheparliamentsofthemembercountries.Ifthereisatradedisputebetweencountries,theWTO’sdisputesettlementprocesshelpsinterprettheagreementsandcommitments,anditensuresthatcountries’tradepoliciesconformtothem.

11.Whatisaninstitutionalinvestor?

Alongwithindividualinvestors,whatdotheydetemine?

Answer:

InstitutionalInvestorsareorganizationsthatinvestpoolsofmoneyonbehalfofindividualinvestorsorotherorganizations.Examplesincludebanks,insurancecompanies,pensionfunds,mutualfunds,anduniversityendowments.Institutionalinvestors,togetherwithindividualinvestors,determinethepricesofbondsandstocksimplicitlydeterminingtheexpectedratesofreturnontheseassetstherebysettingtheMNC’scostofcapital.Thecostofcapital,inturn,affectsprojectvaluations,whichdeterminesacompany’sinvestments.

12.Whatareanti-globalists?

Answer:

Anti-globalizationisanumbrellatermencompassingseparatesocialmovements,unitedintheiroppositiontotheglobalizationofcorporateeconomicactivityandthefreetradewithdevelopingnationsthatresultsfromsuchactivity.Anti-globalistsgenerallybelievethatgloballaissez-fairecapitalismisdetrimentaltopoorcountriesandtodisadvantagedpeopleinrichcountries.Anti-globalistsalsocriticizeglobalfinancialinstitutionssuchastheWorldBank,theIMF,andtheWTO.Especiallyunderattackistheso-calledWashingtonconsensusmodelofdevelopment,which,aspromotedbyinternationalfinancialinstitutions（especiallytheIMF）,isinterpretedasrequiringmacroeconomicausterity,privatization,andarelativelylaissez-faireapproachtoeconomicmanagement.Anti-globalistsbelievethatthesepoliciesexacerbateunemploymentandpoverty.

13.WhoareAnteandFreedyHandel?

Howdotheirviewsontheworldeconomydiffer?

Answer:

AnteandFreedyHandelaretwobrotherswhodiscussvariousinternationalfinancialmanagementproblemsandcontroversialissuesininternationalfinanceinPoint–Counterpointfeatures.Thebrothersareenrolledinaninternationalfinanceclass.Antetypicallyrailsagainstfreetradeandfreemarketsashebelievesfinancialmarketsareinefficientandthatpricesdonotnecessarilycorrectlyreflectinformationaboutafirm’sprospects.Freedybelievesmoreinthepowerofthecapitalistsystemtoallocateresourcesefficiently,andheconsequentlybelievesthatfinancialmarketsbyandlargegetthingsright.

PROBLEMS

1.GototheWebsiteofyourfavoritemultinationalfirmanddeterminewhereitoperatesthoughouttheworld.Howmanyemployeesdoesithaveworldwide?

Hasitdoneanyinterestingcross-bordermergersandacquisitionsduringthelastyear?

Answer:

Asanexample,Siemens,hasaninvestorrelationssectioninwhichyou