Tutorial Answers

Tutorial 1
Chapter 1
1. Agency problems of MNC
a. Explain the agency problem of MNCs.
Multinational organizations are those which engage in international business. Often these
international branches are referred to as subsidiaries within the respective territories.
Organizations may do this for many reasons such as gaining competitive advantage, introducing
a new product of expanding an existing one, or a different market may have the raw materials or
labor needed for a businesss operations. Agency problems are those problems that arise when
there is a conflict of interest between the owners of the corporation and the manager of the
international subsidiary. The overall goal for the organization is to produce shareholder wealth,
and when this isnt being achieved can be one of the causes for agency problems. To mitigate
these issues and ensure shareholder wealth organizations can use several methods, referred to as
agency cost.
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
Agency costs might be higher for MNC due to the fact that more resources must be spent on
elements such as appointing or training managers to ensure that the shareholder needs are met,
the facilitate the creation and implementation of management systems to ensure effective
management and communication among agents and corporations. All to reduce the potential
effects of agency problems.
2. Comparative Advantage
a. Explain how the theory of comparative advantage relates to the need for
international business.
Comparative advantage is where one organization has the ability to perform the same tasks or
operations as its competitors, but at a lower cost. This thereby allows organizations to maximize
profits by larger margins over their competitors. Comparative advantage is important in
international trade as it can allow organizations to gain higher profits on their products in foreign
markets where competitors lack the resources to effectively compete on the level of MNC. An
example of this would be a local coffee store having to compete with international giant
Starbucks.
b. Explain how the product cycle theory relates to the growth of an MNC.
The product lifecycle is a theoretical timeline that an organization may go through which details
how its offerings evolve in the market over time. This is directly related to the international
expansion of a business due to the fact that most products will begin sales in the home country of
the business. This is also knowns as the introduction stage, during which, sales are usually quite
low. As the brand and product become more recognizable growth occurs. Eventually this

product will mature and even potentially decline. During the last two stages an organization may
decide to use the money generated from increased sales to expand the product into other
territories, or give it new life should it be declining in existing territories.
3. Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of
subsidiaries in foreign markets.
Imperfect markets are those where information is not easily obtained or disclosed a system of
asymmetric information. Because of this it has become
b. If perfect markets existed, would wages, prices, and interest rates among countries
be more similar or less similar than under conditions of imperfect markets? Why?
4. Methods Used to Conduct International Business.
Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a
foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and
return between a licensing agreement with a foreign firm, and the acquisition of a foreign
firm.

Chapter 2
1. Government Restrictions. How can government restrictions affect international
payments among countries?
2. Free Trade. There has been considerable momentum to reduce or remove trade barriers
in an effort to achieve free trade. Yet, one disgruntled executive of an exporting firm
stated, Free trade is not conceivable; we are always at the mercy of the exchange rate.
Any country can use this mechanism to impose trade barriers. What does this statement
mean?
3. International Investments. U.S.-based MNCs commonly invest in foreign securities.
a. Assume that the dollar is presently weak and is expected to strengthen over time.
How will these expectations affect the tendency of U.S. investors to invest in
foreign securities?
b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs
to invest abroad.
c. In general terms, what is the attraction of foreign investments to U.S. investors?