Assignment

International Finance

Topic: ANSWER THE

FOLLOWING QUESTIONS

Submitted To: Sir Zain Ullah

Designation: Lecturer
Submitted By: Iftikhar Hussain
Student ID: 9267
Program: MBA 1.5 (Finance)
Semester: 3rd
Date: 04th- May- 2019

Department of Management Science

City University of Science & Information Technology, (CUSIT) Peshawar
 ANSWER THE FOLLOWING QUESTION WITH SUPPORT YOUR
ANSWERS WITH CONCRETE ARGUMENTS.

1. Explain the agency problem of MNCs.

ANSWER: The agency problem of MNC’s involves the conflicting goals between the managers and
shareholders of MNC’s.

2. Why might agency costs be larger for an MNC than for a purely domestic firm?

ANSWER: Agency costs are larger for an MNC because they deal with holdings around the world.
These corporations are large-scale companies that cost more money to run then domestic firm.

3. Explain how the product cycle theory relates to the growth of an MNC?

ANSWER: 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.

4. 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?

ANSWER: 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.

5. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous
opportunities for international expansion?

ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries are at
various stages of development. Some countries have just recently opened their borders to MNCs.
Many of these countries do not offer sufficient food or drink products to their consumers.
6. Offer your opinion on why the Internet may result in more international business?

ANSWER: The Internet allows for easy and low cost communication between countries. So that firms
could not develop contacts with potential customers overseas by having a website. Many firms use
their website to identify the products that they sell. Along with the prices for each product. This allows
them to easily advertise their products to potential importers anywhere in the world without
mailing brochures to various countries.

7. Explain why more standardized product specifications across countries can increase
global competition?

ANSWER: Standardized product specifications allow firms to more easily expand their business across
other countries. Which increases global competition.

8. Explain why political risk may discourage international business?

ANSWER: Political risk increases the rate of return required to invest in foreign projects. Some foreign
projects would have been feasible if there was no political risk. But will not be feasible because of
political risk.

9. Anheuser-Busch, the producer of Budweiser and other beers, expanded into Japan
by engaging in a joint venture with Kirin Brewery, the largest brewery in Japan. The
joint venture enables Anheuser-Busch to have its beer distributed through Kirin’s
distribution channels in Japan. In addition, it could utilize Kirin’s facilities to
produce beer that would be sold locally. In return, Anheuser-Busch provided
information about the American beer market to Kirin.
a. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of
maximizing shareholder wealth?

ANSWER: The joint venture creates a way for Anheuser-Busch to distribute Budweiser throughout
japan. It enables Anheuser-Busch to penetrate the Japanese market without requiring a substantial
investment in japan.
 b. Explain how the joint venture limited the risk of the international business?

ANSWER: The Joint venture has limited risk because Anheuser-Busch does not need to establish its
own distribution network in japan.

10. Of what is the current account generally composed?

ANSWER: The current account balance is composed of

(1) The balance of trade,

(2) The net amount of payments of interest to foreign investors and from foreign investment,

(3) Payments from international tourism, and

(4) Private gifts and grants.

11. Of what is the capital account generally composed?

ANSWER: The capital account is composed of all capital investments made between countries,
including both direct foreign investment and purchases of securities with maturities exceeding one year.

12. How would a relatively high home inflation rate affect the home country’s current
account, other things being equal?
ANSWER: A high inflation rate tends to increase imports and decrease exports, thereby increasing the
current account deficit, other things equal.
13. Is a negative current account harmful to a country? Discuss.
ANSWER: This question is intended to encourage opinions and does not have a perfect solution. A
negative current account is thought to reflect lost jobs in a country, which is unfavorable. Yet, the
foreign importing reflects strong competition from foreign producers, which may keep prices
(inflation) low.
14. How is the IMF involved in international trade?

ANSWER: The IMF in involved in international trade because it attempts to stabilize international
payments, and trade represents a significant portion of the international payments.
15. A relatively small U.S. balance of trade deficit is commonly attributed to a strong
demand for U.S. exports. What do you think is the underlying reason for the strong
demand for U.S. exports?

ANSWER: The strong demand for U.S. exports is commonly attributed to strong foreign economies or
to a weak dollar.