• University of South Africa

• FINANCIAL FIN4802

 1: Chapter Managing Finance in Foreign Subsidiaries 1. Motives of an MNC. Describe constraints that interfere with a MNCs objective. ANSWER: The constraints faced by financial managers attempting to maximize shareholder wealth are: a. Environmental constraints - countries impose environmental regulations such as building codes and pollution controls, which increase costs of production. b. Regulatory constraints - host governments can impose taxes, restrictions on earnings remittances, and restrictions on currency convertibility, which may reduce cash flows to be received by the parent. c. Ethical constraints - U. S.-based MNCs may beat a competitive disadvantage if they follow a worldwide code of ethics, because other firms may use tactics that are allowed in some foreign countries but considered illegal by U. S. standards. 2. International Opportunities. a. How does access to international opportunities affect the size of corporations? ANSWER: Additional opportunities will often cause a firm to grow more than if it did not have access to such opportunities. Thus, a firm that considers international opportunities has greater potential for growth. b. Describe a scenario in which the size of a corporation is not affected by access to international opportunities. ANSWER: Some firms may avoid opportunities because they lack knowledge about foreign markets or expect that the risks are excessive. Thus, the size of these firms is not affected by the opportunities. c. Explain why MNCs such as Coca Cola and Pepsi Co, Inc., still have numerous opportunities for international expansion. ANSWER: Coca Cola and Pepsi Co 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. 3. Impact of the Euro on U.S. Subsidiaries. McCanna Corp. has a French subsidiary that produces wine and exports to various European countries. Explain how the subsidiary’s business may have been affected since the conversion of many European currencies into a single European currency (the euro) in 1999. ANSWER: The subsidiary and its customers based in countries that now use the euro as their currency would no longer be exposed to exchange rate risk. 4. Agency Problems of MNCs. Explain the agency problem of MNCs. ANSWER: The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the best interest of the owners. b. Why might agency costs be larger for an MNC than for a purely domestic firm? ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems. 5. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the U.S., wants to expand internationally by selling the same golf clubs in Brazil. a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign investment, etc.) that Snyder could use to achieve its goal. ANSWER: Snyder can export the clubs, but the transportation expenses may be high. If could establish a subsidiary in Brazil to produce and sell the clubs, but this may require a large investment of funds. It could use licensing, in which it specifies to a Brazilian firm how to produce the clubs. In this way, it does not have to establish its own subsidiary there. b. Which method would you recommend for this firm? Justify your recommendation. ANSWER: If the amount of golf clubs to be sold in Brazil is small, it may decide to export. However, if the expected sales level is high, it may benefit from licensing. If it is confident that the expected sales level will remain high, it may be willing to establish a subsidiary. The wages are lower in Brazil, and the large investment needed to establish a subsidiary may be worthwhile. 6. Impact of Eastern European Growth. The managers of Loyola Corp. recently had a meeting to discuss new opportunities in Europe as a result of the recent integration among Eastern European countries. They decided not to penetrate new markets because of their present focus on expanding market share in the United States. Loyola’s financial managers have developed forecasts for earnings based on the 12 percent market share (defined here as its percentage of total European sales) that Loyola currently has in Eastern Europe. Is 12 percent an appropriate estimate for next year’s Eastern European market share? If not, does it likely overestimate or underestimate the actual Eastern European market share next year? ANSWER: It would likely overestimate its market share because the competition should increase as competitors penetrate the European countries.