FINS3616 International Business Finance - Week 1

A. Conceptual questions

1. Define globalization. How has it proceeded in trade in goods and services versus capital
markets?
Globalisation is the increasing connectivity and integration of countries, their
corporations and people in terms of economic, political and social activities. This has
resulted in greater trade in goods and services globally and more active capital markets.
Globalisation has also led to the emergence of MNCs that dominate the global trade.
2. Describe four ways that a company can supply its products to a foreign country. How do
they differ?
1) Licencing sell right to use product for fees (10%)
2) Franchising sell right to product with rules and strategies for higher fees (20%)
3) Joint Venture invest and operate a business with a foreign company (split profits
accordingly)
4) Foreign Direct Investment (FDI) invest in foreign country by establishing business
operations or acquiring business assets. Brown Field Investment (>10%), vs. Green
Field Investment (100%)
3. What percentage ownership typically defines FDI?
FDI involves a company making a significant investment in another country that results
in at least 10% ownership in another company and up to 100% if starting from scratch.
4. What is the agency problem? How do companies overcome the conflict of interest
between managers and shareholders?
Agency problem is the conflict of interest between a companys management and the
companys shareholders due to the separation of ownership and control. Conflict of
interest is overcome through:
- Independent, unbiased board of directors
- Concentrated ownership, enables more power to influence management decisions
- Executive compensation/ Managerial incentivisation i.e. bonuses, remuneration
- Shareholder activism (buy/sell shares to alter the price); Vote in a new management
- Contracts and Shareholder litigation (legal action against management)
- Hostile takeovers
5. Why is ownership more concentrated in emerging countries than that in developed
countries?
Developed countries have well-established legal infrastructure to discipline managers, i.e.
takeovers, competition through rival firms and remuneration incentives. Emerging
countries, on the other hand, do not have such mechanisms in place, hence, rely on
concentrated ownership. Shareholders with large proportions of stock in a firm has
greater interest in monitoring management and the power to change management and
control the companys share price, which affects managers income, vulnerability to
hostile takeovers, etc.
6. What is the IMF? What is its role in the world economy?
The International Monetary Fund is an international organisation of 189 countries
working to:
- improve global monetary cooperation
- international monetary and financial stability
- facilitate trade
- promote employment and economic growth
- alleviate poverty
This is achieved through technical assistance (training, information) and surveillance
(economic discussion)
7. What is the World Bank? What is its role in the world economy?
It is an international financial institution that provides loans to countries for infrastructure
development, comprising of the IBRD and IDA. Their role is to reduce poverty, promote
foreign investment, facilitate capital investment and international trade.
8. What is the WTO? What is its role in the world economy? Go to the WTOs Web site at
www.wto.org and determine which goods or services are the sources of trade disputes
between countries this year.
The World Trade Organisation deals with the rules of trade between nations. WTO
focuses on trade agreements, interpreting the agreements and facilitating dispute
settlement. In 2017, sources of trade disputes are construction materials and agricultural.
9. What is an institutional investor? Along with individual investors, what do they
determine?
Institutional investors (i.e. banks, insurance companies, pension funds, mutual funds and
endowment funds) are organisations that pool money on behalf of individual investors or
other organisations to purchase securities, property, other investment assets or create
loans. They work with individual investors to determine the prices of bonds and stocks,
and thus the expected rates of return on these assets, the cost of capital. This affects
project valuations and determines the companys MNC.

10. What does it mean for a country to experience a capital inflow?

Capital inflow is when foreigners are investing in domestic assets and domestic
individuals are selling foreign assets. Both involve capital flowing in.

11. List some famous around the world

1) Lehman Brothers Hid $50bil in loans disguised as sales

2) Equity Funding Corporation of America creating bogus life insurance policies

3) United Airlines Overbooking flights

4) Barings Bank high risk future trades and increasing debt

5) Bankwest/Commbank forced defaults to profit from clawback clauses

12. How does the Chinese economys new normal affect Australia?

Chinas shift from high speed growth to medium speed growth and shift from expansion
to current production improvements means less mining exports from Australia due to
Chinas falling demand. Australia will need to adapt by exporting goods and services that
in Chinas new demand for higher end products.

13. Why might setting up production facilities abroad lead to expanded sales in local
markets?

Offshoring and outsourcing production facilities abroad can lead to expanded sales in
local markets as it reduces production costs when the foreign countries have comparative
advantage in production either through cheaper labour and capital costs or efficiency and
achieving economy of scale. Lower costs allow companies to pass the savings into their
prices. Lower prices results in higher consumer demand.
B. True or False questions

1. MNCs have investment or financial operations in more than one country.

True

2. The terms stakeholder and shareholder are synonymous.

False shareholders own the company, stakeholders are interested in the companys
performance for other reasons.

3. The MNC faces greater constraints than the domestic corporation in the timing and location
of its investments.
False They are more flexible

4. Political risk is the risk that the business environment in a host country will change
unexpectedly due to political events.
True

5. The domestic financial manager must be knowledgeable in several areas within finance,
whereas the multinational financial manager usually specializes in a single area, such as
corporate finance, investments, or financial markets.
False

6. The worlds financial markets are becoming increasingly segmented as large international
commercial banks achieve more and more economic power.
True

C. MCQ

1. Corporate stakeholders include each of a.-d. except ____.

a. creditors
b. customers
c. managers
d. shareholders
e. Each of the above is a stakeholder in the firm

2. What is the name for the shifting of non-strategic functions to specialist firms to reduce costs?
a. outsourcing
b. multinational company
c. globalization
d. import
 e. all of the above

3. Which of the following was created in an effort to promote free trade?

a. World Trade Organization
b. IMF
c. multilateral development banks
d. the Organization for Economic Cooperation and Development
e. all of the above

4. Which one of the following is the most common method of overcoming the agency problem in
emerging countries?
a. concentrated ownership
b. independent boards
c. hostile takeovers
d. foreign direct investment
e. shareholder activism

5. It is the right given to firms to produce specific products in exchange for a ________ fee.
a. joint venture
b. FDI
c. licensing
d. None of the above
e. All of the above