Kirt C.

Butler, Multinational Finance, 3rd edition

Solutions
to

End-of-Chapter Questions and Problems

in

Multinational Finance
by Kirt C. Butler

Third Edition

Kirt C. Butler, Multinational Finance, 3rd edition

PART I Overview and Background Chapter 1 An Introduction to Multinational Finance

Answers to Conceptual Questions 1.1 Describe the ways in which multinational financial management is different from domestic financial management. Multinational financial management is conducted in an environment that is influenced by more than one cultural, social, political, or economic environment. 1.2 What is country risk? Describe several types of country risk one might face when conducting business in another country. Country risks refer to the political and financial risks of conducting business in a particular foreign country. Country risks include foreign exchange risk, political risk, and cultural risk. 1.3 What is foreign exchange risk? Foreign exchange (or currency) risk is the risk of unexpected changes in foreign currency exchange rates. 1.4 What is political risk? Political risk is the risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. 1.5 How can MNCs can reduce operating expenses relative to domestic firms. MNCs can enjoy several advantages over domestic firms including global brands, size, and flexibility in marketing and distribution. Strategies for enhancing revenues include follow the customer, lead the customer, follow the leader, and establishing local production. Operating costs can be reduced through access to low-cost raw materials and labor, flexibility in sourcing, production, or site selection, and economies of scale or vertical integration. 1.6 What are the perfect financial market assumptions and their implications for multinational financial management. In a perfect financial market, rational investors have equal access to market prices and information in a frictionless market. Therefore, if financial policy is to increase firm value, it must increase expected cash flows or decrease the discount rate in a way that cannot be replicated by individual investors. MNCs are in a better position than domestic firms to take advantage of financial market imperfections through financial market arbitrage, hedging policy, access to international sources of capital, and multinational tax strategy.

Kirt C. Butler, Multinational Finance, 3rd edition 1.7 In what ways do cultural differences impact the conduct of international business? Because they define the rules of the game, national business and popular cultures impact each of the functional disciplines of business from research and development right through to marketing, production, and distribution. 1.8 Describe four broad modes of entry into international markets. Which of these modes requires the most resource commitment on the part of the MNC? Which has the greatest risks? Which offers the greatest growth potential? Export-based entry, import-based entry, contract-based entry, and investment-based entry. Investment entry requires the most resource commitment and exporting the least. The other side of the coin is that expected returns are often higher with investment-based entry than with exporting (so long as the project is positive-NPV and the MNC can pull it off). The advantages and disadvantages of contract-based entry depend on the particular contract. 1.9 What are the relative advantages and disadvantages of foreign direct investment, acquisitions/mergers, and joint ventures? The resource commitments of FDI and foreign acquisition are generally higher than joint ventures. a. FDI allows the MNC relatively permanent access to foreign product and factor markets. The cost of a new investment in an unfamiliar business culture can be high. b. Acquisitions of stock or of assets may be difficult or impossible in countries with investment restrictions or ownership structures (such as the German banking system or the Japanese keiretsu industrial structure) that impede foreign acquisitions. Acquisition premiums can also be prohibitive. c. Joint ventures can allow the MNC to gain quick access to foreign markets and to new production technologies. It can also come with risks, such as the risk of losing control of the MNCs intellectual property rights to the joint venture partner. 1.10 What is the goal of financial management? How might this goal be different in different countries? How might the goal of financial management be different for the multinational corporation than for the domestic corporation? The goal of financial management is to make decisions that maximize the value of the enterprise to some group of stakeholders. The society in which business is conducted determines who these stakeholders are. The relative importance of stakeholders varies by country. Equity shareholders are important in every free-market country. Commercial banks are more important in some countries (e.g., Germany and Japan) than in some other countries (e.g., the United States and the United Kingdom). In socialist countries, the welfare of employees and the general population assume a more prominent role. 1.11 List the MNCs key stakeholders. How does each have a stake in the MNC? Stakeholders narrowly defined include shareholders, debtholders, and management. More broadly defined, stakeholders also would include employees, suppliers, customers, host governments, and residents of host countries.

Kirt C. Butler, Multinational Finance, 3rd edition Problem Solutions 1.1 Rather than make up an entry strategy, lets look at how Motorola has entered Southeast Asia. In the 1960s, Motorola established sales agencies in Japan and Hong Kong as its initial entry mode. In the early 1980s, Motorola decided that it needed direct investment in the region in order to diversify its design and manufacturing capabilities. Development costs are high in the semiconductor industry and economies of scale on a successful product can be substantial. For this reason, Motorola and other semiconductor manufacturers have favored the international joint venture as a way to enter new markets and reduce the costs and risks of product innovation. Here is a partial list of Motorolas international joint ventures: Since 1987, Motorola has had a joint venture with Toshiba to manufacture semiconductors. Joint ventures help Motorola to keep research and development costs down while keeping an eye on their Japanese competitors. In 1990, Motorola built a design and manufacturing facility in Hong Kong as a platform to service the rest of Southeast Asia. Motorola has gradually increased its manufacturing capacity in the Peoples Republic of China, beginning with a 1996 joint venture to manufacture Mac clones with Chinas state-owned Nanjing Power Computing. By 2002, Motorola was the biggest foreign investor in the China. In the same year, China became the single biggest destination for foreign direct investment. Motorola currently derives more than 50% of its sales from outside the United States.