Answers to Questions

10243 Words Aug 30th, 2013 41 Pages
Chapter 1 Answers to End of Chapter Questions
1. Agency Problems of MNCs. a. 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
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It hired a consultant to determine whether it should set up a subsidiary in Mexico, where the parts would be produced. The consultant suggested that Forth Worth should expand for the following reasons. Offer your opinion on whether the consultant’s reasons are logical:

a. Theory of Competitive Advantage: There are not many SUVs sold in Mexico, so Fort Worth Inc. would not have to face much competition there.

b. Imperfect Markets Theory: Fort Worth Inc. can not easily transfer workers to Mexico, but it can establish a subsidiary there in order to penetrate a new market.

c. Product Cycle Theory: Fort Worth Inc. has been successful in the U.S. It has limited growth opportunities because it already controls much of the U.S. market for the parts it produces. Thus, the natural next step is to conduct the same business in a foreign country.

d. Exchange Rate Risk. The exchange rate of the peso has weakened recently, so this would allow Fort Worth Inc. to build a plant at a very low cost (by exchanging dollars for the cheap pesos to build the plant).

e. Political Risk. The political conditions in Mexico have stabilized in the last few months, so Fort Worth should attempt to penetrate the Mexican market now.

ANSWER: None of the arguments by the consultant are logical. If SUVs are not sold in the Mexican market, there is no need for these parts in Mexico. Fort Worth Inc. should only attempt to penetrate a new market if there is demand.

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