Foreign Investment Strategy Myzo Co. (based in the United States) sells basic household products that many other U.S. firms produce at the same quality level; these other U.S. firms have approximately the same production costs as Myzo. Myzo is considering DFI. It believes that the market in the United States is saturated and wants to pursue business in a foreign market where it can generate more revenue. It decides to create a subsidiary in Mexico that will produce household products and sell its products only in Mexico. This subsidiary would definitely not export its products to the United States because exports to the United States could reduce the parent’s market share and Myzo wants to ensure that its U.S. employees remain employed. The labor costs in Mexico are very low. Myzo will comply with some international labor laws that mean the total costs of Myzo’s subsidiary will be 20 percent higher than other Mexican producers of household products in Mexico that are of similar quality. However, Myzo’s subsidiary will be able to produce household products at a cost that is 40 percent lower than its cost of producing household products in the United States. Briefly explain whether you think Myzo’s strategy for DFI is feasible.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 13, Problem 18QA
Textbook Problem

Foreign Investment Strategy Myzo Co. (based in the United States) sells basic household products that many other U.S. firms produce at the same quality level; these other U.S. firms have approximately the same production costs as Myzo. Myzo is considering DFI. It believes that the market in the United States is saturated and wants to pursue business in a foreign market where it can generate more revenue. It decides to create a subsidiary in Mexico that will produce household products and sell its products only in Mexico. This subsidiary would definitely not export its products to the United States because exports to the United States could reduce the parent’s market share and Myzo wants to ensure that its U.S. employees remain employed. The labor costs in Mexico are very low. Myzo will comply with some international labor laws that mean the total costs of Myzo’s subsidiary will be 20 percent higher than other Mexican producers of household products in Mexico that are of similar quality. However, Myzo’s subsidiary will be able to produce household products at a cost that is 40 percent lower than its cost of producing household products in the United States. Briefly explain whether you think Myzo’s strategy for DFI is feasible.

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