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CHAPTER 1  GLOBALIZATION AND THE MULTINATIONAL FIRM
SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS
QUESTIONS 
1. Why is it important to study international financial management? 
Answer:  We We are are are now now now living living living in in in a a a world world world where where where all all all the the the major major major economic economic economic functions, functions, functions, i.e., i.e., i.e., consumption, consumption, production, production, and and and investment, investment, investment, are are are highly highly highly globalized. globalized.  It It is is is thus thus thus essential essential essential for for for financial financial financial managers managers managers to to to fully fully understand understand vital vital vital international international international dimensions dimensions dimensions of of of financial financial financial management. management.  This This global global global shift shift shift is is is in in in marked marked 
contrast to a situation that existed when the authors of this book were learning finance some twenty years ago.  At that time, most professors customarily (and safely, to some extent) ignored international aspects of finance.  This mode of operation has become untenable since then. 
2.  How is international financial management different from domestic financial management? 
Answer:  There are three major dimensions that set apart international finance from domestic finance. They are: 
1.  foreign exchange and political risks, 
2.  market imperfections, and 
3.  expanded opportunity set. 
3. Discuss the three major trends that have prevailed in international business during the last two decades. 
Answer:  The 1980s brought a rapid integration of international capital and financial markets. I
赵文卓与甄子丹事件mpetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets.  The economic integration and globalization that began in the eighties is picking up speed in the 1990s via privatization.  Privatization is the process by 
which a country divests itself of the ownership and operation of a business venture by turning it over to the free market system. Lastly, trade liberalization and economic integration continued to proceed at both the regional and global levels. 
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4.  How How is is is a a a country‟s country‟s economic economic well well well-being -being -being enhanced enhanced enhanced through through through free free free international international international trade trade trade in in in goods goods goods and and services? 
Answer:  According According to to to David David David Ricardo, Ricardo, Ricardo, with with with free free free international international international trade, trade, trade, it it it is is is mutually mutually mutually beneficial beneficial beneficial for for for two two 
countries to each specialize in the production of the goods that it can produce 
relatively  most efficiently and and then then then trade trade trade those those those goods. goods.  By By doing doing doing so, so, so, the the the two two two countries countries countries can can can increase increase increase their their their combined combined combined production, production, which which allows allows allows both countries both countries to to consume consume consume more more more of of of both both both goods. goods.  This This argument argument argument remains remains remains valid even valid even if if a a country country can can can produce produce produce both both both goods goods goods more more more efficiently efficiently efficiently than than than the the the other other other country. country.  International International trade trade trade is is is not not not a a …zero …zero--sum‟ game in which one country benefits at the expense of another count
ry. Rather, international trade could be an …increasing -sum‟ game at which all players become winners.
5. What considerations might limit the extent to which the theory of comparative advantage is realistic? 
Answer:  The The theory theory theory of of of comparative comparative comparative advantage advantage advantage was was was originally originally originally advanced advanced advanced by by by the the the nineteenth nineteenth nineteenth century century economist David Ricardo as an explanation for why nations trade with one another.  The theory claims 
that economic well-being is enhanced if each country‟s citizens produce what they have a comparative advantage in producing relative to the citizens of other countries, and then trade products.  Underlying the the theory theory theory are are are the the the assumptions assumptions assumptions of of of free free free trade trade trade between between between nations nations nations and and and that that that the the the factors factors factors of of of production production production (land, (land, buildings, labor, technology, and capital) are relatively immobile.  To the extent that these assumptions do not hold, the theory of comparative advantage will not realistically describe international trade. 
6. What are multinational corporations (MNCs) and what economic roles do they play? 
Answer:  A A multinational multinational multinational corporation corporation corporation (MNC)
 (MNC) (MNC) can can can be be be defined defined defined as as as a a a business business business firm firm firm incorporated incorporated incorporated in in in one one country country that that that has has has production production production and and and sales sales sales operations operations operations in in in several several several other other other countries. countries. countries. Indeed, Indeed, Indeed, some some some MNCs MNCs MNCs have have operations in dozens of different countries.  MNCs obtain financing from major money centers around the the world world world in in in many many many different different currencies currencies to to to finance finance finance their their their operations. operations.  Global Global operations operations operations force force force the the treasurer‟s office office to to to establish establish establish international international international banking banking banking relationships, relationships, relationships, to to to place place place short short short-term -term -term funds funds funds in in in several several currency denominations, and to effectively manage foreign exchange risk. 
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7. Mr. Ross Perot, a former Presidential candidate of the Reform Party, which is a third political party in the the United United United States, States, States, had had had strongly str
ongly strongly objected objected objected to to to the the the creation creation creation of of of the the the North North North American American American Trade Trade Trade Agreement Agreement 
(NAFTA), which nonetheless was inaugurated in 1994, for the fear of losing American jobs to Mexico where it is much cheaper to hire workers. What are the merits and demerits of Mr. Perot‟s position on NAFTA? Considering the recent economic developments in North America, how would you assess Mr. Perot‟s position on NAFTA?
裴涩琪复古舞曲Answer: Answer: Since Since Since the the the inception inception inception of of of NAFTA, NAFTA, NAFTA, many many many American American American companies companies companies indeed indeed indeed have have have invested invested invested heavily heavily heavily in in Mexico, Mexico, sometimes relocating production from the United sometimes relocating production from the United States States to Mexico. Although this to Mexico. Although this 
might have temporarily temporarily caused caused caused unemployment unemployment unemployment of of of some some some American American American workers, workers, wor
kers, they they they were were were eventually eventually eventually rehired rehired rehired by by by other other 
industries often for higher wages. Currently, the unemployment rate in the U.S. is quite low by historical standard. At the same time, Mexico has been experiencing a major economic boom. It seems clear that both both Mexico Mexico Mexico and and and the the the U.S. U.S. U.S. have have have benefited benefited benefited from from from NAFTA. NAFTA. NAFTA. Mr. Mr. Mr. Perot‟s Perot‟s concern concern appears appears appears to to to have have have been been been ill ill founded. 
8. In 1995, a working group of French chief executive officers was set up by the Confederation of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French corporate governance governance structure. structure. structure. The The The group group group reported reported reported the the the following, following, following, among among among other other other things things things “The “The “The board board board of of of directors directors 
should not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its go
al should be to serve serve the the the company, company, company, whose whose whose interests interests interests should should should be be be clearly clearly clearly distinguished distinguished distinguished from from from those those those of of of its its its shareholders, shareholders, 
employees, creditors, suppliers and clients but still equated with their general common interest, which is to safeguard the prosperity and continuity of the company”. Evaluate the above recommendation of the working group. 
Answer: Answer: The The The recommendations recommendations recommendations of of of the the the French French French working working working group group group clearly clearly clearly show show show that that that shareholder shareholder shareholder wealth wealth 
maximization is not a universally accepted goal of corporate management, especially outside the United States and possibly a few other Anglo-Saxon countries including the United Kingdom and Canada. To some extent, this may reflect the fact that share ownership is not wide spread in most other countries. In France, about 15% of households own shares. 
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9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of corporate scandals, e.g., Enron and WorldCom, U.S. President George W. Bush stated that while tougher laws might help, “ultimately, the ethics of American business depends on the conscience of America‟s business leaders.”  Describe your view on this statement. 
Answer:  There can be different answers to this question. If business leaders always behave with a high ethical standard, many of the corporate scandals we have seen lately might not have happened. Since we cannot cannot fully fully fully depend depend depend on on on the the the ethical ethical ethical behavior behavior behavior on on on the part the part of of business business business leaders, leaders, leaders, the the the society society society should should should protect protect itself itself by by by adopting adopting adopting the the the rules/regulations rules/regulations rules/regulations and and and governance governance governance structure that structure that would would induce induce induce business business business leaders leaders leaders to to behave in the interest of the society at large. 
10. Suppose you are interested in investing in shares of Nokia Corporation of Finland, which is a world leader leader in in in wireless wireless wireless communication. communication. co
mmunication. But But But before before before you you you make make make investment investment investment decision, decision, decision, you you you would would would like like like to to to learn learn about the company. Visit the website of CNN Financial network (wwwnfn) and collect information information about about about Nokia, Nokia, Nokia, including including including the the the recent recent recent stock price stock price history history and and and analysts‟ analysts‟ views views of the of the compa company. ny. 
刘德凯主演的电视剧Discuss what you learn about the company. Also discuss how the instantaneous access to information via internet would affect the nature and workings of financial markets. 
Answer: As students might have learned from visiting the website, information is readily available even for for foreign foreign foreign companies companies companies like like like Nokia. Nokia. Nokia. Ready Ready Ready access access access to to to international international international information information information helps helps helps integrate integrate integrate financial financial 
markets, dismantling barriers to international investment and financing. Integration, however, may help a financial shock in one market to be transmitted to other markets. 
IM-5 MINI CASE: NIKE‟S DE CISION 
Nike, a U.S.-based company with a globally recognized brand name, manufactures athletic shoes in such such Asian Asian Asian developing developing developing countries countries countries as as as China, China, China, Indonesia, Indonesia, Indonesia, and and and Vietnam Vietnam Vietnam using using using subcontractors, subcontractors, subcontractors, and and and sells sells sells the the 
花僮
products in the U.S. and foreign markets. The company has no production facilities in the United States. In In each each each of of of those those those Asian Asian Asian countries countries countries where where where Nike Nike Nike has has has production production production facilities, facilities, facilities, the the the rates rates rates of of of unemployment unemployment unemployment and and underemployment underemployment are are are quite quite quite high. high. high. The The The wage wage wage rate rate rate is is is very very very low low low in in in those those those countries countries countries by by by the the the U.S. U.S. U.S. standard; standard; 
hourly wage rate in the manufacturing sector is less than one dollar in each of those countrie
s, which is compared with about $18 in the U.S. In addition, workers in those countries often are operating in poor and unhealthy environments and their rights are not well protected. Understandably, Asian host countries are are eager eager eager to to to attract attract attract foreign foreign foreign investments investments investments like like like Nike‟s Nike‟s Nike‟s to to to develop develop develop their their their economies economies economies and and and raise raise raise the the the living living 
standards of their citizens. Recently, however, Nike came under a world-wide criticism for its practice of hiring workers for such a low pay, “next to nothing” in the words of critics, and condoning poor working conditions in host countries. 金秀贤裴勇俊
Evaluate Evaluate and and and discuss discuss discuss various various various …ethical‟ …ethical‟ as as well well well as as as economic economic economic ramifications ramifications ramifications of of of Nike‟s Nike‟s decision decision to to 
invest in those Asian countries. 
Suggested Solution to Nike‟s Decision
Obviously, Obviously, Nike‟s Nike‟s investments investments in in in such such such Asian Asian Asian countries countries countries as as as China, China, China, Indonesia, Indonesia, Indonesia, and and and Vietnam Vietnam Vietnam were were 
motivated to take advantage of low labor costs in those countries. While Nike was criticized for the poor working working conditions conditions conditions for for for its its its workers, workers, workers, the the the company company company has has has recognized recognized recognized the the the problem problem problem and and and has has has substantially substantially improved the working environments recently. Although Nike‟s workers get paid very low wages by t he 
Western standard, they probably are making substantially more than their local compatriots who are either under- or unemployed. While Nike‟s detractors may have valid points, one should not ignore the fact that the company is making contributions to the economic welfare of those Asian countries by creating job opportunities.