Eva Diaz

Chapter 1 Questions and applications

#1,2,3,5,6,7,10,15,16

1.
a. Some of the agency problems encountered with the MNC come with the conflict of goals between a firm’s managers and shareholders when making decisions. Agency costs are larger for an MNC than for a purely domestic firm because managers of foreign subsidiaries may be tempted to focus on making decisions to serve their subsidiaries rather than the overall MNC.
b. MNC’s with subsidiaries scattered around the world may experience more agency costs because it is much more difficult to monitor managers in foreign countries, foreign subsidiaries may not follow the same uniform goals, the size of the subsidiaries themselves leads to more conflicts, as well as the beliefs that employees should come first in decision making prior to shareholders.
2.
a. Explain how the theory of comparative advantage relates to the need for international business. The theory of comparative advantage relates to the need for international business because it suggests that each country should use its comparative advantage to specialize in its production and rely on other countries to meet other needs. Therefore all countries would need to trade with each other competitively for the products they are not able to produce.
b. Explain how the product cycle theory relates to the growth of the MNC. The product cycle theory suggests that after firms are established in their home countries, they commonly expand their product specialization in foreign countries. This would therefore lead to the growth of the MNC.
3.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets. The existence of imperfect markets has led to the establishment of subsidiaries in foreign markets because due to the cost of