Why might agency costs be larger for an MNC than for a purely domestic firm?

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1. Agency Problems of MNCs. 

a. Explain the agency problem of MNCs.

b. Why might agency costs be larger for an MNC than for a purely domestic firm?

2. Comparative Advantage. 

a. Explain how the theory of comparative advantage relates to the need for international business.

b. Explain how the product cycle theory relates to the growth of an MNC.

ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to capitalize on its perceived advantages in markets other than where it was initially established.

3. Imperfect Markets. 

a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.

b. Suppose perfect markets existed.Would If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar than under conditions of imperfect markets? Why?

5.  International Opportunities Due to the Internet. 

a.  What factors cause some firms to become more internationalized than others?

b.  Offer your opinion on why the Internet may result in more international business.

8. Valuation of an MNC. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain.

9. Centralization and Agency Costs. Would the agency problem be more pronounced for Berkley Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?

 
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