BBMF3123 INTERNATIONAL FINANCE

TUTORIAL 1

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

An agency cost is a type of internal company expense, which comes from the actions of an
agent acting on behalf of a principal. Agency costs typically arise in the wake of core
inefficiencies, dissatisfactions, and disruptions, such as conflicts of interest between
shareholders and management.

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 (corruption).

 Third, the sheer size of the larger MNCs would also create large agency problems (may
incur more expenses).

 Inconsistency in MNC goal. https://www.theedgemarkets.com/article/serba-dinamik-

Question 2:

What are the various reasons for the emergence of multinational firms?

1. Search for raw materials

• MNCs aim to exploit raw materials found in foreign countries, at the same time minimize
transportation cost and import tax. It also can use to solve continue supply problem.

2. Market Seeking

• Goes overseas to produce and sell in foreign markets especially when domestic market reach
its maturity. (New product, new market)

• Save costs: economies of scale, transportation cost

– Foreign markets provide opportunities for MNCs to achieve economies of scale and

exploit premiums associated with strong brand names.

3. Cost Minimization

• Costs can be minimized by combining production and integration of the firm’s global
manufacturing facilities;

For example, cheaper labour cost in Vietnam.

4. Knowledge Seeking

• Some firms enter foreign markets to gain information and experience to use in other markets
such as domestic market when the firms near to big player.

5. Keeping Domestic Customers

• MNC suppliers follow customers abroad to guarantee them a continuing product flow and
reduce the risk that their customers will find an alternative

local supplier.

For example, Foxcornn as supplier of Apple switch the operation together along with their
customer.

6. Exploiting Financial Market Imperfections

• Operating in numerous countries with different economic cycles reduces systematic risk and
risk relating to exchange rate fluctuations, currency controls, expropriation, and other foreign
government interventions

(“diversification effect”).

For example, tax rate in Thailand is cheaper than US.

Advantages

-Wide range products

-Creates demand

-Communications improve

Disadvantages

-Loss of jobs

-Transferring technology

-Disease

-Social degeneration

-Rich country exploit poor country

No, globalization shall be encouraged to achieve higher efficiency and take advantage of the
factors in other regions to expand market share and enhance Malaysian brand.

In terms of efficiency, multinational companies are able to reach their target markets more easily
because they manufacture in the countries where the target markets are. Also, they can easily
access raw materials and cheaper labor costs. Work is being outsourced to labor-intensive
countries. Some of the countries where cheap labor is available are China, India, Pakistan etc.

In a product life-cycle, a large firm has very limited scope for growing sales in an economy.
Selling abroad enables a much greater consumer base and opens up new possibilities to increase
sales.
The scale of many industries means firms split production into different countries. For example,
Apple designs electronics in the US, where they have access to skilled labour. However, the
design is then manufactured in China, where labour costs make production much more efficient
than producing in the relatively high cost US.

Communication among the countries is on the rise, which allows for better

understanding and broader vision. As communication increases amongst two countries, there is
interchange of cultures as well, we get to know more about the other’s cultural preferences.
Familiarity with other cultures can improve the MNC’s research and development.

4. What are the various ways in which domestic firms enter international markets? What
are the benefits and risks of each strategy of foreign market entry?
a) International trade- by exporting to penetrate markets and importing to obtain supplies at a
low cost

Advantages:

1. Low capital requirements and start-up costs (firms do not have to spend a lot of money, just
need to increase production and export to foreign country.)( x need to hire labour and set up new
factory.)

2. Low risk (If product is not well receive by foreign market, company can discontinue
exportation.)

3. Immediate profits (Once exporter sell the product, the importer will pay and get the profit
immediately. Unlike open subsidiary, need a lot of start-up costs and take time to gain back
profit.)

4. Market information (Company can learn and gain market information such as market
condition, competition, distribution channels and financial system in foreign market.)

Disadvantages:

1. Inability to realise full sales potential ( Exporter may have to deal with tariff and quota which
may lower the sale and limited the quantity that can be export.)

2. Socio barriers (Different in languages and culture in other country.)

Advantages:

1. Minimal investment (Licensor does not need to invest a lot because licensee will pay and sell
in foreign market.)

2. Faster market-entry time (Licensor give license then licensee can enter into market.)

3. Fewer financial and legal risks (Licensor obligates to build technology, licensee is the one
who produce the product. If the product is not well received, licensee is the one to take
responsibility, licensor will still receive payment. Besides, if customer wants to sue the company,
the customer will sue licensee not licensor.)

Disadvantages:

1. Cash flow relatively low (Licensor just receive very small percentage from licensee, licensee
is the one who enjoy profit if product is well received.)

2. Risk of product quality problems (Licensee is the one who produces the product hence it is
difficult for licensor to control the quality of product.)

3. Difficulty controlling exports by the licensee (Licensee may use that technology and learn
from that therefore become competitor of licensor.)

c) Franchising- different from licensing where it gives whole business strategies to the
franchisee and receive periodic payment.

Advantages:
1. Minimal investment (Franchisor does not need to invest a lot in foreign market.)
2. Faster market-entry time (Franchisor provides business strategy then franchisee can enter
into market.)
3. Higher level of control (Franchisor will provide training and SOP to franchisee.)

Disadvantages:
1. Risk of product quality problems (Human error occurs in franchisee will affect the
quality of the products.)
2. Difficulty in controlling exports by the franchisee (Franchisee may learn from that and
open a new brand to compete with franchisor.)

d) Joint ventures- company collaborate with local firm

Advantages:
 1. Capital accumulation (Capital is contributed by 2 firms therefore more capital to use.)
2. Share resources together (Firms can share the cultural differences, preferences, and
knowledge together hence it allows two firms to apply their respective cooperative
advantages in a given project.)
3. Easier to get government approval (Local firm may have record in its own country.)

Disadvantages:
1. Conflict and disagreement (The project is jointly owned by the 2 firms, hence it need
both parties agreement.)
2. Profit sharing (The firm cannot enjoy all benefits alone.)
3. Liable to partner’s action (partner sign poor contract or made poor decision will affect
your company as well.)

e) Acquisition- buy over an existing firm in foreign market.

Advantages:
1. Full control and quickly obtain large portion of foreign market share in short period of
time. (Does not need to start from zero, will take over existing market share.)

Disadvantages:
1. Higher risk (Larger capital needed hence lead to higher losses.)
2. Liquidation may be difficult if operate poorly (The asset may be difficult to sell at
reasonable price.)

f) Establishing new foreign subsidiaries- direct establish a new subsidiary in foreign country
Advantages:
1. Operation can be tailored exactly to firm’s needs (The firm can have own structure, how
many departments and how to run the business.)

Disadvantages:
1. High risk (It require large investment because the firm need to start from zero.)
2. May not reap any rewards until subsidiary is built and customer established (The firm
may not get profit in short term before it builds customer base and market share.)

5. What factors help determine whether a firm will export its output, license foreign
companies to manufacture its products, or set up its own production or service facilities
abroad? Identify the competitive advantages that lead companies to prefer one mode of
international expansion over another.
The first factor is transportation costs. If the cost of shipping the product to a foreign market
is high, the higher the chance that the firm will not export its product as it will minimize its
profit.

The second factor is size of the foreign market. If the foreign market is small, the more likely
that the firm will export its product. For instance, if there is only 10% of population will be
the potential customer of the firm it is more likely to not export its output to the foreign
market.

The third factor is the production cost. For instance, the real exchange rate and wages rate
(Malaysia RM1000, Thailand around RM1300). Therefore, it is more likely that the firm will
manufacture its product in Malaysia as it has a lower wages rate.

-> Economies of scale (Product bulks, cost become cheaper)

6. Japanese automakers penetrate the US auto markets by joint venture and also
direct exports from Japan. The US usually imposes tariffs (or import taxes on
Japanese cars sold in US) or simply quotas (number of cars that can be exported to
US per year). In your opinion, do Japanese automakers prefer tariff or a quota on
their U.S auto exports? Explain.

Tariff is a tax imposed by one country on the goods and services imported from another
country, implemented to discourage imports and protect domestic company. Quota is a
government-imposed trade restriction that limits the number of goods that a country can
import or export during a particular period. In my opinion, Japanese automakers prefer
tariff over quota because tariff only increase the price but quota will totally restrict the
number that they would initially be able to export. Without the quotas, Japanese
automakers would be able to easily penetrate the US market with unlimited number of
cars.