In order to complete those questions, you may need to use International
Financial Management, 12th edition
by Jeff Madurachapter_13.docxChapter 13
Chapter Questions
1. Motives for DFI. Describe some potential benefits to an MNC as a result of direct foreign investment
(DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to
expand its footwear production in Latin America?
2. Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of computer disks,
plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s
executives believe that the Mexican peso’s value is relatively strong and will weaken against the
dollar over time. If their expectations about the peso value are correct, how will this affect the
feasibility of the project? Explain.
3. DFI to Achieve Economies of Scale. Bear Co. and Viking, Inc., are automobile manufacturers that
desire to benefit from economies of scale. Bear Co. has decided to establish distributorship
subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing
subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
4. DFI to Reduce Cash Flow Volatility. Raider Chemical Co. and Ram, Inc., had similar intentions to
reduce the volatility of their cash flows. Raider implemented a long-range plan to establish 40 percent
of its business in Canada. Ram, Inc., implemented a long-range plan to establish 30 percent of its
business in Europe and Asia, scattered among 12 different countries. Which company will more
effectively reduce cash flow volatility once the plans are achieved?
5. Impact of Import Restrictions. If the United States imposed long-term restrictions on imports,
would the amount of DFI by non-U.S. MNCs in the United States increase, decrease, or be
unchanged? Explain.
6. Capitalizing on Low-Cost Labor. Some MNCs establish a manufacturing facility where there is a
relatively low cost of labor. Yet, they sometimes close the facility later because the cost advantage
dissipates. Why do you think the relative cost advantage of these countries is reduced over time?
(Ignore possible exchange rate effects.)
7. Opportunities in Less Developed Countries. Offer your opinion on why economies of some less
developed countries with strict restrictions on international trade and DFI are somewhat independent
from economies of other countries. Why would MNCs desire to enter such countries? If these
countries relaxed their restrictions, would their economies continue to be independent of other
economies? Explain.
8. Effects of September 11. In August 2001, Ohio Inc. considered establishing a manufacturing plant in
central Asia, which would be used to cover its exports to Japan and Hong Kong. The cost of labor
was very low in central Asia. On September 11, 2001, the terrorist attacks on the U.S. caused Ohio to
reassess the potential cost savings. Why would the estimated expenses of the plant increase after the
terrorist attacks?
9. DFI Strategy. Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereos
and sell them there. It expects that its cost of producing these stereos will be one-third the cost of
producing them in the United States. Assuming that its production cost estimates are accurate, is
Bronco’s strategy sensible? Explain.
10. Risk Resulting from International Business. This chapter concentrates on possible benefits to a
firm that increases its international business.
a. What are some risks of international business that may not exist for local business?
b. What does this chapter reveal about the relationship between an MNC’s degree of international
business and its risk?
11. Motives for DFI. Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by
professional sports teams. It recently decided to expand in Europe. What are the potential benefits for
this firm from using DFI?
12. Disney’s DFI Motives. What potential benefits do you think were most important in the decision of
the Walt Disney Co. to build a theme park in France?
13. DFI Strategy. Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does
this statement mean?
14. Host Government Incentives for DFI. Why would foreign governments provide MNCs with
incentives to undertake DFI there?
Advanced Questions
15. DFI Strategy. J.C. Penney has recognized numerous opportunities to expand in foreign countries and
has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and
Thailand. It has opened new stores in Europe, Asia, and Latin America. In each case, the firm was
aware that it did not have sufficient understanding of the culture of each country that it had targeted.
Consequently, it engaged in joint ventures with local partners who knew the preference of the local
customers.
a. What comparative advantage does J.C. Penney have when establishing a store in a foreign
country, relative to an independent variety store?
b. Why might the overall risk of J.C. Penney decrease or increase as a result of its recent global
expansion?
c. J.C. Penney has been more cautious about entering China. Explain the potential obstacles
associated with entering China.
16. Assume that you wanted to expand your “Learning English” business to other non-U.S. countries
where some individuals may want to speak English.
a. Explain why you might be able to stabilize the profits of your total business in this manner.
Review the motives for direct foreign investment that are identified in this chapter. Which of
these motives are most important?
b. Why would a city such as Montreal be a less desirable site for your business than a city such as
Mexico City?
c. Describe the conditions in which your total business would experience weak effects even if the
business was spread across 3 or 4 countries.
d. What factors affect the probability of these conditions occurring? (In other words, explain why
the conditions could occur in one set of countries, but not another set of countries).
e. What data would you review to assess the probability of these conditions occurring?
f.
Consider that the prevailing service you offer is teaching individuals in Mexico to speak English,
and your business has already created some supplemental pamphlets and CDs that translate
common Spanish terms into English. How could you expand your business in a manner that may
allow you to benefit from economies of scale (and perhaps even benefit from your existing
business reputation)? When you attempt to benefit from economies of scale, do you forgo
diversification benefits? Explain.
g. How would you come to a decision on whether to pursue business expansion that capitalizes on
economies of scale even if it would forgo diversification benefits? Do you think economies of
scale would be more important or less important than diversification for your business?
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