1. Multinational corporations can capitalize on comparative advantages that they have relative to firms in other countries, which allows them to penetrate those other countries’ markets. MNCs may be able to capitalize on comparative advantages. Many MNCs initially penetrate markets by exporting but ultimately establish a subsidiary in foreign markets and attempt to differentiate their products as other firms enter those markets (product cycle theory).
Questions & Applications
1. (#5 a.) The operating characteristics of the firm and the risk perception of international business will influence the degree to which a firm becomes internationalized.
2. (#5 b.) The Internet allows for easy and low-cost communication between countries, so that firms could now develop contacts with potential customers overseas by having a website. Website allow firms to easily advertise products to potential importers anywhere in the world without mailing brochures to various countries. Firms can also use their website to accept orders online.
3. (#7) Growth in international business can be stimulated by access to foreign resources which can reduce costs, or access to foreign markets which boost revenues. International business is at risks of exchange rate fluctuations, and political risk such as a possible government takeover or tax regulations.
4. (#9) The agency problem would be more pronounced for Oakland because of a higher probability that subsidiary decisions would conflict with the parent. Decisions by the parent should be compatible with shareholder objectives. If the subsidiaries made their own decisions, the agency costs would be higher since the parent would need to monitor the subsidiaries to assure that their decisions were intended to maximize shareholder wealth.
5. (#13) A licensing agreement has limited potential for return, because the foreign firm will receive much of the benefits as a result of the licensing agreement. An acquisition by the MNC requires a substantial...