Tutorial 1 Suggested Answers

1. Comparative Advantage.

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

ANSWER: The theory of comparative advantage implies that countries should specialize in
producing something that it could produce in large scale and achieve low cost of economic
scale, thereby relying on other countries for some products. Consequently, there is a 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. This will create new opportunities to grow the product cycle again.

2. Imperfect Markets.

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

ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by
the MNC. Consequently, the MNC must sometimes go to the resources rather than retrieve
resources (such as land, labor, etc.).Therefore, subsidiaries are established in countries where
the resources are available in abundance at lower costs.

b. 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?

ANSWER: If perfect markets existed, resources would be more mobile and could therefore be
transferred to those countries which are willing to pay a high price for them. In such situation,
shortages of resources in any particular country would be alleviated and the costs of such
resources would be similar across countries.

3. Motives of an MNC. Describe constraints that interfere with an MNC’s objective.

ANSWER: The constraints faced by financial managers attempting to maximize shareholder

wealth are:

a. Environmental constraints—countries impose environmental regulations such as building

codes and pollution controls, which increase costs of production.

b. Regulatory constraints—host governments can impose taxes, restrictions on earnings

remittances, and restrictions on currency convertibility, which may reduce cash flows to be
received by the parent.

c. Ethical constraints— Australia based MNCs may be at a competitive disadvantage if they

follow a worldwide code of ethics, because other firms may use tactics that are allowed in
some foreign countries but considered illegal by Australian standards.

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4. International Opportunities.

a. How does access to international opportunities affect the size of corporations?

ANSWER: Additional opportunities will often cause a firm to grow more than if it did not have
access to such opportunities. Thus, a firm that considers international opportunities has greater
potential for growth.

b. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities
for international expansion.

ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries
are at various stages of development. Some countries have just recently opened their borders
to MNCs. Many of these countries do not offer sufficient food or drink products to their
consumers.

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

ANSWER: 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.
Many firms use their website to identify the products that they sell, along with the prices for
each product. This allows them to easily advertise their products to potential importers
anywhere in the world without mailing brochures to various countries. In addition, they can add
to their product line and change prices by simply revising their website, so importers are kept
abreast of the exporter’s product information by monitoring the exporter’s website periodically.
Firms can also use their websites to accept orders online. Some firms with an international
reputation use their brand name to advertise products over the internet. They may use
manufacturers in some foreign countries to produce some of their products subject to their
specification

5. Methods Used to Conduct International Business. Duve, Inc., desires to penetrate a foreign
market with either a licensing agreement with a foreign firm or by acquiring a foreign firm.
Explain the differences in potential risk and return between a licensing agreement with a foreign
firm, and the acquisition of a foreign firm.

ANSWER: 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. Yet, the MNC has limited
risk, because it did not need to invest substantial funds in the foreign country.

An acquisition by the MNC requires a substantial investment. If this investment is not a success,
the MNC may have trouble selling the firm it acquired for a reasonable price. Thus, there is
more risk. However, if this investment is successful, all of the benefits accrue to the MNC.

6. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf
clubs in the U.S., wants to expand internationally by selling the same golf clubs in Brazil.
a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign
investment, etc.) that Snyder could use to achieve its goal.

ANSWER: Snyder can export the golf clubs, but the transportation expenses may be high. If
Snyder could establish a subsidiary in Brazil to produce and sell the clubs in Brazil this
transportation expenses can be eliminated, but this may require a large investment of funds.
Alternatively it could use licensing, in which it specifies to a Brazilian firm how to produce the
clubs. In this way, it does not have to establish its own subsidiary there.

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b. Which method would you recommend for this firm? Justify your recommendation.

ANSWER: If the amount of golf clubs to be sold in Brazil is small, it may decide to export.
However, if the expected sales level is high, it may benefit from licensing the production to a
Brazilian local firm. If it is confident that the expected sales level will remain high for a long
term, it may be willing to establish its subsidiary in Brazil. The wages are lower in Brazil, and
the large investment needed to establish a subsidiary may be worthwhile.

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