1.

Why might a producer want to own resources located in another country,

rather than buying them in open market?
Student Answer: This is due to 1 of the 3 main purposes of an MNC when coming to
foreign market. The Comparative Advantage
As Comparative Advantage said, each country specializes in one industry. For
example, USA, England, Germany have advantage in technology, while China, Thailand,
etc. have advantage in labor cost. Due to the advantage, each country will find the main
industry for their own. Owning resources located in a country will help firm to access the
advantage of this country, this thing cannot be obtained when purchasing from local
market.
The second reason is that, when a firm import their products, they are choosing the
conservative approach to a new market. And the most concerned problem of export is the
import costs. They are to some extents very large with some certain types of product.

2. What are the limitations of licenses as an alternative to FDI?

Student Answer: The main limitations of licenses is that the firm that provides licenses
to other foreign firm cannot impose quality control method to ensure their product will
remain as good as products in mother countries.

3. What role do market imperfections play in FDI?

Student Answer: Market imperfection reflects the real world of us. Some advantages of
countries cannot be transferable. On the other words, they are immobile. For example, the
advantages of China is low labor cost and advantages of USA is technology. If the market
is perfect, this comparative advantages are transferable, so the low labor cost will easily
move to USA. This thing is impossible because we cannot remove the low labor cost
from China easily, or we can say it’s IMMOBILE. If it’s possible, the comparative
advantages of both China and US will no longer be their advantages.
Market imperfection ensure the comparative advantages of countries and it reflects things
happening in the real world

4. Which of the reasons for the growth of MNCs do you think are the primary
reasons for the development of multinationals in the following industries?
Student Answer:
a. Pharmaceutical development and manufacturing
Protecting their reputations, exploiting reputations, product life cycle, protecting secrecy,
avoid tariffs and quotas
b. Automobile manufacturing
Integrating operations, product life cycle hypothesis, organizational factors, avoid taxes
and tariffs, avoiding regulations
c. Metal refining
Access to raw materials, avoiding regulations
d. Hotel operation
Protecting reputations, exploiting reputations, strategic FDI, non-transferable knowledge
e. Commercial banking
Protecting reputations, exploiting reputations, non-transferable knowledge, symbiotic
relationship
 f. Energy development
Access raw material, integrating operation, avoid tariffs and quotas, avoid regulations.
g. Fast food
Non-transferable knowledge, protecting secrecy, exploiting reputation, product life-cycle
hypothesis,
h. Fashion clothing.
Access raw materials, product life-cycle hypothesis, exploit reputations,

5. Why might country risk depend on the diversity of exports as well as on the
value of exports versus debt-service payments?
Student Answer: The debt-service/export ratio is a solvency index that helps to assess
the external debt-servicing capacity of a country. As debt can be an inhibiting factor
limiting economic growth, social development, and poverty eradication, high debt-
service/export ratio may cause negative effects on investments and savings of the
country, thus increase the country risk level. However, this ratio does not reflect the
diversity of goods and services that earn foreign exchange. For example, a country with a
single export is a poorer risk than a country with diversified export earnings, even if the
two countries have the same ratio (see note 26, p. 464). Therefore the country risk level
will depend on both the diversity of exports and the debt-service/export ratio.

6. What is pollution haven?

Student Answer: Pollution haven is the country which have less strict regulation on
environmental problem from industry.

How does an MNC use host country as a pollution haven?

Student Answer: When large industrialized nations seek to set up factories or offices
abroad, they will often look for the cheapest option in terms of resources and labor that
offers the land and material access they require. However, this often comes at the cost of
environmentally sound practices. Developing nations with cheap resources and labor tend
to have less stringent environmental regulations, and conversely, nations with stricter
environmental regulations become more expensive for companies as a result of the costs
associated with meeting these standards. Thus, companies that choose to physically
invest in foreign countries tend to (re)locate to the countries with the lowest
environmental standards or weakest enforcement.

Example of Vietnam:
In recent years, the most notorious case of MNC using Vietnam as a pollution haven
is the case of Vedan – a food material manufacturer from Taiwan. In 2008, Vedan was
suspected of dumping industrial wastes into Thi Vai River of Dong Nai Province. The
onset of this suspicion was just brought about only when there is some cases of toxic
infection from residence near Thi Vai River. After 3 months of justification, Vedan
Vietnam was sued officially and must paid 127 billion Vietnam Dong for their bad
activity of dumping wastes.
The thing is that, Vedan came to Vietnam in 1991 and not until 2008 did we realize
that they were dumping industrial wastes. This activity must have a long period of time,
but no one realize it. Or we can say, Vietnam’s regulation over environmental problem is
still weak and we have no strict remedy and control over them. So that’s why Vietnam
can be considered as a pollution haven for MNC when coming to VN.

7. Alternatives to International Acquisitions

Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to
produce personal computers (PCs) and market them throughout Russia, where
demand for PCs has increased substantially in recent years. Assume that the stock
market conditions are not favorable in Russia, as the stock prices of most Russian
companies rose substantially just prior to Rastell’s assessment of the target. What
are some alternatives available to Rastell?

Online Answer: There are at least two alternatives available to Rastell Inc. First, it could
enter into a licensing agreement with the Russian target to manufacture and distribute
PCs with the Rastell name throughout Russia. Second, it could enter into a joint venture
with the potential Russian target. Both of these methods would allow Rastell to access the
Russian PC market. Furthermore, when stock prices in Russia decline, Rastell could
make a bid for the potential Russian target.

Student Answer:
- Rastell can use International Partial Acquisition instead of full acquisition
Because the stock market of Russia is increasing, so full acquisition requires a huge sum
of money and it’s hard to persuade owner to change the hand of ownership. So Partial
Acquisition will help Rastell have a proportion of stakes in Russia’s firm. This
acquisition can avoid labor turnover due to acquisition, and Rastell still have voice in
management and marketing strategy and other business things.
- Using joint ventures and licensing agreement as a International Alliances
This alternative will help Rastell to avoid effect of stock market booming, in return they
still receive fees from licensing agreement and voice from joint ventures investment, and
they can have time to recalculate the market clearly until the stock market come back to
declining period. Then they can decide whether to make acquisition or not.

8. Privatized Business Valuations

Why are valuations of privatized businesses previously owned by the governments
of developing countries more difficult than valuations of existing firms in developed
countries?

Online Answer: There are several reasons why the valuation of a privatized business
may be more difficult than the valuation of an existing firm in a developed country. First,
future cash flows associated with a privatized business are very uncertain because the
businesses previously have been operating in environment of little or no competition.
Second, there are very limited data in some of these countries. Third, economic
conditions in these countries are very uncertain. Fourth, exchange rate estimates are very
uncertain. Fifth, the cost of local financing for projects in developing countries is very
uncertain. Sixth, the lack of established stock markets in developing countries prevents an
MNC from deriving a value for a business based on comparable publicly held firms.
Seventh, the government may retain part of the firm, which could lead to control conflicts
in the future.
9. Why a Foreign Acquisition May Backfire
Provide reasons why an MNC’s strategy of acquiring a foreign target will backfire.
That is, explain why the acquisition might result in a negative NPV.

Online Answer (2 reasons): The MNC may overestimate the cash flows to be generated
by the target, due to overestimating the revenues or underestimating the cost of operating
the target. In addition, it may overestimate the future salvage value of the target.

Student Answer:
 Reasons:
a. Stock market is not stable.
b. Change in foreign exchange rates.
c. Political condition is not favorable.
d. Economic condition is poor
e. Foreign Currency is overvalued
f. Taxes factor is high
g. Talent of management team is questionable
h. Previous cash flow is not correct

 Explanation:
When valuing a foreign firm, we must consider so many factor, but we can divide it into
2 main parts: Costs and Revenue. These 2 parts are the main source why foreign
acquisition can backfire and give us negative NPV.
o Costs: The most important thing when considering costs is initial outlay. IO
depends so much on the stock market, the current exchange rate, the local
political condition and current economic condition. If we pay less attention
and calculate at our risk and poor estimation, the IO will be high and we must
pay a huge sum of money to acquire this company. IO is negative value
representing our money used to buy firm, if this number is too large, this will
give us negative NPV.
o Revenue: The first thing is cash flow estimation. Sometimes we can just
estimate future cash flow based on the previous cash flow. But what if the
economic conditions in the near future is volatile? The cash flow will not be
as expected. And the market rate is still at high level. => the discount of
future cash flow to present value will give us a small number.
The salvage value with this reason will be affected and when we sell our
business, we cannot have a large sum. => the revenue cannot cover the initial
outlays => negative NPV.

10. Pricing a Foreign Target

Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial
negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If
Alaska completes the purchase, it would keep Estoya’s operations for 2 years and
then sell the company. In the recent past, Estoya has generated annual cash fl ows of
500 million new sol per year, but Alaska believes that it can increase these cash fl
ows by 5 percent each year by improving the operations of the plant. Given these
improvements, Alaska believes it will be able to resell Estoya in 2 years for 1.2
billion new sol. The current exchange rate of the new sol is $.29, and exchange rate
forecasts for the next 2 years indicate values of $.29 and $.27, respectively. Given
these facts, should Alaska, Inc., pay 1 billion new sol for Estoya Corp. if the
required rate of return is 18 percent? What is the maximum price Alaska should be
willing to pay?

Online Answer:
Year 0 1 2
Operating CF 525.00 551.25
Sale of Estoya 1,200.00
Cash flows in new sol 525.00 1,751.25
Exchange rate $.29 $.27
Cash flows in $ $152.25 $472.84
PV (18% discount rate) $129.03 $339.59
Cumulative PV $129.03 $468.62

Alaska, Inc. should not pay more than $468.62 million for Estoya Corp. Estoya is asking
for 1.2 billion new sol, which translates to $348 million at the current exchange rate of
$.29. Therefore, Alaska, Inc. should purchase Estoya Corp.

Student Answer:
- IO: 1 billion Peruvian new sol
- Recent Cash flow: 500 million Peruvian new sol per year
- Expected growth rate: 5% annually
- Maturity: 2 years
- Salvage value: 1.2 billion peruvian new sol
- Current exchange rate = $0.29
- Next 2 year exchange rate = $0.29 and $0.27
- Required rate of return: 18%/year

Initial outlays is: 1 billion peruvian * 0.29 = $290 million

Cash flow in year 1 = 500 * 1.05 * 0.29 = $152.25 million
Cash flow in year 2 = 500 * 1.05 * 1.05 * 0.27 = $148.84 million
Salvage value in year 2 = 1.2 billion * 0.27 = $324 million

 NPV = -290 + 152.25 / ( 1.18 ) + 148.84 / ( 1.18^2 ) + 324 / ( 1.18^2 ) = $178.61

million = 178.61 / 0.29 = 616 million Peruvian new sol
 Maximum price Alaska willing to pay is the initial outlays that make NPV equal
to zero
 0 = -IO + 152.25/1.18 + 148.84/1.18^2 + 324/1.18^2
 IO = $468.61 million = 468.61/0.29 = 1.616 billion Peruvian new sol