Study Guide If you see a it means you definitely should know understand There are a handful through the study guide 1 Know the agency problem of MNCs a Goal of managers maximize the value of the firm same as domestic companies b Agency problem conflict of goals between managers and shareholders c Cost are generally larger for MNCs d Agency Conflict Reduced by i Provide managers with the MNC s stock as part of compensation parent control ii Tied salary iii Corporate Control threat of takeover institutional investors iv Sarbanes Oxley Act of 2002 2 Know the difference between centralized and decentralized structure pros and cons of each a Centralized managers of parent company control foreign subsidiaries reduced power of subsidiary managers i Pro management of parent company rules and helps reduce waste from little managers and reduce agency problems ii Cons High up manager doesn t know the day to day dealings so decisions are not so easy to make b Decentralized gives more control to those managers who are closer to the subsidiary operations and environment i Pro may operate more efficiently Con more agency problems 3 Know the different theories of why a firm pursues international business a Theory of Comparative Advantage specialization increases production efficiency b Imperfect Markets Theory factors of production are somewhat immobile providing incentive to seek out foreign opportunities i Examples like climate people natural resources c Product Cycle Theory as a firm matures it recognizes opportunities outside its domestic market i Demand for a product gets larger so you meet that demand by shipping and later putting up a shop 4 Know the various ways to engage in international business a International trade exporting importing b Licensing obligates a firm to provide its technology copyrights patents trademarks or trade names in exchange for fees or other benefits i Risk is the borrowing company messes up and cause the firm s reputation to be hurt c Franchising obligates a firm to provide a specialized sales or service strategy and support assistance in exchange for periodic fees d Joint Venture jointly owned and operated by two or more firms e Acquisition buy another company whom is already international i Run the risk of over paying produce and sell their products f Establishing new foreign subsidiaries establish new operations in foreign countries to g Direct Foreign Investment DFI any method of increasing international business that requires direct investment in foreign operations 5 Know the balance of payments the two accounts and what they measure know examples of transactions and whether it s a credit or debt a Summary of transactions between domestic and foreign residents for a specific country over a specified period of time b Inflows of funds generate credits for the country s balance while outflows of funds generate debits i Think your check book c Has two accounts Current inflow and capital outflow i Current The current account summarizes the flow of funds between one specified country and all other countries due to purchases of goods or services or the provision of income on financial assets ii Main components 1 Payments for merchandise and services a Balance of trade the difference between total exports and imports 2 Factor income interest and dividend payments received by investors on foreign investments in financial assets 3 Transfers aid grants and gifts from one country to another aiding another country outflow iii Examples 1 TRADE a Best Buy purchases stereos produced in China that it will sell in its US retail Stores US Cash outflow Debit b Mexican govt pays a U S consulting firm for services provided by the firm US cash inflow Credit 2 FACTOR INCOME Credit 3 TRANSFERS a US investor receives a dividend payment from a French firm US Cash inflow b US Treasury sends interest payment to a German insurance company that purchased Treasury bonds 1 year ago US Cash outflow Debit a US provide aid to Japan in response to a Tsunami US cash outflow Debit b Switzerland provides a grant to US scientist to work on cancer research US cash inflow Credit iv Capital account The capital account summarizes the flow of funds resulting from the sale of assets between one specified country and all other countries v Components 1 Direct Foreign Investment the investment in fixed assets in foreign countries that can be used to conduct business operations 2 Portfolio investment transaction involving long term financial assets stocks bonds between countries that do not affect the transfer of control 3 Other capital investment transactions involving short term financial assets money market securities between countries 4 Errors and Omissions current capital if not than issue a Most countries still impose some type of trade restrictions on particular products in order 6 Know what a Balance of Trade deficit is a Deficit means imports exports 7 Know what trade frictions are to protect local firms hurts trade b Examples i Environmental restrictions ii Labor laws iii Bribes iv Government subsidies v Tax breaks vi Exchange Rate Manipulations e g China c Too much restrictions can be costly with how a country is being run 8 Know factors affecting international trade flow d Not always bad we have them in place to protect us like our patents or we don t agree a International trade can affect a country s economy Most influential factors i Inflation current account decreases imports will increase exports will decrease ii National Income current account decrease rise in consumption of goods iii Government Policies subsidizing exporters restrictions on imports lack of enforcement on piracy iv Exchange Rates current account decreases if currency appreciates relative to other b The factors interact such that their simultaneous influence on the balance of trade is countries complex c Hypos BoT Exports Imports results inflation National income Currency appreciates Currency depreciates d Down Same Down Up Up Up Dec Dec Dec Down Inc 9 Know factors affecting DFI and portfolio investment a Direct financing investment Changes in Restrictions removal of government barriers in 1990 s opened up DFI b Privatization national governments selling some of their operations to corporations ad investors anticipated improvement in managerial efficiency c Potential Economic Growth may be able to capitalize on that growth by establishing more business there d Tax rates low tax rates attract DFI e Exchange Rates Pursue DFI