Study GuideIf you see a “*” it means you definitely should know/understand. There are a handful through the study guide1) Know the agency problem of MNCsa) Goal of managers: maximize the value of the firm (same as domestic companies)b) Agency problem: conflict of goals between managers and shareholdersc) Cost are generally larger for MNCsd) Agency Conflict Reduced by:i) Provide managers with the MNC’s stock as part of compensation (parent control)ii) Tied salaryiii) Corporate Control (threat of takeover, institutional investors)iv) Sarbanes-Oxley Act of 20022) Know the difference between centralized and decentralized structure; pros and cons of eacha) 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 problemsii) Cons: High up manager doesn’t know the day to day dealings so decisions are not so easy to makeb) Decentralized-gives more control to those managers who are closer to the subsidiary operations and environmenti) Pro: may operate more efficiently Con: more agency problems3) Know the different theories of why a firm pursues international businessa) Theory of Comparative Advantage: specialization increases production efficiencyb) Imperfect Markets Theory: factors of production are somewhat immobile providing incentive to seek out foreign opportunitiesi) Examples like: climate, people, natural resourcesc) *Product Cycle Theory: as a firm matures, it recognizes opportunities outside its domestic marketi) Demand for a product gets larger so you meet that demand by shipping and later putting up a shop4) Know the various ways to engage in international businessa) International trade: exporting, importingb) Licensing: obligates a firm to provide its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or other benefitsi) Risk is the borrowing company messes up and cause the firm’s reputation to be hurtc) 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 internationali) Run the risk of over paying f) Establishing new foreign subsidiaries: establish new operations in foreign countries to produce and sell their productsg) Direct Foreign Investment (DFI)-any method of increasing international business that requires direct investment in foreign operations5) 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 timeb) Inflows of funds generate credits for the country’s balance, while outflows of funds generate debits. i) Think your check bookc) 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, outflowiii) *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(a) US investor receives a dividend payment from a French firm-US Cash inflow-Credit(b) US Treasury sends interest payment to a German insurance company that purchased Treasury bonds 1 year ago- US Cash outflow-Debit(3) TRANSFERS(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- Creditiv) 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 6) Know what a Balance of Trade deficit isa) Deficit means imports>exports7) Know what trade frictions area) Most countries still impose some type of trade restrictions on particular products in order to protect local firms(hurts trade)b) Examples:i) Environmental restrictionsii) Labor lawsiii) Bribesiv) Government subsidiesv) Tax breaksvi) Exchange Rate Manipulations (e.g., Chinac) Too much restrictions can be costlyd) Not always bad, we have them in place to protect us like our patents or we don’t agree with how a country is being run. 8) Know factors affecting international trade flowa) International trade can affect a country’s economy. Most influential factors:i) Inflation: current account decreases; imports will increase, exports will decreaseii) National Income: current account decrease; rise in consumption of goodsiii) Government Policies: subsidizing exporters, restrictions on imports, lack of enforcement on piracy.iv) Exchange Rates: current account decreases if currency appreciates relative to other countriesb) The factors interact, such that their simultaneous influence on the balance of trade is complexc) HyposBoT = Exports - Imports resultsinflation = Down - DecNational income= Same - Up DecCurrency appreciates= Down - Up DecCurrency depreciates= Up - Down Inc.d)9) Know factors affecting DFI and portfolio investmenta) 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