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24 Cards in this Set

  • Front
  • Back

What is a Multi-National Corporation?

Firms that engage in some form of international business.


Involves international investing and financing decision to maximize the value of the MNC.

Both International and Domestic Firms are affected by:

1. Exchange Rates


2. Foreign Interest Rates


3. Labor Costs


4. Inflation

What is an Agency Problem?

Conflict of interest between a firm's managers and shareholders.

How do you prevent Agency Problems?

1. Clear goals and budgets for each subsidiary.


2. Coherent compensation plans and organizational structure.


3. Good control of subsidiary decisions.

What is SOX?

Sarbanes-Oxley Act: ensures more transparent reporting of financial statements.

What constraints are MNC managers confronted with?

1. Environmental Constraints


2. Regulatory Constraints


3. Ethical Constraints

What are the three theories of International Business?

1. Theory of Comparative Advantage


2. The Imperfect Market Theory


3. The Product Life Cycle Theory

What is the Theory of Comparative Advantage?

Specialization by countries can increase production efficiency.



The competitive advantages allow firms to penetrate foreign markets.

What is The Imperfect Market Theory?

A market where information is not quickly disclosed to all participants in it and where the matching of buyers and sellers isn't immediate.



Imperfect markets provide an incentive for firms to seek out foreign opportunities.

What is the International Product Life Cycle?

1. Firm creates product to accommodate local demand.


2. Firm exports product to accommodate foreign demand.


3. Firm establishes foreign subsidiary to establish presence in foreign country and possibly reduce costs.


4a. Firm differentiates product from competitors and expands product line in foreign country.


4b. Firm's foreign business declines as its competitive advantages are eliminated.

How do firms engage in International Business?

1. International Trade


2. Licensing


3. Franchising


4. Joint Ventures


5. Acquisition of existing operations


6. Establishing new foreign subsidiaries

What is International Trade?

-Conservative approach to penetrate new markets and obtain supply at low cost.



-minimal risk, no capital at risk, possible exit at low cost.

What is Licensing?

-Obligates a firm to provide its technology in exchange of fees or other specified benefits.



-no need of significant investment, difficult to ensure quality control in the foreign production process.

What is franchising?

-Obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly, an initial investment in the franchise in exchange of periodic fees.



-No major investment in foreign countries.

What are Joint Ventures?

-Ventures jointly owned and operated by 2 or more firms.



-2 firms apply their comparative advantages and share risks and investments.



-risk of sharing control and leadership. cA

What is the acquisition of existing operations?

-Frequent means of penetrating foreign markets which allows firms full control over their foreign business and quickly obtain large portion of foreign market share.



-risk of large losses



-large investment, smaller for partial acquisitions

What is establishing new foreign subsidiaries?

-Operations can be tailored exactly to the firm's needs.



-Investment risk


-Time to market.

What is direct foreign investment (DFI)?

Any method of increasing international business that requires a direct investment in foreign operations.

What methods of engaging in international business require DFI?

NO: International Trade & Licensing


KIND OF: Franchising and Joint Ventures


YES: Foreign acquisitions and new foreign subsidiaries.



*MNCs use a combination of mentioned methods to increase int'l business*

What is the flow of cash for International Trade?

Inflow: MNC cash from exporting.



Outflow: MNC cash to pay for importing.

What is the flow of cash for Licensing, franchising and joint ventures?

Inflow: MNC cash from services provided.



Outflow: MNC cash for services received.

What is the flow of cash for foreign subsidiaries by MNC?

Inflow: MNC cash from remitted earn.



Outflow: MNC cash for finance operations.

What is the Valuation Model of a Purely Domestic Firm?

Expected Cash Flows


---------------------------------------------------------------------


Required Rate of Return (Borrowed $ & Equity)



-"N": number of periods.


-"K": WACC


-decline in numerator, increase in denom.= sharp decline in value of company.

What is the Valuation Model for an MNC?

Expected Cash Flows/ RROR & incorporates exchange rate.