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©2012PearsonEducation,Inc.Chapter1GlobalizationandtheMultinationalCorporationQUESTIONS1.Defineglobalization.Howhasitproceededintradeingoodsandservicesversuscapitalmarkets?Answer:Globalizationreferstotheincreasingconnectivityandintegrationofcountriesandcorporationsandthepeoplewithinthemintermsoftheireconomic,political,andsocialactivities.Becauseofglobalization,multinationalcorporationsdominatethecorporatelandscape.2.Describefourswaysthatacompanycansupplyitsproductstoaforeigncountry.Howdotheydiffer?Answer:AnMNCcansupplyaforeignmarketthroughexports,bylicensinglocalfirmsabroadtomanufacturethecompany’sproducts,bysettingupajointventurewithaforeigncompany,orbyforeigndirectinvestment.3.Whatisagreenfieldinvestment?Answer:MNCsengageingreenfieldinvestmentswhentheyenterforeignmarketsbysimplyestablishingnewoperationsinthesecountrieswithouthavingalocalpartnerandwithoutacquiringalocalcompany.4.WhatpercentageownershiptypicallydefinesFDI?Answer:Foreigndirectinvestment(FDI)occurswhenacompanyfromonecountrymakesasignificantinvestmentthatleadstoatleasta10%ownershipinterestinafirminanothercountry.5.Whatisagencytheory?Howdoescorporategovernancetheissuesraisedbyagencytheory?2Chapter1GlobalizationandtheMultinationalCorporation©2012PearsonEducation,Inc.Answer:Agencytheoryexplorestheproblemsthatarisebecausetheownersofthefirmdonottypicallymanagethefirm,anditdeviseswaystoresolvetheseproblems.Thisisoftencalledtheseparationofowneshipandcontrol.Amanagerofafirm,inparticularthechiefexecutiveofficer(CEO),isviewedasanagentwhocontractswithvariousprincipals—mostimportantlythefirm’sshareholdersbutalsothefirm’screditors,suppliers,clients,andemployees.Theprincipalsmustdesigncontractsthatmotivatetheagenttoperformactionsandmakedecisionsthatareinthebestinterestsoftheprincipals.6.Whyisownershipmoreconcentratedindevelopingcountriesthanindevelopedcountries?Answer:Inmanydevelopedcountries,theruleoflawisstrongenoughtodisciplinemanagersthroughlegalmeans,forexamplebytakeoversandproxycontestsorthroughcontractualcompensationplans.Concentratedownershipisonewayinwhichagencyproblemsaremitigatedindevelopingcountries.Ablockofstockisheldbyeitherawealthyinvestor,afamily,orafinancialintermediary,whichmightbeabank,aholdingcompany,ahedgefundorapensionfund.Thelargeshareholderclearlyhasavestedinterestinmonitoringmanagementandhasthepowertoimplementchangesinmanagement.Negativeaspectsofthisapproachincludepossiblecollusionbetweenthelargeshareholderandthemanagementtoexpropriatewealthfromsmallershareholdersandthefactthatthestockmaybemoredifficulttotradeonthestockmarketifasubstantialblockofsharesiswithdrawnfromthemarketbutisstillavailabletobesoldshouldthelargeshareholderwanttosell.7.WhatistheIMF?Whatisitsroleintheworldeconomy?Answer:TheInternationalMonetaryFund(IMF)isaninternationalorganizationof187membercountries,basedinWashington,DC,whichwasconceivedataUnitedNationsconferenceconvenedinBrettonWoods,NewHampshire,in1944.ThemaingoaloftheIMFistoensurethestabilityoftheinternationalmonetaryandfinancialsystem—thesystemofinternationalpaymentsandexchangeratesamongnationalcurrenciesthatenablestradetotakeplacebetweencountries,tohelpresolvecriseswhentheyoccur,andtopromotegrowthandalleviatepoverty.Tomeettheseobjectives,theIMFofferssurveillanceandtechnicalassistance.Surveillanceistheregulardialogueaboutacountry’seconomicconditionandpolicyadvicethattheIMFofferstoeachofitsmembers.Technicalassistanceandtrainingareofferedtohelpmembercountriesstrengthentheircapacitytodesignandimplementeffectivepolicies,includingfiscalpolicy,monetaryandexchangeratepolicies,bankingandfinancialsystemsupervisionandregulation,andstatistics.8.WhatistheWorldBank?Whatisitsroleintheworldeconomy?Answer:TheWorldBankisaninternationalinstitutioncreatedin1944,astheChapter1GlobalizationandtheMultinationalCorporation3©2012PearsonEducation,Inc.InternationalBankforReconstructionandDevelopment(IBRD)tofacilitatepostwarreconstructionanddevelopment.Overtime,theIBRD’sfocusshiftedtowardpovertyreduction,andin1960,theInternationalDevelopmentAssociation(IDA)wasestablishedasanintegralpartoftheWorldBank.WhereastheIBRDfocusesonmiddle-incomecountries,theIDAfocusesonthepoorestcountriesintheworld.Togethertheyprovidelow-interestloans,interest-freecredits,andgrantstodevelopingcountriesforinvestmentsineducation,health,infrastructure,communications,andotheractivities.TheWorldBankalsoprovidesadvisoryservicestodevelopingcountriesandisactivelyinvolvedwitheffortstoreduceandcanceltheinternationaldebtofthepoorestcountries.9.Whatarethemajormultilateraldevelopmentbanks?Answer:ThetermtypicallyreferstotheWorldBankGroupandfourregionaldevelopmentbanks:theAfricanDevelopmentBank,theAsianDevelopmentBank,theEuropeanBankforReconstructionandDevelopment,andtheInter-AmericanDevelopmentBank.Thesebankshaveabroadmembershipthatincludesbothdevelopingcountries(borrowers)anddevelopedcountries(donors),andtheirmembershipisnotlimitedtocountriesfromtheregionoftheregionaldevelopmentbank.Whileeachbankhasitsownindependentlegalandoperationalstatus,theirsimilarmandatesandaconsiderabl