CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM




Question 1
Why is it important to study international financial management?
We are now living in a world where all the major economic function, i.e., consumption, production, and investment, are highly globalized. It is thus essential for financial managers to fully understand vital international dimensions of financial management. This global shift is in marked contrast to a situation that existed when the authors of this book were learning finance some twenty years ago. At that time, most professors customarily (and safely, to some extent) ignored international aspets of finance. This mode has become untenable since then.


Question 2
How is internationl financial management different from domestiv financial management?
There are three major dimensions that set apart international finance from domestic finance. They are :
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.


Question 3
Discuss the two major trends that have prevailed in international business during the last two decades.
The 1980s brought a rapid integration of international capital and financial markets. Impetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets. The economic integration and globalization that began in the eighties is picking up speed in the 1990s via privatization. Privatization is the process by which a country divests itself of the ownership and operation of a business venture by turning it over to the free market system.


Question 4
How is a country's economic well-being enhanced through free international trade in goods and services?
According to David Ricardo, with free international trade, it is mutaully beneficial for two countries to each specialized in the production of the goods that it can produce relatively most efficiently and then trade those goods. By doing so, the two countris can increase their combined production, which allows both countries to consume more of both goods. This argument remains valid even if a country can produce both goods more efficiently thatn the other country. International trade is not a 'zero-sum' game in which one country benefits at the expense of another country. Rather, international trade could be an 'increasing-sum' game at which all players become winners.


Question 5
What considerations might limit the extent to which the theory of comparative advantage is realistic?
The theory of comparative advantage was originally advanced by the nineteenth century economist David Ricardo as an explanation for why nations trade with one another. The theory claims that economic well-being is enhanced if each country's citizens produce what they have a comparative advantage in producing relative to the citizens of other countries, and then trade products. Underlying the theory are the assumptions of free trade between nations and that the factors of production (land, building, labor, technology, and capital) are relatively immobile. To the extent that these assumptions do not hold, the theory of comparative advantage will not realistivally describe international trade.


Question 6
What are multinational corporations (MNCs) and what economic roles do they play?
A multinational corporation (MNC) can be defined as a business firm incorporated in one country that has production and sales operations inseveral other countries. Indeed, some MNCs have operations in dozens of different countries. MNCs obtain financing from major money centers around the world in many different currencies to finance their operations. Global operations force the treasurer's office to establish international banking relationships, to place short-term funds in several currency denominations, and to effectively manage foreign exchange risk.