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Assignment #1
FINA 4314- International Finance
Saba Soliman Al-Mohawis
201000230
Spring 2013
24-2-2013
Ch.1:
Q.7:
Methods Used to Conduct International Business.
Duve, Inc desires to penetrate a foreign market with either a licensing agreement with a
foreign firm or by acquiring a foreign firm. Explain the differences in potential
risk and return between a licensing agreement with a foreign firm, and the
acquisition of a foreign firm
Advantages for licensing

Allows firms to use their technology
in foreign markets without a major
investment and transportation

Disadvantages for licensing

Difficulty in ensuring quality control
in the foreign production process
.
Licensing agreement: Has limited return, because the foreign firm will receive
much of the benefits as a result of the licensing agreement. Still, the MNC has
limited risk; because it did not need to invest substantial funds in the foreign country. An
acquisition by the MNC requires a substantial investment. If this investment is not a success,
the MNC may have trouble selling the firm it acquired for a reasonable price. Thus, there is
more risk. However, if this investment is successful, all of the benefits accrue to the MNC
(Madura, 2010, p.10)
Q.8:
International Opportunities Due to the Internet.
a. What factors cause some firms to become more internationalized than others?
International trade risk potential; the operating characteristics of the firm what it
imports and export produce and sell. In addition to that, many other factors such as
access to capital, Firms that are labor-intensive could more easily capitalize on low-wage
countries while firms that rely on technological advances could not.
b. Offer your opinion on why the Internet may result in more international business.
Internet allows for easy and low-cost communication between countries, so that firms could
now develop contacts with potential customers overseas by having a website. It is making it
easier for parent to monitor the actions and performance of its foreign subsidiaries.
For example the website may show the product and price that is selling at which allows to:
easily advertise their products to potential importers anywhere in the world without
mailing brochures to various countries. (Madura, 2010, p.6, p.9)
Q.12
Imperfect markets
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign
markets.
If each countries market were closed from all other countries they would be no
international business. Because of imperfect markets, resources cannot be easily and freely
retrieved by the MNC. In some cases the MNC must sometimes go to the resources rather
than retrieve resources (Madura, 2010, p.8)
3b. if perfect markets existed would wages, prices, and interest rates among countries be more similar or less
similar than under conditions of imperfect markets? Why?
If perfect markets existed, factors of production will flow wherever they were in demand.
Resources would be more mobile and easily be transferred to those countries more willing to
pay a high price for them. When this happen, shortages of resources in any particular country
would be alleviated and the costs of such resources would be similar across countries.
(Madura, 2010, p.8)
Ch.2
Q.6:
Government Restrictions
How can government restrictions affect international payments among countries?
Governments can place:

Quotas

Tariffs on imports to restrict imports.

Place taxes on income from foreign securities, there by discouraging
investors from purchasing foreign securities.
If they loosen restrictions, they can encourage international payments among countries.
(Madura, 2010, p.39)
Q.7:
Effect of the euro
Explain how the existence of the euro may affect U.S. international trade.
The euro allowed for a single currency among many European countries. It could
encourage firms in those countries to trade among each other since there is no exchange rate
risk. This would possibly cause them to trade less with the U.S.
The euro can increase trade within Europe because it eliminates the need for
several European countries to exchange currencies when trading with each other.
(Madura, 2010, p.34, 35)
Inflation Effect on Trade.
a. How would a relatively high home inflation rate affect the home country’s
current account, other things being equal?
Current account will be expected to decrease, when
( Other things being equal) i n f l a t i o n r a t e b e c o m e s h i g h i m p o r t s i n c r e a s e a n d
e x p o r t d e c r e a s e . T h e r e f o r e , increasing the current account deficit.
(Madura, 2010, p.39)
B. Is a negative current account harmful to a country? Discuss.
In my opinion, negative current account is considered to reflect unemployment,
which is unfavorable. On the other hand, the foreign importing reflects strong competition
from foreign producers, which may keep prices (inflation) low. (Madura, 2010, p.39)
Reference:
Madura, J. (2010). International corporate finance (10th ed.). Mason, Ohio: South-Western.
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