Download Solutions to BA 178 Midterm Exam B Summer 2007

Solutions to BA 178 Midterm Exam B Summer 2007
Part A
1. A
2. D
3. C
4. D
5. C
6. A
7. D
8. B
9. B
10. A
11. B
12. C
13. A
14. B
15. A
16. C
17. C
18. D
19. C
20. C
Part B
B1: (1) Discuss the different ways to protect intellectual property. (2) Why is it
important to protect intellectual property rights in general and corporate property
rights in particular? Give examples where possible. (10 points)
(1)Award 0.5 point for identifying and 0.5 point for explaining and giving an example of
what each of the following types of intellectual protection is (for a total of 3 points)
A patent grants the inventor of a new product or process exclusive rights for a defined
period to the manufacture, use, or sale of that invention. (e.g., patent on a mouse that has
a specific gene sequence that a team of researchers has hybridized – can be any other
correct example)
Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and
publishers to publish and disperse their work as they see fit. (e.g., J.K. Rowling’s Harry
Potter series is protected by copyright law)
Trademarks are designs and names by which merchants or manufacturers designate and
differentiate their products. (e.g., MacDonald’s “golden arches” is a trademark.
Everyone recognizes the yellow “M” immediately and identifies it with a fast food chain
that sells hamburgers and fries, among other things)
(2)Award 4 points for mentioning that innovation is a driver of economic growth, and
that the protection of corporate property rights in particular is import to ensure that
innovators benefit from their innovation – to create the correct incentives for
people/companies to innovate.
Award 2 points for mentioning intellectual property rights need to be protected because
of the increased digitization of intellectual property – in the form of software, DVDs,
digital books, etc. This digitization renders the intellectual property especially vulnerable
to piracy. Also, intellectual property is generally on the frontier of “innovation” so it is
especially important to protect intellectual property rights.
Award 1 point for providing a good example for how protecting property rights lead to
innovation and subsequently economic growth. (Or give an example of how the lack of
property rights might hinder economic growth: the example from the case, “the poorest
continent,” is a good illustration. The woman who wanted to expand her goat milk
business could not secure a loan because she had no property rights period – not in her
house – so she couldn’t put her house up as collateral to borrow from a bank).
B2: (1) What is a Greenfield investment? (2) Why would a firm choose this form of
FDI instead of a merger or acquisition? Explain your answer fully. (10 points)
(1) Award 3 points for correctly explaining what a Greenfield investment is: investment in a
new facility, or “starting the business from scratch.”
(2) For the second part, award 1 point for observing that the majority of FDI takes the form
of acquisitions or mergers because M&A are (a) quick; (b) the acquired firm may have a
valuable asset; or (c) firms make acquisitions because they think they can make the
acquired firm more efficient. (no need to mention all 3 points (a),(b), and (c). Just
mention that M&As are more common than Greenfield investments to get 1 point)
Award 2 points if the student mentions that there are no target firms to acquire, so
Greenfield is necessary. MUST GIVE AN EXAMPLE.
Award 2 points if the student mentions that firms may not acquire the only existing
operation because the operation may not be able mesh well with the acquiring firm
(that is, perhaps the company values are so different that there may be a culture clash
to acquire the current operation). MUST GIVE AN EXAMPLE.
Award 2 points if the student mentions that in rare circumstances, government
regulations prohibit a foreign firm from acquiring a local company because that local
company is in an “important national industry,” so the foreign company must start a
Greenfield investment if they want to invest in that business in the host country. MUST
GIVE AN EXAMPLE.
For the total of 6 points of above, take 0.5 point off each if no example is given.
B3: (1) What are the main uses of the foreign exchange market by non-financial
firms? (2) What types of currency risk do firms have and (3) how can they hedge
this risk with instruments available in the foreign exchange market? Give specific
examples where possible.
(1) Give 3 points (1.5 points each) The main uses of the forex market are: (a) currency
conversion, and (b) insuring against foreign exchange risk. Explain that (a) is necessary
whenever a company buys something from or sells something to another company with
a difference currency. Also a company may have different subsidiaries across the globe
and may need to convert currencies. Explain that (b) is necessary because of the
transaction, translation, or economic exposure risks that a firm may be faced when
transacting across borders.
(2) Award 0.25 point each for listing the right “risk” and 0.75 each for explaining what that
risk is for a total 3 points: (a) transaction exposure: the extent to which the income
from individual transactions is affected by fluctuations in foreign exchange values; (b)
translation exposure: the impact of currency exchange rate changes on the reported
financial statements of a company; (c) economic exposure: the extent to which a firm’s
future international earning power is affected by changes in exchange rates (economic
exposure is concerned with the long-run effect of changes in exchange rates on future
prices, sales, and costs. This is distinct from transaction exposure, which is concerned
with the effect of exchange rate changes on individual transactions, most of which are
short-term).
(3) Award 0.25 point each for listing the right instrument and 0.5 point each for explaining
each of the instruments, and 0.25 point each for giving an example for each instrument
for a total of 3 points. Give 1 extra point for explaining the option example well because
that was covered only in class: (a) forward contract: it’s a contract to “purchase” a
foreign currency in the future at a rate determined now: Example: Buying a contract to
buy 1,000,000 yen at 100 yen to the dollar 60 days from now. Say that this eliminates
risk because you know ahead of time how much it would cost to buy yen 60 days from
now. (b) currency swap: the simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates. Example: Acme company gets a Swiss
investor to finance its US operations. Acme “swaps” this Swiss-denominated investment
with a London bank, so now the US company gets its cash flow in US dollars, so this
eliminates currency risk for Acme. the Bank gets cash flow in Swiss Francs. (c) currency
option: the “right” to buy a specified amount of foreign currency at a specified rate.
Unlike forward contracts, options can be “exercised” or “let expire without exercising”.
Example: pay a premium to buy an option to buy yen at 100 yen to the dollar 60 days
from now. If the yen is trading at 75 yen to the dollar, you would “exercise” your
option. In other words, by exercising your option, you get 100 yen to the dollar, but if
you buy at the spot exchange rate then, you get only 75 yen to the dollar. So this
eliminates the risk that the yen will appreciate in the future.
Part C
1. a. The accumulation of reserves in developing countries is due to the export
surpluses and oil revenues of some developing countries.
b. The implications: [Note: they are only asked to discuss two of these]
World Economy: developing countries have become creditors to developed
countries resulting in reverse capital flows (compared to historical) and economic
influence in the global capital markets.
International Institutions: IMF and World Bank are losing influence as some
developing countries begin to provide economic assistance to others. The
developing countries could also become more significant funders of these
institutions.
Global Business: New and rapidly growing markets for MNE’s and potential sites
for FDI as well as sources of financing for MNE’s
Political Influence: With greater economic power will likely come greater
political influence in international organizations and bilateral relationships
2. a. Lessons for Disney: listen to local experts, hire indigenous managers, more
market research before entry, use a local joint venture partner
b. Guidelines for firms expanding into new markets: tap local expertise and
management, use joint ventures, do market research before entry, remain flexible
to adapt to new circumstances, and be culturally sensitive
Part D
“Mexico’s Case Study”
1. The opportunity for Mexico of China’s growth is that it could be a potentially
large market for Mexican firms both for exports and FDI and could be a source of
FDI for Mexico.
2. Strategies that Mexican firms could use to compete with China are move up the
value chain to higher technology industries, use its geographic proximity and
NAFTA access as advantages, export and invest in China, and identify markets
where Mexican firms will be competitive against Chinese ones.
3. Policies that the Mexican government could follow to increase competitiveness of
Mexican firms include develop Mexican infrastructure (education, transport,
communications), develop incentives to attract FDI, and encourage (subsidies, tax
breaks, export services) Mexican firms to expand abroad.
4. The value of sending Mexicans to study in China is the acquisition of language
skills, market knowledge, and business/government contacts.