1.) Agency Problems of MNCs a.) Explain the agency problem of MNCs. b.) Why migh
ID: 2809411 • Letter: 1
Question
1.) Agency Problems of MNCs
a.) Explain the agency problem of MNCs.
b.) Why might agency costs be larger for an MNC than for a purely domestic firm?
2.) Comparative Advantage
a.) Explain how the theory of comparative advantage relates to the need for international business.
b.) Explain how the product cycle theory related to the growth of an MNC.
3.) Imperfect Markets
a.) Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
b.) 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?
4.) International Opportunities
a.) Do you think the acquisition of a foreign firm or licensing will result in greater growth for an MNC? Which alternative is likely to have more risk?
b.) Describe a scenario in which the size of a corporation is not affected by access to international opportunities.
c.) Explain why MNCs such as Coca-Cola and PepsiCo, Inc., still have numerous opportunities for international expansion.
Explanation / Answer
Question 1:
(a) Agency problem refers to the conflict of interest that is present in any relationship when on party is expected to act in the best interest of the other party. In an MNC the agency problem is due to the relationship between the shareholders and the top managers of the business. The shareholders are referred to as the "Principal" and the top managers of the MNC are referred to as the "agents" of the shareholders. The top managers of the MNC are expected to act as per the interest of the shareholders who are principals. It is seen at times that the managers act in their own interest rather than that of the shareholders which gives rise to the agency problem.
(b) The agency costs are always larger for an MNC than a domestic firm. An MNC means that these businesses are located in multiple geographies and the managers are present in all different locations across the globe. It becomes very difficult for the managers in other counties to act in the best interest of the shareholders of the domestic country. For example let us take the example of a British MNC Unilever that has office in an emerging nation India. The shares of Unilever are listed in London and the manager in India may be too focussed on getting a pay rise in India rather than having to act in the interest of shareholders in London. A domestic firm on the other hand operating in only one known environment and hence it is easier to manage the agency costs. For this reason the agency costs are higher for a MNC than a domestic firm.
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