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Potential Final Exam Questions - INMT 3039 - Spring 2017

INSTRUCTIONS: You will need to read the questions listed below and decide how you will respond to them. You may consult your textbook, class notes, materials posted on Blackboard and any other sources except classmates. Once you have decided how to respond to the questions, you must commit your responses to memory. Your responses must reflect your own thoughts and words. They may not be the same or similar to words used in the textbook or written by another student. You are expected to develop your responses alone and are not to work with anyone else.

Question 1 (20 points) a. List and describe three reasons why a firm will conduct business outside its home market.

1. Sales Expansion – Conducting business outside a firm’s home market means increased sales which translates to more profits. Expanding businesses to an international level increases opportunities for increased sales volume. About 96% of the world’s population lives outside of the United States therefore conducting business out of the country would mean that a firm’s product or service would be accessed by more people therefore increasing sales which eventually translates to profits.

2. Stay Competitive – The trend in the current business market is very competitive. Most firms are going global in a bid to stay relevant in the ever competitive domestic market. There are so many firms and companies that emerge each new day in each industry therefore it is necessary for firms to expand and conduct their businesses outside the home market in order to have more business options. Business outside the home markets means more international customers therefore high chances of success hence a firm will always remain competitive.

3. Market and risk diversification – Conducting business outside home market enhances profitability and minimizes loses in the sense that a firm’s business maybe declining in the home market but experiencing rapid growth in international markets. Operating in more than the home market insulates the firm against economic downturns. A firm carrying out its operations in Africa, Asia and America will not suffer much in case of an economic crisis, for instance in the United States. In this case, a company can use revenue gained from other markets to sustain and develop the home market.

b. List and describe two non-equity modes of entry into a foreign market. Provide two positive arguments and two negative arguments for each.

The two non-equity modes are:

1. Exporting

Exporting involves the sale of goods from one country to another either directly or indirectly. With direct exporting, the exporting party has control over the goods and services and also a direct contact always exists between the parties involved. Indirect exporting makes use of intermediaries. The exporter has no control over the goods and its distribution.

Positive arguments:

· With direct exporting, the exporter always receives good information feedback from the target market which is important for development of good customer relationship

· Indirect exporting is relatively cheaper and there is always fast market access

Negative arguments:

· It involves higher investment of resources, personnel and time

· High start-up costs are required when carrying out directing exporting

2. Contractual arguments

Contractual arguments involve formal ways in which parties enter into an agreement or agreements. The various forms of contractual arguments are: Assembly operations, licensing, subcontracting and franchising.

Positive arguments:

· Contractual agreements allows simultaneous business expansion into different regions

· Licensing reduces trading barriers

Negative arguments:

· Most of these agreements are usually limiting. Licensees have no control over the product and licensing agreement terms are usually bound and have considerable limitations.

· With franchising and subcontracting, the target market always view the investment company as an outsider therefore the target parties are always reluctant to get into business.

c. List and describe two equity modes of entry into a foreign market. Provide two positive arguments and two negative arguments for each.

The two equity modes of entry are:

1. Joint venture

The joint venture mode is equity based. It entails forming a company or business with several parties owning a certain proportion. The major reasons of coming up with a joint venture are: access to distribution channels, access to technology and gaining entry into a foreign market.

Positive arguments:

· There is always shared business risks among the participating parties

· In a joint venture, there is sharing of resources and responsibilities

Negative arguments:

· There are high chances of mistrust and conflicting when coming up and handling new investments.

· There is always a lack of parent firm support in a joint venture

2. Wholly owned subsidiaries

This is a kind of subsidiary in a foreign country entirely owned by the parent company. There are two ways of setting up wholly owned subsidiaries; through establishing Greenfield operations and through acquisitions.

Positive arguments:

· The is a greater market power in wholly owned subsidiaries

· There is always good planning before setting up subsidiaries

Negative arguments:

· Integrating two organization may be difficult because of the different organizational cultures.

· Acquisitions leads to increase in debts in organizations

Question 2 (20 points) a. A U.S. based firm agrees to buy U.S.D.25 million worth of goods from a Swiss firm. The U.S. firm agrees to pay in Swiss Francs in 60 days. You are the CFO of the U.S. firm. You know that the U.S. Dollar has been weakening against the Swiss Franc and expect this trend to continue for at least the next 60 days.

a. Describe, in detail, three hedging strategies you would consider using to ensure that when the U.S. firm makes its payment in 60 days, it minimizes its risk of loss converting U.S. Dollars to Swiss Francs. (15 points)

The hedging strategies are:

1. Foreign Bank Account

Opening a bank account in Switzerland will help the U.S based firm minimize the risk loss when making payments. Opening an account in the foreign country is among the best currency protection methods. The firm will make the payments via the foreign bank when the exchange rate is favorable. The bank itself will convert the money into the local currency which eventually will translate to minimized loses.

2. Currency Forward Contract

The firm can approach a major bank for a currency forward contract that would see into it that the firm will make payments based on the current exchange rate rather than the weakening exchange rate that is evident in the trend which shows that the dollar will continue to weaken against the Swiss Franc in the next 60 days that the firm is required to make payments.

3. Currency options

During the signing of the agreement, the firm can decide to set its payment options to be the Swiss Franc but not the Dollar. By doing this, the possibilities of loses would have been minimized because there would be no other exchange transactions.

b. Does this problem illustrate translation or transaction risk? Briefly describe the difference between hedging and speculation. (5 points)

This problem illustrates a transaction risk.

Hedging involves trying to prevent a business investment against unanticipated price changes while speculation involves trading the financial assets of significant risk while hoping to get profits. Hedging offers protection against unexpected and undesired price fluctuations while speculation solely depends on taking risks in order to get profits. Hedgers are risk averse while speculators are risk lovers.

Question 3 (20 points) Refer to the Wall Street Journal articles on McDonalds discussed in class and posted on Blackboard.

a. Briefly describe and state where McDonalds is doing three aspects of its business differently outside the United States.

Outside the United States, McDonald’s is doing its business differently in the following places:

· Asia

· Middle East

· Africa

In these regions, McDonald’s mostly uses the delivery mode of business. In cities like Cairo, Beijing and Seoul, McDonald’s business is mostly dependent on deliveries. This is because deliveries are cheap, for instance in countries like China there is a flat rate fee of just over $1 for deliveries. Egypt is an example of a country in Africa where McDonald’s carries out its business a little much differently than it does in the U.S. The main reason for the different mode of business is down to the varied culture among people in these regions of the world.

b. Briefly describe and state where McDonalds is doing three aspects of its business outside the United States that are the same as it is doing in the United States.

Outside the United States, McDonald’s does its business similarly in the following countries:

· Russia

· U.K

· Germany

· France

It is worth noting that these are countries in Europe which accounts for approximately 40% of McDonald’s total annual revenues. The mode of business in these countries is the same one that McDonald’s uses in the United States mainly because of the similarity in business and societal culture.

c. Some have suggested that consumers visit McDonalds to experience an element of U.S. culture. Explain why you agree or disagree that by adapting itself to local conditions McDonalds is diluting or weakening its position as a leading restaurant to experience U.S. culture.

I disagree. I strongly belief that by adapting itself to local conditions, McDonald’s is strengthening its position as a leading restaurant to experience U.S culture. The local conditions enables the company reach out to a large customer base that are always connected with that American culture. The mode of approach may be different in other regions as compared to the United States but that is only for the purposes of increasing sales. The U.S cultural experience remains the same. A large customer base means a higher connection to the U.S culture. The only way to get this large customer base is to adapt to local conditions.

OVER

Question 4 (20 points)

Refer to the article discussed in class and posted on Blackboard “Roots of Development” about factors that influence a nation’s development.

a. Do you agree with the authors’ conclusion? Please explain your response.

I do not agree with the author.

The author quotes three things as the roots of development. I don’t really agree with the three factors because there are other core factors that affect development. The three factors that the author lists are: Geographical locations, Institutions and Government policies. The other factors that I think are the roots of development are: technological development, human resources, natural resources and capital formation.

b. Based on other materials discussed during the course, do you think there are other factors that influence a nation’s development? Please explain your response.

Yes, there are other factors that influence the development of a Nation. These factors are:

Technological development: Technological development involves the use of scientific methods and production techniques to get the best out of a certain task or tasks. Technological development increases productivity therefore technological developed countries grow rapidly as compared to the less developed countries technologically.

Capital Formation: The capital formation of a country is very important for its development. Capital formation entails producing and acquiring of things such as Infrastructure, land, machinery, power and communication. A country with a well laid capital formation tends to have a higher capital/labor ratio which increases output and ensures growth in the economy.

Human resources: The quality and quantity of human resources in a country determines its economic growth. Well trained and well equipped people enhances economic growth.

Question 5 (20 points)

a. Describe how a weakening currency affects exports. Is this favorable or unfavorable to exporters?

A weakening currency stimulates exports by making it cheaper therefore it is favorable for exporters.

b. Describe how a strengthening currency affects exports. Is this favorable or unfavorable to exporters?

A strengthening currency hampers exports by making it more expensive hence it is unfavorable to exporters.

c. Now describe and explain how a weakening currency affects importers.

A weakening currency makes imports more expensive therefore it is unfavorable to importers.

d. Describe and explain how a strengthening currency affects importers.

A strengthening currency makes imports cheaper therefore it becomes favorable to importers.

e. Name two government policies that could be used to reduce a trade deficit.

· Deflationary policies such as monetary and fiscal policies

· Lowering wages

· Devaluation

Question 6 (20 points)

a. List and briefly describe the four types of economic integration agreements between nations.

1. Free Trade Agreement: Free Trade Area entails removing all trade restrictions within the trading group. The individual countries are free to have whatever kind of relationship they want with other non-member countries. Countries forming up a Free Trade Area have no external tariffs to maintain. Countries in a free trade area always signs a free trade agreement.

2. Customs Union: Customs Union entails having a common agreement among countries to have free trade among themselves. The agreement also entails having external barriers against non-members. An example of Customs Union is the Gulf Cooperation Council whose members are Saudi Arabia, Oman, Bahrain, United Arab Emirates, Qatar and Kuwait.

3. Economic Union: An Economic Union is a trade bloc with a common market. It implies complete economic integration between the countries. In an Economic Union, there is always free mobility of commodities and resources. In simple terms, an Economic Union is just a common market.

4. Preferential Trade Agreement: The main objective of preferential trading is to promote business among the group members. It entails giving preferential access to specific products from the countries involved. Participating countries must sign Preferential Trade Agreement. An example of such agreement is the Asia-Pacific Trade Agreement.

b. Describe their similarities and differences.

The economic agreements have a common aim of integrating countries wishing to trade among each other. In a trade bloc, Preferential Trade Agreement is always viewed as the starting point while the Free Trade Agreement is perceived as the last goal in participating countries. Preferential Trade Agreement aims at reducing tariffs while Free Trade Agreement aims at completely eliminating tariffs.

c. In your opinion, should the countries that make up the North American Free Trade Agreement (Canada, Mexico and the U.S.) consider becoming a customs union? Explain your response and how it would be beneficial or detrimental.

In my opinion, I think these countries (Canada, Mexico and the U.S) should consider becoming a customs union.

A union involving these North American Countries will have greater economic benefits to all the three countries. The major standout benefit is that Canada and Mexico will have a greater access to the capital investment from the U.S while the United States will have a greater access to the raw materials and labor present in Canada and Mexico. The Union will lead to less nationalism and more globalization. Canada and Mexico will have a great bargaining power because they will be having the backing of the most powerful nation in the world. The free movement of money and people will enhance social, political and economic stability within these countries. The poor especially from Mexico will benefit from the job market and the large investment.