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Globalization and the Multinational Corporation



1. Define globalization. How has it proceeded in trade in goods and services versus capital markets? Answer: Globalization refers to the increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities. Because of globalization, multinational corporations dominate the corporate landscape. 2. Describe fours ways that a company can supply its products to a foreign country. How do they differ? Answer: An MNC can supply a foreign market through exports, by licensing local firms abroad to manufacture the company’s products, by setting up a joint venture with a foreign company, or by foreign direct investment.

3. What is a greenfield investment? Answer: MNCs engage in greenfield investments when they enter foreign markets by simply establishing new operations in these countries without having a local partner and without acquiring a local company.

4. What percentage ownership typically defines FDI? Answer: Foreign direct investment (FDI) occurs when a company from one country makes a significant investment that leads to at least a 10% ownership interest in a firm in another country.

5. What is agency theory? How does corporate governance the issues raised by agency theory?

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2 Chapter 1 Globalization and the Multinational Corporation

Answer: Agency theory explores the problems that arise because the owners of the firm do not typically manage the firm, and it devises ways to resolve these problems. This is often called the separation of owneship and control. A manager of a firm, in particular the chief executive officer (CEO), is viewed as an agent who contracts with various principals—most importantly the firm’s shareholders but also the firm’s creditors, suppliers, clients, and employees. The principals must design contracts that motivate the agent to perform...