Chapter 16, Question 1
1. Why do firms from each category below become multinational? Identify the competitive
advantages that a firm in each category must have to be a successful multinational.
FDI: possibility of opportunism costly, thus go overseas to more fully utilise their skills and other
tangible and intangible assets.
a. Raw materials seekers
Existence of low cost raw materials overseas (not a sufficient condition, why?)
Just import raw materials rather than set up operations abroad to extract them
Have intangible capabilities (e.g. technical skills): price their special skills or to write, monitor
and enforce use restrictions government technology-transfer arrangements.
Possesses a valuable asset and is better off directly controlling use of the asset rather than
selling or licensing it.
Problems of opportunism: very expensive to enter into longterm purchase contracts to fully
ultilise their production or distribution capability (e.g. oil company, too expensive if they do
not control the oil supply)
b. Market seekers
Usually have intangible capital in the form of organizational skills that are inseparable from
the firm itself
Organizational skills: Basic skills involve knowing how best to service a market(e.g. quality
control, advertising..)
c. Cost minimizers
Local firms⇾inherent cost advantage over foreign investors
▪Succeed abroad: only if production or marketing edge cannot be purchased or duplicated
by local competitors.
▪possess specialized design or marketing skill, a good distribution system
▪Excess profits are earned on these intangible assets, not on the low foreign labor or
materials costs
Chapter 16, Question 2
2.a. Why do companies generally follow a sequential strategy in moving overseas?
Exporting⇾ setting up a foreign sales subsidiary⇾ possible licensing agreements⇾ foreign
production.
Highly uncertain foreign environment: risk minimizing
By internationalizing in phases, a firm can gradually move from a relatively low risk low
return, export oriented strategy to a higher risk higher return strategy emphasizing international
production investing in information at each stage
b. What are the pluses and minuses of exporting? Licensing? Of foreign production?
Chapter 16, Question 5
5. Given the added political and economic risks that appear to exist overseas, are multinational
firms more or less risky than purely domestic firms in the same industry? Consider whether a firm
that decides not to operate abroad is insulated from the effects of economic events that occur
outside
the home country.
Individual foreign projects may face more political and economic risks than comparable domestic
projects. Yet MNCs are likely to be less risky than purely domestic firms because much of the risk
faced overseas is diversifiable. Moreover, by operating and producing overseas, the MNC has
diversified its cost and revenue structure relative to what it would be if it were a purely domestic
firm producing and selling in the home market. It is important to note that domestic firms are not
insulated from economic changes abroad. For example, domestic firms face exchange risk because
their competitive positions depend on the cost structures of both foreign and domestic competitors.
Similarly, changes in the price of oil and other materials abroad immediately lead to changes in
domestic prices.
Chapter 16, Problem 1
1. Suppose the worldwide profit breakdown for General Motors is 85 percent in the United States,
3 percent in Japan, and 12 percent in the rest of the world. Its principal Japanese competitors earn
40 percent of their profits in Japan, 25 percent in the United States, and 35 percent in the rest of
the world. Suppose further that through diligent attention to productivity and substitution of
enormous quantities of capital for labour (for example, Project Saturn), GM manages to get its
automobile production costs down to the level of the Japanese.
a. Who is likely to have the global competitive advantage? Consider, for example, the ability of
GM to respond to a Japanese attempt to gain U.S. market share through a sharp price cut.
b. How might GM respond to the Japanese challenge?
c. Which competitive response would you recommend to GM's CEO?
Chapter 17, Question 8
Early results on the Lexus, Toyota's upscale car, showed it was taking the most business from
customers changing from either BMW (15 percent), Mercedes (14 percent), Toyota (14 percent),
General Motors' Cadillac (12 percent), and Ford's Lincoln (6 percent). With what in the auto
business is considered a high percentage of sales coming from its own customers, how badly is
Toyota hurting itself with the Lexus?
No, it is not hurting itself as the Toyota can gain sales from other brand if it losses its own and can
get advantage of retaining customers and conversion of other brands customers to its own.