Suggested Solutions Tutorial 02 - An overview of multinational financial
management *
BFW2341
1. The table below shows the ability of country X and Y to turn per unit of input (lbs or yards) to
produce food and textile:
Output per unit of input
Food
Textile
Country X
17
5
Country Y
5
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a. Determine the comparative advantage of the two countries.
Opportunity cost for FOOD
Country Food Textile
X
1
5/17=0.2941
Y
1
2/5=0.4
Opportunity cost for TEXTILE
Country Textile Food
X
1
17/5=3.4
Y
1
5/2=2.5
Examination of the input/output table indicates that Country X has an absolute
advantage in the production of food and textiles. However, looking at the comparative
advantage of the two countries, the opportunity cost for food in country X is 0.29 of
textile and it is 1.4 in country Y. Country X has lower opportunity cost in textile when
producing food, so country X has comparative advantage in producing food relative to
country Y.
As for textile, the opportunity cost of producing textile relative to food is 3.4 in country
X and 2.5 in country Y. Country Y has comparative advantage in producing textile
relative to country X.
b. How is a country’s economic well-being enhanced through free international trade in
goods and services?
According to David Ricardo, with free international trade, it is mutually beneficial for
two countries to each specialize in the production of the goods that it can produce
relatively most efficiently and then trade those goods. By doing so, the two countries
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can increase their combined production, which allows both countries to consume more
of both goods. This argument remains valid even if a country can produce both goods
more efficiently in absolute terms than the other country. International trade is not a
‘zero-sum’ game in which one country benefits at the expense of another country.
Rather, international trade could be an ‘increasing-sum’ game from which all players
become winners.
c. What considerations might limit the extent to which the theory of comparative
advantage is realistic?
The theory of comparative advantage was originally advanced by the nineteenth
century economist David Ricardo as an explanation for why nations trade with one
another. The theory claims that economic well-being is enhanced if each country’s
citizens produce what they have a comparative advantage in producing relative to the
citizens of other countries, and then trade products. Underlying the theory are the
assumptions of free trade between nations and that the factors of production (land,
buildings, labor, technology, and capital) are relatively immobile. To the extent that
these assumptions do not hold, the theory of comparative advantage may not
realistically describe international trade.
The questions below should assist you in understanding the case. Your tutor may ask you
additional questions during tutorial.
2. Identify the challenges that Netflix faced before engaging in its expansion plans. Which
challenge(s) do you think is the most difficult one to deal with?
●
●
●
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To secure content deals by regions and, in some cases, by countries.
To face a diverse set of country-level regulatory restrictions.
To deal with the reluctance to pay for the streaming service.
To serve a diverse preference of the international market’s customers who may
not be fluent in English.
● Netflix lost the first-mover advantage in some countries where Amazon Prime
had existed.
The last three challenges seem to be more challenging to deal with than the first two
because it requires some strategic moves to educate/reach the potential clients. The
case of not being the first streaming service provider would require more investment
to ensure that Netflix can compete with Amazon Prime.
3. Explain the three theories that aim to explain why MNCs pursue international business. Which
theory matches with Netflix’s expansion? Discuss your answer.
Some keywords:
● Theory of Comparative Advantage: Specialization increases the production
efficiency.
● Imperfect Markets Theory: Factors of production are somewhat immobile,
providing an incentive to seek out foreign opportunities.
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● Product Cycle Theory: As a firm matures, it recognizes opportunities outside
its domestic market.
The comparative advantage and the product life cycle theory seem to explain, at least
partially, the way Netflix expanded its business. Netflix specializes in the streaming
industry, but it may not be the most efficient one before its international engagement.
However, it is interesting to note that Netflix’s expansion was mainly motivated by
expanding its consumer base, resembling the product life cycle theory. The imperfect
market theory does not suit the expansion patterns of Netflix.
4. Explain how Netflix gains advantage from the three-phase expansion strategy.
From the first phase of its expansion, Netflix learned how to expand and enhance its
core capabilities beyond the home market. The critical success factor of Netflix’s global
expansion was the decision to start expanding in a market with close geography and
psychic distance from the U.S. This strategy led Netflix to develop its
internationalization capabilities.
The second phase consists of the expansion to 50 countries that were selected due to
their attractiveness. This attractiveness consists of several factors: shared similarities,
the presence of affluent customers, and broadband internet availability. Here, Netflix
still minimizes variations and expands to relatively similar markets while leveraging
its internationalization capabilities.
The third phase of the expansion sees Netflix taking the fullest advantage of its
internationalization capabilities. The capabilities would include It had gained expertise
in the contents that people prefer, the marketing that the customers respond to, and how
the company needed to organize itself. Now Netflix focused on adding more languages
(including subtitles), optimizing its personalization algorithms for a global library of
content, and expanding its support for a range of devices, operation, and payment
partnerships.
From the above, we can see that the three phases of expansions would allow Netflix to
focus on its core business while developing its internationalization capabilities to serve
multiple markets with diverse requirements.
5. Explain the different ways MNCs can engage in international business. Explain which one that
Netflix implemented during its expansion.
These are the ways MNCs can do international business:
● International Trade
● Licensing
● Franchising
● Joint Ventures
● Acquisitions of Existing Operations
● Establishment of New Foreign Subsidiaries
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Netflix partnered with key local companies to forge win-win relationships. These
international partnerships would likely be in the form of international trade agreements
but are less likely to be joint ventures (i.e., no equity participation from Netflix). The
partnership between Netflix and local companies also took form in the production of
local content to serve the local and global market.
Netflix pursued global licensing deals instead of dealing with the licensing issues
country to country. Netflix’s decisions to pursue global or regional licenses for its
content would help the company get more content without dealing with different sets
of regulations and regulators.
6. The article proposes a strategy labeled as exponential globalization. Explain this strategy and
look for an example.
It’s a carefully orchestrated cycle of expansion, executed at increasing speed, to an
increasing number of countries and customers. The approach has helped the company
expand far more quickly than competitors.
7. This question is not related to the Netflix case. Watch the following video. In your tutorial,
discuss how the trends that the videos highlight would change the way MNCs operate in the
post-pandemic era? Please conduct your own research and discuss the results in the tutorial.
There are several issues to be highlighted during the tutorial discussion. You can have
a look at the video from the Economist and other materials.
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The contributing factors to the de-globalization:
o The Great Recession (2007-2009)
o The trade war between U.S. and China led governments and businesses to
realize that they have been relying too much on China.
o The Covid-19 pandemic.
Highlight the new trends in the supply chain:
o Flexible supply chain arrangement that is not mainly concerned about getting
the cheapest cost.
o The ZARA supply chain model is closer to home (i.e., not the cheapest) but
offers flexibility
o The availability of the on-demand economy to support the flexible supply
chain model
Implications of de-globalization for developing and developed countries
o Less likelihood for developing countries to leapfrog like China (i.e., taking
advantage of their population)
o The jobs may not return to the developed countries due to automation
So what
o Key success factors in this changing world are to be flexible and to have the
ability to innovate
o Businesses and countries will have to be interdependent and work with
resilience.
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