Assignment:
1. Initially, we introduced models of "horizontal" and "vertical" MNEs, in which the decisions as to where to locate production was a more-or-less straightforward calculation given values of certain variables. Following that, we broadened our approach to encompass variables; specifically, marginal costs and revenues.
Using this standard "economic" approach, explainthe profit-maximizing levels of operation for the following cases in which an MNE operates in two independent markets:
a) differential product pricing when final demand — as represented by the "demand curve" - for a particular product differs between countries; and
b) differential output levels when costs of production for the final good — as represented by the "supply" curve - differ between countries
2. Production of many "final" goods does not occur in a single location as assumed in the previous questions. Explain diagrammatically how the cost of production can be seen as the summation of the (rising) cost of producing an intermediate good at the "component" stage plus the (rising) cost of "assembly" to make the final good.
If there is another location where the first stage can be undertaken, explain how production of that intermediate good would shift between locations as its cost in the second location rises from an initial level less than or greater than in the first country.
3. Explain the three "types" of tax regimes levied by various countries on a company's foreign income, and construct a numerical example for each.
Discuss effects that might be expected from the US having a relatively high nominal (as opposed to "effective") rate of tax on foreign earnings of US-based companies.
4. With the demise, in 1971, of the Bretton Woods agreement that had essentially fixed exchange rates (against the dollar), in a very few years all currencies were floating against each other.
This gave rise to a need for international businesses to protect themselves from disastrous currency movements; and of course simultaneous strategies to profit from these movements. Using simple "profit profile" diagrams, explain the following situations:
a) a US company paying for received parts made by a European company, settled in Euros.at the due date for payment, at the then-current "spot" rate for $ vis-a-vis the Euro.
b) the same situation as (a) but at the moment the sale is agreed the US company buys Euros "forward" (e.g. in the currency "futures" market) in the amount of the billing in Euros needed at the future date of settlement.
c) the same situation as (b) but instead of contracting to buy a quantity of Euros at a given future date, at a given price, the US company buys an option to buy Euros at that same date. Is this a "put"or a "call" option, and is the company in a "short" or a "long" position? Explain
5. Explain the nature of a "swap", including its convenience for companies compared with using options. Construct a simple example where a bank can borrow at a cheaper long-run rate than a typical company, and vice versa for short-term rates. Discuss this situation in comparison to Ricardo's theory of comparative advantage!
6. Explain the "Washington Consensus", repeatedly upheld by rich countries in dealings with less-developed-countries (LDCs) as the way to economic growth. In particular, this approach implicitly focuses on private-sector investment (through MNEs) as the carrier of the seeds of sustainable progress.
However, apart from specific sectors, such as oil, and although health care has improved greatly on a global scale (sustaining a population of around 7 billion or so), incomes at the levels of the DCs are still a distant goal, perhaps even receding.
Discuss the need, even for large MNEs, to rely on other agencies — e.g. the IMF, as well as other monitors — to assure themselves of stability of would-be developing countries. Assess how well the IMF has dobg its job over the last forty years or so.
7. We have heard several presentations about actual MNEs. Pick at least one of these and compare and contrast it to at least one of the other companies presented.