18.1)  What are the main advantages and disadvantages of the ethnocentric, polycentric and geocentric approaches to staffing policy?  When is each approach appropriate?

An ethnocentric staffing policy is one in which key management positions are filled by parent country nationals.  The advantages of the ethnocentric approach are: (1) Overcomes lack of qualified managers in host country, (2) Unified culture, and (3) Helps transfer core competencies.  The disadvantages of the ethnocentric approach are: (1) Produces resentment in host country, and (2) Can lead to cultural myopia.  An ethnocentric approach is typically appropriate for firms utilizing an international strategy.  A polycentric staffing policy requires host country nationals to be recruited to manage subsidiaries, while parent country nations occupy key positions at corporate headquarters.  The advantages of the polycentric approach are: (1) Alleviates cultural myopia, and (2) It is inexpensive to implement.  The disadvantages of the polycentric approach are: (1) Limits career mobility, and (2) Isolates headquarters from foreign subsidiaries.  A polycentric approach is typically appropriate for firms utilizing a multidomestic strategy.  A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality.  The advantages of a geocentric approach are: (1) Uses human resources efficiently, (2) Helps build strong culture and informal management network.  The disadvantages of the geocentric staffing policy are: (1) National immigration policies may limit implementation, and (2) It is expensive to implement.  A geocentric approach is typically appropriate for firms unitizing a global or transnational strategy.

18.4)  In what ways can organized labor constrain the strategic choices of an international business?  How can an international business limit these constraints?

Organized labor can significantly constrain the choices firms make with respect to location.  International firms (or domestic ones for that matter) often choose to locate new facilities in places where there is relative labor peace and harmonious working relations.  Labor can also raise objections and threaten disruptive behavior if a firm decides to move some activities to other locations, which in some cases only reinforces the need for relocating the activities.  Organized labor has also attempted to (i) set-up its own international organizations, (ii) lobby for national legislation to restrict multinationals, and (iii) achieve regulation of multinationals through international organization such as the United Nations. However, none of these broader efforts have been very successful.  International businesses have the advantage of being able to provide or take away jobs, and in today's labor market that gives them considerable power.  As a condition of opening or expanding a facility, firms can negotiate favorable conditions with local unions and force unions to compete against each other for the gains in membership.

19.3)  The following are selected amounts from the separate financial statements of a parent company (unconsolidated) and one of its subsidiaries:





$   180

$     80


$   380

$   200

Accounts payable

$   245

$   110

Retained Earnings

$   790

$   680




Rent Income

$       0

$   200

Dividend Income

$   250

$       0




(i) Parent owes subsidiary $70
(ii) Parent owns 100% of sub.  During the year sub paid parent a dividend of $250.
(iii) Subsidiary owns the building that parent rents for $200
(iv) During the year parent sold some inventory to subsidiary for $2,200.  It had cost Parent $1,500. Subsidiary, in turn, sold the inventory to an unrelated party for $3,200.

Given this information
(a) What is the parent's (unconsolidated) net income?
(b) What is the subsidiary's net income?
(c) What is the consolidated profit on the inventory that the parent originally sold to the subsidiary?
(d) What are the amounts of consolidated cash and receivables?

(a) Parent's unconsolidated net income:  Revenues (4980-2200) + Rent Income (0) + Dividend Income (250 - 250) - Expenses (4160 -1500-200) = 320
(b) Subsidiary's net income:  Revenues (3520) + Rent Income (200) + Dividend Income (0) - Expenses (2960) = 490
(c) Consolidated profit on the inventory:  3200 - 1500 = 1700
(d) Cash:  180 + 80 = 260, Receivables:  380 - 70 +200 = 510

20.4)  You are the CFO of a Canadian firm that is considering building a $10 million factory in Russia to produce milk.  The investment is expected to produce net cash flows of $3 million every year for the next 10 years, after which the investment will have to close down due to technological obsolescence.  Scrap values will be zero.  The cost of capital will be is 6% if financing is arranged through the Eurobond market.  However, you have an option to finance the project by borrowing funds from a Russian bank at a 12 percent.  Analysts tell you that due to high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar.  Analysts also rate the probability of violent revolution occurring in Russia within the next ten years as high.  How would you incorporate these factors into your evaluation of the investment opportunity?  What would you recommend that the firm do?

In considering these investments there are three basic steps:
There are several different ways of approaching this problem, and the method outlined below is just one.  Different assumptions would lead to different answers.

(1)  Make a basic analysis of the investment:
A quick analysis of the basic problem (a $10m investment that pays $3m/year for 10 years shows a ROI of 27%) suggests that this is a good opportunity.

(2)  Adjust for risk:
In the case of Russia, the likelihood of violent revolution, which could damage the plant irreparably or cause the firm to lose ownership, is probably as likely to occur in the first year as it is in any future year.  Hence treating later cash flows different than earlier cash flows is inappropriate.  By adjusting the $3m cash flows down by some percentage for each year (the risk that there will be a violent revolution that will cause the plant to close in any given year), probability that the plant will still be available to the firm can be factored into the yearly cash flows.

(3)  Determine whether it would be better to fund the project from Canada or Russia or not at all:
(i) Russian funds: If we assume that if there is a violent revolution, we would neither earn money nor have to pay back the bank. (Let them have the plant if they are around to get it from the revolutionaries.) The financing in Russia looks very good.  Having a 27% ROI, while having to pay only 12%, shows this to be a very profitable investment.  And even if it does fail in the first year due to revolution, the bank is at risk, not the firm.  The main issue is being able to get funds out of Russia and back to Canada.  The yearly cash flows that could be repatriated would be $3m less interest and principal. You might make an adjustment for economic/political risk and anticipated exchange rate changes.  The net present value of these cash flows in Canadian dollars could then be calculated.
(ii) Eurobond Funds:  Eurobond investors would still want to be paid even if the plant goes out of production.  They will also want to be paid most likely in US dollars or some European currency; it is unlikely that the Eurobonds would be denominated in either rubles or Canadian dollars.  Hence the approach would be to discount the cash flows for economic/political risk, discount them for the currency depreciation, make payments on the Eurobonds, and then determine the net present value of the remainder.  The quick calculation shows that this is still a positive net present value option.

After more careful analysis both choices would likely yield a positive net present value, although which one is higher is not obvious.  While one can make estimates for the risks and include them as suggested, it is clear that the Eurobond option exposes the firm to higher economic/political and exchange rate risks.  It also requires that funds be repatriated to pay off the bonds, while with the bank financing, the firm could just keep the funds in Russia if foreign exchange controls were instituted.  Thus, unless the Eurobond option has a significantly higher net present value, the Russian bank financing has some strong advantages that are difficult to fully quantify.