Analyzing Ethical Standards for MNCs in International Competition

This assignment provides answers to nine questions related to multinational corporations (MNCs) and international business. It addresses whether MNCs should reduce ethical standards to compete internationally, analyzing arguments for and against this proposition. The assignment also explores how joint ventures, such as Anheuser-Busch's venture with Kirin, enable companies to maximize shareholder wealth and limit international business risks. Further topics include the contagion effects of the Greece credit crisis throughout Europe, the reasons for interest rate variations among countries, and the impact of exchange rate fluctuations on foreign market returns. Additionally, it discusses hedging exchange rate risk, the separation of ownership from managerial control in corporations, and its implications.

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QUESTIONS AND ANSWERS
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Answer any Nine (9) out of Ten (10) questions. Each Question carries 10 marks.
Question 1:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument
do you support? Offer your own opinion on this issue.
An MNC is an abbreviation for Multinational Corporations. Basically, these are
corporations that have facilities and other assets in different countries other than their home
countries. They as well have offices and factories in those countries however with a
centralized head office where all branches are coordinated and managed. Ethical standards
are paramount for MNCs because they tend to operate in different countries where beliefs and
cultures differ largely. Through ethical standards, these corporations stand a chance of
operating in different environments.
Although it’s very easy to conclude that code of ethics is paramount for any kind of
business and that MNC’s should as well strive to maintain the standards as stipulated in their
host countries, the reality has always disadvantaged their operations in most cases by
rendering them uncompetitive. A good example can be seen in the bids made to win
government tenders. Some countries have made it a routine for corporates to bribe
government officials in order to win tenders and that makes most of the MNC’s which are
keen on observing the code of ethics fail to win those tenders even if they submit the lowest
bids for such tenders. This does not imply that they should act unethically but rather should

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be keen on the way things are done on the foreign countries and adhere to that lest they risk
being out of the market due to stiff competition from the unethical firms.
Contrary, some countries have strict regulations as far as unethical deeds are
concerned. MNCs caught acting in an unethical manner, therefore, risks on their permit
termination and which may be highly costly for the corporation. MNCs should, therefore,
adhere to the ethical standards fully to reduce the risks of permit termination which might be
highly costly.
Question 2:
Required:
Explain how the joint venture enabled Anheuser-Busch to achieve its objective of
maximizing shareholder wealth.
ANSWER: In its basic definition, a joint venture has been defined as a commercial
enterprise which is geared by either two or more firms together and to whom retain their
individual identities (Larimo, Nguyen and Ali, 2016, p.877). The main reasons behind joint
ventures are to combine resources of the involved parties, combine their expertise and to save
money. The main advantages of joint ventures are to enable small firms to access new
markets and other distribution networks, increase the capacity of partners and share
risks/costs.
From the above case study of Anheuser-Busch engaging into a joint venture with Kirin in
the textile industry, Anheuser-Busch will be propelled to achieve its objective and maximize
the shareholder wealth by first reducing the risks involved in entering a new market and
secondly by creating a way for the firm to access the new market (Japan) easily. In regard to

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reducing the risks (Larimo, Nguyen and Ali, 2016, p.879), Anheuser-Busch won’t be
required to make any kind of capital investments in Japan and which could expose the firm
into risks. On the other hand, the company will easily escape all the costs incurred by the firms
in their initial stages of penetrating into new markets through its Joint-venture with Kirin as it
will have created an opportunity for it to enter into the Japanese market when distributing
Budweiser across Japan.
Explain how the joint venture limited the risk of international business.
ANSWER: first of all, its wort to note that Anheuser-Busch will not be required to
establish its own network of distribution in Japan which otherwise will have been the first
thing to do in order to venture into the Japanese market. For that matter the joint venture can
be seen as a risk-limiting agent as far as the entrance of the company into the Japanese
market is concerned because Anheuser-Busch will require a considerably smaller investment
for its international business (Japanese market), and also the probability of its success is very
high because it will highly rely on the reputation of Karin in the market (Larimo, Nguyen and
Ali, 2016, p.880).
What barrier in Japan did Anheuser-Busch circumvent as a result of the joint venture?
ANSWER: Through an established distribution system of Kirin in Japan, Anheuser-
Busch will be able to access the Japanese market which would have not been possible
otherwise. On the other hand, through the joint venture Kirin Company will be able to get tips
on how Anheuser-Busch has been able to expand its operations across various countries
including the United States in order to break through an “information” barrier (Beamish, and
Lupton, 2016, p.163)

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Question 3: Explain why the Greece credit crisis can cause contagion effects throughout
Europe.
Credit is important for a country’s economy because it increases its spending and thus
promoting its income level and which in turn raises its GDP to facilitate productivity.
The credit crisis in Greece will see the country enter into a liquidity deficit and which is a
cash crunch on its currency as well as its reserves.
Because most of the European countries were creditors for Greece before entering into a credit
crisis, the country would not be able to settle its debts. As a result of its inability to pay back its
loans from the European countries, then that will be a default risk to those governments and
ultimately rendering them unable to settle their own debts as well.
Also, in consideration to the European country MNC’s operating within Greece, they will
be on the receiving end since they must have had sold products and services to the Greece
government. This is in consideration of the fact that if the Greece government can default on
loans, it will definitely not be unable to pay those MNC’s.
Question 4: Why do interest rates vary among countries? Why are interest rates
normally similar for those European countries that use the euro as their currency?
Interest rates are the amounts charged by the lenders to the borrowers for the use of
assets and expressed as percentages of principal. Interest rates are computed using the
formula: A = P (1 + rt) where P stands for Principal amount invested at an Interest rate basis.
And r which is in a decimal form simple is simply the interest rate expressed as a percentage
while t is the time to pay back the principal amount. Basically, interest rates vary among
countries because of the demand and supply factor of funds for a given currency.

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However, in Europe, demand and supply conditions for euros are determined by the
participating countries together and don’t vary among the involved countries. Yet, different
countries using the euro as their currency have varying interest rates which could be somewhat
higher than the others using euro if subject to default risk. Higher interest rates reflect the risk
premium.
Question 5:
Chapman Co. is a privately owned MNC in the U.S. that plans to engage in an initial public
offering (IPO) of stock so that it can finance its international expansion. At the present time,
world stock market conditions are very weak but are expected to improve. The U.S. market
tends to be weak in periods when the other stock markets around the world are weak. A
financial manager of Chapman Co. recommends that it wait until the world stock markets
recover before it issues stock. Another manager believes that Chapman Co. could issue its stock
now even if the price would be low since its stock price should rise later once world stock
markets recover. Who is correct? Explain.
International expansion is applied when a multinational corporation wants to establish
itself and its operations on a different country away from its home country.
The movement of stock markets has an impact in issuing the stocks because they affect
the net value of company shares as currency.
In the case study, the financial manager is correct: Chapman Co. must be patient to
make sure world stock markets have begun to recover and that the conditions of U.S
markets have improved. If it declares its stock at the moment when the price is too low, it
will definitely receive a lower dollar amount proceeds to utilize for its growth. If the stock
prices increase later, it won’t realize any benefits because it would have sold the shares

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already (under the condition that shareholders who acquired the shares originally will
benefit if the stock price went up).
Question 6:
Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch
supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward
contract three months before the next order will arrive. In other words, Cornell is always
covered for the next three monthly shipments. Because Cornell consistently hedges in this
manner, it is not concerned with exchange rate movements. Is Cornell insulated from
exchange rate movements? Explain.
When exchange rates change, the common terms which come into limelight include
depreciation, devaluation, appreciation, and revaluation.
Appreciation describes the upward movement of the freely floating rate of exchange
while revaluation describes the upward movement of the exchange rate mainly when the
exchange rate system is fixed. On the other hand, depreciation describes the downward
movement when the exchange rate is floating while devaluation describes the situation where
the government changes the fixed rate of a fixed rate of exchange downwards.
These movements have varied impacts on the economy. For instance, depreciation
reduces the overseas prices of a country’s exports leading to an increased demand for the
exports. Depreciation on the other side increases the prices for imports leading to a decline in
the demand for the imports.
No! Cornell is subjected to the risks of exchange rates over time considering the fact that
the forward rate fluctuates over time. Whenever the euro appreciates, its forward rate is

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definitely expected to rise over time and which upsurges the compulsory payments by
Cornell.
Question 7:
Explain how exchange rate fluctuations affect the return from a foreign market
measured in dollar terms. Discuss the empirical evidence on the effect of exchange rate
uncertainty on the risk of foreign investment.
Exchange rate- this is the value given to one currency for the purposes of converting
it into a different one. The continuous changes in a country’s exchange rates are a major
source of foreign investment risks because they add volatility to the currency converted
returns just as the local market returns are done by the induced exchange rates effects. The
latter impact is a covariance that has positive effects in most cases (i.e., the local market
returns being positively linked with an increase in the country‘s currency external value) and
which implies that the covariance effects increases the exchange risks rather than offsetting
them. Exchange risks are more significant in the bond investment sector than they are in the
stock investments.
Question 8:
What is meant by the statement that ownership is separated from managerial control in
the corporation? Why does this separation exist?
Separation of corporate ownership from managerial control- Separation of corporation
ownership from managerial control is a situation where management of a corporation is done
independently by a different team rather than its owners or stakeholders. The growth of modern
public corporations depends primarily on the efficient split-up of corporate ownership and
managerial control. This is in consideration to the fact that shareholders invest in those

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corporations by acquiring stock (to represent ownership) and which gives them the right to get a
share of the company’s residual income ( profits) remaining after the company expenses are fully
paid. Being able to share the residual incomes also implies that the shareholders must accept the
risks that no residual profits remain if the expenses are more than the income. Shareholders also
manage the company investment risks by investing in a diversified firm portfolio. In small firms,
therefore, the owners and managers of the firm are one and the same people hence there is less
separation of firm control and ownership.
Question 9:
What is an agency relationship? What is managerial opportunism? What assumptions
do owners of corporations make about managers as agents?
Definition of terms
An agency relationship is a condition that exists when one person or a group of people
owning a firm hires another person or a group of people persons who are specialists in
decision making for the purpose of making firm decisions.
Managerial opportunism seeks self-interest with guile which is mainly done in a cunning
and deceitful manner.
Agency relationship mainly occurs in a case where one party gives the decision-making
responsibility in a firm to another party for on a hired approach. Managerial opportunism, on
the other hand, seeks self-interest with guile (in a cunning and deceitful manner). It is
opportunism that entails both the attitude and set behaviors. The owners of a company
assume on managers as the agents are that they have different goals and interests. Problems
can, at last, arise when the principals and the agents pursue different goals and interests, or
because the shareholder lacks direct control over large publicly traded corporations. Also,
problems may surface when agents make decisions that result in the persuasion of goals
conflicting with those of the principals.

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Question 10:
Read the following cases and answer the questions listed below:
When hospital staff failed to speak out about poor care, the challenge began to fall on
relatives. Julie Bailey began to take on Stafford General Hospital. Believing that it would
never happen to her, it happened at Stafford where she took her mom. Julie Bailey’s mother,
Bella, had been taken to Stafford General Hospital in September 2007. But, from her first
impressions, she believed something was wrong. She recognized that the patients in her
mom’s ward couldn’t speak for themselves and the relative was visiting them oblivious to
what was going on. For 8 weeks, Bella’s family members maintained a 24-hour watch at her
bedside keeping a record of what they saw. Julie Bailey reads the records made and indicated
the fear they had for being branded troublemakers. Bella Bailey died in the hospital in
November 2007. Julie Bailey created a determined campaign, in her café, to make people
aware of what she had seen but struggled to make her voice heard. In an interview, Julie
listed all the people she tried to speak to with the intent to try and tell as many people as
possible.
At that time she was unaware that the primary investigator of the Health Care Commission
was planning to investigate high death rates at the hospital between 2005 and 2008. The
report, when made public, showed managers putting targets ahead of patient care. With the
mortality rates being further investigated, the report agreed there were serious concerns about
patient care. It appeared that some doctors were even, privately, aware of the problems. The
Commission report also said that the majority of doctors interviewed said they would not
have been happy for a relative to have been treated there. Julie Bailey expressed her concern
that it wasn’t good enough for their relatives but it was good enough for ours. She says if they

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had known or the doctors had spoken out none of their relatives would have been put there. A
Staffordshire MP, Tony Wright—Labour, Cannock Chase, could not believe that doctors
would be happy delivering that level of care and that nurses must have been unhappy
working in that situation. He had helped introduce legislation to encourage employees to
speak up—The Public Interest Disclosure Act of 1998 was intended to give whistleblowers
legal protection from dismissal or victimization. Mr. Wright indicates that the whole point of
these provisions was so that individuals could raise their concerns properly without
threatening their job, without damaging their career, and without having to go to the media.
However, in Staffordshire, there was a whole culture that discouraged complaints. The
investigation indicated that nurses felt poorly supported as a profession and consultants
appeared to have given up expressing their views since managers were said to dislike critical
comments and ignored them. Mr. Wright says that the governments should revisit what it said
to health organizations in the past—the good things such as the need to get whistleblower
protection in place. The new leadership at Mid Staffordshire NHS Foundation Trust has now
made it known that quality of care is now its primary concern. To this end, it is investing 12
million pounds in frontline clinical staff, improved training and facilities, and has published a
new “no blame whistleblowing policy” aimed to bring poor practice out in the open.
Required:
1. What corporate governance mechanisms failed at Stafford General Hospital?
2. Were there possibilities of agency problems within Stafford? Why or why not? Could
managerial opportunism be an issue?
3. Can the Trust Foundation for Stafford be effective as a market for corporate control?
4. What role do you think the corporate governance structure of the United Kingdom
played in the problems at Stafford?
5. How do you think the site

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6. action at Stafford will impact global corporate governance?
References
Beamish, P.W. and Lupton, N.C., 2016. Cooperative strategies in international business and
management: Reflections on the past 50 years and future directions. Journal of World
Business, 51(1), pp.163-175.
Larimo, J., Le Nguyen, H. and Ali, T., 2016. Performance measurement choices in
international joint ventures: What factors drive them?. Journal of Business Research, 69(2),
pp.877-887.