Question

(a) Describe the difference between centralized and decentralized management structure in controlling foreign subsidiaries.

(b) Describe the trade-off of using centralized management structure to solve agency problem.

(c) Explain the rationale of multinational companies (MNCs) to establish foreign subsidiaries under Product Cycle Theory.

(d) Describe the trade-off between acquiring existing companies and establishing new foreign subsidiaries to expand overseas.

(e) Explain how the valuation of MNC will be affected if there is political unrest in the foreign country.

Answer 1

(a) In centralized management structure for controlling foreign subsidiaries, decision-making and related rights are with holding company while they are delegated to the subsidiaries in decentralized structure.

(b) Centralized structure is used to avoid agency problem with the subsidiaries, but it has some cons. it can be tough to centralize, there is high product diversity or the subsidiaries are relatively large to be handled by the holding/parent company.

(c) In product life cycle theory, there are growth and maturity stage, wherein product has the capability to be successful in the international market also. MNCs works on this stage only. Foreign subsidiaries helps in expanding the business in foreign market.

(d) Acquiring an existing foreign company is reliable as the market is already tapped and known, low risk is there for introducing the products. and entry is quite quick, while setting up a foreign subsidiary will be on advantage if control and power is the foremost point of consideration.