Question

1. Why are valuations of privatized businesses previously owned by the governments of developing countries more difficult than valuations of existing firms in developed countries?

2. Some MNCs establish a manufacturing facility where there is a relatively low cost of labor. Yet, they sometimes close the facility later because the cost advantage dissipates. Why do you think the relative cost advantage of these countries is reduced over time? (Ignore possible exchange rate effects.)

3. The reduction in expected cash flows of Asian subsidiaries as a result of the Asian crisis likely resulted in a reduced valuation of these subsidiaries from the parent’s perspective. Explain why a U.S.–based MNC might not have sold its Asian subsidiaries.

4. Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereos and sell them there. It expects that its cost of producing these stereos will be one‑third the cost of producing them in the United States. Assuming that its production cost estimates are accurate, is Bronco’s strategy sensible? Explain.

Answer 1

Basically there are major factors due to which Cost advantages are reduced over time as mentioned below.

First of all the main cost saving is relatively very low labor cost, Companies of developed countries are used to establish units in developing countries due to cost saving in labor cost.

The other reason to open the company in developing countries is that low Government Taxes and Other Subsidies and benefits provided by that governments.

But when Government withdraw all the benefits provided by them or increases the taxes then it becomes costly.

Further in developing countries there is huge competition in the local market so that effects the business.

Further due to lower consumption power compared to developed countries, developing countries customers are used to buy cheaper things having low quality rather than having good quality and high priced things which is vice e versa in developed countries.

However its generally beneficial to open branches in Asian countries and sell there products as it will lower the cost if other social and political factors are in favor.