QUESTION 10 2.5 points One of the advantages of MNCs is international diversific

Question

QUESTION 10 2.5 points One of the advantages of MNCs is international diversification which helps with risk reduction. Theoretically (and even empirically), which strategy is best when it comes to international diversification and risk reduction? Invest in markets where project cash fiows are negatively correlated with project cash flows where existing subsidiaries are based. Invest in countries where aggregate demand exceeds aggregate supply Invest in countries where project cash flows fluctuate the same way as projects in countries where existing subsidiaries are based. Establish a subsidiary in a market where the local currency is strong and expected to remain strong over time.

Explanation / Answer

The best strategy when it comes to international diversification and risk reduction is option B which is " invest in countries where aggregate demand exceeds aggregate supply. From this we can conclude that the market may be developing market and there is less no of players means less competition and the price of goods is higher because the demand is more than supply which means there is high profitablility for the companies. This is attractive market for investor. And hence company will get market share easily with invest in manufacturing in the country. This lead to diversification internationally as the company is getting market which is favourable for then in terms of profitability.

Option A is incorrect because already company subsidiary is present in the country then the company already diversififed in the country market. So, with already presence there is no meaning to invest and it is not internationally diversified.

Option C is incorrect because already company has existing subsidiary present.

Option D can be option but we don't know about the country demand and supply curve. Might be there is huge number of players present in the market and lead to less profitability for the company. So, this is also not the correct option.

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