Expansion of Business in Mexico
a. Discuss the corporate control of your business. Explain why your business in Mexico is exposed to agency problems.
b. How would you attempt to monitor the ongoing operations of the business?
c. Explain how you might be able to use a compensation plan that limits the potential agency problems?
d. Assume that you have been approached by a competitor in Mexico to engage in a joint venture. The competitor would offer the classroom facilities (so that you would not need to rent classroom facilities), while your employees would provide the teaching. You would split the profits with this business. Discuss how your potential return and your risk would change if you pursue the joint venture.
e. Explain the conditions that would cause your business to be adversely affected by exchange rate movements.
f. Explain how your business could be adversely affected by political risk.
Your business provides CDs for free to customers who pay for the English courses that you offer in Mexico. You consider the idea of mass production of the CDs in the U.S. so that you can sell (export) them to distributors or to retail stores throughout Mexico. You would price the CDs in dollars when exporting them. The CDs are not as effective without teaching but can be useful to individuals who want to learn the basics of the English language.
a. If you pursue this idea, explain how the factors that affect international trade flows (identified in Chapter 2) could affect the Mexican demand for your CDs. Which of these factors would likely have the largest impact on the Mexican demand for your CDs? What other factors would affect the Mexican demand for CDs?
b. If you believe the Mexican government would impose a tariff on the CDs exported to Mexico, how could you still execute this business idea at a relatively low cost while avoiding the tariff? Describe any disadvantages of this idea that would avoid the tariff.
Assuming that the business in Mexico grows, explain how financial markets could help to finance the growth of the business.