Agency Problems of MNCs a. Explain the agency problem of MNCs. b. Why might agency costs be larger for an MNC than for a purely domestic firm?

Agency Problems of MNCs a. Explain the agency problem of MNCs. b. Why might agency costs be larger for an MNC than for a purely domestic firm?

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December 22, 2021
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Agency Problems of MNCs

a. Explain the agency problem of MNCs.

b. Why might agency costs be larger for an MNC than for a purely domestic firm?

Answer and ExplanationSolution by a verified expert

Explanation
A multinational corporation is a company that operates in more than one country.

The decisions built by managers of an MNC may differ from the shareholder's goal of maximization of wealth. This difference of goals and interests between shareholders and managers leads to conflicts between them, which are known as agency problems. For instance, a manager may focus on a new location for the establishment of a subsidiary instead of focusing on its potential advantages to shareholders.

Verified Answer
Agency problems are the problems that arise due to differences in the opinion of managers and shareholders, leading to a conflict of interest and goals between managers and shareholders. Agency problems arise due to analyzing situations from different perspectives by the managers and shareholders.

b
Explanation
A multinational corporation is a company that operates in more than one country, and domestic firms operate only in their home country.

Operating a business in other than home country requires lots of managing staff and place. So, a corporation incurs more expenses on controlling and monitoring subsidiaries located in different countries. Domestic companies do not face this cost because they can monitor their branch managers effectively in their own country. Every country has its own culture, so this may also create conflicts with uniform goals. Due to larger size and larger agency problems, the cost for MNCs is also on the higher side compared to domestic firms.

Verified Answer
The agency costs of multinational companies are generally higher due to their huge sizes and operations being monitored and executed in different countries, where managers may have different goals and interests due to differences in cultures.

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