If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be ____ affected by the project.
A) adversely; adversely
B) favorably; adversely
C) favorably; favorably
D) adversely; favorably

Question

Quizplus · Accepted Answer

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in the country, it is likely that the subsidiary will compete with the parent's exports, resulting in adverse effects on cash flows from prevailing operations. This is because the subsidiary's sales may cannibalize the parent's exports, and the subsidiary may have higher costs of production due to local factors.

On the other hand, if an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the subsidiary may benefit from lower costs and increased efficiency due to proximity to the parent and local factors. This may result in favorable effects on cash flows from prevailing operations, even though the subsidiary may compete with the parent in some markets.

If an MNC Exports to a Country, Then Establishes a Subsidiary