Question

Assume that you live in the United States and invest $100,000 to establish a computer and social media literacy business, World Technology, Inc., in Mexico City, Mexico. Although your business is structured as a corporation, you initially hold all of the common stock in the firm. Your Mexico City facility has an office and an attached training area, which you lease. You hire local individuals in Mexico who are bi-lingual in both Spanish and English to teach full-time at your training facility. Your training facility offers two types of courses: 1) A one-month structured course; and 2) a one-week intensive course. You advertise both types of courses to potential customers. All revenue and expenses associated with your business are denominated in Mexican pesos. Your subsidiary sends most of the profits from the business in Mexico to you at the end of each month. Although your expenses are somewhat stable, your revenue varies with the number of clients who sign up for the courses in Mexico. The Mexico City location of your business performs very well during its first year of operations. You then plan to expand your Mexico City business location. To fund this expansion, you sell 50,000 shares of stock in your business, World Technology, Inc., to the general public. Based on the above information, please answer the following questions: 1) Describe the type(s) of agency problems facing your business in Mexico City. a. What type of compensation plan you might be able to use for the employees at the Mexico City location to limit the potential agency problems? b. Describe the agency problem(s) created by selling stock in World Technology, Inc. to the general public. 1. How can you best deal with this agency problem? 2) Assume that you have been approached by a competitor firm in Mexico City to engage in a joint venture. The competitor would provide the facilities (so you would not need to lease space), while your employees would teach the courses. You and the competitor would split the profits. a. Describe additional agency problem(s) that may arise if this joint venture is implemented. b. How could you best deal with the additional agency problem(s) resulting from this proposed joint venture? 3) What environmental factor(s) outside the control of you or your business, World Technology, Inc. could impact its Mexico City operations? Please describe.

Answer 1

1.

The Mexican subsidiary is being operated by the employees and not by the owner himself. It creates Principal-Agent problems because the employees would not look for the benefit of the company but rather become lethargic to expand the company's business. There comes a conflict of interest among the principal and agent because the employees would not like to take initiative for the betterment of the company.

Possible solution to the problem :

Incentive-based scheme

The employees can be paid an incentive for each additional enrolment in the course. It will keep them motivated to work harder.

2. Agency problem created by selling the stock to general public.

Principal-principal (PP) problems arise in this case as it raises the conflicts between controlling shareholders and minority shareholders. The stockholder would like to get a good payout but the US owner would like to expand the business by retaining the profits back to the company.

Possible solution to the problem :

By keeping the shareholders updated thoroughly with the company's progress and future prospects. At the same time, a regular constant payout will make them satisfied.

2)

In case of a joint venture, there arises another type of Principle Principle problem. In an international joint venture, one party is a local partner and has more experience and knowledge about the production process and the domestic market. In this particular case, the partner in joint venture and the employees are locals of the subsidiary company, so there are chances of fraud for their mutual benefits.

Possible solution to the problem :

The parent company can appoint a manager from US for the supervision purpose.

3) External Environmental factors affecting the business in Mexico

Political Legal Environment- The company cannot control the political parties and their ideologies which could affect the Mexico business severally if the ruling government changes or the current govt turns hostile towards your home country

Economic factors - The economic environment consists of all the external factors in the immediate marketplace and the broader economy. A recession in an economy can devastate a flourishing business also.