Asymmetric Information Occurs When One

Asymmetric information occurs when one party has superior information to another in a transaction (Investopedia, 2011). An example can be found in the medical services industry -- an example could be treatment of injuries received in an accident. The medical clinic understands the cost of providing the treatment and the supplies that are used. The patient usually has no idea what the cost of providing the service is and often does not even understand the treatment options involved. If the client is paying out of pocket, this represents information asymmetry. Asymmetry leads to moral hazards and adverse selection, among other negative outcomes (Ibid). Often, the best way to mitigate the problems inherent with asymmetric information is to reduce that asymmetry. If patients were able to understand the different treatment options and their costs, they would be able to make better decisions with respect to their health care. Purchasing insurance can help, as the insurance companies employ experts, but the benefits of this mitigation strategy are constrained by the lack of price elasticity of demand on health insurance -- insurance companies have no incentive to provide better information to customers.

2. Currency exchange rate risk is one source of risk inherent in international investments. There are two elements to this -- transaction risk and translation risk. Translation risk is difficult to manage, although geographic diversification will often smooth out the volatility associated with exchange rate risk. Transaction risk can be hedged, and there are a number of mechanisms to do this. These include forwards, futures, interest rate swaps and other more obscure hedging mechanisms. Another complexity that might arise for multinational corporations is the tax treatment of transfers between international subsidiaries, which can both save the company money and put it in a position to be prosecuted for tax evasion. Managing this complexity requires keeping top tax lawyers on retainer in each country where the MNC operates so that it can make the best decisions possible with respect to flows between its foreign subsidiaries

3.1. Many Asian countries have a high degree of power distance, meaning that employees are more willing to accept that power is distributed unevenly (Geert Hofstede.com, 2009). Lower-level employees are less likely to make decisions, saving all decisions for top executives. This can cause frustration with American firms, who can be comfortable allowing mid-level managers to make important decisions. This can impact the pace at which negotiations move and there may be offense taken on the part of senior executives of Asian companies if they are not meeting with their equal in the American company. The U.S. company in this situation would need to be more patient in the early stages of negotiation and take time to understand the differences in the decision-making process when dealing with Asian companies.