International Business Exam #2

The ___ was established to increase multinational cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region

Asia-Pacific Economic Cooperation

Which level of economic integration eliminates trade barriers between member countries and adopts a common external trade policy?

Customs union

What is the term for selling goods in a foreign market below their costs of production?

Dumping

What is the most enduring free trade area in the world?

EFTA

___ are normally underwritten by an international syndicate of banks

Eurobonds

The ____ represents the interests of member states and is clearly the ultimate controlling authority within the EU

European Council

Which of the following statements is true about the growth of foreign direct investment in the world economy over the last few decades?

FDI has accelerated faster than world trade growth

An ad valorem tariff is levied as a fixed charge for each unit of a good imported (T/F)

False

Both governments and consumers realize significant gains from tariffs, while domestic producers typically see a negative effect (T/F)

False

Exporting involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on each unit sold (T/F)

False

Only a few countries choose pragmatic nationalism preferring instead either the free market or radical view (T/F)

False

A Chinese firm borrows 1 million U.S. dollars from an American bank. The cost of this loan will be less if U.S. dollar appreciates against the Chinese currency (T/F)

False. Movements in foreign exchange rates can substantially increase the cost of foreign currency loans. In this case, the value of the loan increases as U.S. dollar appreciates.

Establishment of the Euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades (T/F)

False. Second most widely traded currency after the U.S. dollar

The EU is an example of a perfect economic union (T/F)

False. The EU is an economic union, although an imperfect one.

The Council of the EU is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states (T/F)

False. The European Commission is.

The cost of capital is the difference between cost of inputs and outputs

False. The cost of capital is the price of borrowing money, which is the rate of return that borrowers must pay investors. This is the interest rate on debt loans and the dividend yield and expected capital gains on equity loans.

The most typical joint venture is a 25/75 venture (T/F)

False. The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50% ownership stake and contributes a team of managers to share operating control.

Using floating exchange rates will help countries reduce the risk of investing in foreign assets

False. The risk-reducing effects of international portfolio diversification would be greater were it not for the volatile exchange rates associated with the current floating exchange rate regime. Floating exchange rates introduce an additional element of risk into investing in foreign assets.

Which of the following is true of acquisitions?

In many cases, firms make acquisitions to preempt their competitors

What is the primary advantage of licensing

It helps a firm avoid the development costs associated with opening a foreign market

Which of the following is true of wholly owned subsidiaries?

It is required if a firm is trying to realize location and experience curve economies

To ensure that a free trade agreement does not result in trade diversion, which of the following has to come within the scope of WTO?

Nontariff barriers

Which of the following is NOT one of the seven main instruments of trade policy?

Quota Rents

The ___ raised tariff barriers in the hope of protecting jobs and diverting consumer demand away from foreign products

Smoot-Hawley Act

What is a government payment to a domestic producer?

Subsidy

Which of the following is a concern of some economist regarding regional integration?

The benefits of regional integration may have been oversold, while the costs have been ignored

___ argues that FDI is a benefit to both the source country and to the host country

The free market view

___ traces its roots to Marxist political & economic theory

The radical view

A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs (T/F)

True

A capital market brings together those who want to invest money and those who want to borrow money

True

A joint venture is often politically more acceptable than a wholly owned subsidiary and brings a degree of local knowledge to the subsidiary (T/F)

True

A major impediment to economic integration is the loss of sovereignty it entails (T/F)

True

A strategic trade policy that aims to establish domestic firms in a global industry might attract retaliation and a trade war (T/F)

True

Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency

True

Economists who have studied the issue have found little evidence that firms move production in response to changes in pollution regulations (T/F)

True

Foreign direct investment has grown more rapidly than world trade and world output for many reasons, including the fear of international business of protectionist pressures (T/F)

True

Internalization theory explains why firms often prefer FDI over licensing as a strategy for entering foreign markets (T/F)

True

Investors can reduce the level of risk by diversifying a portfolio internationally (T/F)

True

Licensing limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location (T/F)

True

Since 20002, the number of regulations that have been unfavorable to FDI have increased, particularly in Latin America (T/F)

True

The agreement reached at Bretton Woods established the International Monetary Fund and the World Bank (T/F)

True

The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with going business in that country (T/F)

True

The U.S. had large and growing trade deficit between 1980 and 1985. Despite this, the value of U.S. dollar rose during this period. Which of the following is a factor that caused this occurrence?

U.S. attracted heavy inflows of capital from foreign investors during this period

Which feature of a customs union differentiates it from a free trade area?

a common external trade policy toward nonmembers

Which feature of an economic union differentiates it from a common market?

a common monetary and fiscal policy

McDonald's is an example of a firm that uses ___

a franchising strategy

A currency crisis occurs due to

a speculative attack on the exchange value

Gold par value refers to the

amount of a currency needed to purchase one ounce of gold

A Eurocurrency is

any currency banked outside of its country of origin

Eurodollars

are dollars banked outside of the United States

Business firms are major players on the international trade scene, and as such:

be aware of the problems both protectionism and free trade can bring

A ___ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members

common market

Three countries agree to remove barriers to trade between member countries and adopt a common external trade policy toward nonmembers. They also agree to allow people and other factors of production to move freely across their borders. Which level of economic integration is this an example of?

common market

Which of the following will help a company hedge against currency fluctuation?

dispersing production to different geographic locations

___ account for about two-thirds of all Eurocurrencies

euro-dollars

The Asian economic crisis and the global financial of 2008-2009 crisis were caused by

excessive debt

Knowledge spillovers such as those arising from the concentration of intellectual talent in Silicon Valley are referred to as ___

externalities

Market makers are

financial service companies that connect investors and borrowers

Market movers are

financial service companies that connect investors and borrowers

Early entrants to a market that are able to create switching costs that tie the customer to the product are capitalizing on

first-mover advantages

United States sells bonds that are denominated in dollars in Europe. This is an example of a(n) ___ bond

foreign

Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include

governments

Establishing a new operation in a foreign country is called a(n) ___

greenfield investment

The main advantage of ___ is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants

greenfield investment

Companies receive a ___ when using the Eurocurrency market

higher interest rate on deposits and pay less for loans

In which of the following situations would FDI improve the current account of the host country's balance of payments?

if the FDI is a substitute for imports of goods or services

Protectionism

increased in the 1980s and 1990s after a period of relative decline

All of the following were part of the agenda of the Doha round of talks EXCEPT:

increasing the use of antidumping laws to bring discipline to the trading system

Intellectual property rights have become thorny areas of international trade, especially in relation to software, pharmaceuticals, music and entertainment, and:

innovation remains a principal driver for economic growth

Which of the following is a distinct advantage of exporting?

it avoids the often substantial costs of establishing manufacturing operations in the host country

The strategic trade policy argument has two main components. First, appropriate government actions can help raise national incomes if the governments can ensure domestic firms gain first mover advantages. Second, ___

it may help domestic firms overcome barriers to entry created by foreign firms who had a first mover advantage

A ___ is more likely to capture first-mover advantages associated with demand preemption, scale economies, and switching costs

large-scale entrant

The systematic risk is the

level of non-diversifiabe risk in an economy

A purely domestic capital market faces the problem of ___

limited liquidity

The costs and risks associated with doing business in a foreign country are typically

low in an economically advanced nation

If a company wants a quick entry into a foreign market, ___ are appropriate

mergers and acquisitions

___ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries

multipoint competition

Which of the following statements is true of pegged exchange rates?

pegged exchange rates are popular among many of the world's smaller nations

Preserving jobs, protecting industries important to national security, retaliating against unfair foreign competition, and advancing human rights of individuals in exporting countries are examples of ___

political arguments for government intervention

Governments do not always act in the national interest as they intervene in the economy, when, for example, ____

politically important interest groups influence them

The cost of capital is the

price of borrowing money

The World Bank was established at the Bretton Woods conference to

promote general economic development

A political benefit of economic integration is that it

reduces the potential for violent conflict

When a company brings capital and/or technology to a host country, the host country benefits from the

resource-transfer effect of FDI

By lowering production costs, ___ help domestic producers in two ways: competing against foreign firms and gaining export markets

subsidies

The WTO's role as a global policeman for trade has so far been

successful

FDI is more profitable than licensing when the firm has valuable know-how that cannot be protected by a licensing contract and when ___

the firm needs tight control over a foreign entity to maximize its market share and earnings in that country

A country is said to be in balance-of-trade equilibrium when

the income its residents earn from exports is equal to the money its residents pay to other countries for imports

Many economists criticize ___ for trade intervention arguing that it leads to prolonged inefficiency

the infant industry argument

Which of the following is a reason why Turkey is not yet a member of the EU?

there are concerns over human rights issues in the country

The stock of FDI is the

total accumulated value of foreign-owned assets at a given time

A firm will need to consider ___ as it develops and executes its strategy, disperse activities around the globe and recognizes its cost structures

trade barriers

___ occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area

trade creation

A capital market brings together those who want to invest money and those who want to borrow money (T/F)

true

Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency (T/F)

true

The International Monetary Fund's original function was to provide a pool of money from which members could borrow in the short term (T/F)

true

The current system of foreign exchange is a mixed system of government intervention and speculative activity

true

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar

true

The Japanese government was pressured by the U.S. government to place limits on the number of vehicles exported to the U.S. by Japanese automobile producers in 1981. This is an example of:

voluntary export restraint