International Finance Chapter 15

59 Political risk refers to: a) the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country. b) macroeconomic risks. c) microeconomic risks. d) bankruptcy or high inflation rates.

A

6 The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar, a British auto maker. a) This is an example of cross-border M&A. b) This was a Greenfield investment. c) both a) and b) d) none of the above

A

13 The dominant source of FDI outflows a) several developed countries. b) a few underdeveloped countries next to wealthy neighbors, like Mexico. c) Africa and China. d) none of the above

A

17 Unlike the theory of international trade or the theory of international portfolio investment, a) we do not have a well-developed, comprehensive theory of FDI. b) the comprehensive theory of FDI focuses on mean-variance efficiency. c) the comprehensive theory of FDI is an arbitrage argument, like interest rate parity. d) none of the above

A

21 A classic example for trade barrier-motivated FDI is a) Honda's investment in Ohio. b) Bridgestone's investment in Japan. c) NAFTA. d) None of the above

A

23 Trade barriers can arise naturally. Which of the following are natural barriers to trade? a) Transportation costs b) Quotas c) Tariffs d) Transactions costs

A

24 In a push to serve the North American market Samsung, a Korean firm, chose to locate production facilities in Mexico, mainly because a) of lower labor costs in Mexico. b) to circumvent trade barriers imposed by NAFTA. c) because of colder weather in Canada. d) none of the above

A

25 Labor services in a country might be underpriced relative to productivity because a) workers are not allowed to freely mover across national boundaries to seek higher wages. b) some countries do a bad job of educating their work force, consequently they are not very productive. c) in some countries there is a shortage of capital investment. d) all of the above are equally important

A

28 Severe imperfections in the labor market lead to a) persistent wage differentials among countries. b) persistent exchange rate volatility among countries. c) persistent interest rate differentials among countries. d) none of the above

A

31 The boomerang effect a) the possibility that if the secret formula of Coca-Cola were leaked, that other firms would come up with similar products and hurt Coca-Cola's sales. b) the possibility that FDI in an undeveloped nation will lead to a group of workers who have enough money to afford the firm's products, leading to an increase of sales and increase of workers and so on. c) the possibility that FDI in an undeveloped nation will lead to a group of domestic workers no longer have enough money to afford the firm's products, leading to an decrease of sales. d) none of the above

A

38 FDI vertical integration is backward a) when FDI involves an industry abroad that produces inputs for MNCs. b) when FDI involves an industry abroad that sells the MNC's outputs. c) none of the above

A

39 An example of forward vertical FDI a) U.S. car makers built their own network of dealerships in Japan to help sell their cars. b) U.S. car makers began to source parts in Japan to lower the cost of their cars. c) U.S. car makers entered into joint partnerships with car makers in Japan to help sell their cars. d) None of the above

A

4 In the early 1980s, Honda, the Japanese automobile company, built an assembly plant in Marysville, Ohio, and began to produce cars for the North American market. As the production capacity at the Ohio plant expanded, Honda began to export its U.S.-manufactured cars to Japan. a) True b) False

A

42 The product life-cycle theory predicts that a) over time the United States switches from an exporting country of new products to an importing country. b) over time the United States switches from a comparative advantage in R&D to a service economy. c) over time the United States education system maintains the country's dominant position in the world economy. d) none of the above

A

50 As a mode of FDI entry, cross-border M&A offers two key advantages over greenfield investments: a) speed and access to proprietary assets. b) firms bolster their competitive positions in the world market by acquiring special assets from other firms or using their own assets on a larger scale. c) firms can better leverage their intangible assets and on a larger scale. d) none of the above

A

51 Mergers and acquisitions are a popular mode of investment for firms wishing to protect, consolidate and advance their global competitive positions. Examples include, a) selling off divisions that fall outside the scope of their core competence. b) acquiring strategic assets that reduce their competitiveness. c) firms can better leverage their intangible assets and on a larger scale through licensing. d) none of the above

A

55 True or false: cross-border acquisitions are generally found to be synergy-generating corporate activities. a) True b) False

A

61 Operational risk refers to the risk which arises from the uncertainty about a) the host's country's policies affecting the local operations of an MNC. b) the host's country's policy regarding ownership and control of local operations. c) cross-border flows of capital, payment, know-how, and the like. d) none of the above

A

62 Countries may welcome greenfield investments, a) as they are viewed as representing new investment and employment opportunities. b) as they are viewed as substitutes for foreign firms' bids to acquire domestic firms. c) but they are also often resisted and sometimes even resented by the local firms. d) none of the above

A

66 Examples of transfer risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments. b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs. d) none of the above

A

8 According to a recent UN survey, the world FDI stock grew at what rate relative to worldwide exports of goods and services? a) The world FDI stock grew twice as fast as worldwide exports of goods and services. b) The world FDI stock grew at the same rate as worldwide exports of goods and services. c) The world FDI stock grew half as fast as worldwide exports of goods and services. d) None of the above

A

10 MNCs might have been lured to invest in China not only by lower labor and material costs but also a) by China's lower labor and material costs. b) by the desire to preempt the entry of rivals into China's potentially huge market. c) by the Kung Pao chicken. d) by the desire to see, if not buy, all the tea in China.

B

2 Following Honda's FDI in the U.S., a) The U.S. government imposed a Voluntary Trade Agreement under which Japanese automobile manufacturers were not allowed to increase their exports to the U.S. market. b) Toyota and Nissan made direct investments in America c) Sales of Hondas declined d) none of the above

B

30 Coca-Cola has invested in bottling plants all over the world rather than licensing local firms a) because the foreigners can't be trusted to follow the secret recipe. b) because Coca-Cola wanted to protect the formula for its famous soft drink. c) because of the internalization theory of FDI. d) both b) and c)

B

33 MNCs may undertake overseas investment projects in a foreign country, despite the fact that local firms may enjoy inherent advantages. This implies that a) MNCs are making a mistake in this case and will have to eventually withdraw. b) MNCs should have significant advantages over local firms such as comparative advantages due to intangible assets. c) the local firms will not have to compete due to their inherent advantages over the foreigners. d) none of the above

B

36 The conflicts between the upstream and downstream firms can be resolved, a) if the two firms form a horizontally integrated firm. b) if the two firms form a vertically integrated firm. c) if the two firms form a linearly integrated firm. d) none of the above

B

37 Also, MNCs often find it profitable to locate manufacturing/processing facilities near a) the home office to exploit their assets in place. b) the natural resources in order to save transportation costs. c) their competitor's manufacturing plant to even out the playing field with regard to shipping costs. d) none of the above

B

40 U.S. car makers were forced to build their own network of dealerships to enter the Japanese market. a) This is an example of backward vertical integration. b) This is an example of forward vertical integration. c) This is an example of sideways vertical integration. d) None of the above

B

45 When a firm holds assets in many countries, a) the firm's cash flows are internationally hedged. b) thus, shareholders of the firm can indirectly benefit from international diversification even if they are not directly holding foreign shares. c) thus, shareholders of the firm can directly benefit from international diversification even if they are not directly holding foreign shares. d) none of the above

B

46 A "greenfield" investment a) involves soybeans in the spring, corn in the summer. b) are generally less politically sensitive than the acquisition of an existing foreign firm. c) are generally more politically sensitive than the acquisition of an existing foreign firm. d) none of the above

B

48 Cross-border acquisition involves a) building new production facilities in a foreign country. b) buying existing foreign business. c) both a) and b) d) none of the above

B

57 OPIC is the a) Overseas Pirate Investment Corporation. b) Overseas Private Investment Corporation. c) Organization Petroleum Importing Countries. d) None of the above

B

58 Cross-border acquisitions of businesses are a politically sensitive issue, a) as most countries prefer to retain foreign control of domestic firms. b) as most countries prefer to retain local control of domestic firms. c) as most countries prefer to retain local control of foreign firms. d) none of the above

B

64 Some of the risks that a U.S. based MNC can encounter in its foreign investments are: (i)- an increase in the cost of borrowing due to a rise in interest rates (ii)- increase in inflation rates (iii)- dumping (iv)- unfair competition by local companies (v)- inconvertibility of foreign currencies (vi)- expropriation (vii)- destruction of properties due to war, revolution, and other violent political events in foreign countries (viii)- loss of business income due to political violence In the U.S., the Overseas Private Investment Corporation (OPIC) offers insurance against which of the above: a) (i), (ii), (iii), and (iv) b) (v), (vi), (vii), and (viii) c) a) and b) d) none of the abo

B

65 The communist victory in China in 1949 is an example of a) micro risk. b) macro risk. c) both a) and b) d) none of the above

B

67 Examples of operational risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments. b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs. d) none of the above

B

9 Japan plays a major role as an exporter of FDI. As a recipient of FDI, a) Japan receives as much FDI as it exports, making it a major player on both fronts. b) Japan plays a relatively minor role, reflecting a variety of legal, economic, and cultural barriers to FDI. c) Japan's receipts of FDI are third in the world. d) None of the above

B

12 FDI stocks a) are the common shares of multinational companies that invest abroad. b) are mutual funds that invest in FDI. c) represent the accumulation of previous years' FDI flows. d) at the sum total of current year FDI flows.

C

22 Such products as mineral ore and cement that are heavy or bulky relative to their economic values a) may be suitable for exporting because high transportation costs will be overcome by high profit margins in oligopolistic industries. b) have high "value-to-weight ratios" that protect profit margins. c) may not be suitable for exporting because high transportation costs will substantially reduce profit margins. d) none of the above

C

29 Severe imperfections in the labor market arise from immobility of workers due to immigration barriers. As a response, firms should consider a) moving to the workers. b) moving to countries where labor services are the lowest in absolute terms. c) moving to countries where labor services are underpriced relative to productivity. d) hiring illegal immigrants.

C

35 What kind of integration is vertical integration? a) When the government outlaws discrimination against both short and tall people. b) When two firms join together in a conglomerate merger. c) When two firms related in the production process are owned by the same firm, as in a plywood manufacturer owning a logging company. d) All of the above

C

49 The rapid increase in cross-border M&A deals can be attributed to a) the end of the greenfield era—we are running out of land. b) the lack of domestic investment opportunity. c) the ongoing liberalization of capital markets and the integration of the world economy. d) none of the above

C

56 Synergistic gains a) are obtained when the acquiring firm is greater in value than the stand-alone valuations of the target firm(s). b) can only be obtained by increases in market power. c) are obtained when the value of the combined firm is greater than the stand-alone valuations of the individual (acquiring and target) firms. d) none of the above

C

60 Transfer risk refers to the risk which arises from the uncertainty about a) the host's country's policies affecting the local operations of an MNC. b) the host's country's policy regarding ownership and control of local operations. c) cross-border flows of capital, payment, know-how, and the like. d) none of the above

C

63 Country risk refers to a) political risk. b) credit risk, and other economic performances. c) every risk except political risk. d) both a) and b)

C

68 Examples of control risk include a) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments. b) unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities. c) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs. d) none of the above

C

74 Country risk a) is a broader measure of risk than political risk. b) encompasses political risk, credit risk, and other economic performances. c) all of the above d) none of the above

C

1 Under a 1981 Voluntary Trade Agreement Japanese automobile manufacturers were not allowed to increase their exports to the U.S. market. As a result a) they exited the market. b) Honda was motivated to circumvent the trade barriers. c) Honda's FDI may have been part of an overall corporate strategy designed to bolster their competitive position vis-à-vis their domestic rivals such as Toyota. d) both b) and c)

D

11 MNCs have invested in China a) by lower material costs. b) by lower labor costs. c) by a desire to preempt the entry of rivals into China's potentially huge market. d) all of the above

D

14 Alternatives to firms locating production overseas include a) exporting from the home country. b) licensing production to a local firm in the host country. c) ignoring the foreign market. d) all of the above

D

15 The key factors that are important in a firm's decision to invest overseas are a) Trade barriers, imperfect labor market, and intangible assets. b) vertical integration, product life cycle, and shareholder diversification services. c) profit maximization, global prestige, and competition. d) both a) and b)

D

16 Why do firms locate production overseas rather than exporting finished goods? a) Shipping costs b) Firms seek to extend corporate control overseas c) Imperfect factor markets d) All of the above

D

18 While there is no comprehensive theory of FDI, many existing theories emphasize a) imperfections in product markets. b) imperfections in capital markets. c) imperfections in labor markets. d) all of the above

D

19 Why do governments regulate international trade? a) To raise revenue b) Protect domestic industries c) Pursue other economic objectives d) All of the above

D

20 Governments regulate international trade a) to raise revenue (e.g. through tariffs). b) to protect domestic industries. c) to pursue other economic policy objectives (e.g. North Korea forgoing trade). d) all of the above

D

26 Labor services in a country can be severely underpriced relative to its productivity a) because workers are not allowed to freely move across national boundaries to seek higher wages. b) because among all factor markets, the labor market is the most imperfect. c) because workers may choose to not move across national boundaries to seek higher wages due to the cultural differences. d) all of the above

D

27 Severe imperfections in the labor market lead to persistent wage differentials among countries. Some explanations include a) because workers are not allowed to freely move across national boundaries to seek higher wages. b) because workers may choose to not move across national boundaries to seek higher wages due to the cultural differences. c) but these differences are offset by low productivity in low labor cost countries. d) both a) and b)

D

3 Honda's decision to build a plant in Ohio a) was welcomed by the United Auto Workers. b) was encouraged by assistance from the state of Ohio, including improved infrastructure around the plant and abatement of property taxes. c) involved setting up a special foreign trade zone that allowed Honda to import auto parts from Japan at a reduced tariff rate. d) all of the above

D

32 Examples of intangible assets include a) technological, managerial, and marketing know-how. b) superior R&D capabilities. c) brand names. d) all of the above

D

34 Intangible assets are often hard to package and sell to foreigners a) because they usually default on the contracts that they sign. b) As a result, there is more FDI than there might otherwise be. c) Because property rights in intangible assets are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available. d) both b) and c)

D

41 Which of the following statements is true about product life cycle theory? a) In the early stages of the product life cycle, the demand for the new product is relatively insensitive to the price and thus a pioneering firm can charge a relatively high price. b) It predicts that over time the U.S. switches from an exporting country of new products to an importing country. c) It has an "S" shaped curve when plotting "quantity sold" versus "time". d) All of the above

D

43 Which of the following statements is true about product life cycle theory? a) The theory was developed in the 1960s when the U.S. was the leader in R&D. b) The international system of production is becoming too complicated to be explained by a simple version of the product life cycle theory. c) It predicts that over time the U.S. switches from an exporting country of new products to an importing country. d) All of the above

D

44 Since shareholders of MNCs may indirectly benefit from corporate international diversification, a) therefore firms are motivated to undertake FDI for the purpose of providing shareholders with diversification services. b) therefore firms are motivated to undertake FDI for the purpose of being part of the global minimum variance portfolio. c) therefore firms are motivated to undertake FDI for the purpose of staying on the efficient frontier. d) none of the above

D

47 As a mode of entry into a foreign market, cross-border acquisition a) involves building new production facilities in a foreign country. b) offer faster speed over greenfield investment. c) can offer access to proprietary assets. d) both b) and c)

D

5 FDI can take the form of a) Greenfield investment. b) cross-border M&A. c) establishing new production facilities in a foreign country. d) all of the above

D

52 Synergistic gains refers to: a) gains from hedging. b) gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firms. c) gains arising if the combined companies can save on the costs of production, marketing, distribution, and R&D. d) both b) and c)

D

53 Whether or not cross-border acquisitions produce synergistic gains and how such gains are divided between acquiring and target firms a) are important issues from the perspective of shareholder welfare. b) are important issues from the perspective of public policy. c) are important issues from the perspective of stakeholders in the target firms. d) all of the above

D

54 Imperfections in the market for intangible assets can also play a major role in motivating firms to undertake cross-border acquisitions. According to the internalization theory, a) cross-border acquisitions may also be motivated by the acquirer's desire to acquire and internalize the target firm's intangible assets. b) a firm with intangible assets that have a public good property such as technical and managerial know-how may acquire foreign firms as a platform for using its special assets on a larger scale and, at the same time, avoid the misappropriation that may occur while transacting in foreign markets through a market mechanism. c) the internalization thus may proceed forward to internalize the acquirer's assets, or backward to internalize the target's assets. d) all of the above

D

69 Once a MNC decides to undertake a foreign project, it can take various measures to minimize its exposure to political risk. These include a) the MNC can form a joint venture with a local company. b) the MNC may also consider forming a consortium of international companies to undertake the foreign project. c) the MNC can use local debt to finance the foreign project. d) the MNC may purchase insurance against the hazard of political risk. e) all of the above

D

7 Firms become multinational a) when they undertake foreign direct investments (FDI). b) with the establishment of new production facilities in foreign countries such as Honda's Ohio plant. c) when they become involved in mergers with and acquisitions of existing foreign businesses. d) all of the above

D

70 One particular type of political risk that MNCs and investors may face is corruption associated with the abuse of public office for private benefits. a) Investors may often encounter demands for bribes from politicians and government officials for contracts and smooth bureaucratic processes. b) If companies refuse to make grease payments, they may lose business opportunities or face difficult bureaucratic red tape. c) They may risk violating laws or being embarrassed when the payments are discovered and reported in the media. d) All of the above

D

71 In evaluating political risk, experts focus their attention on a set of key factors such as a) integration of the host country into the world political/economic system. b) the host country's ethnic and religious stability. c) the host country's regional security, and key economic indicators. d) all of the above

D

72 When evaluating a foreign investment project, it is important for the MNC to consider the effect of political risk, as a sovereign country can change "the rules of the game". To account for this a) the MNC may adjust the cost of capital upward. b) the MNC may lower the expected cash flows from the foreign project. c) the MNC may purchase insurance policies against the hazard of political risks. d) all of the above

D

73 In evaluating political risk for FDI, experts focus their attention on a set of key factors such as a) the host country's political/government system. b) historical records of political parties and their relative strengths. c) integration of the host country into the world political/economic system. d) all of the above

D