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Quiz 9 Chapter 17 and 18
Foreign Direct Investment and
Political Risk
17.1 Sustaining and Transferring Competitive
Advantage
Multiple Choice
1) An
example of economies of scale in financing include:
A) being
able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being
able to ship product in shiploads or carloads.
C) being
able to use large-scale plant and equipment.
D) all
of the above
2) Which
of the following is NOT a factor of Porter's "diamond of national
advantage"?
A)
factor conditions
B)
demand conditions
C)
related and supporting industries
D) All
of the above are factors of the diamond of national advantage.
3) The
OLI paradigm is an attempt to create a framework to explain why MNEs choose
________ rather than some other form of international venture.
A)
licensing
B) joint
ventures
C)
foreign direct investment
D)
strategic alliances
4) The O
in OLI refers to an advantage in a firm's home market that is:
A)
operator independent.
B)
owner-specific.
C)
open-market.
D)
official designation.
5) The
owner-specific advantages of OLI must be:
A)
firm-specific.
B) not
easily copied.
C)
transferable to foreign subsidiaries.
D) all
of the above
6) A/An
________ would be an example of an owner-specific advantage for an MNE.
A)
patent
B) economy
of scale
C)
economy of scope
D) all
of the above
7) The L
in OLI refers to an advantage in a firm's home market that is a:
A)
liability in the domestic market.
B)
location-specific advantage.
C)
longevity in a particular market.
D) none
of the above
8) A/An
________ would be an example of a location-specific advantage for an MNE.
A)
patent
B)
economy of scale
C)
unique source of raw materials
D)
possession of proprietary information
9) The I
in OLI refers to an advantage in a firm's home market that is an:
A)
internalization.
B)
industry-specific advantage.
C)
international abnormality.
D) none
of the above
10) A/An
________ would be an example of an internalization advantage for an MNE.
A)
patent
B)
economy of scale
C)
unique source of raw materials
D)
possession of proprietary information
True/False
1) MNEs
that are resident in liquid and unsegmented capital markets are more likely to
be able to demonstrate financial strength by achieving and maintaining a global
cost and availability of capital.
2) A
strongly competitive home market tends to dull the competitive advantage
relative to firms located in less competitive home markets.
3) The
authors were unable to identify in lesser developed countries specific firms
that are nearing the status of global MNE.
Essay
1) List
and explain three strategic motives why firms become multinationals and give an
example of each.
2) What
does the OLI Paradigm propose to explain? Define each component and provide an
example of each.
17.2 Deciding Where to Invest
Multiple Choice
1) Which
of the following is NOT true regarding behavioral observations of firms making
a decision to invest internationally?
A) MNEs
initially invest in countries with a similar "national psychic."
B) Firms
eventually take greater risks in terms of the national psychic of countries in
which they invest.
C)
Initial investments tend to be much larger than subsequent ones.
D) All
of the above have been observed.
True/False
1) In
practice, when expanding into other countries, firms have been observed to
follow a sequential search pattern as described in the behavioral theory of the
firm.
2) As a
general rule, the decision about where to invest abroad for the first time is
the same as the decision about where to reinvest abroad.
17.3 How to Invest Abroad: Modes of Foreign
Involvement
Multiple Choice
1) Which
of the following is NOT an advantage to exporting goods to reach international
markets rather than entering into some form of FDI?
A) fewer
political risks
B)
greater agency costs
C) lower
front-end investment
D) All
of the above are advantages.
2) Which
of the following is an advantage to exporting goods to reach international
markets rather than entering into some form of FDI?
A) fewer
agency costs
B) fewer
direct advantages from research and development
C) a
greater risk of losing markets to copycat goods producers
D) an
inability to exploit R&D as effectively as if also invested abroad
3) Which
of the following is NOT a form of FDI?
A)
wholly-owned affiliate
B) joint
venture
C)
exporting
D)
greenfield investment
4) With
licensing the ________ is likely to be lower than with FDI because of lower
profits; however, the ________ is likely to be higher due to a greater return
per dollar invested.
A) IRR;
NPV
B) NPV;
IRR
C) cost
of capital; NPV
D) IRR;
cost of capital
5) Which
of the following is NOT a potential disadvantage of licensing relative to FDI?
A)
possible loss of quality control
B)
establishment of a potential competitor in third-country markets
C)
possible improvement of the technology by the local licensee, which then enters
the original firm's home market
D) All
of the above are potential disadvantages to licensing.
6) A
________ is a shared ownership in a foreign business.
A)
licensing agreement
B)
greenfield investment
C) joint
venture
D)
wholly-owned affiliate
7) Which
of the following is NOT an advantage to a joint venture?
A)
Possible loss of opportunity to enter the foreign market with FDI later.
B) The
local partner understands the customs and mores of the foreign market.
C) The
local partner can provide competent management at many levels.
D) May
be a realistic alternative when 100% foreign ownership is not allowed.
8) Greenfield
investments are typically ________ and ________ than cross-border acquisition.
A)
slower; more uncertain
B)
faster; of greater certainty
C)
slower; of greater certainty
D)
faster; more uncertain
9) All
of the following may be justification for a strategic alliance EXCEPT:
A)
takeover defense.
B) a
joint venture to pool resources for research and development.
C) joint
marketing and serving agreements.
D) All
of the above are legitimate reasons for strategic alliances.
True/False
1)
Licensing is a popular form of foreign investment because it does not need a
sizable commitment of funds, and political risk is often minimized.
2) MNEs
typically used licensing with independent firms rather than with their own
foreign subsidiaries.
3) Joint
ventures are a more common FDI than wholly owned subsidiaries.
4) Local
partners in a foreign country and in a joint venture with an MNE are likely to
make decisions that maximize the value of the subsidiary. Such actions probably
will not maximize the value of the entire firm.
17.4 Political Risk
Multiple Choice
1)
________ risks are those that affect the MNE at the local or project level, but
originate at the country level.
A)
Country-specific
B)
Firm-specific
C)
Global-specific
D) none of
the above
2) Which
of the following is NOT an example of a country-specific risk?
A)
transfer risk
B) war
and ethnic strife
C)
cultural and religious heritage
D) All
of the above are examples of country-specific risk.
3)
According to your authors, MNEs can anticipate government regulations that are
discriminatory or wealth depriving from a/an ________ or ________ level view.
A)
foreign; domestic
B)
micro; macro
C)
internal; external
D)
local; global
4)
________ is the ability to exercise effective control over a foreign subsidiary
within a country's legal and political environment.
A)
Political risk
B)
Portfolio risk
C)
Interest rate risk
D)
Governance risk
5) Of
the following, which would NOT be considered an issue for an investment agreement
prior to investing in a foreign country?
A) the
basis for setting transfer prices
B) the
right to export to third-country markets
C)
provision for arbitration of disputes
D) All
of the above could be negotiated prior to investing.
6) OPIC
stands for:
A)
Organization for the Prevention of Insufficient Capitalization.
B)
Organization of Petroleum Importing Countries.
C)
Overseas Private Investment Corporation.
D)
Overseas Public Insurance Commission.
7)
________ is a type of political risk that OPIC does NOT cover.
A)
Inconvertibility
B)
Expropriation
C) War
D) OPIC
covers all of the above.
8)
________ is the risk that the host government will take specific steps that
prevent the foreign affiliate from exercising control over the firm's assets.
A)
Inconvertibility
B)
Expropriation
C)
Business income risk
D) none
of the above
9)
________ is NOT one of the three main country-specific risks as outlined by
your authors.
A)
Transfer risk
B)
Cultural differences
C) Thin
equity base
D) Protectionism
10) Of
the following, which was NOT identified by the authors as a type of cultural
difference that MNEs must consider when expanding to foreign countries?
A)
differences in human resource norms
B)
differences in religious heritage
C) differences
in allowable ownership structures
D) All
of the above must be considered.
11) An
alternative strategy to engaging in bribery in international investments
include:
A)
refuse bribery outright.
B)
retain local advisors to diffuse requests for bribes.
C)
educate management and local employees about the firm's bribery policy.
D) all
of the above
12)
________ industries are NOT typically "protected" by government
policy.
A)
Textiles
B)
Defense
C)
Agriculture
D)
"Infant" industries
13) Forming
regional alliances is one way to help mitigate the practice of government
protectionism. Which of the following is NOT a regional trade organization
formed by government treaty?
A) EU
B) NAFTA
C) NATO
D)
MERCOSUR
14)
Terrorism, cyber attacks, and the anti-globalization movement are each examples
of ________ risks.
A)
firm-specific
B)
country-specific
C)
institutional
D)
global-specific
15)
Governance risk due to goal conflict between an MNE and its host government is
the main political ________ risk.
A)
firm-specific
B)
country-specific
C)
global-specific
D)
cultural-specific
16) The
speed at which inventory moves through a manufacturing process is known as:
A)
supply chain management.
B)
working capital management.
C)
inventory velocity.
D) warp
speed.
17) As a
result of the terrorist attacks of September 11, 2001, many firms have employed
a wide range of tactics to ensure continued flow of inventory in the face of
government steps to curb terrorism. Which of the following is an inventory
sourcing strategy response (as opposed to an inventory management response, or
a transportation response)?
A)
carrying more inventory on-hand
B)
minimizing cross-border exposure from suppliers
C)
shifting to air cargo shipments instead of co-habitation of products and
passengers on commercial air flights
D)
increasing the on-hand supply of critical parts
18)
Blocked funds are cash flows that:
A) come
in regular intervals in standardized amounts or blocks.
B) have
been restricted in transfer out of a local country.
C) come
from a certain sector or region of the world.
D) none
of the above
19) A
________ loan, also known as ________ is a parent-to-affiliate loan channeled
through a financial intermediary such as a large commercial bank.
A)
fronting; link financing
B)
parallel; a back-to-back loan
C)
fronting; a back-to-back loan
D) link
financing; parallel loan
20)
Which of the following is NOT a typical characteristic of a fronting loan made
to an international subsidiary?
A) The
parent makes a deposit equal to the size of the desired loan into a large
commercial bank.
B) The
bank lends to the subsidiary firm an amount equal to the parent deposit at a
slightly higher interest rate.
C) The
lending bank is located in the subsidiary's country.
D) All
of the above are typical characteristics of a fronting loan.
21)
Which of the following could be considered an example of forced reinvestment if
the blockage of funds was expected to be temporary?
A)
vertical reinvestment by an automobile manufacturer to buy parts suppliers and
showrooms
B) A
lumber cutting company subsequently builds a paper mill with blocked funds.
C)
purchase of local money market instruments and short-term loans
D) all
of the above
True/False
1) When
faced with additional risk from a foreign investment, firms typically account
for the additional risk by adjusting the discount rates or by adjusting cash
flows.
2) A
number of institutional services provide updated country risk ratings on a
regular basis. This is an example of micro-risk information for MNEs using this
data.
3) A
country can react to the potential for blocked funds prior to making an
investment, during operations, or by investing in the local country in assets
than maintain their value.
4) Banks
are very hesitant to engage in fronting loans because of the low probability of
repayment and thus their risk exposure up to a 100% loss.
5) Many
problems such as poverty, environmental concerns, and cyber attacks are beyond
the capabilities of MNEs alone to correct and require government participation
as well.
6)
Business risk can be measured through sensitivity analysis but from only the
project viewpoint.
Essay
1) What
are blocked funds? List and explain two of the three methods the authors list
in this chapter for dealing with blocked funds.
Chapter 18 Multinational Capital Budgeting and
Cross-Border Acquisitions
18.1 Complexities of Budgeting for a Foreign
Project
Multiple Choice
1) The
traditional financial analysis applied to foreign or domestic projects, to
determine the project's value to the firm is called:
A) cost
of capital analysis.
B)
capital budgeting.
C)
capital structure analysis.
D)
agency theory.
2) Which
of the following is NOT a basic step in the capital budgeting process?
A)
Identify the initial capital invested.
B)
Estimate the cash flows to be derived from the project over time.
C)
Identify the appropriate interest rate at which to discount future cash flows.
D) All
of the above are steps in the capital budgeting process.
3) Of
the following capital budgeting decision criteria, which does NOT use
discounted cash flows?
A) net
present value
B)
internal rate of return
C)
accounting rate of return
D) All
of these techniques typically use discounted cash flows.
4) Which
of the following is NOT a reason why capital budgeting for a foreign project is
more complex than for a domestic project?
A)
Parent cash flows must be distinguished from project cash flows.
B)
Parent firms must specifically recognize remittance of funds due to differing
rules and regulations concerning remittance of cash flows, taxes, and local
norms.
C)
Differing rates of inflation exist between the foreign and domestic economies.
D) All
of the above add complexity to the international capital budgeting process.
5) For
purposes of international capital budgeting, which of the following statements
is NOT true?
A)
Managers must evaluate political risk because political events can drastically
reduce the value or availability of expected cash flows.
B)
Parent cash flows must be distinguished from project cash flows. Each of these
two types of flows contributes to a different view of value.
C) An
array of nonfinancial payments can generate cash flows from subsidiaries to the
parent, including payment of license fees and payments for imports from the
parent.
D) All
of the above are true statements.
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