Deck 18: Political Risk Assessment and Management

Question 1

Adjusting the discount rate to account for increased political risk is almost always the best possible way to account for risk.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

All of the above are examples of country-specific risk.

Question 4

________ is a type of political risk that OPIC does NOT cover.

A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.

Question 5

Which of the following is NOT an example of a subjective measure gathered by institutional researchers?

A) a local country's ranking for political stability
B) a local country's ranking for economic stability
C) a local country's unemployment rate
D) All of the above are subjective measures.

Question 6

FDI may require firms to be flexible in how they do business. Which of the following is NOT a potential problem associated with a firm adapting to a government requirement of local sourcing?

A) a lack of local economies of scale to produce needed raw materials
B) unreliable delivery schedules on the part of local firms
C) uncertain quality control
D) All of the above are potential forced local sourcing problems.

Question 7

Which of the following is NOT a strategy to measure and manage foreign investment risks?

A) sensitivity analysis
B) diversification
C) insurance
D) All are strategies to measure and manage foreign investment risk.

Question 8

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.

Question 9

Of the following, which would NOT be considered a firm-specific risk?

A) the risk of getting new management
B) management policies toward hedging foreign exchange risk
C) parent company policy toward management of local subsidiaries
D) All could be considered firm-specific risk.

Question 10

________ is the risk that the investor will not be able to convert profits, royalties, or fees into dollars.

A) Inconvertibility
B) Expropriation
C) Business income risk
D) None of the above

Question 11

________ 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

Question 12

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.

Question 13

________ 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

Question 14

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.

Question 15

________ 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

Question 16

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.

Question 17

The possibility of suffering harm or loss, or a course involving uncertain danger or hazard is a definition of ________.

A) risk
B) standard deviation
C) beta
D) variance

Question 18

An FDI project that enters a country for the purpose of constructing an assembly facility for products that are to be re-exported is an example of ________.

A) resource seeking behavior
B) market seeking behavior
C) production seeking behavior
D) labor seeking behavior

Question 19

Which of the following would be a shortcoming of adjusting discount rates to account for the increased risk of foreign investments?

A) The actual size of the cash inflows may vary from the expected values.
B) The timing of the cash flows are unknown.
C) Treating the uncertain cash flows as if they were one-sided risks rather than two-sided risks.
D) None of the above.

Question 20

________ 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

Question 21

________ industries are NOT typically "protected" by government policy.

A) Textiles
B) Defense
C) Agriculture
D) "Infant" industries

Question 22

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.

Question 23

Sovereign risk is the danger

A) that the country's royalty will be overthrown in a military coup.
B) that a country will need to pay a risk premium to investors in order to raise funds at home or abroad.
C) that country's royal family is unfit to rule.
D) none of the above.

Question 24

Business risk can be measured through sensitivity analysis but from only the project viewpoint.

Question 25

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.

Question 26

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.

Question 27

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

Question 28

The U.S. Treasury bond is considered to be a "risk-free" security because the payment of principal and interest

A) will be adjusted for inflation.
B) will be adjusted for changes in the U.S. dollar's yield curve.
C) will be paid because the U.S. government has the ability to create money to repay bondholders.
D) all of the above are true.

Question 29

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.

Question 30

________, also known as micro risks, are political risks that affect the MNE at the project and corporate level but do not originate at the country level.

A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Transfer risks

Question 31

________ is an acceptable method of adjusting for risk when analyzing the prospects of a foreign investment.

A) Adjusting the discount rate
B) Adjusting the cash flows
C) Conducting sensitively and scenarios analysis
D) All of the above

Question 32

The Scandinavian countries such as Denmark, Finland, and Sweden, are perceived as having the lowest level of corruption in the world.

Question 33

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

Question 34

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

Question 35

Which of the following are NOT among the leaders in the world's anti-globalization movement?

A) MNEs
B) environmentalists
C) unions whose workers lose jobs as a result of trade pacts such as NAFTA
D) those opposed to the loss of cultural identity due to combinations such as the European Union

Question 36

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.

Question 37

As of 2007, the United States government has been a willing participant and co-sponsor of international treaties to reduce pollution worldwide.

Question 38

Government authorities are more likely to allow subsidiary repayment of a loan to a large international bank than to a parent firm because

A) stopping payment to an international bank would have a negative impact on the credit image of the country.
B) the government is also borrowing money from that bank and wants a larger loan before they choose to default.
C) corrupt government officials have accounts at the bank and they have made an under-the-table agreement not to withhold funds from that bank.
D) none of the above are true.

Question 39

A foreign investment undertaken by an MNE that is considered risky from a political and currency perspective may still be undertaken because:

A) The investor is forming a strategic alliance with a domestic partner.
B) The MNE is basing its foreign investment decisions on a portfolio basis.
C) The MNEs management does not believe that risk can be measured or predicted.
D) The investor knows that they will be more than adequately compensate for accepting higher risk.

Question 40

Which of the following is NOT a technique for moving blocked funds out of a country?

A) use fronting loans
B) create unrelated exports
C) obtain a special dispensation
D) All of the above are techniques for moving blocked funds.

Question 41

Over the last three decades, the country of Zimbabwe has suffered ________.

A) hyperinflation
B) hyperunemployment
C) a drastic reduction in life expectancy
D) all of the above

Question 42

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

Question 43

Negotiations under the General Agreement on Tariffs and Trade (GATT) have NOT had much impact on reducing the level of tariffs over the last several decades.

Question 44

Macro political risk analysis is likely to include all but which of the following?

A) analysis of a country's historical stability
B) evidence of present turmoil or dissatisfaction with the current government
C) indications of economic stability or instability
D) All of the above are likely to be included in a macro political analysis.

Question 45

According to surveys reported in March 2007, which country had the highest value (least risk) on a country-wide economic risk scale?

A) Indonesia
B) Brazil
C) Finland
D) Russia

Question 46

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

Question 47

Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks.

A) firm-specific
B) country-specific
C) institutional
D) global-specific

Question 48

The USA has a value of 7.4 on the 2007 Corruption Perception Index. Although this value does not put the USA at the top of the list, the USA is still perceived as one of the ________ least corrupt countries in the world in which to do business.

A) 5
B) 10
C) 15
D) 20

Question 49

Which of the following would NOT be considered a non-tariff barrier to trade?

A) inconsistent customs and administrative entry procedures
B) unduly stringent or discriminating standards imposed on imports in the name of protecting health, safety, and quality
C) established import procedures that make importing more difficult
D) All of the above are non-tariff trade barriers.

Question 50

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) minimize 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

Question 51

What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.

Question 52

Generally, firms adjust for the additional risk from investing in foreign locations using one of two techniques. List and explain the two techniques, cite advantages and disadvantages of each, and provide an example of when each might be most appropriate.

Question 53

________, also known as macro risks, are political risks that affect the firm at the project or corporate level but originate at the country level.

A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Governance risks

Question 54

Zimbabwe ranks 150th on the 2007 Corruption Perception Index. Thus, despite the country's economic woes, it still perceived as having low levels of government corruption.

Question 55

Which of the following is NOT an established regional market designed in part to reduce protectionism and trade barriers among members?

A) The European Union
B) NAFTA
C) MERCOSUR
D) All are regional markets.

Question 56

Transfer risk concerns mainly the problem of ________.

A) governance risk
B) cultural risk
C) blocked funds
D) environmental concerns