Deck 15: Foreign Direct Investment and Cross-Border Acquisitions

Question 1

Foreign direct investment is undertaken via:

A) buying bonds in a foreign company.
B) buying 1% of the equity capital of a foreign company.
C) buying substantial degree of the equity capital of a foreign company.
D) can only be done when a foreign subsidiary is built up from scratch.

Answer 1

C

Question 2

Control 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 these.

Answer 2

B

Question 3

Which of the following is an example of a transfer risk:

A) Risk of involuntary transfer of the firm's ownership from foreign shareholders to the government of the host country through expropriation.
B) A possibility that the host country government will impose the restriction on the percentage of the foreign ownership in which case new equity must be issued and the current foreign shareholders will effectively lose control over the firm although they will be compensated for their shares of control over the firm.
C) Risk that the firm's shares will not be allowed to be listed on the host country stock exchange, which reduces the ability to freely transfer the ownership.
D) Restriction on the cross-border flow of capital.

Answer 3

D

Question 4

Political risk can be evaluated by studying:

A) the host country's political and government system.
B) key economic indicators.
C) regional security.
D) All of these.

Question 5

Some of the risks that a Canadian 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 Canada,the Export Development Canada (EDC)offers insurance against which of the above:

A) (i), (ii), (iii), and (iv)
B) (v), (vi), (vii), and (viii)
C) (iv), (v), (vi), and (vii)
D) None of these.

Question 6

The following are barriers to trade except:

A) Tariffs
B) Transportation costs
C) Telecommunications
D) Import taxes

Question 7

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 these.

Question 8

An increase in political risk can be managed by:

A) adjusting a foreign investment project's NPV by either reducing its expected cash flows, or by increasing the cost of capital.
B) forming joint venture with a local company.
C) purchasing insurance against the hazard of political risk.
D) All of these.

Question 9

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 these.

Question 10

Synergistic gains refer 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 companies can save on the costs of production, marketing, distribution, and R&D standalone.
D) gains obtained when the companies face together into a competition for a particular product market.

Question 11

Which of the following is not an example of a political risk?

A) Expropriation.
B) Change in tax law.
C) An unanticipated depreciation of the foreign currency.
D) All of the these are examples of political risk.

Question 12

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) macro-economic risks.
C) micro-economic risks.
D) bankruptcy or high inflation rates.

Question 13

Country risk refers to:

A) transfer risk.
B) control risk.
C) political risk, credit risk and other economic performances.
D) every risk except political risk.

Question 14

Corruption is all of the following except:

A) a type of political risk.
B) illegal for Canadians abroad.
C) illegal in Canada.
D) Not a serious problem.

Question 15

Cross-border acquisition involves:

A) building new production facilities in a foreign country.
B) buying existing foreign business.
C) purchasing minor intangible assets in existing foreign business.
D) None of these.

Question 16

Examples of intangible assets of MNCs are all except:

A) production costs.
B) R&D capabilities.
C) marketing know-how.
D) managerial know-how.

Question 17

The key factors that are important in a firm's decision to invest overseas are:

A) Trade barriers, perfect labor market, and tangible assets.
B) product integration, product life cycle, and shareholder unification services.
C) profit maximization, global prestige, and competition.
D) Trade barriers, imperfect labor market, intangible assets, vertical integration, product life cycle, and shareholder diversification.

Question 18

Greenfield investment:

A) is an investment in agricultural industry.
B) is an investment in a an environmentally friendly technology.
C) can be a result of a cross-border acquisition of any existing and operational business abroad.
D) None of these.

Question 19

The most important mode of entering into a foreign market via FDI in the last few years is:

A) greenfield investments.
B) brownfield investments.
C) mergers & acquisitions.
D) All modes are equally important.

Question 20

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 these.

Question 21

Explain political risk and its three main classifications.How can political risk be incorporated in the decision making process when firms decide on whether to invest in foreign project or not?

Question 22

The communist victory in China in 1949 is an example of:

A) micro risk.
B) macro risk.
C) both micro and macro risk.
D) None of these.

Question 23

How can firms establish a wholly owned subsidiary in a foreign country?
What are the advantages and disadvantages of each method?

Question 24

Explain the role of market imperfections in FDI.

Question 25

ABC Inc.,located in Vancouver,BC wants to buy XYZ Inc.,located in Seattle,WA.What does the ABC Inc.have to consider so that the acquisition will be successful?

Question 26

What percentage of FDI originated in developed countries during the past decade?

A) 60%
B) 80%
C) 90%
D) 95%

Question 27

Political risk is classified into:

A) macro- and micro risk
B) major- and minor risk
C) macro- and minor risk
D) major- and micro risk

Question 28

How can Export Development Canada (EDC)help firms to deal with political risk?