Deck 18: Foreign Direct Investment Theory and Political Risk

Question 1

A/n ________ 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

Answer 1

possession of proprietary information

Question 2

Which of the following is NOT a form of FDI?

A)Wholly-owned affiliate.
B)Joint venture.
C)Exporting.
D)Greenfield investment.

Answer 2

Exporting.

Question 3

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.

Answer 3

Fewer agency costs.

Question 4

A ________ is a shared ownership in a foreign business.

A)licensing agreement
B)greenfield investment
C)joint venture
D)wholly-owned affiliate

Question 5

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

Question 6

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

Question 7

A/n ________ 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

Question 8

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.

Question 9

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

Question 10

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

Question 11

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.

Question 12

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

Question 13

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.

Question 14

List and explain three strategic motives why firms become multinationals and give an example of each.

Question 15

What does the OLI Paradigm propose to explain? Define each component and provide an example of each.

Question 16

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

Question 17

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.

Question 18

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

Question 19

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.

Question 20

A/n ________ 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

Question 21

________ 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 22

________ 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 23

Joint ventures are a more common FDI than wholly owned subsidiaries.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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

Question 28

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.

Question 29

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 30

Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.

Question 31

________ 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 32

MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.

Question 33

Which of the following is the motivation for making foreign direct investment?

A)Knowledge seeking.
B)Market seeking.
C)Raw material seeking.
D)all of the above

Question 34

________ 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 35

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 36

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.

Question 37

According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a ________ or ________ level view.

A)foreign; domestic
B)micro; macro
C)internal; external
D)local; global

Question 38

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 39

________ 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 40

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.

Question 41

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

Question 42

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

Question 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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

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

Question 56

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.