Question 1

Relative to MNEs, purely domestic firms tend to have GREATER political risk.

Accepted Answer

Political risk refers to the potential for political actions or events to negatively impact a company's profitability or operations. MNEs, being multinational in nature, have a greater exposure to political risk as they operate in various countries with different political systems and regulations. On the other hand, purely domestic firms operate within a single country, which may have a relatively stable political system, thereby facing less political risk.

Question 2

________ investments are designed to promote and enhance the growth and profitability of the firm. ________ investments are designed to deny those same opportunities to the firm's competitors.

Accepted Answer

Proactive investments are investments made with the intention of promoting and enhancing the growth and profitability of the firm. Defensive investments, on the other hand, are investments made to protect the firm from potential threats or risks, such as downturns in the market, regulatory changes, or new competition. Therefore, the answer is C, as it describes the two types of investments mentioned in the question.

Question 3

Because countries have different financial regulations and customs, it is common for MNEs to apply their domestic rules and regulations when doing financial business in a foreign country.

Accepted Answer

MNEs must comply with the financial regulations and customs of the foreign country where they operate, rather than applying their domestic rules and regulations. Failure to comply with local regulations can result in legal and financial consequences, such as fines and damage to the company's reputation.

Question 4

The five strategic motives driving the decision to invest abroad and become an MNE (market seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political safety seekers) are mutually exclusive.

Accepted Answer

The five strategic motives are not mutually exclusive and a single MNE may have multiple motives for investing abroad. For example, a company may seek to access new markets while also seeking lower production costs or raw materials. Additionally, political safety considerations may be a factor in any of the other strategic motives.

Question 5

A number of financial instruments that are used in domestic financial management have been modified for use in international financial management. Examples are foreign currency options and futures, interest rate and currency swaps, and letters of credit.

Accepted Answer

This statement is true, as financial instruments such as foreign currency options and futures, swaps, and letters of credit are used in both domestic and international financial management, although they may have some modifications or adaptations for use in cross-border transactions.

Question 6

Defensive measures are designed to enhance growth and profitability of the firm itself.

Accepted Answer

Defensive measures are designed to protect the firm from potential risks or threats, rather than enhance growth and profitability. Examples of defensive measures include implementing a cybersecurity system or acquiring insurance policies to hedge against unforeseen events. Offensive measures, on the other hand, are designed to promote growth and profitability, such as expanding into new markets or investing in research and development.

Question 7

MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities.

Accepted Answer

MNEs operate in multiple countries with varying economic, legal, and political systems. These complexities can affect the cost of capital and capital budgeting decisions. Therefore, MNEs must modify traditional finance theories to account for these foreign complexities.

Question 8

In the recent past, much of the business development in multinational firms was led by cross-functional teams, teams of professionals who are competent over a broader array of functional fields. Develop an argument as to why this is the case.

Accepted Answer

The answer of In the recent past, much of the...

Question 9

Although international trade might have approached the comparative advantage model during the nineteenth century, it certainly does not today, for a variety of reasons. Develop an argument as to why this is not happening today.

Accepted Answer

The answer of Although international trade might have approached the...

Question 10

Large international firms are better able to exploit product differentiation than are their local competitors.

Accepted Answer

Large international firms have more resources, such as higher budgets for research and development, marketing, and distribution, allowing them to develop and promote their unique products more effectively than local competitors. Additionally, they can leverage their global brand recognition to differentiate themselves from local brands in the minds of consumers. This provides a competitive advantage that is difficult for local firms to match.

Question 11

Domestic firms do not have foreign exchange risk.

Accepted Answer

Domestic firms can have foreign exchange risk if they have operations or transactions involving foreign currencies. Fluctuations in exchange rates can impact the profitability and cash flows of these firms.

Question 12

In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a knowledge seeker. They operate in foreign countries to exploit existing technological expertise.

Accepted Answer

The answer of In determining why a firm becomes multinational...

Question 13

As the general principle of comparative advantage is still valid, complete specialization remains a realistic case.

Accepted Answer

While the general principle of comparative advantage is still valid, complete specialization is not considered a realistic case because it ignores the risks associated with dependency on one particular product or service. Most countries and businesses today practice partial specialization, meaning they focus on producing a few products or services they have a comparative advantage in, while still maintaining some level of diversification to mitigate risks.

Question 14

Which of the following is NOT always understood by MNE management?

Accepted Answer

MNE (Multinational Enterprise) management may not always fully understand culture, history, and institutions, as these are complex, vary greatly between countries, and require deep local knowledge. Political risk, foreign exchange risk, and financial instruments are more standardized areas of knowledge in international business.

Question 15

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

Accepted Answer

The answer of List and explain three strategic motives why...

Question 16

Which of the following domestic financial instruments have NOT been modified for use in international financial management?

Accepted Answer

All the options listed (currency options and futures, interest rate and currency swaps, letters of credit) are domestic financial instruments that have been adapted for use in international financial markets to manage risks associated with currency exchange rates, interest rates, and international trade transactions.

Question 17

Domestic firms tend to make GREATER use of financial derivatives than MNEs because they can bear the greater risk presented by these financial instruments.

Accepted Answer

This statement is not accurate. In fact, MNEs are typically larger and more diversified than domestic firms, which means they are better equipped to handle risk. Therefore, MNEs are more likely to use financial derivatives to manage their exposure to risk.

Question 18

In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms produce in foreign countries?

Accepted Answer

Political safety and small likelihood of government expropriation of assets are typically cited as reasons for resource-seeking firms to invest in foreign countries, not market-seeking firms. Market-seeking firms produce in foreign countries to satisfy local demand or to export to foreign markets. Therefore, option C is NOT a reason why market-seeking firms produce in foreign countries.

Question 19

For firms competing in a world characterized by oligopolistic competition, strategic motives can be subdivided into proactive and defensive investments.

Accepted Answer

This statement is true. Proactive investments refer to investments made to gain a competitive advantage over rivals while defensive investments refer to investments made to protect existing market position and prevent rivals from gaining an advantage.

Question 20

In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a raw material seeker. Which of the following is NOT a reason why raw material seeker extract raw materials in foreign countries?

Accepted Answer

Raw material seekers typically extract materials to export or process them elsewhere, not necessarily for sale or further processing in the host country.

Quiz 1: Multinational Financial Management: Opportunities and Challenges