Deck 13: Direct Foreign Investment

Question 1

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar.  Which of the following is true

A) Japanese exporters can increase American sales by shift ing operations from their British subsidiaries to Japan.
B) British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
C) American exporters can increase sales to Japan by shift ing operations from Japanese subsidiaries to American subsidiaries.
D) B and C

Answer 1

A

Question 2

Assume a U.S.firm initiates direct foreign investment in the U.K..  If the British pound is expected to appreciate against the dollar,the dollar value of earnings remitted to the parent should _______.  The parent may request that the subsidiary _______ in order to benefit from the expectation about the pound.

A) increase;postpone remitting earnings until the pound strengthens
B) decrease;postpone remitting earnings until the pound strengthens
C) decrease;remit earnings immediately before the pound strengthens
D) increase;remit earnings immediately before the pound strengthens

Answer 2

A

Question 3

If countries are highly influential upon each other,the correlations of their economic growth levels would likely be __________.  A firm would benefit __________ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.

A) high and positive;more
B) close to zero;more
C) high and positive;less
D) close to zero;less

Answer 3

C

Question 4

Even if production costs are higher in a foreign country,a U.S.firm may establish a manufacturing plant in the foreign country now if:

A) the host government of that country eliminates all quotas.
B) the host government of that country reduces all quotas.
C) the host government of that country increases all quotas.
D) the host government of that country eliminates all tariffs.

Question 5

According to the text,a firm may be able to achieve a "more efficient" project portfolio if it:

A) focuses solely on one product.
B) focuses solely on one location to market what it produces.
C) A and B
D) none of the above

Question 6

A country with high unemployment could best increase its employment by:

A) encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
B) encouraging foreign firms to establish licensing arrange ments for products local firms produce.
C) encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
D) none of the above would reduce employment.

Question 7

According to information in the text,a host government would be least likely to provide incentives for direct foreign investment (DFI)into its country if the firm planning DFI:

A) would compete with local firms of the host country.
B) would produce a good not currently available in the host country.
C) would produce a good and export it to other countries.
D) B and C

Question 8

According to your text,_______________ is a country that has been perceived as one of the most attractive sources of new demand.

A) Paraguay
B) Morocco
C) Sweden
D) China

Question 9

Based on the text,it should be obvious that markets are__________ in reality,and consequently,monopolistic advantages _________ be exploited.

A) perfect;may possibly
B) perfect;cannot
C) imperfect;may possibly
D) imperfect;cannot

Question 10

The __________ a project's variability in cash flows,and the __________ the positive correlation between the project's cash flow and MNC's cash flow,the lower the risk of the project.

A) higher;higher
B) higher;lower
C) lower;lower
D) lower;higher

Question 11

Direct foreign investment would typically be welcomed if:

A) the products to be produced are substitutes for other locally produced products.
B) people from its headquarters country are transferred to the foreign country to work at the subsidiary.
C) the products to be produced are going to be exported.
D) all of the above

Question 12

When a firm analyzes the feasibility of a project,it should consider the:

A) variability of the project's cash flow.
B) correlation of the project's cash flow relative to the prevailing cash flows of the MNC.
C) A and B
D) none of the above

Question 13

Most of the DFI by U.S.firms is Mexico.

Question 14

Which of the following is a reason to consider international business

A) economies of scale.
B) exploit monopolistic advantages.
C) diversification.
D) all of the above

Question 15

From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:

A) is the top point.
B) is the point closest to the vertical axis.
C) is the point half way between the two end points.
D) cannot be determined since firms vary in their willing ness to accept risk.

Question 16

Direct foreign investment is perceived by foreign governments to:

A) be a cause of national problems.
B) be a remedy for national problems.
C) either A or B is possible.
D) have no impact on national problems.

Question 17

A firm will likely benefit most from diversifying if:

A) the correlations between country economies are high.
B) the correlations between country economies are low.
C) the variability of all country economy levels is high.
D) B and C

Question 18

Consider a country that presently has a high level of unemployment because of weak economic conditions.Its income levels are very low.This country may be an attractive target as a result of ______ motives by U.S.firms that engage in direct foreign investment.

A) revenue-related
B) cost-related
C) A and B
D) none of the above

Question 19

When a foreign currency is perceived by a firm to be undervalued,the firm may consider direct foreign investment in that country,as the initial outlay should be relatively low.

Question 20

Consider Firm "A" and Firm "B" that both produce the same product.  Firm "A" would more likely have more stable cash flows if its percentage of foreign sales were __________ and the number of foreign countries it sold products to was __________.

A) higher;large
B) higher;small
C) lower;small
D) higher;large

Question 21

The best means to accomplish the revenue-related motive of attracting new sources of demand is to:

A) acquire a competitor that has controlled its local market.
B) establish a subsidiary or acquire a competitor in a new market.
C) establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
D) establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 22

To fully benefit from economies of scale,an MNC should:

A) establish a subsidiary in a new market that can sell products produced elsewhere.
B) establish a subsidiary in a market that has relatively low costs of labor or land.
C) establish a subsidiary in a market where raw materials are cheap and accessible.
D) participate in a joint venture in order to learn about a production process or other operations.

Question 23

Countries that became part of the European Union in 2004 had high labor and production costs and therefore were not targeted for new DFI by MNCs that wanted to reduce manufacturing costs.

Question 24

______________ is not a revenue-related motive for direct foreign investment.

A) Attracting new sources of demand
B) Fully benefiting from economies of scale
C) Exploiting monopolistic advantages
D) Entering profitable markets

Question 25

Which of the following is not true regarding the efficient frontier considered by MNCs

A) There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.
B) The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects.
C) Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
D) A and C are false.
E) All of the above are true.

Question 26

When economic conditions of two countries are ________,then a firm would _______ its risk by operating in both countries instead of concentrating just in one.

A) highly correlated;reduce
B) not highly correlated;not reduce
C) not highly correlated;reduce
D) none of the above

Question 27

When a firm perceives that a foreign currency is _________,the firm may attempt direct foreign investment in that country,as the initial outlay should be relatively _______.

A) overvalued;high
B) overvalued;low
C) undervalued;high
D) undervalued;low

Question 28

____________ is not a cost-related motive for direct foreign investment.

A) Exploiting monopolistic advantages
B) Fully benefiting from economies of scale
C) Uses foreign factors of production
D) Using foreign raw materials

Question 29

To use foreign factors of production,an MNC should:

A) establish a subsidiary in a new market that can sell products produced elsewhere.
B) establish a subsidiary in a market that has relatively low costs of labor or land.
C) establish a subsidiary in a market where raw materials are cheap and accessible.
D) participate in a joint venture in order to learn about a production process or other operations.

Question 30

Which of the following is not an advantage resulting from the Asian crisis that would favor direct foreign investment in Asia

A) strong local demand for products.
B) low production costs.
C) weak local currencies.
D) all of the above are advantages.

Question 31

Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)

A) Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
B) Host governments generally perceive DFI as a remedy to eliminate a country's political problems.
C) The ability of a host government to attract DFI is dependent on the country's markets and resources.
D) Some types of DFI will be more attractive to some governments than to others.
E) All of the above are true.

Question 32

Along the frontier of efficient project portfolios,exactly one portfolio can be singled out as "optimal" for all MNCs.

Question 33

MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.

Question 34

Some governments restrict foreign ownership of local firms.Such restrictions may limit or prevent international acquisitions.

Question 35

Assume the correlation coefficient between the returns on the existing project and the return on a proposed foreign project is 1.Also assume the returns on existing project and the new project are equal,and that the existing project has a lower standard deviation than the proposed project.Under this scenario,undertaking the proposed project will ___________ the variance of the firm's overall returns.

A) decrease
B) increase
C) decrease or increase, depending on the exact size of the returns and standard deviations
D) none of the above

Question 36

They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

Question 37

To enter markets where superior profits are possible,an MNC should:

A) acquire a competitor that has controlled its local market.
B) establish a subsidiary or acquire a competitor in a new market.
C) establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
D) establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 38

To exploit monopolistic advantages,an MNC should:

A) acquire a competitor that has controlled its local market.
B) establish a subsidiary or acquire a competitor in a new market.
C) establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume.
D) establish subsidiaries in markets where competitors are unable to produce the identical product.

Question 39

Generally speaking,direct foreign investment by U.S.firms is common in ________ but not to common in _________.

A) Europe;Canada
B) Asia;Europe
C) Europe;Asia
D) none of the above

Question 40

____________ is not a disadvantage of direct foreign investment.

A) The expense of establishing a foreign subsidiary
B) The uncertainty of inflation and exchange rate movements
C) Political risk
D) All of the above are disadvantages of direct foreign investment

Question 41

Although direct foreign investment is sometimes conducted,benefits are rarely realized.

Question 42

In assessing the risk of an individual project,the expected correlation of the new project's returns with those of the prevailing business should be considered.

Question 43

Direct foreign investment (DFI)represents investment in real assets (such as land,buildings,or even existing plants)in foreign countries.

Question 44

Due to market imperfections,the cost of factors of production (such as labor)may differ substantially across countries.

Question 45

MNCs often attempt to set up production in locations where land and labor are expensive,because expensive factors of production indicate high demand.