Deck 12: Foreign Market Entry and Country Risk Management

Question 1

New products typically are tested in foreign markets and then introduced into the home market.

Answer 1

False

Question 2

The MNC is exposed to country risk when unexpected events occur in a host country.

Answer 2

False

Question 3

The main reason for investment-based foreign market entry is to minimize cultural risk.

Answer 3

False

Question 4

Foreign direct investment requires a relatively large resource commitment from the parent firm.

Question 5

Contract-based modes of entry into foreign markets include licensing and franchising.

Question 6

Political risk is the risk that politics in a host government will unexpectedly change the rules of the game under which businesses operate.

Question 7

Licensing provides quick and relatively low-risk entry into foreign markets as long as the parent can protect its intellectual property rights.

Question 8

In a sense, political risk indices reflect a country's willingness to repay its loans, whereas financial risk indices reflect a country's ability to repay its loans.

Question 9

Political risk includes any changes in the political climate that are expected over a particular period of time.

Question 10

The easiest mode of entry into foreign markets is foreign direct investment.

Question 11

The country risk indices produced by companies that assess country risk use identical risk rating systems according to the conventions of the United Nations' Model Treatment of Country Risk.

Question 12

The country risk indices produced by companies that assess country risk tend to reflect the same underlying economic phenomena.

Question 13

Country risk is the risk that the business environment in a host country will change unexpectedly.

Question 14

Country risk indices are used by international lenders to judge the risks of lending to a particular country.

Question 15

The objectives of foreign governments and multinational corporations are seldom in conflict.

Question 16

The sales and marketing benefits of foreign direct investment are usually less than those of export entry into foreign markets.

Question 17

Foreign direct investment is when a multinational corporation builds productive capacity in a foreign country.

Question 18

In the context of country risk assessment, financial risk refers to the risks of a particular financial instrument, such as a currency option contract.

Question 19

Exporting through a foreign sales agent requires little resource commitment and helps to insulate the exporter from the costs and risks of foreign market entry.

Question 20

Corporations often try to extend their product life cycles by entering foreign markets.

Question 21

Protectionism refers to the natural inclination of the multinational corporation to protect its intellectual property rights.

Question 22

For manufacturing firms with patents, the most important difference between the various foreign market entry modes for manufacturing firms is in whether or not the parent firm maintains control of ______.

A) distribution
B) marketing
C) packaging
D) production
E) purchasing

Question 23

An investment agreement between an MNC and a host country reduces the likelihood of opportunistic behavior on the part of one or both parties.

Question 24

Resource commitment is highest for which foreign market entry mode?

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) foreign direct investment
D) foreign joint venture
E) licensing

Question 25

The risk of expropriation can usually be handled in a capital budgeting analysis by assuming that expropriation risk affects expected future cash flows, but not investors' required return.

Question 26

Entry modes into international markets include each of a) through d) EXCEPT

A) exporting
B) franchising
C) investment
D) licensing
E) Each of the above is an entry mode

Question 27

Diversifiable political risks should be included only in expected future cash flows and not in the required return on foreign investment.

Question 28

Political events are unforeseeable, so there is little reward in trying to anticipate and plan for negative political outcomes.

Question 29

If a multinational corporation knows with certainty that a foreign tax rate will be increased by 10 percent at the end of the current fiscal year, then this is a source of political risk.

Question 30

All else constant, a large and geographically diversified multinational corporation is more likely to need political risk insurance than a smaller, less diversified company with foreign operations in a single country.

Question 31

Protectionism refers to protection of local industries through tariffs, quotas, and regulations that discriminate against foreign businesses.

Question 32

A macro (micro) political risk is a political risk with a big (small) impact on the firm.

Question 33

Although the consequences of expropriation are severe, expropriation itself is relatively uncommon.

Question 34

Political risks are seldom insurable.

Question 35

Country risk ratings are based on quantitative, rather than on qualitative, factors.

Question 36

Intellectual property rights tend to be even more respected in the People's Republic of China than in the United States.

Question 37

Micro risks in country risk assessment are specific to an industry, company, or project.

Question 38

An example of an exposure to a macro political risk is an unexpected change in tax rates in a host country.

Question 39

An example of an exposure to a micro political risk is an unexpected assault by a foreign host government on a multinational corporation's transfer pricing policies.

Question 40

The most prevalent foreign political risk is the risk of expropriation.

Question 41

Political risk includes each of the following EXCEPT

A) expropriation
B) potential loss of intellectual property rights
C) protectionism
D) risks arising from dealing with an unfamiliar culture
E) the risk of disruptions in operations

Question 42

Problems in overcoming cultural distance are greatest with which of a) through c)?

A) exporting through foreign sales agents
B) foreign direct investment
C) licensing
D) problems of cultural distance are approximately the same in each of the above
E) problems of cultural distance are generally not a problem for any of the above

Question 43

The most important element of a successful partnership is in ______.

A) choosing the right partner
B) limiting the scope of the technology transfer
C) limiting the transferability of the technology by contract
D) removing the threat by acquiring the assets of the foreign partner
E) using only assets near the end of their product life cycle

Question 44

Capital market investment restrictions are the biggest obstacle for ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) licensing
D) foreign acquisition
E) foreign joint venture

Question 45

Companies that rate country risk ______.

A) produce country risk ratings that are positively correlated with each other
B) produce country risk ratings that are negatively correlated with each other
C) produce country risk ratings that are uncorrelated with each other
D) seldom provide assessments of micro risks
E) use Morgan Stanley Dean Witter's rating system to produce their ratings

Question 46

Import barriers on manufactured goods are the biggest obstacle for ______.

A) exporting through domestic sales agents
B) licensing
C) foreign direct investment
D) foreign acquisitions
E) foreign joint ventures

Question 47

A central point of contention in the relationship between a manufacturer and a sales agent is ______.

A) the expected level of service in the foreign country
B) the resource commitment of the manufacturer
C) the termination or cancellation clause in the sales contract
D) whether the manufacturer maintains control over patents
E) whether the manufacturer maintains control over production

Question 48

Exposure to political risk is greatest with ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) licensing
D) foreign joint venture
E) foreign acquisition

Question 49

Examples of macro country risks include each of the following EXCEPT

A) unexpected changes in a host country's tax rates
B) unexpected changes in a host country's fiscal policies
C) unexpected changes in a host country's monetary policies
D) unexpected changes in a host country's bankruptcy or ownership laws
E) unexpected changes in a host country's regulations on the use of migrant workers

Question 50

The foreign market entry mode with the lowest sales potential is ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) foreign direct investments
D) foreign joint ventures
E) licensing

Question 51

Country risk can affect the value of a multinational corporation through ______.

A) changes in future cash flows
B) changes in investors' required return on investment
C) changes in managers' actions
D) More than one of the above
E) None of the above

Question 52

According to the text, sources of country risk include ______.

A) expropriation risk and default risk
B) expropriation risk and other political risks
C) financial risk and socioeconomic risk
D) political risk and financial risk
E) political risk and socioeconomic risk

Question 53

Political risks arise because of ______.

A) investment agreements between MNCs and host governments
B) the methods used to identify particular political risks
C) unexpected events in a country's financial, economic, or business life
D) unexpected changes in the political environment within a host country or in the relationship of a host country to another country
E) None of the above

Question 54

Strategies to preserve revenues include each of the following EXCEPT

A) follow the leader
B) follow the customer
C) lead the customer
D) preservation of market share
E) reduction of operating inefficiencies

Question 55

The fastest way to gain access to a foreign market is by ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) foreign acquisition
D) foreign direct investment
E) foreign joint venture

Question 56

A strategy for reducing operating costs is ______.

A) accessing new capital markets
B) developing economies of vertical integration
C) follow the customer
D) seek indirect diversification benefits
E) seek risk reduction through international asset diversification

Question 57

The potential loss of production technology is greatest with ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) licensing
D) foreign direct investment
E) foreign acquisition

Question 58

Corporate control over production is least with ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) licensing
D) foreign direct investment
E) foreign joint venture

Question 59

The best way to obtain foreign market entry is through ______.

A) exporting through foreign sales agents or branches
B) licensing
C) foreign direct investment
D) foreign joint venture
E) the best entry mode depends on the circumstance

Question 60

Control over marketing and distribution channels is least with ______.

A) exporting through foreign sales agents
B) exporting through foreign sales branches
C) licensing
D) foreign direct investment
E) foreign joint venture

Question 61

Political risk is greatest ______.

A) in monarchies
B) in democracies
C) as a result of armed conflict
D) when a country has a large trade deficit
E) when an incumbent political party imposes its agenda on foreign-based MNCs

Question 62

Political risk insurance can be obtained on which of a) through c)?

A) currency incontrovertibility
B) expropriation
C) repatriation restrictions
D) More than one of the above
E) None of the above

Question 63

A ______ is a proprietary idea, process, formula, technique, or device that a company uses to its competitive advantage.

A) copyright
B) patent
C) trademark
D) trade secret
E) None of the above

Question 64

Intellectual property rights include each of the following EXCEPT

A) copyrights
B) monopoly access to a market
C) patents
D) proprietary technologies
E) secret formulas

Question 65

Qualitative factors that affect country risk assessments include each of the following EXCEPT

A) cancellations of contracts by a host government
B) currency risk
C) loan defaults or restructurings
D) losses from exchange controls
E) payment delays

Question 66

Insurable political risks possess each of a) through d) EXCEPT

A) A large number of individuals or businesses are exposed to the risk.
B) The expected loss over the life of the contract is estimable.
C) The loss is identifiable in time, place, cause, and amount.
D) The loss is outside the influence of the insured.
E) Insurable political risks possess more than one of the above.

Question 67

Much of the 1990's growth in political risk insurance was due to ______.

A) increasing political uncertainty in developed countries
B) increasing political uncertainty in developing countries
C) the collapse of the Iron Curtain
D) the withdrawal of private insurers from the market
E) the growth in project finance

Question 68

A ______ can be obtained on processes, products, machines, and new chemical compounds.

A) copyright
B) patent
C) trademark
D) trade secret
E) None of the above

Question 69

Blocked funds are a drain on project value when ______.

A) a project suffers early losses
B) they are blocked in the host economy
C) they are generated by real assets
D) they cannot be immediately repatriated to the parent corporation
E) they cannot earn their required return in the host country

Question 70

Ways to limit the MNC's exposure to country risk include which of a) through d)?

A) enlist local partners
B) limit dependence on a single partner
C) limit the scope of the technology transfer
D) use more stringent investment criteria
E) More than one of the above

Question 71

The text describes each of the following strategies for managing country risk EXCEPT

A) disclose material risks in the firm's financial statements
B) negotiate the environment with the host country.
C) obtain political risk insurance.
D) plan for disaster recovery.
E) structure operations to minimize the MNC's risk exposure and maximize return.

Question 72

A ______ prohibits the unauthorized reproduction of creative works including books, magazines, drawings, paintings, musical compositions, and sound and video recordings.

A) copyright
B) patent
C) trademark
D) trade secret
E) None of the above

Question 73

A ______ is a distinctive name, word, symbol, or device used to distinguish a company's goods or services from those of its competitors.

A) copyright
B) patent
C) trademark
D) trade secret
E) None of the above

Question 74

Macroeconomic factors that affect country risk assessments include each of the following EXCEPT

A) currency risk
B) expropriation
C) inflation
D) interest rate risk
E) the current account balance