Deck 13: Direct Foreign Investment

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

Developing countries are mostly targeted for direct foreign investment because they have advanced technology.

Question 6

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

Question 7

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

Question 8

Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in Western Europe.

Question 9

Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders.

Question 10

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

Question 11

​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 12

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

Question 13

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

Question 14

Direct foreign investment is normally completed first, and then capital budgeting can be applied later.

Question 15

The overall variability of a firm's returns depends on the expected return of each individual project, the percentage of funds invested in each individual project, and the correlation coefficient of returns between the investments.

Question 16

Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.

Question 17

MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.

Question 18

Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the foreign country if the government of that country:

A) eliminates all quotas.
B) reduces all quotas.
C) imposes restrictive quotas.
D) eliminates all tariffs.

Question 19

The most important cost-related motive for direct foreign investment is diversification across product markets.

Question 20

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 21

According to 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) would produce a good not currently available in the host country AND would produce a good and export it to other countries.

Question 22

Which of the following is not true regarding host government attitudes toward 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 these are true.

Question 23

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 U.S. sales by shifting operations from their British subsidiaries to Japan.
B) British exporters can increase U.S. sales by shifting operations from their Japanese subsidiaries to Britain.
C) U.S. exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to U.S. subsidiaries.
D) British exporters can increase U.S. sales by shifting operations from their Japanese subsidiaries to Britain AND U.S exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to U.S. subsidiaries.

Question 24

____ 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 these are disadvantages of direct foreign investment.

Question 25

Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the 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 these are correct.

Question 26

To fully benefit from use of foreign raw materials:

A) establish a subsidiary in a market where raw materials are cheap and accessible.
B) sell the finished product to countries where raw materials are more expensive.
C) establish a subsidiary in a new market that can sell products produced elsewhere.
D) establish a subsidiary in a market where raw materials are cheap and accessible AND sell the finished product to countries where raw materials are more expensive.

Question 27

​Assume a U.S. MNC initiates direct foreign investment in the United Kingdom. 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

Question 28

​____ 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 29

A way of accomplishing the revenue-related motive of diversifying internationally 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 30

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 be a cause of national problems OR be a remedy for national problems is possible.
D) have no impact on national problems.

Question 31

A country presently has a high level of unemployment because of weak economic conditions, and its income levels are very low. This country would most likely be an attractive target for direct foreign investment by MNCs as a result of the motive to:

A) enter markets where superior profits are possible.
B) react to trade restrictions.
C) diversify internationally.
D) use foreign factors of production.

Question 32

An MNC 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) the correlations between country economies are low AND the variability of all country economy levels is high.

Question 33

​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 34

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

A) There is only one point on the efficient frontier that is optimal for all MNCs, regardless of their degree of risk aversion.
B) The efficient frontier for portfolios of domestic and international projects will probably lie to the left of the efficient frontier for portfolios of purely domestic projects.
C) Most points on the efficient frontier represent a portfolio of projects as opposed to an individual project.
D) All of these are true.

Question 35

​To diversify internationally for the purpose of reducing risk, which strategy is appropriate?

A) ​Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are based.
B) ​Establish a subsidiary in a market that has relatively low cost of labor or land.
C) ​Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time.
D) ​Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 36

Which of the following is not a cost-related motive of direct foreign investment?

A) international diversification
B) low labor costs
C) low price of purchasing land
D) weak value of the foreign currency needed

Question 37

​Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.

A) ​increase; postpone remitting earnings until the euro weakens
B) ​decrease; postpone remitting earnings until the euro weakens
C) ​decrease; remit earnings immediately before the euro weakens
D) ​increase; remit earnings immediately before the euro weakens

Question 38

Procedural and documentation requirements imposed by a foreign government on an MNC pursuing DFI are referred to as:

A) economic barriers.
B) industry barriers.
C) protective barriers.
D) "red tape" barriers.

Question 39

When an MNC 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) variability of the project's cash flow AND correlation of the project's cash flow relative to the prevailing cash flows of the MNC.
D) None of these are correct.

Question 40

​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 halfway between the two end points.
D) ​cannot be determined since firms vary in their willingness to accept risk.

Question 41

If countries' economies are highly integrated, 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 whose economies are less integrated.

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

Question 42

Which of the following is a reason to consider international business?

A) economies of scale
B) exploit monopolistic advantages
C) diversification
D) All of these are correct.
Answer Key

Question 43

An MNC's cash flows are likely to be less volatile if its percentage of foreign sales is ____ and the number of foreign countries it sells products to is ____.

A) high; large
B) high; small
C) low; small
D) high; large

Question 44

Which of the following purchases does not represent direct foreign investment?

A) machinery to be used in manufacturing
B) a tract of land
C) bonds and other financial assets
D) a manufacturing plant

Question 45

Direct foreign investment is commonly considered by MNCs because it allows the MNC to:

A) attract new sources of demand.
B) enter profitable markets.
C) react to exchange rate movements.
D) react to trade restrictions.
E) All of these are correct.

Question 46

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

A) establish a subsidiary in a new market that can sell products produced elsewhere, which allows for increased production and thus possibly greater efficiency.
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 47

When economic conditions of two countries are ____, an MNC 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 these are correct.

Question 48

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) focuses solely on one product AND focuses solely on one location to market what it produces.
D) None of these are correct.

Question 49

Direct foreign investment would typically be welcomed if:

A) the products to be produced are substitutes for other locally produced products.
B) people from the country of the company's headquarters 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 these are correct.

Question 50

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 arrangements for products local firms produce.
C) encouraging foreign firms to establish subsidiaries that produce products that are not produced locally and to export the products.
D) None of these would reduce employment.

Question 51

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

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