Deck 13: Foreign Direct Investment

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

B

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

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 5

Even if production costs are higher in a foreign country, a UK 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 6

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 7

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

Question 8

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 9

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 10

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 11

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

Question 12

____ 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 13

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 14

When considering a major new investment, it is not just the individual risk that is important, but how that risk contributes to the overall risk of the portfolio of projects that a MNC is undertaking.

Question 15

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 16

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 17

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 18

____ 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 19

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

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

Question 20

The following data is available for an investment object: $\bullet$ Acquisition cost: 60,000
$\bullet$ Operating cash flows: 20,000 in year 1; 30,000 in year 2; 35,000 in year 3.
Using the NPV model with a discount rate of 10%, which of the following is true?

A) If the investment is realized, a positive NPV of approximately 9,300 can be achieved.
B) If the investment is realized, a negative NPV of approximately 9,300 can be achieved.
C) If the investment is realized, a negative NPV of approximately 25,000 can be achieved.
D) If the investment is realized, a positive NPV of approximately 25,000 can be achieved.

Question 21

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

A) the variability of the project's cash flow.
B) the 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 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

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

Question 24

Assume a US firm initiates direct foreign investment in the UK 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 25

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 26

The feasibility of the capital budgeting analysis can vary with the perspective because the net after-tax cash inflows to the subsidiary can differ substantially from those to the parent. Such differences can be due to which of the following factors:

A) tax differentials.
B) restricted remittances.
C) exchange rate movements.
D) all 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

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

Question 29

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 local firms do not produce.
D) none of the above would reduce employment.

Question 30

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 31

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 UK firms that engage in foreign direct investment.

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

Question 32

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

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 33

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 34

Which of the following decision models is used to evaluate investments?

A) NPV
B) Real options
C) Game Theory / Strategy
D) all of the above

Question 35

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 36

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

Question 37

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

Question 38

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

Question 39

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 40

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 41

____ 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 42

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 shifting 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 shifting operations from Japanese subsidiaries to American subsidiaries.
D) B and C

Question 43

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 44

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