Deck 16: Foreign Direct Investment and International

Question 1

For the purpose of distinguishing, in the Balance of Payments statistics, between direct investment and portfolio investment the equity threshold used by Australia to imply significant control is:

A) 15 per cent.
B) 10 per cent.
C) 25 per cent.
D) anything, depending on the nature of the project.

Answer 1

10 per cent.

Question 2

For the purpose of distinguishing, in the Balance of Payments statistics, between direct investment and portfolio investment the equity threshold used to imply significant control is:

A) higher in France, Germany and the UK than in the US and Australia.
B) lower in France, Germany and the UK than in the US and Australia.
C) higher in Belgium and the Netherlands than in the US and Australia.
D) lower in Belgium and the Netherlands than in the US and Australia.

Answer 2

higher in France, Germany and the UK than in the US and Australia.

Question 3

The growth of foreign direct investment in the post-World War Two period is due to:

A) improvement in transport and communications.
B) the need to finance reconstruction projects in Japan and Europe.
C) U.S. tax law which favoured foreign investment.
D) all of the given answers.

Answer 3

all of the given answers.

Question 4

Which of the following was not a reason for the rebound of FDI in the 1990s?

A) German re-unification
B) The increasing number of multinationals
C) The increasing sectoral diversity of FDI
D) The increasing number of countries participating in this activity

Question 5

Which of the following theories of FDI assumes perfect markets?

A) The internalisation hypothesis
B) The location hypothesis
C) The diversification hypothesis
D) The eclectic theory

Question 6

Which of the following theories of FDI assumes imperfect markets?

A) The differential rates of return hypothesis
B) The diversification hypothesis
C) The output and market size hypothesis
D) The industrial organisation hypothesis

Question 7

The differential rates of return hypothesis assumes:

A) risk aversion.
B) risk neutrality.
C) UIP.
D) Ex ante PPP.

Question 8

The location hypothesis explains FDI in terms of:

A) the rates of return on investment.
B) firm-specific advantages.
C) the immobility of some factors of production.
D) the desire to internalise some market transactions.

Question 9

According to the eclectic theory, FDI is determined by the following advantages, except:

A) financial advantages.
B) ownership advantages.
C) internalisation advantages.
D) locational advantages.

Question 10

A firm will expand overseas by exporting if:

A) there are no internalisation gains.
B) there are internalisation gains but locational factors favour domestic expansion.
C) there are internalisation gains and locational factors favour foreign expansion.
D) any of the given answers depending on the circumstances.

Question 11

A main shortcoming of the oligopolistic reaction hypothesis of FDI is:

A) that it is based on the assumption of oligopolistic markets which do not exist in reality.
B) that it assumes oligopolistic rather than perfect competition.
C) its conclusion that FDI is self-limiting.
D) that there is no empirical support for it.

Question 12

The implications of the currency areas hypothesis of FDI is that:

A) firms from countries with strong currencies tend to invest abroad.
B) countries with strong currencies tend to be host countries.
C) countries with weak currencies tend to be sources of direct investment.
D) the pattern of FDI is determined by the level of the real exchange rates relative to then values implied by PPP.

Question 13

The internal financing hypothesis is more appropriate for explaining FDI in developing countries

A) in developing countries there often are greater restrictions on the movement of funds.
B) inefficient financial markets in developing countries.
C) undeveloped financial markets in developing countries.
D) all of the given answers.

Question 14

Trade-oriented FDI:

A) generates an excess demand for imports at the original terms of trade.
B) generates an excess demand for exports at the original terms of trade.
C) leads to welfare improvement in the host country only.
D) implies investment in industries in which the source country has a comparative advantage.

Question 15

Political risk arises from:

A) changes in the constitution.
B) elections resulting in hung parliaments.
C) election wins by right-wing parties.
D) unexpected changes in the legal and fiscal frameworks.

Question 16

Tax policies affect the incentive to engage in FDI and its means of financing for all of these reasons, except that they affect:

A) the profitability of FDI.
B) the profitability of FDI relative to domestic investment.
C) interest and exchange rates.
D) the cost of capital.

Question 17

What was not a determinant of FDI into Australia according to Yang, Groenewold and Tcha (2000)?

A) the higher interest rates on offer in Australia.
B) relatively low inflation rates in Australia.
C) a stable judiciary system.
D) lower industrial disputes.

Question 18

The reasons why multinational firms engage in FDI include:

A) to exploit economies of scale.
B) to enter higher profit markets.
C) to access foreign factors of production.
D) all the given answers.

Question 19

The accounting rate of return is not appropriate for evaluating direct investment projects because it:

A) is based on double-entry bookkeeping.
B) does not take into account the effect of inflation.
C) is based on profit which is an accounting concept.
D) is not based on the principle of accruals.

Question 20

The payback period is not an appropriate criterion for evaluating direct investment projects because:

A) it ignores the time value of money.
B) it overlooks cash flows arising after the payback period.
C) it is based on profit.
D) it both ignores the time value of money and it overlooks cash flows arising after the payback period.

Question 21

Which of the following is an example of FDI?

A) The purchase of foreign companies.
B) The investment in foreign stock markets directly, without going through a broker.
C) The purchase of foreign bonds on foreign OTC markets.
D) The involvement in licensing agreements.

Question 22

FDI is perceived by the host countries to:

A) have no impact on the domestic economy.
B) be a cause of national problems.
C) be a source of economic growth.
D) both be a cause of national problems and/or be a source of economic growth.

Question 23

Which of the following factors are important for the evaluation of FDI projects?

A) Future inflation.
B) Restrictions on remittances.
C) Blocked funds.
D) All of the given answers.

Question 24

International capital budgeting is:

A) less complex than in domestic capital budgeting.
B) more complex than in domestic capital budgeting.
C) involves the estimation of a number of variables.
D) more complex than in domestic capital budgeting and involves the estimation of a number of variables.

Question 25

Firms, which have FDI projects in high-inflation countries:

A) tend to have low required rates of return.
B) can ignore inflation and changes in exchange rates because they cancel out each other.
C) view the projects less favourably than their subsidiaries.
D) almost invariably obtain negative net present values from these projects.

Question 26

Which one of the following features is not a feature of tax havens?

A) Zero or only nominal effective tax rates.
B) Lack of effective exchange of information.
C) Lack of transparency.
D) A weak justice system.

Question 27

The net present value method:

A) takes account of the time value of money.
B) measures the absolute financial benefit of a project.
C) is the preferred method for evaluating FDI projects.
D) both takes account of the time value of money and measures the absolute financial benefit of a project.

Question 28

A project with a net present value equal to zero:

A) is not worth considering.
B) has an internal rate of return equal to its discount rate.
C) has an internal rate of return equal to the project's cost of capital.
D) both has an internal rate of return equal to its discount rate and has an internal rate of return equal to the project's cost of capital.

Question 29

The Weighted Average Cost of Capital:

A) equals the sum of the cost of equity and the cost of debt, weighted by their respective shares of the project's capital.
B) equals the product of the cost of equity and the cost of debt, weighted by their respective shares of the project's capital.
C) is often used as the discount value in calculating the net present value of a project.
D)both equals the sum of the cost of equity and the cost of debt, weighted by their respective shares of the project's capital and is often used as the discount value in calculating the net present value of a project.

Question 30

In order to account for any variation in the risk associated with the estimated cash flows of a project:

A) the discount rate may be adjusted to reflect a higher degree of associated risk.
B) the estimated cash flows may be reduced to reflect a higher degree of associated risk.
C) the net present valuation of the project may be supplemented by breakeven and sensitivity analysis.
D) all of the given answers.

Question 31

Factors which need to be considered in relation to transfer pricing include:

A) relative taxation rates of different countries.
B) global regulation.
C) management incentives and performance
D) all the given answers.

Question 32

Why might a multinational firm depend on foreign subsidiaries for the sale of its finished goods?

A) In order to control its distribution facilities.
B) In order to provide specialised after-sale services.
C) In order to ensure a reliable flow of information between the firm and its customers.
D) All the given answers.

Question 33

How might country risk be incorporated into the capital budgeting process?

A) By adjusting expected cash flows for losses due to country risk.
B) By estimating the value of an insurance contract designed to reimburse all losses resulting from a country risk event.
C) By pricing the country risk using option pricing theory.
D) Any of the given answers.

Question 34

Adjusted present value:

A) evaluates the project as if it was all equity financed.
B) evaluates the project as if it was all debt financed.
C) evaluates the project as if it was all equity financed and then adds the value of side effects, which . are discounted at separate rates reflecting their own systematic risk.
D ) evaluates the project as if it was all debt financed and then adds the value of side effects, which are discounted at separate rates reflecting their own systematic risk.

Question 35

It may be preferable to adjust for country risk:

A) by adjusting cash flows.
B) adjusting the discount rate.
C) by adjusting the pay-back period.
D) none of the given answers.

Question 36

Multinational firms use transfer pricing:

A) to move profit from a high taxing country to a lower taxing country.
B) to facilitate internal financing of one subsidiary by another.
C) to provide low cost inputs to other subsidiaries within the firm.
D) both to move profit from a high taxing country to a lower taxing country and to facilitate internal . financing of one subsidiary by another.

Question 37

The arguments for FDI include:

A) FDI flows are less volatile than portfolio investment flows.
B) FDI is an important source of funds for developing countries.
C) FDI involves the transfer of financial capital, technology and other skills.
D) all of the given answers.

Question 38

The arguments against FDI include:

A) FDI symbolises new colonialism.
B) FDI results in a loss of sovereignty and compromises national security.
C) Multinational firms form alliances with corrupt elites in developing countries.
D) all of the given answers.

Question 39

The cost of capital is lower for multinational firms because:

A) they are larger and as a result receive preferential treatment by creditors.
B) they have better access to international capital markets.
C) they are exposed to foreign exchange risk.
D) both they are larger and as a result receive preferential treatment by creditors and they have better . access to international capital markets.