Deck 16: Foreign Direct Investment and Political Risk

Question 1

A/n ________ would be an example of a location-specific advantage for an MNE.

A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

Answer 1

unique source of raw materials

Question 2

Which of the following is NOT a potential disadvantage of licensing relative to FDI?

A) possible loss of quality control
B) establishment of a potential competitor in third-country markets
C) possible improvement of the technology by the local licensee, which then enters the original firm's home market
D) All of the above are potential disadvantages to licensing.

Answer 2

All of the above are potential disadvantages to licensing.

Question 3

The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.

A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances

Answer 3

foreign direct investment

Question 4

The O in OLI refers to an advantage in a firm's home market that is

A) operator independent.
B) owner-specific.
C) open-market.
D) official designation.

Question 5

A/n ________ would be an example of an internalization advantage for an MNE.

A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

Question 6

Which of the following is NOT a form of FDI?

A) wholly-owned affiliate
B) joint venture
C) exporting
D) Greenfield investment

Question 7

Which of the following is an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer agency costs
B) fewer direct advantages from research and development
C) a greater risk of losing markets to copycat goods producers
D) an inability to exploit R&D as effectively as if also invested abroad

Question 8

The owner-specific advantages of OLI must be

A) firm-specific.
B) not easily copied.
C) transferable to foreign subsidiaries.
D) all of the above

Question 9

Investing in production facility in a country with low cost of labor is

A) example of location-specific advantage.
B) not prudent if there is no domestic market for the produced goods.
C) example of a market-driven advantage.
D) not prudent because the cost of labor will increase over time.

Question 10

Which of the following is NOT a potential disadvantage of licensing relative to FDI?

A) possible loss of opportunity to enter the licensee's market with FDI later
B) risk that technology will be stolen
C) high agency costs
D) All of the above are potential disadvantages to licensing.

Question 11

Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?

A) MNEs initially invest in countries with a similar "national psychic."
B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.

Question 12

Based on the internationalization process, economists observed that firms tended to invest first in countries that were not too far distant in psychic terms. Close psychic distance defined countries with a cultural, legal, and institutional environment similar to the home country.

Question 13

The I in OLI refers to an advantage in a firm's home market that is an

A) internalization.
B) industry-specific advantage.
C) international abnormality.
D) none of the above

Question 14

An example of economies of scale in financing includes

A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large-scale plant and equipment.
D) all of the above.

Question 15

Which of the following is NOT a proactive financial strategy related to the OLI paradigm in explaining FDI?

A) strategies to gain lower global cost of capital
B) strategies to reduce global taxation
C) strategies to reduce operating and transaction exposure
D) All of the above are proactive strategies.

Question 16

A/n ________ would be an example of an owner-specific advantage for an MNE.

A) patent
B) economy of scale
C) economy of scope
D) all of the above

Question 17

Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.

Question 18

Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer political risks
B) greater agency costs
C) lower front-end investment
D) All of the above are advantages.

Question 19

Joint-Venture is a preferred mode of foreign-direct investment if

A) the host government limits other modes of entrance.
B) the MNE wants to mitigate Greenfield start up risks.
C) the MNE wants to mitigate country risks.
D) All of the above

Question 20

The L in OLI refers to an advantage in a firm's home market that is a

A) liability in the domestic market.
B) location-specific advantage.
C) longevity in a particular market.
D) none of the above.

Question 21

Which of the following is NOT an advantage to a joint venture?

A) There is possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) It may be a realistic alternative when 100% foreign ownership is not allowed.

Question 22

MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.

Question 23

Transfer risk concerns mainly the problem of

A) governance risk.
B) cultural risk.
C) blocked funds.
D) environmental concerns.

Question 24

Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm.

Question 25

A ________ is a shared ownership in a foreign business.

A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate

Question 26

Which of the following is NOT a potential advantage to a cross-border acquisition compared to a Greenfield investment?

A) Market imperfections may under-price local assets and allow the purchase of assets at significant discount.
B) Cross-border acquisitions take longer, thus allowing the firm a better understanding of the local market before attempting sales.
C) Acquisitions may be a cost-effective way of gaining competitive advantages such as technology or brand names.
D) All of the above are advantages of acquisition over green field investment.

Question 27

A ________ is establishing a production or service facility from the ground up.

A) joint venture
B) licensing agreement
C) greenfield investment
D) wholly-owned facility

Question 28

Of the following, which would NOT be considered a firm-specific risk?

A) the risk of getting new management
B) management policies toward hedging foreign exchange risk
C) parent company policy toward management of local subsidiaries
D) All could be considered firm-specific risk.

Question 29

Which of the following is/are NOT a/an advantage to a joint venture?

A) The local partner's reputation enhances access to local financial markets.
B) The local partner might take advantage of proprietary information.
C) There are higher agency costs than with a purely domestic firm.
D) The local partner's public image may enhance local sales.

Question 30

OPIC stands for

A) Organization for the Prevention of Insufficient Capitalization.
B) Organization of Petroleum Importing Countries.
C) Overseas Private Investment Corporation.
D) Overseas Public Insurance Commission.

Question 31

Which of the following is NOT an example of a country-specific risk?

A) transfer risk
B) war and ethnic strife
C) cultural and religious heritage
D) All of the above are examples of country-specific risk.

Question 32

Negotiations under the General Agreement on Tariffs and Trade (GATT) have NOT had much impact on reducing the level of tariffs over the last several decades.

Question 33

Which of the following would NOT be considered a non-tariff barrier to trade?

A) inconsistent customs and administrative entry procedures
B) unduly stringent or discriminating standards imposed on imports in the name of protecting health, safety, and quality
C) established import procedures that make importing more difficult
D) All of the above are non-tariff trade barriers.

Question 34

Greenfield investments are typically ________ and ________ than cross-border acquisition.

A) slower; more uncertain
B) faster; of greater certainty
C) slower; of greater certainty
D) faster; more uncertain

Question 35

Joint ventures are a more common FDI than wholly owned subsidiaries.

Question 36

________ is the ability to exercise effective control over a foreign subsidiary within a country's legal and political environment.

A) Political risk
B) Portfolio risk
C) Interest rate risk
D) Governance risk

Question 37

________, also known as macro risks, are political risks that affect the firm at the project or corporate level and originate at the country level.

A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Governance risks

Question 38

________, also known as micro risks, are political risks that affect the MNE at the project and corporate level but do not originate at the country level.

A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Transfer risks

Question 39

Potential strategies to mitigate the risk of expropriation and amendments in the investment agreement include

A) obtaining insurance from OPIC against country risk.
B) thin equity injection supplemented with large local debt.
C) using International Finance Institutions loans or co-investment vehicles.
D) all of the above

Question 40

________ is the risk that the investor will not be able to convert profits, royalties, or fees into dollars.

A) Inconvertibility
B) Expropriation
C) Business income risk
D) None of the above

Question 41

A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.

A) fronting; link financing
B) parallel; a back-to-back loan
C) fronting; a back-to-back loan
D) link financing; parallel loan

Question 42

Government authorities are more likely to allow subsidiary repayment of a loan to a large international bank than to a parent firm because

A) stopping payment to an international bank would have a negative impact on the credit image of the country.
B) the government is also borrowing money from that bank and wants a larger loan before they choose to default.
C) corrupt government officials have accounts at the bank and they have made an under-the-table agreement not to withhold funds from that bank.
D) none of the above are true.

Question 43

Which of the following is NOT a technique for moving blocked funds out of a country?

A) use fronting loans
B) create unrelated exports
C) obtain a special dispensation
D) All of the above are techniques for moving blocked funds.

Question 44

What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.

Question 45

What does the OLI Paradigm propose to explain? Define each component and provide an example of each.

Question 46

________ risks are those that affect the MNE at the local or project level, and originate at the country level.

A) Country-specific
B) Firm-specific
C) Global-specific
D) None of the above

Question 47

Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks.

A) firm-specific
B) country-specific
C) institutional
D) global-specific

Question 48

Identify and define the two behavioral theories of Foreign Direct Investment as identified by the authors.

Question 49

________ is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm's assets.

A) Inconvertibility
B) Expropriation
C) Business income risk
D) None of the above

Question 50

Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries?

A) differences in human resource norms
B) differences in religious heritage
C) differences in allowable ownership structures
D) All of the above must be considered.

Question 51

Blocked funds are cash flows that

A) come in regular intervals in standardized amounts or blocks.
B) have been restricted in transfer out of a local country.
C) come from a certain sector or region of the world.
D) none of the above.

Question 52

________ is NOT one of the three main country-specific risks as outlined by your authors.

A) Transfer risk
B) Cultural differences
C) Thin equity base
D) Protectionism

Question 53

Joint ventures have significant advantages as well several disadvantages versus a wholly owned subsidiary with regard to investment abroad. Define the two types of investment opportunities and provide a comprehensive list of the advantages and disadvantages for the joint venture form of international investment.

Question 54

A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value.

Question 55

Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary?

A) The parent makes a deposit equal to the size of the desired loan into a large commercial bank.
B) The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate.
C) The lending bank is located in the subsidiary's country.
D) All of the above are typical characteristics of a fronting loan.

Question 56

Banks are very hesitant to engage in fronting loans because of the low probability of repayment and thus their risk exposure up to a 100% loss.

Question 57

Which of the following could be considered an example of forced reinvestment if the blockage of funds was expected to be temporary?

A) vertical reinvestment by an automobile manufacturer to buy parts suppliers and showrooms
B) a lumber cutting company subsequently builds a paper mill with blocked funds
C) purchase of local money market instruments and short-term loans
D) all of the above

Question 58

________ is a type of political risk that OPIC does NOT cover.

A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.