Deck 15: International Portfolio Investment

Question 1

Operational risk refers to the risk which arises from the uncertainty about:

A)the host's country's policies affecting the local operations of an MNC
B)the host's country's policy regarding ownership and control of local operations
C)cross-border flows of capital, payment, know-how, and the like
D)none of these

Answer 1

A

Question 2

Control risk refers to the risk which arises from the uncertainty about:

A)the host's country's policies affecting the local operations of an MNC
B)the host's country's policy regarding ownership and control of local operations
C)cross-border flows of capital, payment, know-how, and the like
D)none of these

Answer 2

B

Question 3

Transfer risk refers to the risk which arises from the uncertainty about:

A)the host's country's policies affecting the local operations of an MNC
B)the host's country's policy regarding ownership and control of local operations
C)cross-border flows of capital, payment, know-how, and the like
D)none of these

Answer 3

C

Question 4

Some of the risks that a Canadian based MNC can encounter in its foreign investments are:
(i)- an increase in the cost of borrowing due to a rise in interest rates
(ii)- increase in inflation rates
(iii)- dumping
(iv)- unfair competition by local companies
(v)- inconvertibility of foreign currencies
(vi)- expropriation
(vii)- destruction of properties due to war,revolution,and other violent political events in foreign countries
(viii)- loss of business income due to political violence
In Canada,the Export Development Canada (EDC)offers insurance against which of the above:

A)(i), (ii), (iii), and (iv)
B)(v), (vi), (vii), and (viii)
C)a and b
D)none of these

Question 5

Political risk refers to:

A)the potential losses to the parent firm of an MNC resulting from adverse political developments in the host country
B)macro-economic risks
C)micro-economic risks
D)bankruptcy or high inflation rates

Question 6

Which of the following statements is true about product life cycle theory?

A)in the early stages of the product life cycle, the demand for the new product is relatively insensitive to the price and thus a pioneering firm can charge a relatively high price
B)it predicts that over time the U.S.switches from an exporting country of new products to an importing country
C)it has an "S" shaped curve when plotting "quantity sold" versus "time"
D)all of these

Question 7

Political risk is classified into:

A)Macro- and micro risk
B)Major- and minor risk
C)Macro- and minor risk
D)Major- and micro risk

Question 8

Cross-border acquisition involves:

A)building new production facilities in a foreign country
B)buying existing foreign business
C)a and b
D)none of these

Question 9

Synergistic gains refer to:

A)gains from hedging
B)gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firms
C)gains arising if the combined companies can save on the costs of production, marketing, distribution, and R&D
D)b and c

Question 10

What percentage of FDI originates in developed countries?

A)60%
B)80%
C)90%
D)95%

Question 11

Foreign direct investment is undertaken via

A)Buying bonds in a foreign company
B)Buying 1% of the equity capital of a foreign company
C)Buying 100% of the equity capital of a foreign company
D)Can only be done when a foreign subsidiary is built up from scratch

Question 12

An increase in political risk can be managed by:

A)adjusting a foreign investment project's NPV by either reducing its expected cash flows, or by increasing the cost of capital
B)forming joint venture with a local company
C)purchasing insurance against the hazard of political risk
D)all of these

Question 13

Corruption is all of the following except

A)A type of political risk
B)Illegal for Canadians abroad
C)Illegal in Canada
D)Not a serious problem

Question 14

The key factors that are important in a firm's decision to invest overseas are:

A)Trade barriers, imperfect labor market, and intangible assets
B)vertical integration, product life cycle, and shareholder diversification services
C)profit maximization, global prestige, and competition
D)a and b

Question 15

The following are barriers to trade except:

A)Tariffs
B)Transportation costs
C)Telecommunications
D)Import taxes

Question 16

Which of the following statements is true?

A)There are no ownership and control limitations to foreign ownership in Canada.
B)Foreign investors cannot own more than 25% of a firm in commercial aircraft aviation in Canada.
C)Foreign investors cannot own more than 50% of a firm in commercial aircraft aviation in Canada.
D)Foreign investors cannot own more than 75% of a firm in commercial aircraft aviation in Canada.

Question 17

Examples of intangible assets of MNCs are all except

A)Production costs
B)R&D capabilities
C)Marketing know-how
D)Managerial know-how

Question 18

The most important mode of entering a foreign market via FDI in the last few years is

A)Greenfield investments
B)Brownfield investments
C)Mergers & acquisitions
D)All modes are equally important

Question 19

Political risk can be evaluated by studying

A)The host country's political and government system
B)Key economic indicators
C)Regional security
D)All of these

Question 20

Country risk refers to:

A)political risk
B)credit risk and other economic performances
C)a and b
D)every risk except political risk

Question 21

Explain political risk and its three main classifications.How can political risk be incorporated in the decision making process when firms decide on whether to invest in foreign project or not?

Question 22

Explain the role of market imperfections in FDI.

Question 23

ABC Inc.,located in Vancouver,BC wants to buy XYZ Inc.,located in Seattle,WA.What does the ABC Inc.have to consider so that the acquisition will be successful?

Question 24

How can firms establish a wholly owned subsidiary in a foreign country?
What are the advantages and disadvantages of each method?

Question 25

How can Export Development Canada (EDC)help firms to deal with political risk?