Question 1

Of the following, which would NOT be considered an issue for an investment agreement prior to investing in a foreign country?

Accepted Answer

All of the options listed are potential issues that could be negotiated prior to investing.

Question 2

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

Accepted Answer

Forced reinvestment refers to the situation where a company has to reinvest its funds in a location or asset due to external constraints, rather than because it's the best investment decision. When the blockage of funds is expected to be temporary, investing in liquid, short-term financial instruments like local money market instruments and short-term loans is a typical example of forced reinvestment. This is because these investments can be easily liquidated once the blockage is lifted, unlike the long-term and strategic investments in options A and B.

Question 3

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

Accepted Answer

A fronting loan is a type of loan where a parent company makes a deposit in a bank and then the bank lends that amount to its international subsidiary. The loan is made at a slightly higher interest rate than the deposit rate, which generates a profit for the fronting bank. However, there is no requirement that the lending bank be located in the subsidiary's country, so C is not a typical characteristic of a fronting loan.

Question 4

A number of institutional services provide updated country risk ratings on a regular basis. This is an example of micro-risk information for MNEs using this data.

Accepted Answer

Country risk ratings are considered macro-risk information because they assess risks at the national or country level, affecting all businesses operating within that country, rather than specific risks associated with individual enterprises or micro-level entities.

Question 5

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

Accepted Answer

Expropriation is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm's assets. Inconvertibility refers to the inability to convert local currency into another freely traded currency when necessary, while business income risk refers to fluctuations in the economic environment that can affect the profitability of the foreign affiliate.

Question 6

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

Accepted Answer

The Overseas Private Investment Corporation (OPIC), now part of the U.S. International Development Finance Corporation (DFC), provides political risk insurance for various risks including inconvertibility (the risk that a government will restrict currency exchange), expropriation (the risk that a government will seize private assets), and war (the risk of loss due to conflict). Therefore, OPIC covers all the risks listed.

Question 7

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.

Accepted Answer

Fronting loans involve a bank (the fronting bank) issuing a loan on behalf of another, usually smaller or foreign, bank that wants to remain anonymous or cannot directly issue the loan itself. The fronting bank assumes the credit risk, but these arrangements typically include indemnities or guarantees from the ultimate lender (the bank behind the fronting bank) to mitigate the risk of loss, making banks less hesitant if properly secured.

Question 8

An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment agreement?

Accepted Answer

The answer of An investment agreement spells out specific rights...

Question 9

Blocked funds are cash flows that:

Accepted Answer

Blocked funds are cash flows that have been restricted in transfer out of a local country. This is often done by governments to control capital outflows and protect their currency reserves. The funds can be blocked for various reasons, such as legal disputes, tax issues, or regulatory requirements. As a result, they cannot be freely used or transferred to other countries until the restrictions are lifted.

Question 10

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.

Accepted Answer

This statement is correct. A country can take preventive measures such as assessing the risk of blocked funds prior to making investments, implementing strategies during operations to mitigate the impact of blocked funds, and investing in assets that are less likely to be affected by blocked funds.

Question 11

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

Accepted Answer

The answer of A ________ loan, also known as ________...

Question 12

Which of the following is NOT one of the stages at which MNEs can react to the potential for blocked funds?

Accepted Answer

All the options listed (prior to investing, during operations, and reinvesting in the local country when funds cannot be moved) are indeed stages at which multinational enterprises (MNEs) can react to the potential for blocked funds.

Question 13

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

Accepted Answer

The answer of What are blocked funds? List and explain...

Question 14

According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a/an ________ or ________ level view.

Accepted Answer

The authors suggest that MNEs can anticipate government regulations using a micro (domestic) or macro (foreign) level view, which is the best fit with option B. Thus, the correct answer is B.

Question 15

OPIC stands for:

Accepted Answer

OPIC stands for Overseas Private Investment Corporation. It is a United States government agency that provides businesses with finance and insurance options for overseas investment projects.

Quiz 17: Foreign Direct Investment and Political Risk