Question 1

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

Accepted Answer

The key to international diversification is actually selecting foreign projects whose performance levels are not highly correlated over time. This helps to reduce overall portfolio risk by spreading investments across different countries and industries.

Question 2

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

Accepted Answer

This statement is not necessarily true. Direct foreign investment can bring many benefits, including job creation, technology transfer, and increased economic growth. However, the success of foreign investment depends on various factors such as the host country's business environment, political stability, and market conditions. So, while benefits are not always guaranteed, it is incorrect to say that they are rarely realized.

Question 3

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

Accepted Answer

Direct foreign investment can provide MNCs with access to new markets, resources, and capabilities, which can lead to increased profitability and shareholder wealth.

Question 4

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

Accepted Answer

Direct foreign investment involves investing in real assets in foreign countries, rather than investing in financial assets like stocks or bonds.

Question 5

Developing countries are mostly targeted for direct foreign investment because they have advanced technology.

Accepted Answer

Developing countries are often targeted for direct foreign investment because they have lower labor costs, access to natural resources, and emerging markets, rather than having advanced technology.

Question 6

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

Accepted Answer

MNCs tend to seek locations where the factors of production such as land and labor are cheaper, as this allows them to minimize their production costs and maximize profits.

Question 7

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

Accepted Answer

Governments may impose restrictions on foreign ownership of local companies, which can limit or even prevent international acquisitions.

Question 8

Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in Western Europe.

Accepted Answer

MNCs tend to look for lower costs of land and labor, and countries in Eastern Europe generally offer these advantages compared to countries in Western Europe.

Question 9

Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders.

Accepted Answer

The answer of Managers of MNCs may attempt to expand...

Question 10

When a foreign currency is perceived by an MNC to be undervalued, the MNC may consider direct foreign investment in that country, as the initial outlay should be relatively low.

Accepted Answer

When a foreign currency is undervalued, it means that the cost of investing in that country will be relatively low for the MNC, making it a more attractive option for direct foreign investment.

Question 11

​According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.

Accepted Answer

The text states that China has been perceived as one of the most attractive sources of new demand.

Question 12

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

Accepted Answer

Different MNCs have different goals, strategies, resources, and constraints, which lead to different optimal project portfolios. Therefore, there cannot be a single optimal project portfolio for all MNCs.

Question 13

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

Accepted Answer

Market imperfections, such as differences in labor laws, regulations, and institutions, can lead to substantial differences in labor costs across countries.

Question 14

Direct foreign investment is normally completed first, and then capital budgeting can be applied later.

Accepted Answer

Capital budgeting is done before making any investment decision including foreign investment to assess the feasibility of the investment and its potential returns.

Question 15

The overall variability of a firm's returns depends on the expected return of each individual project, the percentage of funds invested in each individual project, and the correlation coefficient of returns between the investments.

Accepted Answer

The variability of a firm's returns can be impacted by many factors, including the expected return of each project, the percentage of funds invested in each project, and the correlation coefficient of returns between the investments. All of these factors can impact the overall variability of returns, making it difficult to predict or manage risk without a careful analysis of each investment opportunity. By carefully considering these factors, firms can better manage their risk exposure and maximize their overall returns over time.

Question 16

Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.

Accepted Answer

Periodic monitoring of the foreign subsidiary is necessary to assess its performance and ensure that it aligns with the company's objectives. Adjustments may be needed along the way to optimize the subsidiary's operations and maximize its potential success.

Question 17

MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.

Accepted Answer

Diversification helps to reduce the overall risk of a portfolio by spreading investments across different products and geographical markets. This can lead to a more desirable risk-return profile for MNCs.

Question 18

Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the foreign country if the government of that country:

Accepted Answer

Imposing restrictive quotas can make it more attractive for a U.S. MNC to establish a manufacturing plant in a foreign country because it limits the amount of goods that can be imported into the country, potentially making locally produced goods more competitive despite higher production costs.

Question 19

The most important cost-related motive for direct foreign investment is diversification across product markets.

Accepted Answer

The most important cost-related motive for direct foreign investment is typically seeking lower production costs, such as cheaper labor or raw materials, rather than diversification across product markets.

Question 20

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.

Accepted Answer

The expected correlation of the new project's returns with those of the prevailing business should be considered when assessing the risk of an individual project. This is because if the project's returns are highly correlated with the prevailing business, then any negative events affecting the prevailing business could also adversely affect the project.

Quiz 13: Direct Foreign Investment