Question 1

Operational risk refers to the risk which arises from the uncertainty about
A)the host country's policies affecting the local operations of an MNC.
B)the host 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 the above

Accepted Answer

Operational risk refers to the risk which arises from the uncertainty about the host country's policies affecting the local operations of an MNC.

Question 2

Countries may welcome Greenfield investments,
A)as they are viewed as representing new investment and employment opportunities.
B)as they are viewed as substitutes for foreign firms' bids to acquire domestic firms.
C)but they are also often resisted and sometimes even resented by the local firms.
D)none of the above

Accepted Answer

Greenfield investments are viewed as new investments that can provide employment opportunities in the country. Therefore, countries may welcome them.

Question 3

Country risk
A)is a broader measure of risk than political risk.
B)encompasses political risk, credit risk, and other economic performances.
C)all of the above
D)none of the above

Accepted Answer

Country risk includes not only political risk but also credit risk, economic risk, and other types of risk that could impact a country's ability to repay debt, attract investment, and maintain stable economic growth. Therefore, it is a broader and more comprehensive measure of risk.

Question 4

In 1992,the Enron Development Corporation,a subsidiary of the Houston-based energy company,signed a contract to build the largest-ever power plant in India,requiring a total investment of $2.8 billion.After Enron had spent nearly $300 million,the project was canceled by Hindu nationalist politicians in the Maharashtra state where the plant was to be built.Which of the following is true?
A)Subsequently, Maharashtra invited Enron to renegotiate its contract.
B)The lack of an effective means of enforcing contracts in a foreign country is clearly a major source of political risk associated with FDI.
C)In an effort to pressure Maharashtra to reverse its decision, Enron "pushed like hell" the U.S.Energy Department to make a statement in June 1995 to the effect that canceling the Enron deal could adversely affect other power projects.The statement only compounded the situation.The BJP politicians immediately criticized the statement as an attempt by Washington to bully India.
D)All of the above

Accepted Answer

The situation described involves political risk, contract renegotiation, and diplomatic pressure, all of which are mentioned in the choices.

Question 5

Once a MNC decides to undertake a foreign project,it can take various measures to minimize its exposure to political risk.These include
A)the MNC can form a joint venture with a local company.
B)the MNC may also consider forming a consortium of international companies to undertake the foreign project.
C)the MNC can use local debt to finance the foreign project.
D)the MNC may purchase insurance against the hazard of political risk.
E)all of the above

Accepted Answer

The answer of Once a MNC decides to undertake a...

Question 6

Examples of control risk include
A)the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B)unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C)restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D)none of the above

Accepted Answer

The answer of Examples of control risk include
A)the unexpected imposition...

Question 7

The communist victory in China in 1949 is an example of
A)micro risk.
B)macro risk.
C)both a) and b)
D)none of the above

Accepted Answer

The communist victory in China in 1949 is an example of macro risk because it had a significant impact on the overall political and economic environment in China, and potentially impacted global politics and trade relations.

Question 8

Country risk refers to
A)political risk.
B)credit risk, and other economic performances.
C)every risk except political risk.
D)both a) and b)

Accepted Answer

The answer of Country risk refers to
A)political risk.
B)credit risk, and...

Question 9

In 1992,the Enron Development Corporation,a subsidiary of the Houston-based energy company,signed a contract to build the largest-ever power plant in India,requiring a total investment of $2.8 billion.After Enron had spent nearly $300 million,the project was canceled by Hindu nationalist politicians in the Maharashtra state where the plant was to be built.Which of the following is true?
A)This move by the government played well with Indian voters with visceral distrust of foreign companies since the British colonial era.
B)This move by the government was widely criticized in India on the grounds that it would deter future foreign investment.
C)This move by the government was widely criticized in India on the grounds that severe power shortages have been one of the bottlenecks hindering India's economic growth.
D)None of the above

Accepted Answer

The cancellation of the project played well with Indian voters who had a historical distrust of foreign companies due to the British colonial experience.

Question 10

One particular type of political risk that MNCs and investors may face is corruption associated with the abuse of public office for private benefits.
A)Investors may often encounter demands for bribes from politicians and government officials for contracts and smooth bureaucratic processes.
B)If companies refuse to make grease payments, they may lose business opportunities or face difficult bureaucratic red tape.
C)They may risk violating laws or being embarrassed when the payments are discovered and reported in the media.
D)All of the above

Accepted Answer

Investors and MNCs may face demands for bribes from government officials when conducting business in a foreign country. Refusal to pay these bribes may result in the loss of business opportunities or delays in bureaucratic processes. Additionally, paying bribes may violate laws and can lead to potential legal repercussions and reputation damage if discovered and reported in the media. Therefore, all of the answer choices are the potential consequences of dealing with corruption associated with the abuse of public office for private benefits.

Question 11

When evaluating a foreign investment project,it is important for the MNC to consider the effect of political risk,as a sovereign country can change "the rules of the game".To account for this
A)the MNC may adjust the cost of capital upward.
B)the MNC may lower the expected cash flows from the foreign project.
C)the MNC may purchase insurance policies against the hazard of political risks.
D)all of the above

Accepted Answer

All of the above choices may be used by MNCs to account for political risk in foreign investment projects. Adjusting the cost of capital and lowering expected cash flows both serve to reduce the potential financial impact of political risk, while purchasing insurance can provide an additional layer of protection against potential loss. It is up to each individual MNC to decide which approach or combination of approaches is best suited to their specific needs and circumstances.

Question 12

Examples of transfer risk include
A)the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B)unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C)restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D)none of the above

Accepted Answer

The answer of Examples of transfer risk include
A)the unexpected imposition...

Question 13

In evaluating political risk,experts focus their attention on a set of key factors such as
A)integration of the host country into the world political/economic system.
B)the host country's ethnic and religious stability.
C)the host country's regional security, and key economic indicators.
D)all of the above

Accepted Answer

Experts in political risk evaluation focus on all of the above-mentioned factors (integration of host country into world political/economic system, ethnic and religious stability, regional security, and key economic indicators) in their analysis. Each of these factors can have an impact on the stability and potential risks for businesses operating within the host country. Therefore, it is important to consider all of these factors in evaluating political risk.

Question 14

In 1992,the Enron Development Corporation,a subsidiary of the Houston-based energy company,signed a contract to build the largest-ever power plant in India,requiring a total investment of $2.8 billion.After Enron had spent nearly $300 million,the project was canceled by Hindu nationalist politicians in the Maharashtra state where the plant was to be built.Which of the following is true?
A)Upon the news release of the project cancellation, Enron's share price fell immediately by about 10 percent.
B)In the process of structuring the deal, Enron made a profound political miscalculation: Instead of waiting for the next election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way.
C)Enron had the last laugh, however when they went bankrupt and left the power plant unfinished.
D)All of the above

Accepted Answer

The answer of In 1992,the Enron Development Corporation,a subsidiary of...

Question 15

Examples of operational risk include
A)the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividend and interest payments.
B)unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, and restriction on access to local credit facilities.
C)restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out requirements), and the nationalization of local operations of MNCs.
D)none of the above

Accepted Answer

The answer of Examples of operational risk include
A)the unexpected imposition...

Question 16

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)purchase insurance against the hazard of political risk.
D)all of the above

Accepted Answer

All three options listed (adjusting NPV, forming joint ventures, and purchasing political risk insurance) can be effective ways to manage an increase in political risk. Adjusting the NPV can reflect the potential impact of political risk on cash flows and cost of capital, while forming a joint venture with a local company can help mitigate the risks associated with unfamiliar local political and economic environments. Purchasing insurance can also help manage the financial impact of political risk. Therefore, the best choice is all of the above.

Question 17

North Korea,Iran,and Cuba are examples of
A)countries with low levels of political risk.
B)countries with high levels of political risk.
C)countries that are politically and economically isolated from the rest of the world.
D)both b) and c)

Accepted Answer

North Korea, Iran, and Cuba are all countries with high levels of political risk and are politically and economically isolated from the rest of the world. These factors make them unattractive for foreign investment and can create difficulties for businesses operating within their borders.

Question 18

In evaluating political risk,experts focus their attention on a set of key factors such as
A)the host country's political/government system.
B)historical records of political parties and their relative strengths.
C)integration of the host country into the world political/economic system.
D)all of the above

Accepted Answer

Experts focus on evaluating a set of key factors that includes the host country's political/government system, historical records of political parties and their relative strengths, and integration of the host country into the world political/economic system. Therefore, all of the above options are important in evaluating political risk.

Question 19

More than fifty percent of FDI in dollar terms
A)takes the form of cross-border mergers and acquisitions.
B)takes the form of Greenfield investment.
C)is initiated by governments.
D)none of the above

Accepted Answer

Cross-border mergers and acquisitions generally involve a larger amount of capital compared to Greenfield investment, which usually involves building new facilities from scratch. Therefore, it is likely that more than 50% of FDI in dollar terms takes the form of cross-border mergers and acquisitions. FDI is also mostly initiated by multinational corporations rather than governments, so option C is also incorrect.

Question 20

Some of the risks that a U.S.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 the U.S.,the Overseas Private Investment Corporation (OPIC)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 the above

Accepted Answer

OPIC offers political risk insurance which covers risks such as inconvertibility of foreign currencies, expropriation, destruction of properties due to war or political violence, and loss of business income due to political violence. It does not offer insurance for risks such as increase in the cost of borrowing, inflation, dumping, or unfair competition by local companies.

Quiz 16: Foreign Direct Investment and Cross-Border Acquisitions

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

Countries may welcome Greenfield investments,

Country risk

Once a MNC decides to undertake a foreign project,it can take various measures to minimize its exposure to political risk.These include

Examples of control risk include

The communist victory in China in 1949 is an example of

Country risk refers to

One particular type of political risk that MNCs and investors may face is corruption associated with the abuse of public office for private benefits.

When evaluating a foreign investment project,it is important for the MNC to consider the effect of political risk,as a sovereign country can change "the rules of the game".To account for this

Examples of transfer risk include

In evaluating political risk,experts focus their attention on a set of key factors such as

Examples of operational risk include

An increase in political risk can be managed by

North Korea,Iran,and Cuba are examples of

In evaluating political risk,experts focus their attention on a set of key factors such as

More than fifty percent of FDI in dollar terms