Question 1

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 options

Accepted Answer

Experts focus on all of the options mentioned, as each factor plays a significant role in determining the level of political risk in a host country. Integration into the world political/economic system can impact a country's stability and ability to attract foreign investment, while ethnic and religious stability can affect social cohesion and potential conflict. Regional security and key economic indicators are also critical factors in understanding the political risk environment.

Question 2

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(are)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 options

Accepted Answer

Both A and B are true.

Question 3

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.
A)(i),(ii),(iii),and (iv)
B)(v),(vi),(vii),and (viii)
C)(i),(ii),(iii),(iv),(v),(vi),(vii),and (viii)
D)none of the options

Accepted Answer

These risks are specific to foreign investments, including currency inconvertibility, expropriation, and political violence-related issues.

Question 4

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

Accepted Answer

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

Question 5

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 options
D)none of the options

Accepted Answer

Country risk includes a range of risks related to a country's economic and political stability, such as political risk, credit risk, economic risk, and financial risk. Therefore, option C is the correct choice. Option A is incorrect because political risk is just one aspect of country risk. Option B is also incorrect because it doesn't mention all of the different types of risks that are included in country risk.

Question 6

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 are 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 options

Accepted Answer

All the statements are true. Maharashtra did invite Enron to renegotiate its contract after the initial cancellation, highlighting the complexities of international business and political risk. The lack of effective means to enforce contracts in a foreign country is indeed a significant source of political risk for foreign direct investments (FDI). Enron's efforts to pressure Maharashtra through the U.S. Energy Department and the subsequent backlash from BJP politicians illustrate the challenges and sensitivities involved in international negotiations and the impact of political actions on business operations.

Question 7

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 options

Accepted Answer

Greenfield investments are viewed positively by countries as they represent new investment and employment opportunities. They are seen as beneficial for the local economy and can help boost economic growth.

Question 8

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 options

Accepted Answer

Transfer risk involves the risk of capital controls and withholding taxes affecting the movement of funds across borders.

Question 9

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 options

Accepted Answer

According to various reports and studies, cross-border mergers and acquisitions typically account for more than 50% of FDI in dollar terms. This is primarily driven by large multinational corporations acquiring or merging with companies in foreign countries to expand their market presence and gain access to new technologies and resources. Greenfield investment, in which a company builds its operations from scratch in a foreign country, is also a significant form of FDI, but typically accounts for a smaller percentage of total FDI. Government-initiated FDI is relatively rare and tends to be limited to strategic investments in key industries or sectors.

Question 10

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 the options

Accepted Answer

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

Question 11

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 options

Accepted Answer

Experts focus their attention on a set of key factors such as 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 the options are correct.

Question 12

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 options

Accepted Answer

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

Question 13

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 options

Accepted Answer

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

Question 14

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 the options

Accepted Answer

All of the options mentioned can help manage the increase in political risk. Adjusting the investment project's NPV by reducing expected cash flows or increasing the cost of capital can help mitigate potential losses. Forming a joint venture with a local company can provide access to local knowledge, resources, and networks. Purchasing insurance against political risk can help hedge against any potential losses. Therefore, all options are valid choices for managing an increase in political risk.

Question 15

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 options

Accepted Answer

When evaluating a foreign investment project, it is important for the MNC to consider the potential political risks. To account for this risk, the MNC may utilize a combination of options such as adjusting the cost of capital upward, lowering the expected cash flows from the foreign project, or purchasing insurance policies against the hazard of political risks. Therefore, all of the options are potential choices for an MNC to manage political risk.

Question 16

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 options

Accepted Answer

Control risk involves government actions that affect the ownership and control of foreign businesses, such as restrictions on foreign ownership and nationalization.

Question 17

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(are)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 options

Accepted Answer

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

Question 18

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

Accepted Answer

The communist victory in China in 1949 was a macro risk as it had a significant impact on global politics and economic systems, and affected the relationships between countries.

Question 19

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 options

Accepted Answer

All of the options are correct. MNCs and investors may face corruption risks when dealing with government officials who demand bribes for contracts or bureaucratic processes. Refusal to pay may result in loss of business opportunities or bureaucratic red tape. Additionally, engaging in corruption risks violating laws and negative publicity if discovered and reported in the media.

Question 20

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)countries with high and low levels of political risk.

Accepted Answer

The answer of North Korea,Iran,and Cuba are examples of
A)countries with...

Quiz 16: Foreign Direct Investment and Cross-Border Acquisitions

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

Country risk refers to

Country risk

Countries may welcome greenfield investments,

Examples of transfer risk include

More than fifty percent of FDI in dollar terms

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

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

Examples of operational risk include

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

An increase in political risk can be managed by

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 control risk include

The communist victory in China in 1949 is an example of

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

North Korea,Iran,and Cuba are examples of