Question 1

Examples of transfer risk include

Accepted Answer

Transfer risk specifically refers to the risk of capital controls and restrictions on the movement of funds across borders, such as withholding taxes on dividend and interest payments.

Question 2

The communist victory in China in 1949 is an example of

Accepted Answer

The communist victory in China in 1949 is an example of macro risk because it had a significant impact on the economy, politics, and society of not just China but also the global community. The establishment of a communist government in one of the largest countries in the world had far-reaching consequences for international relations and had a significant impact on global power dynamics.

Question 3

Country risk refers to

Accepted Answer

The answer of Country risk refers to
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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 are true?

Accepted Answer

The cancellation resonated with Indian voters who had a historical distrust of foreign companies due to colonial experiences.

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

Accepted Answer

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

Question 6

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

Accepted Answer

All three options are valid methods for MNCs to account for political risk. Adjusting the cost of capital upward and lowering expected cash flows are ways to reflect the risk in the project's financial analysis. Purchasing insurance policies can help to mitigate some of the risk and provide a safety net in case of negative political events. It is important for MNCs to consider all available options for managing political risk and tailor their approach to the specific circumstances of each project.

Question 7

Examples of control risk include

Accepted Answer

The answer of Examples of control risk include
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Question 8

Countries may welcome greenfield investments,

Accepted Answer

Greenfield investments are the establishment of a new business or facility in a foreign country, representing new investment and employment opportunities. Therefore, countries may welcome greenfield investments as they bring new benefits to the local economy.

Question 9

An increase in political risk can be managed by

Accepted Answer

all of the above options can be used to manage an increase in political risk. Adjusting NPV by reducing expected cash flows or increasing cost of capital can help mitigate potential losses, forming joint venture with a local company can provide insider knowledge and protection, and purchasing insurance can provide a safety net in case of unexpected events. Combining these strategies can provide a comprehensive approach to managing political risk.

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.

Accepted Answer

All of the options listed are potential consequences of the political risk of corruption associated with the abuse of public office for private benefits. Investors may face demands for bribes, companies might lose business opportunities or face bureaucratic red tape if they refuse to make payments. Additionally, if the bribery is discovered and reported in the media, MNCs may violate laws or damage their reputation.

Question 11

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?

Accepted Answer

A is true as Maharashtra did invite Enron to renegotiate the contract. 
B is true as the cancellation of the project highlights the risk associated with investing in foreign countries where contracts may not be effectively enforced. 
C is true as Enron did pressure the U.S. Energy Department to make a statement, which was then criticized by the BJP politicians.

Question 12

More than fifty percent of FDI in dollar terms

Accepted Answer

Cross-border mergers and acquisitions (M&A) account for more than 50% of foreign direct investment (FDI) in dollar terms. This is because M&A activities involve the transfer of ownership rights, control, and technology from one company to another, which can result in significant investment flows. Greenfield investments, on the other hand, refer to the establishment of new facilities, operations, or subsidiaries in a foreign country, which tend to account for a smaller proportion of FDI. Government-initiated FDI is also relatively rare, as most FDI activities are driven by private sector firms seeking new growth opportunities and market access.

Question 13

North Korea, Iran, and Cuba are examples of

Accepted Answer

North Korea, Iran, and Cuba are considered to have high levels of political risk due to their history of political instability, economic isolation, and strained relationships with other countries. Additionally, these countries are politically and economically isolated from the rest of the world, making them more vulnerable to economic and political turmoil. Thus, the correct option is D, both b and c.

Question 14

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:

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.

Question 15

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?

Accepted Answer

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

Question 16

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

Accepted Answer

All of the factors listed (A, B, and C) are important to consider when evaluating political risk in a host country. The integration of the host country into the global political and economic system can affect its stability and susceptibility to external influences. Ethnic and religious stability can impact social cohesion and potential conflicts. Regional security and economic indicators are also crucial factors that can affect political stability and potential risks. Therefore, it is important to consider all three of these key factors when evaluating political risk.

Question 17

Country risk

Accepted Answer

Country risk includes political risk, credit risk, and other economic factors such as inflation, exchange rate stability, and economic growth. It is a broader measure of risk than just political risk, as it considers various factors that can affect an investor's return on investment in a foreign country.

Question 18

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

Accepted Answer

Evaluating political risk involves considering a variety of factors, including the host country's political and government system (A), historical records of political parties and their relative strengths (B), as well as the integration of the host country into the world political and economic system (C). Therefore, the best choice is D, which includes all of the above factors.

Question 19

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

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 20

Examples of operational risk include

Accepted Answer

The answer of Examples of operational risk include
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Quiz 16: Foreign Direct Investment and Cross-Border Acquisitions

Examples of transfer risk include

The communist victory in China in 1949 is an example of

Country risk refers to

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

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

Countries may welcome greenfield investments,

An increase in political risk can be managed by

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

More than fifty percent of FDI in dollar terms

North Korea, Iran, and Cuba are examples of

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

Country risk

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

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

Examples of operational risk include