Question 1

A firm will likely benefit most from diversifying if:

Accepted Answer

Diversification is most effective when the correlations between country economies are low. This means that the performance of one economy is not strongly related to the performance of another, reducing the overall risk of the firm's investments. However, high variability of all country economy levels may increase overall risk, making diversification less effective in reducing risk.

Question 2

Direct foreign investment is perceived by foreign governments to:

Accepted Answer

Foreign governments may perceive direct foreign investment as either a cause or a remedy for national problems, depending on the specific circumstances and impacts on their economy and society.

Question 3

The ____ a project's variability in cash flows, and the ____ the positive correlation between the project's cash flow and the MNC's cash flow, the lower the risk of the project.

Accepted Answer

Lower variability in cash flows and a lower positive correlation with the MNC's cash flow both contribute to reducing the project's risk.

Question 4

Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of ____ motives by U.S. firms that engage in direct foreign investment.

Accepted Answer

U.S. firms may find the country attractive for cost-related motives due to low labor costs associated with high unemployment and low income levels.

Question 5

Direct foreign investment would typically be welcomed if:

Accepted Answer

Direct foreign investment would typically be welcomed if the products to be produced are going to be exported. This would bring foreign currency into the country and boost the economy. The other options do not necessarily guarantee a favorable outcome for the host country. Having products that compete with locally produced goods may harm the local economy and transferring foreign workers may result in taking away jobs from locals.

Question 6

Based on the text, it should be obvious that markets are ____ in reality, and consequently, monopolistic advantages ____ be exploited.

Accepted Answer

The text implies that markets are imperfect in reality, which rules out options A and B. Additionally, the text mentions that monopolistic advantages can possibly be exploited, which rules out option D. Therefore, the correct answer is C.

Question 7

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

Accepted Answer

According to the text, China has been perceived as one of the most attractive sources of new demand.

Question 8

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

Accepted Answer

If a foreign currency is undervalued, it means that the firm's currency is relatively stronger than the host country's currency. This makes the initial outlay for direct foreign investment relatively low, as the firm can get more for their currency in terms of the host country's currency. Therefore, the statement is true.

Question 9

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 related to accessing lower production costs, such as lower labor or raw materials costs in the foreign country. Diversification across product markets can be a secondary benefit, but it is not typically the primary motive for foreign investment.

Question 10

According to the text, a firm may be able to achieve a "more efficient" project portfolio if it:

Accepted Answer

The text does not provide a specific answer about what would lead to a more efficient project portfolio. Therefore, none of the options is the best choice.

Question 11

According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI:

Accepted Answer

If the firm planning DFI would compete with local firms of the host country, the host government would be less likely to provide incentives as it may harm the domestic businesses. On the other hand, if the firm would produce a good not currently available in the host country or export its products to other countries, the host government may see it as an opportunity to strengthen its economy and may provide incentives. Therefore, option A is the best choice.

Question 12

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?

Accepted Answer

The answer of Assume the British pound appreciates against the...

Question 13

Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____.

Accepted Answer

The answer of Consider Firm A and Firm B that...

Question 14

If countries are highly influential upon each other, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.

Accepted Answer

If countries are highly influential upon each other, their economic growth levels would likely have high and positive correlations. A firm would benefit less by diversifying sales among these countries because their economies would tend to move together, reducing the diversification benefit.

Question 15

Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.

Accepted Answer

If the pound is expected to appreciate against the dollar, it means that each pound earned by the subsidiary will be worth more dollars in the future. Therefore, the parent may request that the subsidiary postpone remitting earnings until the pound strengthens, so that when the remittance is finally made, the parent will receive more dollars for each pound earned. This strategy will allow the parent to benefit from the expected appreciation of the pound. Hence, the dollar value of earnings remitted to the parent should increase, and the best choice is A.

Question 16

From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:

Accepted Answer

The efficient frontier represents a set of optimal portfolios that offer the highest expected return for a defined level of risk. The optimal point on the frontier varies for each firm based on their individual risk tolerance, so it cannot be universally determined.

Question 17

Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:

Accepted Answer

The answer of Even if production costs are higher in...

Question 18

When a firm analyzes the feasibility of a project, it should consider the:

Accepted Answer

When analyzing the feasibility of a project, it is important to consider the variability of the project's cash flows (option A). This is because if the project's cash flows are highly variable, it increases the risk associated with the project. Additionally, it is important to consider the correlation of the project's cash flow relative to the MNC's prevailing cash flows (option B). This is because if the project's cash flows are negatively correlated with the MNC's cash flows, it can act as a natural hedge and reduce the overall risk of the MNC. Therefore, both options A and B should be considered when analyzing the feasibility of a project.

Question 19

A country with high unemployment could best increase its employment by:

Accepted Answer

By encouraging foreign firms to establish subsidiaries that produce products local firms do not produce, it can lead to the creation of new industries and job opportunities that were not previously available. This can provide more employment opportunities to the local population and help reduce unemployment. Encouraging foreign firms to produce the same or already existing products as local firms may lead to competition and job losses among local firms. Licensing arrangements may not necessarily lead to job creation as the foreign firm may not need to set up a physical presence in the country.

Question 20

Which of the following is a reason to consider international business?

Accepted Answer

All three options - economies of scale, monopolistic advantages, and diversification - are valid reasons for considering international business. By expanding into international markets, companies can achieve economies of scale that allow for cost savings and increased efficiency. They can also exploit monopolistic advantages, such as unique intellectual property or expertise, in markets where competition may be less intense. Finally, international business can provide diversification benefits by spreading risks across different markets and reducing dependence on a single domestic market.

Quiz 13: Direct Foreign Investment