Question 1

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 British pound is expected to appreciate against the dollar, it would mean that the dollar will have a lower value in terms of the pound. Therefore, the dollar value of earnings remitted to the parent should decrease. To benefit from the expected appreciation of the pound, the parent may request that the subsidiary postpone remitting earnings until the pound strengthens. This would allow the parent to receive a higher dollar value when the earnings are eventually remitted. Therefore, the best choice is A.

Question 2

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

C

Question 3

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

Accepted Answer

China has been perceived as one of the most attractive sources of new demand due to its large population and emerging middle class with increasing purchasing power.

Question 4

Direct foreign investment is perceived by foreign governments to:

Accepted Answer

The perception of direct foreign investment varies by government and can be seen as either a cause or remedy for national problems. Some governments may view foreign investment as a threat to their local industries, while others may see it as a way to boost economic growth and development. Therefore, both A and B are possible depending on the perspective of the government in question.

Question 5

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 reduce the project's risk, as they indicate more predictable and independent cash flows.

Question 6

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

Accepted Answer

When the Japanese yen depreciates against the dollar, goods produced in Japan become cheaper for American buyers, making it advantageous for Japanese exporters to shift operations back to Japan to increase sales in the American market. Conversely, if the British pound appreciates against the dollar, British goods become more expensive for American buyers, making it less advantageous to shift operations from Japan to Britain for the purpose of increasing American sales.

Question 7

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 usually to reduce production and distribution costs. Diversification across product markets may also be a motivation, but it is not the most important cost-related motive.

Question 8

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

A higher percentage of foreign sales and a large number of foreign countries can diversify revenue sources, reducing reliance on any single market and stabilizing cash flows.

Question 9

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

Accepted Answer

The optimal point on an efficient frontier varies for each firm because it depends on the firm's specific risk tolerance and investment goals. The efficient frontier represents a set of portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Since firms have different preferences and strategies regarding risk and return, there is no single point on the frontier that is optimal for all firms.

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 suggest that focusing solely on one product or one location would lead to a more efficient project portfolio. Therefore, none of the given choices are correct.

Question 11

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

Accepted Answer

Encouraging foreign firms to establish subsidiaries that produce products local firms do not produce would bring new jobs and opportunities to the country, rather than competing with existing local firms for the same product market. This would also create a more diverse economy, leading to more sustainable growth and job creation in the long term. The other options may result in competition for the same jobs and resources, potentially leading to further unemployment.

Question 12

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 be highly and positively correlated. A firm would benefit less by diversifying sales among these countries because their economies would move together, reducing the diversification benefit.

Question 13

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 for DFI as it could lead to job losses and other negative effects on the local economy. The other options, such as producing a good not currently available in the host country or exporting to other countries, could be seen as beneficial for the host country's economy and would therefore be more likely to receive incentives.

Question 14

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 can lead to economic growth and job creation in the foreign country. The other options, such as producing substitutes for locally produced products or transferring people from the company's headquarter, may not be as welcomed by the local government or population.

Question 15

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

Accepted Answer

International business offers various advantages such as economies of scale, ability to exploit monopolistic advantages, and diversification of business risks. Therefore, all of the above options are the reasons to consider international business.

Question 16

A firm will likely benefit most from diversifying if:

Accepted Answer

When the correlations between country economies are low, diversification is beneficial because when one economy is performing poorly, another economy may be performing well, which can balance out the negative impacts. If the correlations between country economies are high, economic downturns will affect all countries, leading to greater risks and fewer benefits from diversification. The variability of all country economy levels being high can indicate that diversification can be beneficial as it reduces the risks of loss due to country-specific economic issues. Therefore, both B and C are not correct as the first statement is correct.

Question 17

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

When a foreign currency is undervalued, the firm will have to pay less in their local currency to acquire assets or resources in the foreign country. Therefore, the initial outlay for direct foreign investment should be relatively low.

Question 18

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

Accepted Answer

The text mentions "imperfect competition" which suggests that markets are imperfect and not perfect. It also states that monopolistic advantages "can possibly be exploited," indicating that they might not always be successful but can be attempted. Therefore, the correct answer is C, imperfect; may possibly.

Question 19

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

Accepted Answer

Both A and B should be considered when analyzing the feasibility of a project. The variability of the project's cash flow is important to assess the risk associated with the project, while the correlation between the project's cash flow and the MNC's prevailing cash flows is important to assess the impact of the project on the overall cash flow of the MNC. Therefore, both factors are critical in determining the feasibility of a project.

Question 20

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, as low income levels and high unemployment can lead to lower labor costs.

Quiz 13: Direct Foreign Investment

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.