1.4 What Is Different About International Financial Management?
1) Which of the following domestic financial instruments have NOT been modified for use in
international financial management?
A) currency options and futures
B) interest rate and currency swaps
C) letters of credit
D) All of the above are domestic financial instruments that have also been modified for use in
international financial markets.
2) Which of the following is not always understood by MNE management?
A) Culture, history, and institutions
B) Political risk
C) Foreign exchange risk
D) Financial instruments
3) MNEs must modify finance theories like cost of capital and capital budgeting because of
foreign complexities.
4) Relative to MNEs, purely domestic firms tend to have GREATER political risk.
5) Domestic firms tend to make GREATER use of financial derivatives than MNEs because they
can bear the greater risk presented by these financial instruments.
6) Because countries have different financial regulations and customs, it is common for MNEs to
apply their domestic rules and regulations when doing financial business in a foreign country.
7) A number of financial instruments that are used in domestic financial management have been
modified for use in international financial management. Examples are foreign currency options
and futures, interest rate and currency swaps, and letters of credit.
8) Domestic firms do not have foreign exchange risk.
9) The objectives and responsibilities of the modern multinational have grown significantly more
complex in the twenty-first century. Develop and argument as to why this is the case.
1.5 Market Imperfections: A Rationale for the Existence of the Multinational Firm
1) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms
produce in foreign countries?
A) satisfaction of local demand in the foreign country
B) satisfaction of local demand in the domestic markets
C) political safety and small likelihood of government expropriation of assets
D) All of the above are market-seeking activities.
2) ________ investments are designed to promote and enhance the growth and profitability of
the firm. ________ investments are designed to deny those same opportunities to the firm’s
competitors.
A) Conservative; Aggressive
B) Defensive; Proactive
C) Proactive; Defensive
D) Aggressive; Proactive
3) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a raw material seeker. Which of the following is NOT a reason why raw material
seeker extract raw materials in foreign countries?
A) They extract raw materials wherever they can be found to export from the host country.
B) They extract raw materials wherever they can be found for sale in the host country.
C) They extract raw materials wherever they can be found for further processing in the host
country.
D) All of the above.
4) For firms competing in a world characterized by oligopolistic competition, strategic motives
can be subdivided into proactive and defensive investments.
5) Defensive measures are designed to enhance growth and profitability of the firm itself.
6) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a knowledge seeker. They operate in foreign countries to exploit existing
technological expertise.
7) The five strategic motives driving the decision to invest abroad and become an MNE (market
seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political
safety seekers) are mutually exclusive.
8) List and explain three strategic motives why firms become multinationals and give an example
of each.
1) The phase of the globalization process characterized by imports from foreign suppliers and
exports to foreign buyers is called the:
A) domestic phase.
B) multinational phase.
C) international trade phase.
D) import-export banking phase.
2) The authors describe the multinational phase of globalization for a firm as one characterized
by the:
A) ownership of assets and enterprises in foreign countries.
B) potential for international competitors or suppliers even though all accounts are with domestic
firms and are denominated in dollars.
C) imports from foreign suppliers and exports to foreign buyers.
D) requirement that all employees be multilingual.
3) A firm in the International Trade Phase of Globalization:
A) makes all foreign payments in foreign currency units and all foreign receipts in domestic
currency units.
B) receives all foreign receipts in foreign currency units and makes all foreign payments in
domestic currency units.
C) bears direct foreign exchange risk.
D) none of the above
4) Of the following, which was NOT mentioned by the authors as an increase in the demands of
financial management services due to increased globalization by the firm?
A) evaluation of the credit quality of foreign buyers and sellers
B) foreign consumer method of payment preferences
C) credit risk management
D) evaluation of foreign exchange risk
5) The twin agency problems limiting financial globalization are caused by these two groups
acting in their own self-interests rather than the interests of the firm.
A) rulers of sovereign states and unsavory customs officials
B) corporate insiders and attorneys
C) corporate insiders and rulers of sovereign states
D) attorneys and unsavory customs officials
6) Typically, a firm in its domestic stage of globalization has all financial transactions in its
domestic currency.
7) Typically, a “greenfield” investment abroad is considered an investment having a greater
foreign presence than a joint venture with a foreign firm.
8) The authors argue that financial inefficiency caused by influential insiders may prove to be an
increasingly troublesome barrier to international finance.
9) The authors describe a process for development of a MNE that begins with a purely domestic
phase, followed by the multinational phase, and topping out with the international trade phase.
10) Today it is widely assumed that there are NO LIMITS to financial globalization.
11) The growth in the influence and self-enrichment of organizational insiders is seen as an
impediment to the growth of financial globalization in general.
12) The actions of corporate insiders and the actions of rulers of sovereign states are both agency
costs that act as an impediment to the growth of globalization.
13) Describe the structural and managerial changes and challenges experienced by a firm as it
moves its operations from domestic to global (globalization process).