Multinational Business Finance, 14e (Eiteman)
Chapter 17 Foreign Direct Investment and Political Risk
17.1 Sustaining and Transferring Competitive Advantage
1) An example of economies of scale in financing include:
A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large-scale plant and equipment.
D) all of the above
2) Which of the following is NOT a factor of Porter’s “diamond of national advantage”?
A) factor conditions
B) demand conditions
C) related and supporting industries
D) All of the above are factors of the diamond of national advantage.
3) Based on observations of firms that have successfully invested abroad, we can conclude that
one of the competitive advantages enjoyed by MNEs is:
A) managerial expertise.
B) financial strength.
C) competitiveness of their home markets.
D) all of the above are competitive advantages.
4) Based on observations of firms that have successfully invested abroad, we can conclude
companies are more competitive when:
A) facing sophisticated and demanding customers in the home market.
B) surrounded by a critical mass of related industries and suppliers.
C) located in countries that are naturally endowed with the appropriate factors of production.
D) all of the above are true
5) MNEs that are resident in liquid and unsegmented capital markets are more likely to be able to
demonstrate financial strength by achieving and maintaining a global cost and availability of
capital.
6) A strongly competitive home market tends to dull the competitive advantage relative to firms
located in less competitive home markets.
7) The authors were unable to identify in lesser developed countries specific firms that are
nearing the status of global MNE.
8) Small– and medium-size firms often attract foreign investors and achieve a global cost of
capital.
9) List and explain three strategic motives why firms become multinationals and give an example
of each.
Answer: The authors provide 5 strategic motives for firms to become multinationals: market
17.2 The OLI paradigm and Internationalization
1) The OLI paradigm is an attempt to create a framework to explain why MNEs choose
________ rather than some other form of international venture.
A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances
2) The O in OLI refers to an advantage in a firm’s home market that is:
A) operator independent.
B) owner-specific.
C) open-market.
D) official designation.
3) The owner-specific advantages of OLI must be:
A) firm-specific.
B) not easily copied.
C) transferable to foreign subsidiaries.
D) all of the above
4) A/An ________ would be an example of an owner-specific advantage for an MNE.
A) patent
B) economy of scale
C) economy of scope
D) all of the above
5) The L in OLI refers to an advantage in a firm’s home market that is a:
A) liability in the domestic market.
B) location-specific advantage.
C) longevity in a particular market.
D) none of the above
6) A/An ________ would be an example of a location-specific advantage for an MNE.
A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information
7) The I in OLI refers to an advantage in a firm’s home market that is an:
A) internalization.
B) industry-specific advantage.
C) international abnormality.
D) none of the above
8) A/An ________ would be an example of an internalization advantage for an MNE.
A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information
9) In deciding whether to invest abroad, management must first determine whether the firm has a
sustainable competitive advantage that enables it to compete effectively in the home market. The
competitive advantage must be:
A) firm specific.
B) not easily copied.
C) in a transferable form.
D) all of the above
10) Which of the following is NOT a market imperfection or genuine comparative advantage that
attracts FDI to particular locations:
A) low cost and productive labor force.
B) unique sources of raw materials.
C) defensive investments.
D) an expansive monetary policy.
11) Reactive financial strategies can be formulated in advance by the MNE’s financial managers.
12) Proactive financial strategies depend on discovering market imperfections.
13) What does the OLI Paradigm propose to explain? Define each component and provide an
example of each.
1) Which of the following is NOT true regarding behavioral observations of firms making a
decision to invest internationally?
A) MNEs initially invest in countries with a similar “national psychic.”
B) Firms eventually take greater risks in terms of the national psychic of countries in which they
invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.
2) In practice, when expanding into other countries, firms have been observed to follow a
sequential search pattern as described in the behavioral theory of the firm.
3) As a general rule, the decision about where to invest abroad for the first time is the same as
the decision about where to reinvest abroad.
4) Economists have observed that firms tend to invest first in countries that are too far distant in
psychic distance (similar cultural, legal, and institutional environment).
5) Transnationals are firms that have operations in more than one country and conduct their
business through branches, foreign subsidiaries, or joint ventures with host country firms.
6) The decision about where to invest abroad is influenced by behavioral factors. Explain the
behavioral approach to FDI.
Answer: The behavioral approach to analyzing the FDI decision is typified by the so-called
Swedish School of economists. The Swedish School has rather successfully explained not just
17.4 Modes of Foreign Involvement
1) Which of the following is NOT an advantage to exporting goods to reach international
markets rather than entering into some form of FDI?
A) fewer political risks
B) greater agency costs
C) lower front-end investment
D) All of the above are advantages.
2) Which of the following is an advantage to exporting goods to reach international markets
rather than entering into some form of FDI?
A) fewer agency costs
B) fewer direct advantages from research and development
C) a greater risk of losing markets to copycat goods producers
D) an inability to exploit R&D as effectively as if also invested abroad
3) Which of the following is NOT a form of FDI?
A) wholly-owned affiliate
B) joint venture
C) exporting
D) greenfield investment
4) With licensing the ________ is likely to be lower than with FDI because of lower profits;
however, the ________ is likely to be higher due to a greater return per dollar invested.
A) IRR; NPV
B) NPV; IRR
C) cost of capital; NPV
D) IRR; cost of capital
5) Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of quality control
B) establishment of a potential competitor in third-country markets
C) possible improvement of the technology by the local licensee, which then enters the original
firm’s home market
D) All of the above are potential disadvantages to licensing.
6) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate
7) Which of the following is NOT an advantage to a joint venture?
A) Possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) May be a realistic alternative when 100% foreign ownership is not allowed.
8) Greenfield investments are typically ________ and ________ than cross-border acquisition.
A) slower; more uncertain
B) faster; of greater certainty
C) slower; of greater certainty
D) faster; more uncertain
9) All of the following may be justification for a strategic alliance EXCEPT:
A) takeover defense
B) a joint venture to pool resources for research and development
C) joint marketing and serving agreements
D) All of the above are legitimate reasons for strategic alliances
10) Licensing is a popular form of foreign investment because it does not need a sizable
commitment of funds, and political risk is often minimized.