11) MNEs typically used licensing with independent firms rather than with their own foreign
subsidiaries.
12) Joint ventures are a more common FDI than wholly owned subsidiaries.
13) Local partners in a foreign country and in a joint venture with an MNE are likely to make
decisions that maximize the value of the subsidiary. Such actions probably will not maximize the
value of the entire firm.
14) What are the advantages and disadvantages of serving a foreign market through a greenfield
foreign direct investment compared to an acquisition of a local firm in the target market?
Answer: A greenfield investment is defined as establishing a production or service facility
starting from the ground up, i.e., from a green field. Compared to greenfield investment, a cross–
17.5 Illustrative Case: Corporate Competition from the Emerging Markets
1) Which of the following is NOT one of classic trade-off confronting gloabl challengers
according to the Boston Consulting Group?
A) Growth versus market share
B) Volume versus margin
C) Rapid expansion versus low leverage
D) Growth versus dividends
2) When faced with additional risk from a foreign investment, firms typically account for the
additional risk by adjusting the discount rates or by adjusting cash flows.
3) According to the Boston Consulting Group analysis gloabl challengers have been able to have
both volume and margin.
4) According to the Boston Consulting Group gloabl challengers are companies based in rapidly
developing economies that are “shaking up” the established economic order.
1) ________ risks are those that affect the MNE at the local or project level, but originate at the
country level.
A) Country-specific
B) Firm–specific
C) Global-specific
D) none of the above
2) Which of the following is NOT an example of a country-specific risk?
A) transfer risk
B) war and ethnic strife
C) cultural and religious heritage
D) All of the above are examples of country-specific risk.
3) According to your authors, MNEs can anticipate government regulations that are
discriminatory or wealth depriving from a/an ________ or ________ level view.
A) foreign; domestic
B) micro; macro
C) internal; external
D) local; global
4) ________ is the ability to exercise effective control over a foreign subsidiary within a
country’s legal and political environment.
A) Political risk
B) Portfolio risk
C) Interest rate risk
D) Governance risk
5) Of the following, which would NOT be considered an issue for an investment agreement prior
to investing in a foreign country?
A) the basis for setting transfer prices
B) the right to export to third-country markets
C) provision for arbitration of disputes
D) All of the above could be negotiated prior to investing.
6) OPIC stands for:
A) Organization for the Prevention of Insufficient Capitalization.
B) Organization of Petroleum Importing Countries.
C) Overseas Private Investment Corporation.
D) Overseas Public Insurance Commission.
7) ________ is a type of political risk that OPIC does NOT cover.
A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.
8) ________ is the risk that the host government will take specific steps that prevent the foreign
affiliate from exercising control over the firm’s assets.
A) Inconvertibility
B) Expropriation
C) Business income risk
D) none of the above
9) ________ is NOT one of the three main country-specific risks as outlined by your authors.
A) Transfer risk
B) Cultural differences
C) Thin equity base
D) Protectionism
10) Governance risk due to goal conflict between an MNE and its host government is the main
political ________ risk.
A) firm-specific
B) country-specific
C) global-specific
D) cultural–specific
11) A number of institutional services provide updated country risk ratings on a regular basis.
This is an example of micro-risk information for MNEs using this data.
12) Business risk can be measured through sensitivity analysis but from only the project
viewpoint.
13) What is meant by the term “governance risk”? What is the most important type of
governance risk?
14) An investment agreement spells out specific rights and responsibilities of both the foreign
firm and the host government. What are the main financial policies that should be included in an
investment agreement?
Answer: An investment agreement spells out specific rights and responsibilities of both the
foreign firm and the host government. The presence of MNEs is as often sought by development–
seeking host governments as a particular foreign location is sought by an MNE. All parties have
alternatives, and so bargaining is appropriate. An investment agreement should spell out policies
on financial and managerial issues, including the following:
– The basis on which fund flows, such as dividends, management fees, royalties, patent fees, and
1) Blocked funds are cash flows that:
A) come in regular intervals in standardized amounts or blocks.
B) have been restricted in transfer out of a local country.
C) come from a certain sector or region of the world.
D) none of the above