International Financial Management, 8e (Eun)
1) In the early 1980s, Honda, the Japanese automobile company, built an assembly plant in
Marysville, Ohio, and began to produce cars for the North American market. As the production
capacity at the Ohio plant expanded, Honda began to export its U.S.-manufactured cars to Japan.
2) Shareholders of U.S. bidders (acquiring firms in M&A) experience significant positive
abnormal returns when firms expand into new industries and geographic markets.
3) Shareholders of U.S. targets experience higher wealth gains when they are acquired by foreign
firms than when acquired by U.S. firms.
4) Cross-border acquisitions are generally found to be synergy-generating corporate activities.
5) Under a 1981 Voluntary Restraint Agreement Japanese automobile manufacturers were not
allowed to increase their exports to the U.S. market. As a result
A) they exited the market.
B) Honda was motivated to circumvent the trade barriers.
C) Honda’s FDI may have been part of an overall corporate strategy designed to bolster their
competitive position vis-à-vis their domestic rivals such as Toyota.
D) Honda was motivated to circumvent the trade barriers, and Honda’s FDI may have been part of
an overall corporate strategy designed to bolster their competitive position vis-à-vis their domestic
rivals such as Toyota.
6) Following Honda’s FDI in the U.S.,
A) the U.S. government imposed a Voluntary Restraint Agreement under which Japanese
automobile manufacturers were not allowed to increase their exports to the U.S. market.
B) Toyota and Nissan made direct investments in America.
C) sales of Hondas declined.
D) none of the options
7) Honda’s decision to build a plant in Ohio
A) was welcomed by the United Auto Workers.
B) was encouraged by assistance from the state of Ohio, including improved infrastructure around
the plant and abatement of property taxes.
C) involved setting up a special foreign trade zone that allowed Honda to import auto parts from
Japan at a reduced tariff rate.
D) all of the options
8) When firms undertake FDI,
A) they become MNCs.
B) they reduce their tax rate since they can tell each country that they do business in that they paid
their taxes in other countries.
C) they can exploit workers by paying them below-market wages in depreciating currencies.
D) all of the options
9) Prior to Honda’s decision to build a plant in Ohio,
A) the Japanese government had been urging the automobile companies to begin production in the
United States.
B) the Japanese government had been urging the automobile companies to keep production in
Japan.
C) the Japanese government imposed import quotas on U.S.-made automobiles.
D) none of the options
10) FDI can take the form of
A) Greenfield investment.
B) cross-border M &A.
C) establishing new production facilities in a foreign country.
D) all of the options
11) The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar, a
British auto maker.
A) This is an example of cross-border M&A.
B) This was a Greenfield investment.
C) This is an example of cross-border M&A, and was also a Greenfield investment.
D) none of the options
12) Firms become multinational
A) when they undertake foreign direct investments (FDI).
B) with the establishment of new production facilities in foreign countries such as Honda’s Ohio
plant.
C) when they become involved in mergers with and acquisitions of existing foreign businesses.
D) all of the options
13) The United States is the largest initiator, of FDI. The largest recipient of FDI is
A) also the United States.
B) France.
C) Germany.
D) China.
14) According to a recent UN survey, the world FDI stock grew to what amount in 2015?
A) $25 billion
B) $20 billion
C) $10 billion
D) none of the options
15) During the six-year period 2010-2015, total annual worldwide FDI outflows amounted to
A) about $1,500 million on average.
B) about $1,394 billion on average.
C) about $1,000 trillion on average.
D) none of the options
16) During the six-year period 2010-2015,
A) China received the largest amount of FDI inflows.
B) India received the largest amount of FDI inflows.
C) Mexico received the largest amount of FDI inflows.
D) the United States received the largest amount of FDI inflows.
17) Japan plays a major role as an exporter of FDI. As a recipient of FDI,
A) Japan receives as much FDI as it exports, making it a major player on both fronts.
B) Japan plays a relatively minor role, reflecting a variety of legal, economic, and cultural barriers
to FDI.
C) Japan’s receipts of FDI are third in the world.
D) none of the options
18) MNCs might have been lured to invest in China not only by lower labor and material costs, but
also
A) by China’s lower labor and material costs.
B) by the desire to preempt the entry of rivals into China’s potentially huge market.
C) by the Kung Pao chicken.
D) by the desire to see, if not buy, all the tea in China.
19) The third most important source of FDI outflows is
A) the United States.
B) Japan.
C) China.
D) Mexico.
20) MNCs have invested in China
A) by lower material costs.
B) by lower labor costs.
C) by a desire to preempt the entry of rivals into China’s potentially huge market.
D) all of the options
21) FDI stocks
A) are the common shares of multinational companies that invest abroad.
B) are mutual funds that invest in FDI.
C) represent the accumulation of previous years’ FDI flows.
D) are the sum total of current year FDI flows.
22) The dominant source of FDI outflows is
A) several developed countries.
B) a few underdeveloped countries next to wealthy neighbors, like Mexico.
C) Africa and China.
D) none of the options
23) Alternatives to firms locating production overseas include
A) exporting from the home country.
B) licensing production to a local firm in the host country.
C) ignoring the foreign market.
D) all of the options
24) The key factors that are important in a firm’s decision to invest overseas are
A) trade barriers, imperfect labor market, and intangible assets.
B) vertical integration, product life cycle, and shareholder diversification services.
C) profit maximization, global prestige, and competition.
D) trade barriers, imperfect labor market, and intangible assets, as well as vertical integration,
product life cycle, and shareholder diversification services.
25) Why do firms locate production overseas rather than exporting finished goods?
A) Shipping costs
B) Firms seek to extend corporate control overseas
C) Imperfect factor markets
D) all of the options
26) Unlike the theory of international trade or the theory of international portfolio investment,
A) we do not have a well-developed, comprehensive theory of FDI.
B) the comprehensive theory of FDI focuses on mean-variance efficiency.
C) the comprehensive theory of FDI is an arbitrage argument, like interest rate parity.
D) none of the options
27) While there is no comprehensive theory of FDI, many existing theories emphasize
A) imperfections in product markets.
B) imperfections in capital markets.
C) imperfections in labor markets.
D) all of the options
28) International markets for goods and services are often imperfect. Which is the most common
and most important?
A) Acts of governments
B) Natural barriers like distance
C) Cultural barriers
D) Lack of knowledge
29) Why do governments regulate international trade?
A) To raise revenue
B) Protect domestic industries
C) Pursue other economic objectives
D) all of the options
30) Governments regulate international trade
A) to raise revenue (e.g., through tariffs).
B) to protect domestic industries.
C) to pursue other economic policy objectives (e.g., North Korea forgoing trade).
D) all of the options
31) A classic example for trade barrier-motivated FDI is
A) Honda’s investment in Ohio.
B) Bridgestone’s investment in Japan.
C) NAFTA.
D) none of the options
32) Such products as mineral ore and cement that are heavy or bulky relative to their economic
values
A) may be suitable for exporting because high transportation costs will be overcome by high profit
margins in oligopolistic industries.
B) have high “value-to-weight ratios” that protect profit margins.
C) may not be suitable for exporting because high transportation costs will substantially reduce
profit margins.
D) none of the options
33) Trade barriers can arise naturally. Which of the following are natural barriers to trade?
A) Transportation costs
B) Quotas
C) Tariffs
D) Transactions costs
34) In a push to serve the North American market Samsung, a Korean firm, chose to locate
production facilities in Mexico, mainly because
A) of lower labor costs in Mexico.
B) to circumvent trade barriers imposed by NAFTA.
C) because of colder weather in Canada.
D) none of the options
35) Labor services in a country might be underpriced relative to productivity because
A) workers are not allowed to freely move across national boundaries to seek higher wages.
B) some countries do a bad job of educating their work force, consequently they are not very
productive.
C) in some countries there is a shortage of capital investment.
D) all of the options are equally important
36) Labor services in a country can be severely underpriced relative to its productivity
A) because workers are not allowed to freely move across national boundaries to seek higher
wages.
B) because among all factor markets, the labor market is the most imperfect.
C) because workers may choose to not move across national boundaries to seek higher wages due
to the cultural differences.
D) all of the options
37) Severe imperfections in the labor market lead to persistent wage differentials among countries
A) because workers are not allowed to freely move across national boundaries to seek higher
wages.
B) because workers may choose to not move across national boundaries to seek higher wages due
to the cultural differences.
C) but these differences are offset by low productivity in low labor cost countries.
D) because workers are not allowed to freely move across national boundaries to seek higher
wages, and because workers may choose to not move across national boundaries to seek higher
wages due to the cultural differences.
38) Factors of production include land, labor, capital, and entrepreneurial ability. Of all the factor
markets, the most imperfect is the
A) labor market.
B) capital market.
C) real estate market.
D) market for entrepreneurial ability.
39) Severe imperfections in the labor market lead to
A) persistent wage differentials among countries.
B) persistent exchange rate volatility among countries.
C) persistent interest rate differentials among countries.
D) none of the options
40) Severe imperfections in the labor market arise from immobility of workers due to immigration
barriers. As a response, firms should consider
A) moving to the workers.
B) moving to countries where labor services are the lowest in absolute terms.
C) moving to countries where labor services are underpriced relative to productivity.
D) hiring illegal immigrants.
41) Coca-Cola has invested in bottling plants all over the world rather than licensing local firms
A) because the foreigners can’t be trusted to follow the secret recipe.
B) because Coca-Cola wanted to protect the formula for its famous soft drink.
C) because of the internalization theory of FDI.
D) because Coca-Cola wanted to protect the formula for its famous soft drink and because of the
internalization theory of FDI.
42) The boomerang effect is defined as
A) the possibility that if the secret formula of Coca-Cola were leaked, that other firms would come
up with similar products and hurt Coca-Cola’s sales.
B) the possibility that FDI in an undeveloped nation will lead to a group of workers who have
enough money to afford the firm’s products, leading to an increase of sales and increase of workers
and so on.
C) the possibility that FDI in an undeveloped nation will lead to a group of domestic workers no
longer have enough money to afford the firm’s products, leading to an decrease of sales.
D) none of the options
43) Examples of intangible assets include
A) technological, managerial, and marketing know-how.
B) superior R&D capabilities.
C) brand names.
D) all of the options
44) In the 1960s, Coca-Cola, which had bottling plants in India, faced strong pressure from the
Indian government to reveal the Coke formula as a condition for continued operations in India. As
a result,
A) Coke agreed to reveal the formula to the Indian government, which has maintained it as a state
secret to this day.
B) instead of revealing the formula, Coke withdrew from the Indian market.
C) Coke was able to successfully lobby the government to withdraw this demand.
D) none of the options
45) MNCs may undertake overseas investment projects in a foreign country, despite the fact that
local firms may enjoy inherent advantages. This implies that
A) MNCs are making a mistake in this case and will have to eventually withdraw.
B) MNCs should have significant advantages over local firms such as comparative advantages due
to intangible assets.
C) the local firms will not have to compete due to their inherent advantages over the foreigners.
D) none of the options
46) Intangible assets are often hard to package and sell to foreigners
A) because they usually default on the contracts that they sign.
B) and as a result, there is more FDI than there might otherwise be.
C) because property rights in intangible assets are difficult to establish and protect, especially in
foreign countries where legal recourse may not be readily available.
D) because property rights in intangible assets are difficult to establish and protect, especially in
foreign countries where legal recourse may not be readily available. As a result of intangible assets
being difficult to package and sell to foreigners, there is more FDI than there might otherwise be.
47) According to the internalization theory of FDI,
A) firms that have intangible assets with a public good property tend to invest directly in foreign
countries.
B) property rights in intangible assets are difficult to establish and protect, especially in foreign
countries where legal recourse may not be readily available.
C) firms that have intangible assets with a public good property tend to invest directly in foreign
countries. Additionally, property rights in intangible assets are difficult to establish and protect,
especially in foreign countries where legal recourse may not be readily available.
D) none of the options
48) Firms that have intangible assets with a public good property tend to invest directly in foreign
countries. This is
A) in order to use these assets on a larger scale.
B) to avoid the misappropriation that may occur while transacting in foreign countries through the
market mechanism.
C) in order to use these assets on a larger scale, and to avoid the misappropriation that may occur
while transacting in foreign countries through the market mechanism.
D) none of the options
49) What kind of integration is vertical integration?
A) When the government outlaws discrimination against both short and tall people.
B) When two firms join together in a conglomerate merger.
C) When two firms related in the production process are owned by the same firm, as in a plywood
manufacturer owning a logging company.
D) all of the options
50) The conflicts between the upstream and downstream firms can be resolved,
A) if the two firms form a horizontally integrated firm.
B) if the two firms form a vertically integrated firm.
C) if the two firms form a linearly integrated firm.
D) none of the options
51) Many MNCs involved in extractive/natural resources industries
A) tend to directly own oil fields, mine deposits, and forests.
B) tend to lease their oil fields, mine deposits, and forests.
C) tend to partner with local firms, leveraging their intangible assets.
D) none of the options
52) Also, MNCs often find it profitable to locate manufacturing/processing facilities near
A) the home office to exploit their assets in place.
B) the natural resources in order to save transportation costs.
C) their competitor’s manufacturing plant to even out the playing field with regard to shipping
costs.
D) none of the options
53) FDI vertical integration is backward
A) when FDI involves an industry abroad that produces inputs for MNCs.
B) when FDI involves an industry abroad that sells the MNC’s outputs.
C) none of the options
D) when FDI involves an industry abroad that produces inputs for MNCs, as well as when FDI
involves an industry abroad that sells the MNC’s outputs.
54) The majority of foreign vertical integration is
A) backward.
B) forward.
C) sideways.
D) none of the options
55) An example of forward vertical FDI is when
A) U.S. car makers built their own network of dealerships in Japan to help sell their cars.
B) U.S. car makers began to source parts in Japan to lower the cost of their cars.
C) U.S. car makers entered into joint partnerships with car makers in Japan to help sell their cars.
D) none of the options
56) U.S. car makers were forced to build their own network of dealerships to enter the Japanese
market.
A) This is an example of backward vertical integration.
B) This is an example of forward vertical integration.
C) This is an example of sideways vertical integration.
D) none of the options