57) Which of the following statements is true about product life cycle theory?
A) In the early stages of the product life cycle, the demand for the new product is relatively
insensitive to the price and thus a pioneering firm can charge a relatively high price.
B) It predicts that over time the U.S. switches from an exporting country of new products to an
importing country.
C) It has an “S”-shaped curve when plotting “quantity sold” versus “time.”
D) all of the options
58) According to Raymond Vernon (1966),
A) U.S. firms undertake FDI at a particular stage in the life cycle of the products that they initially
introduced.
B) the majority of new products, such as computers, televisions, and mass-produced cars, were
developed by U.S. firms and first marketed in the United States.
C) in the early stage of the product life cycle, the demand for the new product is relatively
insensitive to the price and thus the pioneering firm can charge a relatively high price.
D) all of the options
59) The product life-cycle theory predicts that
A) over time the United States switches from an exporting country of new products to an importing
country.
B) over time the United States switches from a comparative advantage in R&D to a service
economy.
C) over time the United States education system maintains the country’s dominant position in the
world economy.
D) none of the options
60) Which of the following statements is true about product life cycle theory?
A) The theory was developed in the 1960s when the U.S. was the leader in R&D.
B) The international system of production is becoming too complicated to be explained by a
simple version of the product life cycle theory.
C) It predicts that over time the U.S. switches from an exporting country of new products to an
importing country.
D) all of the options
61) Since shareholders of MNCs may indirectly benefit from corporate international
diversification,
A) firms are motivated to undertake FDI for the purpose of providing shareholders with
diversification services.
B) firms are motivated to undertake FDI for the purpose of being part of the global minimum
variance portfolio.
C) firms are motivated to undertake FDI for the purpose of staying on the efficient frontier.
D) none of the options
62) Considering the fact that many barriers to international portfolio investments have been
dismantled in recent years,
A) capital market imperfections as a motivating factor for FDI are likely to become more
important going forward.
B) capital market imperfections as a motivating factor for FDI are likely to become less relevant.
C) labor market imperfections as a motivating factor for FDI are likely to become less relevant.
D) none of the options
63) When a firm holds assets in many countries,
A) the firm’s cash flows are internationally hedged.
B) shareholders of the firm can indirectly benefit from international diversification even if they are
not directly holding foreign shares.
C) shareholders of the firm can directly benefit from international diversification even if they are
not directly holding foreign shares.
D) none of the options
64) Which of the following is the most disingenuous argument in favor of FDI?
A) Shareholder diversification
B) The internalization theory of FDI
C) The promise of synergistic gains
D) Vertical integration
65) A “greenfield” investment
A) involves soybeans in the spring, corn in the summer.
B) is generally less politically sensitive than the acquisition of an existing foreign firm.
C) is generally more politically sensitive than the acquisition of an existing foreign firm.
D) none of the options
66) As a mode of entry into a foreign market, cross-border acquisition
A) involves building new production facilities in a foreign country.
B) offer faster speed over greenfield investment.
C) can offer access to proprietary assets.
D) offer faster speed over greenfield investment, and can also offer access to proprietary assets.
67) Cross-border acquisition involves
A) building new production facilities in a foreign country.
B) buying an existing foreign business.
C) building new production facilities in a foreign country and buying an existing foreign business.
D) none of the options
68) The rapid increase in cross-border M&A deals can be attributed to
A) the end of the greenfield era—we are running out of land.
B) the lack of domestic investment opportunity.
C) the ongoing liberalization of capital markets and the integration of the world economy.
D) none of the options
69) As a mode of FDI entry, cross-border M&A offers two key advantages over greenfield
investments:
A) speed and access to proprietary assets.
B) firms bolster their competitive positions in the world market by acquiring special assets from
other firms or using their own assets on a larger scale.
C) firms can better leverage their intangible assets and on a larger scale.
D) none of the options
70) Mergers and acquisitions are a popular mode of investment for firms wishing to protect,
consolidate and advance their global competitive positions. Examples include
A) selling off divisions that fall outside the scope of their core competence.
B) acquiring strategic assets that reduce their competitiveness.
C) firms can better leverage their intangible assets and on a larger scale through licensing.
D) none of the options
71) Synergistic gains refers to
A) gains from hedging.
B) gains obtained when the value of the acquiring and target firms, combined, is greater than the
stand-alone valuations of the individual firms.
C) gains arising if the combined companies can save on the costs of production, marketing,
distribution, and R&D.
D) gains obtained when the value of the acquiring and target firms, combined, is greater than the
stand-alone valuations of the individual firms. It also refers to gains arising if the combined
companies can save on the costs of production, marketing, distribution, and R&D.
72) Whether or not cross-border acquisitions produce synergistic gains and how such gains are
divided between acquiring and target firms
A) are important issues from the perspective of shareholder welfare.
B) are important issues from the perspective of public policy.
C) are important issues from the perspective of stakeholders in the target firms.
D) all of the options
73) Imperfections in the market for intangible assets can also play a major role in motivating firms
to undertake cross-border acquisitions. According to the internalization theory,
A) cross-border acquisitions may also be motivated by the acquirer’s desire to acquire and
internalize the target firm’s intangible assets.
B) a firm with intangible assets that have a public good property such as technical and managerial
know-how may acquire foreign firms as a platform for using its special assets on a larger scale and,
at the same time, avoid the misappropriation that may occur while transacting in foreign markets
through a market mechanism.
C) the internalization, thus, may proceed forward to internalize the acquirer’s assets, or backward
to internalize the target’s assets.
D) all of the options
74) In a study of the effect of international acquisitions on the stock prices of U.S. firms, U.S.
acquiring firms with information-based intangible assets experience a significantly positive stock
price reaction upon foreign acquisition.
A) This is consistent with the finding that the market value of the firm is positively related to its
multinationality because of the firm’s intangible assets, such as R&D capabilities, with public
good nature.
B) It is not the multinationality per se that contributes to the firm’s value.
C) Their empirical findings support the (forward-) internalization theory of FDI.
D) all of the options
75) Synergistic gains
A) are obtained when the acquiring firm is greater in value than the stand-alone valuations of the
target firm(s).
B) can only be obtained by increases in market power.
C) are obtained when the value of the combined firm is greater than the stand-alone valuations of
the individual (acquiring and target) firms.
D) none of the options
76) If cross-border acquisitions generate synergistic gains,
A) then both the acquiring and target shareholders gain wealth at the same time.
B) then one can argue that cross-border acquisitions are mutually beneficial and thus should not be
thwarted both from a national and global perspective.
C) then the value of the combined firm is greater than the stand-alone valuations of the individual
(acquiring and target) firms.
D) all of the options.
77) OPIC is the
A) Overseas Pirate Investment Corporation.
B) Overseas Private Investment Corporation.
C) Organization Petroleum Importing Countries.
D) none of the options
78) Cross-border acquisitions of businesses are a politically sensitive issue,
A) as most countries prefer to retain foreign control of domestic firms.
B) as most countries prefer to retain local control of domestic firms.
C) as most countries prefer to retain local control of foreign firms.
D) none of the options
79) Political risk refers to
A) the potential losses to the parent firm of an MNC resulting from adverse political developments
in the host country.
B) macroeconomic risks.
C) microeconomic risks.
D) bankruptcy or high inflation rates.
80) Transfer risk refers to the risk which arises from the uncertainty about
A) the host’s country’s policies affecting the local operations of an MNC.
B) the host’s country’s policy regarding ownership and control of local operations.
C) cross-border flows of capital, payment, know-how, and the like.
D) none of the options
81) Operational risk refers to the risk which arises from the uncertainty about
A) the host’s country’s policies affecting the local operations of an MNC.
B) the host’s country’s policy regarding ownership and control of local operations.
C) cross-border flows of capital, payment, know-how, and the like.
D) none of the options
82) Countries may welcome greenfield investments,
A) as they are viewed as representing new investment and employment opportunities.
B) as they are viewed as substitutes for foreign firms’ bids to acquire domestic firms.
C) but they are also often resisted and sometimes even resented by the local firms.
D) none of the options
83) Country risk refers to
A) political risk.
B) credit risk, and other economic performances.
C) every risk except political risk.
D) political risk, credit risk, and other economic performances.
84) More than fifty percent of FDI in dollar terms
A) takes the form of cross-border mergers and acquisitions.
B) takes the form of greenfield investment.
C) is initiated by governments.
D) none of the options
85) An increase in political risk can be managed by
A) adjusting a foreign investment project’s NPV by either reducing its expected cash flows, or by
increasing the cost of capital.
B) forming joint venture with a local company.
C) purchasing insurance against the hazard of political risk.
D) all of the options
86) Some of the risks that a U.S.-based MNC can encounter in its foreign investments are
(i) an increase in the cost of borrowing due to a rise in interest rates.
(ii) increase in inflation rates.
(iii) dumping.
(iv) unfair competition by local companies.
(v) inconvertibility of foreign currencies.
(vi) expropriation.
(vii) destruction of properties due to war, revolution, and other violent political events in foreign
countries.
(viii) loss of business income due to political violence.
A) (i), (ii), (iii), and (iv)
B) (v), (vi), (vii), and (viii)
C) (i), (ii), (iii), (iv), (v), (vi), (vii), and (viii)
D) none of the options
87) The communist victory in China in 1949 is an example of
A) micro risk.
B) macro risk.
C) both micro and macro risk.
D) none of the options
88) Examples of transfer risk include
A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options
89) Examples of operational risk include
A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options
90) Examples of control risk include
A) the unexpected imposition of capital controls, inbound or outbound, and withholding taxes on
dividend and interest payments.
B) unexpected changes in environmental policies, sourcing/local content requirements, minimum
wage law, and restriction on access to local credit facilities.
C) restrictions imposed on the maximum ownership share by foreigners, mandatory transfer of
ownership to local firms over a certain period of time (fade-out requirements), and the
nationalization of local operations of MNCs.
D) none of the options
91) Once a MNC decides to undertake a foreign project, it can take various measures to minimize
its exposure to political risk. These include
A) the MNC can form a joint venture with a local company.
B) the MNC may also consider forming a consortium of international companies to undertake the
foreign project.
C) the MNC can use local debt to finance the foreign project.
D) the MNC may purchase insurance against the hazard of political risk.
E) all of the options
92) One particular type of political risk that MNCs and investors may face is corruption associated
with the abuse of public office for private benefits.
A) Investors may often encounter demands for bribes from politicians and government officials for
contracts and smooth bureaucratic processes.
B) If companies refuse to make grease payments, they may lose business opportunities or face
difficult bureaucratic red tape.
C) They may risk violating laws or being embarrassed when the payments are discovered and
reported in the media.
D) all of the options
93) In evaluating political risk, experts focus their attention on a set of key factors such as
A) integration of the host country into the world political/economic system.
B) the host country’s ethnic and religious stability.
C) the host country’s regional security, and key economic indicators.
D) all of the options
94) When evaluating a foreign investment project, it is important for the MNC to consider the
effect of political risk, as a sovereign country can change “the rules of the game.” To account for
this
A) the MNC may adjust the cost of capital upward.
B) the MNC may lower the expected cash flows from the foreign project.
C) the MNC may purchase insurance policies against the hazard of political risks.
D) all of the options
95) In evaluating political risk, experts focus their attention on a set of key factors such as
A) the host country’s political/government system.
B) historical records of political parties and their relative strengths.
C) integration of the host country into the world political/economic system.
D) all of the options
96) Country risk
A) is a broader measure of risk than political risk.
B) encompasses political risk, credit risk, and other economic performances.
C) all of the options
D) none of the options
97) North Korea, Iran, and Cuba are examples of
A) countries with low levels of political risk.
B) countries with high levels of political risk.
C) countries that are politically and economically isolated from the rest of the world.
D) countries with high and low levels of political risk.
98) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled by
Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which of the
following is(are) true?
A) Upon the news release of the project cancellation, Enron’s share price fell immediately by about
10 percent.
B) In the process of structuring the deal, Enron made a profound political miscalculation: Instead
of waiting for the next election results, Enron rushed to close the deal and began construction,
apparently believing that a new government would find it difficult to unwind the deal when
construction was already under way.
C) Enron had the last laugh, however when they went bankrupt and left the power plant unfinished.
D) all of the options
99) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled by
Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which of the
following is(are) true?
A) This move by the government played well with Indian voters with visceral distrust of foreign
companies since the British colonial era.
B) This move by the government was widely criticized in India on the grounds that it would deter
future foreign investment.
C) This move by the government was widely criticized in India on the grounds that severe power
shortages have been one of the bottlenecks hindering India’s economic growth.
D) none of the options
100) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy
company, signed a contract to build the largest-ever power plant in India, requiring a total
investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled by
Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which of the
following are true?
A) Subsequently, Maharashtra invited Enron to renegotiate its contract.
B) The lack of an effective means of enforcing contracts in a foreign country is clearly a major
source of political risk associated with FDI.
C) In an effort to pressure Maharashtra to reverse its decision, Enron “pushed like hell” the U.S.
Energy Department to make a statement in June 1995 to the effect that canceling the Enron deal
could adversely affect other power projects. The statement only compounded the situation. The
BJP politicians immediately criticized the statement as an attempt by Washington to bully India.
D) all of the options