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Chapter 13: Direct Foreign Investment
1. Which of the following purchases does not represent direct foreign investment?
a.
machinery to be used in manufacturing
b.
a tract of land
c.
bonds and other financial assets
d.
a manufacturing plant
2. When an MNC analyzes the feasibility of a project, it should consider the:
a.
variability of the project's cash flow.
b.
correlation of the project's cash flow relative to the prevailing cash flows of the MNC.
c.
A and B
d.
none of the above
3. The ____ the variability of a project’s cash flows, and the ____ the positive correlation between the project's cash flow
and the MNC's cash flow, the lower the risk of the project.
a.
higher; higher
b.
higher; lower
c.
lower; lower
d.
lower; higher
4. The most important cost-related motive for direct foreign investment is diversification across product markets.
a.
True
b.
False
5. An MNC’s cash flows are likely to be less volatile if its percentage of foreign sales is ____ and the number of foreign
countries it sells products to is ____.
a.
high; large
b.
high; small
c.
low; small
d.
high; large
6. According to the text, a firm may be able to achieve a "more efficient" project portfolio if it:
a.
focuses solely on one product.
b.
focuses solely on one location to market what it produces.
c.
A and B
d.
none of the above
7. According to the text, a host government would be least likely to provide incentives for direct foreign investment (DFI)
into its country if the firm planning DFI:
a.
would compete with local firms of the host country.
b.
would produce a good not currently available in the host country.
c.
would produce a good and export it to other countries.
d.
B and C
8. If countries’ economies are highly integrated, the correlations of their economic growth levels would likely be ____. A
firm would benefit ____ by diversifying sales among these countries relative to another set of countries whose economies
are less integrated.
a.
high and positive; more
b.
close to zero; more
c.
high and positive; less
d.
close to zero; less
9. An MNC will likely benefit most from diversifying if:
a.
the correlations between country economies are high.
b.
the correlations between country economies are low.
c.
the variability of all country economy levels is high.
d.
B and C
10. When a foreign currency is perceived by an MNC to be undervalued, the MNC may consider direct foreign investment
in that country, as the initial outlay should be relatively low.
a.
True
b.
False
11. A country presently has a high level of unemployment because of weak economic conditions, and its income levels are
Chapter 13: Direct Foreign Investment
very low. This country would most likely be an attractive target for direct foreign investment by MNCs as a result of the
motive to _______________.
a.
enter markets where superior profits are possible.
b.
react to trade restrictions.
c.
diversify internationally.
d.
use foreign factors of production.
12. Which of the following is a reason to consider international business?
a.
economies of scale.
b.
exploit monopolistic advantages.
c.
diversification.
d.
all of the above
13. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:
a.
is the top point.
b.
is the point closest to the vertical axis.
c.
is the point halfway between the two end points.
d.
cannot be determined since firms vary in their willingness to accept risk.
14. Direct foreign investment is perceived by foreign governments to:
a.
be a cause of national problems.
b.
be a remedy for national problems.
c.
either A or B is possible.
Chapter 13: Direct Foreign Investment
d.
have no impact on national problems.
15. Direct foreign investment would typically be welcomed if:
a.
the products to be produced are substitutes for other locally produced products.
b.
people from the country of the company's headquarter are transferred to the foreign country to work at the
subsidiary.
c.
the products to be produced are going to be exported.
d.
all of the above
16. Assume a U.S. MNC initiates direct foreign investment in the United Kingdom. If the British pound is expected to
appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that
the subsidiary ____ in order to benefit from the expectation about the pound.
a.
increase; postpone remitting earnings until the pound strengthens
b.
decrease; postpone remitting earnings until the pound strengthens
c.
decrease; remit earnings immediately before the pound strengthens
d.
increase; remit earnings immediately before the pound strengthens
17. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which
of the following is true?
a.
Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
b.
British exporters can increase American sales by shifting operations from their Japanese subsidiaries to
Britain.
c.
American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American
subsidiaries.
Chapter 13: Direct Foreign Investment
d.
B and C
18. Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the
foreign country now if the government of that country:
a.
eliminates all quotas.
b.
reduces all quotas.
c.
increases all quotas.
d.
eliminates all tariffs.
19. A country with high unemployment could best increase its employment by:
a.
encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
b.
encouraging foreign firms to establish licensing arrangements for products local firms produce.
c.
encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
d.
none of the above would reduce employment.
20. According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.
a.
Paraguay
b.
Morocco
c.
Sweden
d.
China
21. ____ is not a disadvantage of direct foreign investment.
a.
The expense of establishing a foreign subsidiary
b.
The uncertainty of inflation and exchange rate movements
c.
Political risk
d.
All of the above are disadvantages of direct foreign investment.
22. Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign
project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has
a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the
variance of the firm's overall returns.
a.
decrease
b.
increase
c.
decrease or increase, depending on the exact size of the returns and standard deviations
d.
none of the above
23. Which of the following is not true regarding host government attitudes toward direct foreign investment (DFI)?
a.
Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
b.
Host governments generally perceive DFI as a remedy to eliminate a country's political problems.
c.
The ability of a host government to attract DFI is dependent on the country's markets and resources.
d.
Some types of DFI will be more attractive to some governments than to others.
e.
All of the above are true.
24. Which of the following is not true regarding the efficient frontier considered by MNCs?
a.
There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of
risk aversion.
b.
The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic
projects.
c.
Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project.
d.
All of the above are true.
e.
A and C are false.
25. Which of the following is not a cost-related motive of direct foreign investment?
a.
International diversification.
b.
Low labor costs.
c.
Land can be purchased at a low price.
d.
Manufacturing plants can be built for a low price.
26. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance
shareholder wealth.
a.
True
b.
False
27. ____ is not a revenue-related motive for direct foreign investment.
Chapter 13: Direct Foreign Investment
a.
Attracting new sources of demand
b.
Fully benefiting from economies of scale
c.
Exploiting monopolistic advantages
d.
Entering profitable markets
28. When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country,
as the initial outlay should be relatively ____.
a.
overvalued; high
b.
overvalued; low
c.
undervalued; high
d.
undervalued; low
29. Developing countries are mostly targeted for direct foreign investment because they have advanced technology.
a.
True
b.
False
30. Direct foreign investment is normally completed first, and then capital budgeting can be applied later.
a.
True
b.
False
31. The best way to accomplish the revenue-related motive of attracting new sources of demand is to:
a.
acquire a competitor that has controlled its local market.
b.
establish a subsidiary or acquire a competitor in a new market.
c.
establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export
volume.
d.
establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are
based.
32. To enter markets where superior profits are possible, an MNC should:
a.
acquire a competitor that has controlled its local market.
b.
establish a subsidiary or acquire a competitor in a new market.
c.
establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export
volume.
d.
establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are
based.
33. To exploit monopolistic advantages, an MNC should:
a.
acquire a competitor that has controlled its local market.
b.
establish a subsidiary or acquire a competitor in a new market.
c.
establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export
volume.
d.
establish subsidiaries in markets where competitors are unable to produce the identical product.
34. To fully benefit from economies of scale, an MNC should:
a.
establish a subsidiary in a new market that can sell products produced elsewhere.
b.
establish a subsidiary in a market that has relatively low costs of labor or land.
c.
establish a subsidiary in a market where raw materials are cheap and accessible.
d.
participate in a joint venture in order to learn about a production process or other operations.
35. The key to international diversification is selecting foreign projects whose performance levels are highly correlated
over time.
a.
True
b.
False
36. When economic conditions of two countries are ____, an MNC would ____ its risk by operating in both countries
instead of concentrating just in one.
a.
highly correlated; reduce
b.
not highly correlated; not reduce
c.
not highly correlated; reduce
d.
none of the above
37. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as "optimal" for all MNCs.
a.
True
b.
False
Chapter 13: Direct Foreign Investment
38. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international
acquisitions.
a.
True
b.
False
39. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants)
in foreign countries.
a.
True
b.
False
40. Although direct foreign investment is sometimes conducted, benefits are rarely realized.
a.
True
b.
False
41. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors
of production indicate high demand.
Chapter 13: Direct Foreign Investment
a.
True
b.
False
42. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.
a.
True
b.
False
43. In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the
prevailing business should be considered.
a.
True
b.
False
44. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a
result of expansion. This goal is consistent with the goals of shareholders.
a.
True
b.
False
45. Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than
countries in Western Europe.
a.
True
b.
False
46. Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar,
the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.
a.
increase; postpone remitting earnings until the euro weakens
b.
decrease; postpone remitting earnings until the euro weakens
c.
decrease; remit earnings immediately before the euro weakens
d.
increase; remit earnings immediately before the euro weakens
47. To diversify internationally for the purpose of reducing risk, which strategy is appropriate?
a.
Establish subsidiaries in markets whose business cycles are the same as those where existing subsidiaries are
based.
b.
Establish a subsidiary in a market that has relatively low cost of labor or land.
c.
Establish a subsidiary in a market where the local currency is weak but is expected to appreciate over time.
d.
Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are
based.
48. To fully benefit from use of foreign raw materials:
a.
establish a subsidiary in a market where raw materials are cheap and accessible.
b.
sell the finished product to countries where the raw materials are more expensive.
c.
establish a subsidiary in a new market that can sell products produces elsewhere.
Chapter 13: Direct Foreign Investment
d.
A and B
49. Procedural and documentation requirements imposed by the foreign government on an MNC pursuing DFI are
referred to as:
a.
regulatory barriers.
b.
industry barriers.
c.
protective barriers.
d.
"red tape" barriers.
50. The overall variability of a firm's returns depends on the expected return of each individual project, the percentage of
funds invested in each individual project, and the correlation coefficient of returns between the investments.
a.
True
b.
False
51. MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently
diversify among products and geographical markets.
a.
True
b.
False
52. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of
the project is necessary.
a.
True
b.
False
53. Direct foreign investment is commonly considered by MNCs because it allows the MNC to:
a.
attract new sources of demand.
b.
enter profitable markets.
c.
react to exchange rate movements.
d.
react to trade restrictions.
e.
all of the above
