Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 16 Foreign Direct Investment and Political Risk
Multiple Choice and True/False Questions
16.1 Sustaining and Transferring Competitive Advantage
1) An example of economies of scale in financing includes
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.
16.2 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/n ________ 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/n ________ 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) Investing in production facility in a country with low cost of labor is
A) example of location-specific advantage.
B) not prudent if there is no domestic market for the produced goods.
C) example of a market-driven advantage.
D) not prudent because the cost of labor will increase over time.
8) 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
9) A/n ________ 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
10) Which of the following is NOT a proactive financial strategy related to the OLI paradigm in
explaining FDI?
A) strategies to gain lower global cost of capital
B) strategies to reduce global taxation
C) strategies to reduce operating and transaction exposure
D) All of the above are proactive strategies.
16.3 Deciding Where to Invest
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) Based on the internationalization process, economists observed that firms tended to invest first
in countries that were not too far distant in psychic terms. Close psychic distance defined
countries with a cultural, legal, and institutional environment similar to the home country.
16.4 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) Joint-Venture is a preferred mode of foreign-direct investment if
A) the host government limits other modes of entrance.
B) the MNE wants to mitigate Greenfield start up risks.
C) the MNE wants to mitigate country risks.
D) All of the above
5) Licensing is a popular form of foreign investment because it does not need a sizable
commitment of funds, and political risk is often minimized.
6) 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.
7) Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of opportunity to enter the licensee’s market with FDI later
B) risk that technology will be stolen
C) high agency costs
D) All of the above are potential disadvantages to licensing.
8) MNEs typically used licensing with independent firms rather than with their own foreign
subsidiaries.
9) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate
10) Which of the following is NOT an advantage to a joint venture?
A) There is 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) It may be a realistic alternative when 100% foreign ownership is not allowed.
11) Which of the following is/are NOT a/an advantage to a joint venture?
A) The local partner’s reputation enhances access to local financial markets.
B) The local partner might take advantage of proprietary information.
C) There are higher agency costs than with a purely domestic firm.
D) The local partner’s public image may enhance local sales.
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) A ________ is establishing a production or service facility from the ground up.
A) joint venture
B) licensing agreement
C) greenfield investment
D) wholly-owned facility
15) 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
16) Which of the following is NOT a potential advantage to a cross-border acquisition compared
to a Greenfield investment?
A) Market imperfections may under-price local assets and allow the purchase of assets at
significant discount.
B) Cross-border acquisitions take longer, thus allowing the firm a better understanding of the
local market before attempting sales.
C) Acquisitions may be a cost-effective way of gaining competitive advantages such as
technology or brand names.
D) All of the above are advantages of acquisition over green field investment.
16.5 Predicting Political Risk
1) 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.
2) Of the following, which would NOT be considered a firm-specific risk?
A) the risk of getting new management
B) management policies toward hedging foreign exchange risk
C) parent company policy toward management of local subsidiaries
D) All could be considered firm-specific risk.
3) ________ is the risk that the investor will not be able to convert profits, royalties, or fees into
dollars.
A) Inconvertibility
B) Expropriation
C) Business income risk
D) None of the above
4) ________, also known as micro risks, are political risks that affect the MNE at the project and
corporate level but do not originate at the country level.
A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Transfer risks
5) ________, also known as macro risks, are political risks that affect the firm at the project or
corporate level and originate at the country level.
A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Governance risks
6) Negotiations under the General Agreement on Tariffs and Trade (GATT) have NOT had much
impact on reducing the level of tariffs over the last several decades.
7) Which of the following would NOT be considered a non-tariff barrier to trade?
A) inconsistent customs and administrative entry procedures
B) unduly stringent or discriminating standards imposed on imports in the name of protecting
health, safety, and quality
C) established import procedures that make importing more difficult
D) All of the above are non-tariff trade barriers.
8) Transfer risk concerns mainly the problem of
A) governance risk.
B) cultural risk.
C) blocked funds.
D) environmental concerns.
16.6 Firm Specific Political Risk: Governance Risk
1) Potential strategies to mitigate the risk of expropriation and amendments in the investment
agreement include
A) obtaining insurance from OPIC against country risk.
B) thin equity injection supplemented with large local debt.
C) using International Finance Institutions loans or co-investment vehicles.
D) all of the above
2) ________ 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
3) 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.
4) ________ is a type of political risk that OPIC does NOT cover.
A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.
5) ________ 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
6) ________ 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
16.7 Country Specific Risk: Transfer Risk
1) ________ risks are those that affect the MNE at the local or project level, and originate at the
country level.
A) Country-specific
B) Firm-specific
C) Global-specific
D) None of the above
2) A country can react to the potential for blocked funds prior to making an investment, during
operations, or by investing in the local country in assets than maintain their value.
3) 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.
4) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a
financial intermediary such as a large commercial bank.
A) fronting; link financing
B) parallel; a back-to-back loan
C) fronting; a back-to-back loan
D) link financing; parallel loan
5) Which of the following is NOT a typical characteristic of a fronting loan made to an
international subsidiary?
A) The parent makes a deposit equal to the size of the desired loan into a large commercial bank.
B) The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly
higher interest rate.
C) The lending bank is located in the subsidiary’s country.
D) All of the above are typical characteristics of a fronting loan.
6) Banks are very hesitant to engage in fronting loans because of the low probability of
repayment and thus their risk exposure up to a 100% loss.
7) Government authorities are more likely to allow subsidiary repayment of a loan to a large
international bank than to a parent firm because
A) stopping payment to an international bank would have a negative impact on the credit image
of the country.
B) the government is also borrowing money from that bank and wants a larger loan before they
choose to default.
C) corrupt government officials have accounts at the bank and they have made an under-the-table
agreement not to withhold funds from that bank.
D) none of the above are true.
8) Which of the following is NOT a technique for moving blocked funds out of a country?
A) use fronting loans
B) create unrelated exports
C) obtain a special dispensation
D) All of the above are techniques for moving blocked funds.
9) Which of the following could be considered an example of forced reinvestment if the
blockage of funds was expected to be temporary?
A) vertical reinvestment by an automobile manufacturer to buy parts suppliers and showrooms
B) a lumber cutting company subsequently builds a paper mill with blocked funds
C) purchase of local money market instruments and short-term loans
D) all of the above
16.8 Country Specific Risk: Cultular and Institutional Risk
1) Of the following, which was NOT identified by the authors as a type of cultural difference that
MNEs must consider when expanding to foreign countries?
A) differences in human resource norms
B) differences in religious heritage
C) differences in allowable ownership structures
D) All of the above must be considered.
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16.9 Global Specific Risk
1) Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________
risks.
A) firm-specific
B) country-specific
C) institutional
D) global-specific
Essay Questions
16.1 Sustaining and Transferring Competitive Advantage
1) What does the OLI Paradigm propose to explain? Define each component and provide an
example of each.
16.2 The OLI Paradigm and Internationalization
1) There are no questions in this section.
16.3 Deciding Where to Invest
1) Identify and define the two behavioral theories of Foreign Direct Investment as identified by
the authors.
16.4 How to Invest Abroad: Modes of Foreign Involvement
1) Joint ventures have significant advantages as well several disadvantages versus a wholly
owned subsidiary with regard to investment abroad. Define the two types of investment
opportunities and provide a comprehensive list of the advantages and disadvantages for the joint
venture form of international investment.
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16.5 Predicting Political Risk
1) What are blocked funds? List and explain two of the three methods the authors list in this
chapter for dealing with blocked funds.
16.6 Firm Specific Political Risk: Governance Risk
1) There are no questions in this section.
16.7 Country Specific Risk: Transfer Risk
1) There are no questions in this section.
16.8 Country Specific Risk: Cultular and Institutional Risk
1) There are no questions in this section.
16.9 Global Specific Risk
1) There are no questions in this section.