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Indicate whether the statement is true or false.
1. 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
2. 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
3. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in
foreign countries.
a.
True
b.
False
4. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of
production indicate high demand.
a.
True
b.
False
5. 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
6. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international
acquisitions.
a.
True
b.
False
7. 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
8. The key to international diversification is selecting foreign projects whose performance levels are highly correlated
over time.
a.
True
b.
False
9. 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
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10. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as “optimal” for all MNCs.
a.
True
b.
False
11. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries
a.
True
b.
False
12. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance
shareholder wealth.
a.
True
b.
False
13. 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
14. The most important cost-related motive for direct foreign investment is diversification across product markets.
a.
True
b.
False
15. Direct foreign investment is normally completed first, and then capital budgeting can be applied later.
a.
True
b.
False
16. 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
17. Although direct foreign investment is sometimes conducted, benefits are rarely realized.
a.
True
b.
False
18. Developing countries are mostly targeted for direct foreign investment because they have advanced technology.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
19. 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
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20. Even if production costs are higher in a foreign country, a U.S. MNC may establish a manufacturing plant in the
foreign country if the government of that country:
a.
eliminates all quotas.
b.
reduces all quotas.
c.
imposes restrictive quotas.
d.
eliminates all tariffs.
21. 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.
the correlations between country economies are low AND the variability of all country economy levels is high.
22. Procedural and documentation requirements imposed by a foreign government on an MNC pursuing DFI are referred
to as:
a.
economic barriers.
b.
industry barriers.
c.
protective barriers.
d.
“red tape” barriers.
23. 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.
24. Which of the following is not true regarding the efficient frontier considered by MNCs?
a.
There is only one point on the efficient frontier that is optimal for all MNCs, regardless of their degree of risk
aversion.
b.
The efficient frontier for portfolios of domestic and international projects will probably lie to the left of the
efficient frontier for portfolios of purely domestic projects.
c.
Most points on the efficient frontier represent a portfolio of projects as opposed to an individual project.
d.
All of these are true.
25. A way of accomplishing the revenue-related motive of diversifying internationally 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.
26. ____ is not a disadvantage of direct foreign investment.
a.
The expense of establishing a foreign subsidiary
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b.
The uncertainty of inflation and exchange rate movements
c.
Political risk
d.
All of these are disadvantages of direct foreign investment.
27. 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 raw materials are more expensive.
c.
establish a subsidiary in a new market that can sell products produced elsewhere.
d.
establish a subsidiary in a market where raw materials are cheap and accessible AND sell the finished product
to countries where raw materials are more expensive.
28. 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 these are true.
29. 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.
variability of the project’s cash flow AND correlation of the project’s cash flow relative to the prevailing cash
flows of the MNC.
d.
None of these are correct.
30. 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 be a cause of national problems OR be a remedy for national problems is possible.
d.
have no impact on national problems.
31. 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.
would produce a good not currently available in the host country AND would produce a good and export it to
other countries.
32. 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 U.S. sales by shifting operations from their British subsidiaries to Japan.
b.
British exporters can increase U.S. sales by shifting operations from their Japanese subsidiaries to Britain.
c.
U.S. exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to U.S.
subsidiaries.
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d.
British exporters can increase U.S. sales by shifting operations from their Japanese subsidiaries to Britain
AND U.S exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to U.S.
subsidiaries.
33. ____ is not a revenue-related motive for direct foreign investment.
a.
Attracting new sources of demand
b.
Fully benefiting from economies of scale
c.
Exploiting monopolistic advantages
d.
Entering profitable markets
34. A country presently has a high level of unemployment because of weak economic conditions, and its income levels are
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.
35. 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 these are correct.
36. 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.
37. 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
38. Which of the following is not a cost-related motive of direct foreign investment?
a.
international diversification
b.
low labor costs
c.
low price of purchasing land
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d.
weak value of the foreign currency needed
39. 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
40. 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
41. 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
42. 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.
focuses solely on one product AND focuses solely on one location to market what it produces.
d.
None of these are correct.
43. 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 that are not produced locally and to
export the products.
d.
None of these would reduce employment.
44. 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
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45. 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
46. 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
47. 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 headquarters 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 these are correct.
48. 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 these are correct.
49. 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 these are correct.
50. To fully benefit from economies of scale, an MNC should:
a.
establish a subsidiary in a new market that can sell products produced elsewhere, which allows for increased
production and thus possibly greater efficiency.
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.
51. Which of the following is a reason to consider international business?
a.
economies of scale
b.
exploit monopolistic advantages
c.
diversification
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d.
All of these are correct.
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