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Student name:__________
1) 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.
2) 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
3) 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
4) When firms undertake FDI,
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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
5) 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
6) 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
7) 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
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8) 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
9) 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.
10) According to a recent UN survey, the world FDI stock grew to what amount in 2017?
A) $31 billion
B) $28 billion
C) $10 billion
D) none of the options
11) During the six-year period 2012-2017, total annual worldwide FDI outflows amounted to
A) about $1,979 million on average.
B) about $1,423 billion on average.
C) about $1,150 trillion on average.
D) none of the options
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12) During the six-year period 2012-2017,
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.
13) 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
14) MNCs might have been lured to invest in China
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) Both A & B are correct.
D) Neither A nor B are correct.
15) The third most important source of FDI outflows is
A) the United States.
B) Japan.
C) China.
D) Mexico.
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16) 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
17) 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.
18) 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
19) 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
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20) 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) Both A & B are correct.
21) 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
22) 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
23) 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
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24) 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
25) Why do governments regulate international trade?
A) To raise revenue
B) Protect domestic industries
C) Pursue other economic objectives
D) all of the options
26) 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
27) 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
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28) 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
29) Trade barriers can arise naturally. Which of the following are natural barriers to trade?
A) Transportation costs
B) Quotas
C) Tariffs
D) Transactions costs
30) 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
31) Labor services in a country might be underpriced relative to productivity because
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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
32) 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
33) 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) Both A & B are correct.
34) Factors of production include land, labor, capital, and entrepreneurial ability. Of all the
factor markets, the most imperfect is the
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A) labor market.
B) capital market.
C) real estate market.
D) market for entrepreneurial ability.
35) 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
36) 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.
37) 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.
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38) 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
39) 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
40) 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
41) MNCs may undertake overseas investment projects in a foreign country, despite the fact
that local firms may enjoy inherent advantages. This implies that
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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
42) 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) Both B & C are correct.
43) 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) All of the above are correct.
44) Firms that have intangible assets with a public good property tend to invest directly in
foreign countries. This is
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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
45) 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
46) 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
47) 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
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48) 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
49) 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.
50) The majority of foreign vertical integration is
A) backward.
B) forward.
C) sideways.
D) none of the options
51) 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
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52) 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
53) 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
54) 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
55) The product life-cycle theory predicts that
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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
56) 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
57) 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
58) Considering the fact that many barriers to international portfolio investments have been
dismantled in recent years,
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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
59) 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
60) 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
61) 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
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62) 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.
63) 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
64) 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
65) As a mode of FDI entry, cross-border M&A offers two key advantages over greenfield
investments:
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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
66) 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
67) Synergistic gains refers to
A) gains from hedging.
B) gains obtained when the value of the acquiring and target firms, combined, is less
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, but not 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.
68) Whether or not cross-border acquisitions produce synergistic gains and how such gains
are divided between acquiring and target firms
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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
69) 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
70) 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
71) Synergistic gains
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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
72) 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.
73) OPIC is the
A) Overseas Pirate Investment Corporation.
B) Overseas Private Investment Corporation.
C) Organization Petroleum Importing Countries.
D) none of the options
74) 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
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75) 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.
76) Depending on the manner in which firms are affected, political risk can be classified into
which of the following types of risk?
A) transfer and operational risk only
B) operational and control risk only
C) operational and transfer risk only.
D) transfer, operational, and control risk
77) Control 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
78) 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
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79) 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
80) 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
81) 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.
82) 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
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83) 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
84) Some of the risks that a U.S.-based MNC can encounter in its foreign investments are
1. (i) an increase in the cost of borrowing due to a rise in interest rates.
2. (ii) increase in inflation rates.
3. (iii) dumping.
4. (iv) unfair competition by local companies.
5. (v) inconvertibility of foreign currencies.
6. (vi) expropriation.
7. (vii) destruction of properties due to war, revolution, and other violent political events in
foreign countries.
8. (viii) loss of business income due to political violence.
9.
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
85) The communist victory in China in 1949 is an example of
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A) micro risk.
B) macro risk.
C) both micro and macro risk.
D) none of the options
86) 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
87) 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
88) Examples of control risk include
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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) 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
90) 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
91) Severe inequality in income distribution and deteriorating living standards are examples
of which type of political risk key factor?
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A) Integration into the world system
B) Economic indicators
C) Regional security
D) Host country’s ethnic and religious stability
92) In the United States the Overseas Private investment Corporation offers insurance against
i) the inconvertibility of foreign currencies.
ii) expropriation of U.S.-owned assets overseas
iii) destruction of U.S.-owned physical properties due to war, revolution, and other violent
political event sin foreign countries
iv) loss of business income due to political violence
A) i)
B) i), ii)
C) i), ii), iii)
D) i), ii), iii), iv)
93) Which of the following statements regarding political risk that MNCs and investors may
face regarding corruption is not true?
A) Investors may often encounter demands for bribes from politicians and government
officials for contracts and smooth bureaucratic processes.
B) Refusing to make grease payments may result in companies losing business
opportunities or facing difficult bureaucratic red tape.
C) If companies pay a bribe, they may risk violating laws or being embarrassed when
the payments are discovered and reported in the media
D) none of the options.
94) In evaluating political risk, experts focus their attention on a set of key factors such as
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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
95) 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
96) 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
97) 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
98) North Korea, Iran, and Cuba are examples of
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A) countries with low levels of political risk.
B) countries with zero 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.
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) 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
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 is(are) true?
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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
101) 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
102) 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.
⊚ true
⊚ false
103) Shareholders of U.S. bidders (acquiring firms in M&A) experience significant positive
abnormal returns when firms expand into new industries and geographic markets.
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⊚ true
⊚ false
104) Shareholders of U.S. targets experience higher wealth gains when they are acquired by
foreign firms than when acquired by U.S. firms.
⊚ true
⊚ false
105) Cross-border acquisitions are generally found to be synergy-generating corporate
activities.
⊚ true
⊚ false
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Answer Key
Test name: chapter 16
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