Multinational Business Finance 13th Edition Test Bank Chapter 17

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 17 Foreign

Direct Investment and Political Risk 17.1 Sustaining and Transferring Competitive

Advantage Multiple Choice Question: An example of economies of scale in financing

include: 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 Answer:

Question: Which of the following is NOT a factor of Porters “diamond of national

advantage”? A) factor conditions B) demand conditions C) related and supporting

industries D) All of the above are factors of the diamond of national advantage. Answer:

Question: 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 Answer:

Question: The O in OLI refers to an advantage in a firms home market that is: A) operator

independent. B) owner-specific. C) open-market. D) official designation. Answer:

Question: 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 Answer:

Question: A/An ________ 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 Answer:

Question: The L in OLI refers to an advantage in a firms 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 Answer:

Question: A/An ________ 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 Answer:

Question: The I in OLI refers to an advantage in a firms home market that is an: A)

internalization. B) industry-specific advantage. C) international abnormality. D) none of

the above Answer:

Question: A/An ________ 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 Answer:

Question: MNEs that are resident in liquid and unsegmented capital markets are more

likely to be able to demonstrate financial strength by achieving and maintaining a global

cost and availability of capital. Answer:

Question: A strongly competitive home market tends to dull the competitive advantage

relative to firms located in less competitive home markets. Answer:

Question: The authors were unable to identify in lesser developed countries specific firms

that are nearing the status of global MNE. Answer:

Question: List and explain three strategic motives why firms become multinationals and

give an example of each. Answer:

Question: What does the OLI Paradigm propose to explain? Define each component and

provide an example of each. Answer:

Question: 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. Answer:

Question: In practice, when expanding into other countries, firms have been observed to

follow a sequential search pattern as described in the behavioral theory of the firm.

Answer:

Question: As a general rule, the decision about where to invest abroad for the first time is

the same as the decision about where to reinvest abroad. Answer:

Question: 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.

Answer:

Question: 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

Answer:

Question: Which of the following is NOT a form of FDI? A) wholly-owned affiliate B)

joint venture C) exporting D) greenfield investment Answer:

Question: With licensing the ________ is likely to be lower than with FDI because of

lower profits; however, the ________ is likely to be higher due to a greater return per

dollar invested. A) IRR; NPV B) NPV; IRR C) cost of capital; NPV D) IRR; cost of capital

Answer:

Question: 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 firms home market D) All of the above are potential

disadvantages to licensing. Answer:

Question: A ________ is a shared ownership in a foreign business. A) licensing agreement

B) greenfield investment C) joint venture D) wholly-owned affiliate Answer:

Question: Which of the following is NOT an advantage to a joint venture? A) 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) May be a realistic alternative when 100% foreign

ownership is not allowed. Answer:

Question: 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 Answer:

Question: All of the following may be justification for a strategic alliance EXCEPT: A)

takeover defense. B) a joint venture to pool resources for research and development. C)

joint marketing and serving agreements. D) All of the above are legitimate reasons for

strategic alliances. Answer:

Question: Licensing is a popular form of foreign investment because it does not need a

sizable commitment of funds, and political risk is often minimized. Answer:

Question: MNEs typically used licensing with independent firms rather than with their

own foreign subsidiaries. Answer:

Question: Joint ventures are a more common FDI than wholly owned subsidiaries. Answer:

Question: 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. Answer:

Question: ________ risks are those that affect the MNE at the local or project level, but

originate at the country level. A) Country-specific B) Firm-specific C) Global-specific D)

none of the above Answer:

Question: 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. Answer:

Question: According to your authors, MNEs can anticipate government regulations that are

discriminatory or wealth depriving from a/an ________ or ________ level view. A)

foreign; domestic B) micro; macro C) internal; external D) local; global Answer:

Question: ________ is the ability to exercise effective control over a foreign subsidiary

within a countrys legal and political environment. A) Political risk B) Portfolio risk C)

Interest rate risk D) Governance risk Answer:

Question: Of the following, which would NOT be considered an issue for an investment

agreement prior to investing in a foreign country? A) the basis for setting transfer prices B)

the right to export to third-country markets C) provision for arbitration of disputes D) All

of the above could be negotiated prior to investing. Answer:

Question: 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. Answer:

Question: ________ is a type of political risk that OPIC does NOT cover. A)

Inconvertibility B) Expropriation C) War D) OPIC covers all of the above. Answer:

Question: ________ is the risk that the host government will take specific steps that

prevent the foreign affiliate from exercising control over the firms assets. A)

Inconvertibility B) Expropriation C) Business income risk D) none of the above Answer:

Question: ________ 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 Answer:

Question: 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. Answer:

Question: An alternative strategy to engaging in bribery in international investments

include: A) refuse bribery outright. B) retain local advisors to diffuse requests for bribes.

C) educate management and local employees about the firms bribery policy. D) all of the

above Answer:

Question: ________ industries are NOT typically “protected” by government policy. A)

Textiles B) Defense C) Agriculture D) “Infant” industries Answer:

Question: Forming regional alliances is one way to help mitigate the practice of

government protectionism. Which of the following is NOT a regional trade organization

formed by government treaty? A) EU B) NAFTA C) NATO D) MERCOSUR Answer:

Question: Terrorism, cyber attacks, and the anti-globalization movement are each

examples of ________ risks. A) firm-specific B) country-specific C) institutional D)

global-specific Answer:

Question: Governance risk due to goal conflict between an MNE and its host government

is the main political ________ risk. A) firm-specific B) country-specific C) global-specific

D) cultural-specific Answer:

Question: The speed at which inventory moves through a manufacturing process is known

as: A) supply chain management. B) working capital management. C) inventory velocity.

D) warp speed. Answer:

Question: As a result of the terrorist attacks of September 11, 2001, many firms have

employed a wide range of tactics to ensure continued flow of inventory in the face of

government steps to curb terrorism. Which of the following is an inventory sourcing

strategy response (as opposed to an inventory management response, or a transportation

response)? A) carrying more inventory on-hand B) minimizing cross-border exposure from

suppliers C) shifting to air cargo shipments instead of co-habitation of products and

passengers on commercial air flights D) increasing the on-hand supply of critical parts

Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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 subsidiarys country. D) All of the above are typical characteristics of a

fronting loan. Answer:

Question: 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 Answer:

Question: When faced with additional risk from a foreign investment, firms typically

account for the additional risk by adjusting the discount rates or by adjusting cash flows.

Answer:

Question: A number of institutional services provide updated country risk ratings on a

regular basis. This is an example of micro-risk information for MNEs using this data.

Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: Many problems such as poverty, environmental concerns, and cyber attacks are

beyond the capabilities of MNEs alone to correct and require government participation as

well. Answer:

Question: Business risk can be measured through sensitivity analysis but from only the

project viewpoint. Answer:

Question: What are blocked funds? List and explain two of the three methods the authors

list in this chapter for dealing with blocked funds. Answer: