Deck 13: Direct Foreign Investment

Question 1

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.

Answer 1

D

Question 2

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.
D)have no impact on national problems.

Answer 2

C

Question 3

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

Answer 3

C

Question 4

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.
D)B and C

Question 5

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.

Question 6

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

Question 7

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

Question 8

The most important cost-related motive for direct foreign investment is diversification across product markets.

Question 9

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

Question 10

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

Question 11

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

Question 12

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.

Question 13

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

Question 14

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

Question 15

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

Question 16

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.

Question 17

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

Question 18

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.

Question 19

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

Question 20

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

Question 21

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

Question 22

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.

Question 23

Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.

Question 24

____ 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.

Question 25

Direct foreign investment is normally completed first, and then capital budgeting can be applied later.

Question 26

The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

Question 27

Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions.

Question 28

Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as "optimal" for all MNCs.

Question 29

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.

Question 30

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.

Question 31

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.

Question 32

Although direct foreign investment is sometimes conducted, benefits are rarely realized.

Question 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.

Question 34

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.

Question 35

Developing countries are mostly targeted for direct foreign investment because they have advanced technology.

Question 36

MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.​

Question 37

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

Question 38

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

Question 39

____ 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

Question 40

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.

Question 41

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.

Question 42

Countries in Eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in Western Europe.

Question 43

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.

Question 44

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.

Question 45

MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.

Question 46

Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.

Question 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.

Question 48

Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.

Question 49

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

Question 50

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.
D)A and B

Question 51

MNCs oFten attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.

Question 52

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

Question 53

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.