Question 1

While there is no comprehensive theory of FDI, many existing theories emphasize

Accepted Answer

A) imperfections in product markets. 
B) imperfections in capital markets. 
C) imperfections in labor markets. 
D) all of the above

Question 2

In evaluating political risk, experts focus their attention on a set of key factors such as

Accepted Answer

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 above

Question 3

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?

Accepted Answer

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 above

Question 4

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?

Accepted Answer

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 above

Question 5

Some of the risks that a U.S. based MNC can encounter in its foreign investments are: (i) - an increase in the cost of borrowing due to a rise in interest rates
(ii) - increase in inflation rates
(iii) - dumping
(iv) - unfair competition by local companies
(v) - inconvertibility of foreign currencies
(vi) - expropriation
(vii) - destruction of properties due to war, revolution, and other violent political events in foreign countries
(viii) - loss of business income due to political violence
In the U.S., the Overseas Private Investment Corporation (OPIC) offers insurance against which of the above:

Accepted Answer

A) (i), (ii), (iii), and (iv) 
B) (v), (vi), (vii), and (viii) 
C) a and b 
D) none of the above

Question 6

Severe imperfections in the labor market arise from immobility of workers due to immigration barriers. As a response, firms should consider

Accepted Answer

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.

Question 7

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,

Accepted Answer

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 above

Question 8

The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and Jaguar, a British auto maker.

Accepted Answer

A) This is an example of cross-border M&A. 
B) This was a Greenfield investment. 
C) both a and b 
D) none of the above

Question 9

Also, MNCs often find it profitable to locate manufacturing/processing facilities near

Accepted Answer

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 above

Question 10

Cross-border acquisition involves

Accepted Answer

A) building new production facilities in a foreign country. 
B) buying existing foreign business. 
C) both a and b 
D) none of the above

Question 11

Transfer risk refers to the risk which arises from the uncertainty about

Accepted Answer

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 above

Question 12

Examples of operational risk include

Accepted Answer

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 above

Question 13

Firms that have intangible assets with a public good property tend to invest directly in foreign countries. This is because

Accepted Answer

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) all of the above

Question 14

FDI can take the form of

Accepted Answer

A) Greenfield investment. 
B) cross-border M&A. 
C) establishing new production facilities in a foreign country. 
D) all of the above

Question 15

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

Accepted Answer

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 above

Question 16

Countries may welcome greenfield investments,

Accepted Answer

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 above

Question 17

Synergistic gains

Accepted Answer

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 above

Question 18

MNCs might have been lured to invest in China not only by lower labor and material costs but also

Accepted Answer

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) by the Kung Pao chicken. 
D) by the desire to see, if not buy, all the tea in China.

Question 19

Prior to Honda's decision to build a plant in Ohio,

Accepted Answer

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 above

Question 20

During the five-year period 2007-2011,

Accepted Answer

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.

Exam 16: Foreign Direct Investment and Cross-Border Acquisitions