Deck 16: Foreign Direct Investment and Cross-Border Acquisitions

Question 1

When firms undertake FDI,

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)the can exploit workers by paying them below-market wages in depreciating currencies.
D)all of the above

Answer 1

A

Question 2

During the five-year period 2004-2008,

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.

Answer 2

D

Question 3

During the five-year period 2004-2008,total annual worldwide FDI outflows amounted to

A)About $1,423 million on average.
B)About $1,423 billion on average.
C)About $1,423 trillion on average.
D)None of the above

Answer 3

B

Question 4

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 above

Question 5

Cross-border acquisitions are generally found to be synergy-generating corporate activities.

Question 6

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.

Question 7

Shareholders of U.S.targets experience higher wealth gains when they are acquired by foreign firms than when acquired by U.S.firms.

Question 8

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.
E)none of the above

Question 9

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 above

Question 10

Following Honda's FDI in the U.S.,

A)The U.S.government imposed a Voluntary Trade 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 above

Question 11

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 above

Question 12

Under a 1981 Voluntary Trade 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)both b) and c)

Question 13

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 above

Question 14

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

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 15

Shareholders of U.S.bidders (acquiring firms in M&A)experience significant positive abnormal returns when firms expand into new industries and geographic markets.

Question 16

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)both a) and b)
D)none of the above

Question 17

According to a recent UN survey,the world FDI stock grew at what rate relative to worldwide exports of goods and services?

A)The world FDI stock grew twice as fast as worldwide exports of goods and services.
B)The world FDI stock grew at the same rate as worldwide exports of goods and services.
C)The world FDI stock grew half as fast as worldwide exports of goods and services.
D)None of the above

Question 18

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 above

Question 19

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 above

Question 20

The third most important host country for FDI is

A)the United States.
B)Japan.
C)China.
D)Mexico.

Question 21

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 above

Question 22

Why do governments regulate international trade?

A)To raise revenue
B)Protect domestic industries
C)Pursue other economic objectives
D)All of the above

Question 23

Severe imperfections in the labor market lead to persistent wage differentials among countries.Some explanations include

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) and b)

Question 24

Factors of production include land,labor,capital,and entrepreneurial ability.Of all the factor markets,the MOST IMPERFECT is the

A)labor market.
B)capital market.
C)real estate market.
D)market for entrepreneurial ability.

Question 25

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 above

Question 26

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)of colder weather in Canada.
D)none of the above

Question 27

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 above

Question 28

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 above

Question 29

The dominant source of FDI outflows

A)several developed countries.
B)a few underdeveloped countries next to wealthy neighbors, like Mexico.
C)Africa and China.
D)none of the above

Question 30

Trade barriers can arise naturally.Which of the following are natural barriers to trade?

A)Transportation costs
B)Quotas
C)Tariffs
D)Transactions costs

Question 31

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 above

Question 32

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

Question 33

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 above

Question 34

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 above

Question 35

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) and b)

Question 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.

Question 37

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)at the sum total of current year FDI flows.

Question 38

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 above

Question 39

Labor services in a country might be underpriced relative to productivity because

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 above are equally important

Question 40

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 above

Question 41

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

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 42

MNCs may undertake overseas investment projects in a foreign country,despite the fact that local firms may enjoy inherent advantages.This implies that

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 above

Question 43

The majority of foreign vertical integration is

A)backward.
B)forward.
C)sideways.
D)none of the above

Question 44

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)both b) and c)

Question 45

Examples of intangible assets include

A)technological, managerial, and marketing know-how.
B)superior R&D capabilities.
C)brand names.
D)all of the above

Question 46

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 above

Question 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 above

Question 48

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 above

Question 49

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 above

Question 50

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)both b) and a)
D)none of the above

Question 51

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 above

Question 52

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 above

Question 53

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 above

Question 54

An example of forward vertical FDI

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 above

Question 55

Intangible assets are often hard to package and sell to foreigners

A)because they usually default on the contracts that they sign.
B)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) and c)

Question 56

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 above

Question 57

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 above

Question 58

The product life-cycle theory predicts that

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 above

Question 59

The boomerang effect

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 above

Question 60

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 above

Question 61

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)both b) and c)

Question 62

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 above

Question 63

As a mode of FDI entry,cross-border M&A offers two key advantages over Greenfield investments:

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 above

Question 64

Considering the fact that many barriers to international portfolio investments have been dismantled in recent years,

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 above

Question 65

When a firm holds assets in many countries,

A)the firm's cash flows are internationally hedged.
B)thus, shareholders of the firm can indirectly benefit from international diversification even if they are not directly holding foreign shares.
C)thus, shareholders of the firm can directly benefit from international diversification even if they are not directly holding foreign shares.
D)none of the above

Question 66

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 above

Question 67

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 above

Question 68

Since shareholders of MNCs may indirectly benefit from corporate international diversification,

A)therefore firms are motivated to undertake FDI for the purpose of providing shareholders with diversification services.
B)therefore firms are motivated to undertake FDI for the purpose of being part of the global minimum variance portfolio.
C)therefore firms are motivated to undertake FDI for the purpose of staying on the efficient frontier.
D)none of the above

Question 69

A "Greenfield" investment

A)involves soybeans in the spring, corn in the summer.
B)are generally less politically sensitive than the acquisition of an existing foreign firm.
C)are generally more politically sensitive than the acquisition of an existing foreign firm.
D)none of the above

Question 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 above

Question 71

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

Question 72

Synergistic gains

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 73

Whether or not cross-border acquisitions produce synergistic gains and how such gains are divided between acquiring and target firms

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 above

Question 74

Cross-border acquisition involves

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 75

OPIC is the

A)Overseas Pirate Investment Corporation.
B)Overseas Private Investment Corporation.
C)Organization Petroleum Importing Countries.
D)None of the above

Question 76

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 above.

Question 77

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 above

Question 78

Synergistic gains refers to:

A)gains from hedging.
B)gains obtained when the value of the acquiring and target firms, combined together, is greater 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, and R&D.
D)both b) and c)

Question 79

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.

Question 80

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

A)the host country's policies affecting the local operations of an MNC.
B)the host 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