16

Student: ___________________________________________________________________________

1.

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

2.

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

3.

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

4.

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

True False

5.

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--vis their domestic rivals such as Toyota.
D. both b and c

6.

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

Athe 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

7.

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

8.

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

9.

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

10. 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
11. 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
12. 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
13. 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
14. 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
15. During the five-year period 2007-2011, total annual worldwide FDI outflows amounted to
A. about $1,698 million on average.
B. about $1,698 billion on average.
C. about $1,698 trillion on average.
D. None of the above
16. During the five-year period 2007-2011,
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.
17. 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
18. 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.

19. The third most important host country for FDI is

A. the United States.
B. Japan.
C. China.
D. Mexico.
20. 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
21. 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.
22. 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
23. 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
24. 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
25. 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
26. 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
27. 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

28. 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
29. Why do governments regulate international trade?
A. To raise revenue
B. Protect domestic industries
C. Pursue other economic objectives
D. All of the above
30. 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
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
32. 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
33. Trade barriers can arise naturally. Which of the following are natural barriers to trade?
A. Transportation costs
B. Quotas
C. Tariffs
D. Transactions costs
34. 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 above
35. Labor services in a country might be underpriced relative to productivity because
A. workers are not allowed to freely mover 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
36. 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

37. 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
38. 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.
39. 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
40. 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.
41. 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
42. 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.
Bthe 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.
Cthe 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
43. 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
44. 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

45. 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
46. 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
47. 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
48. 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
49. 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
50. 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
51. 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
52. 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
53. 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

54. The majority of foreign vertical integration is

A. backward.
B. forward.
C. sideways.
D. none of the above
55. 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
56. 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
57. Which of the following statements is true about product life cycle theory?
AIn 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
58. 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
59. 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
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
61. 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

62. 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
63. 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
64. 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
65. 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
66. 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
67. 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
68. The rapid increase in cross-border M&A deals can be attributed to
A. the end of the greenfield erawe 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
69. 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
70. 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

71. 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
72. 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
73. 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.
Ba 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
74. 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.
AThis 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
75. 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
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.
77. OPIC is the
A. Overseas Pirate Investment Corporation.
B. Overseas Private Investment Corporation.
C. Organization Petroleum Importing Countries.
D. None of the above

78. 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
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.
80. 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 above
81. 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 above
82. 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 above
83. Country risk refers to
A. political risk.
B. credit risk, and other economic performances.
C. every risk except political risk.
D. both a and b
84. 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 above
85. 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. purchase insurance against the hazard of political risk.
D. all of the above

86. 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:
A. (i), (ii), (iii), and (iv)
B. (v), (vi), (vii), and (viii)
C. a and b
D. none of the above
87. The communist victory in China in 1949 is an example of
A. micro risk.
B. macro risk.
C. both a and b
D. none of the above
88. 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.
Crestrictions 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
89. 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.
Crestrictions 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
90. Examples of control 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.
Crestrictions 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

91. 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 above
92. 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 above
93. In evaluating political risk, experts focus their attention on a set of key factors such as
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
94. 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 above
95. 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 above
96. 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 above
D. none of the above
97. North Korea, Iran, and Cuba are examples of
A. countries with low levels of political risk.
B. countries with high levels of political risk.
C. countries that are politically and economically isolated from the rest of the world.
D. both b and c

98. 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. Upon the news release of the project cancellation, Enron's share price fell immediately by about 10
percent.
BIn 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
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 are true?
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
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 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.
CIn 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 above

16 Key
1.

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
Eun - Chapter 16 #1
Topic: Global Trends in FDI

2.

Shareholders of U.S. bidders (acquiring firms in M&A) experience significant positive abnormal
returns when firms expand into new industries and geographic markets.
TRUE
Eun - Chapter 16 #2
Topic: Cross-Border Mergers and Acquisitions

3.

Shareholders of U.S. targets experience higher wealth gains when they are acquired by foreign firms
than when acquired by U.S. firms.
TRUE
Eun - Chapter 16 #3
Topic: Cross-Border Mergers and Acquisitions

4.

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

TRUE
Eun - Chapter 16 #4
Topic: Cross-Border Mergers and Acquisitions

5.

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--vis their domestic rivals such as Toyota.
D. both b and c
Eun - Chapter 16 #5
Topic: Global Trends in FDI

6.

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
Eun - Chapter 16 #6
Topic: Global Trends in FDI

7.

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
Eun - Chapter 16 #7
Topic: Global Trends in FDI

8.

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
Eun - Chapter 16 #8
Topic: Global Trends in FDI

9.

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
Eun - Chapter 16 #9
Topic: Global Trends in FDI

10.

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
Eun - Chapter 16 #10
Topic: Global Trends in FDI

11.

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
Eun - Chapter 16 #11
Topic: Global Trends in FDI

12.

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
Eun - Chapter 16 #12
Topic: Global Trends in FDI

13.

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
Eun - Chapter 16 #13
Topic: Global Trends in FDI

14.

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
Eun - Chapter 16 #14
Topic: Global Trends in FDI

15.

During the five-year period 2007-2011, total annual worldwide FDI outflows amounted to
A. about $1,698 million on average.
B. about $1,698 billion on average.
C. about $1,698 trillion on average.
D. None of the above
Eun - Chapter 16 #15
Topic: Global Trends in FDI

16.

During the five-year period 2007-2011,

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.
Eun - Chapter 16 #16
Topic: Global Trends in FDI

17.

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
Eun - Chapter 16 #17
Topic: Global Trends in FDI

18.

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.
Eun - Chapter 16 #18
Topic: Global Trends in FDI

19.

The third most important host country for FDI is

A. the United States.
B. Japan.
C. China.
D. Mexico.
Eun - Chapter 16 #19
Topic: Global Trends in FDI

20.

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
Eun - Chapter 16 #20
Topic: Global Trends in FDI

21.

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.
Eun - Chapter 16 #21
Topic: Global Trends in FDI

22.

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
Eun - Chapter 16 #22
Topic: Global Trends in FDI

23.

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
Eun - Chapter 16 #23
Topic: Why Do Firms Invest Overseas?

24.

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
Eun - Chapter 16 #24
Topic: Why Do Firms Invest Overseas?

25.

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
Eun - Chapter 16 #25
Topic: Why Do Firms Invest Overseas?

26.

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
Eun - Chapter 16 #26
Topic: Why Do Firms Invest Overseas?

27.

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
Eun - Chapter 16 #27
Topic: Why Do Firms Invest Overseas?

28.

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
Eun - Chapter 16 #28
Topic: Trade Barriers

29.

Why do governments regulate international trade?

A. To raise revenue
B. Protect domestic industries
C. Pursue other economic objectives
D. All of the above
Eun - Chapter 16 #29
Topic: Trade Barriers

30.

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
Eun - Chapter 16 #30
Topic: Trade Barriers

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
Eun - Chapter 16 #31
Topic: Trade Barriers

32.

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
Eun - Chapter 16 #32
Topic: Trade Barriers

33.

Trade barriers can arise naturally. Which of the following are natural barriers to trade?
A. Transportation costs
B. Quotas
C. Tariffs
D. Transactions costs
Eun - Chapter 16 #33
Topic: Trade Barriers

34.

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 above
Eun - Chapter 16 #34
Topic: Imperfect Labor Market

35.

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

A. workers are not allowed to freely mover 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
Eun - Chapter 16 #35
Topic: Imperfect Labor Market

36.

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
Eun - Chapter 16 #36
Topic: Imperfect Labor Market

37.

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
Eun - Chapter 16 #37
Topic: Imperfect Labor Market

38.

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.
Eun - Chapter 16 #38
Topic: Imperfect Labor Market

39.

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
Eun - Chapter 16 #39
Topic: Imperfect Labor Market

40.

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.
Eun - Chapter 16 #40
Topic: Imperfect Labor Market

41.

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
Eun - Chapter 16 #41
Topic: Intangible Assets

42.

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.
Bthe 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
Eun - Chapter 16 #42
Topic: Intangible Assets

43.

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
Eun - Chapter 16 #43
Topic: Intangible Assets

44.

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
Eun - Chapter 16 #44
Topic: Intangible Assets

45.

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
Eun - Chapter 16 #45
Topic: Intangible Assets

46.

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
Eun - Chapter 16 #46
Topic: Intangible Assets

47.

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
Eun - Chapter 16 #47
Topic: Intangible Assets

48.

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
Eun - Chapter 16 #48
Topic: Intangible Assets

49.

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
Eun - Chapter 16 #49
Topic: Vertical Integration

50.

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
Eun - Chapter 16 #50
Topic: Vertical Integration

51.

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
Eun - Chapter 16 #51
Topic: Vertical Integration

52.

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
Eun - Chapter 16 #52
Topic: Vertical Integration

53.

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
Eun - Chapter 16 #53
Topic: Vertical Integration

54.

The majority of foreign vertical integration is

A. backward.
B. forward.
C. sideways.
D. none of the above
Eun - Chapter 16 #54
Topic: Vertical Integration

55.

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
Eun - Chapter 16 #55
Topic: Vertical Integration

56.

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
Eun - Chapter 16 #56
Topic: Vertical Integration

57.

Which of the following statements is true about product life cycle theory?
AIn 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
Eun - Chapter 16 #57
Topic: Product Life Cycle

58.

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
Eun - Chapter 16 #58
Topic: Product Life Cycle

59.

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
Eun - Chapter 16 #59
Topic: Product Life Cycle

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
Eun - Chapter 16 #60
Topic: Product Life Cycle

61.

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
Eun - Chapter 16 #61
Topic: Shareholder Diversification Services

62.

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
Eun - Chapter 16 #62
Topic: Shareholder Diversification Services

63.

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
Eun - Chapter 16 #63
Topic: Shareholder Diversification Services

64.

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
Eun - Chapter 16 #64
Topic: Shareholder Diversification Services

65.

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
Eun - Chapter 16 #65
Topic: Cross-Border Mergers and Acquisitions

66.

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
Eun - Chapter 16 #66
Topic: Cross-Border Mergers and Acquisitions

67.

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
Eun - Chapter 16 #67
Topic: Cross-Border Mergers and Acquisitions

68.

The rapid increase in cross-border M&A deals can be attributed to

A. the end of the greenfield erawe 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
Eun - Chapter 16 #68
Topic: Cross-Border Mergers and Acquisitions

69.

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
Eun - Chapter 16 #69
Topic: Cross-Border Mergers and Acquisitions

70.

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
Eun - Chapter 16 #70
Topic: Cross-Border Mergers and Acquisitions

71.

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
Eun - Chapter 16 #71
Topic: Cross-Border Mergers and Acquisitions

72.

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
Eun - Chapter 16 #72
Topic: Cross-Border Mergers and Acquisitions

73.

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.
Ba 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
Eun - Chapter 16 #73
Topic: Cross-Border Mergers and Acquisitions

74.

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.
AThis 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
Eun - Chapter 16 #74
Topic: Cross-Border Mergers and Acquisitions

75.

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
Eun - Chapter 16 #75
Topic: Cross-Border Mergers and Acquisitions

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.
Eun - Chapter 16 #76
Topic: Cross-Border Mergers and Acquisitions

77.

OPIC is the
A. Overseas Pirate Investment Corporation.
B. Overseas Private Investment Corporation.
C. Organization Petroleum Importing Countries.
D. None of the above
Eun - Chapter 16 #77
Topic: Cross-Border Mergers and Acquisitions

78.

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
Eun - Chapter 16 #78
Topic: Political Risk and FDI

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.
Eun - Chapter 16 #79
Topic: Political Risk and FDI

80.

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 above
Eun - Chapter 16 #80
Topic: Political Risk and FDI

81.

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 above
Eun - Chapter 16 #81
Topic: Political Risk and FDI

82.

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 above
Eun - Chapter 16 #82
Topic: Political Risk and FDI

83.

Country risk refers to

A. political risk.
B. credit risk, and other economic performances.
C. every risk except political risk.
D. both a and b
Eun - Chapter 16 #83
Topic: Political Risk and FDI

84.

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 above
Eun - Chapter 16 #84
Topic: Political Risk and FDI

85.

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. purchase insurance against the hazard of political risk.
D. all of the above
Eun - Chapter 16 #85
Topic: Political Risk and FDI

86.

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:
A. (i), (ii), (iii), and (iv)
B. (v), (vi), (vii), and (viii)
C. a and b
D. none of the above
Eun - Chapter 16 #86
Topic: Political Risk and FDI

87.

The communist victory in China in 1949 is an example of

A. micro risk.
B. macro risk.
C. both a and b
D. none of the above
Eun - Chapter 16 #87
Topic: Political Risk and FDI

88.

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.
Crestrictions 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
Eun - Chapter 16 #88
Topic: Political Risk and FDI

89.

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.
Crestrictions 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
Eun - Chapter 16 #89
Topic: Political Risk and FDI

90.

Examples of control 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.
Crestrictions 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
Eun - Chapter 16 #90
Topic: Political Risk and FDI

91.

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 above
Eun - Chapter 16 #91
Topic: Political Risk and FDI

92.

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 above
Eun - Chapter 16 #92
Topic: Political Risk and FDI

93.

In evaluating political risk, experts focus their attention on a set of key factors such as
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
Eun - Chapter 16 #93
Topic: Political Risk and FDI

94.

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 above
Eun - Chapter 16 #94
Topic: Political Risk and FDI

95.

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 above
Eun - Chapter 16 #95
Topic: Political Risk and FDI

96.

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 above
D. none of the above
Eun - Chapter 16 #96
Topic: Political Risk and FDI

97.

North Korea, Iran, and Cuba are examples of

A. countries with low levels of political risk.
B. countries with high levels of political risk.
C. countries that are politically and economically isolated from the rest of the world.
D. both b and c
Eun - Chapter 16 #97
Topic: Political Risk and FDI

98.

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. Upon the news release of the project cancellation, Enron's share price fell immediately by about 10
percent.
BIn 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
Eun - Chapter 16 #98
Topic: Enron versus Bombay Politicians

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 are true?
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
Eun - Chapter 16 #99
Topic: Enron versus Bombay Politicians

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 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.
CIn 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 above
Eun - Chapter 16 #100
Topic: Enron versus Bombay Politicians

16 Summary
Category
Eun - Chapter 16
Topic: Cross-Border Mergers and Acquisitions
Topic: Enron versus Bombay Politicians
Topic: Global Trends in FDI
Topic: Imperfect Labor Market
Topic: Intangible Assets
Topic: Political Risk and FDI
Topic: Product Life Cycle
Topic: Shareholder Diversification Services
Topic: Trade Barriers
Topic: Vertical Integration
Topic: Why Do Firms Invest Overseas?

# of Questions
100
16
3
19
7
8
20
4
4
6
8
5