Ch016 Foreign Direct Investment and Cross-Border Acquisitions.doc

Eun & Resnick 4eCHAPTER 16 Foreign Direct Investment and Cross-Border AcquisitionsGlobal Trends in FDIWhy Do Firms Invest Overseas?Trade BarriersImperfect Labor MarketIntangible AssetsVertical IntegrationProduct Life CycleInternational Finance in Practice: Linear Sequence in Manufacturing: Singer & CompanyShareholder Diversification ServicesCross-Border Mergers and AcquisitionsPolitical Risk and FDIInternational Finance in Practice: DaimlerChrysler: The First Global Car ColossusInternational Finance in Practice: Stories Past and PresentSummaryMINI CASE: Enron versus Bombay Politicians1 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 marketb) Honda was motivated to circumvent the trade barriers.c) Hondas FDI may have been part of an overall corporate strategy designed to bolster their competitive position vis-vis their domestic rivals such as Toyotad) Both b) and c)Answer: d)2 Following Hondas 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 Americac) Sales of Hondas declinedd) none of the aboveAnswer: b)3 Hondas decision to build a plan in Ohioa) Was welcomed by the United Auto Workersb) 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 aboveAnswer: d)4 When firms undertake FDI,a) They become MNCsb) 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 aboveAnswer: a)5 FDI can take the form of:a) Greenfield investmentb) Cross-border M&Ac) Establishing new production facilities in a foreign countryd) All of the aboveAnswer: d)6 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&Ab) This was a Greenfield investmentc) Both a) and b)d) None of the aboveAnswer: a)7 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 aboveAnswer: a)Global Trends in FDI8 Japan plays a major role as an exporter of FDI. As a recipient of FDIa) 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) Japans receipts of FDI are third in the worldd) None of the aboveAnswer: b)9 The third most important host country for FDI isa) The United Statesb) Japanc) Chinad) MexicoAnswer: c)10 MNCs have invested in Chinaa) By lower material costs.b) By lower labor costs.c) By a desire to preempt the entry of rivals into Chinas potentially huge market.d) All of the aboveAnswer: d)11 FDI stocksa) Are the common shares of multinational companies that invest abroadb) Are mutual funds that invest in FDIc) Represent the accumulation of previous years FDI flowsd) At the sum total of current year FDI flowsAnswer: c)12 The dominant source of FDI outflowsa) Several developed countriesb) A few underdeveloped countries next to wealthy neighbors, like Mexicoc) Africa and Chinad) None of the aboveAnswer: a)Why Do Firms Invest Overseas?13 The key factors that are important in a firms decision to invest overseas are:a) Trade barriers, imperfect labor market, and intangible assetsb) vertical integration, product life cycle, and shareholder diversification servicesc) profit maximization, global prestige, and competitiond) a) and b)Answer: d)14 Why do firms locate production overseas rather than exporting finished goods?a) Shipping costsb) Firms seek to extend corporate control overseasc) Imperfect factor marketsd) All of the aboveAnswer: d)15 While there is no comprehensive theory of FDI, many existing theories emphasize:a) Imperfections in product markets.b) Imperfections in capital marketsc) Imperfections in labor marketsd) All of the aboveAnswer: d)Trade Barriers16 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 distancec) Cultural barriers d) Lack of knowledgeAnswer: a)17 Why do governments regulate international trade?a) To raise revenueb) Protect domestic industries c) Pursue other economic objectivesd) All of the aboveAnswer: d)18 Trade barriers can arise naturally. Which of the following represent a natural barrier to trade?a) Transportation costsb) Quotasc) Tariffs d) Transactions costsAnswer: a)Imperfect Labor Market19 In a push to serve the North American market Samsung, a Korean firm, chose to locate production facilities in Mexico, mainly becausea) Of lower labor costs in Mexicob) To circumvent trade barriers imposed by NAFTAc) Because of colder weather in Canadad) None of the aboveAnswer: a)Rationale: this is what the book says, but consider partial credit for b)20 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 productivec) In some countries there is a shortage of capital investment.d) All of the above are equally importantAnswer: a)21 Factors of production include land, labor, capital, and entrepreneurial ability. Of all the factor markets, the MOST IMPERFECT is the a) Labor marketb) Capital marketc) Real estate marketd) Market for entrepreneurial abilityAnswer: a)22 Severe imperfections in the labor market lead toa) Persistent wage differentials among countriesb) Persistent exchange rate volatility among countriesc) Persistent interest rate differentials among countriesd) None of the aboveAnswer: a)23 Severe imperfections in the labor market arise from immobility of workers due to immigration barriers. As a response, firms should considera) 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.Answer: c)Intangible Assets24 Coca-Cola has invested in bottling plants all over the world rather than licensing local firmsa) Because the foreigners cant 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 FDId) Both b) and c)Answer: b)25 The boomerang effecta) The possibility that if the secret formula of Coca-Cola were leaked, that other firms would come up with similar products and hurt Coca-Colas sales.b) The possibility that FDI in an undeveloped nation will lead to a group of workers who have enough money to afford the firms 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 firms products, leading to an decrease of sales.d) None of the aboveAnswer: a)26 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 resulta) 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 aboveAnswer: a)27 MNCs may undertake overseas investment projects in a foreign country, despite the fact that local firms may enjoy inherent advantages. This implies thata) MNCs are making a mistake in this case and will have to eventually withdrawb) MNCs should have significant advantages over local firms such as comparative advantages due to intangible assetsc) The local firms will not have to compete due to their inherent advantages over the foreigners.d) none of the aboveAnswer: b)28 Examples of intangible assets includea) Technological, managerial, and marketing know-howb) Superior R&D capabilitiesc) Brand namesd) All of the aboveAnswer: d)29 Intangible assets are often hard to package and sell to foreigners.a) Because they usually default on the contracts that they signb) 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) b) and c)Answer: d)30 According to the internalization theory of FDIa) 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) b) and a)d) None of the aboveAnswer: a)31 Firms that have intangible assets with a public good property tend to invest directly in foreign countries. This is becausea) In order to use these assets on a larger scaleb) To avoid the misappropriation that may occur while transacting in foreign countries through the market mechanismc) All of the aboveAnswer: c)Vertical Integration32 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 mergerc) When two firms related in the production process are owned by the same firm, as in a plywood manufacturer owning a logging companyd) All of the aboveAnswer: c)33 The majority of foreign vertical integration isa) Backwardb) Forwardc) Sidewaysd) None of the aboveAnswer: a)34 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 integrationb) This is an example of forward vertical integrationc) This is an example of sideways vertical integrationd) None of the aboveAnswer: b)Product Life Cycle35 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 priceb) It predicts that over time the U.S. switches from an exporting country of new products to an importing countryc) It has an “S” shaped curve when plotting “quantity sold” versus “time”d) All of the aboveAnswer: d)36 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 theoryc) It predicts that over time the U.S. switches from an exporting country of new products to an importing countryd) All of the aboveAnswer: d)Cross-Border Mergers and Acquisitions37 A GREENFIELD investmenta) Involves soybeans in the spring, corn in the summerb) 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 aboveAnswer: b)38 As a mode of entry into a foreign market, cross-border acquisition:a) Involves building new production facilities in a foreign countryb) Offer faster speed over greenfield investmentc) Can offer access to proprietary assetsd) b) and c)Answer: d)39 Cross-border acquisition involves:a) building new production facilities in a foreign countryb) buying existing foreign businessc) a and bd) none of the aboveAnswer: b)40 Synergistic gains refers to:a) gains from hedgingb) gains obtained when the value of the acquiring and target firms, combined together, is greater than the stand-alone valuations of the individual firmsc) gains arising if the combined companies can save on the costs of production, marketing, distribution, and R&D d) b and cAnswer: d)Political Risk and FDI41 Political risk refers to:a) the potential losses to the parent firm of an MNC resulting from adverse political developments in the host countryb) macroeconomic risksc) microeconomic risksd) bankruptcy or high inflation ratesAnswer: a)42 Transfer risk refers to the risk which arises from the uncertainty about:a) the hosts countrys policies affecting the local operations of an MNCb) the hosts countrys policy regarding ownership and control of local operationsc) cross-border flows of capital, payment, know-how, and the liked) none of the aboveAnswer: c)43 Operational risk refers to the risk which arises from the uncertainty about:a) the hosts countrys policies affecting the local operations of an MNCb) the hosts countrys policy regarding ownership and control of local operationsc) cross-border flows of capital, payment, know-how, and the liked) none of the aboveAnswer: a)44 Country risk refers to:a) political riskb) credit risk, and other economic performancesc) a) and b)d) every risk except political riskAnswer: c)45 More than fifty percent of FDI in dollar termsa) Takes the form of cross-border mergers and acquisitionsb) Takes the form of greenfield investmentc) Is initiated by governmentsd) None of the aboveAnswer: a)46 An increase