Question 1

Protectionism refers to the natural inclination of the multinational corporation to protect its intellectual property rights.

Accepted Answer

Protectionism arises when a nation protects resident businesses to the detriment of foreign businesses.

Question 2

For manufacturing firms with patents, the most important difference between the various foreign market entry modes for manufacturing firms is in whether or not the parent firm maintains control of ______.

Accepted Answer

The most important difference between the various foreign market entry modes for manufacturing firms with patents is whether or not the parent firm maintains control of production. For example, in licensing and franchising modes, the parent firm gives the right to produce the patented product to another firm, thus losing control of production. In contrast, in wholly owned subsidiaries and joint ventures, the parent firm maintains control of production.

Question 3

An investment agreement between an MNC and a host country reduces the likelihood of opportunistic behavior on the part of one or both parties.

Accepted Answer

An investment agreement outlines the terms and conditions between an MNC and a host country, which helps to clarify expectations and minimize the potential for opportunistic behavior by either party. It also helps to establish a framework for resolving disputes and enforcing contractual obligations.

Question 4

Resource commitment is highest for which foreign market entry mode?

Accepted Answer

Foreign direct investment requires the highest level of resource commitment as it involves setting up a wholly-owned subsidiary or acquiring an existing company in the foreign market. This involves significant financial, managerial, and operational resources. The other options - exporting through foreign sales agents or branches, licensing, and foreign joint ventures - involve lesser resource commitment as they do not involve ownership or control of assets in the foreign market.

Question 5

The risk of expropriation can usually be handled in a capital budgeting analysis by assuming that expropriation risk affects expected future cash flows, but not investors' required return.

Accepted Answer

The statement is generally true, as expropriation risk can be factored into expected future cash flows when conducting a capital budgeting analysis, but it typically does not directly affect investors' required return on investment. However, in certain cases where expropriation risk is high, investors may demand a higher required return to compensate for the added risk.

Question 6

Entry modes into international markets include each of a) through d) EXCEPT

Accepted Answer

All the options A, B, C and D are entry modes into international markets. Therefore, the best choice is E, which correctly states that all the options are entry modes.

Question 7

Diversifiable political risks should be included only in expected future cash flows and not in the required return on foreign investment.

Accepted Answer

Diversifiable political risks can be reduced through diversification of investment portfolio, and therefore should not affect the required return on foreign investment. However, they should be considered in the expected future cash flows as they can have an impact on the company's earnings and profitability.

Question 8

Political events are unforeseeable, so there is little reward in trying to anticipate and plan for negative political outcomes.

Accepted Answer

Planning for disaster recovery is an important part of country risk management.

Question 9

If a multinational corporation knows with certainty that a foreign tax rate will be increased by 10 percent at the end of the current fiscal year, then this is a source of political risk.

Accepted Answer

Risk refers only to unexpected changes.

Question 10

All else constant, a large and geographically diversified multinational corporation is more likely to need political risk insurance than a smaller, less diversified company with foreign operations in a single country.

Accepted Answer

MNC's diversified operations are partially self-insuring.

Question 11

Protectionism refers to protection of local industries through tariffs, quotas, and regulations that discriminate against foreign businesses.

Accepted Answer

Protectionism aims to protect local industries from foreign competition by setting up barriers such as tariffs, quotas, and regulations that favor domestic businesses over foreign ones.

Question 12

A macro (micro) political risk is a political risk with a big (small) impact on the firm.

Accepted Answer

Micro risks are specific to an industry or company. Macro risks are macroeconomic.

Question 13

Although the consequences of expropriation are severe, expropriation itself is relatively uncommon.

Accepted Answer

While expropriation is a serious issue, it is not particularly common, as most governments prefer to avoid the negative consequences that can come with it.

Question 14

Political risks are seldom insurable.

Accepted Answer

Insurable events arising from political risks include currency inconvertibility, expropriation, and war.

Question 15

Country risk ratings are based on quantitative, rather than on qualitative, factors.

Accepted Answer

Qualitative factors are perhaps the more important input.

Question 16

Intellectual property rights tend to be even more respected in the People's Republic of China than in the United States.

Accepted Answer

Intellectual property rights are seldom as respected in developing countries as they are in developed countries.

Question 17

Micro risks in country risk assessment are specific to an industry, company, or project.

Accepted Answer

Micro risks in country risk assessment refer to risks that are specific to a particular industry, company, or project. These risks are different from macro risks that are associated with the overall stability and economic conditions of a country. Examples of micro risks include project-specific risks such as regulatory approvals, labor disputes, and supply chain disruptions.

Question 18

An example of an exposure to a macro political risk is an unexpected change in tax rates in a host country.

Accepted Answer

A macro political risk refers to a risk that affects an entire industry or country, such as a change in government or a natural disaster. An unexpected change in tax rates in a host country would fall under this category.

Question 19

An example of an exposure to a micro political risk is an unexpected assault by a foreign host government on a multinational corporation's transfer pricing policies.

Accepted Answer

Macro risks affect all firms in a particular host country.

Question 20

The most prevalent foreign political risk is the risk of expropriation.

Accepted Answer

Expropriation is the most severe, but not the most common, political risk.

Quiz 12: Foreign Market Entry and Country Risk Management