Foreign Market Entry And Country | Verified Test Bank Ch.12

Chapter 12 Foreign Market Entry and Country Risk Management

Notes to instructors:

Answers to non-numeric multiple choice questions are arranged alphabetically, so that answers are randomly assigned to the five outcomes.

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1. Exporting through a foreign sales agent requires little resource commitment and helps to insulate the exporter from the costs and risks of foreign market entry.

2. Building productive capacity directly in a foreign country is called foreign direct investment.

3. The easiest mode of entry into foreign markets is foreign direct investment.

FDI is one of the most difficult entry modes.

4. An international license agreement is a contract-based mode of entry into foreign markets.

5. Foreign direct investment requires a large resource commitment from the parent firm relative to most other forms of entry.

6. The sales and marketing benefits of foreign direct investment are usually less than those of export entry into foreign markets.

With established operations in the foreign country, multinational corporations are able to promote their products and services more effectively.

7. Licensing provides quick and relatively low-risk entry into foreign markets as long as the parent can protect its intellectual property rights.

8. The main reason for foreign direct investment is to minimize cultural risk.

Although management of cultural risks is important, the main drivers of foreign direct investment are the potential for higher sales and lower costs.

9. Country risk is the risk that the business environment in a host country will change unexpectedly.

10. A firm is exposed to country risk when unexpected events occur in foreign countries.

Country risk is not the same as country risk exposure. A corporation is exposed to country risk to the extent that its value changes with unexpected events in that country.

11. The objectives of foreign governments and multinational corporations are seldom in conflict.

Conflicts are even more prevalent internationally than they are domestically.

12. Country risk indices are used by international lenders to judge the risks of lending to a particular country.

13. In a sense, political risk indices reflect a country’s willingness to repay its loans, whereas financial risk indices reflect a country’s ability to repay its loans.

14. Political risk is the risk that politics in a host government will unexpectedly change the rules of the game under which businesses operate.

15. Political risk includes any changes in the political climate that are expected over a particular period of time.

If change can be anticipated, then it is not truly risk.

16. In the context of country risk assessment, financial risk refers to the risks of a particular financial instrument, such as a currency option contract.

Financial risk refers to unexpected events in a host country’s financial, economic, or business life.

17. The country risk indices produced by companies that assess country risk tend to reflect the same underlying economic phenomena.

18. The country risk indices produced by companies that assess country risk use identical risk rating systems according to the conventions of the United Nations’ Model Treatment of Country Risk.

There is no model treatment. Individual companies differentiate their products to appeal to different clientele.

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

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

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

21. 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.

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

23. 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.

Risk refers only to unexpected changes.

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

Qualitative factors are perhaps the more important input.

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

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

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

27. 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.

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

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

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

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

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

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

32. Political risks are seldom insurable.

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

33. 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.

MNC’s diversified operations are partially self-insuring.

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

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

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

Multiple Choice Select the BEST ANSWER

1. Entry modes into international markets include each of (a) through (d) EXCEPT ____.

a. acquisition of assets

b. exporting

c. investment

d. licensing

e. Each of the above is an entry mode.

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 ____.

a. distribution

b. marketing

c. packaging

d. production

e. purchasing

3. Resource commitment is highest for which foreign market entry mode?

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. foreign direct investment

d. foreign joint venture

e. licensing

4. The fastest way to gain access to a foreign market is by ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. foreign acquisition

d. foreign direct investment

e. foreign joint venture

5. The foreign market entry mode with the lowest sales potential is ____.

a. exporting through foreign sales agents

b. foreign direct investments

c. foreign joint ventures

d. licensing

e. merger or acquisition

6. Import barriers on manufactured goods are the biggest obstacle for ____.

a. exporting through domestic sales agents

b. licensing

c. foreign direct investment

d. foreign acquisitions

e. foreign joint ventures

7. Capital market investment restrictions are the biggest obstacle for ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. licensing

d. foreign acquisition

e. foreign joint venture

8. Control over marketing and distribution channels is least with ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. licensing

d. foreign direct investment

e. foreign joint venture

9. Corporate control over production is least with ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. licensing

d. foreign direct investment

e. foreign joint venture

10. The potential loss of production technology is greatest with ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. licensing

d. foreign direct investment

e. foreign acquisition

11. Exposure to political risk is greatest with ____.

a. exporting through foreign sales agents

b. exporting through foreign sales branches

c. licensing

d. foreign joint venture

e. foreign acquisition

12. Problems in overcoming cultural distance are greatest with which of (a) through (c)?

a. exporting through foreign sales agents

b. foreign direct investment

c. licensing

d. Problems of cultural distance are approximately the same in each of the above.

e. Problems of cultural distance are generally not a problem for any of the above.

13. A central point of contention in the relationship between a manufacturer and a sales agent is ____.

a. the expected level of service in the foreign country

b. the resource commitment of the manufacturer

c. the termination or cancellation clause in the sales contract

d. whether the manufacturer maintains control over patents

e. whether the manufacturer maintains control over production

14. The most important element of a successful partnership is in ____.

a. choosing the right partner

b. limiting the scope of the technology transfer

c. limiting the transferability of the technology by contract

d. removing the threat by acquiring the assets of the foreign partner

e. using only assets near the end of their product life cycle

15. The best way to obtain foreign market entry ____.

a. is through exporting through foreign sales agents or branches

b. is by licensing

c. is through foreign direct investment

d. is form foreign joint venture

e. depends on the circumstances

16. According to the text, sources of country risk include ____.

a. expropriation risk and default risk

b. expropriation risk and other political risks

c. financial risk and socioeconomic risk

d. political risk and financial risk

e. political risk and socioeconomic risk

17. Political risks arise because of ____.

a. investment agreements between MNCs and host governments

b. the methods used to identify particular political risks

c. unexpected events in a country’s financial, economic, or business life

d. unexpected changes in the political environment within a host country or in the relationship of a host country to another country

e. none of the above

18. Country risk can affect the value of a multinational corporation through ____.

a. changes in future cash flows

b. changes in investors’ required return on investment

c. changes in managers’ actions

d. more than one of the above

e. none of the above

19. Companies that rate country risk ____.

a. produce country risk ratings that are positively correlated with each other

b. produce country risk ratings that are negatively correlated with each other

c. produce country risk ratings that are uncorrelated with each other

d. seldom provide assessments of micro risks

e. use Morgan Stanley Dean Witter’s rating system to produce their ratings

20. Examples of macro country risks include each of the following EXCEPT unexpected changes in a host country’s ____.

a. tax rates

b. fiscal policies

c. monetary policies

d. bankruptcy or ownership laws

e. regulations on the use of migrant workers

21. Political risk includes each of the following EXCEPT ____.

a. expropriation

b. potential loss of intellectual property rights

c. protectionism

d. risks arising from dealing with an unfamiliar culture

e. the risk of disruptions in operations

22. Political risk is greatest ____.

a. in monarchies

b. in democracies

c. as a result of armed conflict

d. when a country has a large trade deficit

e. when an incumbent political party imposes its agenda on foreign-based MNCs

23. Blocked funds are a drain on project value when ____.

a. a project suffers early losses

b. they are blocked in the host economy

c. they are generated by real assets

d. they cannot be immediately repatriated to the parent corporation

e. they cannot earn their required return in the host country

24. Intellectual property rights include each of the following EXCEPT ____.

a. copyrights

b. monopoly access to a market

c. patents

d. proprietary technologies

e. secret formulas

25. Macroeconomic factors that affect country risk assessments include each of the following EXCEPT ____.

a. currency risk

b. expropriation

c. inflation

d. interest rate risk

e. the current account balance

26. Qualitative factors that affect country risk assessments include each of the following EXCEPT ____.

a. cancellations of contracts by a host government

b. currency risk

c. loan defaults or restructurings

d. losses from exchange controls

e. payment delays

27. The text describes each of the following strategies for managing country risk EXCEPT ____.

a. disclose material risks in the firm’s financial statements

b. negotiate the environment with the host country

c. obtain political risk insurance

d. plan for disaster recovery

e. structure operations to minimize the MNC’s risk exposure and maximize return

28. Insurable political risks possess each of (a) through (d) EXCEPT ____.

a. A large number of individuals or businesses are exposed to the risk.

b. The expected loss over the life of the contract is estimable.

c. The loss is identifiable in time, place, cause, and amount.

d. The loss is outside the influence of the insured.

e. Insurable political risks possess more than one of the above.

29. Political risk insurance can be obtained on which of (a) through (c)?

a. currency incontrovertibility

b. expropriation

c. repatriation restrictions

d. more than one of the above

e. none of the above

30. Much of the 1990s growth in political risk insurance was due to ____.

a. increasing political uncertainty in developed countries

b. increasing political uncertainty in developing countries

c. the collapse of the Iron Curtain

d. the withdrawal of private insurers from the market

e. the growth in project finance

31. Ways to limit the MNC’s exposure to country risk include which of the following?

a. Enlist local partners.

b. Limit dependence on a single partner.

c. Limit the scope of the technology transfer.

d. Use more stringent investment criteria.

e. Methods to limit risk include more than one of these options.

32. A ____ can be obtained on processes, products, machines, and new chemical compounds.

a. copyright

b. patent

c. trademark

d. trade secret

e. none of the above

33. A ____ prohibits the unauthorized reproduction of creative works including books, magazines, drawings, paintings, musical compositions, and sound and video recordings.

a. copyright

b. patent

c. trademark

d. trade secret

e. none of the above

34. A ____ is a distinctive name, word, symbol, or device used to distinguish a company’s goods or services from those of its competitors.

a. copyright

b. patent

c. trademark

d. trade secret

e. none of the above

35. A ____ is a proprietary idea, process, formula, technique, or device that a company uses to its competitive advantage.

a. copyright

b. patent

c. trademark

d. trade secret

e. none of the above