Answer (C) is correct. Reasons for international business expansion, known as direct foreign investment, can be both revenue-oriented (seeking new markets or avoiding trade restrictions) and cost-oriented (seeking cheaper inputs or favorable exchange rates.
All of the following are valid reasons for expansion of international business by U.S. multinational corporations except to
Answer (D) is correct. Reasons for international business expansion, known as direct foreign investment, can be both revenue-oriented (seeking new markets or avoiding trade restrictions) and cost-oriented (seeking cheaper inputs or favorable exchange rates). An attempt to protect the firm’s domestic market from foreign competition by expanding operations into foreign countries is unlikely.
Which one of the following statements concerning American Depository Receipts (ADRs) is false?
Answer (A) is correct. Ownership rights in foreign corporations are sometimes evidenced by American Depository Receipts (ADRs). The foreign stocks are deposited with a large U.S. bank, which in turn issues ADRs representing ownership in the foreign shares. The ADR shares then trade on a U.S. stock exchange, whereas the company’s original shares trade in foreign stock markets. ADRs allow foreign companies to develop a U.S. shareholder base without being subject to many SEC restrictions.
A British company currently has domestic operations only. It plans to invest equal amounts of money on projects either in the U.S. or in China. The company will select the country based on risk and return for its portfolio of domestic and international projects taken together. The risk reduction benefits of investing internationally (based on 50% of British domestic operations
and 50% foreign operations) will be the greatest when there is perfectly
Answer (D) is correct. Portfolio theory concerns the composition of an investment portfolio that is efficient in balancing the risk with the rate of return of the portfolio. Diversification reduces risk. This firm’s goal is to balance the risk inherent in having 100% of its operations in Britain. This will be accomplished when the foreign investment moves in the opposite direction from the domestic (British) operations.
Technocrat, Inc., located in Belgium, currently manufactures products at its domestic plant and exports them to the U.S. since it is less expensive to produce at home. The company is considering the possibility of setting up a plant in the U.S. All of the following factors would encourage the company to consider direct foreign investment in the U.S. except the
Answer (C) is correct. Production costs in the home country are already lower than those in the U.S. Widening this gap would not serve the firm’s interests.
All of the following are concerns that are unique to foreign investments except
Answer (C) is correct. Interest rates are an aspect of doing business within any modern economy. They are not unique to foreign investment.
The cost of capital for foreign investment projects is higher because of all of the following factors except
Answer (D) is correct. The cost of capital is typically higher for foreign projects for a variety of reasons, including exchange-rate risk, political risk, and limitations on sources of financing that often require a certain percentage of domestic ownership. Trigger pricing is not a cause. Trigger pricing is a means of managing exchange-rate risk by supplying foreign funds at an indexed price, but with an option to convert to a futures-based fixed price when a specified basis differential exists between the two prices.
Which of the following is not a political risk of investing in a foreign country?
Answer (D) is correct. Political risks include the threat of expropriation of company assets, destruction of assets in rebellions in third-world nations, and limitations on the repatriation of profits (or even initial investments). Default by a foreign customer is not a political risk, but a risk of doing business either locally or internationally.
The benefits of direct foreign investment by multinational corporations include all of the following except
Answer (D) is correct. Benefits include easier access to scarce resources, improved earnings opportunities, and improved international understanding. Expropriation is not a benefit. It is the risk that a foreign government will nationalize a company’s assets.
Which of the following is a benefit to the home country of international diversification by multinational companies?
Answer (A) is correct. A better international monetary system, because of greater participation by many users, is a benefit of international diversification.