FIN 165 Chapter 1

International trade might have approached the comparative advantage model in the 19th century, and it does so even more today.
False
Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities.
True
Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet.
True
Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs.
False
When discussing comparative advantage, it is apparent that today at least two factors of production, capital and technology, now flow directly and easily between countries, rather than only directly through traded goods and services.
True
It would be safe to make the statement that modern telecommunications now take business activities to labor rather than moving labor to the places of business.
True
As the general principle of comparative advantage is still valid, complete specialization remains a realistic case.
False
Which of the following domestic financial instruments have NOT been modified for use in international financial management?
A) currency options and futures
B) interest rate and currency swaps
C) letters of credit
D) All of the above are domestic financial instruments that have also been modified for use in international financial markets.
D) All of the above are domestic financial instruments that have also been modified for use in international financial markets.
Which of the following is not always understood by MNE management?
A) Culture, history, and institutions
B) Political risk
C) Foreign exchange risk
D) Financial instruments
A) Culture, history, and institutions
MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities
True
Relative to MNEs, purely domestic firms tend to have GREATER political risk.
False
Domestic firms tend to make GREATER use of financial derivatives than MNEs because they can bear the greater risk presented by these financial instruments.
False
Because countries have different financial regulations and customs, it is common for MNEs to apply their domestic rules and regulations when doing financial business in a foreign country.
False
A number of financial instruments that are used in domestic financial management have been modified for use in international financial management. Examples are foreign currency options and futures, interest rate and currency swaps, and letters of credit.
True
Domestic firms do not have foreign exchange risk.
False
In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Why of the following is NOT a reason why market-seeking firms produce in foreign countries?
A) satisfaction of local demand in the foreign country
B) satisfaction of local demand in the domestic markets
C) political safety and small likelihood of government expropriation of assets
D) All of the above are market-seeking activities.
C) political safety and small likelihood of government expropriation of assets
________ investments are designed to promote and enhance the growth and profitability of the firm. ________ investments are designed to deny those same opportunities to the firm’s competitors.
A) Conservative; Aggressive
B) Defensive; Proactive
C) Proactive; Defensive
D) Aggressive; Proactive
C) Proactive; Defensive
In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a raw material seeker. Which of the following is NOT a reason why raw material seeker extract raw materials in foreign countries?
A) They extract raw materials wherever they can be found to export from the host country.
B) They extract raw materials wherever they can be found for sale in the host country.
C) They extract raw materials wherever they can be found for further processing in the host country.
D) All of the above.
D) All of the above
For firms competing in a world characterized by oligopolistic competition, strategic motives can be subdivided into proactive and defensive investments.
True
Defensive measures are designed to enhance growth and profitability of the firm itself.
False
In determining why a firm becomes a multinational there are many reasons. One reason is that the firm is a knowledge seeker. They operate in foreign countries to exploit existing technological expertise.
False
The five strategic motives driving the decision to invest abroad and become an MNE (market seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political safety seekers) are mutually exclusive.
False
The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the:
A) domestic phase.
B) multinational phase.
C) international trade phase.
D) import-export banking phase.
C) International trade phase
The authors describe the multinational phase of globalization for a firm as one characterized by the:
A) ownership of assets and enterprises in foreign countries.
B) potential for international competitors or suppliers even though all accounts are with domestic firms and are denominated in dollars.
C) imports from foreign suppliers and exports to foreign buyers.
D) requirement that all employees be multilingual.
A) ownership of assets and enterprises in foreign countries.
A firm in the International Trade Phase of Globalization:
A) makes all foreign payments in foreign currency units and all foreign receipts in domestic currency units.
B) receives all foreign receipts in foreign currency units and makes all foreign payments in domestic currency units.
C) bears direct foreign exchange risk.
D) none of the above
C) bears direct foreign exchange risk
Of the following, which was NOT mentioned by the authors as an increase in the demands of financial management services due to increased globalization by the firm?
A) evaluation of the credit quality of foreign buyers and sellers
B) foreign consumer method of payment preferences
C) credit risk management
D) evaluation of foreign exchange risk
B) foreign consumer method of payment preferences
The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm:
A) rulers of sovereign states and unsavory customs officials
B) corporate insiders and attorneys
C) corporate insiders and rulers of sovereign states
D) attorneys and unsavory customs officials
C) Corporate insiders and rulers of sovereign states
Typically, a firm in its domestic stage of globalization has all financial transactions in its domestic currency.
True
Typically, a “greenfield” investment abroad is considered an investment having a greater foreign presence than a joint venture with a foreign firm.
True
The authors argue that financial inefficiency caused by influential insiders may prove to be an increasingly troublesome barrier to international finance.
True
The authors describe the process for development of a MNE that begins with purely domestic phase, followed by the multinational phase, and topping out with the international trade phase.
False
Today it is widely assumed that there are NO LIMITS to financial globalization.
False
The growth in the influence and self-enrichment of organizational insiders is seen as an impediment to the growth of financial globalization in general.
True
The actions of corporate insiders and the actions of rules of sovereign states are both agency costs that act as an impediment to the growth of globalization.
False
Financial globalization has not resulted in:
A) continuing imbalances of balance of payments.
B) an increase in quantity and speed in the flow of capital across the world.
C) capital markets less open and a decrease in the availability of capital for many organizations.
D) uniform ways of ownership, control, and governance across the world.
D) Uniform ways of ownership, control, and governance across the world
BRICs is a term used in international finance to represent assets that are considered to be inexpensive and sturdy, but fundamentally unsound and incapable of coping with the upheavals now apparent in international financial markets.
False
Multinational Enterprises are firms, both for profit companies and not-for-profit organizations, that have operations in more than one country, and conduct their business through foreign subsidiaries, branches, or joint ventures with host country firms.
True
Ownership, control, and governance changes radically across the world. The publicly traded company is not the dominant global business organization – the privately held or family-owned business is the prevalent structure – and their goals and measures of performance differ dramatically.
True
A well established, large U.S.-based MNE will probably NOT be able to overcome which of the following obstacles to maximizing firm value?
A) an open market place
B) high quality strategic management
C) access to capital
D) none of the above
D) None of the above
A well established, large China-based MNE will probably be most adversely affected by which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
A) an open marketplace
A well-established, large, Brazil-based MNE will probably be most adversely affected by which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
C) access to capital
A major cost avoided in the eurocurrency markets is the payment of deposit insurance fees, such as:
A) Federal Deposit Insurance Corporation – FDIC
B) Office of the Comptroller of the Currency – OCC
C) International Monetary Fund – IMF
D) World Bank – WB
A) Federal Deposit Insurance Corporation (FDIC)
The modern eurocurrency market was born shortly after:
A) World War II
B) World War I
C) Korean War
D) Bosnian War
A) World War II
The reference rate of interest in the eurocurrency market is the:
A) London Interbank Offered Rate
B) Prima rate
C) Federal funds rate
D) Treasury rate
A) London InterBank Offered Rate
Interest spreads in the eurocurrency market are small for many reasons EXCEPT:
A) Eurocurrency loans are secured loans.
B) Eurocurrency deposits and loans are made in amounts of $500,000 or more on an unsecured basis.
C) The eurocurrency is a wholesale market.
D) Borrowers are usually large corporations or government entities.
A) Eurocurrency loans are secured loans
Your authors suggest that one way to characterize the global financial marketplace is through its assets, institutions, and linkages.
True
Eurocurrencies are domestic currencies of one country on deposit in a second country.
True
A euro dollar deposit is a demand deposit.
False
Eurocurrency markets serve two valuable purposes: 1) Eurocurrency deposits are an efficient and convenient way to market device for holding excess corporate liquidity; and 2) the Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs, including the financing of imports and exports.
True
The key factor attracting both depositors and borrowers to the Eurocurrency loan market is the narrow interest rate spread within that market.
True
The Eurocurrency market continues to thrive because it is a large international money market free from governmental regulation and interference. Recent events may lead to greater regulations.
True
The theory that suggests specialization by country can increase worldwide production is:
A) the theory of comparative advantage.
B) the theory of foreign direct investment.
C) the international Fisher effect.
D) the theory of working capital management.
A) the theory of comparative advantage
Which of the following is NOT a reason governments interfere with comparative advantage?
A) Governments attempt to achieve full employment.
B) Governments promote economic development.
C) national self-sufficiency in defense-related industries
D) All are reasons governments interfere with comparative advantage.
D) All of the above
Which of the following factors of production DO NOT flow freely between countries?
A) raw materials
B) financial capital
C) (non-military) technology
D) All of the above factors of production flow freely among countries.
A) Raw materials
Which of the following would NOT be a way to implement comparative advantage?
A) IBM exports computers to Egypt.
B) Computer hardware is designed in the United States but manufactured and assembled in Korea.
C) Water of the greatest purity is obtained from wells in Oregon, bottled, and exported worldwide.
D) All of the above are examples of ways to implement comparative advantage.
D) All of the above
Of the following, which would NOT be considered a way that government interferes with comparative advantage?
A) tariffs
B) managerial skills
C) quotas
D) other non-tariff restrictions
B) managerial skills
The concept of absolute comparative advantage’s origins lie in:
A) Adam Smith’s work of 1776
B) David Ricardo’s work of 1776
C) The Wealth of Nations book, published in 1887
D) On the Principles of Political Economy and Taxation book, published in 1817
A) Adam Smith’s work of 1776
The concept of relative comparative advantage’s origins lie in:
A) Adam Smith’s work of 1776
B) David Ricardo’s work of 1776
C) The Wealth of Nations book, published in 1887
D) On the Principles of Political Economy and Taxation book, published in 1817
D) On the Principles of Political Economy and Taxation book, published in 1817
Comparative advantage is one of the underlying principles driving the growth of global business.
True