Chapter 9 – International Resource Movements and Multinational Corporations
Multiple Choice
The purchase of purely financial assets, such as bonds and stocks, is called:
A)portfolio investment
B)direct investment
C)indirect investment
D)corporate investment
Answer: A pg. 225
_____________ allow the investor to lend capital to get fixed payouts or regular returns, then receive the face value at a date in the future.
A)Stocks
B)Bonds
C)Dividends
D)Mutual funds
Answer: B pg. 225
The United States government defines portfolio investment as what percent of the voting stock of a corporation?
A)Less than 20%
B)Less than 35%
C)Less than 15%
D)Less than 10%
Answer: D pg. 225
When an investor purchases __________, then he/she is purchasing a claim on the net worth of the firm.
A)a bond
B)stock
C)a mutual fund
D)real estate
Answer: B pg. 225
Real investment in factories, capital goods, land, and inventories where the investor retains control over the use of the invested capital is referred to as:
A)Portfolio investment
B)Direct investment
C)Indirect investment
D)Corporate investment
Answer: B pg. 225
_____________ often takes the form of starting a subsidiary or taking control of another firm.
A)Private investment
B)Portfolio investment
C)Direct investment
D)Indirect investment
Answer: C pg. 225
The United States government defines direct investment as what percent of the voting stock of a corporation?
A)More than 50%
B)More than 15%
C)More than 20%
D)More than 10%
Answer: D pg. 225
In the international community, direct investments are undertaken by multinational corporations engaged in what type of industry?
A)manufacturing
B)resource extraction
C)services
D)all of the above
Answer: D pg. 225
Suppose General Electric charges its Mexican subsidiary $500,000 for manufacturing equipment that could be purchased in the open market for $300,000. This practice is best referred to as:
A)Price gouging
B)Transfer pricing
C)Export subsidy
D)Predatory pricing
Answer: B pg. 236
The rapid growth in US direct investment in Europe from 1950 to 2002 was due to which of the following?
A)the US desire to be join the European Union
B)the US desire to avoid the common external tariff imposed by the EU
C)the relatively slow growth of the European Union
D)all of the above
Answer: B pg. 227
Why was US direct investment in Latin America lower in 1985 then in 1980?
A)inflation in the US
B)recessions in the Latin American countries
C)international debt problems in the Latin American countries
D)a recession in the US
Answer: C pg. 227
The basic motive for international portfolio investments is:
A)to earn higher returns domestically than are possible abroad
B)to earn higher returns abroad than are possible domestically
C)to earn returns domestically on incomes earned abroad
D)to earn returns abroad that cannot be taxed domestically
Answer: B pg. 227
When will a resident of one country purchase bonds of another country?
A)if the returns on bonds are higher in the other country
B)if the returns on bonds are lower in the other country
C)if the returns on bonds cannot be taxed domestically
D)if the returns on bonds are equal in both countries
Answer: A pg. 228
According to the_________________ model, returns on capital are originally higher in the nation having the ___________ overall relative capital-labor ratio.
A)Heckscher-Ohlin, higher
B)Heckscher-Ohlin, lower
C)Stolper-Samuelson, higher
D)Stolper-Samuelson, lower
Answer: B pg. 228
Two-way international capital flows is often explained by the element of ___________.
A)higher returns in other countries
B)risk
C)specialization
D)diminishing marginal returns
Answer: B pg. 228
________________ are the primary risks associated with activity in the bond market.
A)Bankruptcy and the variability of exchange rates
B)Bankruptcy and the variability in their market value
C)Variability in their market value and the risk of bank failure
D)Bankruptcy and the risk of bank failure
Answer: B pg. 228
The risk associated with stocks is:
A)bankruptcy
B)variability in market value
C)possibility of lower than anticipated returns
D)all of the above
Answer: D pg. 228
In general, ___________________ on all types of investment.
A)the greater the risk, the greater the return
B)the lower the risk, the greater the return
C)the lower the interest rates, the lower the return
D)there is no relationship between risk and return
Answer: A pg. 228
How is risk measured?
A)By the standard deviation of returns about the average
B)By the variance of returns about the average
C)By the mean value of returns
D)By the average number of stocks and bonds sold international
Answer: B pg. 229
Portfolio theory states that:
A)When investing in securities with yields that are positively related over time, a higher yield can be obtained for the same level of risk for a portfolio as a whole.
B)When investing in securities with yields that are inversely related over time, a given yield can be obtained at a smaller risk or a higher yield can be obtained for the same level of risk for a portfolio as a whole.
C)When investing in securities with yields that are inversely related over time, the risk level will be so low as to make reasonable returns impossible for the portfolio as a whole
D)When investing in securities with yields that are positively related over time, the investor’s level of risk will be so great as to discourage most investors from entering the market
Answer: B pg. 230
Why is a portfolio including both domestic and foreign securities likely to have a higher average yield than one only containing domestic securities?
A)Yields on foreign securities are more likely to be inversely related to yields on domestic securities
B)Yields on foreign securities are less likely to be inversely related to yields on domestic securities
C)Yields on foreign securities do not depend on economic conditions abroad, as do yields on domestic securities
D)A portfolio including both foreign and domestic securities is NOT likely to have a higher average yield than one containing only domestic securities.
Answer: A pg. 230
______________________ can explain two-way international portfolio investments.
A)Portfolio theory
B)Horizontal integration
C)Risk diversification
D)Vertical integration
Answer: C pg. 230
Investments in securities with yields that are inversely correlated is known as:
A)Portfolio theory
B)Risk diversification
C)Vertical integration
D)Horizontal integration
Answer: B pg. 230
It has been found that firms with a strong international orientation tend to ______________.
A)be less profitable than those that are wholly domestic
B)be more profitable than those that are wholly domestic
C)have greater variability in profits than purely domestic firms
D)earn only accounting profit, not economic profit
Answer: B pg. 230
____________ is the production abroad of a differentiated product that is also produced at home.
A)Forward integration
B)Backward integration
C)Vertical integration
D)Horizontal integration
Answer: D pg. 231
Both Coca-Cola and Pepsi Cola are multinational firms in that their soft drinks are bottled throughout the world. This practice illustrates:
A)Forward vertical integration
B)Horizontal integration
C)Backward vertical integration
D)Backward horizontal integration
Answer: D pg. 231
IBM does not want to license foreign producers because it wants to retain complete control over its ____________ and to ensure consistence in _____________.
A)trade secrets and patents, workforce
B)accounting process, quality and service
C)trade secrets and patents, quality and services
D)stock, quality and service
Answer: C pg. 231
When a multinational corporation controls the raw material used in the production of its final good, which of these will likely occur?
A)the MNC will obtain an uninterrupted supply of the raw material at the lowest possible cost
B)consumers will pay lower prices for the good
C)the MNC will face anti-trust charges for owning firms that produce both the raw material and the final good
D)consumers will pay higher prices for the good
Answer: A pg. 231
When a firm expands in the production process to supply its own raw materials and intermediate products or forward to provide its own sales or distribution networks, the process is called:
A)horizontal merger
B)risk diversification
C)vertical integration
D)horizontal integration
Answer: C pg. 231
________________ has been the most common form of direct foreign investments in developing countries and in some mineral-rich developed countries.
A)Backward vertical integration
B)Forward vertical integration
C)Linear integration
D)Horizontal integration
Answer: A pg. 231
_______________ involves multinational corporations establishing subsidiaries for the sale or distribution of their final goods abroad.
A)Backward vertical integration
B)Forward vertical integration
C)Linear integration
D)Horizontal integration
Answer: B pg.231
Direct foreign investments have been greatly facilitated by the rapid advancements in ___________________ since the end of World War II.
A)manufacturing technology
B)transportation and communication
C)accounting practices
D)anti-trust legislation
Answer: B pg.232
The United States is the main supplier of foreign direct investments to what countries?
A)Ghana and Morocco
B)Former communist countries in Eastern Europe
C)Latin America, Bangladesh, Pakistan, the Philippines, and Saudi Arabia
D)Taiwan and Japan
Answer: C pg.231
If capital (K) is free to move internationally, then K will flow from the nation with ___________, to the nation with ______________ until the returns have equalized between countries.
A)higher K returns, lower K returns
B)lower K returns, higher K returns
C)higher labor returns, lower labor returns
D)lower labor returns, lower capital returns
Answer: B pg. 232
When capital moves from lower returns to higher returns, there will be:
A)greater efficiency in the use of capital internationally
B)increased world output
C)increased world welfare
D)all of the above
Answer: D pg. 232
If less than full employment is present, then foreign investments tend to ______ the level of employment in the investing country and ________ foreign investments in the host country.
A)decrease, increase
B)increase, decrease
C)decrease, decrease
D)increase, increase
Answer: A pg. 234
In the year in which foreign investment takes place, an investing country will see what occur?
A)increase in foreign expenditures and a balance-of-payment deficit
B)decrease in foreign expenditures and a balance-of-payment surplus
C)increase in foreign expenditures and a balance-of-payment surplus
D)decrease in foreign expenditures and a balance-of-payment deficit
Answer: A pg. 234
Today, multinational corporations account for what percent of the world’s output?
A)5%
B)50%
C)25%
D)40%
Answer: C pg. 235
The overpricing or under pricing of products in the intrafirm trade of multinational corporations in an attempt to shift income and profits from high to low tax nations is know as:
A)predatory pricing
B)transfer pricing
C)tax pricing
D)out-bidding pricing
Answer: B pg. 236
True/False
True or False? The two main types of foreign investments are portfolio and direct investments.
Answer: True pg. 225
True or False? Brain drain is the migration of highly skilled and trained people from developing to developed nations, and from other industrial nations to the United States.
Answer: True pg. 243
True or False? A purchase of 10% or more of a corporation constitutes a portfolio investment.
Answer: False pg. 225
True or False? From 1950 to 2002, both US private holdings of foreign long-term securities and foreign private holdings of US long-term securities increased very rapidly.
Answer: True pg. 226
True or False? Direct investments would not include takeovers by another firm.
Answer: False pg. 225
True or False? US direct investments in Latin American countries increased from 1980 to 1985 because of the international debt problem in Latin America.
Answer: False pg. 227
True or False? The Hecksher-Ohlin model states that returns on capital are originally higher in the nation having the lower overall relative to capital-labor ration.
Answer: True pg. 228
True or False? Investors are only interested in the rate of return.
Answer: False pg. 228
True or False? A portfolio including both domestic and foreign securities tends to have lower risks than a portfolio containing only domestic securities.
Answer: True pg. 230
True or False? In reality, investors always know precisely the average return on stocks.
Answer: False pg. 230
Essay
What are the basic reasons for a multinational corporations (MNCs) existence?
The MNCs existence is because of vertical and horizontal integration with foreign affiliates, taking advantage of economies of scale, and by having a better position than purely national firms to control the environment in which they operate. By vertical integration, the MNCs can ensure their supply of foreign raw materials. By horizontal integration it can better protect and exploit their monopoly power. Economies of scale exist in production, financing, research and development, and the gathering of market information. The position of the MNC is that due to their size and behavior they are able to receive better deals of quality and price of labor and materials.
Pg. 235-237
