Ch001-Globalization-and-the-Multinational-Firm

Eun & Resnick 4eCHAPTER 1 Globalization and the Multinational FirmQuestions in the test bank follow the order of the chapter outline:What’s Special about International Finance?Foreign Exchange and Political RisksMarket ImperfectionsExpanded Opportunity SetGoals for International FinancialManagementGlobalization of the World Economy:Major TrendsEmergence of Globalized Financial MarketsEmergence of the Euro as a Global CurrencyTrade Liberalization and Economic IntegrationPrivatizationMultinational CorporationsSummaryMINI CASE: Nike and Sweatshop LaborAPPENDIX 1A: Gains from Trade: The Theory ofComparative AdvantageWhat’s Special about “International” Finance?1)What major dimension sets apart international finance from domesticfinance?a)foreign exchange and political risksb)Market imperfectionsc)Expanded opportunity setd)all of the aboveAnswer: d2)An example of a political risk isa)Expropriation of assetsb)Adverse change in tax rulesc)The opposition party being electedd)a) and b) are both correctAnswer: d - p. 53)Production of goods and services has become globalized to a largeextent as a result ofa)Skilled labor being highly mobileb)Natural resources being depleted in one country after anotherc)Multinational corporations’ efforts to source inp uts and locateproduction anywhere where costs are lower and profits higherd)Common tastes worldwide for the same goods and servicesAnswer: c - p. 44)Recently, financial markets have become highly integrated. Thisdevelopmenta)Allows investors to diversify their portfolios internationallyb)Allows minority investors to buy and sell stocksc)Has increased the cost of capital for firmsd)Answers a) and c) are both correct.Answer: a. see page 45)Japan has experienced large trade surpluses. Japanese investors haveresponded to this bya)Liquidating their positions in stocks to buy dollar denominatedbondsb)Investing heavily in U.S. and other foreign financial marketsc)Lobbying the U.S. government to depreciate its currencyd)Lobbying the Japanese government to allow the yen to appreciate Answer: b - p. 46)Suppose your firm invests $100,000 in a project in Italy. At thetime the exchange rate is $1.25 = €1.00. One year later theexchange rate is the same, but the Italian government hasexpropriated your firm’s assets paying only €80,000 incompensation. This is an example ofa)Exchange rate riskb)Political riskc)Market imperfectionsd)None of the above, since $100,000 = €80,000×$1.25/€1.00 Answer: b) political risk—the government is only giving you back your initial investment, if this was a good investment it should have been worth more than $100,000 a year later. For example if your cost of capital was 8% it should have been worth $108,000.7)Suppose that Great Britain is a major export market for your firm, aU.S. based MNC. If the British pound depreciates against the U.S.dollar,a)Your firm will be able to charge more in dollar terms whilekeeping pound prices stable.b)Your firm may be priced out of the U.K. market, to the extent thatyour dollar costs stay constant and your pound prices will rise.c)To protect U.K. market share, your firm may have to cut the dollarprice of your goods to keep the pound price the same.d)b) and c) are both correct.Answer: b) and c) are both correct. See page 5.8)Most governments at least try to make it difficult for people tocross their borders illegally. This barrier to the free movementof labor is an example ofa)Information asymmetryb)Excessive transactions costsc)Racial discriminationd)A market imperfectionAnswer: d) see page 6.9)When individual investors become aware of overseas investmentopportunities and are willing to diversify their portfoliosinternationally,a)they trade one market imperfection, information asymmetry, foranother, exchange rate risk.b)they benefit from an expanded opportunity set.c)They should not bother to read or to understand the prospectus,since its probably written in a foreign languaged)They should invest only in dollars or euros.Answer: b see page 8.10)Nestlé, a well-known Swiss corporation,a)Has been a paragon of virtue in its opposition to all forms ofpolitical risk.b)At one time placed restrictions on foreign ownership of its stock.When it relaxed these restrictions, the total market value of the firm fell.c)At one time placed restrictions on foreign ownership of its stock.When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to Swiss shareholders.d)None of the aboveAnswer: c) See page 7.Goals for International Financial Management11)The goal of shareholder wealth maximizationa)is not appropriate for non-U.S. business firmsb)means that all business decisions and investments that a firmmakes are done for the purpose of making the owners of the firmbetter off financiallyc)is a sub-objective the firm should attempt to achieve after theobjective of customer satisfaction is metd)is in conflict with the privatization process taking place inthird-world countriesAnswer: b - p. 812)As capital markets are becoming more integrated, the goal ofshareholder wealth maximizationa)Has been altered to include other goals as well.b)Has lost out to other goals, even in the U.S.c)Has been given increasing importance by managers in Europe.d)Has been shown to be a deterrent to raising funds abroad.Answer c) see page 813)Recent corporate scandals at firms such as Enron, WorldCom and theItalian firm Parmalata)Show that managers might be tempted to pursue their own privateinterests at the expense of shareholders.b)Show that Italian shareholders are better at monitoring managerialbehavior than U.S. shareholders.c)Show that white-collar criminals hardly ever get punished.d)Show that socialism is a better way to go than capitalism.Answer a) see page 9.14)While the corporate governance problem is not confined to the UnitedStates,a)It can be a much more serious problem in many other parts of theworld, where legal protection of shareholders is weak ornonexistent.b)It has reached its high point in the United States.c)The U.S. legal system, with lawsuits used only as a last resort,ensured that any conflicts of interest will soon be a thing of thepast.d)None of the aboveAnswer: a) see page 9.15)The owners of a business are thea)Taxpayersb)Workersc)Suppliersd)ShareholdersAnswer: d)16)The massive privatization that is currently taking place in formerlysocialist countries, will likelya)eventually enhance the standard of living to these countries’citizensb)depend on private investmentc)increase the opportunity set facing these countries’ citizensd)all of the aboveAnswer: d) See page 10.17)A firm with concentrated ownershipa)May give rise to conflicts of interest between dominantshareholders and small outside shareholders.b)May enjoy more accounting transparency than firms with diffuseownership structures.c)Is a partnership, never a corporation.d)Tends to exist overseas but not in the U.S.Answer: d) See page 9.18)The ultimate guardians of shareholder interest in a corporation, arethea)Rank and file workersb)Senior managementc)Boards of directorsd)All of the aboveAnswer: c) See page 9.19)In countries like France and Germany,a)Managers have often made business decisions with regard maximizingmarket share to the exclusion of other goals.b)Managers have often viewed shareholders as one of the“stakeholders” of the firm, others being employees, customers, suppliers, banks and so forth.c)Managers have often regarded the prosperity and growth of theircombines, or families of related firms, as their critical goal.d)Managers have traditionally embraced the maximization ofshareholder wealth as the only worthy goal.Answer: b) see page 9.20)When corporate governance breaks downa)Shareholders are unlikely to receive fair returns on theirinvestmentsb)Managers may be tempted to enrich themselves at shareholderexpensec)The board of directors is not doing its jobd)All of the aboveAnswer: d)Globalization of the World Economy21)Privatization refers to process of:a)Having government operate businesses for the betterment of thepublic sectorb)Government allowing the operation of privately owned businessc)Prohibiting government operated enterprisesd)A country divesting itself of the ownership and operation of abusiness venture by turning it over to the free market system Answer: d - p. 1422)Deregulation of world financial marketsa)Provided a natural environment for financial innovations, likecurrency futures and options.b)Has promoted competition among market participants.c)Has encouraged developing countries such as Chile, Mexico, andKorea to liberalize by allowing foreigners to directly invest in their financial markets.d)All of the aboveAnswer: d see page 10.23)The emergence of global financial markets is due in no small part toa)Advances in computer and telecommunications technologyb)Rigorous enforcement of the Soviet system of state ownership ofresources of production.c)Government regulation and protection of infant industries.d)None of the above.Answer: a) See page 11.24)The euroa)is the common currency of Europeb)is divisible into 100 cents, just like the U.S. dollarc)may eventually have a transaction domain larger than the U.S.dollard)All of the above.Answer: d) see page 11.25)Since its inception the euro has brought about revolutionary changesin European finance. For examplea)By redenominating corporate bonds and stocks from 12 differentcurrencies into one common currency, the euro has precipitated the emergence of continent wide capital markets in Europe that arecomparable to U.S. markets in depth and liquidity.b)Swiss bank accounts are all denominated in euro.c)The European banking sector has become much more important as asource of financing for European firms.d)There have actually not been any revolutionary changes.Answer: a) page 11.26)Since the end of World War I, the dominant global currency has beenthea)British poundb)Japanese yenc)Eurod)U.S. dollarAnswer: d) page 11.27)In David Ricardo’s theory of c omparative advantage,a)International trade is a zero-sum game in which one tradingpartner’s gain comes at the expense of another’s loss.b)Liberalization of international trade will enhance the welfare ofthe world’s citizens.c)Is a short-run argument, not a long-run argument.d)Has been superseded by the now-orthodox view of mercantilism. Answer: b) page 14.28)The World Trade Organization, WTO,a)Has the power to enforce the rules of international trade.b)Covers agriculture and physical goods, but not services orintellectual property rights.c)Recently expelled China for human rights violations.d)Ruled that NAFTA is to be the model for world trade integration. Answer: b) page 14.29)Privatizationa)Has spurred a tremendous increase in cross-border investment.b)Has allowed many governments to have the funds to nationalizeimportant industries.c)Has guaranteed that new ownership will be limited to the localcitizens.d)Has generally decreased the efficiency of the enterprise. Answer: b) page 15-16.30)The theory of comparative advantage:a)Claims that economic well-being is enhanced if each country’scitizens produce only a single productb)Claims that economic well-being is enhanced when all countriescompare commodity prices after adjusting for exchange ratedifferences in order to standardize the prices charged allcountriesc)Claims that economic well-being is enhanced if each country’scitizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade productiond)Claims that no country has an absolute advantage over anothercountry in the production of any good or service.Answer: c - pp. 11 – 12Multinational Corporations31)A multinational firm can be defined asa)A firm that invests short-term cash inflows in more than onecurrencyb)A firm that has sales affiliates in several countriesc)A firm that is incorporated in more than one countryd)A firm that incorporated in one country that has production andsales operations in several other countries.Answer: d - p. 1532)A MNC may gain from its global presence bya)Spreading R&D expenditures and advertising costs over their globalsalesb)Pooling global purchasing power over suppliersc)Utilizing their technological and managerial know-how globallywith minimum additional costsd)All of the above are potential gains.Answer: d) page 17.33)MNCs can use their global presence toa)Take advantage of underpriced labor services available in certaindeveloping countriesb)Gain access to special R&D capabilities residing in advancedforeign counties.c)Boost profit margins and create shareholder value.d)All of the above.Answer: d) page 17.34)Foreign-owned manufacturing companiesa)Generally are more productive and pay their workers more than docomparable locally-owned businesses, in the world’s most highlydeveloped countries.b)Generally are more productive and pay their workers less than docomparable locally-owned businesses, in the world’s most leastdeveloped countries.c)Tend to specialize in articles of manufacture that are illegal intheir home countries.d)Gain from their global presence by paying their workers in shoes. Answer: d – see International Finance in Practice p. 1735)A purely domestic firm sources its products, sells its products, andraises its funds domesticallya)Can face stiff competition from a multinational corporation thatcan source its products in one country, sell them in severalcountries, and raise its funds in a third country.b)Can be more competitive than a MNC on its home turf due tosuperior knowledge of the local marketc)Can still face exchange rate risk, just like a MNCd)All of the above are true.Answer: d36)MNC stands fora)Multinational Corporationb)Mostly National Corporationc)Messy National Corporationd)Military National CooperationAnswer: a)37)Which is growing at a faster rate, foreign direct investment by MNCsor international trade?a)FDI by MNCsb)International tradec)Since they are linked, they grow at the same rated)None of the aboveAnswer: a) page 16.38)A true MNC, with operations in dozens of different countriesa)Must effectively manage foreign exchange riskb)Can ignore foreign exchange risk since it is diversifiedc)Will pay taxes in only its home countyd)None of the above.Answer: a) page 17.39)A MNC cana)Be a factor that increases the opportunities of the citizens ofless developed countriesb)Be a factor that increases the opportunity set of domesticinvestorsc)Increase economic efficiencyd)All of the above.Answer: d) page 17.40)A corporation that can source its products in one country, sell themin another country, and raise the funds in a third countrya)Is a multinational corporation.b)Is a domestic firm if all of the shareholders are from the samecountryc)Enjoys a built-in hedge against exchange rate riskd)Enjoys a built-in hedge against political riskAnswer: a)Appendix: The Theory of Comparative Advantage41)Country A can produce 10 yards of textiles and 6 pounds of food perunit of input. Compute the opportunity cost of producing oneadditional unit of food instead of textiles.a)1 yard of textiles per 1.67 pounds of foodb)1 pound of food per 1.67 yards of textilesc)1 yard of textiles per .6 pounds of foodd)1 pound of food per .6 yards of textilesAnswer: cRationale: 6/10 = .6 pounds of food42)The gains from tradea)Are likely realized in the long run when workers and firms havehad the time to adjust to the new competitive environmentb)Are immediately realized in the short run, when governments dropprotectionist policies.c)Are smaller than the costs of adjustmentd)None of the above.Answer: a)43)Comparative advantagea)Is also known as relative efficiencyb)Can lead to trade even in the face of absolute efficiencyc)Exists when one party can produce a good or service at a loweropportunity cost than another party.d)All of the aboveAnswer: d)44)Country A can produce 10 yards of textiles and 6 pounds of food perunit of input. Country B can produce 8 yards of textiles and 5 pounds of food per unit of input.a)Country A is relatively more efficient than Country B in theproduction of foodb)Country B is relatively more efficient than Country A in theproduction of textilesc)Country A has an absolute advantage over Country B in theproduction of food and textilesd)Country B has an absolute advantage over Country A in theproduction of food and textilesAnswer: cRationale: Country A can produce more of everything than Country B.Thus, Country A has an absolute advantage over Country B in theregardinga)Free trade between nationsb)That the factors of production (land, labor, capital, andentrepreneurial ability) are relatively immobile.c)That the factors of production (land, labor, capital, andentrepreneurial ability) are relatively mobiled)a) and b)Answer: d) see page 22.46)If one country is twice the size of another country and is better atmaking almost everything than the benighted citizens of the smaller county,a)The bigger county enjoys an absolute advantageb)The bigger county enjoys an relative advantagec)The bigger county enjoys an comparative advantaged)There is not enough information to make a determinationAnswer: a) see page 22.47)Country A can produce 10 yards of textiles and 6 pounds of food perunit of input. Country B can produce 8 yards of textiles and 5pounds of food per unit of input.a)Country A is relatively more efficient than Country B in theproduction of textilesb)Country B is relatively more efficient than Country A in theproduction of foodc)Country A has an absolute advantage over Country B in theproduction of food and textilesd)All of the aboveAnswer: d - pp.24 - 25an opportunity cost of 1yard of textiles per .6(= 6/10) pounds of food;Country B has anopportunity cost of 1yard of textiles for .63(= 5/8) pounds of food.Country A has anopportunity cost of 1pound of food per 1.67 (=10/6) yards of textiles;Country B has anopportunity cost of 1pound of food for 1.60 (=8/5) yards of textiles.Thus, Country A has anabsolute advantage and arelative efficiency overCountry B in theproduction of textiles.Country B has a relative efficiency over Country A in the production of food. Country B does not have an absolute advantage over Country A in the production of food or textiles.48)Consider the no-trade input/output situation presented in thefollowing table and graph for countries A and B. Assuming that free trade is legal, develop a scenario that will benefit the citizens of both countries.CountryA B TotalI. Total Potential Output(lbs. or yards; 000,000s)Food 600 500 1100500 1700Textiles 120II. Consumption(lbs. or yards; 000,000s)Food 300 400 700Textiles 200 400 600a)Country B should make all the textiles and trade with Country Afor foodb)Country A should make nothing but textiles and trade with CountryB for food.c)Country B should make all the textiles and Country A should makeall the foodd)Country B should make nothing but textiles and trade with CountryA for food.Answer: b)There’s asubtledifferencebetween a) andb). With answera) there areonly500,000,000yards oftextilesproduced, whichis less thanthe 600,000,000units currentlyconsumed.49)Counties A and Bcurrently consume 400units of food and 400units of textiles eachand currently do nottrade with one another.The citizens of countryA have to give up onethe citizens of countryB have to give up onecurves are shown.a)The citizens of country A should make food and trade with thecitizens of country B for textilesb)The citizens of country A should make textiles and trade with thecitizens of country B for foodc)There are no gains from trade in this exampled)A is twice as good as B at making food and B is twice as good as Aat making textilesRationale: consider theshape of the combinedproduction possibilitiescurve with and withouttrade: The citizens ofcountry A should maketextiles and trade withthe citizens of countryB for food; the citizenswill be able to go fromthe point shown on thecombined no trade lineto somewhere better.50)Consider a dentist and a 14-year old boy. The dentist can make $100per hour drilling teeth and the 14-year old boy can make $2 per hour picking up used aluminum cans. The dentist is a manly man and can mow his half-acre lot in one hour. The 14-year old boy can mow the lawn in two hours. If the dentist hires the boy to mow his lawn at any price less than $100, but more than $4a)Both he and the boy are better offb)The dentist would be exploiting the boyc)The boy would be exploiting the dentistd)All of the aboveAnswer: a) or d).Rationale: It really comes down to a philosophical question regarding exploitation.。