Chapter 1 – Assessing the Environment – Political,
Economic, Legal, Technological

Multiple Choice Questions

1. One indicator of globalism is that foreign direct investment has grown ____________ the world output of goods. a. as fast as b. twice as fast as

more than three times as fast as (difficult, page 5)

c. negatively compared to

2. The European Union (EU) has now caught up with the United States to share the position of the world’s ____________. a. largest debtor

largest investor (moderate, page 5)

b. largest market c. largest tariff-free market

3. The TRIAD market consists of which regions? a. Western Europe, Eastern Europe, and North America b. Western Europe, Asia, and the United States c. Western Europe, Asia, and North America (moderate, page 5) d. Europe, Southeast Asia, and the Americas

4. Which of the following countries is not one of the Four Tigers? a. South Korea b. Hong Kong c. Taiwan d. Thailand (moderate, page 6)

5. Which of the following best describes the keiretsu and chaebol? a. control b. globalize c. conglomerate (moderate, page 6) d. culturally diverse

6. Which of the following does not characterize keiretsu and chaebol? a. financially linked entities b. market the same products (moderate, page 6) c. play a significant role in their nation’s economies d. function like a trade barrier to U.S. firms

7. Maquiladoras are____________. a. fqwertyuiinancing institutions in South America b. Latin American banks c. trade and investment corporations d. manufacturing facilities (moderate, page 7)

8. China has enjoyed recent success as an export powerhouse built upon its ____________. a. strengths of low costs and flow of capital (moderate, page 7) b. geographic location in the world c. close ties with the rest of Asia d. close ties with Japan
9. Privatization involves ____________. a. the purchase of private companies by governments b. joint ventures between governments c. joint ventures between the private and public (governmental) sectors d. the sale of government-owned operations to private investors. (moderate, page 8)

10. All of the following are examples of factors that are changing the world labor force EXCEPT: a. increasing movement across borders of workers at all skill levels. b. the rising average age of employees. c. rising levels of education for women in the workforce. d. slow wage growth in the U.S. (moderate, page 9)

11. Which of the following is NOT a force for increased workforce diversity? a. workers crossing national borders b. greater numbers of college educated workers (moderate, page 9) c. rising age of employees d. increased number of women in the workforce

12. An important aspect of the political environment is the phenomenon of ____________ -- a driving force behind political instability around the world.

ethnicity (moderate, page 11)

a. religion b. fascism c. racism

13. Political risks are any governmental actions or politically motivated events that adversely affect the ____________. a. capacity of the company to survive b. long-run profitability or value of the company (moderate, page 12) c. personal safety of corporate managers and employees d. company’s capacity to meet consumer needs

14. Which of the following best describes nationalization? a. use of locals in management positions b. giving hiring precedence to locals over employees from the company’s headquarters c. government’s gradual and subtle actions against a firm d. forced sale of assets to local buyers (moderate, page 12)

15. _____________ occurs when the local government seizes the foreign-owned assets of the MNC without any sort of compensation. a. Expropriation b. Confiscation (moderate, page 12) c. Contraction d. Repatriation

16. The risk of expropriation is highest in countries that ____________. a. have a large number of MNCs operating b. experience continuous political upheaval (easy, page 12) c. have low levels of education and economic development d. have stable economies 17. Micro political risk events are those that affect ____________. a. numerous industries or companies b. several other nations in the same region c. one industry or company or a few companies (easy, page 12) d. managers and employees who are nationals

18. Events that affect all foreign firms doing business in a country or region are called ____________.

macro political risk events (easy, page 12)

a. micro political risk events b. country risk events c. regional risk events

19. Which of the following is NOT one of the seven typical political risk events common today? a. loss of technology or intellectual property rights b. political takeovers and civil wars (moderate, page 12) c. discriminatory treatment in the application of laws d. interference in managerial decision making

20. Expropriation of corporate assets without prompt and adequate compensation is an example of ____________. a. economic risk

political risk (moderate, page 12)

b. legal risk c. cultural risk

21. Risk assessment by multinational corporations usually takes two forms: ____________ and ____________. a. use of consultants; computer modeling

use of consultants; internal staff (moderate, page 13)

b. use of internal staff; computer modeling c. government risk reports; computer modeling

22. No matter how sophisticated the methods of political risk assessment become, nothing can replace timely information from ____________. a. government agencies b. broadcast media c. academic research d. people on the front line (moderate, page 13)

23. The key to a PRISM system is the ____________. a. quantity of data input by executives b. number of variables in the PRISM equations c. quality of the data input by executives (moderate, page 14) d. power of the computers

24. To analyze their data on potential risks, some companies allocate a minimum and a maximum score for which of the following criteria? a. the political and economic environment b. domestic economic conditions c. external economic relations

All of the answers are correct. (difficult, page 14)

25. All of the following are categories used in political risk assessment EXCEPT: a. political and economic environment b. domestic economic conditions c. external economic relations

political elections (moderate, page 14)

26. ____________ involves the use of lead indicators to predict possible political dangers. a. Computer modeling system b. PRISM c. Composite ranking d. Early warning system (moderate, page 14)

27. Which of the following countries is considered to be least risky in terms of political environment? a. Saudi Arabia

Italy (moderate, page 15)

b. United Kingdom c. Thailand

28. Which of the following countries is considered to be most risky in terms of political environment? a. Singapore b. United Kingdom

Russia (moderate, page 15)

c. Thailand

29. For autonomous international subsidiaries, most of the impact from political risks will be at the level of __________ in terms of political environment. a. ownership and control (moderate, page 14) b. financial operations c. marketing and sales operations d. managerial strategy and policy-making

30. Which of the following risk reduction strategies is not a form of adaptation to the political regulatory environment? a. equity sharing b. participative management c. localization d. hedging (moderate, page 17)

31. Which of the following is NOT a means of adaptation? a. participative management b. development assistance c. funds sharing (moderate, page 17) d. localization of the operation

32. Which of the following is NOT a means of maintaining dependency? a. market control b. equity sharing (difficult, page 17) c. staged contribution strategies d. input control 33. _____________ includes the initiation of joint ventures with nationals to reduce political risks. a. Equity sharing (moderate, page 17) b. Participative management c. Localization of the operation d. Development assistance

34. Which of the following requires that the firm actively involve nationals in the management of the subsidiary? a. equity sharing b. participative management (moderate, page 17) c. localization of the operation d. development assistance

35. ____________ means that the firm maintains control over key inputs, such as raw materials, components, technology, and know-how. a. Input control (moderate, page 17) b. Market control c. Position control d. Bureaucratic control

36. Which of the following requires that the firm keep control of the means of distribution (for example, by only manufacturing components for the parent firm or legally blocking sales outside the host country)? a. input control b. market control (moderate, page 17) c. position control d. bureaucratic control

37. ____________ involves keeping certain key subsidiary management positions in the hands of expatriate or home-office managers. a. Input control b. Market control c. Position control (moderate, page 17) d. Bureaucratic control

38. The Overseas Private Investment Corporation is a ____________. a. large overseas bank b. currency hedging center

provider of political risk insurance (moderate, page 17)

c. United Nations subsidiary

39. Political risk insurance is a form of ___________. a. input control b. development assistance c. equity sharing d. hedging (difficult, page 17)

40. Political risk insurance usually covers ____________. a. losses in revenues not assets b. losses in both revenues and assets

losses in assets but not revenues (moderate, page 17)

c. None of the answers are correct. 41. Which of the following is a form of hedging? a. staged contribution strategies b. development assistance c. local debt financing (difficult, page 17) d. localization of the operation

42. A country’s level of ____________ generally determines its economic stability. a. agricultural development b. industrial development c. innovativeness d. economic development (moderate, page 18)

43. A country’s ability or intention to meet its financial obligations determines its ____________.

economic risk (moderate, page 19)

a. financial risk b. political risk c. country risk

44. Economic risk concerns the risk that a company’s subsidiary will become unprofitable and the risk of ____________. a. expropriation b. nationalization c. exchange rate volatility (difficult, page 19) d. technological appropriation

45. John Mathis’ four recommended methods of analyzing economic risk include all of the following EXCEPT: a. the quantitative approach.

the axiomatic approach. (moderate, page 19)

b. the qualitative approach. c. the checklist approach .

46. Which of the following is NOT a generally accepted method of assessing the creditworthiness of a country? a. quantitative approach b. survey approach (moderate, page 19) c. qualitative approach d. checklist approach

47. The ____________ method of analyzing economic risk attempts to measure statistically a country’s ability to honor its debt obligation. a. quantitative (moderate, page 19) b. qualitative c. checklist approach d. subjective/objective analysis

48. The qualitative approach economic risk evaluation involves evaluating ________ and ________. a. a country’s resources for payments; willingness to pay b. a country’s leadership competence; resources for payments c. a country’s leadership competence; likely policies to be implemented (difficult, page 19) d. probability of terrorism; resources for payments

49. The ____________ approach to analyzing economic risk relies on a few easily measurable and timely criteria believed to reflect or indicate changes in the creditworthiness of the country. a. qualitative b. checklist (moderate, page 19) c. statistical d. brainstorming

50. Under what form of law are past court decisions used as precedents? a. bureaucratic law b. civil law c. common law (easy, page 22) d. cultural law

51. _____________ is based on a comprehensive set of laws organized into a code. a. Bureaucratic law b. Civil law (easy, page 22) c. Common law d. Cultural law

52. European nations are most likely to use which type of law? a. common b. Islamic c. civil (moderate, page 22) d. custom

53. About 70 countries, predominantly in Europe, are ruled by _____________ law, as is Japan. a. common b. Islamic c. civil (moderate, page 22) d. custom

54. A(n) ____________ is an agreement by the parties concerned to establish a set of rules to govern a business transaction. a. procedure b. policy c. contract (moderate, page 22) d. rule

55. Tariffs and quotas are examples of what types of policies? a. protectionist (moderate, page 23) b. economic development c. free market d. political development

56. In Canada, crown corporations are ____________. a. entrepreneurial in nature b. wholly owned by the public sector (moderate, page 23) c. owned by the private sector but managed by the public sector d. owned by the public sector but managed by the private sector

57. The appropriability of technology deals with ____________. a. technology which has been illegally appropriated by a foreign government b. how appropriate the technology is for generating long-term profit c. how easily the technology can be learned and used by host nation employees d. the ability of the firm to profit from its technology (difficult, page 24)
58. The International Convention for the Protection of Industrial Property is often referred to as the _____________. a. Economic Union b. North American Free Trade Agreement c. Paris Union (moderate, page 24) d. World Trade Organization

59. The Paris Union deals with ____________. a. software development b. electronics and other high tech sales c. protection of patents (moderate, page 24) d. international cooperation in reducing pollution

60. Which type of country is most likely to use its investment laws to acquire appropriate technology? a. post industrial b. newly industrializing c. less developed (moderate, page 24) d. industrial

Short Essay Questions

61. Briefly describe the goal of the North American Free Trade Agreement (NAFTA). The goal of the NAFTA was to bring faster growth, more jobs, better working conditions, and a cleaner environment for all as a result of increased exports and trade. (moderate, page 7)

62. What is the primary difference between nationalization and expropriation? Under nationalization, companies receive some compensation for their confiscated assets, which they do not typically receive under expropriation. (moderate, page 12)

63. Under what condition is the risk of expropriation highest? Expropriation is highest in countries that experience continuous political upheaval. (easy, page 12)

64. What is the primary difference between macro and micro political risks? Macro political risk events affect all foreign firms in a given region, while micro risk events affect only a few. (easy, page 12)

65. Identify seven of the most typical political risk events common today. Expropriation of corporate assets; forced sale of equity to host country; discriminatory treatment in the application of laws; barriers to repatriation of funds; loss of technology or intellectual property; interference in managerial decision making; dishonesty by government officials. (difficult, page 12)

66. What are the two forms of risk assessment usually taken by multinational corporations? One form of risk assessment is through the use of experts or consultants familiar with the country or region under consideration. A second and increasingly common means of political risk assessment used by MNCs is through the development of their own internal staff and in-house capabilities. (moderate, page 13)

67. What is PRISM? Primary Risk Investment Screening Matrix. PRISM is a computer-aided model that reduces over 200 variables to an index of political and economic stability. It is a quantitative method of assessing risk. (moderate, page 13)

68. Describe the two major decisions that managers face when deciding how to manage the political risk of investing or maintaining current operations in a country. On one level, managers can decide to suspend their firm’s dealings with a certain country at a given point—either by the avoidance of investment or by the withdrawal of current investment. On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may choose to start or maintain operations there and to accommodate that risk through adaptation to the political regulatory environment. (moderate, page 14)

69. Identify and describe four means of political risk adaptation. Equity sharing – shared ownership or partial ownership with nationals; participative management – actively involve nationals in the management of the firm; localization of operations – modifications to the company’s management style, company name, etc. to accommodate national issues; development assistance – corporate aid for infrastructure development. (difficult, page 17)

70. Identify and describe four means of maintaining dependency between corporations and host nations. Input control – firm maintains control over key inputs, market control – firm maintains control over key markets, position control – firm controls key management positions in the subsidiary operation, staged contribution strategies – firm announces plans to increase in successive years its contributions to the host government. (difficult, page 17)

71. What are the two common means of hedging? Political risk insurance and local debt financing. (moderate, page 17)

72. What are the two most common forms of economic risk to a company? Its subsidiary in a particular country may become unprofitable; exchange rate volatility. (moderate, page 19)

73. Define currency translation exposure. Currency translation exposure occurs when the value of one country’s currency changes relative to another. (easy, page 19)

74. According to Mathis, what are the four methods of analyzing economic risk (a country’s credit worthiness)? Quantitative; qualitative; a combination of both qualitative and quantitative; and the checklist approach. (moderate, page 19)

75. What are the three international law systems and their primary distinctions? Common law uses past court decisions as precedents; civil law is based on a comprehensive set of laws organized into a code; Islamic law (Muslim) is based upon religious beliefs. (moderate, page 22)

76. Describe the differences between common law and civil law. In common law, past court decisions act as precedents to the interpretation of law. Civil law is based on a comprehensive set of laws organized into a code. (moderate, page 22)

77. What is the difference between appropriability of technology and appropriateness of technology? Appropriability concerns how readily a firm can protect its technology from being stolen or abused, while appropriateness refers to how adaptable that technology is to local needs. (moderate, page 24)

78. In what ways does international law protect intellectual property rights? Over 80 countries adhere to the International Convention for the Protection of Industrial Property, often referred to as the Paris Union. However, differences in rule in some non-Paris union countries as well as industrial espionage activities mean that intellectual property rights are not fully guaranteed. (moderate, page 24)

Comprehensive Essay Questions

79. Describe political risk insurance and local debt financing. Given the choice between political risk insurance and local debt financing, which would be most appropriate to use? Political risk insurance is offered by most industrialized countries. In the United States, the Overseas Private Investment Corporation (OPIC) provides coverage for new investments in projects in friendly, less developed countries. Insurance minimizes losses arising from specific risks – such as the inability to repatriate profits, expropriation, nationalization, or confiscation – and from damage as a result of war, terrorism. The Foreign Credit Insurance Association (FCIA) also covers political risks caused by war, revolution, currency inconvertibility, and the cancellation of import or export licenses. Local debt financing (money borrowed in the host country), where available, helps a firm hedge against being forced out of operation without adequate compensation. In such instances, the firm withholds debt repayment in lieu of sufficient compensation for its business losses.

Both methods have their strengths and weaknesses. It is difficult to assess them perfectly without knowing the exact cost of the insurance. Political risk insurance only covers the loss of a firm’s assets, not the loss of revenue resulting from expropriation. If a firm had sufficient debt financing, it could cover cash flows for a short period of time. Also, in the threat of expropriation, the host government faces fewer local repercussions from insurance than from local debt financing. Therefore, insurance seems less of a deterrent to expropriation. (difficult, page 17)

80. List and discuss the four methods of analyzing economic risk, or a country’s creditworthiness as recommended by John Mathis, a former senior financial policy analyst for the World Bank. The four methods for analyzing economic risk include: (1) the quantitative approach, (2) the qualitative approach, (3) a combination of both of these approaches, and (4) the checklist approach.

The quantitative approach “attempts to measure statistically a country’s ability to honor its debt obligation.” This measure is arrived at by assigning different weights to economic variables to produce a composite index used to monitory the country’s creditworthiness over time and to make comparisons with other countries. The qualitative approach evaluates a country’s economic risk by assessing the competence of its leaders and analyzing the types of polices they are likely to implement. This approach entails a subjective assessment by the researcher in the process of interviewing those leaders and projecting the future direction of the economy. The checklist approach “relies on a few easily measurable and timely criteria believed to reflect or indicate changes in the creditworthiness of the country.” Researchers develop various vulnerability indicators that categorize countries in terms of their ability to withstand economic volatility. (difficult, page 19)

81. What are the three major bases of law used in different regions of the world? What are the implications of these for running a company overseas? Under common law, past court decisions act as precedents to the interpretation of the law and to common custom. Civil law is based on a comprehensive set of laws organized into a code. Muslim law is used in Islamic countries where the social order is based on religious beliefs. International managers must obviously be keenly aware of the legal infrastructure of the cultures they operate in and do everything possible to anticipate legal problems and difficulties before they occur. The legal structure of a nation has a profound impact upon behavioral patterns within the nation. (moderate, page 22)

82. What are common types of protectionist policies used by foreign governments? How do these affect global trade? What is Japan's stance toward such policies? The most common types of protectionist policies are tariffs, quotas, and other types of trade restrictions imposed by countries to give their products and industries a competitive advantage. The Japanese have been criticized for engaging in blatant protectionist activities in limiting imports of foreign goods while continuing to export consumer goods on a massive scale. Protectionist policies have a negative influence on the attractiveness of investing in a given country because the MNC’s profitability is on the line. Many countries have signed tax treaties or conventions that define various aspects of subtle protectionism. (moderate, page 23)