Copyright?2023PearsonEducation,Inc.

MultinationalBusinessFinance,16e(Eiteman/Stonehill/Moffett)

Chapter17ForeignDirectInvestmentandPoliticalRisk

17.1TheForeignDirectInvestmentDecision

1)Basedonobservationsoffirmsthathavesuccessfullyinvestedabroad,wecanconcludethatoneofthecompetitiveadvantagesenjoyedbyMNEsis:

A)managerialexpertise.

B)financialstrength.

C)competitivenessoftheirhomemarkets.

D)Alloftheabovearecompetitiveadvantages.

Answer:D

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

2)Basedonobservationsoffirmsthathavesuccessfullyinvestedabroad,wecanconcludecompaniesaremorecompetitivewhen:

A)facingsophisticatedanddemandingcustomersinthehomemarket.

B)surroundedbyacriticalmassofrelatedindustriesandsuppliers.

C)locatedincountriesthatarenaturallyendowedwiththeappropriatefactorsofproduction.

D)Alloftheabovearetrue.

Answer:D

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

3)TheOLIparadigmisanattempttocreateaframeworktoexplainwhyMNEschoose________ratherthansomeotherformofinternationalventure.

A)licensing

B)jointventures

C)foreigndirectinvestment

D)strategicalliances

Answer:C

Diff:1

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

4)TheOinOLIreferstoanadvantageinafirm'shomemarketthatis:

A)operatorindependent.

B)owner-specific.

C)open-market.

D)officialdesignation.

Answer:B

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

5)Theowner-specificadvantagesofOLImustbe:

A)firm-specific.

B)noteasilycopied.

C)transferabletoforeignsubsidiaries.

D)alloftheabove

Answer:D

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

6)A/An________wouldbeanexampleofanowner-specificadvantageforanMNE.

A)patent

B)economyofscale

C)economyofscope

D)alloftheabove

Answer:A

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

7)TheLinOLIreferstoanadvantageinafirm'shomemarketthatisa:

A)liabilityinthedomesticmarket.

B)location-specificadvantage.

C)longevityinaparticularmarket.

D)noneoftheabove

Answer:B

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

8)A/An________wouldbeanexampleofalocation-specificadvantageforanMNE.

A)patent

B)economyofscale

C)uniquesourceofrawmaterials

D)possessionofproprietaryinformation

Answer:C

Diff:1

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

9)TheIinOLIreferstoanadvantageinafirm'shomemarketthatisan:

A)internationalization.

B)industry-specificadvantage.

C)internationalabnormality.

D)noneoftheabove

Answer:A

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

10)A/An________wouldbeanexampleofaninternalizationadvantageforanMNE.

A)patent

B)economyofscale

C)uniquesourceofrawmaterials

D)possessionofproprietaryinformation

Answer:D

Diff:1

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

11)Indecidingwhethertoinvestabroad,managementmustfirstdeterminewhetherthefirmhasasustainablecompetitiveadvantagethatenablesittocompeteeffectivelyinthehomemarket.Thecompetitiveadvantagemustbe:

A)firmspecific.

B)noteasilycopied.

C)inatransferableform.

D)alloftheabove

Answer:D

Diff:1

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

12)WhichofthefollowingisNOTamarketimperfectionorgenuinecomparativeadvantagethatattractsFDItoparticularlocations?

A)lowcostandproductivelaborforce

B)uniquesourcesofrawmaterials

C)defensiveinvestments

D)anexpansivemonetarypolicy

Answer:D

Diff:1

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

13)Astronglycompetitivehomemarkettendstodullthecompetitiveadvantagerelativetofirmslocatedinlesscompetitivehomemarkets.

Answer:FALSE

Diff:3

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

14)ReactivefinancialstrategiescanbeformulatedinadvancebytheMNE'sfinancialmanagers.

Answer:FALSE

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

15)Proactivefinancialstrategiesdependondiscoveringmarketimperfections.

Answer:FALSE

Diff:2

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Recognition

AACSB:Applicationofknowledge

16)Listandexplainthreestrategicmotiveswhyfirmscouldbecomemultinationalsandgiveanexampleofeach.

Answer:Thestrategicmotivesforfirmstobecomemultinationalscouldbe:marketseekers,rawmaterialsseekers,productionefficiencyseekers,knowledgeseekers,andpoliticalsafetyseekers.Marketseekersarelookingformoreconsumersfortheirproductssuchasautomobiles,orsteel.KnowledgeseekersmaybelookingforaneducatedworkforcesimilartothewayfirmsseekingRandDsetupshopinuniversitytowns.Rawmaterialsseekersmaybeaftercommoditiessuchasoilorcopper.ProductionefficienciesmayoccurincountrieslikeMexicothathavecapableworkersandlowerwages.Politicalsafetyseekersarelookingforcountriesthatwillnotexpropriatetheirassets,sotheymaystayawayfromcountriesthatintheposthaveengagedinsuchactivities.

Diff:3

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

17)WhatdoestheOLIParadigmproposetoexplain?Defineeachcomponentandprovideanexampleofeach.

Answer:TheOLIParadigmisanattempttodevelopanoverallframeworktoexplainwhyMNEschooseFDItoserveforeignmarketsratherthanalternativessuchaslicensingorexporting.ThelettersoftheparadigmareOforowner-specificadvantages,Lforlocation-specificadvantages,andIforinternalization.

Owner-specificadvantagesrequirethatthefirmhaveacomparativeadvantageinitshomemarketthatitfeelsitcanexploitinternationally.Tobemosteffective,theadvantagesshouldbedifficulttocopy.Locationspecificadvantagesmaybeduetomarketimperfectionsorgenuinecomparativeadvantagessuchasasourceofaparticularlyhighqualitynaturalresource.Withinternalizationthefirmhasinitspossessionsomeproprietaryinformationorproductsuchassoftwareorpersonnelthatmayprovideanadvantageintheinternationalmarketplace.

Diff:3

L.O.:17.1TheForeignDirectInvestmentDecision

Skill:Conceptual

AACSB:Applicationofknowledge

17.2StructuralChoicesforForeignMarketEntry

1)WhichofthefollowingisNOTtrueregardingbehavioralobservationsoffirmsmakingadecisiontoinvestinternationally?

A)MNEsinitiallyinvestincountrieswithasimilar"nationalpsychic."

B)Firmseventuallytakegreaterrisksintermsofthenationalpsychicofcountriesinwhichtheyinvest.

C)Initialinvestmentstendtobemuchlargerthansubsequentones.

D)Alloftheabovehavebeenobserved.

Answer:C

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

2)WhichofthefollowingisNOTanadvantagetoexportinggoodstoreachinternationalmarketsratherthanenteringintosomeformofFDI?

A)fewerpoliticalrisks

B)greateragencycosts

C)lowerfront-endinvestment

D)Alloftheaboveareadvantages.

Answer:B

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

3)WhichofthefollowingisanadvantagetoexportinggoodstoreachinternationalmarketsratherthanenteringintosomeformofFDI?

A)feweragencycosts

B)fewerdirectadvantagesfromresearchanddevelopment

C)agreaterriskoflosingmarketstocopycatgoodsproducers

D)aninabilitytoexploitR&Daseffectivelyasifalsoinvestedabroad

Answer:A

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

4)WhichofthefollowingisNOTaformofFDI?

A)wholly-ownedaffiliate

B)jointventure

C)exporting

D)greenfieldinvestment

Answer:C

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

5)Withlicensingthe________islikelytobelowerthanwithFDIbecauseoflowerprofits;however,the________islikelytobehigherduetoagreaterreturnperdollarinvested.

A)IRR;NPV

B)NPV;IRR

C)costofcapital;NPV

D)IRR;costofcapital

Answer:B

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

6)WhichofthefollowingisNOTapotentialdisadvantageoflicensingrelativetoFDI?

A)possiblelossofqualitycontrol

B)establishmentofapotentialcompetitorinthird-countrymarkets

C)possibleimprovementofthetechnologybythelocallicensee,whichthenenterstheoriginalfirm'shomemarket

D)Alloftheabovearepotentialdisadvantagestolicensing.

Answer:D

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

7)A________isasharedownershipinaforeignbusiness.

A)licensingagreement

B)greenfieldinvestment

C)jointventure

D)wholly-ownedaffiliate

Answer:C

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

8)WhichofthefollowingisNOTanadvantagetoajointventure?

A)PossiblelossofopportunitytoentertheforeignmarketwithFDIlater.

B)Thelocalpartnerunderstandsthecustomsandmoresoftheforeignmarket.

C)Thelocalpartnercanprovidecompetentmanagementatmanylevels.

D)Maybearealisticalternativewhen100%foreignownershipisnotallowed.

Answer:A

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

9)Greenfieldinvestmentsaretypically________and________thancross-borderacquisition.

A)slower;moreuncertain

B)faster;ofgreatercertainty

C)slower;ofgreatercertainty

D)faster;moreuncertain

Answer:A

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

10)AllofthefollowingmaybejustificationforastrategicallianceEXCEPT:

A)takeoverdefense.

B)ajointventuretopoolresourcesforresearchanddevelopment.

C)jointmarketingandservingagreements.

D)Alloftheabovearelegitimatereasonsforstrategicalliances.

Answer:D

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

11)Inpractice,whenexpandingintoothercountries,firmshavebeenobservedtofollowasequentialsearchpatternasdescribedinthebehavioraltheoryofthefirm.

Answer:TRUE

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

12)Asageneralrule,thedecisionaboutwheretoinvestabroadforthefirsttimeisthesameasthedecisionaboutwheretoreinvestabroad.

Answer:FALSE

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

13)Economistshaveobservedthatfirmstendtoinvestfirstincountriesthataretoofardistantinpsychicdistance(similarcultural,legal,andinstitutionalenvironment).

Answer:FALSE

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

14)Transnationalsarefirmsthathaveoperationsinmorethanonecountryandconducttheirbusinessthroughbranches,foreignsubsidiaries,orjointventureswithhostcountryfirms.

Answer:FALSE

Diff:2

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

15)Licensingisapopularformofforeigninvestmentbecauseitdoesnotneedasizablecommitmentoffunds,andpoliticalriskisoftenminimized.

Answer:TRUE

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

16)MNEstypicallyusedlicensingwithindependentfirmsratherthanwiththeirownforeignsubsidiaries.

Answer:FALSE

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

17)JointventuresareamorecommonFDIthanwhollyownedsubsidiaries.

Answer:FALSE

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Recognition

AACSB:Applicationofknowledge

18)LocalpartnersinaforeigncountryandinajointventurewithanMNEarelikelytomakedecisionsthatmaximizethevalueofthesubsidiary.Suchactionsprobablywillnotmaximizethevalueoftheentirefirm.

Answer:TRUE

Diff:1

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

19)Thedecisionaboutwheretoinvestabroadisinfluencedbybehavioralfactors.ExplainthebehavioralapproachtoFDI.

Answer:ThebehavioralapproachtoanalyzingtheFDIdecisionistypifiedbytheso-calledSwedishSchoolofeconomists.TheSwedishSchoolhasrathersuccessfullyexplainednotjusttheinitialdecisiontoinvestabroad,butalsolaterdecisionstoreinvestelsewhere,andtochangethestructureofafirm'sinternationalinvolvementovertime.BasedontheinternationalizationprocessofasampleofSwedishMNEs,theeconomistsobservedthatthesefirmstendedtoinvestfirstincountriesthatwerenottoofardistantinpsychicterms.Closepsychicdistancedefinedcountrieswithacultural,legal,andinstitutionalenvironmentsimilartoSweden's,suchasNorway,Denmark,Finland,Germany,andtheUnitedKingdom.Theinitialinvestmentsweremodestinsize,tominimizetheriskofanuncertainforeignenvironment.AstheSwedishfirmslearnedfromtheirinitialinvestments,theybecamewillingtotakegreaterriskswithrespecttoboththepsychicdistanceofthecountries,andthesizeoftheinvestments.

Diff:3

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

20)Whataretheadvantagesanddisadvantagesofservingaforeignmarketthroughagreenfieldforeigndirectinvestmentcomparedtoanacquisitionofalocalfirminthetargetmarket?

Answer:Agreenfieldinvestmentisdefinedasestablishingaproductionorservicefacilitystartingfromthegroundup,i.e.,fromagreenfield.Comparedtogreenfieldinvestment,across-borderacquisitionhasanumberofsignificantadvantages.Firstandforemost,itisquicker.Greenfieldinvestmentfrequentlyrequiresextendedperiodsofphysicalconstructionandorganizationaldevelopment.Byacquiringanexistingfirm,theMNEcanshortenthetimerequiredtogainapresenceandfacilitatecompetitiveentryintothemarket.Second,acquisitionmaybeacost-effectivewayofgainingcompetitiveadvantagessuchastechnology,brandnamesvaluedinthetargetmarket,andlogisticalanddistributionadvantages,whilesimultaneouslyeliminatingalocalcompetitor.Third,internationaleconomic,political,andforeignexchangeconditionsmayresultinmarketimperfections,allowingtargetfirmstobeundervalued.ManyenterprisesthroughoutAsiahavebeenthetargetofacquisitionasaresultoftheAsianeconomiccrisis'simpactontheirfinancialhealth.Manyenterpriseswereindireneedofcapitalinjectionsforcompetitivesurvival.

Cross-borderacquisitionsarenot,however,withouttheirpitfalls.Aswithallacquisitions—domesticorinternational—therearethefrequentproblemsofpayingtoohighaprice,orsufferingamethodoffinancingthatistoocostly.Meshingdifferentcorporateculturescanbetraumatic.Managingthepost-acquisitionprocessisfrequentlycharacterizedbydownsizingtogaineconomiesofscaleandscopeinoverheadfunctions.Thisresultsinnonproductiveimpactsonthefirmasindividualsattempttosavetheirownjobs.Internationally,additionaldifficultiesarisefromhostgovernmentsinterveninginpricing,financing,employmentguarantees,marketsegmentation,andgeneralnationalismandfavoritism.Infact,theabilitytocompleteinternationalacquisitionssuccessfullymayitselfbeatestoftheMNE'scompetenceinthetwenty-firstcentury.

Diff:3

L.O.:17.2StructuralChoicesForForeignMarketEntry

Skill:Conceptual

AACSB:Applicationofknowledge

17.3PoliticalRisk:DefinitionandClassification

1)________risksarethosethataffecttheMNEatthelocalorprojectlevel,butoriginateatthecountrylevel.

A)Country-specific

B)Firm-specific

C)Global-specific

D)noneoftheabove

Answer:A

Diff:2

L.O.:17.3PoliticalRisk:DefinitionandClassification

Skill:Recognition

AACSB:Applicationofknowledge

2)WhichofthefollowingisNOTanexampleofacountry-specificrisk?

A)transferrisk

B)warandethnicstrife

C)culturalandreligiousheritage

D)Alloftheaboveareexamplesofcountry-specificrisk.

Answer:D

Diff:2

L.O.:17.3PoliticalRisk:DefinitionandClassification

Skill:Recognition

AACSB:Applicationofknowledge

3)________isNOToneofthethreemaincountry-specificrisksasoutlinedbyyourauthors.

A)Transferrisk

B)Culturaldifferences

C)Thinequitybase

D)Protectionism

Answer:C

Diff:2

L.O.:17.3PoliticalRisk:DefinitionandClassification

Skill:Recognition

AACSB:Applicationofknowledge

4)Anumberofinstitutionalservicesprovideupdatedcountryriskratingsonaregularbasis.Thisisanexampleofmicro-riskinformationforMNEsusingthisdata.

Answer:FALSE

Diff:2

L.O.:17.3PoliticalRisk:DefinitionandClassification

Skill:Recognition

AACSB:Applicationofknowledge

17.4FinancialImpactsofPoliticalRisk

1)Accordingtoyourauthors,MNEscananticipategovernmentregulationsthatarediscriminatoryorwealthdeprivingfroma/an________or________levelview.

A)foreign;domestic

B)micro;macro

C)internal;external

D)local;global

Answer:B

Diff:2

L.O.:17.4FinancialImpactsofPoliticalRisk

Skill:Conceptual

AACSB:Applicationofknowledge

2)Ofthefollowing,whichwouldNOTbeconsideredanissueforaninvestmentagreementpriortoinvestinginaforeigncountry?

A)thebasisforsettingtransferprices

B)therighttoexporttothird-countrymarkets

C)provisionforarbitrationofdisputes

D)Alloftheabovecouldbenegotiatedpriortoinvesting.

Answer:D

Diff:2

L.O.:17.4FinancialImpactsofPoliticalRisk

Skill:Conceptual

AACSB:Applicationofknowledge

3)________istheriskthatthehostgovernmentwilltakespecificstepsthatpreventtheforeignaffiliatefromexercisingcontroloverthefirm'sassets.

A)Inconvertibility

B)Expropriation

C)Businessincomerisk

D)noneoftheabove

Answer:B

Diff:1

L.O.:17.4FinancialImpactsofPoliticalRisk

Skill:Recognition

AACSB:Applicationofknowledge

17.5PoliticalRiskMitigation

1)Blockedfundsarecashflowsthat:

A)comeinregularintervalsinstandardizedamountsorblocks.

B)havebeenrestrictedintransferoutofalocalcountry.

C)comefromacertainsectororregionoftheworld.

D)noneoftheabove

Answer:B

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

2)WhichofthefollowingisNOToneofthestagesatwhichMNEscanreacttothepotentialforblockedfunds?

A)priortoinvesting

B)duringoperations

C)reinvestinginthelocalcountrywhenfundscannotbemoved

D)AlloftheabovearestagesatwhichMNEscanreact.

Answer:D

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

3)A________loan,alsoknownas________,isaparent-to-affiliateloanchanneledthroughafinancialintermediarysuchasalargecommercialbank.

A)fronting;linkfinancing

B)parallel;aback-to-backloan

C)fronting;aback-to-backloan

D)linkfinancing;aparallelloan

Answer:A

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

4)WhichofthefollowingisNOTatypicalcharacteristicofafrontingloanmadetoaninternationalsubsidiary?

A)Theparentmakesadepositequaltothesizeofthedesiredloanintoalargecommercialbank.

B)Thebanklendstothesubsidiaryfirmanamountequaltotheparentdepositataslightlyhigherinterestrate.

C)Thelendingbankislocatedinthesubsidiary'scountry.

D)Alloftheabovearetypicalcharacteristicsofafrontingloan.

Answer:C

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

5)Whichofthefollowingcouldbeconsideredanexampleofforcedreinvestmentiftheblockageoffundswasexpectedtobetemporary?

A)verticalreinvestmentbyanautomobilemanufacturertobuypartssuppliersandshowrooms

B)alumbercuttingcompanysubsequentlybuildsapapermillwithblockedfunds

C)purchaseoflocalmoneymarketinstrumentsandshort-termloans

D)alloftheabove

Answer:C

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Conceptual

AACSB:Applicationofknowledge

6)OPICstandsfor:

A)OrganizationforthePreventionofInsufficientCapitalization.

B)OrganizationofPetroleumImportingCountries.

C)OverseasPrivateInvestmentCorporation.

D)OverseasPublicInsuranceCommission.

Answer:C

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

7)________isatypeofpoliticalriskthatOPICdoesNOTcover.

A)Inconvertibility

B)Expropriation

C)War

D)OPICcoversalloftheabove.

Answer:D

Diff:2

L.O.:17.5PoliticalRiskMitigation

Skill:Recognition

AACSB:Applicationofknowledge

8)Acountrycanreacttothepotentialforblockedfundspriortomakinganinvestment,duringoperations,orbyinvestinginthelocalcountryinassetsthanmaintaintheirvalue.

Answer:TRUE

Diff:1

L.O.:17.5PoliticalRiskMitigation

Skill:Conceptual

AACSB:Applicationofknowledge

9)Banksareveryhesitanttoengageinfrontingloansbecauseofthelowprobabilityofrepaymentandthustheirriskexposureuptoa100%loss.

Answer:FALSE

Diff:1

L.O.:17.5PoliticalRiskMitigation

Skill:Conceptual

AACSB:Applicationofknowledge

10)Whatareblockedfunds?Listandexplaintwoofthethreemethodstheauthorslistinthischapterfordealingwithblockedfunds.

Answer:Blockedfundsarethosethathavebeenrestrictedfromforeignexchangeinsomefashionbythegovernmentofthehostcountry.Ifthisisapotentialproblemsfirmstakeanumberofstepstoreduceorminimizetheimpactofsuchagovernmentalaction.Inthischaptertheauthorsidentifythreetechniquesfordealingwiththeproblemofblockedfunds.First,usingfrontingloans.Herethefirmdepositsmoneyintoalargefinancialinstitution,typicallyin