Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Chapter 4 - QUIZ
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Chapter 4 - QUIZ
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International Business, 8e (Wild/Wild)
Chapter 4 Economic Development of Nations
1) Which of the following terms refers to the broadest measure of economic development of a country?
- A) gross domestic product (GDP)
- B) purchasing power parity (PPP)
- C) gross national product (GNP)
- D) human development index (HDI)
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
2) ________ is the value of all goods and services produced by the domestic economy over a one-year period.
- A) Gross domestic product (GDP)
- B) Human development index (HDI)
- C) Gross national product (GNP)
- D) Purchasing power parity (PPP)
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
3) The ________ of a country is its gross national product divided by its population.
- A) GNP per capita
- B) GDP per capita
- C) purchasing power parity
- D) purchasing power
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
4) The relative ability of two countries' currencies to buy the same basket of goods in those two countries is called ________.
- A) gross national product
- B) gross domestic product
- C) purchasing power
- D) purchasing power parity
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
5) ________ is the value of goods and services that can be purchased with one unit of a country's currency.
- A) Potential output
- B) Gross national product
- C) Purchasing power
- D) Gross domestic product
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
6) An investor wants to invest in a country that has a high gross national income (GNI). Which of the following countries would most likely qualify as a prospect?
- A) Nepal
- B) India
- C) Japan
- D) Vietnam
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
7) Which of the following terms is used to refer to the exchange of goods and services for other goods and services instead of money?
- A) fiat money
- B) letter of credit
- C) barter
- D) guanxi
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
8) The GDP per capita of a country is lower than that of France. If the GDP per capita of the country is adjusted for PPP, the country's revised GDP is higher than that of France. Which of the following is most likely true about the country?
- A) The cost of living in the country is higher than that of France.
- B) The cost of living in the country is lower than that of France.
- C) The cost of living in the country is approximately equal to that of France.
- D) The cost of living in the country has increased over the past decade.
Answer: B
AACSB: Application of knowledge
Skill: Application
Difficulty: Hard
LO: 4.1: Explain economic development and how it is measured.
9) The GDP per capita of a country is higher than that of Thailand. If the GDP per capita of the country is adjusted for PPP, the country's revised GDP is lower than that of Thailand. Which of the following is most likely true about the country?
- A) There are fewer goods available for purchase in the country than in Thailand.
- B) The cost to buy everyday goods in the country is approximately the same as in Thailand.
- C) It costs less to buy everyday goods in the country than in Thailand.
- D) It costs more to buy everyday goods in the country than in Thailand.
Answer: D
AACSB: Application of knowledge
Skill: Application
Difficulty: Hard
LO: 4.1: Explain economic development and how it is measured.
10) Which of the following measures the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living?
- A) category development index
- B) gross national product index
- C) human development index
- D) purchasing power index
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
11) A company is conducting a research on new markets by comparing countries in terms of their human development index (HDI) scores. The company wishes to expand into a market where individuals experience a very high level of total well-being. Which of the following countries would the company most likely choose?
- A) Russia
- B) Mexico
- C) China
- D) Japan
Answer: D
AACSB: Application of knowledge
Skill: Application
Difficulty: Hard
LO: 4.1: Explain economic development and how it is measured.
12) Which of the following is true about economic development of a nation?
- A) The purchasing power parity is a poor indicator of a people's total well-being.
- B) GDP is a larger figure and includes a nation's income generated from exports, imports, and international operations.
- C) Illegal activities such as gambling and black market transactions are considered in GDP and GNP.
- D) Using gross product figures to compare production across countries accounts for different cost of living in each country.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
13) Which of the following statements is true of national production?
- A) Marketers use GDP or GNP figures to determine whether a country's population is wealthy enough to purchase its products.
- B) Per capita numbers provide a detailed picture of development of the entire country.
- C) Gross product figures accurately indicate whether a nation's economy is growing or shrinking.
- D) Volunteer work and unpaid household work are considered in GDP and GNP.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
14) Nations having the poorest infrastructures and lowest personal incomes are called ________.
- A) developed countries
- B) newly industrialized countries
- C) emerging markets
- D) developing countries
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
15) A country that has recently increased the portion of its national production and exports derived from industrial operations is called a(n) ________.
- A) newly industrialized country (NIC)
- B) developing country
- C) emerging market
- D) developed country
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
16) Both GDP and GNP measure a nation's income per person.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
17) Volunteer work and unpaid household work are included in GNP.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
18) Barter is an alternative for buyers who lack money needed to pay for imports.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
19) The concept of purchasing power parity (PPP) must be applied to understand the true value of a currency in its home country.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
20) The human development index (HDI) demonstrates that high national income alone guarantees human progress.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
21) Nations with the poorest infrastructures and lowest personal incomes are called developing countries.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
22) One of the key obstacles faced by countries in economic transition is the lack of managerial expertise.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.1: Explain economic development and how it is measured.
23) How does economic development in countries affect international business?
Answer: Economic development is an increasingly important topic for international businesspeople as companies pursue business opportunities in emerging markets. Productivity is a key factor that drives economic growth and rising living standards. For a company to boost its productivity, it must increase the value of its outputs using the same amount of inputs, create the same value of outputs with fewer inputs, or do both at the same time.
Raising living standards in an economy depends in large part on unlocking the gains that productivity offers. Mixed economies in Western Europe continue to privatize state-owned companies to boost productivity and competitiveness. Former centrally planned economies in Eastern Europe implemented free market reforms to raise living standards. Even North Korea (with one of the lowest standards of living outside Africa) is being compelled to consider economic reform.
As the poorest nations invest in the fundamental drivers of productivity growth (such as basic infrastructure), the richest nations exploit the latest technological advancements.
Information technology is driving productivity gains in online customer service, online purchasing of materials and parts, outsourcing operations, and other areas of business.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
24) Differentiate between GDP and GNP. Briefly discuss the drawbacks of using GDP and GNP as indicators of economic development.
Answer: Gross national product (GNP) is the value of all goods and services produced by a country's domestic and international activities over a one-year period. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy over a one-year period. GDP is a narrower figure that excludes a nation's income generated from exports, imports, and the international operations of its companies.
Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks. First, for a variety of reasons, many of a nation's transactions do not get counted in either GDP or GNP. Second, gross product figures do not indicate whether a nation's economy is growing or shrinking–they are simply a snapshot of one year's economic output. Third, per capita numbers provide an average figure for an entire country, which does not give us a very detailed picture of development. Finally, country comparisons using gross product figures can be misleading.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
25) How are countries classified? Explain with examples.
Answer: Nations are commonly classified as being developed, newly industrialized, or developing.
Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life are developed countries. People in developed countries usually receive the finest health care and benefit from the best educational systems in the world. Countries in this category include Australia, Canada, Japan, New Zealand, and the United States.
Countries that recently increased the portion of their national production and exports derived from industrial operations are newly industrialized countries (NICs). The NICs are located primarily in Asia and Latin America. Most listings of NICs include Asia's "four tigers" (Hong Kong, South Korea, Singapore, and Taiwan), Brazil, China, India, Malaysia, Mexico, South Africa, and Thailand.
Nations with the poorest infrastructures and lowest personal incomes are called developing countries (also called less-developed countries). These countries often rely heavily on one or a few sectors of production, such as agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but typically lack the necessary resources and skills to do so. Most lists of developing countries include many nations in Africa, the Middle East, and the poorest formerly communist nations in Eastern Europe and Asia.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.1: Explain economic development and how it is measured.
26) Does greater economic freedom guarantee a higher standard of living? Provide examples of two specific countries to support your answer.
Answer: Factors making up each country's economic freedom rating include trade policy, government intervention in the economy, property rights, black markets, and wage and price controls. Most developed economies are rated completely "free" or "mostly free."
It can only be said that countries with the greatest economic freedom tend to have the highest standards of living, whereas those with the lowest freedom tend to have the lowest standards of living. The United States and Zimbabwe are two examples: the U.S. has high economic freedom and a high GNI, while Zimbabwe has low economic freedom and a low GNI.
Greater economic freedom does not guarantee a high per capita income, however. A country can rank very low on economic freedom yet have a higher per capita income than a country with far greater freedom. Saudi Arabia, for instance, has relatively low economic freedom with a relatively high GNI.
AACSB: Application of knowledge; Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 4.1: Explain economic development and how it is measured.
27) ________ is the process by which a nation changes its fundamental economic organization and creates new free-market institutions.
- A) Central planning
- B) Economic transition
- C) Industrialization
- D) Economic liberalism
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.2: Describe economic transition and its main obstacles.
28) Which of the following is a major obstacle to economic transition?
- A) lack of government support
- B) environmental degradation
- C) privatization
- D) black markets
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.2: Describe economic transition and its main obstacles.
29) Economic transition is the process of moving from ________.
- A) developed to developing economies
- B) centrally planned to free-market economies
- C) developed to emerging economies
- D) free-market to centrally planned economies
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.2: Describe economic transition and its main obstacles.
30) What is economic transition? Describe the obstacles that countries face during economic transition.
Answer: Economic transition is the process through which countries move from centrally planned economies to stronger market economies. This process involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. It typically involves four reform measures: (1) stabilizing the economy; (2) allowing prices to reflect supply and demand; (3) legalizing private business; and (4) reducing barriers to trade.
Transition from central planning to free-market economics generates tremendous international business opportunities. Yet difficulties arising from years of socialist economic principles hampered progress from the start, and some countries still endure high unemployment rates. Countries in transition face four key obstacles. These are: lack of managerial expertise, lack of capital, cultural differences, and environmental degradation.
Recent years are seeing higher quality management in transition countries. Reasons for this trend include improved education, opportunities to study and work abroad, and changes in work habits caused by companies investing locally. Economic transition is expensive. The governments of many countries in transition cannot afford all the investments required of them. Economic transition and reform make deep cultural impressions on a nation's people. It can, in many cases, lead to culture shock. The environment in these countries become highly polluted. Countries in transition often suffer periods during which the negative effects of a market economy seem to outweigh its benefits.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.2: Describe economic transition and its main obstacles.
31) What is privatization? What role does it play in economic transition?
Answer: The selling of government-owned economic resources to private operators is called privatization. Privatization helps eliminate subsidized materials, labor, and capital formerly provided to government-owned companies. It also curtails the practice of appointing managers for political reasons rather than for their professional expertise. To survive, newly privatized companies must produce competitive products at fair prices because they are subject to forces of the free market. The overall aim of privatization is to increase economic efficiency, boost productivity, and raise living standards.
Economic transition is the process through which countries move from centrally planned economies to stronger market economies. This process involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. It typically involves four reform measures: (1) stabilizing the economy; (2) allowing prices to reflect supply and demand; (3) legalizing private business; and (4) reducing barriers to trade.
During economic transition, privatization occurs as part of establishing a free market system. To solidify the new economy, governments must legalize private business, sell state-owned companies, and support property rights as this legalization helps in increasing economic efficiency, boosting productivity and raising the standard of living of a country.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 4.2: Describe economic transition and its main obstacles.
32) Which of the following terms refers to the forced transfer of assets from a company to the government without compensation?
- A) expropriation
- B) nationalism
- C) nationalization
- D) confiscation
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
33) ________ is the forced transfer of assets from a company to the government with compensation.
- A) Expropriation
- B) Nationalization
- C) Confiscation
- D) Localization
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
34) Which of the following is a disadvantage of local requirement laws to foreign companies?
- A) They do not foster local business activity and increase regional and national unemployment.
- B) They make it necessary for the government to resort to expropriation and confiscation.
- C) The companies are forced to bring in raw material and workers from their own countries.
- D) Companies required to hire local personnel might be forced to take on inadequately trained workers.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
35) Global Trading just learned that the government of one country in which it does business has taken over the entire electric utility industry. The government's actions are an example of ________.
- A) confiscation
- B) globalization
- C) expropriation
- D) nationalization
Answer: D
AACSB: Analytical thinking; Application of knowledge
Skill: Application
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
36) Had the government taken over (with compensation) the assets of Global Trading but not those of any other company, the government's actions would be an example of ________.
- A) expropriation
- B) nationalization
- C) confiscation
- D) communism
Answer: A
AACSB: Analytical thinking; Application of knowledge
Skill: Application
Difficulty: Moderate
LO: 4.3: Outline the various sources of political risk.
37) Had the government taken over the assets of Global Trading without compensation, and not taken over the assets of any other company, the government's actions would be an example of ________.
- A) expropriation
- B) nationalization
- C) confiscation
- D) communism
Answer: C
AACSB: Analytical thinking; Application of knowledge
Skill: Application
Difficulty: Moderate
LO: 4.3: Outline the various sources of political risk.
38) ________ is the chance that political forces may change a country's business environment in ways that lead investors to lose some or all of the value of their investment or be forced to accept a lower-than-projected rate of return.
- A) Governmental risk
- B) Operating risk
- C) Transaction risk
- D) Political risk
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
39) Expropriation is best defined as the ________.
- A) transference of ownership of resources from private to public sector with no compensation
- B) transference of ownership from private to public sector with compensation to private owners for their losses
- C) conversion of state-owned property to privately owned property
- D) conversion of state-owned property to privately owned property with no compensation
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
40) Himark Enterprises has foreign operations in Taiwan, India, and China. The firm pays an annual insurance premium to the Overseas Private Investment Corporation. The firm is most likely protecting itself from ________.
- A) privatization
- B) natural disasters
- C) nationalization
- D) financial instability
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
41) Political risk that affects all firms in a country is referred to as ________.
- A) micropolitical risk
- B) macropolitical risk
- C) inclusive political risk
- D) exclusive political risk
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
42) ________ is political risk that affects only a specific firm or firms within a specific industry.
- A) Inclusive political risk
- B) Exclusive political risk
- C) Micropolitical risk
- D) Macropolitical risk
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
43) ________ has one of the highest levels of macropolitical risk.
- A) Saudi Arabia
- B) Chile
- C) Venezuela
- D) Afghanistan
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
44) Christopher Electronics plans to expand into foreign markets. Top executives want the firm to focus only on locations where the rule of law prevails. Which of the following should most likely be considered by Christopher?
- A) wealthier, westernized countries
- B) developing, non-Western countries
- C) emerging economies experiencing rapid growth
- D) countries inclined toward totalitarian-style government
Answer: A
AACSB: Application of knowledge
Skill: Application
Difficulty: Moderate
LO: 4.3: Outline the various sources of political risk.
45) Which of the following statements about approaches to political risk management is NOT true?
- A) Passive political risk management discourages managers from fully or partially hedging their bets against exposure to political hazards.
- B) Passive political risk management assumes that it is difficult, if not impossible, to systematically model political risk.
- C) Active political risk management assumes that positive and negative political events in any country are neither independent nor random events.
- D) Active political risk management assumes that political events unfold in observable patterns that statistical methods can detect.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.3: Outline the various sources of political risk.
46) CADE Enterprises, a U.S. manufacturer, received assistance from the Overseas Private Investment Corporation when it expanded operations into Saudi Arabia. Which of the following types of support did CADE most likely receive from OPIC?
- A) financial capital
- B) cultural training
- C) legal guidance
- D) political risk insurance
Answer: D
AACSB: Application of knowledge
Skill: Application
Difficulty: Moderate
LO: 4.3: Outline the various sources of political risk.
47) A solid grasp of local values, customs, and traditions can help reduce a company's exposure to political risk.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
48) Expropriation involves the forced transfer of assets from a company to the government without compensation.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
49) Among asset seizure approaches, expropriation is more common than confiscation and nationalization.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
50) Lobbying is the policy of hiring people to represent a company's views on political matters.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
51) Civil conflict, tax discrimination, weak legal systems, and terrorist actions are political risks faced by MNEs operating in foreign countries.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
52) Expropriation is said to have occurred when a foreign national company dispossesses a home-country company through uncompetitive practices.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
53) If a foreign company is taken over by the host-country government and some form of compensation is paid, confiscation is said to have occurred.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
54) A government can limit the economic activities of a foreign firm that resists its effort to introduce home-country nationals into the company.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
55) Foreign properties expropriated by a government cannot be reclaimed.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
56) The immediate cause of country risk is a legal or political factor.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
57) Nationalization describes government seizure of an entire industry, with or without compensation.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.3: Outline the various sources of political risk.
58) Explain the three types of property seizure. Why might property seizure be a risk for a business operating in a totalitarian nation?
Answer: Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization.
The forced transfer of assets from a company to the government without compensation is called confiscation. Usually the former owners have no legal basis for requesting compensation or the return of assets.
The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensation. There is no framework for legal appeal, and compensation is typically far below market value. Today, governments rarely resort to confiscation or expropriation because these acts can force companies to leave the nation and can jeopardize future investment in the country.
Whereas expropriation involves one or several companies in an industry, nationalization means government takeover of an entire industry. Nationalization is more common than confiscation and expropriation. Likely candidates for nationalization include industries important to a nation's security and those that generate large revenues. In recent years, Venezuela's President Hugo Chavez nationalized that country's telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela.
In general, a government may nationalize an industry to:
- Use subsidies to protect an industry for ideological reasons.
- Save local jobs in an ailing industry to gain political clout.
- Control industry profits so they cannot be transferred to low-tax-rate countries.
- Invest in sectors, such as public utilities, that private companies cannot afford.
The extent of nationalization varies widely from country to country. Whereas the governments of Cuba, North Korea, and Vietnam control practically every industry, those of the United States and Canada own very few. Many countries, including France, Mexico, Poland, and India, try to strike a balance between government and private ownership.
Property seizure is a risk in a totalitarian nation because totalitarianism is the belief that every aspect of people's lives must be controlled for a nation's political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labor. Totalitarian political systems include authoritarian regimes such as communism and fascism. Totalitarian systems deny citizens the constitutional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject concepts such as freedom of expression, periodically held elections, guaranteed civil and property rights.
AACSB: Application of knowledge; Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 4.3: Outline the various sources of political risk.
59) Local content regulations are primarily intended to ________.
- A) address cultural differences between local employees and expatriates
- B) encourage MNEs to increase production activities in a country
- C) address contract negotiation difficulties
- D) assess local tax rates on MNEs
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.4: Explain how companies can manage political risk.
60) Countries often use local content regulations to determine the proportion of the product that must be made in the local market versus made outside of the local market in order to ________.
- A) maximize product safety
- B) ensure a cultural fit
- C) favor domestic companies
- D) relieve production pressures on local companies
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.4: Explain how companies can manage political risk.
61) ________ refers to governmental action to dispossess a company or investor.
- A) Equity dilution
- B) Deracination
- C) Expropriation
- D) Earnings stripping
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
62) ________ occurs if ownership of a property or assets of a company is transferred to the host government.
- A) Internalization
- B) Nationalization
- C) Deportation
- D) Deracination
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
63) Country risk is considered similar to ________.
- A) political risk
- B) commercial risk
- C) currency risk
- D) cross-cultural risk
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
64) Rockwall Enterprises is planning to expand the firm by establishing operations outside of the U.S. In which of the following countries would Rockwall most likely be able to establish operations most quickly?
- A) Japan
- B) Brazil
- C) Germany
- D) Australia
Answer: D
AACSB: Application of knowledge
Skill: Application
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
65) Which of the following statements is true about the political risks in a global marketing environment?
- A) The political risk of low-income countries is lesser than high-income countries.
- B) The more a country is developed, the greater is the political risk.
- C) Political risk is a major deterrent for companies that want to invest abroad.
- D) A country with high political risks attracts more investors.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.4: Explain how companies can manage political risk.
66) An individual from a country with a high degree of political risk would most likely be from ________.
- A) Canada
- B) Singapore
- C) Iraq
- D) Japan
Answer: C
AACSB: Application of knowledge
Skill: Application
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
67) An individual from a country with a low degree of political risk would most likely be from ________.
- A) Venezuela
- B) Canada
- C) Zimbabwe
- D) Iraq
Answer: B
AACSB: Application of knowledge
Skill: Application
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
68) Guanxi, in the Chinese business context, means ________.
- A) bribing government officials
- B) manufacturing inexpensive products
- C) personal relationships
- D) preference for communism
Answer: C
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
Scenario: Cleanshot USA in Russia
When Cleanshot USA, a photography products company, decided to enter the international arena, it chose Russia as its main market. Although Russia has been in transition for years, Cleanshot managers believe their company has tremendous opportunities there.
69) Russia is in transition from ________.
- A) a capitalist economy to a mixed economy
- B) a centrally planned economy to a free-market economy
- C) a market economy to a centrally planned economy
- D) a mixed economy to a centrally planned economy
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
70) The Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
71) Managers who take an active approach to political risk management are likely to rely on statistical modeling to quantify the precise degree of political risk.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
72) International companies often must customize products to comply with local standards if they are to do business in a particular country.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
73) Expropriation is the term used to describe a host-country government seizing the assets of a foreign corporation and providing no compensation in return.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
74) Managers who take an active approach to political risk management are likely to rely on statistical modeling to quantify the precise degree of political risk.
Answer: TRUE
AACSB: Application of knowledge
Skill: Application
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
75) Political risk insurance is more likely to be purchased by MNEs that apply an active approach to political risk management.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
76) International companies often must customize products to comply with local standards if they are to do business in a particular country.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
77) Political risk tends to be higher in developing countries compared to industrialized countries.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
78) U.S. individuals are exempt from being prosecuted for bribery under the Foreign Corrupt Practices Act.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
79) Briefly explain each of the three main methods companies use to manage political risk.
Answer: International companies benefit from monitoring and attempting to predict political changes that can negatively affect their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attractive, international companies find other ways to manage political risks, including:
- ADAPTATION: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies:
Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets.
Localization entails modifying operations, the product mix, or some other business element–even the company name–to suit local tastes and culture.
Development assistance lets an international business assist the host country or region in improving the quality of life for locals.
Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing.
- INFORMATION GATHERING International firms attempt to gather information that will help them predict and manage political risk. Two sources that companies use to conduct accurate political risk forecasting are Current Employees with Relevant Information and Agencies Specializing in Political-Risk Services.
- POLITICAL INFLUENCE Managers must work within the established rules and regulations of each national business environment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politicians directly or through lobbyists. Lobbying is the policy of hiring people to represent a company's views on political matters. Bribes often represent attempts to gain political influence.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
80) Explain each of the four means of incorporating risk into business strategies when companies employ an adaptation strategy.
Answer: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies:
- Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.
- Localization entails modifying operations, the product mix, or some other business element–even the company name–to suit local tastes and culture.
- Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.
- Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association also insures U.S. exporters against loss due to a variety of causes.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.4: Explain how companies can manage political risk.
81) Explain the risk-management method of "adaptation." Why would it most likely be less costly and time-consuming to pursue this method in a nation that practices civil law rather than in a nation that practices common law?
Answer: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies:
- Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.
- Localization entails modifying operations, the product mix, or some other business element– even the company name– to suit local tastes and culture.
- Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.
- Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association also insures U.S. exporters against loss due to a variety of causes.
Pursuing adaptation in a nation that practices civil law would most likely be less costly and time-consuming because of the lack of room for arbitrary interpretation of the law. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters.
AACSB: Diverse and multicultural work environments; Reflective thinking
Skill: Synthesis
Difficulty: Moderate
LO: 4.4: Explain how companies can manage political risk.
82) Describe the Foreign Corrupt Practices Act, and explain how it relates to corporate social responsibility.
Answer: The Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations (except when a person's life is in danger). A bribe constitutes "anything of value"– money, gifts, and so forth– and cannot be given to any "foreign government official" empowered to make a "discretionary decision" that may be to the payer's benefit. The law also requires firms to keep accounting records that reflect their international activities and assets.
Bribery and corruption are corporate social responsibility issues. In certain countries, bribes are routinely paid to distributors and retailers to push a firm's products through distribution channels. Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity. The Foreign Corrupt Practices Act addresses this issue by making bribery illegal.
AACSB: Ethical understanding and reasoning; Reflective thinking; Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 4.4: Explain how companies can manage political risk.
Scenario: Cleanshot USA in Russia
When Cleanshot USA, a photography products company, decided to enter the international arena, it chose Russia as its main market. Although Russia has been in transition for years, Cleanshot managers believe their company has tremendous opportunities there.
83) Which of the following challenges is Cleanshot most likely to face in Russia?
- A) organized crime
- B) too many competitors
- C) low demand for the products of non-Russian companies
- D) fading underground economy
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 4.5: Describe China's and Russia's experiences with economic transition.
84) Given the lack of available hard currency, Russian businesses often use goods and services as payment for other products they buy from abroad. This practice is referred to as ________.
- A) letter of credit
- B) fiat money
- C) barter
- D) guanxi
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 4.5: Describe China's and Russia's experiences with economic transition.
85) Why are many mixed economies converting to market-based systems? How does the role of government change when a mixed economy transitions to a market economy?
Answer: Many mixed economies are remaking themselves to more closely resemble free markets. When assets are owned by the government there seems to be less incentive to eliminate waste or to practice innovation. Extensive government ownership on a national level tends to result in a lack of accountability, rising costs, defective products, and slow economic growth. Many government-owned businesses in mixed economies need large infusions of taxpayer money to survive as world-class competitors, which raises taxes and prices for goods and services. Underpinning the move toward market-based systems is the sale of government-owned businesses.
In a market economy, the government has relatively little direct involvement in business activities. Even so, it usually plays four important roles: enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment, and preserving political stability.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 4.5: Describe China's and Russia's experiences with economic transition.
86) Compare and contrast the business environments in China and Russia.
Answer: Doing Business—China and Russia share certain similarities in terms of what it takes to do business in those countries. In both cultures, patience is required to develop business arrangements. The quality of personal interactions also appears to be very important. In Russia, individual personalities have a significant impact on business dealings. In China, personal relationships are highly valued and must be established first before business agreements.
Economic Obstacles—Similar obstacles that both countries face are political and social problems that can lead to social unrest, and a lack of managerial expertise stemming from the fact that such expertise was not required of managers in both countries' centrally planned economies. The countries differ with respect to certain other key obstacles, however. China's progress is hindered by issues concerning unification, which is not a challenge faced by Russia. In addition, Russia maintains an unstable investment climate, while China has attracted huge sums of investment due to its immense population, rising incomes, and expanding opportunities.
AACSB: Application of knowledge; Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 4.5: Describe China's and Russia's experiences with economic transition.
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