Chapter 9: The Politics of Multinational Corporations

Multiple Choice Questions

1. The politics of MNCs emerge from the competing interests of a) host countries of MNCs. b)home countries of MNCs. c)the MNCs themselves. d)host countries and home countries. e)host countries and home countries and the MNCs themselves.

Answer: e

2.In the immediate postwar era, according to Oatley, the fifteen largest agricultural MNCs controlled approximately a)10% of developing countries’ exports. b)30% of developing countries’ exports. c)50% of developing countries’ exports. d)80% of developing countries’ exports. e)95% of developing countries’ exports.

Answer: d

3. The central political concern for developing countries regarding MNCs ownership of critical natural-resource industries was that a) it compromised the hard-won national autonomy achieved in the struggle for independence. b) governments would be unable to use these resources to promote ISI strategies. c) extractive industries did not usually transfer technology. d) extractive industries used primarily foreign workers so that skills were obtained by domestic workers. e) extractive industries accelerated the depletion of non-renewable resources.

Answer: a

4. Nationalization was common during the late 1960s and the first half of the 1970s. Nationalizations occurred most often in a) banking and transportation. b) banking and public utilities. c) transportation and extractive industries. d) banking and extractive industries. e) extractive industries and public utilities.

Answer: e a) Required percentage of inputs from domestic suppliers. b) Required percentage of exports. c) Required percentage of research and development inside host country. d) Limits on repatriation of profits. e) Limits on access to local capital markets.

5. Which of the following regulations were not performance requirements on MNC affiliates?

Answer: d

6. Export-processing zones are industrial areas set aside for MNCs with special rules or subsidies. Foreign firms based in EPZs are primarily allowed to a) import components free of taxes, as long as all of their output is exported. b) pay workers less than elsewhere in the country. c) pay workers more than elsewhere in the country. d) Ignore safety and environmental regulations. e) import components for assembly free of taxes, as long as none of their output is exported.

Answer: a

7. Only France and Japan a) have been more open to FDI than other advanced industrial countries. b) required explicit government approval for manufacturing investments by foreign firms. c) excluded foreign firms from owning industries deemed “critical”. d) have been more restrictive of FDI than developing countries. e) prohibit foreign firms from participating in defense-related industries.

Answer: b

8. Sovereign wealth funds (SWFs) are a) royalty-owned funds that purchase private assets in foreign markets. b) royalty-owned funds that purchase public assets in foreign markets. c) government-owned funds that purchase public assets in domestic markets. d) government-owned funds that purchase private assets in domestic markets. e) government-owned funds that purchase private assets in foreign markets.

Answer: e

9. From a global perspective, sovereign wealth funds are a) medium sized, but with five percent of total global assets, not yet significant players in global finance. b)small sized, and but with only two percent of total global assets, almost insignificant players in global finance. c)large sized, but with fifteen percent of total global assets, a major force to be reckoned with as players in global finance. d)medium sized, but with seven percent of total global assets, somewhat more important as players in global finance. e)large sized, but with ten percent of total global equities, not dominant players in global finance.

Answer: e

10.Few SWFs are open about a)the strategies that motivate their investment decisions or about the assets that they own. b)political rather than economic objectives. c)social rather than economic objectives. d)economic rather than political objectives. e)domestic rather than international objectives.

Answer: a

11.Japanese restrictions on inward direct investment were designed to a) compensate for lack of transparency in operations. b) encourage technology transfers c) protect against security threats. d) protect against economic threats e) protect against destabilizing trading activity.

Answer: b

12.Governments that have refrained from promoting active industrial policies have generally a)not restricted foreign ownership of sensitive industries. b)not restricted foreign ownership of cutting edge high technology industries. c)attempted to protect national firms from competition by restricting foreign investment. d)restricted foreign ownership of critical industries. e)less open to FDI than most developing countries.

Answer: d

13.Obsolescing bargaining power happens when a)the MNC can easily remove its fixed investment from the country. b)uncertainty about of the return on the investment stays high. c)technology has been significantly transferred to the host country workers. d)technology has not been significantly transferred to the host country workers. e) the MNC has monopoly control over the necessary capital.

Answer: c Page 10

14.MNCs usually enjoy more bargaining power than host countries in low-skilled laborintensive manufacturing industries because a)only a few developing countries have excess low skilled labor. b)investments in low-skilled manufacturing entail a relatively low amount of fixed capital. c)investments in low-skilled manufacturing cannot be readily moved out of a particular country. d)technology in many manufacturing industries changes rapidly and, therefore, is easily transferred to host workers. e)like natural-resource investments, manufacturing investments can become hostages.

Answer: b

15.Locational incentives are packages host countries offer to MNCs that a)decrease the profits of a particular investment. b)increase the costs of that investment. c)increase the risk of that investment. d)provide subsidized loans for that investment. e)depreciate their investments at slower rates.

Answer: d

16.Advanced industrial countries have been less vulnerable to foreign domination than developing countries because a)developing countries have larger economies. b)developing countries have more diversified economies. c)foreign affiliates are more likely to face competition from domestic firms in a developing country. d)developing countries have felt less compelled to regulate MNC activity. e)foreign affiliates are more likely to face competition from domestic firms in an advanced industrial country.

Answer: e

17.The two largest foreign investors during the last 140 years, the United States and Great Britain, have also been a)the most closed to inward foreign investment. b)reluctant to invite retaliation that would make to harder for their own firms to invest abroad. c)the most open to invite retaliation that would make to easier for their own firms to invest abroad. d)more narrowly based on host-country issues. e)the most closed to outward foreign investment.

Answer: b

18. Different attitudes about the government’s role in the national economy have translated into different approaches to FDI. According to Oatley, at this time we are likely to see a)a shift back to more restrictive practices in developing countries. b)most developing countries becoming more vulnerable to foreign domination. c)developing countries still attracting more foreign investment in natural resources than manufacturing. d)no evidence of an impending shift back toward interventionist strategies. e)developing countries continue to make it harder for foreign firms to participate in the local economy.

Answer: d

19.The reason why there are no comprehensive international investment rules is that a)governments have never tried to create multilateral rules. b)the OCED and WTO rules have already created effective comprehensive guidelines. c)conflict between capital-exporting advanced industrial countries and the capitalimporting developing countries has prevented agreement on such rules. d)conflict between capital-exporting developing countries and the capitalimporting advanced industrial countries has prevented agreement on such rules. e)MNCs have already created rules on their own initiative.

Answer: c

20.Historically, international rules governing FDI have been based on the following legal principles: a)Foreign investments are private property but are treated less favorably than domestic private property. b)Governments have no right to expropriate foreign investments for a public purpose. c)Governments must compensate the owner for the full value of the expropriated property. d)The home country of the foreign investors must forcefully retaliate in the disputed host country’s economy. e)Expropriation, like foreign loan defaults, must be punished with no new investment for seven years.

Answer: c

21. The International Trade Organization’s (ITO) experience with international legal protection for foreign investments is important because a)it firmly established the Calvo doctrine as a legal mandate. b)its success established international rules governing FDI. c)the GATT rules became the prevailing guide since they had a lot to say about foreign investment. d)its failure reflects a basic conflict that has dominated international discussions about FDI rules to this day. e)support for its investment articles from American business proved a major reason for the ITO’s success in gaining US congressional approval.

Answer: d

22.The United Nations’ Resolution on Permanent Sovereignty over Natural Resources was passed in 1962. This resolution a)recognized the right of host countries to exercise full control over foreign firms extracting those resources. b)recognized the right of foreign firms to exercise full control over their operations extracting those resources. c)recognized the right of foreign firms to determine the appropriate compensation in the event of expropriation. d)was formally rejected by capital-exporting governments in 1982. e)was successfully re-negotiated in 1992.

Answer: a

23.The typical Bilateral Investment Treaties (BITs) system a)is highly asymmetric b)has balancing measures that require a firm’s imports be offset by its exports. c)offers strong protection to MNCs as well as expand the rights of host countries. d)does not limit expropriation. e)emerged as the predominant approach to governing FDI beginning in the late 1970s.

Answer: a

24.The Multilateral Agreement on Investment (MAI) failed to be negotiated because of a)disagreements among OECD governments and to strong and vocal opposition from groups outside the process. b)disagreements among OECD governments and to strong and vocal opposition from groups inside the process. c)agreements among OECD governments but strong and vocal opposition from groups outside the process. d)United States pressure to include health and environmental standards. e)disagreements among OECD governments about national treatment and fair compensation.

Answer: a

25. Regulatory arbitrage is seen by critics as a “race to the bottom”. This means that a)MNCs may shift activities out of stringent countries into less stringent countries. b)MNCs may shift activities out of less stringent countries into more stringent countries. c)MNCs will demand no regulations on their activities. d)MNCs will refuse to follow regulations that are imposed on domestic firms. e)countries will not compete with each other for the least regulations on MNCs.

Answer: a

True-False Questions

1. Restrictions on 100-percent foreign ownership have been lifted in most countries.

Answer: True

2. The tension inherent in overlapping decision-making frameworks shapes the domestic and international politics of MNCs.

Answer: True

3. Even though both developed and developing countries regulate MNC activities, developed countries have relied far more heavily on such practices.

Answer: False

4. Most developing countries entered the postwar period as primary-commodity exporters often controlled by MNCs who kept the profits the exports generated.

Answer: True

5. Nationalizations in the late 1960s and first half of the 1970s occurred most often in the extractive industries and the banking sector.

Answer: False

6. Governments imposed performance requirements on local affiliates in order to promote a specific economic objective.

Answer: True

7. Most developing countries have placed more restrictions on MNCs since the 1980s.

Answer: False

8. Though many predicted that the rapid growth seen in the early 2000s would continue, the sharp decline of energy prices after 2009 hit the SWFs hard.

Answer: True

9. The more the host country has exclusive control over the things the MNC values, the more bargaining power the MNCs has.

Answer: True

10. When a MNC can no longer easily remove its fixed investment from a host country and the investment becomes a hostage it is called an “obsolescing bargain”.

Answer: True

Essay/Discussion Questions

1. How has globalization of the world economy changed the political and economic stakes for MNCs and advanced industrial countries?

2. Explain the political dynamics in newly independent developing countries after WW II with MNCs that controlled most of their exports.

3. Discuss how regulation of MNCs has changed over time in developing countries.

4. Explain the costs and benefits of Japan’s unique experience with MNC regulation. How did it differ from other East Asian governments?

5. Describe and explain the political and economic concerns expressed by the growing importance of sovereign wealth funds.

6. Describe and explain conditions of the shifting balances of bargaining power between host countries and MNCs. Which side seems to be gaining power recently?

7.Explain and analyze the costs and benefits of locational incentives to attract jobs and FDI in advanced industrial states. What role do local versus national governments play?

8.Explain the concept of obsolescing bargains. How are conditions the same or different for advanced industrial or developing countries

9. What is meant by the phrase “the race to the bottom” in MNC regulation? Can governments realistically hold domestic firms to higher standards of working conditions and environmental protection than MNCs? How?

10.Explain and compare the unique and competing interests of host and home countries of MNCs as well as those of the MNCs themselves.