MIB Master of International Business: Global Business Environment 2 — Questions and Answers
Question 1: Which theory explains why countries export goods in industries where they have a large domestic market, even without a natural resource advantage?
- Heckscher-Ohlin theory
- Linder's demand similarity theory (Correct answer)
- Absolute advantage theory
- Leontief paradox
Correct answer: Linder's demand similarity theory
Linder's theory holds that countries trade most intensively in products for which they share similar domestic demand structures.
Question 2: A multinational corporation shifts profits to a low-tax subsidiary by pricing intra-company transactions above market rates. This practice is called:
- Currency arbitrage
- Transfer pricing manipulation (Correct answer)
- Capital flight
- Thin capitalization
Correct answer: Transfer pricing manipulation
Transfer pricing manipulation involves setting artificial prices on intercompany transactions to shift taxable income to lower-tax jurisdictions.
Question 3: The OECD's Base Erosion and Profit Shifting (BEPS) project primarily targets:
- Currency devaluation by emerging markets
- Tax avoidance strategies that exploit gaps in international tax rules (Correct answer)
- Trade protectionism through non-tariff barriers
- Labor standard violations in global supply chains
Correct answer: Tax avoidance strategies that exploit gaps in international tax rules
BEPS addresses strategies used by multinationals to shift profits to low- or no-tax locations, eroding the tax base of higher-tax countries.
Question 4: Under a floating exchange rate regime, a country running a persistent current account deficit will theoretically experience:
- Currency appreciation, reducing the deficit
- Currency depreciation, which helps correct the deficit (Correct answer)
- No exchange rate change due to capital inflows
- A rise in domestic interest rates only
Correct answer: Currency depreciation, which helps correct the deficit
A current account deficit means more foreign currency is demanded than supplied, pushing the currency down and making exports cheaper and imports dearer.
Question 5: Which WTO principle requires a member to extend the same trade advantages given to one trading partner to all other WTO members?
- National treatment
- Most-Favored-Nation (MFN) (Correct answer)
- Reciprocity
- Safeguard principle
Correct answer: Most-Favored-Nation (MFN)
The MFN principle prohibits discrimination among WTO members, requiring equal treatment for all in tariff and trade policy.
Question 6: A country adopts a currency board arrangement. This means its central bank:
- Freely floats the exchange rate based on market conditions
- Pegs the currency at a fixed rate backed fully by foreign reserves (Correct answer)
- Sets interest rates independently to target inflation
- Allows commercial banks to set their own exchange rates
Correct answer: Pegs the currency at a fixed rate backed fully by foreign reserves
A currency board commits to converting domestic currency on demand at a fixed rate, requiring full foreign reserve backing.
Question 7: The 'liability of foreignness' concept in international business refers to:
- Higher tariffs imposed on foreign-owned firms
- The extra costs and disadvantages foreign firms face compared to local competitors (Correct answer)
- Legal restrictions on repatriating profits abroad
- Currency risk exposure unique to foreign subsidiaries
Correct answer: The extra costs and disadvantages foreign firms face compared to local competitors
Foreign firms incur additional costs from unfamiliarity with local institutions, culture, and regulations that domestic rivals do not face.
MIB Master of International Business: Global Business Environment 2
Which theory explains why countries export goods in industries where they have a large domestic market, even without a natural resource advantage?