Question

Compared to international trade, direct foreign investment generally results in ____ exposure to international political risk and ____ exposure to international economic conditions.

a. lower; higher
b. higher; lower
c. higher; higher
d. lower; lower

Answer 1

Direct foreign investment leads to higher exposure to both international political risk and economic conditions due to long-term commitments and managerial responsibilities. Option c.

Step-by-step explanation:

Compared to international trade, direct foreign investment generally results in higher exposure to international political risk and higher exposure to international economic conditions option c. This is because foreign direct investment involves purchasing a significant share (more than ten percent) of a company and often entails some managerial responsibility, leading to a longer-term focus. Portfolio investment, on the other hand, involves a smaller share and is typically characterized by a short-term orientation, allowing investors to quickly withdraw their investments. Foreign direct investments are much more intertwined with local economies and regulations, increasing exposure to the risks associated with them.