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T/F: When a firm exports its products to a foreign country, foreign direct investment occurs. |
FALSE Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity. |
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(T/F) According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity. |
TRUE |
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(T/F) Greenfield investment involves the establishment of a new operation in a foreign country. |
TRUE A greenfield investment is a form of FDI which involves the establishment of a new operation in a foreign country. |
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(T/F) The flow of foreign direct investment refers to the number of countries a firm is investing in at any given point in time. |
FALSE The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). |
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(T/F) The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time. |
TRUE The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time (normally a year). |
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(T/F) The globalization of the world economy is having a negative effect on the volume of FDI. |
FALSE The globalization of the world economy is having a positive effect on the volume of FDI. Many firms now see the whole world as their market, and they are undertaking FDI in an attempt to make sure they have a significant presence in many regions of the world. |
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(T/F) FDI has grown significantly slower than world trade and world output. |
FALSE FDI has grown more rapidly than world trade and world output for several reasons, including the general shift toward democratic political institutions and free market economies. |
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(T/F) According to the United Nations, majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI. |
TRUE According to the United Nations, some 90 percent of the 2,700 changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment created a more favorable environment for FDI. |
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(T/F) Historically, most FDI has been directed at the least developed nations of the world. |
FALSE Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others’ markets. During the 1980s and 1990s, the United States was often the favorite target for FDI inflows. |
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(T/F)S ince World War II, the United States has been the largest source country for FDI, a position it retained during the late 1990s and early 2000s. |
TRUE Since World War II, the United States has been the largest source country for FDI, a position it retained during the late 1990s and early 2000s. Other important source countries include the United Kingdom, France, Germany, the Netherlands, and Japan. Collectively, these six countries accounted for 60 percent of all FDI outflows for 1998-2010. |
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(T/F) Greenfield investments are quicker to execute than mergers and acquisitions. |
FALSE Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Many firms apparently believe that if they do not acquire a desirable target firm, then their global rivals will. |
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(T/F) When a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. |
TRUE When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. Similarly, when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. |
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(T/F) The attractiveness of exporting increases in comparison to FDI or licensing when products have a low value-to-weight ratio. |
FALSE The viability of an exporting strategy is often constrained by transportation costs and trade barriers. When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance. This is particularly true of products that have a low value-to-weight ratio and that can be produced in almost any location. For such products, the attractiveness of exporting decreases, relative to either FDI or licensing. |
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(T/F) By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. |
TRUE Transportation costs aside, some firms undertake foreign direct investment as a response to actual or threatened trade barriers such as import tariffs or quotas. By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. Similarly, by limiting imports through quotas, governments increase the attractiveness of FDI and licensing. |
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(T/F) By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing. |
FALSE By limiting imports through quotas, governments increase the attractiveness of FDI and licensing. For example, the wave of FDI by Japanese auto companies in the United States during the 1980s and 1990s was partly driven by protectionist threats from Congress and by quotas on the importation of Japanese cars. For Japanese auto companies, these factors decreased the profitability of exporting and increased that of foreign direct investment. |
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(T/F) A critical competitive feature of an oligopoly is independence of the major players. |
FALSE An oligopoly is an industry composed of a limited number of large firms. A critical competitive feature of such industries is interdependence of the major players: What one firm does can have an immediate impact on the major competitors, forcing a response in kind. |
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(T/F) Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. |
TRUE Knickerbocker’s theory can be extended to embrace the concept of multipoint competition. Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. Economic theory suggests that rather like chess players jockeying for advantage, firms will try to match each other’s moves in different markets to try to hold each other in check. The idea is to ensure that a rival does not gain a commanding position in one market and then use the profits generated there to subsidize competitive attacks in other markets. |
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(T/F) Economists refer to knowledge "spillovers" as externalities, AND there is a well-established theory suggesting that firms can BENEFIT from such externalities by locating close to their source. |
TRUE Economists refer to knowledge "spillovers" as externalities, and there is a well-established theory suggesting that firms can benefit from such externalities by locating close to their source |
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(T/F) According to the extreme version of radical view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination. |
TRUE Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. According to the radical view, FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward and dependent on advanced capitalist nations for investment, jobs, and technology. Thus, according to the extreme version of this view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination. Where MNEs already exist in a country, they should be immediately nationalized. |
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(T/F) By the early 1990s, the RADICAL POSITION toward FDI was in retreat due to the rise of communism in eastern Europe. |
FALSE By the early 1990s, the radical position was in retreat almost everywhere. There seem to be three reasons for this: (1) the collapse of communism in eastern Europe; (2) the generally abysmal economic performance of those countries that embraced the radical position, and a growing belief by many of these countries that FDI can be an important source of technology and jobs and can stimulate economic growth; and (3) the strong economic performance of those developing countries that embraced capitalism rather than radical ideology (e.g., Singapore, Hong Kong, and Taiwan). |
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(T/F) According to the FREE MARKET VIEW, countries should specialize in the production of those goods and services that they can produce most efficiently. |
TRUE The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently. |
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(T/F) According to the PRAGMATIC NATIONALIST VIEW, no country should ever permit foreign corporations to undertake FDI. |
FALSE According to the RADICAL VIEW, no country should ever permit foreign corporations to undertake FDI, since they can never be instruments of economic development, only of economic domination. In practice, many countries have adopted neither a radical policy nor a free market policy toward FDI, but instead a policy that can best be described as pragmatic nationalism. The pragmatic nationalist view is that FDI has both benefits and costs. |
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(T/F) World trade has been growing TWICE as fast as the growth in the volume of FDI worldwide. |
FALSE Although few countries have adopted a pure free market policy stance, an increasing number of countries are gravitating toward the free market end of the spectrum and have liberalized their foreign investment regime. One result has been the surge in the volume of FDI worldwide, which, as we noted earlier, has been growing twice as fast as the growth in world trade. Another result has been an increase in the volume of FDI directed at countries that have recently liberalized their FDI regimes, such as China, India, and Vietnam. |
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(T/F) The INDIRECT employment effects of FDI are often as large as, if not larger than, the DIRECT effects. |
TRUE The effects of FDI on employment are both direct and indirect. Direct effects arise when a foreign MNE employs a number of host country citizens. Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE. The indirect employment effects are often as large as, if not larger than, the direct effects. |
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(T/F) Services, such as telecommunications, retailing, and many financial services, where the service has to be produced where it is delivered, lend themselves WELL to exporting. |
FALSE FDI’s impact on competition in domestic markets may be particularly important in the case of services, such as telecommunications, retailing, and many financial services, where exporting is often not an option because the service has to be produced where it is delivered. |
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(T/F) An acquisition DOES NOT result in a net increase in the number of players in a market. |
TRUE An acquisition does not result in a net increase in the number of players in a market, the effect on competition may be neutral. When a foreign investor acquires two or more firms in a host country, and subsequently merges them, the effect may be to reduce the level of competition in that market, create monopoly power for the foreign firm, reduce consumer choice, and raise prices. |
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(T/F) Offshore production refers to FDI undertaken to serve the HOST market. |
FALSE International trade theory tells us that home-country concerns about the negative economic effects of offshore production may be misplaced. The term offshore production refers to FDI undertaken to serve the home market. |
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(T/F) Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk like the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home. |
TRUE Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. The types of risks insurable through these programs include the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home. Such programs are particularly useful in encouraging firms to undertake investments in politically unstable countries. |
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(T/F) Ownership restraints and performance requirements are the TWO MOST COMMON WAYS in which host governments restrict FDI. |
TRUE Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements. |
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(T/F) Performance requirements are controls over the behavior of the MULTINATIONAL ENTERPRISE’S local subsidiary. |
TRUE Performance requirements can also take several forms. Performance requirements are controls over the behavior of the MNE’s local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management. |
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(T/F) The WTO embraces the promotion of international trade in services. |
TRUE The WTO embraces the promotion of international trade in services. Because many services have to be produced where they are sold, exporting is not an option. Given this, the WTO has become involved in regulations governing FDI. |
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(T/F) The LOCATION-SPECIFIC ADVANTAGES ARGUMENT associated with John Dunning helps explain why firms prefer FDI to licensing or to exporting. |
FALSE The implications of the theories of FDI for business practice are straightforward. First, the location-specific advantages argument associated with John Dunning does help explain the direction of FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting. |
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(T/F) Licensing is NOT a good option if the competitive advantage of a firm is based upon MANAGERIAL or MARKETING knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints." |
TRUE Licensing is not a good option if the competitive advantage of a firm is based upon managerial or marketing knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints." This would seem to be the case for firms based in a fairly wide range of industries. |
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(T/F) Franchising is essentially the SERVICE-INDUSTRY VERSION OF LICENSING, although it normally involves much longer-term commitments than licensing. |
TRUE Franchising is essentially the service-industry version of licensing, although it normally involves much longer-term commitments than licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee’s profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor’s brand name. |
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(T/F) Despite the move toward a free market stance in recent years, many countries still have a rather PRAGMATIC stance toward FDI. |
TRUE Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI. In such cases, a firm considering FDI must often negotiate the specific terms of the investment with the country’s government. |
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(T/F) A firm’s bargaining power is low when the host government places a low value on what the firm has to offer. |
TRUE From the perspective of a firm negotiating the terms of an investment with a host government, the firm’s bargaining power is high when the host government places a high value on what the firm has to offer, the number of comparable alternatives open to the firm is greater, and the firm has a long time in which to complete the negotiations. The converse also holds. The firm’s bargaining power is low when the host government places a low value on what the firm has to offer, the number of comparable alternatives open to the firm is fewer, and the firm has a short time in which to complete the negotiations. |
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A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of: A. insourcing. B. stock consolidation. C. foreign direct investment. D. product differentiation. E. market segmentation. |
C. foreign direct investment. Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. |
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According to the U.S. Department of Commerce, in the United States _____ occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity. A. multilateral investment B. foreign direct investment C. reciprocal foreign investment D. international divestment E. asset divestment |
B. foreign direct investment Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. According to the U.S. Department of Commerce, in the United States FDI occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity. |
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A firm becomes a(n) _____, once it undertakes FDI. A. outsourcer B. retail chain C. offshore company D. multinational enterprise E. national corporation |
D. Multinational Enterprise Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. Once a firm undertakes FDI, it becomes a multinational enterprise. |
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Which of the following is most likely to involve establishment of a new operation in a foreign country? A. Consolidation B. Greenfield investment C. Acquisition D. Licensing agreement E. Mass customization |
B. Greenfield investment FDI takes on two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. |
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Which of the following indicates that a firm has full outright stake in an acquisition? A. Anderson Corporations acquires at least 75 percent of a company. B. Sheffield Enterprises acquires at least 60 percent of a company. C. Arthur Enterprises acquires 98 percent of a company. D. Maximus Corporations acquires 100 percent of a company. E. Dream Animax acquires atleast 85 percent of a company. |
D. Maximus Corporations acquires 100 percent of a company. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm’s voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent). |
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The _____ of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year). A. portfolio B. flow C. status D. stock E. fragment |
B. flow The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). We also talk of outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, the flow of FDI into a country. |
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The stock of foreign direct investment refers to: A. the total accumulated value of foreign-owned assets at a given time. B. the number of shares of a foreign firm held by the local investors. C. to the amount of FDI undertaken over a given time period (normally a year). D. the dividend amount paid by the foreign firm to local investors. E. the flow of foreign direct investment out of a country. |
A. the total accumulated value of foreign-owned assets at a given time. |
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Which of the following statements is true regarding foreign direct investment? A. The flow of FDI refers to the total accumulated value of foreign-owned assets at a given time. B. FDI has grown more rapidly than world trade and world output. C. The general shift toward democratic political institutions has discouraged FDI. D. Generally, free market economies oppose FDI. E. The globalization of the world economy is having a negative effect on the volume of FDI. |
B. FDI has grown more rapidly than world trade and world output. |
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Why has FDI grown more rapidly than world trade? A. Decline in trade barriers has made the fear of protectionist pressures redundant. B. Executives of business firms see FDI as a way of circumventing future trade barriers. C. There has been a general shift toward radical and totalitarian political institutions. D. Privatization has made developing nations less attractive for multinational enterprises. E. There has been a general shift toward centrally planned command economies. |
B. Executives of business firms see FDI as a way of circumventing future trade barriers. |
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Historically, most FDI has been directed at the _____ nations of the world. A. underdeveloped B. developing C. developed D. emerging E. least developed |
C. developed |
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The United States has been an attractive target for FDI partly because of its: A. abundance of cheap and skilled labor. B. stable and dynamic economy. C. commitment to environmental issues. D. low corporate tax rates. E. high trade barriers |
B. stable and dynamic economy. |
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Which of the following is true regarding the inflow of FDI? A. Even though developing nations still account for the largest share of FDI inflows, FDI into underdeveloped nations has increased markedly. B. Africa has historically been the largest recipient of inward FDI. C. The United Kingdom and France have historically been the smallest recipients of inward FDI. D. There has been an increase in the importance of China as a recipient of FDI. E. Latin America is the least important region in the developing world for FDI inflows. |
D. There has been an increase in the importance of China as a recipient of FDI. Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased markedly. Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia. Driving much of the increase has been the growing importance of China as a recipient of FDI, which attracted about $60 billion of FDI in 2004 and rose steadily to hit a record $124 billion in 2011. |
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Countries such as the U.S., the U.K., France, Germany, the Netherlands, and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world’s largest multinationals because: A. they were the most developed countries postwar and home to the largest and best capitalized enterprises. B. they pursued a policy of blocking or restricting FDI inflow into their own economies. C. they provided subsidies for their domestic firms to protect them from foreign competition. D. they control much of the operating structure of the WTO which governs international trade. E. they were the governing body of the International Monetary Fund. |
A. they were the most developed countries postwar and home to the largest and best capitalized enterprises. |
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During 1998 to 2010, which of the following countries had the highest FDI outflow? A. United Kingdom B. United States C. Netherlands D. Germany E. Japan |
B. United States |
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In the case of developing nations, about _____ of FDI is in the form of cross-border mergers and acquisitions. A. three-fourth B. one-third C. one-half D. two-third E. three-fifth |
B. one-third The majority of FDI flows into developed nations are in the form of mergers and acquisitions rather than greenfield investments. This differs markedly from those into developing nations where only about one-third of FDI is in the form of cross-border mergers and acquisitions. |
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Mergers and acquisitions differ from greenfield investments in that: A. greenfield investments are quicker to execute than mergers and acquisitions. B. greenfield investments are undertaken to take advantage of valuable strategic assets, such as brand loyalty and trademarks or patents, of a foreign competitor. C. the majority of FDI flows into developed nations are in the form of greenfield investments rather than mergers and acquisitions. D. the majority of FDI flows into developing nations is in the form of cross-border mergers and acquisitions. E. the percentage of mergers and acquisitions is lower than greenfield investments in developing nations. |
E. the percentage of mergers and acquisitions is lower than greenfield investments in developing nations. The majority of FDI flows into developed nations are in the form of mergers and acquisitions rather than greenfield investments. This differs markedly from those into developing nations where only about one-third of FDI is in the form of cross-border mergers and acquisitions. The lower percentage of mergers and acquisitions may simply reflect the fact that there are fewer target firms to acquire in developing nations. |
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_____ involves producing goods at home and then shipping them to the receiving country for sale. A. Outsourcing B. Licensing C. Franchising D. Exporting E. Diversifying |
D. Exporting |
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The _____ states that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI and it also requires the firm to establish production facilities where those foreign assets or resource endowments are located. A. strategic trade policy B. integration approach C. scramble theory D. eclectic paradigm E. infant industry argument |
D. eclectic paradigm |
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3M, an American firm, manufactures adhesive tapes in St. Paul, Minnesota, and ships the tapes to South Korea for sale. According to this information, which of the following is being done by 3M? A. Exporting B. Licensing C. Franchising D. Insourcing E. Outsourcing |
A. Exporting |
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Which of the following involves granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold? A. Outsourcing B. Exporting C. Licensing D. Diverging E. Hedging |
C. Licensing |
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FDI is risky because of the problems associated with: A. sharing a valuable technological know-how with a potential competitor. B. increase in the transportation costs, especially for those products that have a low value-to-weight ratio. C. doing business in a different culture where the rules of the game may be very different. D. the possibility of increase in trade barriers such as import tariffs or quotas. E. increased production costs. |
C. doing business in a different culture where the rules of the game may be very different. |
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The viability of an exporting strategy is often constrained by transportation costs, particularly of products that have a _____ and that can be produced in almost any location. A. high local content requirement B. low total landed cost C. low value-to-weight ratio D. low licensing tariff E. high marginal cost |
C. low value-to-weight ratio |
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Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting? A. The presence or threat of trade barriers B. The costs of acquiring a foreign enterprise C. The costs of establishing production facilities in a foreign country D. The risk of giving away valuable technological know-how to a potential foreign competitor E. The possibility of diminishing returns |
A. The presence or threat of trade barriers |
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A firm will favor FDI over exporting as an entry strategy when: A. the costs of establishing production facilities are high. B. the transportation costs or trade barriers are high. C. there are problems associated with doing business in a different culture. D. the products involved have a high value-to-weight ratio. E. the firm wants to occupy a position that falls inside the efficiency frontier. |
B. the transportation costs or trade barriers are high. |
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Which of the following products has a low value-to-weight ratio? A. Electronic components B. Personal computers C. Medical equipment D. Computer software E. Cement |
E. Cement |
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A firm that does not want to bear the costs of establishing production facilities in a foreign country should avoid: A. exporting. B. FDI. C. licensing. D. franchising. E. outsourcing. |
B. FDI. |
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Governments impose quotas to limit _____. A. FDI B. importing C. franchising D. outsourcing E. licensing |
B. importing |
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The argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing constitutes the _____. A. comparative advantage theory B. distribution theory C. new trade theory D. internalization theory E. licensing theory |
D. internalization theory A branch of economic theory known as internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets (this approach is also known as the market imperfections approach). It argues that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing. |
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The market imperfections approach seeks to explain: A. the disadvantages associated with the adoption of a completely free market view. B. why different nations import goods from other countries even when they are more capable of producing them efficiently. C. the preference for FDI over licensing by firms as a strategy to enter foreign markets. D. the benefits of exercising protectionism coupled with partial adoption of free market approach. E. the pattern of sale of products from one country to another. |
C. the preference for FDI over licensing by firms as a strategy to enter foreign markets. |
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According to internalization theory: A. licensing gives a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. B. licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor. C. licensing has no major drawbacks as a strategy for exploiting foreign market opportunities. D. a problem with licensing arises when the firm’s competitive advantage is based much on its products rather than on the management, marketing, and manufacturing capabilities that produce those products. E. licensing is more profitable than FDI. |
B. licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor. |
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According to internalization theory, one of the drawbacks of licensing is that: A. it may result in a firm’s technological know-how being restricted to a limited knowledge base and stifles any future development. B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. C. when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. D. its use is restricted by the government by imposing tariffs and quotas. E. it is less cost-effective than FDI. |
B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. |
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A firm is most likely to favor foreign direct investment over exporting when: A. the firm wants its technological know-how to be widely disseminated. B. the firm wishes to maintain control over its operations and business strategy. C. the transportation costs are low. D. there are no trade barriers. E. the firm wants to customize its products as per the tastes and preferences of foreign consumers. |
B. the firm wishes to maintain control over its operations and business strategy. |
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The strategic behavior theory: A. explains the constrains of exporting and licensing. B. seeks to explain the challenges faced by a firm during the establishment of a new operation in a foreign country. C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. D. reviews the theories that have been used to explain foreign direct investment. E. explains how greenfield investments are better than FDI. |
C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. Strategic behavior theory is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. An early variant of this argument was expounded by F. T. Knickerbocker, who looked at the relationship between FDI and rivalry in oligopolistic industries. |
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70. The cement market in Erbia is dominated by four firms. These firms control 85 percent of selling and buying of the domestic market. Which of the following terms explains the market structure of cement industry in Erbia? A. Perfect competition B. Monopoly C. Oligopoly D. Dual monopoly E. Monopsony |
C. Oligopoly An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly). |
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A critical competitive feature of an oligopoly is: A. the lack of interaction among the major players. B. the presence of a domestic market which is open for foreign firms. C. the desire of all the major players to avoid the phenomenon of diminishing returns. D. the interdependence of the major players. E. the lack of imitative behavior among the major players. |
D. the interdependence of the major players. |
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If one firm in an oligopoly cuts prices, then most likely, its competitors: A. will make profits. B. will also respond with similar price cuts. C. will correspondingly raise prices. D. will capture additional market share. E. will not be impacted by the price cuts. |
B. will also respond with similar price cuts. |
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The interdependence between firms in an oligopoly leads to _____. A. trade wars B. a decrease in the supply C. imitative behavior D. higher demand E. increased domestic consumption |
C. imitative behavior |
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QFresh, a brand for energy drinks launched a healthy lime based drink without preservatives. Immediately after this another brand, Fast Fizz, which manufactures energy drinks, also announced the launch of a new refreshing drink without preservatives. Then Ignite, a third brand of energy drinks, reduced the price of its apple based drink. Which of the following is most likely to happen in this oligopolistic market set up? A. QFresh and Fast Fizz will reduce the prices of their respective drinks. B. Fast Fizz will launch another new drink. C. QFresh will tie up with Ignite to launch a completely new product. D. Fast Fizz and Ignite will collaborate against QFresh. E. QFresh will have an increased domestic consumption. |
A. QFresh and Fast Fizz will reduce the prices of their respective drinks. |
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(n) _____ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. A. monopoly B. monopsony C. cartel D. multipoint competition E. oligopsony |
D. multipoint competition |
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The idea behind multipoint competition is to ensure that: A. a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere. B. the competitors cooperate with each other to establish a cartel. C. no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers. D. growing technologies or business methods in new markets are transferred to established markets. E. the firms in an industry prefer FDI over licensing or exporting. |
A. a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere. |
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The difference between Internalization theory and imitative theory is that: A. internalization theory does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license. B. imitative theory addresses the issue of whether FDI is more efficient than exporting or licensing for expanding abroad. C. most economists favor imitative theory as an explanation for FDI. D. no important aspect of FDI is explained by imitative theory. E. internalization theory addresses the issue of efficiency of FDI over exporting or licensing. |
E. internalization theory addresses the issue of efficiency of FDI over exporting or licensing. |
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Which of the following concepts helps explain how location factors affect the direction of FDI? A. The eclectic paradigm B. The protectionism argument C. The product life-cycle theory D. The new trade theory E. The infant industry argument |
A. The eclectic paradigm The eclectic paradigm has been championed by the British economist John Dunning who argues that location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment. |
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Location-specific advantages for a firm are those that arise from: A. acquiring the home markets of foreign firms that threaten a firm’s domestic market. B. gaining a commanding position in one market and using them to subsidize competitive attacks in other markets. C. preferring exporting over licensing in order to retain control over know-how, manufacturing, marketing, and strategy. D. utilizing resource assets that are tied to a particular foreign location and valuable enough to be combined with the firm’s own unique assets. E. franchising and licensing. |
D. utilizing resource assets that are tied to a particular foreign location and valuable enough to be combined with the firm’s own unique assets. |
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Which of the following is true about Dunning’s arguments? A. Dunning rejects the argument of internalization theory that it is difficult for a firm to license its own unique capabilities and know-how. B. Dunning suggests that to exploit such foreign resources, such as oil and other minerals, a firm must undertake licensing rather than FDI. C. Dunning argues that it makes sense for a firm to locate production facilities in those countries where the cost and skills of local labor is most suited to its particular production processes, since labor is not internationally mobile. D. Dunning’s theory and its extensions help explain the imitative FDI behavior by firms in oligopolistic industries. E. Dunning argues that combining location-specific assets or resource endowments with the firm’s own unique capabilities always requires licensing. |
C. Dunning argues that it makes sense for a firm to locate production facilities in those countries where the cost and skills of local labor is most suited to its particular production processes, since labor is not internationally mobile. |
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Economists refer to knowledge "spillovers" that occur when companies in the same industry are located in the same area as: A. technology flows. B. overlaps. C. corporate espionage. D. externalities. E. a free rider problem. |
D. externalities. |
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Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world’s major computer and semiconductor companies located close to each other, thus offering the location-specific advantage of: A. a multipoint competition. B. an oligopoly. C. a first mover. D. externalities. E. free riders. |
D. externalities. |
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The _____ view of FDI traces its roots to Marxist political and economic theory. A. radical B. free market C. pragmatic nationalism D. comparative advantage E. pluralist |
A. radical |
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Radical writers argue that: A. a multinational enterprise (MNE) is an instrument of economic development rather than economic domination. B. MNEs are more beneficial to host countries than to their home countries. C. important jobs in the foreign subsidiaries of MNEs go to host-country nationals rather than to citizens of the home country. D. FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward. E. MNEs exploit their home countries for the exclusive benefit of their host countries. |
D. FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward. |
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People with radical view toward FDI argue that _____ is an instrument of imperialist domination. A. privatization B. a multinational enterprise C. nationalization D. a publicly traded company E. outsourcing |
B. a multinational enterprise |
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According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country: A. should be immediately nationalized. B. should be made to pay higher taxes. C. should be converted in to publicly traded companies. D. should be banned from obtaining finance from the financial institutions in the host country. E. should be immediately privatized. |
A. should be immediately nationalized. According to the extreme version of the radical view, no country should ever permit foreign corporations to undertake FDI, since they can never be instruments of economic development, only of economic domination. Where MNEs already exist in a country, they should be immediately nationalized. |
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According to the radical view, which of the following countries would benefit the most from FDI? A. Host countries of MNEs B. Third world countries C. Less developed FDI destinations D. Advanced, capitalist home countries of MNEs E. Underdeveloped countries |
D. Advanced, capitalist home countries of MNEs |
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Which of the following is a reason for the decline in the popularity of the radical view of FDI? A. The rise of communism in Eastern Europe B. The generally steady economic growth of those countries that embraced the radical position C. The growing belief in many countries that FDI leads to loss of jobs D. The strong economic performance of those developing countries that embraced capitalism E. The collapse of capitalism in the newly independent nations of Asia |
D. The strong economic performance of those developing countries that embraced capitalism |
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The _____ view argues that international production should be distributed among countries according to the theory of comparative advantage. A. conservative B. pragmatic nationalism C. free market D. radical E. Keynesian economic |
C. free market |
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According to the free market view, how does FDI increase the efficiency of world economy through MNEs? A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. B. MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale. C. When an MNE produces products, profits from the investment go abroad, and hence the MNE helps foreign exchange to rotate. D. A foreign-owned manufacturing plant may import many components from its home country, thus improving the balance of payments of the host country. E. MNEs increase the efficiency of world economy by increasing the flow of capital in the world market. |
A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. |
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Which of the following statements regarding the free market view is true? A. According to the free market view, MNEs decrease the overall efficiency of the world economy. B. No country has adopted the free market view in its pure form. C. According to the free market view, MNEs can never be instruments of economic development, only of economic domination. D. According to the free market view, FDI is beneficial to the host country of an MNE but it is harmful for the home country of the MNE. E. The free market view traces its roots to Marxist political and economic theory. |
B. No country has adopted the free market view in its pure form. |
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Britain reserves the right to intervene in FDI by: A. reserving the right to block foreign takeovers of domestic firms in certain situations. B. prohibiting FDIs over and above a certain fixed annual amount. C. nationalizing certain industries that provide essential goods and services. D. imposing economic sanctions against specific countries. E. by limiting exports and licensing. |
A. reserving the right to block foreign takeovers of domestic firms in certain situations. |
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The pragmatic nationalist view is that : A. FDI benefits only the host country. B. FDI does not make any positive contribution to the host economy. C. every country should adopt the free market view. D. FDI should not be allowed by any country as it is an instrument of economic domination rather than economic development. E. FDI has both benefits and costs. |
E. FDI has both benefits and costs. |
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Many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country’s _____. A. free trade agreements B. inward FDI C. sovereignty D. balance-of-payments position E. gold reserves |
D. balance-of-payments position |
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According to the _____, FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs. A. eclectic paradigm theory B. free market view C. pragmatic nationalist view D. radical view E. internalization theory |
C. pragmatic nationalist view |
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The tendency to aggressively court FDI believed to be in the national interest of a country is an aspect of: A. pragmatic nationalism. B. the radical view. C. nationalism. D. imitative theory. E. eclectic paradigm. |
A. pragmatic nationalism. |
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Which of the following is true regarding the pragmatic nationalist view of FDI? A. One aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants. B. The pragmatic nationalist view states that FDI always has a positive effect on the balance of payments which arises from the outflow of a foreign subsidiary’s earnings and from the import of inputs from abroad. C. According to pragmatic nationalist view, international production should be distributed among countries based on the theory of comparative advantage. D. According to pragmatic nationalist view, FDI should not be allowed to enter into a country because its costs always outweigh its benefits. E. The pragmatic nationalist view of FDI accepts the Marxist theory, and suggests that FDI by MNEs is an instrument of imperialism. |
A. One aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants. |
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Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of: A. adopting a retaliatory stance in bilateral trade. B. courting FDI believed to be in national interest. C. adopting a radical stance to FDI. D. blocking FDI inflows into the country. E. curbing a trade war. |
B. courting FDI believed to be in national interest. |
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The main benefits of inward FDI for a host country arise from: A. the resource-transfer effect, the employment effect, and the balance-of-payments effect. B. the labor-transfer effect, the technology effect, and the currency-exchange effect. C. the cultural awareness effect, first-mover advantage effect, and economic development effect. D. the foreign exchange reserves effect, knowledge flow effect, and the reverse resource transfer effect. E. the employment effect, the labor-transfer effect, and the technology effect. |
A. the resource-transfer effect, the employment effect, and the balance-of-payments effect. |
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Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country, whether those operations are acquired or greenfield developments. This benefit of FDI falls into the category of _____. A. employment effects B. balance-of-payments effects C. effects on competition D. resource transfer effects E. autonomy effects |
D. resource transfer effects |
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Which of the following statements is most likely to be true regarding the effects of FDI on employment? A. FDI does not result in job creation. B. FDI has only indirect effects on employment in the host country. C. The indirect employment effects of FDI are always smaller than the direct effects. D. When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment, the immediate effect is always an increase in the employment. E. A beneficial employment effect claimed for FDI is that it brings jobs to a host country that would otherwise not be created there. |
E. A beneficial employment effect claimed for FDI is that it brings jobs to a host country that would otherwise not be created there. |
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DIRECT effects of FDI on employment in the host country arise when a foreign MNE: A. brings in managers trained in the latest management techniques from the home country. B. creates jobs because of increased local spending by employees of the MNE. C. employs a number of host country citizens. D. causes local suppliers to hire more people. E. creates jobs in the supporting industries. |
C. employs a number of host country citizens. |
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INDIRECT effects of FDI on employment in a host country arise when: A. a foreign MNE employs a number of host-country citizens. B. jobs are created because of increased local spending by employees of an MNE. C. an MNE brings in managers from the home country for its operations in the host country. D. an MNE recruits people from the host country for research and development. E. an MNE sends it home country employees to host countries for training. |
B. jobs are created because of increased local spending by employees of an MNE. |
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_____ accounts are national accounts that track both payments to and receipts from other countries. A. Equity B. Dematerialized C. Balance of trade D. Asset E. Balance-of-payments |
E. Balance-of-payments |
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In the balance of payments, the _____ account records transactions involving the export and import of goods and services. A. current B. foreign C. internal D. tariff E. savings |
A. current |
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A current account deficit is also known as a(n) _____ deficit. A. stock B. inventory C. external D. tariff E. trade |
E. trade |
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When a country is importing more goods and services than it is exporting, it is incurring a(n): A. trade surplus. B. current account deficit. C. positive balance of payment. D. economic recession. E. net capital inflow. |
B. current account deficit. |
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Which of the following is the ONLY WAY in which a current account deficit can be supported in the long run? A. Borrowing from the IMF B. Selling assets to foreigners C. Divesting stock in domestic corporations D. Purchasing stocks, bonds, and real estate in other countries E. Issuing negotiable instruments like the bills of exchange |
B. Selling assets to foreigners |
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Which of the following is most likely to be the effect of FDI in the form of a greenfield investment on the host country? A. It drives down prices and increases the economic welfare of consumers. B. It raises unemployment levels. C. It causes firms to fight for scarce capital investments. D. It leads to an oligopolistic market and unfair pricing. E. It leads to decreased productivity, product and process innovations, and lesser economic growth. |
A. It drives down prices and increases the economic welfare of consumers. |
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Which of the following statements is most likely to be true regarding the adverse effects of FDI on the host country? A. It decreases the level of competition in the host country. B. It tends to increase the prices of the products. C. It leads to a high rate of unemployment in the long run. D. When a foreign subsidiary imports a substantial number of its inputs from abroad, it results in a debit on the current account of the host country’s balance of payments. E. When a foreign subsidiary sends its profits to its home country, it results in the depletion of gold reserves of the host country. |
D. When a foreign subsidiary imports a substantial number of its inputs from abroad, it results in a debit on the current account of the host country’s balance of payments. |
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The most important concerns regarding the costs of FDI for the home-country center on: A. the balance-of-payments and employment effects of outward FDI. B. the technology capture effect and the perceived loss of national sovereignty. C. the reverse-resource transfer effect and the exposure to foreign markets caused by FDI. D. the import of substantial input from abroad and being held to "economic ransom." E. the exposure to foreign markets and the decreased costs of production. |
A. the balance-of-payments and employment effects of outward FDI. |
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Offshore production refers to FDI undertaken: A. to focus on extractive industries, such as oil and gas. B. to serve the home market. C. in shipping industries. D. to decrease the prices of products in the host countries. E. to capture tax benefits in the host country. |
B. to serve the home market. |
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Which of the following is a major type of foreign investment risk that is INSURABLE through government-backed programs? A. Lack of funds B. Risk of transaction loss C. Poor strategic tie-ups D. Risks of expropriation E. Losses due to natural calamities |
D. Risks of expropriation |
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As an incentive to encourage domestic firms to undertake FDI, many countries have: A. eliminated double taxation of foreign income. B. started imposing local content requirements. C. imposed higher import tariffs. D. abolished the use of custom duties. E. eliminated subsidies. |
A. eliminated double taxation of foreign income. |
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Which of the following is a home-country policy for limiting outward FDI? A. Eliminating double taxation of foreign income B. Manipulating tax rules to encourage the firms to invest at home C. Withdrawing government-backed insurance programs provided to local investors D. Reducing interest rates earned on domestic investments E. Prohibiting organizations from entering into a cartel |
B. Manipulating tax rules to encourage the firms to invest at home |
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To encourage inward FDI, it is increasingly common for governments to: A. offer tax concessions to firms that invest in their countries. B. exclude foreign companies from specific industries. C. require that local investors own significant proportion of the equity in a joint venture. D. impose high custom duties on foreign firms. E. prohibit MNEs from joining a cartel. |
A. offer tax concessions to firms that invest in their countries. |
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Host governments use a range of controls to restrict inward FDI. The two most common are: A. monetary restraints and prohibition on investing in certain countries. B. voluntary export restrictions and employment restraints. C. ownership restraints and performance requirements. D. tax concessions and government-backed insurance. E. employment restraints and tax deductions. |
C. ownership restraints and performance requirements. |
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Many SERVICES have to be produced where they are sold; hence _____ is not an option. A. FDI B. franchising C. greenfield investment D. exporting E. outsourcing |
D. exporting |
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Firms for which licensing is not a good option include: A. low-technology industries. B. global oligopolies. C. industries characterized by low cost pressures. D. industries where transportation costs are high. E. industries which need to have low control over foreign operations. |
B. global oligopolies. |
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Although it normally involves much longer-term commitments, franchising is essentially the service industry version of: A. exporting. B. licensing. C. foreign direct investment. D. greenfield investment. E. diversifying. |
B. licensing. |
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