ch 8: Foreign Direct Investment
The Hudson Footwear Company based in New York recently purchased Mediterranean Shoe Group based in Italy. Hudson Footwear wanted to expand its reach of FDI and believed that buying an existing firm was the best method to accomplish this goal. Which form of FDI did the company use?
Acquisition
Select two potential costs of FDI for host countries.
Adverse effects on balance of payments Adverse effects on competition
What are two current trends in FDI?
An increase in FDI aimed at countries that have liberalized their FDI regimes An increase in the volume of FDI
Firms for which licensing is NOT a good option are clustered in which three industries?
High-tech industries Global oligopolies Industries with intense cost pressures
Which concept BEST explains why the first firm in an oligopoly relies on foreign direct investment rather than exporting or making a licensing agreement?
Internalization theory
What is one drawback associated with Knickerbocker's imitative theory?
It fails to address the issue of whether FDI is more efficient than exporting or licensing.
What are two reasons businesses prefer acquisition as a means of FDI over a greenfield investment?
It is less risky to acquire firms that have certain business assets in place. -Acquisitions are faster to execute than greenfield investments.
Assume that Green Organics Ltd. based in Phoenix, Arizona has given a British-based company the right to produce and sell its products. In return for this, the British company will pay Green Organics $1 for every unit it sells. What type of investment is Green Organics using?
Licensing
Which company demonstrates a successful franchising strategy?
McDonald's
The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in several benefits, including which two of the following?
Modernization of telephone networks Lower prices
What are three advantages of FDI?
Overcomes high transportation costs Allows for tight control over the firm's operations Allows the firm to maintain control over technological know-how
What two measures can countries employ to restrict foreign direct investment?
Ownership restraints Performance requirements
What are the two most common incentives governments offer to foreign firms to invest in their country?
Subsidies Low-interest loans
What two positive contributions to a host country can FDI provide?
Supply capital, technology, and management resources Boost a country's economic growth rate
Which country has consistently been the largest source of FDI since World War II?
The United States
Which two factors would reveal that a company has little bargaining power when considering FDI?
The company has a short period of time to complete negotiations Host government does not value what the firm has to offer
What two factors cause major adverse effects on a host country's balance of payments?
The outflow of earnings from a foreign subsidiary to its parent company A foreign subsidiary importing a large number of inputs from abroad
What are two limitations on exporting?
Trade barriers and transportation costs
One reason for the wave of FDI into the United States by Japanese auto companies starting in the mid-1980s was in response to
U.S. government-imposed tariffs on Japanese auto imports.
With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI.
WTO
The stock of foreign direct investment refers to the total
accumulated value of foreign-owned assets at a given point in time.
Because of political unrest, armed conflict, and frequent changes in economic policy, what region has typically received the smallest amount of inward investment?
africa
Knickerbocker would say that in an oligopoly, if one firm decides to raise prices, then other firms would
also raise prices.
A country's ___________ accounts track expenditures and receipts from other countries.
balance-of-payments
According to pragmatic nationalism, FDI should be allowed as long as
benefits outweigh costs.
Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.
capital outflow
A government would be concerned when the country is running a ______ on the current account of their balance of payments.
deficit
In the past, most foreign direct investment has been directed at _____ nations.
developed
The ______ effects of FDI come when a multinational enterprise hires host-country citizens and ______ effects come when local suppliers hire workers as a result of the FDI.
direct; indirect
Most economists _____ the idea that FDI is usually accompanied by some loss of economic independence.
dismiss
Producing a good at home and then shipping it to another country for sale is called _______.
exporting
Simple Services Corp. is considering FDI in Japan. However, Simple Services wants to keep tight control over the foreign entity to ensure it will achieve maximum earnings in Japan. Which form of FDI would be better for the company to use?
exporting
______ refers to shipping goods and services out of the jurisdiction of a country.
exporting
An acquisition is considered beneficial because it effectively reduces the number of businesses in a market.
false
The World Trade Organization has been successful in its efforts to establish a universal set of rules governing the liberalization of FDI.
false
It is in the best interest of a company to seek out a country that has _________ (restrictive or favorable?) policies toward FDI.
favorable
The idea that an MNE could come into a country and monopolize a market tends to be a greater concern in countries that have
few large firms of their own.
Performance requirements are put in place to minimize the costs of FDI for the _________ country. (Choose investor or host.)
host
Venezuela and Bolivia are examples of countries that have become more _______ to FDI. (Choose open or hostile.)
hostile
Over the past few years, more and more companies are investing in businesses in Central America. These investments represent the _____ of FDI for the Central American countries.
inflow
Allowing a foreign firm to produce and sell your product for a royalty fee is called ______.
licensing
The ability of an individual, company, or economy to conduct an activity better than another for reasons related to location is called a(n)
location-specific advantage.
One cost to a host country related to FDI would be the ______ (gain or loss?) of sovereignty and autonomy.
loss
Exporting strategy does not work for a _______ (low or high?) value-to-weight ratio product that can be produced anywhere.
low
ABC Co. should choose exporting over licensing as a form of FDI if it has ______ transportation costs and is facing ______ trade barriers.
low; low
Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare.
lower, increase
The situation where two or more firms encounter each other in different regional markets, national markets, or industries is called
multi-point competition.
Griffin Labs and Sequence Labs are in competition in the same seven regional markets. This is an example of
multipoint competition.
Ownership restraints on FDI are often put into place by a host country based on concerns of
national security.
FDI that serves the home market is called ______ production.
offshore
A(n) ______ is a market form in which a market or industry has a limited number of large firms.
oligopoly
Pre-1980, Japan blocked the majority of potential foreign investments. Yet, if a company that had cutting edge technology wanted to invest in Japan, they were allowed to undertake FDI. This is an example of the ______ view.
pragmatic nationalism
One way that a government can limit the amount of imports entering a country is by imposing _____.
quotas
The _____ view of foreign direct investment has its basis in Marxist theory.
radical
A(n) ______ effect has occurred when a company's FDI of capital, technology, and management resources creates a positive contribution to a host country that might not otherwise be available.
resource transfer
At one time, Britain taxed British companies' foreign earnings at a higher rate than their domestic earnings in order to _____ FDI.
restrict
Ownership restraints and performance requirements are two ways in which governments can _________ FDI. (Choose encourage or restrict.)
restrict
The 1997 World Trade Organization agreement opened the telecommunications market to foreign competitors and exemplifies how ______ are impacted by FDI. (Choose products or services.)
services
An example of the pragmatic nationalist view is that the host country can gain in jobs and skills and the profits go to the ______ country.
source
Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the _____ effect where some jobs created are offset by jobs lost elsewhere.
substitution
Critics argue that FDI by Japanese auto makers does not make up for the jobs lost in U.S.-based auto manufacturers. These critics are concerned with the
substitution effect.
When a country maintains a current account ________ (deficit or surplus?), it is unlikely to have to sell off assets in order to balance accounts.
surplus
When a firm invests directly in a business or venture in another country, it is called ______.
FDI
When a firm participates in ______, it evolves into a multinational enterprise.
FDI
What are the two main types of FDI?
- establishing a new operation in a foreign market - acquisition or merger with an existing foreign firm
Identify two costs of FDI to a home country.
Balance of payments are negatively affected if FDI is a substitute for direct exports. Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location.
What are two reasons why the radical view of political ideology began to retreat in the 1990s?
Collapse of communism in eastern Europe Strong economic performance by countries embracing capitalism
What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?
Creation of a monopoly
When the German-based company Forrest Health Supply Inc. developed operations in Italy, it built a manufacturing facility there. In turn, the new facility also imported supplies and equipment from companies based in Germany. Which home country benefit of FDI does this represent?
Employment effects
_____ are a network of informal contacts that allow companies to benefit from each other's knowledge.
Externalities
What two reasons does the text give as to why FDI has outpaced world trade and world output?
FDI has been driven by political and economic changes in developing nations. Firms want to circumvent potential future trade barriers.
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which two results?
Foreign investors transferred technology to countries in which they invested. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested.
Which view of FDI is based on the classical international trade theory of Smith and Ricardo asserting that international production should be based on comparative advantage?
Free market
What are two potential long-term effects from increased competition?
Increased productivity growth Product and process innovations
What are two characteristics of the eclectic paradigm?
It provides a single holistic explanation of foreign direct investment. It combines the best aspects of other theories of foreign direct investment into a single explanation.
______ theory of FDI suggests that firms imitate and react to each other's behavior.
Knickerbocker's
What are two alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?
Licensing Exporting
What are two benefits of FDI to a home country?
MNE learns skills from exposure to foreign market Foreign subsidiary creates demand for home-country exports
What are two examples of location-specific advantages?
Natural resources Skilled labor
The board of directors of Green Garden Supply in Vermont voted to invest in a production facility in Mexico as a way to lower costs and free up financial resources for the company to grow in other areas. What form of FDI is this company using?
Offshore production
What are two reasons the United States has been an attractive target for FDI?
Stable economy Large domestic markets
Which theory of foreign direct investment attempts to combine (1) the theories that focus on favoring direct investment when exporting and licensing are available and (2) theories that say certain locations are favored over others for FDI?
The eclectic paradigm
When a company moves operations overseas to take advantage of lower labor costs, this strategy increases the overall efficiency of resource utilization in the global economy. According to the free market view of FDI, this benefits
both the source and the host countries.
The _____ account tracks goods and services exports and imports in balance-of-payments accounting.
current
When FDI occurs through greenfield investment, it will increase competition in a market and decrease economic welfare.
false
The _______ of FDI is the amount of FDI attempted over a period of time (usually one year).
flow
Dell moved its assembly operations for many of its personal computers to Mexico to take advantage of lower labor costs. The ______ view of FDI states that overall efficiency of resource utilization increases the world economy.
free market
The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage.
free market
Foreign direct investment can be in the form of a(n) ______, which occurs when a firm establishes a new operation in a foreign market.
greenfield investment
FDI occurs when a company invests in facilities
in a foreign country
Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing ______ of the world economy.
interdependence
Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market.
licensing
Many of the world's oil companies have to invest where oil is located in order to combine their technological and management capabilities with the actual product. This demonstrates the idea of a(n) _____ advantage.
location-specific
One reason Toyota does NOT make licensing agreements is because its management and process capabilities have been developed over many years and are a part of the organization. In other words, Toyota's ______ cannot be licensed.
organizational culture
The ______ of FDI refers to the value of outward direct investment made to external economies.
outflows
The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations governing ______.
the service industry
A company would favor FDI over exporting when trade barriers are in place.
true
Acquisitions are the preferred method of FDI because global markets evolve very rapidly and acquisitions are quicker to execute.
true
Tax concessions can be used by a government to encourage foreign firms to do business in that country.
true
Which country has a policy that encourages FDI?
Country A has a government-backed insurance program to protect against the risk of expropriation.
FDI has a positive ______ impact on host countries as a result of technology transfers.
economic
The market imperfections approach is also known as the ______ theory.
internalization
According to the U.S. Department of Commerce, an interest of ______ in a foreign business is needed to achieve FDI.
10 percent or more
Which view of FDI states that there are benefits and costs to FDI and that countries attempt to maximize the benefits and minimize the national costs of FDI?
Pragmatic nationalism
How has a shift toward democratic political institutions and free market economies affected FDI?
These shifts encourage businesses to participate in FDI.
The United States, the United Kingdom, the Netherlands, France, Germany, and Japan together have accounted for the majority of all FDI outflows for 1998-2018 for what two reasons?
They were the most developed nations with the largest economies in the postwar period. They provided the base for many of the largest and best-capitalized businesses.
For the most part, the radical view has diminished in strength since the early 1990s. However, ______ continues to follow this philosophy under the government of Hugo Chavez and his successor, Nicolas Maduro.
Venezuela
What international organization is involved in the governing of FDI?
WTO
When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a(n) ______ investment.
capital
Which country has shown a marked increase in FDI inflows since 2004?
china
Tracking exports and imports of goods and services is measured by the __________ account in balance-of-payments accounting.
current
The concern that an MNE could drive local firms out of business, monopolize the market, and raise prices above those that would prevail in competitive markets is more of a worry for _________ economies. (Choose developing or advanced.)
developing
The 2,000 employees working in Toyota's factory in France are an example of the ______ effect of FDI on employment, while the 2,000 new jobs that were created in support industries are an example of the ______ effect of FDI on employment.
direct, indirect
To encourage FDI, many countries have eliminated ______ taxation of foreign income.
double
Instead of FDI, a company could choose ______, which involves producing goods at home and shipping them overseas, or ______, which is granting a foreign firm the right to produce and sell a product in return for a royalty fee.
exporting; licensing
When a company wants to have tight control over a foreign entity, it is in the best interest of that company to forge a licensing agreement rather than use foreign direct investment.
false
A low-cost, no-frills grocery store chain that began in the United States decided to open similar stores in Germany which did not have any stores like this. What type of FDI is this company using?
greenfield investment
What is a feature of an oligopoly?
interdependence of the major players.
Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyota pioneered ______, which enables it to produce higher quality automobiles at a lower cost than global rivals.
lean production
Two major limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production, and strategy.
licensing
John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.
location-specific advantages
A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial capital ________ required to finance the FDI. (Choose inflow or outflow.)
outflow
Some countries prohibit national firms from investing in specific countries for ______ reasons, such as U.S. firms being prohibited from investing in Cuba during the Cold War.
political
The radical view toward FDI argues that MNE's extract ______ from the host country and take them back to their home country.
profits
The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to _____.
sell off assets to foreigners
A company that decides to locate operations close to other companies so it can take advantage of their knowledge is an example of how businesses use externalities.
true