Chapter 8 Reading Questions

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Based on standards set by the US Department of Commerce, a firm is engaging in FDI when it takes an interest of _____ or more in a foreign business entity

10%

What two factors cause major adverse effects on a host country's balance of payments

A foreign subsidiary importing a large number of inputs from abroad The outflow of earnings from a foreign subsidiary to its parent company

What are two current trends in FDI

An increase in the volume of FDI An increase in FDI aimed at countries that have liberalized their FDI regimes

Identify the three costs of FDI to a home country

Balance of payments negatively affected if FDI is a substitute for direct exports Balance of payments negatively affected if purpose of FDI is to develop a low-cost production location Balance of payments negatively affected initially from the capital outflow to fund FDI

What two countries have shifted to a more hostile approach to FDI

Bolivia Venezuela

What are two limitations of licensing

firm does not have tight control over producing, marketing and strategy in a foreign country gives away valuable know-how to a potential competitor

The _____ of FDI describes the amount of FDI undertaken during a year

flow

According to internalization theory, a company would rather gain entrance into a foreign market by using

FDI

Jamal's company wants to retain tight control over a foreign entity in order to get the maximum impact of market share. His company should utilize

FDI

When a firm invests directly in a foreign market to produce or market a product, it is called

FDI

What is an accurate summary of the rationale behind the free market view

FDI is a benefit to both the source country and the host country

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found what two results

Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. Foreign investors transferred technology to countries in which they invested.

Firms for which licensing is NOT a good option are clustered in which three industries

Industries with intense cost pressures High-tech industries Global oligopolies

Choose the three benefits of FDI to a home country

Inward flow of foreign earnings Foreign subsidiary creates demand for home-country exports MNE learns skills from exposure to foreign market

Along with the United States, which five countries accounted for 60% of all FDI outflows from 1998 to 2018

Japan Germany The Netherlands The United Kingdom France

What are two alternatives to FDI

Licensing Exporting

Which company demonstrates a successful franchising, strategy

McDonald's

What are three advantages of FDI

Overcomes high transportation costs Allows the firm to maintain control over technological know-how Allows for tight control over the firm's operations

What are two measures countries can employ to restrict foreign direct investment

Ownership restraints Performance requirements

What are the three potential costs of FDI to host countries

Perceived loss of national sovereignty & autonomy Adverse effects on balance of payments Adverse effects on competition

An example of ______ is when firms benefit from each other's knowledge generation

externalities

Economists refer to knowledge "spillovers" as _____, and there is a theory that suggests firms can benefit from these "spillovers" by locating close to their source

externalities

A number of investor countries try to encourage FDI through the use of

political influence

How has the flow of FDI compared to the growth in world trade since 1990

The flow of FDI has accelerated faster than the growth in world trade

Which is TRUE for firms considering foreign direct investment

The host government's attitude toward FDI should be an important variable in decisions about where to invest.

True or false: Knickerbocker was concerned with the effect of licensing on industries composed of a limited number of large firms

false

True or false: The pragmatic nationalism view contends that FDI has no costs, but many benefits

false

True or false: When FDI occurs through greenfield investment, this will lower competition in a market and decrease economic welfare

false

What country has been the largest source of FDI since World War II

United States

Which country was a favorite target for FDI inflows during the 1980s and 1990s

United States

What international organization is involved in the governing of FDI

WTO

Which of these factors creates a limitation to exporting

a product that can be produced almost anywhere

The stock of foreign direct investment refers to the total

accumulated value of foreign-owned assets at a given point in time

What are the two types of FDI

acquisition or merger with an existing foreign firm establishing a new operation in a foreign market

The main reason why businesses prefer acquisition as a means of FDI is because acquisitions are ________ than greenfield investments

faster to execute

Tracking its expenditures and its receipts from other countries occurs in a country's _ of _ accounts

balance payments

One key factor that leads to adverse effects on a host country's ______ accounts is when a foreign subsidiary imports a substantial number of inputs from abroad, which results in a debit on the current account

balance of payments

A country's ___________ accounts track the country's payments to and receipts from other countries

balance-of-payments

Tariffs and quotas are examples of _____ to foreign direct investment

barriers

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 home and the host countries

A key cost of FDI for the home country is when the balance of payments are adversely affected by the initial ____ outflow that is necessary to finance FDI

capital

When a firm invests in plant, equipment, and R&D as a result of increased competition, it is engaging in ______ investment

capital

Eastern European countries were opposed to FDI until the late 1980s with the demise of

communism

The _____ account tracks goods and services exports and imports in balance-of-payments accounting

current

Past activity of FDI shows that the majority of it has been directed at

developed nations

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 a worry for _ economies

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

The ____ effects of FDI arise when a multinational enterprise hires host-country citizens and the _____ effects arise when local suppliers hire workers as a result of the FDI

direct, indirect

Most economists _____ that FDI is usually accompanied by some loss of economic independence

dismiss

To encourage FDI, many countries have eliminated ______ taxation of foreign income

double

The ______ combines the various perspectives of foreign direct investment into a holistic theory

eclectic paradigm

FDI has a positive ______ impact on host countries as a result of technology transfers

economic

What are three positive contributions FDI can provide to a host country

economic growth resource transfer effects balance of payment effects

Which of the following is a benefit of inward FDI for a host country

employment effect

The text notes two reasons why FDI has outpaced world trade and world output. What are those two reasons

even though trade barriers are diminishing, firms still fear protectionist pressures FDI has been driven by political and economic changes in developing nations

Kennedy Construction Corp. wants to create a presence internationally but does not want to establish operations in a foreign country. What could the company do to accomplish this

exporting

Kimberly's company produces body lotion in the United States and ships it overseas to retail stores that sell the product. Her company is delivering product through

exporting

When a company produces a good in the home country and then ships it to another country for sale it is called

exporting

A key benefit of FDI to a home country is from the inward flow of _____ earnings

foreign

A(n) _____ strategy is favored over exporting when transportation costs or trade barriers are prohibitive

foreign direct investment

Bethany's company holds valuable know-how in the electronics industry and the company realizes this knowledge cannot be adequately protected. In this situation, what would be more profitable for Bethany's company

foreign direct investment

Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of

foreign direct investment

What is a company participating in when it directly invests in facilities to produce or market in a foreign country

foreign direct investment

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 in 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

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

A(n) _ investment occurs when a firm goes to a foreign market and establishes a new operation

greenfield

What is the name of a business venture where finances are used to create a new physical facility for a business in a foreign location where the company currently does not have existing facilities

greenfield

Performance requirements are put in place to minimize the costs of FDI for the ______ country

host

Increased competition could ______ capital investments by firms in plant, equipment and R&D as firms try to gain a competitive advantage over their rivals

increase

Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing _ of the world economy

interdependence

Businesses should seek out a country that has ______ policies toward FDI

lenient

Grant's company has given a company in Japan the right to produce and sell its line of active wear. For every article of clothing the Japanese company sells, it pays Grant's company a fee. This is an example of

licensing

Internalization theory tries to explain why firms often prefer FDI over _____ as a method for getting into foreign markets

licensing

The limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy

licensing

allows a company to collect a royalty fee from a foreign firm that it has granted the right to produce and sell its product

licensing

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

pragmatic nationalism

What are two characteristics of an oligopoly

limited number of firms large firms

When ownership restraints are used to restrict FDI, it is based on the idea that _____ owners can help maximize the employment benefits of FDI for the host country

local

What name is given to the advantages that coincide with utilizing resource endowments or assets tied to a specific area

location-specific

A host country cost of FDI could be the _ of sovereignty and autonomy

loss

Exporting strategy does not work for a ______ value-to-weight ratio product that can be produced anywhere

low

The Kendrick Corporation has ______ transportation costs and is facing ______ trade barriers. This company should choose exporting over FDI

low, low

What are two common incentives governments offer to foreign firms to invest in their country

low-interest loans subsidies

Firms for which licensing is a good option tend to have what two characteristics

low-tech industries tight control over foreign operations not necessary

One potential benefit to consumers related to offshore production is

lower prices for goods

Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare

lower, increase

What is a potential adverse impact on competition when a foreign entity acquires firms in a host country

monopoly

The basis in Marxist politics is evident when radical writers argue that ______ enterprises are an instrument of imperialist domination

multinational

Once a business undertakes foreign direct investment it becomes a(n)

multinational enterprise

The radical view toward FDI argues that ______ extract profits from the host country and take them back to their home country

multinational enterprises

Historically countries like Iran and India that are more ______ than _____ have favored the radical position that FDI is bad

nationalistic, socialistic

FDI that is pursued to serve the home market is called ________ production

offshore

Knickerbocker argued that firms follow the same imitative behavior in their FDI strategies as ______ follow

oligopolies

A(n) ____ is an industry made up of a limited number of large firms where there is an interdependence of the major players

oligopoly

FDI _____ describe the flow of FDI out of a country

outflows

The various theories of FDI try to explain the _____ of FDI flows, which deals with why certain locations are favored as targets of FDI

pattern

A(n) _____ can be set by the government in order to limit the number of imports which increases the attractiveness of FDI and licensing

quota

Ownership restraints and performance requirements are two ways in which governments can ______ FDI

restrict

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

The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations governing

services

The _____ of FDI measures the total accumulated value of a company's foreign-owned assets at a specific time

stock

Inflows of FDI are described as

the flow of FDI into a country

FDI theory suggests that exporting is preferable to licensing and FDI as long as what two conditions exist

trade barriers are low transportation costs are low

True or false: Acquisitions are the preferred method of FDI because global markets evolve very rapidly and acquisitions are quicker to execute

true

True or false: Jim's US-based paper products company sources paper from a plant in Brazil that takes advantage of the available forestry near the plant. This is an example of a location-specific advantage

true

True or false: One way a government can encourage FDI is to offer a foreign firm a tax concession if it chooses to do business in that country

true

True or false: When RCA licensed its color television product to a number of Japanese companies in the 1960s, these companies turned around and entered the US to directly compete with RCA and diminished its role in the market. In this situation, licensing resulted in RCA giving away proprietary information to a potential competitor

true


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