IB EXAM II: Ch. 8 Foreign Direct Investment

When FDI occurs through greenfield investment, it will increase competition in a market and increase economic welfare.

TRUE

When tight control over a foreign entity is the goal of a company, it is in the best interest of that company to NOT forge a licensing agreement rather than use foreign direct investment.

TRUE

The ? argues that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI.

eclectic paradigm

A drawback of Knickerbocker's theory is its failure to address:

efficiency

? refers to shipping goods and services out of the jurisdiction of a country.

exporting

A(n) ? is a cost or benefit that affects a party who did not choose to incur that cost or benefit. One example is knowledge "spillovers."

externality

Businesses should seek out a country that has ? (restrictive or favorable) policies toward FDI.

favorable

Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing ? (interdependence or independence) of the world economy.

interdependence

What is a feature of an oligopoly?

interdependence of major players

Griffin Labs and Sequence Labs are in competition in the same seven regional markets. This is an example of:

multipoint competition

When two or more enterprises encounter each other in different regional markets, national markets, or industries, it is called ?

multipoint competition

Historically, countries like Iran and India that are more ? than ? have favored the radical position that FDI is bad.

nationalistic; socialistic

FDI that serves the home market is called:

offshore production

A(n) ? is a market form in which a market or industry is dominated by a small number of sellers.

oligopoly

A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial capital ? (inflow or outflow) required for the FDI.

outflow

? of FDI refers to the value of outward direct investment made by the residents of the reporting economy to external economies.

outflows

According to the U.S. Department of Commerce, an interest of ? in a foreign business creates an FDI.

over 10%

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

political influence

? should be applied when the benefits of FDI are greater than the costs.

pragmatic nationalism

The radical view toward FDI argues that MNE's extract ? from the host country and take them back to their home country.

profits

The ? view of foreign direct investment has its basis in Marxist theory.

radical

At one time, Britain taxed British companies' foreign earnings at a higher rate than their domestic earnings in order to:

restrict FDI

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 1997 World Trade Organization agreement opened the telecommunications market to foreign competitors and exemplifies how ? (products or services) are impacted by FDI.

services

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

As a consequence of ? , the net number of new jobs created by FDI may not be as large as initially claimed.

substitution effects

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

The flow of FDI is:

the amount of FDI attempted over a period of time (usually one year)

What are two limitations on exporting?

1. transportation costs 2. trade barriers

? theory of FDI suggests that firms follow their domestic competitors overseas.

Knickerbocker's

What company demonstrates a successful licensing or franchising strategy?

McDonald's

A(n) ? could subsidize its costs in a host market, and then drive local businesses out of the market to monopolize the market.

Multinational Enterprise (MNE)

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

monopoly

The theories of FDI try to show:

- a combination of avoiding exporting and licensing and entering the same markets as their competitors - why competitive firms will often enter the same markets at the same times - why firms don't use exporting and licensing to enter foreign markets

Why do businesses prefer acquisition as a means of FDI over a greenfield investment?

- businesses believe they can increase the efficiency of the acquired unit - acquisitions are faster to execute than greenfield investments

The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in several benefits, including:

- lower prices - modernization of telephone networks

What are two reasons why FDI has outpaced world trade and world output?

1. FDI has been driven by political and economic changes in developing nations 2. despite the decline in trade barriers, firms still fear protectionist pressures

What are two benefits of FDI to a home country?

1. MNE learns skills from exposure to foreign market 2. foreign subsidiary creates demand for home-country exports

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

1. a foreign subsidiary importing a large number of inputs from abroad 2. the outflow of earnings from a foreign subsidiary to its parent company

What are the two types of FDI?

1. acquisition or merger with an existing foreign firm 2. establishing a new operation in a foreign market

What are two potential costs of FDI to host countries?

1. adverse effects on competition within the host nation 2. adverse effects on balance of payments Based

What are two current trends in FDI?

1. an increase in the volume of FDI 2. an increase in FDI aimed at countries that have liberalized their FDI regimes

What are two alternatives to FDI?

1. exporting 2. licensing

A study of FDI by the OECD found what two results?

1. foreign investors invested significant amounts of capital in R&D in the countries in which they had invested 2. foreign investors transferred technology to countries in which they invested

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

1. industries with intense cost pressures 2. high-tech industries 3. global oligopolies

Based on the internalization theory, what are the three major drawbacks to licensing?

1. licensing does not allow a firm tight control over basic business operations which is necessary to maximize profitability 2. licensing may give away valuable technological know-how to a potential foreign competitor 3. licensing does not account for capabilities in management, marketing, and manufacturing

What are two examples of location-specific advantages as categorized by the eclectic paradigm?

1. natural resources 2. human resources

What are three advantages of FDI?

1. overcomes high transportation costs 2. allows for tight control over the firm's operations 3. allows the firm to maintain control over technological know-how

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

1. ownership restraints 2. performance requirements

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

1. subsidies 2. low-interest loans

What two positive contributions to a host country can FDI provide?

1. supply capital, technology, and management resources 2. boost a country's economic growth rate

What country has shown a marked increase in FDI inflows since 2004?

China

Foreign direct investment can be in the form of a(n) ? investment, which occurs when a firm establishes a new operation in a foreign market.

Greenfield Investment

An acquisition does NOT reduce the number of businesses in a market.

TRUE

Knickerbocker's theory does NOT address the issue of whether FDI is more efficient than exporting or licensing for expanding abroad.

TRUE

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

United States

What international organization is involved in the governing of FDI?

WTO

With the formation of the ? in 1995, there now is a multinational institution that has become involved in regulations governing FDI.

WTO

When FDI occurs through ? , this will increase competition in a market and increase the economic welfare of consumers.

a greenfield investment

The stock of foreign direct investment refers to the total:

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

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

double

When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a:

capital investment

Until the fall of ? between 1989 and 1991, Eastern European countries were opposed to FDI.

communism

Tracking exports and imports of goods and services is measured by the:

current account in balance-of-payments accounting

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 ? (developing or advanced) economies.

developing

The ? effects of FDI come when a multinational enterprise hires host-country citizens and ? effects come when local suppliers hire works as a result of the FDI.

direct; indirect

When a firm invests directly in a business or venture in another country, it is called:

foreign direct investment (FDI)

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

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

One reason for the wave of FDI into the U.S. by Japanese auto companies was partly in response to:

government-imposed tariffs on Japanese auto imports

Performance requirements are put in place to minimize the costs of FDI for the ? (investor or host) country.

host

Knickerbocker argued that firms follow the same ? in their FDI strategies as oligopolies follow.

imitative behavior

After Toyota decided to open a new auto plant in France, it was suggested that 2,000 jobs in support industries would be created. Since these jobs are not located at the auto plant, they are examples of a(n) ? (direct or indirect) effect of FDI.

indirect

By investing in a foreign subsidiary rather than licensing, a company is able to send the knowledge across borders while maintaining it within the firm, where it presumably yields a better return on the investment made to produce it. This is called:

internalization theory

A key benefit of FDI to a home country is from the ? (inward or outward) flow of foreign earnings.

inward

Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyota pioneered ? production, which enables it to produce higher quality automobiles at a lower cost than global rivals.

lean production

Allowing a foreign firm to produce and sell your product for a royalty fee is called:

licensing

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

licensing

Ownership restraints can be used to restrict FDI because it is believed that ? (local or investor) owners can help maximize the employment benefits for the host country.

local

Dunning's eclectic paradigm is seen as a useful addition to explaining patterns of FDI because it explains how ? factors affect the direction of FDI.

location

The eclectic paradigm argues that ? advantages are of considerable importance in explaining the reasons for and direction of FDI.

location-specific advantages

When a firm uses its own unique assets and also utilizes resource endowments or assets tied to a specific foreign geographic area, the firm gains ?

location-specific advantages

ABC Co. should choose exporting over FDI because it has ? transportation costs and is facing ? trade barriers.

low; low

A country's balance-of-payments accounts:

track expenditures and receipts from other countries

Research shows that multinational companies ? (transfer or deplete) technology when they invest in a foreign country.

transfer

It would be more common for a(n) ? to agree to market aggressively as a way of keeping foreign competitors in check.

wholly owned subsidiary