International Business Chapter 8

What are two potential costs of FDI to host countries? (Check all that apply.)

Adverse effects on balance of payments Adverse effects on competition within the host nation

What are two potential costs of FDI to host countries? (Check all that apply.)

Adverse effects on competition within the host nation Adverse effects on balance of payments

Because of political unrest, armed conflict, and frequent changes in economic policy, this region has typically received the smallest amount of inward investment.

Africa

What are three advantages of FDI? (Check all that apply.)

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

What are two current trends in FDI? (Check all that apply.)

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

Identify two costs of FDI to a home country. (Check all that apply.)

Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location. Balance of payments are negatively affected if FDI is a substitute for direct exports.

What are two reasons businesses prefer acquisition as a means of FDI over a greenfield investment? (Check all that apply.)

Businesses believe they can increase the efficiency of the acquired unit. Acquisitions are faster to execute than greenfield investments.

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

China

Which country has a policy that encourages FDI?

Country A has a government-backed insurance program to protect against the risk of expropriation.

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 long-term effects from increased competition? (Check all that apply.)

Increased productivity growth Product and process innovations

Firms for which licensing is NOT a good option are clustered in which three industries? (Check all that apply.)

Industries with intense cost pressures High-tech industries Global oligopolies

What is a feature of an oligopoly?

Interdependence of major players

Which concept BEST explains why the first firm in an oligopoly decides to undertake foreign direct investment rather than exporting or making a licensing agreement?

Internalization theory

What are two characteristics of the eclectic paradigm? Choose all that apply.

It combines the best aspects of other theories of foreign direct investment into a single explanation It provides a single holistic explanation of foreign direct investment

______ theory of FDI suggests that firms imitate and react to each other's behavior.

Knickerbocker's

Green Organics Ltd. based in Phoenix, Arizona has given a British-based company the right to produce and sell their 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

Based on the internalization theory, what are the three major drawbacks to licensing? (Check all that apply.)

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

Identify two benefits of FDI to a home country. (Check all that apply.)

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

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

Monopoly

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

Outflows

What two measures can countries employ to restrict foreign direct investment? (Check all that apply.)

Performance requirements Ownership restraints

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

What are two examples of location-specific advantages? (Check all that apply.)

Skilled labor Natural resources

What two positive contributions to a host country can FDI provide? (Check all that apply.)

Supply capital, technology & management resources Boost a country's economic growth rate

What two factors cause major adverse effects on a host country's balance of payments? (Check all that apply.)

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

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 provided the base for many of the largest and best-capitalized businesses. They were the most developed nations with the largest economies in the postwar period.

True or false: 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

True or false: A company would favor FDI over exporting when trade barriers are in place.

True

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: 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

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

United States

While the radical view has been in retreat since the early 1990s, ______ continues to follow this philosophy under the government of Hugo Chavez.

Venezuela

The stock of foreign direct investment refers to the total

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

A form of FDI, other than greenfield investments, is to

acquire or merge with an existing company in the foreign country.

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.

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.

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

Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.

capital outflow

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

communism

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

current

Tracking exports and imports of goods and services is measured by the _____ account in balance-of-payments accounting.

current

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 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 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

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

double

The _____ paradigm is based on the way location affects the direction of a company's foreign direct investment.

eclectic

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

economic

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

efficiency.

When Crane Automotive Group developed operations in Italy, it not only built a manufacturing plant there but also imports parts from several other European nations. Which home country benefit of FDI does this represent?

employment effects

The shift toward more democratic political institutions and free market economies has _____ foreign direct investment.

encouraged

Producing a good at home and then shipping it to another country for sale is called _______.

exporting

As an alternatives to FDI, firms 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

True or false: When tight control over a foreign entity is the goal of a company, it is in the best interest of that company to forge a licensing agreement rather than use foreign direct investment.

false

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.

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 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

What three reasons are used to explain the retreat of the radical position by the early 1990s?

generally strong performance of the developing countries that embraced capitalism generally poor economic performance of those countries that embraced radical position collapse of communism in eastern Europe

One reason for the wave of FDI into the United States by Japanese auto companies was partly in response to

government-imposed tariffs on Japanese auto imports.

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

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.

Over the past few years, more and more companies are investing in businesses in Scandinavia. These investments represent the _____ of FDI for the Scandinavian countries.

inflow

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

interdependence

The market imperfections approach is also known as the ______ theory.

internalization

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

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

licensing

Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market.

licensing

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

licensing

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

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

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.

John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.

location-specific advantages

Exporting strategy does not work for a(n) (low or high?) value-to-weight ratio product that can be produced anywhere.

low

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?

lower prices modernization of telephone networks

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 multiple 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.

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 ______ production.

offshore

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

A(n) ______ is a market form in which a market or industry has a limited number of large firms.

oligopoly

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

According to the US Department of Commerce, an interest of ______ in a foreign business is needed to achieve FDI.

over 10%

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

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

profits

One way a government can limit the amount of imports coming into 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 create 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

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 _____ 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

What are two reasons the United States has been an attractive target for FDI?

stable economy large domestic markets

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 US-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

What two factors would indicate that a firm has little bargaining power when considering FDI in a nation?

the firm has only a short period of time to complete the negotiations the host government places a low value on what the firm has to offer

What are two limitations on exporting?

trade barriers transportation costs

FDI theory suggests that exporting is preferable to licensing and FDI as long as what two things are in place?

transportation costs are low trade barriers are low

The theories of FDI try to show: (Check all that apply.)

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

What are the two main types of FDI? (Check all that apply.)

Establishing a new operation in a foreign market Acquisition or merger with an existing foreign firm

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

Exporting

What are two alternatives to FDI? (Check all that apply.)

Exporting Licensing

_____ are a network of informal contacts that allow companies to benefit from each other's knowledge.

Externalities

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

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

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

True or false: An acquisition is considered beneficial because it effectively reduces the number of businesses in a market.

False

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

False