Intro to Int Business Ch 8

FDI occurs when a company invests in facilities

A foreign country

What are three advantages of FDI?

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

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

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

Dismiss

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

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

A government would be concerned when the country is running a ______ on the current account of their balance of payments.

Deficit

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

Double

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 Rights

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

Exporting

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

Externalities

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

False

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

It is in the best interest of a company to seek out a country that has _________ (restrictive or favorable?) policies toward FDI

Favorable

What two reasons does the text give as to why FDI has outpaced world trade and world output

Firms want to circumvent potential future trade barriers FDI has been driven by political and economic changes in developing nations.

In the last decade, FDI inflows directed at developing nations have increased and even surpassed inflows into developed nations for the first time in 2018. Which of these developing economies was the recipient of these FDI inflows?

Former Soviet Union

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

Venezuela and Bolivia are examples of countries that have become more ________ to FDI. (Choose open or hostile.)

Hostile

What are two characteristics of the eclectic paradigm?

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.

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

Licensing

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

One cost to a host country related to FDI would be the __________ (gain or loss?) of sovereignty and autonomy

Loss

Ownership restraints on FDI are often put into place by a host country based on concerns of

National Security

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

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

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

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

Profits

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

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

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

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

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

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

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.

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

Trade barriers are low. Transportation costs are low

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

Transfer

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

Knickerbocker would say that in an oligopoly, if one firm decides to raise prices, then other firms would

also raise prices

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

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

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.

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

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 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

What are two alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?

Licensing and Exporting

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

Multipoint Competition

Ownership restraints and performance requirements are two ways in which governments can ________ FDI. (Choose encourage or restrict.)

Restrict

What are two limitations on exporting?

Trade barriers Transportation costs

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

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 main types of FDI?

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

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

Exporting

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

FDI

The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage.

Free Market

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

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

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

Capital Outflow

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

Tax concessions can be used by a government to encourage foreign firms to do business in that country.

True

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.

FDI that serves the home market is called ______ production.

offshore

The World Trade Organization has been successful in its efforts to establish a universal set of rules governing the liberalization of FDI.

Exporting

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

Flow

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

What are two potential long-term effects from increased competition?

Increased productivity growth Product and process innovations

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

Interdependence

What is a feature of an oligopoly?

Interdependence of major players

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

Internalization

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

Large domestic markets Stable economy

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

Low-interest loans Subsidies

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

One way that a government can limit the amount of imports entering a country is by imposing _____.

Quotas

How has a shift toward democratic political institutions and free market economies affected FDI?

These shifts encourage businesses to participate in FDI.

A country's ___________ accounts track expenditures and receipts from other countries.

balance-of-payments

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

Radical

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

Knickerbocker's

Which company demonstrates a successful franchising strategy?

McDonalds