BADM 218 Ch. 8

True

T/F: According to the extreme version of radical view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination. True False

The United States and the European Union

Favorite targets for FDI:

B. global oligopolies.

Firms for which licensing is not a good option include those in: A. low-technology industries. B. global oligopolies. C. industries characterized by low cost pressures. D. industries where transportation costs are high. E. industries which need to have low control over foreign operations.

Licensing

Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells:

C. ownership restraints and performance requirements.

Host governments use a range of controls to restrict inward FDI. The two most common are: A. monetary restraints and prohibition on investing in certain countries. B. voluntary export restrictions and employment restraints. C. ownership restraints and performance requirements. D. tax concessions and government-backed insurance. E. employment restraints and tax deductions.

B. also respond with similar price cuts.

If one firm in an oligopoly cuts prices, then most likely, its competitors will: A. make profits. B. also respond with similar price cuts. C. correspondingly raise prices. D. capture additional market share. E. not be impacted by the price cuts.

-The United States -United Kingdom -Japan -France -Germany -Netherlands

Important source countries, together accounted for 60% of all FDI outflows from 1998-2014

-Increased productivity growth -Product and prices innovation -Greater economic growth

In the long run, increased competition can lead to:

-Transportation costs and trade barriers. -When transportation costs are high, exporting can be unprofitable (low value-to-weight ratio) -FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas

Limitations of exporting:

D. balance-of-payments position.

Many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country's: A. free trade agreements. B. inward FDI. C. sovereignty. D. balance-of-payments position. E. gold reserves.

developing

More recently, _____________ nations have been the recipients of FDI.

False

T/F: According to the pragmatic nationalist view, no country should ever permit foreign corporations to undertake FDI. True False

True

T/F: By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. True False

False

T/F: By the early 1990s, the radical position toward FDI was in retreat due to the rise of communism in eastern Europe. True False

False

T/F: Economists refer to knowledge "spillovers" as externalities, and there is a well-established theory suggesting that firms can benefit from such externalities by locating close to their source. True False

False

T/F: Historically, most FDI has been directed at the least developed nations of the world. True False

False

T/F: Offshore production refers to FDI undertaken to serve the host market. True False

True

T/F: Performance requirements are controls over the behavior of the MNE's local subsidiary. True False

False

T/F: The globalization of the world economy is having a negative effect on the volume of FDI. True False

False

T/F: The location-specific advantages argument associated with John Dunning helps explain why firms prefer FDI to licensing or to exporting. True False

D. multinational enterprise.

Once it undertakes FDI, a firm becomes a(n): A. outsourcer. B. retail chain. C. offshore company. D. multinational enterprise. E. national corporation.

-Governments offer incentives to foreign firms to invest in their countries

Policies designed to encourage inward FDI:

-Have government-backed insurance programs to cover major types of foreign investment risk -Have special funds or banks that make governmental loans to firms investing in developing countries -Have eliminated double taxation of foreign income

Policies designed to encourage outward FDI:

-Manipulate tax rules to make it more favorable for firms to invest at home -Restrict firms from investing in certain nations for political reasons

Policies designed to restrict outward FDI:

Exporting

Producing goods at home and then shipping them to the receiving country for sale:

D. externalities.

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companies located close to each other, thus offering the location-specific advantage of: A. a multipoint competition. B. an oligopoly. C. a first mover. D. externalities. E. free riders.

the Unites States

Since WWII, _________ has been the largest source country for FDI.

True

T/F/: Franchising is essentially the service-industry version of licensing, although it normally involves much longer-term commitments than licensing. True False

False

T/F: A critical competitive feature of an oligopoly is independence of the major players. True False

Multipoint Competition

*When two or more enterprises encounter each other in different regional markets or industries:

Knickerbocker

*Who explored the relationship between FDI and rivalry in oligopolistic industries?

Current Account

*A record of a country's export and import of goods and services:

Balance-of-Payments Account

*A record of a country's payments to and receipts from other countries:

The Radical View

*Argues that MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries:

Location-specific Advantages

*Arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets:

Ownership Restraints

*Exclude foreign firms from certain sectors on the grounds of national security or competition:

Resource Transfer Effects

*FDI can bring capital, technology, and management resources that would otherwise not be available:

Employment Effects

*FDI can bring jobs to a host country that would otherwise not be created there:

-It is a substitute for imports of goods and services. -The MNE uses a foreign subsidiary to exports goods and services to other countries.

*FDI can help achieve a current account surplus if:

Possible Effects on National sovereignty and Autonomy

*FDI can mean some loss of economic independence:

Employment Effects of Outward FDI

*If the home country is suffering from unemployment, there may be concern about the export of jobs:

Effect on Competition and Economic Growth

*Increases the level of competition in a market, drives down prices, and improves the welfare of consumers:

Oligopolistic Industries

*Industries composed of a limited number of large firms:

Greenfield Investment

*Involves the establishment of a new operation in a foreign country:

Externalities

*Knowledge spillovers that occur when companies in the same industry locate in the same area:

-Internationalization Theory (Market Imperfection) -May result in a firm's giving away valuable technological know-how to a potential foreign competitor -Does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability -May be difficult if the firm's competitive advantage is not amenable to it

*Major drawbacks to licensing as a strategy for exploiting market opportunities:

Foreign Direct Investment

*Occurs when a firm invests directly in facilities to produce or market a good or service in a foreign country:

Internationalization Theory (Market Imperfections Approach)

*Seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets:

Inflows of FDI

*The flows of FDI into a country:

Outflows of FDI

*The flows of FDI out of a country:

Adverse Effects on Competition

*The subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be a part of a larger international organization:

Stock of FDI

*The total accumulated value of foreign-owned assets at a given time:

-Firms still fear the threat of protectionism -The general shift toward democratic political institutions and free market economies has encouraged FDI -Globalization is prompting firms to ensure they have a significant presence in many regions of the world.

*Three reasons FDI has grown more rapidly than world trade and world output:

Greenfield Investment and Acquisitions

*Two forms of FDI:

Performance Requirements

*Used to maximize the benefits and minimize the costs of FDI for the host country:

Pragmatic Nationalism

*Views that FDI has both benefits and costs, and that FDI should be allowed only if the benefits outweigh the costs:

-Adverse Effects on Competition -Adverse Effects on the Balance of Payments -Possible Effects on National Sovereignty and Autonomy

*What are the three main costs of inward FDI in host countries?

-The capital outflows as foreign subsidiaries repatriate earnings to the parent country -There is a debit on the current account of the host country's balance-of-payments associated with imports of input products by the foreign subsidiary

*What are the two possible adverse effects of FDI on a host country's balance-of-payments?

A. Exporting

3M, an American firm, manufactures adhesive tapes in St. Paul, Minnesota, and ships the tapes to South Korea for sale. According to this information, which of the following is being done by 3M? A. Exporting B. Licensing C. Franchising D. Insourcing E. Outsourcing

C. foreign direct investment.

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of: A. insourcing. B. stock consolidation. C. foreign direct investment. D. product differentiation. E. market segmentation

D. interdependence of the major players.

A critical competitive feature of an oligopoly is the: A. lack of interaction among the major players. B. presence of a domestic market which is open for foreign firms. C. desire of all the major players to avoid the phenomenon of diminishing returns. D. interdependence of the major players. E. lack of imitative behavior among the major players.

B. FDI.

A firm that does not want to bear the costs of establishing production facilities in a foreign country should avoid: A. exporting. B. FDI. C. licensing. D. franchising. E. outsourcing.

B. the transportation costs or trade barriers are high.

A firm will favor FDI over exporting as an entry strategy when: A. the costs of establishing production facilities are high. B. the transportation costs or trade barriers are high. C. there are problems associated with doing business in a different culture. D. the products involved have a high value-to-weight ratio. E. the firm wants to occupy a position that falls inside the efficiency frontier.

B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

According to internalization theory, one of the drawbacks of licensing is that: A. it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development. B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. C. when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. D. its use is restricted by the government through the imposition of tariffs and quotas. E. it is less cost-effective than FDI.

A. immediately nationalized.

According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country should be: A. immediately nationalized. B. made to pay higher taxes. C. converted into publicly traded companies. D.banned from obtaining finance from the financial institutions in the host country. E. immediately privatized.

John Dunning's Eclectic Paradigm

Argues that in addition to multipoint competition and oligopolistic industries, location-specific advantages and externalities are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment:

Eclectic Paradigm

Argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located.

C. doing business in a different culture where the rules of the game may be very different.

FDI is risky because of the problems associated with: A. sharing a valuable technological know-how with a potential competitor. B. an increase in transportation costs, especially for those products that have a low value-to-weight ratio. C. doing business in a different culture where the rules of the game may be very different. D. the possibility of an increase in trade barriers such as import tariffs or quotas. E. increased production costs.

Offshore Production

FDI undertaken to serve the home market:

-The firm wants control over its technological know-how -The firm wants control over its operation and business strategy -The firm's capabilities are not amenable to licensing

FDI will be favored over licensing when:

International Trade Theory

Tell us that home country concerns about the negative economic effects of offshore production may not be valid:

A. a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere.

The idea behind multipoint competition is to ensure that: A. a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere. B. the competitors cooperate with each other to establish a cartel. C. no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers. D. growing technologies or business methods in new markets are transferred to established markets. E. the firms in an industry prefer FDI over licensing or exporting.

A. the resource-transfer effect, the employment effect, and the balance-of-payments effect.

The main benefits of inward FDI for a host country arise from: A. the resource-transfer effect, the employment effect, and the balance-of-payments effect. B. the labor-transfer effect, the technology effect, and the currency-exchange effect. C. the cultural awareness effect, first-mover advantage effect, and economic development effect. D. the foreign exchange reserves effect, knowledge flow effect, and the reverse resource transfer effect. E. the employment effect, the labor-transfer effect, and the technology effect.

A. balance-of-payments and employment effects of outward FDI.

The most important concerns regarding the costs of FDI for the home country center on the: A. balance-of-payments and employment effects of outward FDI. B. technology capture effect and the perceived loss of national sovereignty. C. reverse-resource transfer effect and the exposure to foreign markets caused by FDI. D. import of substantial input from abroad and being held to "economic ransom." E. exposure to foreign markets and the decreased costs of production.

E. FDI has both benefits and costs.

The pragmatic nationalist view is that: A. FDI benefits only the host country. B. FDI does not make any positive contribution to the host economy. C. every country should adopt the free market view. D. FDI should not be allowed by any country as it is an instrument of economic domination rather than economic development. E. FDI has both benefits and costs.

C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.

The strategic behavior theory: A. explains the constraints of exporting and licensing. B. seeks to explain the challenges faced by a firm during the establishment of a new operation in a foreign country. C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. D. reviews the theories that have been used to explain foreign direct investment. E. explains how greenfield investments are better than FDI.

-Why does a firm favor direct investment over exporting and licensing? -Why do firms in the same industry undertake foreign direct investment at the same time and favor certain locations as target for FDI? -Eclectic Paradigm

Three complimentary perspectives of FDI:

The Radical View

Traces its roots to Marxist political economic theory:

The Free Market View:

Traces its roots to classical economics and the trade theories of Adam Smith and David Ricardo:

-Both the flow and stock of FDI in the world economy have increased over the last 35 years. -FDI has grown more rapidly than world trade and world output.

Trends in FDI:

-South, East, and Southeast Asia -China -Latin America

What countries are now seeing an increase of FDI inflows?

-Bolivia -Venezuela

What countries have become increasingly hostile to FDI?

-China -India -Vietnam

What countries have recently liberalized their regimes?

Trade Surplus

What is usually more favored: trade surplus or trade deficit?

Trade Surplus

When a country is exporting more goods and services than it is importing:

Trade Deficit

When a country is importing more goods and services than it is exporting:

E. Cement

Which of the following products has a low value-to-weight ratio? A. Electronic components B. Personal computers C. Medical equipment D. Computer software E. Cement

B. Flow

Which of the following refers to the amount of FDI undertaken over a given period (normally a year)? A. Portfolio B. Flow C. Status D. Stock E. Fragment

D.When a foreign subsidiary imports a substantial number of its inputs from abroad, it results in a debit on the current account of the host country's balance of payments.

Which of the following statements is most likely to be true regarding the adverse effects of FDI on the host country? A. It decreases the level of competition in the host country. B. It tends to increase the prices of the products. C. It leads to a high rate of unemployment in the long run. D.When a foreign subsidiary imports a substantial number of its inputs from abroad, it results in a debit on the current account of the host country's balance of payments. E. When a foreign subsidiary sends its profits to its home country, it results in the depletion of gold reserves of the host country.

B. FDI has grown more rapidly than world trade and world output.

Which of the following statements is true regarding foreign direct investment? A. The flow of FDI refers to the total accumulated value of foreign-owned assets at a given time. B. FDI has grown more rapidly than world trade and world output. C. The general shift toward democratic political institutions has discouraged FDI. D. Generally, free market economies oppose FDI. E.The globalization of the world economy is having a negative effect on the volume of FDI.

B. The free market view argues that FDI is a benefit to both the source country and the host country.

Which of the following statements regarding the free market view is true? A. According to the free market view, MNEs decrease the overall efficiency of the world economy. B. The free market view argues that FDI is a benefit to both the source country and the host country. C. According to the free market view, MNEs can never be instruments of economic development, only of economic domination. D. According to the free market view, FDI is beneficial to the host country of an MNE but it is harmful for the home country of the MNE. E. The free market view traces its roots to Marxist political and economic theory.

C. Free market

Which view argues that international production should be distributed among countries according to the theory of comparative advantage? A. Conservative B. Pragmatic nationalism C. Free market D. Radical E. Keynesian economic

-They are quicker to execute than Greenfield Investments. -It is easier and less risky for a firm to acquire desired assets than build them from the ground up. -Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills.

Why are Acquisitions more attractive than Greenfield Investments?