IBUS 310 Ch 8 SmartBook

Select two potential costs of FDI for host countries.

-Adverse effects on competition -Adverse effects on balance of payments

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 two positive contributions to a host country can FDI provide?

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

What are the two main types of FDI?

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

What are two reasons businesses prefer acquisition as a means of FDI over a greenfield investment?

-It is less risky to acquire firms that have certain business assets in place. -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 which two of the following?

-Lower prices -Modernization of telephone networks

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

-Product and process innovations -Increased productivity growth

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

Which country has a policy that encourages FDI?

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

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

Creation of a monopoly

Which two factors would reveal that a company has little bargaining power when considering FDI?

-Host government does not value what the firm has to offer -The company has a short period of time to complete negotiations

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

-Industries with intense cost pressures -Global oligopolies -High-tech industries

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

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

outflow

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

Which company demonstrates a successful franchising strategy?

McDonald's

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

The United States

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

These shifts encourage businesses to participate in FDI.

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

True

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

The stock of foreign direct investment refers to the total

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

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

balance-of-payments

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

capital outflow

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

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

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

double

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

economic

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

favorable

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

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.

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

interdependence

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

loss

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

lower, increase

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

national security.

FDI that serves the home market is called ______ production.

offshore

Some countries prohibit national firms from investing in specific countries for ______ reasons, such as U.S. firms being prohibited from investing in Cuba during the Cold War.

political

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

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

restrict

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 U.S.-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

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

the service industry

Research shows that multinational companies ____ technology when they invest in a foreign country.

transfer

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

FDI

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

False

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

False

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.

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which 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.

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

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

-Ownership restraints -Performance requirements

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

-Stable economy -Large domestic markets

What are the two most common incentives governments offer to foreign firms to invest in their country? (Check all that apply.)

-Subsidies -Low-interest loans

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.

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.

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 effects

Simple Services Corp. is considering FDI in Japan. However, Simple Services wants to keep tight control over the foreign entity to ensure it will achieve maximum earnings in Japan. Which form of FDI would be better for the company to use?

Exporting

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

False

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

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

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

True

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

In the past, most foreign direct investment has been directed at _____ nations.

developed

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

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

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

host

ABC Co. should choose exporting over licensing as a form of FDI if it has ______ transportation costs and is facing ______ trade barriers.

low; low

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