International Business Ch. 8 - Foreign Direct Investment

location-specific advantages

Advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management know-how).

What are two potential costs of FDI to host countries?

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

What are two current trends in FDI?

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.

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

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

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

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

Developed

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

Eclectic paradigm

Greenfield Investment

Establishing a new operation in a foreign country

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

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

FDI

Pragmatic Nationalism

FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)

Off-shore production

FDI undertaken to serve the home market

Inflows of FDI

Flow of foreign direct investment into a country

Outflows of FDI

Flow of foreign direct investment out of a country

Identify two benefits of FDI to a home country.

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

Venezuela and Bolivia are examples of countries that have become more ___ to FDI

Hostile

FDI occurs when a company invests in facilities

In a foreign country

Internalization Theory

Marketing imperfection approach to foreign direct investment

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

Oligopoly

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

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.

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

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

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 company

Multipoint competition

arises when two or more enterprises encounter each other in different regional markets, national markets, or industries

Eclectic Paradigm

attempts to combine the two other perspectives into a single holistic explanation of foreign direct investment

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

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

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

double

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

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

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

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

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

Market Imperfections

imperfections in the operation of the market mechanism

Oligopoly

industry composed of a limited number of large firms

What is a feature of an oligopoly?

interdependence of major players

The Free Market View

international production should be distributed among countries according to the theory of comparative advantage

externalities

knowledge spillovers

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

location-specific advantages

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 advantages

A host country cost of FDI could be the ____(gain or loss?) of sovereignty and autonomy.

loss

balance-of-payments accounts

national accounts that track both payments to and receipts from foreigners

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

exporting

producing goods in one country and selling them in another

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

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

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

The Radical View

the MNE is an instrument of imperialist domination, a tool for exploiting hose countries to the exclusive benefits of their capitalist-imperialist home countries

Flow of FDI

the amount of FDI undertaken over a given time period (usually a year)

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

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

Stock of FDI

the total accumulated value of foreign-owned assets at a given time

current acounts

tracks the export and import of goods and services

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

why firms don't use exporting and licensing to enter foreign markets. 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.