International Business Chapter 6

Which of the following statements is true of agglomeration?

Agglomeration advantages stem from knowledge spillover from one firm to another.

Which of the following is a cost of FDI to a host country?

Decisions to produce and market products and services in a host country are being made by foreigners resulting in a loss of sovereignty.

Sub Inc. is a sandwich company whose long time licensee operating in Brazil recently opened a direct competitor using the knowledge it gained through marketing the products of Sub Inc. This scenario represents which risk of licensing?

Dissmination

Citronix Inc. is a semiconductor manufacturing company with its headquarters in Bigania. In its venture to expand business, the company sets up manufacturing units in five other countries where semiconductors are produced and manufactured. In this scenario, Citronix Inc. is engaged in _____.

FDI

_____ is the amount of foreign direct investment (FDI) moving in a given period (usually a year) in a certain direction.

FDI flow

_____ refers to holding securities, such as stocks and bonds, of companies in countries outside one's own but does not entail the active management of foreign assets.

FPI

Home countries often reap benefits and endure costs associated with FDI that are the same as those experienced by the host countries.

False

In the long run, the interests of multinational enterprises (MNEs) in host countries can be best safeguarded if MNEs neglect the interests of host countries.

False

International transaction costs tend to be lesser than domestic transaction costs.

False

Location advantage refers to possession and leveraging by a multinational enterprise (MNE) of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas.

False

Most countries embrace the free market view on FDI.

False

In the context of foreign direct investment, which of the following statements is true of ownership advantages?

Firms can beat rivals abroad by acquiring the advantage of proprietary technology of manufacturing products.

What are the implications of action when firms consider to engage in foreign direct investment (FDI)?

First, firms should carefully assess whether FDI is justified in light of other possibilities such as outsourcing and licensing. If ownership and internalization advantages are not deemed critical, then FDI is not recommended. Second, the quest for location advantages has to fit with a firm's strategic goals. For example, if a firm is searching for the innovation hot spots, then low-cost locations that do not generate sufficient innovations will not be attractive. High-cost locations such as Denmark would be ideal for wind turbine makers in search of cutting-edge innovations. Finally, given the political realities around the world, be aware of the institutional constraints. Savvy multinational enterprise (MNE) managers should not take FDI-friendly policies for granted. Setbacks are likely. The global economic slowdown has made many developed economies less attractive to invest, and the credit crunch means that firms are less able to invest abroad. Attitudes toward certain forms of FDI are changing, which may lead to FDI policies to become more protectionist. In the long run, the interests of MNEs in host countries can be best safeguarded if MNEs accommodate, rather than neglect or dominate, the interests of host countries. In practical terms, contributions to local employment, job training, education, and pollution control will tangibly demonstrate MNEs' commitment to host countries.

Why do firms prefer foreign direct investment (FDI) to licensing?

Foreign direct investment (FDI) affords a high degree of direct management control that reduces the risk of firm-specific resources and capabilities being appropriated. One of the leading risks abroad is dissemination risk, defined as the risk associated with unauthorized diffusion of firm-specific knowledge. FDI provides more direct and tighter control over foreign operations. Without FDI, foreign firms cannot order or control their licensee. Finally, certain knowledge (or know-how) calls for FDI as opposed to licensing. Even if there is no opportunism on the part of licensees and if they follow the wishes of the foreign firm, certain know-how may simply be too difficult to transfer to licensees without FDI.

Analyze the process of overcoming market failure through foreign direct investment (FDI).

Foreign direct investment (FDI) combats market failure through internalization. By replacing an external market relationship with a single organization spanning both countries (a process called internalization), a multinational enterprise (MNE) thus reduces cross-border transaction costs and increases efficiencies.In theory, there can be two possibilities: upstream vertical FDI or downstream vertical FDI. In addition, through intrafirm trade, an MNE is able to coordinate cross-border activities better. So as a result, FDI is viewed as a reflection of both a firm's motivation to extend form-specific capabilities abroad and its responses to overcome market failures and imperfections.

From resource-based and institution-based views, explain what determines success and failure of foreign direct investment (FDI) around the globe.

From a resource-based view, some firms are good at foreign direct investment (FDI) because they leverage ownership, location, and internalization advantages in a way that is valuable, unique, and hard to imitate by rival firms. From an institution-based view, the political realities either enable or constrain FDI from reaching its full economic potential. Therefore, the success and failure of FDI also significantly depend on institutions governing FDI as "rules of the game."

Which of the following statements is true of the radical view on foreign direct investment (FDI)?

Governments embracing this view often nationalize multinational enterprise (MNE) assets or simply ban inbound MNEs.

Rayato Inc. is a cell phone manufacturing company headquartered in Swinland. The company designs, manufactures, and markets cell phones in Swinland. It has recently engaged in foreign direct investment (FDI), setting up its manufacturing units in three other countries. Rayato Inc. has decided to follow the same value-chain stage in the host countries as in Swinland. In this scenario, Rayato Inc. has engaged in:

Horizontal FDI

Which of the following statements is true of internalization?

It involves locating and operating in host countries.

Which of the following statements is true of direct ownership?

It provides a firm with equity ownership rights and management control rights.

Bandoy Corp., a renowned cell phone manufacturing company, decided to engage in international business. So, Bandoy Corp. sold its technology to several multinational enterprises in other countries. This market entry mode is an example of _____.

Licensing

Explain location advantages for firms engaging in foreign direct investment (FDI) and agglomeration advantages.

Location advantages are those enjoyed by firms because they do business in a certain place. Features unique to a place, such as its natural or labor resources or its location near particular markets, provide certain advantages to firms doing business there. Beyond natural geographical advantages, location advantages also arise from the clustering of economic activities in certain locations, referred to as agglomeration. Agglomeration advantages stem from: Knowledge spillover, or the diffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors. Industry demand that creates a skilled labor force whose members may work for different firms without moving out of the region. Industry demand that facilitates a pool of specialized suppliers and buyers also located in the region.

Bricklanes Inc. is a company that designs and manufactures materials for interior decorations. The company expands its business in Cronje Republic to gain the advantages of foreign direct investment. As a result, several companies in Cronje Republic have adopted new advancements that are introduced by Bricklanes Inc. in their processes. In this case, which of the following benefits has the host country acquired?

Technology spillover

_____ refers to the domestic diffusion of foreign technical knowledge and processes.

Technology spillover

Which of the following political views on foreign direct investment (FDI) does not exist in practice?

The free market view on FDI

Explain the advantages of firms when they become multinational enterprises (MNEs) by engaging in foreign direct investment (FDI).

The reasons for firms engaging in foreign direct investment (FDI) boil down to the quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages-collectively known as OLI advantages. In the context of FDI, ownership refers to possession and leveraging by a multinational enterprise (MNE of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas. Owning the proprietary technology and the management know-how that goes into making a BMW helps ensure that the MNE can beat rivals abroad. Location advantages are those enjoyed by firms because they do business in a certain place. Features unique to a place, such as its natural or labor resources or its location near particular markets, provide certain advantages to firms doing business there. From a resource-based view, an MNE's pursuit of ownership and location advantages can be regarded as flexing its muscles-its resources and capabilities-in global competition. Internalization refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries. For example, BMW could sell its technology to an Indonesian firm for a fee. This would be a non-FDI-based market entry mode technically called licensing and can be done with intellectual property as well as technology.

Explain the different political views on foreign direct investment (FDI).

There are three primary political views on foreign direct investment (FDI). First, the radical view on FDI is hostile to FDI. Tracing its roots to Marxism, the radical view treats FDI as an instrument of imperialism and a vehicle for exploiting domestic resources, industries, and people by foreign capitalists and firms. Governments embracing the radical view often nationalize multinational enterprise (MNE) assets or simply ban inbound MNEs. On the other hand, the free market view on FDI suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. Free market-based FDI should lead to a win-win situation for both home and host countries. Most countries embrace the pragmatic nationalism view on FDI, considering both the pros and cons of FDI and approving FDI only when its benefits outweigh its costs.

A multinational enterprise (MNE), by definition, is a firm that engages in foreign direct investment when doing business abroad.

True

A non-multinational enterprise (non-MNE) firm can do business abroad by exporting.

True

A paper company is opening a new branch. In addition to providing the new branch manager and employees with handbooks detailing their jobs, the firm places experienced personal at the new branch for 6 months to teach hands-on skills and share their know-how. In this scenario, the handbooks transfer explicit knowledge, while the experienced personnel insure the acquisition of tacit knowledge.

True

Foreign direct investment (FDI) results in the loss of some economic sovereignty in a host country.

True

Foreign direct investment (FDI) stock is the total accumulation of inbound FDI in a country or outbound FDI from a country.

True

In the context of international investment, foreign portfolio investment (FPI) is an indirect investment.

True

Internalization is a way to combat market failure.

True

OLI advantages refer to the advantages of ownership (O), location (L), and internalization (I) that come from engaging in foreign direct investment.

True

Tacit knowledge is noncodifiable and its acquisition and transfer requires hands-on practice.

True

Technology spillover from FDI is typically beneficial to domestic firms and industries.

True

The United Nations defines FDI as an equity stake of 10% or more in a foreign-based enterprise. A lower percentage invested in a foreign firm is considered FPI?

True

The quest for location advantages has to fit with a firm's strategic goals.

True

Picnia Corp., a leading automobile manufacturing company, assembles its cars in Deltaland, but the components are manufactured in Ristasia. In this scenario, Picnia Corp. has engaged in:

Upstream vertical FDI

_____ refers to a type of foreign direct investment (FDI) in which firms move upstream or downstream in different value chain stages in a host country.

Vertical FDI

Dissemenation risk

_____ is defined as the possibility of unauthorized diffusion of firm-specific know-how.

When market failure is minimized through internalization, _____.

a single organization between two firms is established

When one firm enters a foreign country through foreign direct investment (FDI), its rivals are likely to follow by undertaking additional FDI in a host country to:

acquire location advantages.

Folexa is the largest producer of spices in the world, and its location is an added advantage to its business. It is surrounded by six trading countries. Besides, located close to the southern region of the continent, it attracts business from the neighboring continents as well. Such clustering of economic activities is referred to as _____.

agglomeration

Hisson Technologies, a computer manufacturing company headquartered in Lumberne, had recently undertaken foreign direct investment (FDI) by setting up its office in the Remfur Republic. The company did not engage in computer distribution in Lumberne, but it invested in computer dealership in the Remfur Republic. In this case, Hisson Technologies was engaged in _____.

downstream vertical FDI

Knowledge that can be written down and transferred without losing much of its richness is called _____.

explicit knowledge

The international trade between two subsidiaries in two countries controlled by the same multinational enterprise (MNE) is called _____.

intrafirm trade

Which of the following is a benefit of FDI for the host country?

job creation

Governments embracing this view often nationalize multinational enterprise (MNE) assets or simply ban inbound MNEs.

leads to a win-win situation for both home and host countries.

A United States MNE decides to move operations to a developing nation in Central America to take advantage of the region's low labor costs. This is an example of an MNE in pursuit of _____ advantage.

location

Within the context of FPI, _____ rights are the rights to appoint key managers and establish control mechanisms.

management control

From an institution-based view, internalization is a response to:

market imperfections

In the context of international business, market failure is most likely to result due to:

opportunistic behavior of firms.

HiSpark Inc., a leading sports accessories brand, believes that it has to possess rare, hard-to-imitate technology, valuable brand name, and organizationally embedded culture to achieve consistent success as a multinational enterprise. In this case, HiSpark Inc. is focusing on:

ownership advantage

The _____ is a political view that approves foreign direct investment (FDI) only when its benefits outweigh its costs.

pragmatic nationalism view on FDI

Which of the following political views is hostile to foreign direct investment (FDI)?

radical view of FDI

In international business, when a host country firm acts opportunistically, _____.

suing the opportunistic firm in a foreign country is costly and uncertain

In licensing, a firm that receives explicit knowledge is not likely to succeed because:

tacit knowledge is difficult to transfer and can be acquired only by practice.