Chapter 8

Identify two costs of FDI to a home country.

-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.

Which country has a policy that encourages FDI?

Country A has a government-backed insurance program to protect against the risk of expropriation (government/authority taking property for the owner)

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

False **The opposite will occur. Competition increases and economic welfare increases.

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

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. **Dunning means the advantages that arise from utilizing 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. Requires the firm to establish production facilities where those foreign assets or resource endowments are located.

Solar Chemical, an industrial cleaning products manufacturing company, has a market share of 30 percent in Brazil. Three of its competitors together control 55 percent of the market. Whenever Solar Chemical raises or lowers the prices of its products, the other three companies quickly imitate its action. What is the market structure of this industry in Brazil?

oligopoly

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

profits

One example of a(n) __________ effect of foreign direct investment is when jobs are created because of increased local spending by employees of an MNE.

indirect

Greenfield investing (refers to a type of foreign direct investment where a company establishes operations in a foreign country. - green, new facilities) spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare.

lower, increase

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

lower, increase

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? (Check all that apply.)

- low-interest loans - subsidies

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

Exporting and Licensing

A firm might justify a preference for licensing over FDI because licensing

results in the licensee bearing the costs and risks.

What are two benefits of FDI to a home country?

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

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

What are two characteristics of the eclectic paradigm?

-It provides a single holistic explanation of foreign direct investment. -It combines the best aspects of other theories of foreign direct investment into a single explanation.

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

FDI - foreign direct investment

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

These shifts encourage businesses to participate in FDI.

In terms of employment, the indirect effects of FDI are often as large as, if not larger than, the direct effects.

True

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

deficit **a current account deficit (trade deficit), arises when a country is importing more goods and services than it is exporting

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

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

double

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

multipoint competition

FDI that serves the home market is called ______ production.

offshore

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

Select two potential costs of FDI for host countries.

-Adverse effects on competition -Adverse effects on balance of payments **3 costs of FDI concern host countries. They arise from possible adverse effects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy

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

-Boost a country's economic growth rate (by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate) -Supply capital, technology, and management resources

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.

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.

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

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

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 **greenfield investment involves the establishment of a new operation in a foreign country

What is a feature of an oligopoly?

Interdependence of major players **an oligopoly is an industry composed of a limited number of large firms (an industry in which 4 firms control 80% of a domestic market would be defined as an oligopoly) -what one firm does can have an immediate impact on the major competitors, forcing a response : for example, by cutting prices, one firm in an oligopoly can take market share away from its competitors, forcing them to respond with similar price cuts to retain their market share. Thus, the interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly.

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

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 *Offshore production refers to FDI undertaken to serve the home market.

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

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

The United States

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 **attempts to combine the two other perspective into a single holistic explanation of foreign direct investment (this theory is 'electric' bc the best aspects of other theories are taken and combined into a single explanation) -the electric paradigm has been championed by the late British economist John Dunning.

The flow of foreign direct investment refers to the amount of FDI undertaken over a given period of time—normally a year.

True

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

True Reason: Tax concessions are one example of incentives governments use to encourage FDI.

With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI.

WTO

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

balance-of-payments

Fast Tracker Inc., a U.S.-based company, makes custom wearable fitness trackers in Oregon, which are then shipped to Europe for sale there. Based on this information, Fast Tracker Inc. is involved in

exporting

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

exporting

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

free market **countries should specialize in the production of those goods and services that they can produce most efficiently. - viewed this way, FDI by the MNE increases the overall efficiency of the world economy **the free market view traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo.

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

hostile **

FDI occurs when a company invests in facilities

in a foreign country.

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

location-specific advantages **Dunning means the advantages that arise from utilizing 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 . Therefore, he argues that combining location-specific assets or resource endowments with the firm's own unique capabilities often requires foreign direct investment.

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

loss

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

oligopoly

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

radical **radical writers argue that the MNE(multinational enterprise) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries,.

A ______ 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 effect

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 The pragmatic nationalist view is that FDI has both benefits and costs

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

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

licensing

The _____ account tracks goods and services exports and imports in balance-of-payments accounting.

current

The stock of foreign direct investment refers to the total

accumulated value of foreign-owned assets at a given point in time. ***There is a difference between the flow of FDI and the stock of FDI. Flow of FDI: refers to the amount of FDI undertaken over a given time period (normally a year) Stock of FDI: refers to the total accumulated value of foreign-owned assets at a given time

Tracking exports and imports of goods and services is measured by the_______ account in balance-of-payments accounting.

current *The current account tracks the export and import of goods and services. A current account deficit, or trade deficit as it is often called, arises when a country is importing more goods and services than it is exporting

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

developed

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

exporting

It is one of Sanjay's job responsibilities to report the amount of foreign direct investment undertaken by the government over a one-year time period. Sanjay reports the __________ of FDI.

flow

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

According to the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.

true