Chapter 8 International Business

Select two potential costs of FDI for host countries.

Adverse effects on competition Adverse effects on balance of payments

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

FDI

What two reasons does the text give as to why FDI has outpaced world trade and world output?

FDI has been driven by political and economic changes in developing nations. Firms want to circumvent potential future trade barriers.

What are two limitations on exporting?

Trade barriers and transportation costs

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

developed

If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider

foreign direct investment.

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

licensing

FDI that serves the home market is called ______ production.

offshore

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

outflow

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

profits

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

Exporting

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

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

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

These shifts encourage businesses to participate in FDI.

The market imperfections approach is also known as the ______ theory.

internalization

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

location-specific advantages

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

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.

Which country has a policy that encourages FDI?

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

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.

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

Multipoint competition

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

deficit

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 (blank) economies.

developing

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

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

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

radical

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

A country that relies on the pragmatic nationalist view would say that

FDI should be allowed so long as the benefits outweigh the costs.

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

False

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

Foreign investors transferred technology to countries in which they invested. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested.

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

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

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

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

Licensing Exporting

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

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 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?

Subsidies Low-interest loans

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

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

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

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 were the most developed nations with the largest economies in the postwar period. They provided the base for many of the largest and best-capitalized businesses.

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

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

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 (blank) account in balance-of-payments accounting.

current

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

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

economic

When a nation puts government-backed insurance programs in place to cover major types of foreign investment risk, it has the effect of

encouraging outward FDI by a home country.

If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy.

exporting

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

exporting

If your proprietary know-how of "green" processes is difficult to transfer to other firms, the most effective approach would be

exporting or foreign direct investment.

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

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 (blank) of FDI is the amount of FDI attempted over a period of time (usually one year).

flow

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

free market

Venezuela and Bolivia are examples of countries that have become more (blank) to FDI.

hostile

FDI occurs when a company invests in facilities

in a foreign country.

What is a feature of an oligopoly?

interdependence of the major players.

Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market.

licensing

If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

licensing.

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.

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

loss

Exporting strategy does not work for a (low or high?) value-to-weight ratio product that can be produced anywhere.

low

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

lower, increase

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

oligopoly

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

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