Chapter 8

What are the two types of FDI?

- establishing a new operation in a foreign market - acquisition or merger with an existing foreign firm

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

False: Greenfield investment will increase the number of players in a market, which will lead to lower prices and increased economic welfare.

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

What are three advantages of FDI? (Check all that apply.)

It helps overcome high transportation costs. It allows a firm to maintain control over technological know-how. It allows for tight control over a firm's operations.

Along with the United States, which five countries accounted for 60% of all FDI outflows from 2000-2020?

Japan France The Netherlands The United Kingdom Germany

What name is given to the advantages that coincide with utilizing resource endowments or assets tied to a specific area?

Location-specific

A host country cost of FDI could be the _________ of sovereignty and autonomy

Loss

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

True or false: Jim's US-based paper products company sources paper from a plant in Brazil that takes advantage of the available forestry near the plant. This is an example of a location-specific advantage.

True

In the 1960s, when RCA allowed Japanese companies to use its color TV technology, some of these companies came to the United States to compete directly with RCA, and this made RCA less important in the market. So, in this case, sharing its technology with others ended up helping a possible rival.

True or false

The stock of foreign direct investment refers to the total

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

Tracking its expenditures and its receipts from other countries occurs in a country's ____________ , -of-______________ , accounts.

balance of payment

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

current

Past activity of FDI shows that the majority of it has been directed at

developed nations

The Blank______ combines the various perspectives of foreign direct investment into a holistic theory.

eclectic paradigm

The Blank______ of FDI describes the amount of FDI undertaken during a year.

flow

A key benefit of FDI to a home country is from the inward flow of Blank______ earnings.

foreign

A(n) Blank______ strategy is favored over exporting when transportation costs or trade barriers are prohibitive.

foreign direct investment

What are the three potential costs of FDI to host countries?

Adverse effects on competition Adverse effects on balance of payments Perceived loss of national sovereignty & autonomy

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 the three costs of FDI to a home country.

Balance of payments negatively affected if FDI is a substitute for direct exports Balance of payments negatively affected if purpose of FDI is to develop a low-cost production location Balance of payments negatively affected initially from the capital outflow to fund FDI

Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of

foreign direct investment

What is a company participating in when it directly invests in facilities to produce or market a product in a foreign country?

foreign direct investment

Jamal's company wants to retain tight control over a foreign entity in order to get the maximum impact of market share. His company should utilize

FDI

When a firm invests directly in a foreign market to produce or market a product, it is called

FDI

Grant's company has given a company in Japan the right to produce and sell its line of active wear. For every article of clothing the Japanese company sells, it pays Grant's company a fee. This is an example of

licensing

The limits of Blank______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy.

licensing

What are two characteristics of an oligopoly?

limited number of firms large firms

A key cost of FDI for the home country is when the balance of payments are adversely affected by the initial Blank______ outflow that is necessary to finance FDI.

resource

Exporting strategy does not work for a Blank______ value-to-weight ratio product that can be produced anywhere.

low

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

- Even though trade barriers are diminishing, firms still fear protectionist pressures. -FDI has been driven by political and economic changes in developing nations.

The basis in Marxist politics is evident when radical writers argue that Blank______ enterprises are an instrument of imperialist domination.

Multinational

Main benefit of inward FDI for a host country arise from

Resource transfer effects, employment effects, balance of payment effects, and effects on competition and economic growth.

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

lower, increase

What are two benefits of FDI for a host country?

Economic growth Resource-transfer effects

How has the flow of FDI compared to the growth in world trade since 1990?

The flow of FDI has accelerated faster than the growth in world trade.

The radical view toward FDI argues that Blank______ extract profits from the host country and take them back to their home country.

multinational enterprises

Pre-1980, Japan blocked the majority of potential foreign investments. Yet, if a company that had cutting edge technology wanted to invest in Japan, they were allowed to undertake FDI. This is an example of

pragmatic nationalism

For which of these products does the attractiveness of exporting decrease relative to either FDI or licensing?

A product that can be produced almost anywhere

Choose the three benefits of FDI to a home country.

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