chapter 8
Which of the following statements is true about the growth of foreign direct investment in the world economy over the last few decades?
FDI has accelerated faster than world trade growth
________ gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability
Foreign direct investment
Which of the following is a major drawback of using Knickerbocker's theory in explaining FDI?
It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.
________ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.
Multipoint competition
________ traces its roots to Marxist political and economic theory
The radical view
Host country citizens that are employed by an MNE following an FDI are an example of
a direct effect
Developing nations currently account for ________ of FDI in the form of cross-border mergers and acquisitions
about one-third or less
An Italian car manufacturer purchases a U.S. producer of car tires. This is an example of
an acquisition
If the FDI is a substitute for imports of goods or services, the effect can be to improve the ________ of the host country's balance of payments
current account
The ________ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located.
eclectic paradigm
From the perspective of a firm negotiating the terms of an investment with a host government, the firm's bargaining power is high when the
host government places a high value on what the firm has to offer.
In which of the following situations would FDI improve the current account of the host country's balance of payments?
if the FDI is a substitute for imports of goods or services
Which of the following is a direct consequence of the interdependence between firms in an oligopoly?
imitative behavior
FDI occurs when a firm
invests directly in facilities to produce a product in a foreign country
What has made the United States an attractive target for foreign direct investment?
its wealthy domestic markets
A French wind power company gives an Indonesian company the right to produce and sell wind turbines in return for a royalty fee on every unit sold. Which business practice is this an example of?
licensing
What is the primary reason Africa has attracted FDI in recent years?
raw material availability
Which of the following is a home-country policy aimed at restricting outward FDI flow?
taxing domestic companies' foreign earnings at a higher rate than their domestic earnings
Since World War II, the largest source country for FDI has been
the United States
According to pragmatic nationalist view, FDI should be allowed so long as
the benefits outweigh the costs
Which political view allows FDI so long as the benefits outweigh the costs?
the pragmatic nationalist view
The free market view argues that international production should be distributed among countries according to the
theory of comparative advantage
The stock of FDI refers to the
total accumulated value of foreign-owned assets at a given time
Which of the following arises when a country is importing more goods and services than it is exporting?
trade deficit
Which of the following specifically reduces the viability of an exporting strategy specifically for products with low value-to-weight ratios?
transportation costs
According to Knickerbocker's theory
when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments
In which of the following situations does the internalization theory recommend FDI as opposed to licensing?
when the firm needs tight control over a foreign entity
Which of the following factors has had a positive effect on the volume of foreign trade investments?
world economy globalization
Which of the following is an example of a greenfield investment?
A Chinese sugar maker sets up a sugar crushing facility in Cuba
________ seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets
Internalization theory
Which of the following observations concerning Knickerbocker's theory is true?
It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license
Licensing would be a good option for firms in which of the following industries?
It would be a good option in fragmented, low-technology industries in which globally dispersed manufacturing is not an option.
________ and its extensions can help to explain imitative FDI behavior by firms in oligopolistic industries
Knickerbocker's theory
________ occurs when a firm legally allows the right to produce its product, to use its production processes, or to use its brand name or trademark to another firm.
Licensing
________ arise(s) 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
Location-specific advantages
When contemplating FDI, why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments?
Mergers and acquisitions are quicker to execute than greenfield investments.
________ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries
Multipoint competition
What is double taxation in the context of FDI?
Taxation of income in both home and host country
________ argues that FDI is a benefit to both the source country and the host country
The free market view
Which of the following best describes an industry composed of a limited number of large firms?
an oligopoly
FDI can benefit the home country's ________ if the foreign subsidiary creates demands for home-country exports of capital equipment, intermediate goods, complementary products, and the like.
balance of payments
A country's ________ accounts keep track of both its payments to and its receipts from other countries.
balance-of-payments
A country's ________ keep track of its payments to and its receipts from other countries.
balance-of-payments accounts
Why is it said that not all the new jobs created by FDI represent net additions in employment?
because jobs created by an investment may be offset by the jobs lost in domestic companies
The pragmatic nationalist view highlights ________ of FDI
both the benefits and costs
How can FDI undertaken to serve the home market stimulate economic growth in the home country?
by freeing home-country resources to concentrate on activities where the home country has a comparative advantage
Which of the following is a way in which governments increase the attractiveness of FDI and licensing relative to exporting?
by implementing import quotas
How is the adverse effect of the balance of payments for the home country due to FDI usually offset?
by the subsequent inflow of foreign earnings
What primarily explains why developing nations are characterized by a lower percentage of cross-border mergers and acquisitions compared to developed nations?
fewer target firms to acquire in developing nations
The ________ of FDI refers to the amount of FDI undertaken over a year
flow
________ is essentially the service-industry version of licensing, although it normally involves much longer-term commitments
franchising
Which view of FDI traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo?
free market
In which way can the source country's balance of payments benefit from FDI made in a foreign country?
from the inward flow of foreign earnings
When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance. This is particularly true of products that
have a low value-to-weight ratio
Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
internalization theory
Which branch of economic theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets
internalization theory
As transportation costs or trade barriers increase, exporting becomes unprofitable, and the choice is between FDI and
licensing.
Advantages that arise from using resource endowments or assets that are tied to a particular place and that a firm finds valuable to combine with its own unique assets are known as
location-specific advantages
Recent years have seen a ________ in the number of countries that adhere to a radical ideology regarding FDI.
marked decline
The majority of cross-border investment in the developed world is in the form of
mergers and acquisitions
What is the term that describes when two or more enterprises encounter each other in different regional markets, national markets, or industries?
multipoint competition
FDI undertaken to serve the home market is known as
offshore production
The two most common methods of restricting inward FDI are ownership restraints and
performance requirements
Through their choice of policies, home countries can both encourage and restrict FDI by local firms. Policies designed to encourage outward FDI include which of the following?
political pressure
An aspect of ________ is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants
pragmatic nationalism
The country of Manystan has adopted neither a radical policy nor a free market policy, but rather one that posits that FDI has both benefits and costs. This is best described as
pragmatic nationalism
The ________ and Knickerbocker's theory of FDI tend to be less useful from a business perspective because they are descriptive rather than analytical
product life-cycle theory
According to the ________ view of FDI, multinational enterprises (MNE) extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
radical
When a company brings capital and/or technology to a host country, the host country benefits from the
resource-transfer effect of FDI.
A country rejects FDI proposals in certain industries. It does so because the tangible advantages of such investments are lesser than potential costs like loss of employment and reduction of overall well-being. However, it aggressively pursues inviting foreign investments in sectors like infrastructure, education, and health care because of the benefits that accrue with them. Which political view of FDI is discussed in this example?
the pragmatic nationalist view
