Chapter 8 Reading Questions
Based on standards set by the US Department of Commerce, a firm is engaging in FDI when it takes an interest of _____ or more in a foreign business entity
10%
What two factors cause major adverse effects on a host country's balance of payments
A foreign subsidiary importing a large number of inputs from abroad The outflow of earnings from a foreign subsidiary to its parent company
What are two current trends in FDI
An increase in the volume of FDI An increase in FDI aimed at countries that have liberalized their FDI regimes
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
What two countries have shifted to a more hostile approach to FDI
Bolivia Venezuela
What are two limitations of licensing
firm does not have tight control over producing, marketing and strategy in a foreign country gives away valuable know-how to a potential competitor
The _____ of FDI describes the amount of FDI undertaken during a year
flow
According to internalization theory, a company would rather gain entrance into a foreign market by using
FDI
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
What is an accurate summary of the rationale behind the free market view
FDI is a benefit to both the source country and the host country
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found what two results
Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. Foreign investors transferred technology to countries in which they invested.
Firms for which licensing is NOT a good option are clustered in which three industries
Industries with intense cost pressures High-tech industries Global oligopolies
Choose the three benefits of FDI to a home country
Inward flow of foreign earnings Foreign subsidiary creates demand for home-country exports MNE learns skills from exposure to foreign market
Along with the United States, which five countries accounted for 60% of all FDI outflows from 1998 to 2018
Japan Germany The Netherlands The United Kingdom France
What are two alternatives to FDI
Licensing Exporting
Which company demonstrates a successful franchising, strategy
McDonald's
What are three advantages of FDI
Overcomes high transportation costs Allows the firm to maintain control over technological know-how Allows for tight control over the firm's operations
What are two measures countries can employ to restrict foreign direct investment
Ownership restraints Performance requirements
What are the three potential costs of FDI to host countries
Perceived loss of national sovereignty & autonomy Adverse effects on balance of payments Adverse effects on competition
An example of ______ is when firms benefit from each other's knowledge generation
externalities
Economists refer to knowledge "spillovers" as _____, and there is a theory that suggests firms can benefit from these "spillovers" by locating close to their source
externalities
A number of investor countries try to encourage FDI through the use of
political influence
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
Which is TRUE for firms considering foreign direct investment
The host government's attitude toward FDI should be an important variable in decisions about where to invest.
True or false: Knickerbocker was concerned with the effect of licensing on industries composed of a limited number of large firms
false
True or false: The pragmatic nationalism view contends that FDI has no costs, but many benefits
false
True or false: When FDI occurs through greenfield investment, this will lower competition in a market and decrease economic welfare
false
What country has been the largest source of FDI since World War II
United States
Which country was a favorite target for FDI inflows during the 1980s and 1990s
United States
What international organization is involved in the governing of FDI
WTO
Which of these factors creates a limitation to exporting
a product that can be produced almost anywhere
The stock of foreign direct investment refers to the total
accumulated value of foreign-owned assets at a given point in time
What are the two types of FDI
acquisition or merger with an existing foreign firm establishing a new operation in a foreign market
The main reason why businesses prefer acquisition as a means of FDI is because acquisitions are ________ than greenfield investments
faster to execute
Tracking its expenditures and its receipts from other countries occurs in a country's _ of _ accounts
balance payments
One key factor that leads to adverse effects on a host country's ______ accounts is when a foreign subsidiary imports a substantial number of inputs from abroad, which results in a debit on the current account
balance of payments
A country's ___________ accounts track the country's payments to and receipts from other countries
balance-of-payments
Tariffs and quotas are examples of _____ to foreign direct investment
barriers
When a company moves operations overseas to take advantage of lower labor costs, this strategy increases the overall efficiency of resource utilization in the global economy. According to the free market view of FDI, this benefits
both the home and the host countries
A key cost of FDI for the home country is when the balance of payments are adversely affected by the initial ____ outflow that is necessary to finance FDI
capital
When a firm invests in plant, equipment, and R&D as a result of increased competition, it is engaging in ______ investment
capital
Eastern European countries were opposed to FDI until the late 1980s with the demise of
communism
The _____ 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 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 a worry for _ 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
The ____ effects of FDI arise when a multinational enterprise hires host-country citizens and the _____ effects arise when local suppliers hire workers as a result of the FDI
direct, indirect
Most economists _____ that FDI is usually accompanied by some loss of economic independence
dismiss
To encourage FDI, many countries have eliminated ______ taxation of foreign income
double
The ______ combines the various perspectives of foreign direct investment into a holistic theory
eclectic paradigm
FDI has a positive ______ impact on host countries as a result of technology transfers
economic
What are three positive contributions FDI can provide to a host country
economic growth resource transfer effects balance of payment effects
Which of the following is a benefit of inward FDI for a host country
employment effect
The text notes two reasons why FDI has outpaced world trade and world output. What are those two reasons
even though trade barriers are diminishing, firms still fear protectionist pressures FDI has been driven by political and economic changes in developing nations
Kennedy Construction Corp. wants to create a presence internationally but does not want to establish operations in a foreign country. What could the company do to accomplish this
exporting
Kimberly's company produces body lotion in the United States and ships it overseas to retail stores that sell the product. Her company is delivering product through
exporting
When a company produces a good in the home country and then ships it to another country for sale it is called
exporting
A key benefit of FDI to a home country is from the inward flow of _____ earnings
foreign
A(n) _____ strategy is favored over exporting when transportation costs or trade barriers are prohibitive
foreign direct investment
Bethany's company holds valuable know-how in the electronics industry and the company realizes this knowledge cannot be adequately protected. In this situation, what would be more profitable for Bethany's company
foreign direct investment
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 in a foreign country
foreign direct investment
Dell moved its assembly operations for many of its personal computers to Mexico to take advantage of lower labor costs. The _ _ view of FDI states that overall efficiency of resource utilization increases in the world economy
free market
The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage
free market
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
A(n) _ investment occurs when a firm goes to a foreign market and establishes a new operation
greenfield
What is the name of a business venture where finances are used to create a new physical facility for a business in a foreign location where the company currently does not have existing facilities
greenfield
Performance requirements are put in place to minimize the costs of FDI for the ______ country
host
Increased competition could ______ capital investments by firms in plant, equipment and R&D as firms try to gain a competitive advantage over their rivals
increase
Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing _ of the world economy
interdependence
Businesses should seek out a country that has ______ policies toward FDI
lenient
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
Internalization theory tries to explain why firms often prefer FDI over _____ as a method for getting into foreign markets
licensing
The limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy
licensing
allows a company to collect a royalty fee from a foreign firm that it has granted the right to produce and sell its product
licensing
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
What are two characteristics of an oligopoly
limited number of firms large firms
When ownership restraints are used to restrict FDI, it is based on the idea that _____ owners can help maximize the employment benefits of FDI for the host country
local
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
Exporting strategy does not work for a ______ value-to-weight ratio product that can be produced anywhere
low
The Kendrick Corporation has ______ transportation costs and is facing ______ trade barriers. This company should choose exporting over FDI
low, low
What are two common incentives governments offer to foreign firms to invest in their country
low-interest loans subsidies
Firms for which licensing is a good option tend to have what two characteristics
low-tech industries tight control over foreign operations not necessary
One potential benefit to consumers related to offshore production is
lower prices for goods
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 is a potential adverse impact on competition when a foreign entity acquires firms in a host country
monopoly
The basis in Marxist politics is evident when radical writers argue that ______ enterprises are an instrument of imperialist domination
multinational
Once a business undertakes foreign direct investment it becomes a(n)
multinational enterprise
The radical view toward FDI argues that ______ extract profits from the host country and take them back to their home country
multinational enterprises
Historically countries like Iran and India that are more ______ than _____ have favored the radical position that FDI is bad
nationalistic, socialistic
FDI that is pursued to serve the home market is called ________ production
offshore
Knickerbocker argued that firms follow the same imitative behavior in their FDI strategies as ______ follow
oligopolies
A(n) ____ is an industry made up of a limited number of large firms where there is an interdependence of the major players
oligopoly
FDI _____ describe the flow of FDI out of a country
outflows
The various theories of FDI try to explain the _____ of FDI flows, which deals with why certain locations are favored as targets of FDI
pattern
A(n) _____ can be set by the government in order to limit the number of imports which increases the attractiveness of FDI and licensing
quota
Ownership restraints and performance requirements are two ways in which governments can ______ FDI
restrict
The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to
sell off assets to foreigners
The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations governing
services
The _____ of FDI measures the total accumulated value of a company's foreign-owned assets at a specific time
stock
Inflows of FDI are described as
the flow of FDI into a country
FDI theory suggests that exporting is preferable to licensing and FDI as long as what two conditions exist
trade barriers are low transportation costs are low
True or false: Acquisitions are the preferred method of FDI because global markets evolve very rapidly and acquisitions are quicker to execute
true
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
True or false: One way a government can encourage FDI is to offer a foreign firm a tax concession if it chooses to do business in that country
true
True or false: When RCA licensed its color television product to a number of Japanese companies in the 1960s, these companies turned around and entered the US to directly compete with RCA and diminished its role in the market. In this situation, licensing resulted in RCA giving away proprietary information to a potential competitor
true