Global Economic6
Firms can increase their chances of success with FDI by:
-understanding that political realities either facilitate or constrain FDI. -leveraging OLI advantages in a way that is valuable, unique, and hard to imitate by rival firms. - assessing whether FDI is justified, in light of other options.
Identify the benefits and costs of FDI to host countries.
Benefits- Capital inflow to balance payments, Technology, advanced management know-how, creates jobs Costs-loss of sovereignty, adverse effects on competition, and capital outflow.
What is the primary difference between FDI and FPI?
FDI is defined as a 10% or more equity stake and FPI is less than 10%. -FDI is foreign direct investment and FPI is foreign portfolio investment. -FDI is direct and FPI is indirect.
What is one advantage of FDI compared with licensing?
FDI provides tight control over foreign operations.
The advantages of agglomeration result from all of the following EXCEPT:
Fewer competitors in the same location
The primary political views on FDI are:
Free market and pragmatic nationalism
Differentiate between the primary characteristics of horizontal and vertical FDI.
Horizontal- refers to producing the same products or offering the same services in a host country as firms do at home. Vertical-firm moves upstream or downstream in different value-chain stages in a host country through FDI
Explain the location advantages of FDI. Discuss the value of acquiring and neutralizing location advantages with an example that highlights how a location advantage does not necessarily overlap a country-level advantage.
In 1982, General Motors (GM) ran its Fremont, California, plant into the ground and had to close it. Reopening the same plant, Toyota in 1984 initiated its first FDI project in the United States (in a joint venture (JV) with GM). Since then, Toyota (together with GM) has leveraged that plant's location advantages by producing award-winning cars that American customers particularly like—the Toyota Corolla and Tacoma. The point is: it is Toyota's unique capabilities applied to the California location that literally saved this plant from its demise. The California location in itself does not provide location advantages per se, as shown by GM's inability to make it work prior to 1982.
Describe the process of obsolescing bargain between MNEs and governments.
In Round One, the MNE and the government negotiate a deal. The MNE usually is not willing to enter in the absence of some government assurance of property rights and incentives (such as tax holidays). In Round Two, the MNE enters and, if all goes well, earns profits that may become visible. In Round Three, the government, often pressured by domestic political groups, may demand renegotiations of the deal that seems to yield "excessive" profits to the foreign firm (which, of course, regards these as "fair" and "normal" profits). The previous deal, thus, becomes obsolete. The government's tactics include removing incentives, demanding a higher share of profits and taxes, and even expropriation
Foreign direct investment (FDI) is:
Investment in activities that control and manage value-added activities in foreign countries.
Which of the following is a primary cost of FDI to host countries?
Loss of sovereignty
___ refers to the deal struck by MNEs and host governments, which change their requirements after the initial FDI entry
Obsolescing bargain
Differentiate between the radical, the free market and pragmatic nationalism view on FDI.
Radical- an instrument of imperialism and vehicle for exploitation of domestic resources Free Market- unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services Pragmatic nationalism- viewing FDI as having both pros and cons and only approving FDI when its benefits outweigh costs.
three benefits of FDI to home countries are
Repatriated earnings from profits from FDI. Increased exports of components and services to host countries. Learning via FDI from operations abroad.
Examples of ownership, location, and internalization (OLI) advantages?
Replacement of cross-border markets with one firm operating in two markets Possession of valuable foreign assets Unique natural resources that provide advantages to the firm
Which of the following statements best describes an FDI?
Setting up subsidiaries in foreign locations to do in-house work
An FPI does not provide management control rights to the investing firm.
True
Which three countries invest the most money in other countries (FDI outflow)?
United States, France, Germany
Which of the following statements about the effects of FDI on host countries is true?
While FDI creates jobs and encourages the development of management know-how within the host country, it can also lead to adverse effects on competition and capital outflow.
____ refers to the ability to extract favorable outcome from negotiations due to one party's strengths.
bargaining power
Cost of FDI to home countries are
capital outflow job loss
Which of the following is a primary cost of FDI to home countries?
capital outflow and job loss
_____ refers to the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
contagion effect
____ refers to the problems associated with unauthorized diffusion of firm-specific know-how.
dissemination risk
f Apple invests in iPhone dealerships in Asia but does not engage in distribution in the United States (Apple's host country), then Apple's Asian investment would be considered a(n) _____.
downstream vertical FDI A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.
_____ knowledge can be written down and transferred without losing much of its richness.
explicit
A firm manufacturing clocks in its home country and through FDI is an example of downstream vertical FDI.
false
Compared to licensing, FDI increases dissemination risks.
false
Dissemination risk refers to the cost that a firm has to endure even when its investment turns out to be unsatisfactory.
false
Explicit knowledge is noncodifiable and its transfer requires hands-on practice.
false
Expropriation refers to the knowledge diffused from one firm to others among closely located firms.
false
FDI is more suitable if the activity is marginal and common across multiple end-user industries.
false
Horizontal FDI refers to the amount of FDI moving out of a country in a year.
false
Intrafirm trade refers to international transactions between two subsidiaries in a country controlled by two different MNEs.
false
Repatriated earnings from profits of MNEs benefit the host country financially.
false
The demonstration effect refers to the ability of a firm to engage in an upstream stage of the value chain in a host country.
false
The free market type of FDI is the most prevalent type of FDI practiced.
false
The resource-based view argues that internalization is a response to the imperfect rules governing international transactions.
false
Expropriation refers to the rewarding of property rights and incentives to MNEs from the host country.
false. it is the confiscation of foreign assests
Multinational enterprises (MNEs) are:
firms that engage in foreign direct investment (FDI).
A mortgage broker that dominates the American Southwest has decided to expand into Mexico and several Central American countries. Its new offices in the host countries offer the same mortgage services as in the home country. This is an example of:
horizontal FDI
A good example of agglomeration is:
hundreds of small, medium, and large internet-based, high-tech companies all located in Silicon Valley in California.
An oligopoly is an:
industry dominated by a small number of competitors.
_____ refers to the replacement of cross-border markets with one firm locating in two or more countries.
internalization
_____ refers to international transactions between two subsidiaries in two countries controlled by the same MNE.
intrafirm trade
FPI refers to the _____.
investment in a portfolio of foreign securities that do not entail the active management of foreign assets
Foreign direct investment (FDI) is:
investment in activities that control and manage value-added activities in foreign countries.
Foreign portfolio investment (FPI) is:
investment in foreign stocks and bonds that do not involve the active management of foreign assets
Some of the benefits of FDI to the host country are:
job creation advanced technology capital inflow
Knowledge spillover refers to _____.
knowledge diffused from one firm to others among closely located firms
What determines the success and failure of FDI around the globe?
law and regulations between contries
Which of the following is a benefit of FDI to home countries?
learning from operations
A Spain-based chain of tapas bars authorizes a French company to open a chain of tapas bars using the Spanish company's name, logo, menu, process, and advertising. This is an example of:
licensing
A firm establishing a manufacturing plant in a foreign country due to the cheap labor costs in that country is an example of the _____ advantage that the firm enjoys.
location
If a firm engages in final assembly in its home operations, then which of the following operations of the firm in a foreign country would be considered a downstream vertical FDI?
marketing
A(n) _____ refers to an industry dominated by a small number of players.
oligopoly
An industry dominated by a small number of players is called:
oligopoly
In addition to FDI, other ways a firm can enter foreign markets include:
outsource import and export license and trademark
MNEs' possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI refer to _____.
ownership
OLI advantages refer to a firm's quest for _____via FDI.
ownership advantages, location advantages, and internalization advantages
The three OLI advantages are:
ownership, location, internalization.
Firms prefer FDI to licensing because FDI_____.
provides the firm with direct ownership to its foreign assets
____ knowledge is noncodifiable and its acquisition and transfer requires hands-on practice.
tacit
In Round Two of FDI negotiation process between MNEs and host governments, _____.
the MNE enters the host market and earns profits
Why do firms prefer FDI to licensing?
tighter control
An FDI investment is not considered a zero-sum game.
true
Capital inflow can help improve a host country's balance of payments.
true
Economic agglomeration is an example of an OLI advantage.
true
FPI refers to investment in a portfolio of foreign securities that do not entail the active management of foreign assets.
true
Firms become MNEs because FDI provides OLI advantages that they otherwise would not obtain.
true
In order to become an MNE, an exporter has to undertake FDI.
true
In the context of FDI, ownership refers to MNEs' possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas.
true
Internalization can help reduce opportunistic behavior in international trade.
true
Internalization refers to the replacement of cross-border markets with one firm locating in two or more countries.
true
Intrafirm trade enables MNEs to better coordinate cross-border activities.
true
Investing in FDI will increase the home firm's exports of components and services.
true
MNEs encounter sunk costs when they face an obsolescing bargain with the host country.
true
The radical view treats FDIs as an instrument of imperialism.
true
Harton, a car manufacturer based in UK, only assembles cars and does not manufacture components in the UK. But in France, Harton enters into components manufacturing through FDI. Harton's investment in France would be an example of a(n) _____.
upstream vertical FDI A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.
A large-scale French dairy that produces milk, cheese, yogurt, and other related products decides to buy a chain of mini-marts located throughout many EU countries. Their objective is to sell their dairy products, as well as other products, through these mini-marts. This is an example of:
vertical FDI
