IB Chapter 8, HTM EXAM 2

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which results? Choose all that apply.

- 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

What positive contributions to a host country can FDI provide?

- boost a country's economic growth rate - supply capital, technology & management resources

What are the two types of FDI?

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

__________ is collecting a royalty fee from a foreign firm that you have granted the right to produce and sell your product.

Licensing

___________ of FDI describe the flow of FDI out of a country.

Outflows

___________ of FDI refers to the movement of investment out of a country, and FDI _________ are the flow of investment into a country

Outflows, inflows

Which of the following is a reason for retreat in radical position toward FDI in the 1990s?

The abysmal economic performance of those countries that embraced the radical position

Export tariffs are not as common as import tariffs

True

TRUE OR FALSE: When a foreign investor acquires two or more firms in a host country and then proceeds to merge them, it could result in monopoly power for the foreign investor.

True

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 _______________ (developing, advanced) economies

developing

The British economist, John Dunning, argues in his __________ paradigm that location-specific advantages are important in analyzing FDI.

eclectic

According to the _____, location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

eclectic paradigm

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

economic

The Smoot-Hawley Act tried to divert consumer demand away from foreign products by

establishing tariff barriers.

One way to ensure that there is sufficient supply of a good within a country is to enact a(n) _____, which discriminates against producers from exporting goods.

export tariff

For products with a high value-to-weight ratio, transportation costs have a high impact on the relative attractiveness of exporting, licensing, and FDI.

false

The radical view of foreign direct investment sees FDI as a tool of overall economic development.

false

Those who follow the mercantilist doctrine would not want government intervention to be the reason for a surplus in the balance of trad

false

A key benefit of FDI to a home country is from the inward _________ (flow, stock) of foreign earnings.

flow

FDI _________ (flow, stock) refers to the amount of investment over a given period of time

flow

Foreign direct investment takes on two forms, a(n) ___________ investment occurs when a firm establishes a new operation in a foreign market.

greenfield

After Toyota decided to open a new auto plant in France, it was suggested that 2,000 jobs in support industries would be created. Since these jobs are not located at the auto plant, they are examples of a/an _________ (direct, indirect) effect of FDI.

indirect

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

licensing

Some countries prohibit national firms from investing in specific countries for __________ reasons, such as U.S. firms being prohibited from investing in Cuba.

political

A number of investor countries try to encourage FDI through the use of __________ to persuade host countries to ease restrictions on inbound FDI.

political influence

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

profits

Paul Krugman believed that a country that attempts to use strategic trade policy to establish a domestic firm in a dominant position in a global industry, is most likely to

provoke retaliation.

One objective of export tariffs is to

reduce exports from a sector to ensure a sufficient supply.

SilverFinn makes high end jewelry for women. This jewelry is manufactured and patented in Italy. Manufactures in Argentina create counterfeit SilverFinn Jewelry and sell it in local markets at nearly similar [rices to the original SilverFinn Jewelry sold in other countries. This lack of intellectual property protection is like to result in

reduction in the export opportunities for SilverFinn jewelry in Argentina

Camille told the management team that investing capital in the Swaziland-based manufacturing plant would not only benefit their company in terms of labor cost but would also promote significant economic development in Swaziland. What type of host-country benefits is Camille referring to?

resource-transfer effect

The only way in which a current account deficit can be supported by a country in the long run is by _____.

selling off assets to foreigners.

Another basis for Krugman's argument is that strategic trade policy can be captured by _____, which will distort the policy so it benefits their own needs.

special-interest groups

As a consequence of _____________ effects, the net number of new jobs created by FDI may not be as large as initially claimed.

substitution

Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the _________ effect where some jobs created are offset by jobs lost elsewhere.

substitution

When a country maintains a current asset __________ (deficit, surplus), it is unlikely to have to sell off assets in order to balance accounts.

surplus

Licensing is not a good option if:

the competitive advantage of a firm is based upon managerial or marketing knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints."

FDI can take the form of a greenfield investment in a new facility or an acquisition of or a merger with an existing local firm.

true

If the host government is trying to attract FDI, the central issue is likely to be the kind of incentives the host government is prepared to offer to the multinational enterprise (MNE) and what the firm will commit in exchange.

true

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

true

It would be more common for a ___________ to agree to market aggressively as a way of keeping foreign competitors in check.

wholly owned subsidiary

Which is true of the eclectic paradigm?

- it combines the best aspects of other theories of FDI into a single explanation - it provides a single holistic explanation of FDI

What are some of the advantages of FDI?

- it overcomes high transportation costs - it allows the firm to maintain control over technological know-how - it allows for tight control over the firm's operations

What are the alternatives to FDI?

- licensing - exporting

The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in two benefits. What are these two benefits?

- lower prices - modernization of telephone networks

The limits on exporting include __________.

- trade barriers - transportation costs

Which of the following justifies the reason why a firm might prefer licensing to FDI?

Licensing results in the licensee bearing the costs and risks.

What are the advantages that are based on utilizing resource endowments or assets tied to a specific area?

Location-specific advantages

What 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

Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment.

True

Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI.

True

Licensing is not a good option if the competitive advantage of a firm is based upon managerial or marketing knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints."

True

Cadmia and Rhodia specialize in the production of textiles and agricultural products respectively. They are the best at their respective specializations. Cadmia trades textiles with Rhodia in exchange for agricultural products. Which of the following is illustrated by this form of trade between Cadmia and Rhodia?

absolute advantage

A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial ___________ outflow required to finance FDI.

capital

When a firm invests in plant, equipment and R&D as a result of increased competition, this is referred to as _________ investment.

capital

Earnings from a foreign subsidiary to a parent company are recorded as ___________ on the balance-of-payments accounts.

capital outflow

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

current

One example of a(n) ________ effect of foreign direct investment is when a foreign MNE employs a number of host-country citizens.

direct

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

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

foreign direct investment

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

foreign direct investment

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

free market

Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyots pioneered __________ production, which enables it to produce higher quality automobiles at a lower cost than global rivals.

lean

When ownership restraints are used to restrict FDI, it is based on the belief that _____________ (local/investor) owners can help maximize the employment benefits of FDI for the host country.

local

ComTek Limited has an order to sell 50,000 central processing units (CPUs) to Brazil, but the Brazilian government stipulated that 35 percent of the component parts of those CPUs must be produced in Brazil. This stipulation is an example of a(n)

local content requirement.

Radical writers argue that ______________ ________________ are an instrument of imperialist domination.

multinational enterprises

Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because

neither the importing country nor the exporting country complained to the GATT bureaucracy for it to take action.

A(n) ______________ is an industry made up of a limited number of large firms where there is an interdependence of the major players.

oligopoly

Businesses should seek out a country that has _____________ policies toward FDI.

permissive

Two foreign nations decided to impose tariffs on imports from all countries. They set up a free trade area, removing all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Country A now begins to import sugar from Country B. Prior to this, Country A was producing sugar at a higher cost so it now benefits from this transaction. This is an example of

trade creation

The United States, the United Kingdom, the Netherlands, France, Germany, and Japan together have accounted for _______ of all FDI outflows for 1998-2012.

60%

CopperCore Inc., a U.S. business, took a 31 percent equity interest in Javier Holdings, a family business based in Spain. According to the U.S. Department of Commerce, this would be an example of

FDI

______________ is favored over exporting when transportation costs or trade barriers are formidable.

FDI

The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country.

False

Which of the following acts, enacted by the U.S. Congress, was aimed at avoiding rising unemployment by protecting domestic industry and diverting consumer demand away from foreign products in the 1930s?

Smoot-Hawley Act

The infant industry argument is the oldest economic argument that promotes government intervention.

True

What country has been the larges source of FDI since WWII?

United States

What international organization is involved in the governing of FDI?

WTO

A country's ___________ accounts track expenditures and receipts from other countries

balance-of-payments

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

flow

In a world in which firms from all advanced nations are investing in each other's markets, it is generally __________ (possible, impossible) for one country to hold another to "economic ransom" without hurting itself.

impossible

Indonesia might have a potential comparative advantage in manufacturing textiles but is unable to compete with established textile manufacturing in Japan, at least for the near future. Indonesia could claim the

infant industry argument.

A firm with _______ transportation costs that is facing ___________ trade barriers should choose exporting over FDI.

low, 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

When firms compete in different regional markets, national markets or industries, this is called _________-_____________ competition.

multi-point

The situation where multiple firms encounter each other in different regional markets, national markets or industries is called ______________________.

multi-point competition

The U.S. Dept of Commerce states that once a business undertakes foreign direct investment it becomes a(n) _________.

multinational enterprise

Choose the 3 benefits from 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

What are the 3 potential costs of FDI to host countries?

- Perceived loss of national sovereignty & autonomy - Adverse effects on competition within the host nation - Adverse effects on balance of payments

Identify the 3 costs of FDI to a home country.

- balance of payments negatively affected initially from the capital outflow to fund FDI - 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

What are the 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

India is the largest exporter of information technology services to the U.S. In turn, the U.S. exported $3 billion worth of aircraft to India. Which of the following is illustrated by this form of trade between India and the U.S.?

Absolute advantage

The top management team at the Kentucky-based Mumford Products collectively support the market imperfections approach. This means Mumford Products' top management team is most likely to

Express a preference for FDI over licensing as a strategy to enter foreign markets.

The World Trade Organization's TRIPS agreement focuses on extending free trade agreements to services.

False

___________ argued that firms follow the same imitative behavior in their FDI strategies as oligopolies follow.

Knickerbocker

Which country has shown a marked increase in FDI inflows since 2004?

China

What is the name of an investment by a business to establish new operations in a foreign country?

Greenfield

The _____ in the United States specifies that government agencies must give preference to U.S. products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage.

Buy America Act

___________ nations account for the larges share of FDI inflows.

Developed

According to new trade theory, what is most likely to be a result of market expansion due to trade?

Each nation may specialize in producing a narrower range of products, importing goods that it does not make.

_________________ is producing goods at home and shipping them overseas.

Exporting