I Bus 300- Chapter 8

internalization theory

why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets

Flow of FDI

The amount of foreign direct investment undertaken over a given time period (normally one year).

outflows of FDI

the flow of FDI out of a country

one of the main benefits that FDI provides to the home country is

the home country's balance of payments benefit from the inward flow of foreign earnings

Licensing is a good option to enter a foreign market when

tight control of the foreign operation is not required

stock of FDI

total accumulated value of foreign-owned assets at a given time

Stock of FDI refers to

total accumulated value of foreign-owned assets at a given time.

current account

tracks the export and import of goods and services

Multipoint Competition

Arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. Firms will try to match each other's moves in different markets to try to hold each other in check.

A country that relies on the pragmatic nationalist view would say that

FDI should be allowed so long as the benefits outweigh the costs

One form of FDI is _______, which involves the establishment of a new operation in a foreign country.

Greenfield investment

Concrete Forms International needs immediate access to steel in order to produce a new product line. It cannot afford to wait and establish a new operation in a foreign country where steel is prevalent, so it decides to purchase an existing company instead. Why did concrete forms decide to make this purchase?

Mergers and acquisitions are quicker to execute than Greenfield investments.

location-specific advantages

advantages that arise 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.

Eclectic Paradigm

argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located.

One example of a _______ effect of foreign direct investment is when a foreign MNE employs a number of host-country citizens.

direct

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

eclectic paradigm

Greenfield Investment

establishment of a new operation in a foreign country.

TickTock Inc., an American watchmaker, makes custom watches in California, which it then ships to Brazil for sale. mBased on this information, TickTock Inc. is involved in

exporting

It is one of Garrett's job responsibilities to report the amount of foreign direct investment undertaken by the government over a one-year time period. Garrett reports the __________.

flow

inflows of FDI

flow of FDI into a country

Burger King licenses its brand name to foreign firms as long as the agree to run the restaurants on exactly the same lines as burger king restaurants elsewhere in the world. In return, the foreign firms have to pay Burger King a percentage of their profits. This is an example of

franchising

the ________ view argues that international production should be distributed among countries according to the theory of comparative advantage and countries should specialize in the production of goods they can produce most efficiently.

free market

Licensing

granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

market imperfections

imperfections in the operation of the market mechanism

oligopoly

industry composed of a limited number of large firms (4 firms control 80 percent of domestic market)

Internalization theory is used to explain why a company prefers FDI over ________ as a way to enter a foreign market.

licensing

Royal Chocolatier, a British manufacturer of chocolates, branded U.S. company American Candy Inc. the right to produce and sell Royal Chocolatier's products in the United States. In return, American candy inc. has to pay a royalty fee on every unit sold. According to this, what is being done by royal chocolatier?

licensing

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

multipoint competition

balance-of-payment accounts

national accounts that track both payments to and receipts from foreigners.

SmileBright, a dental products manufacturing company, has a market share of 30 percent in India. Three of its competitors together control 55 percent of the marker. Whenever SmileBright raises or lowers the price of products, the other three companies quickly imitate its action. What is the market structure of this industry in India.

oligopoly

Which political ideology reflects the idea that a multinational enterprise in an instrument of imperialist domination?

radical view

offshore production

refers to FDI undertaken to serve the home market. U.S> automobile companies investing in auto parts production in Mexico, reducing home-country employment. Can boost employment by allowing resources in home country to focus on activities that have comparative advantage.

ownership restraint is a method of

restricting inward FDI by a host country

Externalities

sheer concentration of intellectual talent in an area, resulting in knowledge spillovers that firms can benefit form if they locate it close to their source.