IB Chapter 8: Foreign Direct Investment
What are two characteristics of the eclectic paradigm?
It combines the best aspects of other theories of foreign direct investment into a single explanation, It provides a single holistic explanation of foreign direct investment.
What are two benefits of FDI to a home country?
MNE learns skills from exposure to foreign market, foreign subsidiary creates demand for home-country exports
Which view of FDI states that there are benefits and costs to FDI and that countries attempt to maximize the benefits and minimize the national costs of FDI?
Pragmatic nationalism
Which two factors would reveal that a company has little bargaining power when considering FDI
The company has a short period of time to complete negotiations, Host government does not value what the firm has to offer
Which theory of foreign direct investment attempts to combine (1) the theories that focus on favoring direct investment when exporting and licensing are available and (2) theories that say certain locations are favored over others for FDI?
The eclectic paradigm
What two factors cause major adverse effects on a host country's balance of payments?
The outflow of earnings from a foreign subsidiary to its parent company, A foreign subsidiary importing a large number of inputs from abroad
The United States, the United Kingdom, the Netherlands, France, Germany, and Japan together have accounted for the majority of all FDI outflows for 1998-2018 for what two reasons?
They were the most developed nations with the largest economies in the postwar period, They provided the base for many of the largest and best-capitalized businesses.
With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI
WTO
A country's ___________ accounts track expenditures and receipts from other countries.
balance-of-payments
The _____ account tracks goods and services exports and imports in balance-of-payments accounting.
current
A government would be concerned when the country is running a ______ on the current account of their balance of payments.
deficit
In the past, most foreign direct investment has been directed at _____ nations.
developed
The idea that an MNE could come into a country and monopolize a market tends to be a greater concern in countries that have
few large firms of their own.
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
Foreign direct investment can be in the form of a(n) ______, which occurs when a firm establishes a new operation in a foreign market.
greenfield investment
Venezuela and Bolivia are examples of countries that have become more ____to FDI.
hostile
Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market.
licensing
What are two alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets
licensing, exporting
The ability of an individual, company, or economy to conduct an activity better than another for reasons related to location is called a(n)
location specific advantage
John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.
location-specific advantages
Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare.
lower, increase
The situation where two or more firms encounter each other in different regional markets, national markets, or industries is called
multi-point competition.
FDI that serves the home market is called ______ production.
offshore
A(n) ______ is a market form in which a market or industry has a limited number of large firms.
oligopoly
A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial capital ____required to finance the FDI
outflow
he radical view toward FDI argues that MNE's extract ______ from the host country and take them back to their home country.
profits
The _____ view of foreign direct investment has its basis in Marxist theory.
radical
Liza told the management team that investing capital in the Chilean-based manufacturing plant would not only benefit their company in terms of labor costs but would also promote significant economic development in Chile. What type of host-country benefit is Liza referring to?
resource-transfer effect--> foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate.
An example of the pragmatic nationalist view is that the host country can gain in jobs and skills and the profits go to the ______ country
source
True or false: Tax concessions can be used by a government to encourage foreign firms to do business in that country.
true
Select two potential costs of FDI for host countries.
-Adverse effects on balance of payments -Adverse effects on competition
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
Identify two costs of FDI to a home country.
Balance of payments are negatively affected if FDI is a substitute for direct exports., Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location
What two positive contributions to a host country can FDI provide?
Boost a country's economic growth rate, Supply capital, technology, and management resources
When a firm invests directly in a business or venture in another country, it is called ______.
FDI
How has a shift toward democratic political institutions and free market economies affected FDI?
These shifts encourage businesses to participate in FDI
When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a(n) ______ investment.
capital
Tracking exports and imports of goods and services is measured by the ____ account in balance-of-payments accounting
current
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 more of 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
To encourage FDI, many countries have eliminated ______ taxation of foreign income.
double
Instead of FDI, a company could choose ______, which involves producing goods at home and shipping them overseas, or ______, which is granting a foreign firm the right to produce and sell a product in return for a royalty fee.
exporting, licensing
True or false: When a company wants to have tight control over a foreign entity, it is in the best interest of that company to forge a licensing agreement rather than use foreign direct investment.
false
True or false: When FDI occurs through greenfield investment, it will increase competition in a market and decrease economic welfare.
false, Competition increases and economic welfare increases.
The _______is the amount of FDI attempted over a period of time (usually one year)
flow
In the last decade, FDI inflows directed at developing nations have increased and even surpassed inflows into developed nations for the first time in 2018. Which of these developing economies was the recipient of these FDI inflows?
former soviet union
Exporting strategy does not work for a ____ value-to-weight ratio product that can be produced anywhere.
low
The board of directors of Green Garden Supply in Vermont voted to invest in a production facility in Mexico as a way to lower costs and free up financial resources for the company to grow in other areas. What form of FDI is this company using?
offshore production
What are two reasons the United States has been an attractive target for FDI?
stable economy, large domestic markets
What are the two most common incentives governments offer to foreign firms to invest in their country?
subsidies, low interest loans
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
