IB Chapter 8

What two factors cause major adverse effects on a host country's balance of payments? (Check all that apply.)

A foreign subsidiary importing a large number of inputs from abroad The outflow of earnings from a foreign subsidiary to its parent company

Which country has a policy that encourages FDI?

Country A has a government-backed insurance program to protect against the risk of expropriation.

Select two potential costs of FDI for host countries.

Adverse effects on competition Adverse effects on balance of payments

What are three advantages of FDI? (Check all that apply.)

Allows the firm to maintain control over technological know-how Overcomes high transportation costs Allows for tight control over the firm's operations

Identify two costs of FDI to a home country. (Check all that apply.)

Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location. Balance of payments are negatively affected if FDI is a substitute for direct exports.

when the German-based company Forrest Health Supply Inc. developed operations in Italy, it built a manufacturing facility there. In turn, the new facility also imported supplies and equipment from companies based in Germany. Which home country benefit of FDI does this represent?

Employment effects

Simple Services Corp. is considering FDI in Japan. However, Simple Services wants to keep tight control over the foreign entity to ensure it will achieve maximum earnings in Japan. Which form of FDI would be better for the company to use?

Exporting

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which two results? Multiple select question.

Foreign investors transferred technology to countries in which they invested. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested.

What are two benefits of FDI to a home country?

Foreign subsidiary creates demand for home-country exports MNE learns skills from exposure to foreign 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 low-cost, no-frills grocery store chain that began in the United States decided to open similar stores in Germany which did not have any stores like this. What type of FDI is this company using?

Greenfield investment

Which two factors would reveal that a company has little bargaining power when considering FDI?

Host government does not value what the firm has to offer The company has a short period of time to complete negotiations

What are two characteristics of the eclectic paradigm? (Choose all that apply.)

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 alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?

Licensing Exporting

What are three major drawbacks associated with licensing?

Licensing can potentially damage a company's established brand. Licensing may give away valuable technological know-how to a potential foreign competitor. Licensing does not allow a company to control the marketing strategy used in the foreign country.

What two measures can countries employ to restrict foreign direct investment? (Check all that apply.)

Ownership restraints Performance requirements

What are two potential long-term effects from increased competition?

Product and process innovations Increased productivity growth

What are the two most common incentives governments offer to foreign firms to invest in their country? (Check all that apply.)

Subsidies Low-interest loans

What two positive contributions to a host country can FDI provide?

Supply capital, technology, and management resources Boost a country's economic growth rate

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 are two limitations on exporting?

Trade barriers Transportation costs

The stock of foreign direct investment refers to the total

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

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

balance-of-payments

When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a(n) ______ investment. Multiple choice question.

capital

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

capital outflow

Tracking exports and imports of goods and services is measured by the ___ account 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

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

The ______ effects of FDI come when a multinational enterprise hires host-country citizens and ______ effects come when local suppliers hire workers as a result of the FDI. Multiple choice question.

direct; indirect

to encourage FDI, many countries have eliminated ______ taxation of foreign income.

double

FDI has a positive ______ impact on host countries as a result of technology transfers. Multiple choice question.

economic

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 FDI occurs through greenfield investment, it will increase competition in a market and decrease economic welfare. True false question.

false

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.

The of FDI is the amount of FDI attempted over a period of time (usually one year)

flow

The ______ view of FDI states that international production should be allocated based on the theory of 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

The market imperfections approach is also known as the ______ theory.

internalization

Allowing a foreign firm to produce and sell your product for a royalty fee is called ______.

licensing

Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market. Multiple choice question.

licensing

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

licensing

One cost to a host country related to FDI would 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

Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare.

lower, increase

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

A(n) ______ effect has occurred when a company's FDI of capital, technology, and management resources creates a positive contribution to a host country that might not otherwise be available.

resource transfer

Critics argue that FDI by Japanese auto makers does not make up for the jobs lost in U.S.-based auto manufacturers. These critics are concerned with the

substitution effect.

True or false: A company would favor FDI over exporting when trade barriers are in place

true