INB exam 2
What are two long-term effects from increased competition?
- increased productivity growth - product and process innovations
Free trade agreements account for nearly ____ of regional economic agreements.
90%
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
What are two current trends in FDI?
An increase in FDI aimed at countries that have liberalized their FDI regimes An increase in the volume of FDI
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.
Under the Andean Pact,, which two members received special concessions based on the size of these countries?
Bolivia Ecuador
In 1969, which countries created the Andean Pact that was modeled on the EU, but was not as successful in achieving regional groups objectives?
Bolivia, Chile, Colombia, Ecuador, Peru
In 2004, the US and six Central American countries formed a free trade agreement called
CAFTA
Costa Rica, El Salvador, Guatemala and other countries in the early 1960s formed a common market that was called
Central American Common Market
What are two methods a country would use to achieve economic integration?
Common market Economic union
What are two impediments to establishing economic integration?
Concerns over national sovereignty Costs of integration
What are two factors that support the idea for political integration of nations through trade?
Countries can enhance their political weight in the world. Making nations interdependent can decrease the potential for violent conflict.
Which EU organization handles appeals of EU law?
Court of Justice
What are the two main types of FDI
Establishing a new operation in a foreign market Acquisition or merger with an existing foreign firm
Which objective of the Andean Community has NOT yet been implemented?
Establishment of a common market
Which institution has a monopoly in proposing European Union legislation?
European Commission
The European Community (EC) became the ______ in 1993.
European Union
What are two alternatives to FDI?
Exporting Licensing
True or false: When FDI occurs through greenfield investment, it will increase competition in a market and decrease economic welfare
F
When a firm invests directly in a business or venture in another country, it is called
FDI
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
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 is the purpose of the European Stability Mechanism that was established by the EU?
It is a permanent bailout fund.
What are two potential problems with an economic union?
It requires a coordinating bureaucracy. There is a surrender of some national sovereignty.
Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.
capital outflow
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 ______ argues that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI.
eclectic paradigm
A(n) ______ union adds more economic integration to a common market by requiring a common currency, a common monetary and fiscal policy, and harmonization of tax rates
economic
The shift toward more democratic political institutions and free market economies has _____ foreign direct investment.
encouraged
True or False: Critics say that the EU is an optimal currency area which is why it is difficult to adopt a single currency. True false question.
f
True or false: Economists would agree that the EU is an optimal currency area.
f
One reason for the wave of FDI into the United States by Japanese auto companies was partly in response to
government-imposed tariffs on Japanese auto imports.
Studies of NAFTA's effects show that ______ are the top three trading partners of the US, which suggests that NAFTA has had some positive effects.
greece
The market imperfections approach is also known as the ______ theory.
internalization
Under which treaty was the power of the European Parliament increased?
libson
Since 2010, Mercosur has made ______ progress toward achieving its goals.
little
A host country cost of FDI could be the _______(gain or loss?) of sovereignty and autonomy.
loss
The trade pact developed in 1988, initially between Argentina and Brazil, is called ______.
mercosur
Proponents of NAFTA argued many would benefit from the movement of low-skilled, labor-intensive production to ______, which might have a competitive advantage in this area.
mexico
When NAFTA was established it was a regional economic alliance made up of the United States, Canada, and
mexico
The situation where multiple firms encounter each other in different regional markets, national markets or industries is called
multi-point competition.
The _____ view of foreign direct investment has its basis in Marxist theory.
radical
When NAFTA was created, it allowed for special protection from foreign direct investment on which two Mexican industries?
railway energy
A(n) ______ effect has occurred when a company's FDI of capital, technology, and management resources create a positive contribution to a host country that might not otherwise be available
resource transfer
The euro is the ______-most traded currency in the world.
second
True or false: Less than 20 years after it was established, the Andean Pact was on the verge of collapse.
t
NAFTA eliminated ______ on almost all of the goods traded between Mexico, Canada, and the United States.
tariffs
The collapse of the Central American Common Market was a result of ______.
war between Honduras and El Salvador
Firms for which licensing is NOT a good option are clustered in which three industries?
- High-tech industries - industries with intense cost pressures - global oligopolies
Prior to its renegotiation under the presidency of Donald Trump, NAFTA had been in place _____.
25 years
Before the United Kingdom decided to exit the EU, how many total countries were involved by 2014?
28
According to Ross Perot, ratification of NAFTA would result in the loss of about ______ million jobs from the US and Canada, as firms from these countries sought to capitalize on lower wages in Mexico.
5.9
The United States-Mexico-Canada Agreement renegotiated NAFTA and requires automakers to produce _____ of a vehicle's content in North America to qualify for zero tariffs.
75%
Which level of economic integration is present in an agreement that has no barriers to trade among member countries and allows factors of production (such as labor) to move freely among the members?
A common market
What are two potential costs of FDI to host countries?
Adverse effects on competition within the host nation
The ______ sets interest rates and monetary policy for the EU.
ECB
As the most enduring free trade area in the world, ______ concentrates in the free trade of industrial goods, but not agricultural products
EFTA
The Association of Southeast Asian Nations was formed with the intent to foster _____.
East African
When Crane Automotive Group developed operations in Italy, it not only built a manufacturing plant there but also imported parts from several other European nations. Which home country benefit of FDI does this represent
Employment effects
In the political structure of the European Union, the ______ is composed of one representative from the government of each member state, but the membership varies depending on the topic being discussed.
European Council
Which of these trade unions is made up of European countries that decided NOT to be part of the European Community and emphasized free trade in industrial goods?
European Free Trade Association
The most ambitious attempt at regional economic integration is the _____.
European Union
_____ are a network of informal contacts that allow companies to benefit from each other's knowledge
Externalities
True or false: An acquisition is considered beneficial because it effectively reduces the number of businesses in a market.
F
True or false: The World Trade Organization has been successful in its efforts to establish a universal set of rules governing the liberalization of FDI.
F
True or false: Opponents of NAFTA felt that the program would result in a large exodus of jobs from Mexico.
False
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which two results? (Check all that apply.)
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.
After joining the EU, which three long-term members did NOT agree to the euro as a common currency as directed by the Maastricht Treaty?
Great Britain Denmark Sweden
Which EU country did the International Monetary Fund agree to bailout in 2010 for fear it might default on its sovereign debt?
Greece
What is a feature of an oligopoly
Interdependence of major players
What are two characteristics of the European Central Bank?
It is meant to be free from political pressure. It was established to ensure price stability.
The Maastricht Treaty stated that EU members were to adopt a common currency by January 1, 1999. When were euro notes and coins issued?
January 1, 2002
______ theory of FDI suggests that firms imitate and react to each other's behavior.
Knickerbocker's
Green Organics Ltd. based in Phoenix, Arizona has given a British-based company the right to produce and sell their products. In return for this, the British company will pay Green Organics $1 for every unit it sells. What type of investment is Green Organics using
Licensing
Based on the internalization theory, what are the three major drawbacks to licensing
Licensing does not account for capabilities in management, marketing, and manufacturing. Licensing does not allow a firm tight control over basic business operations which is necessary to maximize profitability. Licensing may give away valuable technological know-how to a potential foreign competitor.
What are the two most common incentives governments offer to foreign firms to invest in their country?
Low-interest loans Subsidies
Identify two benefits of FDI to a home country.
MNE learns skills from exposure to foreign market Foreign subsidiary creates demand for home-country exports
What committed EU members to adopt a common currency by January 1, 1999?
Maastricht Treaty
Which company demonstrates a successful franchising, strategy?
McDonald's
Which country risked the most from participating in NAFTA because it does NOT have access to the capital resources and highly-skilled workforce found in the other countries?
Mexico
Critics of NAFTA worried that ______ as a result of the agreement.
Mexico would degrade clean air and toxic waste standards across the continent
What is a potential adverse impact on competition when a foreign entity acquires firms in a host country
Monopoly
What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?
Monopoly
Which agreement was an attempt at regional economic integration in the United States?
North American Free Trade Agreement
What two measures can countries employ to restrict foreign direct investment?
Performance requirements Ownership restraints
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 three nations are a part of ASEAN?
Singapore Philippines Indonesia
To signify the importance of the ______, the European Community decided to change its name to the European Union once the act took effect.
Single European Act
What are two examples of location-specific advantages?
Skilled labor Natural resources
What two positive contributions to a host country can FDI provide? (Check all that apply.)
Supply capital, technology & management resources Boost a country's economic growth rate
A company would favor FDI over exporting when trade barriers are in place.
T
True or false: A company that decides to locate operations close to other companies so it can take advantage of their knowledge is an example of how businesses use externalities. True false question.
T
True or false: Alexander Yeats claimed that the trade diversion effects of Mercosur outweighed its trade creation effects.
T
True or false: One political reason that supports economic integration is the potential to reduce violent conflict between nations.
T
True or false: Tax concessions can be used by a government to encourage foreign firms to do business in that country.
T
______ is considered the most successful attempt at regional economic integration.
The EU
Which of the following is the overall controlling authority within the European Union (EU) that must approve draft legislation from the European Commission before it becomes EU law?
The European Council
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 provided the base for many of the largest and best-capitalized businesses. They were the most developed nations with the largest economies in the postwar period.
Which of the following are reasons for a customs union being put in place?
To establish a common external trade policy To eliminate trade barriers between member countries
______ is an economic term that refers to high-cost domestic producers being replaced by low-cost producers within the free trade area.
Trade creation
______ is an economic term defined as replacing lower-cost external suppliers with high-cost suppliers within the free trade area.
Trade diversion
True or false: As a consequence of competitive pressure in the European automobile industry, the introduction of the euro has led to lower prices for consumers.
True
The anticipated exit of _____ from the European Union has cast a level of doubt about the future of the project.
UK
What three countries established the North American Free Trade agreement?
United States Mexico Canada
With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI.
WTO
The European Commission, to maintain the level of competition in the EU, is increasingly willing to impose conditions from businesses before allowing
a merger or acquisition.
When an optimal currency area exists, similar underlying structures of economic activity make it more feasible to adopt _____.
a single currency
The stock of foreign direct investment refers to the total
accumulated value of foreign-owned assets at a given point in time.
A form of FDI, other than greenfield investments, is to
acquire or merge with an existing company in the foreign country.
The Maastricht Treaty committed EU members to
adopt a common currency by January 1, 1999.
A restriction put on new members to the EU that entered in 2004 was that these new members could not ______ for several years.
adopt the euro
Knickerbocker would say that in an oligopoly, if one firm decides to raise prices, then other firms would
also raise prices.
Mexican critics of NAFTA claimed that the US would use Mexico as a place to conduct ______ jobs.
assembly
A country's ___________ accounts track expenditures and receipts from other countries.
balance-of-payments
One of the changes proposed by the Single European Act was to abolish the restrictions placed on foreign truckers who pick up and deliver goods within another member's state borders. This hauling process is known as ______.
cabotage
Which NAFTA country experienced a welfare loss since the program's inception?
canda
When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a(n) ______ investment.
captial
The members of Mercosur agreed on a _____ in 2010 in an attempt to avoid paying tariffs more than once.
common customs code
A(n) ______ allows the free movement of factors of productions among member countries, eliminates trade barriers among member countries, and has a common external trade policy
common market
A(n) ______ allows the free movement of factors of productions among member countries, eliminates trade barriers among member countries, and has a common external trade policy.
common market
Until the fall of ______ between 1989 and 1991, Eastern European countries were opposed to FDI.
communism
The European Parliament is considered a _____ body.
consultative
Six Caribbean-area countries established the CSME in 2006 to accomplish what two things?
coordinate macroeconomic and monetary policy lower trade barriers
The _____ account tracks goods and services exports and imports in balance-of-payments accounting.
current
Tracking exports and imports of goods and services is measured by ____ the account in balance-of-payments accounting.
current
In moving toward economic and political integration, a(n) ______ union removes trade barriers among member nations and establishes a common trade policy for nonmembers.
customs
Currently, the Andean Community functions as a
customs union.
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 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.
direct; indirect
How do members of the European Parliament gain their seat?
directly elected by the citizens
The weakening of which currency helped raise the value of the euro beginning in 2001?
dollar
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.
economic
Regional _____ integration creates agreements among countries in a specific geographic area in order to reduce and eventually remove tariff and nontariff barriers to the free flow of goods
economic
What are two requirements countries must take to qualify for EU membership?
establish stable democratic government respect human rights
Producing a good at home and then shipping it to another country for sale is called _______.
exporting
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
refers to shipping goods and services out of the jurisdiction of a country.
exporting
As an alternatives to FDI, firms 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
Businesses should seek out a country that has _______policies toward FDI.
favorable
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
flow
Economic theories advocate for _____ trade and investment that will allow participating countries to gain economically.
free
A lack of barriers to the trade of goods and services among member countries is found in a(n):
free trade area.
The least integrated form of economic integration is a
free trade area.
What were two expected results of the Single European Act?
give EC firms additional opportunities for economies of scale. lower the costs of doing business between member countries
The establishment of the euro is seen as a surprising political accomplishment because it required participating governments to
give up control over monetary policy.
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
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
During the campaign for leaving the EU, one of the recent claims said that leaving the EU would allow the British to take back control of _____.
immigration.
There has been a(n) _____ in regional economic integration in the past two decades.
increase
What were two concerns about NAFTA's short-term effect on Mexico?
increased unemployment difficult economic restructuring
According to Alexander Yeats, the countries that produce the fastest-growing products in intra-Mercosur trade do so _____ and at the _____ price.
inefficiently; highest
Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing ______ of the world economy.
interdependence
When the euro-zone economies are NOT growing at the same rate, a common monetary policy linked to common currency may mean that ______ rates may not reflect any one individual country's needs.
interest
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.
licensing
The limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy.
licensing
Many of the world's oil companies have to invest where oil is located in order to combine their technological and management capabilities with the actual product. This demonstrates the idea of a(n) _____ advantage
location-specific
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
Exporting strategy does not work for a(n) _____(low or high?) value-to-weight ratio product that can be produced anywhere.
low
The creation of a single market creates _____ costs of doing business.
lower
Greenfield investing spurs competition by increasing the number of players in a market and this will tend to _____ prices and ______ economic welfare
lower increase
It was acknowledged that one potential effect of NAFTA was that member countries would take advantage of ______ by moving production efforts to Mexico.
lower labor costs
The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in several benefits, including which two of the following?
lower prices modernization of telephone networks
The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in several benefits, including which two of the following?
modernization of telephone networks lower prices
Griffin Labs and Sequence Labs are in competition in the same seven regional markets. This is an example of
multipoint competition.
Ownership restraints on FDI are often put into place by a host country based on concerns of
national security
Historically, countries like Iran and India that are more ______ than ______ have favored the radical position that FDI is bad.
nationalistic; socialistic
FDI that serves the home market is called ______ production.
offshore
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
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
A(n) ______ is a market form in which a market or industry has a limited number of large firms
oligopoly
The Court of Justice is made up of
one judge from each country in the EU.
Venezuela and Bolivia are examples of countries that have become more _______ to FDI.
open
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
Some countries prohibit national firms from investing in specific countries for ______ reasons, such as US firms being prohibited from investing in Cuba during the Cold War.
political
______ union consists of a central governing body that regulates the economic, social and foreign policy of member states.
political
The United States is considered a close example of a _____ because 50 independent states are effectively combined into a single nation.
political union
The Treaty of Lisbon created the position of ______ of the European Council.
president
The radical view toward FDI argues that MNE's extract ______ from the host country and take them back to their home country.
profits
One way a government can limit the amount of imports coming into a country is by imposing
quotas
Ownership restraints and performance requirements are two ways in which governments can ____ FDI.
restrict
At one time, Britain taxed British companies' foreign earnings at a higher rate than their domestic earnings in order to _____ FDI.
restrits
During 2007 and 2008, many investors were taking money out of the U.S. by selling U.S. stocks, and purchasing euro-denominated assets; therefore, the value of the euro
rose
The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to _____.
sell to foreigners
The 1997 World Trade Organization agreement opened the telecommunications market to foreign competitors and exemplifies how _____ are impacted by FDI.
servoces
One reason given to explain the downfall of the Andean Pact points to the political ideology of the countries involved. This political ideology centered on the ______ end of the political spectrum.
socialist
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
Economic theories suggest that free trade allows countries to
specialize in producing goods and service that they are most efficient at producing.
Critics argue that FDI by Japanese auto makers does not make up for the jobs lost in US-based auto manufacturers. These critics are concerned with the
substitution effect
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.
substitutions
When a country maintains a current account _____(deficit or surplus?), it is unlikely to have to sell off assets in order to balance accounts
surplus
A key impediment to economic integration is that although a majority of citizens may benefit from free trade, certain groups may lose their jobs to low-cost and low-skilled labor in other countries as was the experience of some US and Canadian workers in the ______ industry following the establishment of NAFTA.
textile
CARICOM was a customs union created in 1991 among countries in _____.
the Caribbean
The economic policies of the European Union are established by the four main institutions in the political structure: the European Commission, the Council of the European Union, the European Parliament, and _____.
the Court of Justice
The CAFTA was formed to lower trade barriers between ______.
the US and Central America
The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations governing ______.
the service industry
The two restrictions put on new members to the EU that joined in 2004 were:
they could not adopt the euro for several years. free movement of labor among the new and existing members was prohibited for several years.
What are two limitations on exporting?
trade barriers transportation costs
FDI theory suggests that exporting is preferable to licensing and FDI as long as what two things are in place
trade barriers are low transportation costs are low
Some economists argue that regional free trade agreements will provide global benefits only if
trade creation exceeds trade diversion.
After the British government formally notified of its intent to exit the European Union, the country had _____ to negotiate the terms of the exit.
two years
The theories of FDI try to show:
why firms use a combination of avoiding exporting and licensing and entering the same markets as their competitors. why competitive firms often enter the same markets at the same time. why firms don't use exporting and licensing to enter foreign markets.
