INB 300 Chapter 8, Chapter 8: Foreign Direct Investment, Chapter 8 International Business, International business Exam 2, IB101 chapter 9, Global Business Chapter 6, Global Business Chapter 9, International Business Chapter 18, Chapter 12 Global Fina...
Licensing does not...
give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
One reason FDI has been historically low in Japan is because of the Japanese...
government regulations.
A quota rent is:
the extra profit producers make when supply is artificially limited by an import quota.
Multipoint Competition
Arises when two or more enterprises encounter each other in different regional markets, national markets, or industries
What counties are apart of the Closer Economic Relations Trade Agreement
Australia and New Zealand
A Chinese petroleum company sets up a crude oil refining facility in Vietnam. This is an example of a greenfield investment.
True. A greenfield investment involves the establishment of a new operation in a foreign country.
Which of the following is one of the four attributes present in Porter's diamond?
Factor endowments
Licensing may result in...
a firm's giving away valuable technological know-how to a potential foreign competitor.
Types of Regional Economic Integration: Free Trade Area
a group of countries that remove trade barriers among themselves
Global Economic Integration: Economic Benefits
disputes are handled constructively and rules give clarity and reduce discrimination
Regional Integration: Political Disadvantages (vs. Global)
encourages discrimination against firms outside agreement
The TRIPS regulations established at the 1995 Uruguay Round:
established regulations on patents and copyrights.
The effect of bulky or heavy products on transportation costs can make...
exporting an inappropriate strategy.
General Agreement on Tariffs and Trade is an organization T/F
False
By limiting imports through quotas, governments decrease the attractiveness of FDI and licensing.
False. By limiting imports through quotas, governments increase the attractiveness of FDI and licensing.
If your proprietary know-how of "green" processes is difficult to transfer to other firms, the most effective approach would be...
exporting or foreign direct investment.
If your household goods can be efficiently produced through economies of scale, it would be a good idea to use an...
exporting strategy.
The infant industry argument is criticized because it relies on an assumption that:
firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market.
If consumers in different countries desire different product attributes it would be best to engage in...
foreign direct investment.
According to the _____, international production should be distributed among countries according to the theory of comparative advantage.
free market view. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently.
Types of Regional Economic Integration: Economic Market
has all the features of the common market, members also coordinate and harmonize economic policies to blend their economies into a single economic entity
General Agreement on Tariffs and Trade
multilateral agreement governing the international trade of goods
World Trade Organization
multilateral agreement governing the international trade of goods that grew out of the GATT
What are the objectives of the World Trade Organization
non-discrimination, freer trade, predictability, fair competition, and encourage development and economic reform
FDI undertaken to serve the home market is known as:
offshore production.
Five airlines control 90 percent of the aviation sector of a country. The aviation industry in the country would be an example of a(n) _____.
oligopoly. An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly).
Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are _____ and performance requirements.
ownership restraints. Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements. The other items listed are all common forms of incentives governments offer to foreign firms to invest in their countries.
The _____ is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost.
pragmatic nationalist view. The pragmatic nationalist view is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost. When a foreign company rather than a domestic company produces products, the profits from that investment go abroad. Many countries are also concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country's balance-of-payments position.
Global Economic Integration: Political Benefits
promotes peace by promoting trade and investment
The ecletic paradigm (John Dunning) argues...
that in addition to the various factors discussed earlier, location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of FDI
Home-Country Costs
(1) Adverse employment effects (FDI substitutes for domestic production) (2) Adverse balance of payment effects (initial capital outflow, FDI purpose to serve home market from low cost origin, and FDI substitutes for exports)
Case: FDI by Cemex
(1) Cemex (a cement company) has been a powerhouse in Mexico with more than 60% market control which came from their efficient manufacturing and focus on customer service (2) They use information technology to match production with consumer demand (precise delivery is crucial) (3) Truck-mounted global positioning systems, radio transmitters, satellites, and computer hardware which helps Cemex respond quickly to changes in demand (4) Their int'l expansion strategy was driven by wanting to reduce reliance on the Mexican construction market, there is high demand for cement in developing countries, they believed they better understood construction businesses in developing nations, and they believed they could create a higher value by acquiring inefficient cement companies in other markets (5) Cemex will continue to expand looking into China and India's fast-growing economies
Case: FDI in China
(1) China has enjoyed over 35 years of sustained high economic growth rates which attracted foreign investment (2) China represents the world's largest market with 1.3B people (3) Since China joined the WTO in 2001, average tariff rates have fallen (4) Guanxi (relationship networks) is also important when doing business in China (5) Even though China has high economic growth is it still relatively poor and the highly regulated environment is another problem for business transactions (6) China has been committing to investing into infrastructure projects which emphasizes maintaining a steady economic, keeping inflation low, and making sure currency is stable
Home-Country Benefits
(1) Employment effects (subsidiary creates indirect demand; disposable income for host consumer to buy imports) (2) Positive balance of payments effect (inward flow of foreign earnings and executive compensation AND subsidiary creates direct demand for home-country exports) (3) Positive skills transfer- exposure to foreign markets and international managerial experience)
FDI:
(1) Flow of- amount of FDI undertaken over a given time period (normally a year) (2) Stock of- the total accumulated value of foreign-owned assets at a given time (3) Inflows of- flow of FDI into a country (4) Outflows of- flow of FDI out of a country
Case: FDI in Nigeria
(1) For years Nigeria was held back by political instability, poor gov't polices, lack of infrastructure, and endemic corruption (2) Nigeria has moved toward a more stable democratic form of gov't (in 2007 for the first time ever there was a peaceful transfer of civilian power) (3) The gov't has pursued market-orientated reforms like the removal of subsidies, privatization of state run businesses, lower trade barriers, and deregulation (4) FDI has emerged as one of the major engines of growth (encouraged a large domestic market and better economic management) (5) Foreign retailers will also make major investments in distribution infrastructure such as cold storage facilities and warehouses (25-30% of fruits and veggies spoil in India before they reach the market)
Two Forms of FDI:
(1) Greenfield Investment which involves the establishment of a new operation in a foreign country (2) Acquiring or merging with an existing firm in the foreign country (40-80% of all FDI inflows from 1998-2011 was in this form); quicker to execute than green fields; easier and less riskier
Case: DP World and the U.S.
(1) In 2006 DP World (Dubai gov't-ownded) paid $6.8B to acquire P&O (a British firm that runs a network of marine terminals) which has six management operations in Miami, Philadelphia, Baltimore, New Orleans, New Jersey, and New York (2) It had already been approved by US regulators but US senators raised concerns about security risks and they were concerned about DP World being a state-owned enterprise (3) The Bush Administration stated that the takeover posed no threat to national security (they are a respected global firm with an American chief operator) (4) DP World would not own the US ports, but manage them (5) Dubai is also a member of America's Container Security Initiative, which allows Americans to inspect cargo before it leaves the US (6) DP World announced it would sell off the right to manage the six ports for about $750M
Host Country Costs:
(1) National sovereignty and autonomy (loss of economic independence and undue MNE influence in political process) (2) Negative employment effects (jobs offset and acquisition restructuring) (3) Adverse effects on balance of payments (outflow of MNE earnings and executive salaries and subsidiary imports excessive amount of inputs) (4) Adverse effects on host country competition (more economic power of MNE subsidiaries and acquisition could lead to reduced competitive scope)
Host Country Benefits:
(1) Positive resource transfer effects (capital, technology, and management resources) (2) Positive employment effect (direct employment and indirect employe or suppliers) (3) Positive balance of payment effect (initial capital inflow, import substitution, and subsidiary exports) (4) Positive effects on host country competition and economic growth (increases domestic competition and lower prices increases consumer welfare)
Case: Volkswagen in Russia
(1) Volkswagen decided to invest directly into automobile production in Russia because Russia's economy was growing, living standards were rising, and the level of car ownership was still low in European standards (the demand for cars would grow rapidly) (2) Their rivals, like Toyota, GM, and Ford were also investing in production facilities in Russia (3) The Russian government created incentives that allowed them to avoid import tariffs and a punitive tax on imports (4) In total, foreign carmakers have invested over $5B in Russian assembly operations by 2014 (5) In 2014, however, global oil prices started to fall rapidly all the while Russia was engulfed in a civil war in eastern Ukraine and Western nations posed sanctions on Russia (6) VW excess capacity problem may get worse, they have to decide whether to keep investing or to pull back from the market
The growth of FDI is a result of:
(1) fear of protectionism (2) political and economic changes (3) new bilateral investment treaties (4) globalization of the world economy
Oligopoly
An industry composed of a limited number of large firms
Which of the following best describes an industry composed of a limited number of large firms?
An oligopoly
Electric 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
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 (such as the firm's technological, marketing, or management know-how)
balance-of-payments accounts
Because jobs created by an investment may be offset by the jobs lost in domestic companies
_____ are the highest rate that can be charged, which is often, but not always, the rate that is charged.
Bound tariff rates
Which of the following would a follower of the inefficient market school of thought agree with?
Companies would be better off investing in foreign exchange forecasting services.
Which account keeps track of the export and import of goods and services in a country?
Current account. The current account tracks the export and import of goods and services.
Offshore Production
FDI undertaken to serve the home market which may stimulate economic growth in the home country by freeing home-country resources to concentrate on actives where the home country has a comparative advantage
Identify the correct statement regarding the direction of FDI inflows.
Developed nations still account for the largest share of FDI inflows. Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased.
Regional Integration: Economic Benefits
Disputes are handled constructively and rules give clarity and reduce discrimination
Host-Country Policies
Encouraging inward FDI (offer incentives to foreign firms to invest in their countries) and restricting inward FDI (use ownership restraints and performance requirements)
Home-Country Policies
Encouraging outward FDI (government-backed insurance programs) and restricting outward FDI (limit capital outflows or manipulate tax rules)
Direction of FDI
Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations and the transition economies of eastern Europe and the old Soviet Union have increased markedly.
Knickerbocker
FDI flows are a reflection of strategic rivalry between firms in the global marketplace
The fast-food industry is a good example of a business sector where licensing is a poor option for FDI.
False. Licensing tends to be more common, and more profitable, in fragmented, low-technology industries in which globally dispersed manufacturing is not an option. A good example is the fast-food industry. McDonald's has expanded globally by using a franchising strategy, which is essentially the service-industry version of licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits.
The location-specific advantages argument associated with John Dunning explains why firms prefer FDI to licensing or to exporting.
False. The location-specific advantages argument associated with John Dunning does help explain the direction of FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting.
Which of the following is the reason why most economists prefer Heckscher-Ohlin theory to Ricardo's theory?
Heckscher-Ohlin theory makes fewer simplifying assumptions.
Why is the Asia-Pacific Economic Cooperation ineffective?
It is too big and too diverse
_____ is also known as the market imperfections theory.
Internalization theory. Internalization theory is also known as the market imperfections approach. It seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
Advantages of FDI
It follows that a firm will favor FDI over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive
Externalities
Knowledge "spillover" that occur when companies in the same industry locate in the same area
_____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold.
Licensing. Licensing involves 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.
Which of the following is a home-country policy aimed at limiting outward FDI flow?
Limiting capital outflows. Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time. One policy has been to limit capital outflows out of concern for the country's balance of payments.
Internalization Theory (market imperfections theory)
Marketing imperfection approach to foreign direct investment; seeks to explain why firms often prefer FDI over licensing as a strategy for entering foreign markets; imperfections in the operation of the market mechanism
Licensing
Occurs when a firm (licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee); in return for giving the licensee these rights, the licensor collects royalty fees on every unit the licensee sells
Pragmatic Nationalism
Offering tax subsidiaries to a foreign multinational enterprises in the form of tax breaks or grants, Japan is a good example of this, and when a foreign company produces something in a host country it creates jobs but the profits from the host country go overseas
Limits of Exporting
Often constrained by transportation costs and trade barriers
What countries are apart of Mercosur?
Paraguay , Uruguay, Brazil, Argentina, Venezuela
_____ are controls over the behavior of the MNE's local subsidiary. The most common of these are related to local content, exports, technology transfer, and local participation in top management.
Performance requirements. Performance requirements are controls over the behavior of the MNE's local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.
Exporting
Producing goods at home and then shipping them to the receiving country for sale
The Free Market View
Resource transfers from the parent country benefit the host country, lower labor costs can boost efficiency, and internal production should be distributed among countries; international production should be distributed among countries according to the theory of comparative advantage
Sources of FDI
Since WWII the US has consistently been the largest source country for FDI (other important sources include the UK, France, Germany, the Netherlands, and Japan)
The Radical View
Socialists countries have embraced FDI, many communist companies opposed FDI, and Iran is a Muslim country which rejects Marxist ideology but has embraced FDI; the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
Trends of FDI
The past 35 years have seen a marked increase in both the flow and stock of FDI in the world economy (targeted towards developed nations)
Gross Fixed Capital Formation
The total amount of capital invested in factories, stores, office buildings, and the like
What is the purpose of a greenfield investment?
To establish a new operation in a foreign country. Foreign direct investment takes on two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.
According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
True. According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
Direct effects arise when a foreign MNE employs a number of host-country citizens.
True. Direct effects arise when a foreign MNE employs a number of host-country citizens.
Offshore production refers to FDI undertaken to serve the home market.
True. The term offshore production refers to DFI undertaken to serve the home market. Far from reducing home-country employment, such FDI may actually stimulate economic growth (and hence employment) in the home country by freeing home-country resources to concentrate on activities where the home country has a comparative advantage.
What countries are apart of them North American Free Trade Agreement? (NAFTA)
US, Canada, Mexico
What countries are in the Associate of Southeast Asian Nations (ASEAN)
US, EN, Japan, and China
Since WWII, the largest source country for FDI has been...
USA.
In which of the following situations would FDI deteriorate the current account of the host country's balance of payments?
When a foreign subsidiary imports a substantial number of its inputs from abroad. A concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a debit on the current account of the host country's balance of payments.
Andean Community
a customs union in South America
Mercosur (launched in 1991)
a customs union in South America
FDI occurs when...
a firm invests directly in facilities to produce or market a good or service in a foreign country (10% or more).
The difference between the flow and the stock of FDI is the...
amount vs. total FDI.
A country's _____ keeps track of its payments to and its receipts from other countries.
balance-of-payments accounts
Global Economic Integration: Criticisms
benefits not evenly shared and environment impact
Types of Regional Economic Integration: Customs Union
in addition to FTA policies, a customs union has common external policies on non-participants in order to combat trade diversion
If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be...
licensing.
If General Electric, a U.S. based corporation, purchases a 12 percent interest in a company in Italy, that purchase would be an example of a(n) _____.
minority acquisition. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).
Associate of Southeast Asian Nations (ASEAN)
struggles because its main trading partners are outside the region
Australia - New Zealand Closer Economic Relations Trade Agreement (CER)
the citizens can freely work and move between countries and is very successful
A third problem with licensing arises when...
the firm's competitive advantage is based not as much on its products as on the management, marketing, and manufacturing capabilities that produce those products.
Types of Regional Economic Integration: Political Union
the integration of political and economic affairs of a region
Asia-Pacific Economic Cooperation
the official title for regional economic integration involving 21 member economies around the Pacific