INB exam 2

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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.


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