International Business Chapter 8

What is a feature of an oligopoly?

Interdependence of major players

The eclectic paradigm is based on the idea that intellectual property is of considerable importance in explaining the direction of FDI

FALSE

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

FALSE

True or false: When tight control over a foreign entity is the goal of a company, it is in the best interest of that company to forge a licensing agreement rather than use foreign direct investment.

FALSE

the location specific advantages argument associated with John Dunning explains why firms prefer FDI to licensing or to exporting

FALSE

The european parliament which meets in Strasbourg France, is primarily a legislative rather than consultative body

FALSE (its consultative)

the stock of FDI refers to

the total accumulated value of foreign-owned assets at a given time

9 The creation of a single market increases price competition for business. in other words, it creates a

threat

Licensing is a good option to enter a foreign market when

tight control of the foreign market is not required

9 After the formation of a free trade area for its member countries, the United States found that its high cost furniture producers in NC were replaced by low cost producers from another country within the free trade area. this is an example of

trade creation

9 Gear Electronics used to buy all of its component parts from a local plant in Cleveland, Ohio, but this year it has decided to buy the parts from a lower-cost facility located in Tijuana, Mexico. This is an example of

trade creation

A country that imports more goods than it exports experiences a

trade deficit

9 The United States imports sugar from several nations, if the NAFTA agreement cause the US to import sugar only from Canada, even though it cost more to do so, it would be an example of

trade diversion

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

the _____ view argues that international production should be distributed among countries according to the theory of comparative advantage and countries should specialize in the production of goods they can produce most efficiently

free market

9 When Norway, Iceland, Liechtenstein, and Switzerland were joined by the EFTA, all barriers to the free flow of goods and services between the countries was removed. Member nations are allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent?

free trade area

FDI occurs when a company invests in facilities

in a foreign country

Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing ______ of the world economy.

interdependence

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

internalization

The management team at Yum BBQ Brands has decided not to license its product because of concerns that this will create opportunities for another company to have access to their secret recipe. For this reason, the company decides that FDI is their best course of action. which economic theory does their choice represent

internalization theory

9 Agri-Corp sells farm equipment throughout the euro one. the company has noticed that some customers travel to countries where equipment sells for less to obtain a better deal. what implication of adopting the euro as a common currency does this situation demonstrate

it makes it easier to compare prices across Europe

When a firm invests directly in a business or venture in another country, it is called ______.

FDI

A country that relies on the pragmatic nationalist view would say that

FDI should be allowed so long as the benefits outweigh the costs

in terms of employment, the indirect efforts of FDI are often as large as, if not larger than, the direct effects

TRUE

the attractiveness of exporting is reduced when a product can easily be produced in almost any location

TRUE

the scope of WTO covers all tariff and nontariff barriers to regional economic integration

TRUE

Which country has consistently been the largest source of FDI since World War II?

USA

What are two potential costs of FDI to host countries? (Check all that apply.)

- Adverse effects on competition within the host nation - Adverse effects on balance of payments

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

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

What are two current trends in FDI? (Check all that apply.)

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

The text notes two reasons why FDI has grown more rapidly than world trade and world output. What are those two reasons?

- Despite the decline in trade barriers, firms still fear protectionist pressures. - FDI has been driven by political and economic changes in developing nations

What are the two main types of FDI? (Check all that apply.)

- Establishing a new operation in a foreign market - Acquisition or merger with an existing foreign firm

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

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

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

- Foreign subsidiary creates demand for home-country exports - MNE learns skills from exposure to foreign market

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

- It provides a single holistic explanation of foreign direct investment. - It combines the best aspects of other theories of foreign direct investment into a single explanation.

What are two reasons the United States has been an attractive target for FDI?

- Large domestic markets - Stable economy

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

- Performance requirements - Ownership restraints

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

- Product and process innovations - Increased productivity growth

What are two examples of location-specific advantages? (Check all that apply.)

- Skilled labor - Natural resources

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

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

What two factors would indicate that a firm has little bargaining power when considering FDI in a nation?

- The firm has only a short period of time to complete the negotiations. - The host government places a low value on what the firm has to offer.

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

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

The United States, the United Kingdom, the Netherlands, France, Germany, and Japan together have accounted for the majority of all FDI outflows for 1998-2018 for what two reasons?

- They were the most developed nations with the largest economies in the postwar period. - They provided the base for many of the largest and best-capitalized businesses.

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?

- Transportation costs are low. - Trade barriers are low.

What are two alternatives to FDI? (Check all that apply.)

- licensing - exporting

Offshore production refers to FDI undertaken to serve the host market.

FALSE

Which country has a policy that encourages FDI?

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

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

The ultimate controlling authority with the EU is the

European Council

are a network of informal contacts that allow companies to benefit from each other's knowledge.

Externalities

9 - the European parliament is supported by the prime ministers of each member state

FALSE

9 In recent decades there have been fewer trade blocs established to promote regional economic integration

FALSE

9 Since its establishment on January 1, 1999, the euro has more than tripled in appreciation against the US dollar, reaffirming the ability of the European Central Bank to manage monetary policy within the euro zone

FALSE

9 economic theories suggest that free trade and investment is a zero sum game, in which all participating countries stand to lose

FALSE

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

9 How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnerships, that were being pursued by the Obama administration?

He pulled the United States out of these negotiations

______ theory of FDI suggests that firms imitate and react to each other's behavior.

Knickerbocker's

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

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

9 The andean community now operates as a customs union

TRUE

9 Today, developments in the EU and NAFTA carry the biggest implications for business practices

TRUE

FDI can result in a positive contribution to a host economy by supplying capital and technology which boost the country's economy.

TRUE

In terms of employment, the indirect effects of FDI are often as large as, if not larger than, the direct effects.

TRUE

Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk like the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home.

TRUE

The European Free Trade Association is the most enduring free trade area in the world

TRUE

There are at least 30 firms that control 70% of the computer printer business in Europe, this is an example of an oligopoly.

TRUE

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

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

TRUE

True or false: Tax concessions can be used by a government to encourage foreign firms to do business in that country.

TRUE

a firm that operates outside of a trading bloc will likely face the improved position of competitors within the trading bloc

TRUE

What international organization is involved in the governing of FDI?

WTO

With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI.

WTO

The stock of foreign direct investment refers to the total

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

A form of FDI, other than greenfield investments, is to

acquire or merge with an existing company in the foreign country.

Knickerbocker would say that in an oligopoly, if one firm decides to raise prices, then other firms would

also raise prices.

A host country's cost of FDI could be the perceived loss of national sovereignty and ___________. (Enter one word in the blank.)

autonomy

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.

capital

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

capital outflow

9 A(n) _____ has no barriers to trade among member countries, includes a common external trade policy, and allows factors or production to move freely among members, but does not have a common currency

common market (IDK) (i think free trade area)

Until the fall of ______ between 1989 and 1991, Eastern European countries were opposed to FDI.

communism

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

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 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. (Choose developing or advanced.)

developing

one example of a ____ effect of foreign direct investment is when a foreign MNE employs a number of host country citizens

direct

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

Most economists _____ the idea that FDI is usually accompanied by some loss of economic independence.

dismiss

Gibson Electronics identifies licensees in various countries who produce and sell the company's products in their countries in return for a royalty fee on every unit sold. Gibson Electronics' approach is risky because of the problems associated with

doing business in a different culture where the rules of the game may be very different

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

double

The ______ argues that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI.

eclectic paradigm

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

economic

9 the harmonization of member nations' tax is required to form a(n)

economic union

The shift toward more democratic political institutions and free market economies has _____ foreign direct investment.

encouraged

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

an American watchmaker, makes custom watch in California, which it then ships to Brazil for sale there. Based on this information, TickTick Inc. is involved in

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

The top management team at Kentucky-based Mumford Products collectively support the market imperfections approach. This means Mumford products top management team is most likely to

express a preference for FDI over licensing as a strategy to enter foreign markets

Businesses should seek out a country that has policies _______ toward FDI. (Choose restrictive or favorable.)

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.

9 identify the correct sequence of economic integration from the least integrated to the most integrated

free trade area, customs union, common market, economic union, political union

9 Brett Thiesen wants to make a political case for regional economic integration to his electorate. Which valid statement can he make in this regard?

free trade stimulates economic growth, which creates dynamic gains from trade

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.

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

One form of FDI is ________, which involves the establishment of a new operation in a foreign country.

greenfield investment

Venezuela and Bolivia are examples of countries that have become more ____________ to FDI.

hostile

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

licensing

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

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

internalization theory is used to explain why a company prefers FDI over ______ as a way to enter a foreign market

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 ___________________ (low or high?) value-to-weight ratio product that can be produced anywhere.

low

JumpIn Products is a market leader in playground equipment, which is typically large, bulky, and very heavy. In order to compete, JumpIn Products sells its entire line at very low prices. Although its products can be produced anywhere, it is considering exporting as a way to grow in overseas markets. The viability of JumpIn Products' exporting strategy could be constrained by transportation costs, particularly of products that can be produced in almost any location and have a

low value to weight ratio

Pfingsten & Sons, a leading manufacturer of concrete blocks in the United States, is considering exporting as its FDI strategy. Exporting may not be a good option for Pfingsten & Sons because of the concrete blocks'

low value to weight ratio

ABC Co. should choose exporting over licensing as a form of FDI if it has ______ transportation costs and is facing ______ trade barriers.

low; 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

The situation where two or more firms encounter each other in different regional markets, national markets, or industries is called

multi-point competition.

_____ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

multipoint competition

Griffin Labs and Sequence Labs are in competition in the same seven regional markets. This is an example of

multipoint competition.

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

A(n) ______ is a market form in which a market or industry has a limited number of large firms.

oligopoly

SmileBright, a dental products manufacturing company, has a market share of 30 percent in India. Three of its competitors together control 55 percent of the market. Whenever SmileBright raises or lowers the prices of its products, the other three companies quickly imitate its action. What is the market structure of this industry in India?

oligopoly

A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial capital required to finance the FDI. (Choose inflow or outflow.)

outflow

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

The _____ view of foreign direct investment has its basis in Marxist theory.

radical

which political ideology reflects the idea that a multinational enterprise is an instrument of imperialist domination?

radical view

what is a political argument for regional economic integration

reduces the potential for violent conflict

9 A customs union differs from a free trade area because it allows for

removal of barriers to the trade of goods and services among member countries

9 The Single European Act was put in place in an attempt to

remove all impediments to the formation of a single market

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

The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to _____.

sell off assets to foreigners

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

Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the _____ effect where some jobs created are offset by jobs lost elsewhere.

substitution

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.

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

according to ______, location specific advantages are of considerable importance in explaining both the rationale for and the direction of foreign direct investment

the eclectic paradigm

one of the main benefits that FDI provides to the home country is

the home country's balance of payments benefits from the inward flow of foreign earnings.