CHAP 8-SB Reading
When a firm invests directly in a foreign market to produce or market a product, it is called ______.
(FDI) Foreign Direct Investment
A(n)______ strategy is favored over exporting when transportation costs or trade barriers are prohibitive.
(FDI) foreign direct investment
Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of ______.
(FDI) foreign direct investment
What is a company participating in when it directly invests in facilities to produce or market a product in a foreign country?
(FDI) foreign direct investment
What are the three potential costs of FDI to host countries?
1. Adverse effects on balance of payments 2. Perceived loss of national sovereignty & autonomy 3. Adverse effects on competition
What are two current trends in FDI?
1. An increase in the volume of FDI 2. An increase in FDI aimed at countries that have liberalized their FDI regimes
Identify the three costs of FDI to a home country.
1. Balance of payments negatively affected initially from the capital outflow to fund FDI 2. Balance of payments negatively affected if purpose of FDI is to develop a low-cost production location 3. Balance of payments negatively affected if FDI is a substitute for direct exports
What two countries have shifted to a more hostile approach to FDI?
1. Bolivia 2. Venezuela
The text notes two reasons why FDI has outpaced world trade and world output. What are those two reasons?
1. Even though trade barriers are diminishing, firms still fear protectionist pressures. 2. FDI has been driven by political and economic changes in developing nations.
What are two alternatives to FDI?
1. Exporting 2. Licensing
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found what two resource-transfer effects?
1. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. 2. Foreign investors transferred technology to countries in which they invested.
Choose the three benefits of FDI to a home country.
1. Foreign subsidiary creates demand for home-country exports 2. Inward flow of foreign earnings 3. MNE learns skills from exposure to foreign market
What are three advantages of FDI?
1. It allows for tight control over a firm's operations. 2. It helps overcome high transportation costs. 3. It allows a firm to maintain control over technological know-how.
What are two measures countries can employ to restrict foreign direct investment?
1. Performance requirements 2. Ownership restraints
What are two benefits of FDI for a host country?
1. Resource-transfer effects 2. Economic growth
What two factors cause major adverse effects on a host country's balance of payments?
1. The outflow of earnings from a foreign subsidiary to its parent company 2. A foreign subsidiary importing a large number of inputs from abroad
What are the two types of FDI?
1. acquisition or merger with an existing foreign firm 2. establishing a new operation in a foreign market
What are two characteristics of an oligopoly?
1. large firms 2. limited number of firms
Firms for which licensing is a good option tend to have what two characteristics?
1. low-tech industries 2. tight control over foreign operations not necessary
What are two broad issues that should be considered concerning negotiations with host governments regarding FDI?
1. the concessions the firm must make to be allowed to invest 2. the incentives the host government is prepared to offer to the firm
Tracking its expenditures and its receipts from other countries occurs in a country's______accounts.
Balance-of-payments
When a firm invests in plants, equipment, and R&D as a result of increased competition, it is engaging in ______ investment.
Capital
The ______ account tracks goods and services exports and imports in balance-of-payments accounting.
Current
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 a worry for______economies.
Developing
To encourage FDI, many countries have eliminated ______ taxation of foreign income.
Double
What is a benefit of inward FDI for a host country?
Employment effect
When FDI occurs through greenfield investment, this will lower competition in a market and decrease economic welfare.
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
According to internalization theory, a company would rather gain entrance into a foreign market by using ______.
FDI
The ______ of FDI describes the amount of FDI undertaken during a year.
Flow
The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage.
Free Market
Which view of FDI is based on the classical international trade theory of Smith and Ricardo asserting that international production should be based on comparative advantage?
Free Market
A(n)___ investment occurs when a firm goes to a foreign market and establishes a new operation.
Greenfield
What is the name of a business venture where finances are used to create a new physical facility for a business in a foreign location where the company currently does not have existing facilities?
Greenfield
Performance requirements are put in place to minimize the costs of FDI for the______ country.
Host
Which theory BEST explains why the first firm in an oligopoly decides to undertake foreign direct investment rather than exporting or making a licensing agreement?
Internalization theory
What name is given to the advantages that coincide with utilizing resource endowments or assets tied to a specific area?
Location-specific
A host country cost of FDI could be the____ of sovereignty and autonomy.
Loss
Exporting strategy does not work for a ______ value-to-weight ratio product that can be produced anywhere.
Low
The ______ of FDI measures the total accumulated value of a company's foreign-owned assets at a specific time.
Stock
Jim's US-based paper products company sources paper from a plant in Brazil that takes advantage of the available forestry near the plant. This is an example of a location-specific advantage.
TRUE
When RCA licensed its color television product to a number of Japanese companies in the 1960s, these companies turned around and entered the US to directly compete with RCA and diminished its role in the market. In this situation, licensing resulted in RCA giving away proprietary information to a potential competitor.
TRUE
What country has been the largest source of FDI since World War II?
U.S.
Which country was a favorite target for FDI inflows during the 1980s and 1990s?
U.S.
A country's ______ account tracks the country's payments to and receipts from other countries.
balance-of-payments
A country's______ account tracks the country's payments to and receipts from other countries.
balance-of-payments
Past activity of FDI shows that the majority of it has been directed at______.
developed nations
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
Most economists ______ the idea that FDI is usually accompanied by some loss of economic independence.
dismiss
When a company produces a good in the home country and then ships it to another country for sale it is called______.
exporting
An example of______ is when firms benefit from each other's knowledge generation.
externalities
By placing tariffs on imported goods, governments can ______.
increase the cost of exporting relative to foreign direct investment and licensing
Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing______of the world economy.
interdependence
Grant's company has given a company in Japan the right to produce and sell its line of active wear. For every article of clothing the Japanese company sells, it pays Grant's company a fee. This is an example of______.
licensing
Internalization theory tries to explain why firms often prefer FDI over______ as a method for getting into foreign markets.
licensing
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 basis in Marxist politics is evident when radical writers argue that______ enterprises are an instrument of imperialist domination.
multinational
The radical view toward FDI argues that ______ extract profits from the host country and take them back to their home country.
multinational enterprises
The situation where multiple firms encounter each other in different regional markets, national markets or industries is called ______.
multipoint competition
FDI that is pursued to serve the home market is called ______ production.
offshore
A(n) ______ is an industry made up of a limited number of large firms where there is an interdependence of the major players.
oligopoly
The various theories of FDI try to explain the______ of FDI flows, which deals with why certain locations are favored as targets of FDI.
pattern
Some countries prohibit national firms from investing in specific countries for _____ reasons, such as US firms being prohibited from investing in Cuba.
political
A number of investor countries try to encourage FDI through the use of ______.
political influence
Pre-1980, Japan blocked the majority of potential foreign investments. Yet, if a company that had cutting edge technology wanted to invest in Japan, they were allowed to undertake FDI. This is an example of ______.
pragmatic nationalism
Ownership restraints and performance requirements are two ways in which governments can ______ FDI.
restrict
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
One result of ______ effects is that the net number of new jobs created by FDI may not be as large as initially claimed.
substitution
It would be more common for a(n) ______ to agree to market aggressively as a way of keeping foreign competitors in check.
wholly owned subsidiary
Increased competition could______ capital investments by firms in plants, equipment, and R&D as firms try to gain a competitive advantage over their rivals.
Increase
When ownership restraints are used to restrict FDI, it is based on the idea that _____ owners can help maximize the employment benefits of FDI for the host country.
Local
The Kendrick Corporation has______ transportation costs and is facing______ trade barriers. This company should choose exporting over FDI.
Low/Low
What international organization is involved in the governing of FDI?
WTO
The ______ effects of FDI arise when a multinational enterprise hires host-country citizens and the ______ effects arise when local suppliers hire workers as a result of the FDI.
direct/indirect
FDI has a positive ______ impact on host countries as a result of technology transfers.
economic
Kennedy Construction Corp. wants to create a presence internationally but does not want to establish operations in a foreign country. What could the company do to accomplish this?
exporting
Kimberly's company produces body lotion in the United States and ships it overseas to retail stores that sell the product. Her company is delivering product through______.
exporting
Economists refer to knowledge "spillovers" as______, and there is a theory that suggests firms can benefit from these "spillovers" by locating close to their source.
externalities
Bethany's company holds valuable know-how in the electronics industry and the company realizes this knowledge cannot be adequately protected. In this situation, what would be more profitable for Bethany's company?
foreign direct investment
A key cost of FDI for the home country is when the balance of payments are adversely affected by the initial ______ outflow that is necessary to finance FDI.
Capital
The limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy.
licensing
A(n)______ can be set by the government in order to limit the number of imports. This increases the attractiveness of FDI and licensing.
quota
One key factor that leads to adverse effects on a host country's______ accounts is when a foreign subsidiary imports a substantial number of inputs from abroad, which results in a debit on the current account.
balance of payment
One potential benefit to consumers related to offshore production is______.
lower prices for goods
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
What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?
Monopoly
The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations in international trade governing ______.
Services
Which is TRUE for firms considering foreign direct investment?
The host government's attitude toward FDI should be an important variable in decisions about where to invest.
The stock of foreign direct investment refers to the total______.
accumulated value of foreign-owned assets at a given point in time
A key benefit of FDI to a home country is from the inward flow of ______ earnings.
foreign
The ______ combines the various perspectives of foreign direct investment into a holistic theory.
eclectic paradigm
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
______ allows a company to collect a royalty fee from a foreign firm that it has granted the right to produce and sell its product.
Licensing
What are two common incentives governments offer to foreign firms to invest in their country?
1. Low-interest loans 2. Subsidies
Along with the United States, which five countries accounted for 60% of all FDI outflows from 2000-2020?
1. The Netherlands 2. France 3. Japan 4. Germany 5. The United Kingdom
FDI theory suggests that exporting is preferable to licensing and FDI as long as what two conditions exist?
1. transportation costs are low 2. trade barriers are low
One way a government can encourage FDI is to offer a foreign firm a tax concession if it chooses to do business in that country.
TRUE
How has the flow of FDI compared to the growth in world trade since 1990?
The flow of FDI has accelerated faster than the growth in world trade.
For which of these products does the attractiveness of exporting decrease relative to either FDI or licensing?
A product that can be produced almost anywhere
At one time, the British advanced corporation tax system taxed British companies' foreign earnings at a higher rate than their domestic earnings. This was put in place to ______.
encourage companies to invest at home
