Chapter 6: Investigating Abroad Directly

Which of the following statements is true of agglomeration? a. Agglomeration advantages stem from knowledge spillover from one firm to another. b. Ownership advantages stem from agglomeration. c. Agglomeration deprives a firm from enjoying ownership advantages. d. Agglomeration creates a demand that forces a skilled labor force to move out of a region.

a. Agglomeration advantages stem from knowledge spillover from one firm to another.

_____ is the amount of foreign direct investment (FDI) moving in a given period (usually a year) in a certain direction. a. FDI flow b. FDI stock c. Horizontal FDI d. Upstream vertical FDI

a. FDI flow

In the context of foreign direct investment, which of the following statements is true of ownership advantages? a. Firms can beat rivals abroad by acquiring the advantage of proprietary technology of manufacturing products. b. Firms are able to engage in business abroad without setting up a manufacturing unit abroad. c. Firms can engage in foreign business by selling a technology for a firm abroad. d. Firms can trust foreign governments and stakeholders better than home country stakeholders.

a. Firms can beat rivals abroad by acquiring the advantage of proprietary technology of manufacturing products.

_____ refers to holding securities, such as stocks and bonds, of companies in countries outside one's own but does not entail the active management of foreign assets. a. Foreign portfolio investment (FPI) b. Foreign direct investment (FDI) c. Internalization d. Licensing

a. Foreign portfolio investment (FPI)

Which of the following political views is hostile to foreign direct investment (FDI)? a. The radical view on FDI b. The pragmatic nationalism view on FDI c. The free market view on FDI d. The liberalistic view on FDI

a. The radical view on FDI

A multinational enterprise (MNE), by definition, is a firm that engages in foreign direct investment when doing business abroad. a. True b. False

a. True

A non-multinational enterprise (non-MNE) firm can do business abroad by exporting. a. True b. False

a. True

A paper company is opening a new branch. In addition to providing the new branch manager and employees with handbooks detailing their jobs, the firm places experienced personal at the new branch for 6 months to teach hands-on skills and share their know-how. In this scenario, the handbooks transfer explicit knowledge, while the experienced personnel insure the acquisition of tacit knowledge. a. True b. False

a. True

Foreign direct investment (FDI) results in the loss of some economic sovereignty in a host country. a. True b. False

a. True

Foreign direct investment (FDI) stock is the total accumulation of inbound FDI in a country or outbound FDI from a country. a. True b. False

a. True

In the context of international investment, foreign portfolio investment (FPI) is an indirect investment. a. True b. False

a. True

Internalization is a way to combat market failure. a. True b. False

a. True

OLI advantages refer to the advantages of ownership (O), location (L), and internalization (I) that come from engaging in foreign direct investment. a. True b. False

a. True

Tacit knowledge is noncodifiable and its acquisition and transfer requires hands-on practice. a. True b. False

a. True

Technology spillover from FDI is typically beneficial to domestic firms and industries. a. True b. False

a. True

The United Nations defines FDI as an equity stake of 10% or more in a foreign-based enterprise. A lower percentage invested in a foreign firm is considered FPI.? a. True b. False

a. True

The quest for location advantages has to fit with a firm's strategic goals. a. True b. False

a. True

_____ refers to a type of foreign direct investment (FDI) in which firms move upstream or downstream in different value chain stages in a host country. a. Vertical FDI b. Horizontal FDI c. Platform FDI d. Unilateral FDI

a. Vertical FDI

Folexa is the largest producer of spices in the world, and its location is an added advantage to its business. It is surrounded by six trading countries. Besides, located close to the southern region of the continent, it attracts business from the neighboring continents as well. Such clustering of economic activities is referred to as _____. a. agglomeration b. internalization c. the contagion effect d. the demonstration effect

a. agglomeration

Knowledge that can be written down and transferred without losing much of its richness is called _____. a. explicit knowledge b. embodied knowledge c. tacit knowledge d. embedded knowledge

a. explicit knowledge

Rayato Inc. is a cell phone manufacturing company headquartered in Swinland. The company designs, manufactures, and markets cell phones in Swinland. It has recently engaged in foreign direct investment (FDI), setting up its manufacturing units in three other countries. Rayato Inc. has decided to follow the same value-chain stage in the host countries as in Swinland. In this scenario, Rayato Inc. has engaged in: a. horizontal FDI. b. upstream vertical FDI. c. downstream vertical FDI. d. platform FDI.

a. horizontal FDI.

Which of the following is a benefit of FDI for the host country? a. job creation b. capital outflow c. earnings d. learning from abroad

a. job creation

The free market view on foreign direct investment (FDI): a. leads to a win-win situation for both home and host countries. b. considers FDI as an instrument of imperialism. c. approves FDI only when its benefits outweigh its costs. d. states that FDI enables countries to tap into their absolute advantages when unrestricted by government intervention.

a. leads to a win-win situation for both home and host countries.

Within the context of FPI, _____ rights are the rights to appoint key managers and establish control mechanisms. a. management control b. internalization c. foreign management d. downstream vertical FDI

a. management control

Sub Inc. is a sandwich company whose long time licensee operating in Brazil recently opened a direct competitor using the knowledge it gained through marketing the products of Sub Inc. This scenario represents which risk of licensing? a. Agglomeration b. Dissemination c. Market failure d. Intrafirm trade

b. Dissemination

_____ is defined as the possibility of unauthorized diffusion of firm-specific know-how. a. Agglomeration b. Dissemination risk c. Market failure d. Currency risk

b. Dissemination risk

Home countries often reap benefits and endure costs associated with FDI that are the same as those experienced by the host countries. a. True b. False

b. False

In the long run, the interests of multinational enterprises (MNEs) in host countries can be best safeguarded if MNEs neglect the interests of host countries. a. True b. False

b. False

International transaction costs tend to be lesser than domestic transaction costs. a. True b. False

b. False

Location advantage refers to possession and leveraging by a multinational enterprise (MNE) of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas. a. True b. False

b. False

Most countries embrace the free market view on FDI. a. True b. False

b. False

Which of the following statements is true of direct ownership? a. It allows transfer of power and management to firms in host countries. b. It provides a firm with equity ownership rights and management control rights. c. It provokes protectionist responses from host countries. d. It leads to the possibility of unauthorized diffusion of firm-specific know-how.

b. It provides a firm with equity ownership rights and management control rights.

Which of the following political views on foreign direct investment (FDI) does not exist in practice? a. The pragmatic nationalism view on FDI b. The free market view on FDI c. The radical view on FDI d. The liberalistic view on FDI

b. The free market view on FDI

Hisson Technologies, a computer manufacturing company headquartered in Lumberne, had recently undertaken foreign direct investment (FDI) by setting up its office in the Remfur Republic. The company did not engage in computer distribution in Lumberne, but it invested in computer dealership in the Remfur Republic. In this case, Hisson Technologies was engaged in _____. a. upstream vertical FDI b. downstream vertical FDI c. platform FDI d. horizontal FDI

b. downstream vertical FDI

Bandoy Corp., a renowned cell phone manufacturing company, decided to engage in international business. So, Bandoy Corp. sold its technology to several multinational enterprises in other countries. This market entry mode is an example of _____. a. franchising b. licensing c. outsourcing d. exporting

b. licensing

In the context of international business, market failure is most likely to result due to: a. foreign direct investment. b. opportunistic behavior of firms. c. low transaction costs. d. ownership equity.

b. opportunistic behavior of firms.

HiSpark Inc., a leading sports accessories brand, believes that it has to possess rare, hard-to-imitate technology, valuable brand name, and organizationally embedded culture to achieve consistent success as a multinational enterprise. In this case, HiSpark Inc. is focusing on: a. location advantage. b. ownership advantage. c. internalization advantage. d. export advantage.

b. ownership advantage.

The _____ is a political view that approves foreign direct investment (FDI) only when its benefits outweigh its costs. a. radical view on FDI b. pragmatic nationalism view on FDI c. free market view on FDI d. liberalistic view on FDI

b. pragmatic nationalism view on FDI

In licensing, a firm that receives explicit knowledge is not likely to succeed because: a. licensing involves only tacit knowledge transfer. b. tacit knowledge is difficult to transfer and can be acquired only by practice. c. the firm is excessively controlled by the licensing firm. d. the firm does not have the liberty to disseminate information.

b. tacit knowledge is difficult to transfer and can be acquired only by practice.

Picnia Corp., a leading automobile manufacturing company, assembles its cars in Deltaland, but the components are manufactured in Ristasia. In this scenario, Picnia Corp. has engaged in: a. downstream vertical FDI. b. upstream vertical FDI. c. horizontal FDI. d. platform FDI.

b. upstream vertical FDI.

When market failure is minimized through internalization, _____. a. a firm is forced to license its technology b. a firm engages in indirect export c. a single organization between two firms is established d. the laws and regulations in a host country are changed

c. a single organization between two firms is established

When one firm enters a foreign country through foreign direct investment (FDI), its rivals are likely to follow by undertaking additional FDI in a host country to: a. make the host country entrepreneur friendly. b. discover a new market for its goods. c. acquire location advantages. d. increase the first mover's location advantages.

c. acquire location advantages.

A United States MNE decides to move operations to a developing nation in Central America to take advantage of the region's low labor costs. This is an example of an MNE in pursuit of _____ advantage. a. franchising b. ownership c. location d. internalization

c. location

From an institution-based view, internalization is a response to: a. agglomeration. b. dissemination risk. c. market imperfections. d. outsourcing.

c. market imperfections.

In international business, when a host country firm acts opportunistically, _____. a. the home country firm always receives compensation from the host country firm b. markets function normally, transaction costs decrease, and both firms are profited c. suing the opportunistic firm in a foreign country is costly and uncertain d. competition increases in the market thereby increasing demand for products

c. suing the opportunistic firm in a foreign country is costly and uncertain

Which of the following is a cost of FDI to a host country? a. Learning from abroad is minimized b. Job losses c. Locals serving as heads of MNE subsidiaries represent the interest of domestic firms d. Decisions to produce and market products and services in a host country are being made by foreigners resulting in a loss of sovereignty.

d. Decisions to produce and market products and services in a host country are being made by foreigners resulting in a loss of sovereignty.

Which of the following statements is true of the radical view on foreign direct investment (FDI)? a. Governments embracing this view consider both the pros and cons of FDI and approve only if benefits outweigh costs. b. It believes FDI should lead to a win-win situation for both home and host countries. c. It suggests that FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. d. Governments embracing this view often nationalize multinational enterprise (MNE) assets or simply ban inbound MNEs.

d. Governments embracing this view often nationalize multinational enterprise (MNE) assets or simply ban inbound MNEs.

Which of the following statements is true of internalization? a. It involves direct exporting to host countries. b. It is the cause of imperfect rules in the market. c. It replaces internal market relationship with a firm. d. It involves locating and operating in host countries.

d. It involves locating and operating in host countries.

Citronix Inc. is a semiconductor manufacturing company with its headquarters in Bigania. In its venture to expand business, the company sets up manufacturing units in five other countries where semiconductors are produced and manufactured. In this scenario, Citronix Inc. is engaged in _____. a. foreign portfolio investment (FPI) b. outsourcing c. franchising d. foreign direct investment (FDI)

d. foreign direct investment (FDI)

The international trade between two subsidiaries in two countries controlled by the same multinational enterprise (MNE) is called _____. a. licensing b. franchising c. interfirm trade d. intrafirm trade

d. intrafirm trade