Chapter 8

What two positive contributions to a host country can FDI provide? - Supply capital, technology, and management resources - Decrease any trade imbalance - Boost a country's economic growth rate - Protect intellectual property

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

Toyota's $25 billion investment in the U.S. market indicates that the Japanese company believes that the United States is a strategically important market. When considering future international expansion, if Toyota has valuable know-how that cannot be protected with a licensing contract and also faces high transportation costs, Toyota should

invest directly in target markets.

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

BMW is increasing production capacity in its U.S. operations in order to be able to respond to growing demand for its brand. Which best describes BMW's U.S. operations?

Greenfield investment

Determine whether the scenario represents a benefit or cost to the home or host country. FDI as a substitute for imports of goods and services

Host-Country Benefit

Determine whether the scenario represents a benefit or cost to the home or host country. Increase in direct and indirect employment

Host-Country Benefit

Determine whether the scenario represents a benefit or cost to the home or host country. Transfer of new technology

Host-Country Benefit

For JCB, foreign direct investment in India was initially preferable to exporting because

India had high tariff barriers.

What is a feature of an oligopoly?

Interdependence of major players

Assume that Green Organics Ltd. based in Phoenix, Arizona has given a British-based company the right to produce and sell its 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

What are two alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets? - Licensing - Importing - Embargoes - Exporting

Licensing and Exporting

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. A firm does not have to bear development costs and risks of opening a foreign market.

Licensing—Benefit

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. A firm can quickly lose control over its technology, manufacturing, and marketing.

Licensing—Drawback

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

Multipoint competition

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 items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Communist countries—Many communist countries were opposed in principle to FDI.

Radical View

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Iran—A Muslim country, which rejects Marxist theory, Iran has essentially embraced FDI.

Radical View

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

The United States

Toyota produces 1.2 million vehicles per year in the United States. Which best explains why Toyota has chosen to produce its vehicles in the United States rather than exporting from Japan?

Toyota is concerned that its ability to export from Japan could be compromised by U.S. tariffs and quotas.

JCB's joint venture in India with Escorts can best be described as

a greenfield investment.

A country's ___________ accounts track expenditures and receipts from other countries.

balance-of-payments

Tracking exports and imports of goods and services is measured by the _______ account 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 more of a worry for _______ economies. (Choose developing or advanced.)

developing

If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy.

exporting

The effect of bulky or heavy products on transportation costs can make _______ an inappropriate strategy.

exporting

nstead of FDI, a company 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

It is in the best interest of a company to seek out a country that has _______ (restrictive or favorable?) 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.

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

BMW is planning to make a big push into markets around the world with its MINI brand. If BMW has valuable know-how that cannot be protected with a licensing contract and also faces high transportation costs, BMW should

invest directly in target markets.

JCB's joint venture in India with local conglomerate Escorts

is an example of foreign direct investment.

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 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.

One cost to a host country related to FDI would be the _______ (gain or loss?) of sovereignty and autonomy.

loss

Exporting strategy does not work for a _______ (low or high?) value-to-weight ratio product that can be produced anywhere.

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

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

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

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

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

The stock of FDI refers to the

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

Research shows that multinational companies _______ technology when they invest in a foreign country. (Choose transfer or deplete.)

transfer

______ refers to shipping goods and services out of the jurisdiction of a country.

Exporting

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 the last decade, FDI inflows directed at developing nations have increased and even surpassed inflows into developed nations for the first time in 2018. Which of these developing economies was the recipient of these FDI inflows?

Former Soviet Union

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Comparative advantage—International production should be distributed among countries.

Free Market View

Determine whether the scenario represents a benefit or cost to the home or host country. The inward flow of foreign earnings

Home-Country Benefit

Determine whether the scenario represents a benefit or cost to the home or host country. FDI as a substitute for direct export

Home-Country Cost

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Socialist countries—Many of the socialist countries, particularly the ones in Africa, have embraced this view toward FDI.

Radical View

How has a shift toward democratic political institutions and free market economies affected FDI?

These shifts encourage businesses to participate in FDI.

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

licensing

What two reasons does the text give as to why FDI has outpaced world trade and world output? - FDI has been driven by political and economic changes in developing nations. - Firms want to circumvent potential future trade barriers. - Economic deregulation and privatization programs are on the decrease. - Fewer firms are participating in FDI based on homogeneity.

- FDI has been driven by political and economic changes in developing nations. - Firms want to circumvent potential future trade barriers.

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which two results? - Firms did not create new technology in countries in which they invested. - Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. - Firms did not upgrade existing technology in countries in which they invested. - 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. - Foreign investors transferred technology to countries in which they invested.

What are two limitations on exporting? - Trade barriers - Transportation costs - Design costs - Licensing fees

- Trade barriers - Transportation costs

Which country has a policy that encourages FDI? - Country A has a government-backed insurance program to protect against the risk of expropriation. - Country B has implemented a double taxation policy on all foreign income. - Country C encourages businesses to invest in countries which prevent the transfer of profits. - Country D does not allow government loans to businesses investing in developing countries.

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

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

FDI

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Lower wages—Dell decides to move to Mexico to take advantage of lower labor costs and overall efficiency.

Free Market View

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

Determine whether the scenario represents a benefit or cost to the home or host country. Monopolization of markets

Host-Country Cost

A government would be concerned when the country is running a ______ on the current account of their balance of payments.

deficit

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

false

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

internalization

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

radical

Identify two costs of FDI to a home country. - 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. - Balance of payments are negatively affected if demand increases for home country exports. - Balance of payments are negatively impacted if foreign earnings are sent back to the home country.

- 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.

What are two benefits of FDI to a home country? - Resource transfer effect where skills go to foreign subsidiary - Outward flow of domestic profits - Foreign subsidiary creates demand for home-country exports - MNE learns skills from exposure to foreign market

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

Which two factors would reveal that a company has little bargaining power when considering FDI? - Host government does not value what the firm has to offer - Host government knows there are few alternatives to what the company is offering - Company is competing with multiple other firms - The company has a short period of time to complete negotiations

- Host government does not value what the firm has to offer - The company has a short period of time to complete negotiations

What are two characteristics of the eclectic paradigm? - It argues that the key question of foreign direct investment is whether to choose a greenfield investment or an acquisition. - It offers a good explanation of foreign direct investment in the 1980s and 1990s but is less successful at explaining more recent investment. - 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.

- 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? - High tariffs - Large domestic markets - Small consumer divisions - Stable economy

- Large domestic markets - Stable economy

What are the two most common incentives governments offer to foreign firms to invest in their country? - Subsidies - Non-profit status - Low-interest loans - Network air time

- Subsidies - Low-interest loans

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 had the shortest history as trading nations. - They provided the base for many of the largest and best-capitalized businesses. - They were most economically deprived postwar and required greater FDI inflows.

- 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.

When the German-based company Forrest Health Supply Inc. developed operations in Italy, it built a manufacturing facility there. In turn, the new facility also imported supplies and equipment from companies based in Germany. Which home country benefit of FDI does this represent?

Employment effects

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. Centralized manufacturing can result in scale economies from global sales volume.

Exporting—Benefit

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. Transportation costs can make it unprofitable to ship some products over a long distance.

Exporting—Drawback

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. A firm controls operations in different countries, can use profits from one country to support another.

FDI—Benefit

Match the descriptions below with the correct entry strategy and determine if it is a benefit or a drawback of the entry strategy. A firm bears the costs and risks of overseas operations, and operating in a new culture.

FDI—Drawback

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Benefits—Resource transfers from the parent country benefit the host country.

Free Market View

Determine whether the scenario represents a benefit or cost to the home or host country. Demand creation for home-country export

Home-Country Benefit

Determine whether the scenario represents a benefit or cost to the home or host country. Initial capital outflow to finance FDI

Home-Country Cost

Determine whether the scenario represents a benefit or cost to the home or host country. Loss of economic independence

Host-Country Cost

Determine whether the scenario represents a benefit or cost to the home or host country. Outflow of earnings from a foreign subsidiary

Host-Country Cost

JCB operates several factories in India employing more than 5,000 workers. Which best characterizes JCB's impact on India?

India benefits from employment effects.

According to the video, Japan's Toyota has invested $25 billion in production facilities in the United States. Which is not a correct match between an action occurring because of Toyota's investment in the United States and the effect on the host country?

New jobs in Japan are created to facilitate U.S. investment. Effect on host country: employment effect.

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Japan—When IBM and Texas Instruments set up wholly owned subsidiaries in Japan by negotiating terms that were beneficial to the Japanese economy.

Pragmatic Nationalism

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Profits—When a foreign company produces something in a host country, it creates jobs, but the profits from the host country go overseas.

Pragmatic Nationalism

The items below are related to the changing demographics of the global economy. Match each demographic to the FDI view. Tax subsidiaries—Offering tax subsidiaries to foreign multinational enterprises in the form of tax breaks or grants.

Pragmatic Nationalism

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 theory of foreign direct investment attempts to combine (1) the theories that focus on favoring direct investment when exporting and licensing are available and (2) theories that say certain locations are favored over others for FDI?

The eclectic paradigm

BMW is closely following the implications of several recent elections including the presidential elections in France and the United States, the Brexit vote in the United Kingdom, and the new government in Germany. Why?

The elections create uncertainty in the international business environment.

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 point in time.

The _____ account tracks goods and services exports and imports in balance-of-payments accounting.

current

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

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

double

When a nation puts government-backed insurance programs in place to cover major types of foreign investment risk, it has the effect of

encouraging outward FDI by a home country.

Producing a good at home and then shipping it to another country for sale is called _______.

exporting

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.

The ________ of FDI is the amount of FDI attempted over a period of time (usually one year).

flow

If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider

foreign direct investment.

Dipper Donuts licenses its brand name to foreign firms as long as they agree to run their restaurants on exactly the same lines as Dipper Donuts restaurants elsewhere in the world. In return, the foreign firms have to pay Dipper Donuts a percentage of their profits. This is an example of

franchising.

The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage.

free market

The world flow of foreign direct investment between 1990 and 2017 increased 600 percent. If a company decides to establish a new operation in a foreign country, that company has engaged in

greenfield investment.

Venezuela and Bolivia are examples of countries that have become more _______ to FDI. (Choose open or hostile.)

hostile

FDI occurs when a company invests in facilities

in a foreign country

Dolby Fashion House, an Italian manufacturer of evening dresses, granted U.S. company On the Runway Inc. the right to produce and sell Dolby Fashion's products in the United States. In return, On the Runway Inc. has to pay a royalty fee on every unit sold. According to this information, what form of FDI is Dolby Fashion House using?

licensing

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

John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.

location-specific advantages

FDI that serves the home market is called ______ production.

offshore

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

true

Select two potential costs of FDI for host countries. - Adverse effects on competition - Adverse effects on balance of payments - Positive effects on balance of payments - Gains in national sovereignty and autonomy

- Adverse effects on competition - Adverse effects on balance of payments

What are two current trends in FDI? - A decrease in the volume of FDI directed at countries that have recently liberalized their FDI regimes - An increase in FDI aimed at countries that have liberalized their FDI regimes - A decrease in the volume of FDI worldwide - An increase in the volume of FDI

- An increase in FDI aimed at countries that have liberalized their FDI regimes - An increase in the volume of FDI