Chapter 8
Select two potential costs of FDI for host countries.
-Adverse effects on balance of payments -Adverse effects on competition
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.
-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 two reasons does the text give as to why FDI has outpaced world trade and world output?
-Firms want to circumvent potential future trade barriers. -FDI has been driven by political and economic changes in developing nations.
Which three factors would reveal that a company has little bargaining power when considering FDI?
-Host government does not value what the firm has to offer -The company has a short period of time to complete negotiations -Number of comparable alternatives open to the firm is fewer
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 two positive contributions to a host country can FDI provide?
-Supply capital, technology, and management resources -Boost a country's economic growth rate
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 alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?
-exporting -licensing
Three costs of FDI concern host countries
-possible adverse effects within the host nation -adverse effects on the balance of payments -perceived loss of national sovereignty and autonomy
Most common government incentives to foreign firms to encourage investment their countries:
-tax concessions -low-interest loans -grants/subsidies
location-specific advantages
Advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management know-how).
oligopoly
An industry composed of a limited number of large firms.
Eclectic Paradigm
Argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located.
Which country has a policy that encourages FDI?
Country A has a government-backed insurance program to protect against the risk of expropriation.
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
What are two benefits of FDI to a home country?
MNE learns skills from exposure to foreign market Foreign subsidiary creates demand for home-country exports
licensing
Occurs when a firm (the licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee). In return for giving the licensee these rights, the licensor collects a royalty fee on every unit the licensee sells.
Which situation represents an indirect effect of FDI on employment in a host country?
The employees of Seven Sons Inc. have more money to spend and as a result, more home construction jobs are being created in the country.
How has a shift toward democratic political institutions and free market economies affected FDI?
These shifts encourage businesses to participate in FDI.
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
One way to describe the free market view is to say that
a country should focus on importing goods that it can also produce if those goods are produced at a higher cost elsewhere
Business executives view foreign direct investment as a way to
circumvent future trade barriers
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
When it comes to FDI, Morrison Lighting Inc. makes greenfield investments in various foreign countries and fully manages the established foreign operations on its own rather than relying on host-country staff. This approach to FDI 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
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?
eclectic paradigm
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
Direct effects of FDI on employment in the host country arise when a foreign MNE
employs a number of host country citizens
The Argentinian government decides to offer tax concessions to foreign companies that agree to build a manufacturing facility in Argentina. This tax concession is a way to
encourage inward FDI
Kitchen Supply Corp. produces its entire line of restaurant-grade kitchen utensils and serving dishes at its manufacturing facility in the United States and then ships its products to various companies in Europe to sell. Kitchen Supply Corp. is involved in
exporting
Instead 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
The top management team at Missouri-based Parker Products collectively support the market imperfections approach. This means Parker Products' top management team is most likely to
express a preference for FDI over licensing as a strategy to enter foreign markets
It is in the best interest of a company to seek out a country that has _______ (restrictive or favorable?) policies toward FDI.
favorable
The ______ of FDI is the amount of FDI attempted over a period of time (usually one year).
flow
According to the U.S. Department of Commerce, what occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity?
foreign direct investment
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 ______ 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
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
Rather than acquire an existing machine parts manufacturer in Mexico, Robertson Corp., based in Ohio, chose to establish new operations in a northern Mexico city. This form of FDI is called
greenfield investment
FDI takes two main forms:
greenfield investment and acquiring or merging with an existing firm in the foreign country
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
What is a feature of an oligopoly?
interdependence of the major players.
The management team at Pass the Ketchup 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
Although it normally involves much longer-term commitments, franchising is essentially the service industry version of
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
John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.
location-specific advantages
One cost to a host country related to FDI would be the ______ (gain or loss?) of sovereignty and autonomy.
loss
Robertson's Fertilizers Inc. has decided against licensing its products because it wants to have control over the manufacturing and marketing processes. The company decides to focus on FDI instead. This decision is representative of the
market imperfections approach
Foreign Direct Investment (FDI)
occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
FDI that serves the home market is called ______ production.
offshore
If the United States invests in paper towel production facilities in Mexico, it would be engaging in
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
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
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
The radical view toward FDI argues that MNE's extract ______ from the host country and take them back to their home country.
profits
The _____ view of foreign direct investment has its basis in Marxist theory.
radical
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
Most developing countries do not have access to the technology available in developed nations, but these developing nations need technology to create new jobs and stimulate the economy. Which aspect of inward FDI do these developing nations rely on to have access to needed technology?
resource-transfer effects
Solar Power Inc. identifies licensees in various countries who produce and sell the company's solar panels in their countries in return for a royalty fee on every unit sold. Solar Power's approach is risky because of the problems associated with
sharing valuable technological know-how with a potential competitor
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
Which country has consistently been the largest source of FDI since World War II?
the United States
The flow of FDI refers to
the amount of FDI undertaken over a given time period
The stock of foreign direct investment refers to the total
the total accumulated value of foreign-owned assets at a given time
A firm will favor FDI over exporting as an entry strategy when
the transportation costs or trade barriers are high
Tax concessions can be used by a government to encourage foreign firms to do business in that country.
true