Chapter 8: Foreign Direct Investment

Select two potential costs of FDI for host countries.

Adverse effects on balance of payments Adverse effects on competition

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.

Which country has a policy that encourages FDI?

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

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

What are two alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?

Exporting Licensing

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

FDI

What are two benefits of FDI to a home country?

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

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

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 is a feature of an oligopoly?

Interdependence of major players

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

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 are the two most common incentives governments offer to foreign firms to invest in their country? (Check all that apply.)

Low-interest loans Subsidies

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

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

Stable economy Large domestic markets

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

The United States

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

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

The stock of foreign direct investment refers to the total

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

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

double

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

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

FDI occurs when a company invests in facilities

foreign country

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

free market

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.

FDI that serves the home market is called ______ production.

offshore

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

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

true

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 two positive contributions to a host country can FDI provide?

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

In the past, most foreign direct investment has been directed at _____ nations.

developed

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

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

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 The company has a short period of time to complete negotiations

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

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

hostile

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

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

radical

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 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

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.

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

WTO

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.