Chapter 8 Foreign Direct Investment

What two factors cause major adverse effects on a host country's balance of payments?

-A foreign subsidiary importing a large number of inputs from abroad -The outflow of earnings from a foreign subsidiary to its parent company

What are two reasons businesses prefer acquisition as a means of FDI over a greenfield investment?

-Acquisitions are faster to execute than greenfield investments. -It is less risky to acquire firms that have certain business assets in place.

Select two potential costs of FDI for host countries.

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

What are two current trends in FDI?

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

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 are two reasons why the radical view of political ideology began to retreat in the 1990s?

-Collapse of communism in eastern Europe -Strong economic performance by countries embracing capitalism

What are the two main types of FDI?

-Establishing a new operation in a foreign market -Acquisition or merger with an existing foreign firm

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

-Exporting -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.

Firms for which licensing is NOT a good option are clustered in which three industries?

-Industries with intense cost pressures -High-tech industries -Global oligopolies

What are two characteristics of the eclectic paradigm?

-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 three major drawbacks associated with licensing?

-Licensing can potentially damage a company's established brand. -Licensing does not allow a company to control the marketing strategy used in the foreign country. -Licensing may give away valuable technological know-how to a potential foreign competitor.

The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in several benefits, including which two of the following?

-Lower prices -Modernization of telephone networks

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

What are three advantages of FDI?

-Overcomes high transportation costs -Allows for tight control over the firm's operations -Allows the firm to maintain control over technological know-how

What two measures can countries employ to restrict foreign direct investment?

-Ownership restraints -Performance requirements

What are two potential long-term effects from increased competition?

-Product and process innovations -Increased productivity growth

What are two examples of location-specific advantages?

-Skilled labor -Natural resources

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

-Stable economy -Large domestic markets

What are the two most common incentives governments offer to foreign firms to invest in their country?

-Subsidies -Low-interest loans

What two positive contributions to a host country can FDI provide?

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

Which two factors would reveal that a company has little bargaining power when considering FDI?

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

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 provided the base for many of the largest and best-capitalized businesses. -They were the most developed nations with the largest economies in the postwar period.

What are two limitations on exporting?

-Trade barriers -transportation costs

FDI theory suggests that exporting is preferable to licensing and FDI as long as what two things are in place?

-Trade barriers are low. -Transportation costs are low.

According to the U.S. Department of Commerce, an interest of ______ in a foreign business is needed to achieve FDI.

10 percent or more

The Hudson Footwear Company based in New York recently purchased Mediterranean Shoe Group based in Italy. Hudson Footwear wanted to expand its reach of FDI and believed that buying an existing firm was the best method to accomplish this goal. Which form of FDI did the company use?

Acquisition

Because of political unrest, armed conflict, and frequent changes in economic policy, what region has typically received the smallest amount of inward investment?

Africa

Which country has shown a marked increase in FDI inflows since 2004?

China

Which country has a policy that encourages FDI?

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

What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?

Creation of a monopoly

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

_____ are a network of informal contacts that allow companies to benefit from each other's knowledge.

Externalities

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

FDI

When a firm participates in ______, it evolves into a multinational enterprise.

FDI

True or false: An acquisition is considered beneficial because it effectively reduces the number of businesses in a market.

False

True or false: The World Trade Organization has been successful in its efforts to establish a universal set of rules governing the liberalization of FDI.

False

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

Which concept BEST explains why the first firm in an oligopoly relies on foreign direct investment rather than exporting or making a licensing agreement?

Internalization theory

What is one drawback associated with Knickerbocker's imitative theory?

It fails to address the issue of whether FDI is more efficient than exporting or licensing.

______ theory of FDI suggests that firms imitate and react to each other's behavior.

Knickerbocker's

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

Which company demonstrates a successful franchising strategy?

McDonalds

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 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.

True or false: A company that decides to locate operations close to other companies so it can take advantage of their knowledge is an example of how businesses use externalities.

True

True or false: A company would favor FDI over exporting when trade barriers are in place.

True

True or false: Acquisitions are the preferred method of FDI because global markets evolve very rapidly and acquisitions are quicker to execute.

True

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

True

One reason for the wave of FDI into the United States by Japanese auto companies starting in the mid-1980s was in response to

U.S. government-imposed tariffs on Japanese auto imports.

For the most part, the radical view has diminished in strength since the early 1990s. However, ______ continues to follow this philosophy under the government of Hugo Chavez and his successor, Nicolas Maduro.

Venezuela

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

The stock of foreign direct investment refers to the total

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

Knickerbocker would say that in an oligopoly, if one firm decides to raise prices, then other firms would

also raise prices.

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

balance-of-payments

According to pragmatic nationalism, FDI should be allowed as long as

benefits outweigh costs.

When a company moves operations overseas to take advantage of lower labor costs, this strategy increases the overall efficiency of resource utilization in the global economy. According to the free market view of FDI, this benefits

both the source and the host countries.

When a firm invests in plant, equipment, and R&D as a result of increased competition, this is referred to as a(n) ______ investment.

capital

Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.

capital outflow

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

current

Tracking exports and imports of goods and services is measured by the _____ account in balance-of-payments accounting.

current

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

deficit

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

developed

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

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

Most economists _____ the idea that FDI is usually accompanied by some loss of economic independence.

dismiss

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

double

FDI has a positive ______ impact on host countries as a result of technology transfers.

economic

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

exporting

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

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

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

false

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.

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

flow

Dell moved its assembly operations for many of its personal computers to Mexico to take advantage of lower labor costs. The ______ view of FDI states that overall efficiency of resource utilization increases the world economy.

free market

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

free market

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

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.

hostile

FDI occurs when a company invests in facilities

in a foreign country

Over the past few years, more and more companies are investing in businesses in Central America. These investments represent the _____ of FDI for the Central American countries.

inflow

Fears of "economic ransom" are irrational, according to Robert Reich, because of the growing ______ of the world economy.

interdependence

What is a feature of an oligopoly?

interdependence of the major players.

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

internalization

Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyota pioneered ______, which enables it to produce higher quality automobiles at a lower cost than global rivals.

lean production

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

licensing

Internalization theory is used to explain why a firm would prefer foreign direct investment over ______ as a strategy to enter a foreign market.

licensing

Two major limits of ______ include giving away valuable know-how to competitors and losing control over marketing, production, and strategy.

licensing

Many of the world's oil companies have to invest where oil is located in order to combine their technological and management capabilities with the actual product. This demonstrates the idea of a(n) _____ advantage.

location-specific

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

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

low

ABC Co. should choose exporting over licensing as a form of FDI if it has ______ transportation costs and is facing ______ trade barriers.

low;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

The situation where two or more firms encounter each other in different regional markets, national markets, or industries is called

multi-point competition.

Griffin Labs and Sequence Labs are in competition in the same seven regional markets. This is an example of

multipoint competition.

Ownership restraints on FDI are often put into place by a host country based on concerns of

national security.

FDI that serves the home market is called ______ production.

offshore

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

One reason Toyota does NOT make licensing agreements is because its management and process capabilities have been developed over many years and are a part of the organization. In other words, Toyota's ______ cannot be licensed.

organizational culture

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.

outflow

The ______ of FDI refers to the value of outward direct investment made to external economies.

outflows

Some countries prohibit national firms from investing in specific countries for ______ reasons, such as U.S. firms being prohibited from investing in Cuba during the Cold War.

political

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 the ______ view.

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

One way that a government can limit the amount of imports entering a country is by imposing

quotas

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

At one time, Britain taxed British companies' foreign earnings at a higher rate than their domestic earnings in order to _____ FDI.

restrict

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

The 1997 World Trade Organization agreement opened the telecommunications market to foreign competitors and exemplifies how _____ are impacted by FDI.

services

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

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

Critics argue that FDI by Japanese auto makers does not make up for the jobs lost in U.S.-based auto manufacturers. These critics are concerned with the

substitution effect

When a country maintains a current account _____ (deficit or surplus?), it is unlikely to have to sell off assets in order to balance accounts

surplus

The World Trade Organization has based the majority of its efforts on pushing for the liberalization of regulations governing ______.

the service industry

Research shows that multinational companies_____ technology when they invest in a foreign country.

transfer