Chapter 8: Foreign Direct Investment
FDI has a positive Blank______ impact on host countries as a result of technology transfers.
economic
Kimberly's company produces body lotion in the United States and ships it overseas to retail stores that sell the product. Her company is delivering product through Blank____
exporting
The various theories of FDI try to explain the Blank______ of FDI flows, which deals with why certain locations are favored as targets of FDI.
pattern
Tracking its expenditures and its receipts from other countries occurs in a country's _____ -of- ______ accounts.
Balance-of-Payments
What country in Latin America has been the highest recipient of inward FDI in recent years?
Brazil
Which country has shown steady and dramatic growth as a source of FDI since 2010 and has now turned their attention to more advanced nations?
China
____ has become a major recipient of FDI and hit a record of $149 billion in 2020.
China
Most economists Blank______ the idea that FDI is usually accompanied by some loss of economic independence.
Dismiss
Kennedy Construction Corp. wants to create a presence internationally but does not want to establish operations in a foreign country. What could the company do to accomplish this?
Exporting
When a firm invests directly in a foreign market to produce or market a product, it is called Blank__
FDI
True or false: Knickerbocker was concerned with the effect of licensing on industries composed of a limited number of large firms.
False
True or false: The pragmatic nationalism view contends that FDI has no costs, but many benefits.
False
True or false: When FDI occurs through greenfield investment, this will lower competition in a market and decrease economic welfare.
False
True or false: When tight control over a foreign entity is the goal of a company, it is in the best interest of that company to forge a licensing agreement rather than use foreign direct investment.
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 theory BEST explains why the first firm in an oligopoly decides to undertake foreign direct investment rather than exporting or making a licensing agreement?
Internalization theory
Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyota pioneered Blank______ production, which enables it to produce higher quality automobiles at a lower cost than global rivals.
Lean
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
A country's Blank______ account tracks the country's payments to and receipts from other countries.
balance-of-payments
The Blank______ combines the various perspectives of foreign direct investment into a holistic theory.
eclectic paradigm
When a company produces a good in the home country and then ships it to another country for sale it is called Blank____
exporting
Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of Blank______
foreign direct investment
Increased competition could Blank______ capital investments by firms in plants, equipment, and R&D as firms try to gain a competitive advantage over their rivals.
increase
By placing tariffs on imported goods, governments can Blank___
increase the cost of exporting relative to foreign direct investment and licensing
Grant's company has given a company in Japan the right to produce and sell its line of active wear. For every article of clothing the Japanese company sells, it pays Grant's company a fee. This is an example of Blank____
licensing
Internalization theory tries to explain why firms often prefer FDI over Blank______ as a method for getting into foreign markets.
licensing
Dunning's eclectic paradigm is seen as a useful addition to explaining patterns of FDI because it explains how Blank______ factors affect the direction of FDI.
location
What is a potential adverse impact on competition when a foreign entity acquires firms in a host country?
monopoly
The basis in Marxist politics is evident when radical writers argue that Blank______ enterprises are an instrument of imperialist domination.
multinational
Once a business undertakes foreign direct investment it becomes a(n) Blank__
multinational enterprise
The radical view toward FDI argues that Blank______ extract profits from the host country and take them back to their home country.
multinational enterprises
Knickerbocker argued that firms follow the same imitative behavior in their FDI strategies as Blank______ follow.
oligopolies
A(n) Blank______ is an industry made up of a limited number of large firms where there is an interdependence of the major players.
oligopoly
FDI Blank______ describe the flow of FDI out of a country.
outflows
The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to Blank___
sell off assets to foreigners
Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the Blank______ effect where some jobs created are offset by jobs lost elsewhere.
substitution
Inflows of FDI are described as Blank___
the flow of FDI into a country
It would be more common for a(n) Blank______ to agree to market aggressively as a way of keeping foreign competitors in check
wholly owned subsidiary
It would be more common for a(n) Blank______ to agree to market aggressively as a way of keeping foreign competitors in check.
wholly owned subsidiary
A host country cost of FDI could be the _____ of sovereignty and autonomy.
Loss
Exporting strategy does not work for a Blank______ value-to-weight ratio product that can be produced anywhere.
Low
Past activity of FDI shows that the majority of it has been directed at Blank___
developed nations
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 a worry for ________ economies.
developing
True or false: Direct effects of FDI arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the multinational enterprise.
false
One key factor that leads to adverse effects on a host country's Blank______ accounts is when a foreign subsidiary imports a substantial number of inputs from abroad, which results in a debit on the current account.
balance of payment
The Blank______ account tracks goods and services exports and imports in balance-of-payments accounting.
current
A(n) Blank______ investment occurs when a firm goes to a foreign market and establishes a new operation.
greenfield
The Blank______ of FDI measures the total accumulated value of a company's foreign-owned assets at a specific time.
stock
What is a benefit of inward FDI for a host country?
Employment effect
The Blank______ of FDI describes the amount of FDI undertaken during a year.
Flow
_____ allows a company to collect a royalty fee from a foreign firm that it has granted the right to produce and sell its product.
Licensing
A(n) Blank______ can be set by the government in order to limit the number of imports. This increases the attractiveness of FDI and licensing.
Quota
What country has been the largest source of FDI since World War II?
United States
Which country was a favorite target for FDI inflows during the 1980s and 1990s?
United States
According to internalization theory, a company would rather gain entrance into a foreign market by using Blank______.
FDI
The 1997 World Trade Organization agreement opened the telecommunications market to foreign competitors and exemplifies how Blank______ are impacted by FDI.
services
One result of Blank______ effects is that the net number of new jobs created by FDI may not be as large as initially claimed.
substitution
What two countries have shifted to a more hostile approach to FDI?
1. Venezuela 2. Bolivia
What is the name of a business venture where finances are used to create a new physical facility for a business in a foreign location where the company currently does not have existing facilities?
Greenfield
Economists refer to knowledge "spillovers" as Blank______, and there is a theory that suggests firms can benefit from these "spillovers" by locating close to their source.
externalities
China's FDI efforts have typically been toward less developed nations and directed at Blank______ industries.
extractive
The main reason why businesses prefer acquisition as a means of FDI is because acquisitions are Blank______ than greenfield investments.
faster to execute
How has the flow of FDI compared to the growth in world trade since 1990?
The flow of FDI has accelerated faster than the growth in world trade.
True or false: Acquisitions are the preferred method of FDI because global markets evolve very rapidly and acquisitions are quicker to execute.
True
What is a company participating in when it directly invests in facilities to produce or market a product in a foreign country?
foreign direct investment
The Blank______ view of FDI states that international production should be allocated based on the theory of comparative advantage.
free market
What are the three potential costs of FDI to host countries?
1. Adverse effects on competition 2. Adverse effects on balance of payments 3. Perceived loss of national sovereignty & autonomy
What are two current trends in FDI?
1. An increase in FDI aimed at countries that have liberalized their FDI regimes 2. An increase in the volume of FDI
What is an accurate summary of the rationale behind the free market view?
FDI is a benefit to both the source country and the host country.
The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in what two benefits?
1. lower prices 2. modernization of telephone networks
Based on standards set by the US Department of Commerce, a firm is engaging in FDI when it takes an interest of Blank______ or more in a foreign business entity.
10%
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 Blank______ cannot be licensed
organizational culture
What are three advantages of FDI? (Check all that apply.)
1. It allows a firm to maintain control over technological know-how. 2. It allows for tight control over a firm's operations. 3. It helps overcome high transportation costs.
Along with the United States, which five countries accounted for 60% of all FDI outflows from 2000-2020?
1. Japan 2. The United Kingdom 3. France 4. The Netherlands 5. Germany
Choose the three benefits of FDI to a home country.
1. MNE learns skills from exposure to foreign market 2. Foreign subsidiary creates demand for home-country exports 3. Inward flow of foreign earnings
The 2,000 employees working in Toyota's factory in France are an example of the Blank______ effect of FDI on employment, while the 2,000 new jobs that were created in support industries are an example of the Blank______ effect of FDI on employment.
direct, indirect
A(n) Blank______ strategy is favored over exporting when transportation costs or trade barriers are prohibitive.
foreign direct investment
What two factors cause major adverse effects on a host country's balance of payments?
1. The outflow of earnings from a foreign subsidiary to its parent company 2. A foreign subsidiary importing a large number of inputs from abroad
What are the two types of FDI?
1. acquisition or merger with an existing foreign firm 2. establishing a new operation in a foreign market
True or false: Jim's US-based paper products company sources paper from a plant in Brazil that takes advantage of the available forestry near the plant. This is an example of a location-specific advantage.
True
Historically countries like Iran and India that are more Blank______ than Blank______ have favored the radical position that FDI is bad.
nationalistic, socialistic
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 Blank______
both the home and the host countries
Until the collapse of ______ between 1989 and 1991, the countries of eastern Europe were opposed to FDI.
communism
What name is given to the advantages that coincide with utilizing resource endowments or assets tied to a specific area?
Location-specific
Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of Blank_____
foreign direct investment
Greenfield investing spurs competition by increasing the number of players in a market and this will tend to Blank______ prices and Blank______ economic welfare
lower, increase
What are two examples of location-specific advantages as categorized by the eclectic paradigm?
1. Human resources 2. Natural resources
The stock of foreign direct investment refers to the total Blank_
accumulated value of foreign-owned assets at a given point in time
The situation where multiple firms encounter each other in different regional markets, national markets or industries is called Blank______.
multipoint competition
For which of these products does the attractiveness of exporting decrease relative to either FDI or licensing?
A product that can be produced almost anywhere
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found what two resource-transfer effects?
1. Foreign investors transferred technology to countries in which they invested. 2. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested.
True or false: When RCA licensed its color television product to a number of Japanese companies in the 1960s, these companies turned around and entered the US to directly compete with RCA and diminished its role in the market. In this situation, licensing resulted in RCA giving away proprietary information to a potential competitor.
True
The Blank______ effects of FDI arise when a multinational enterprise hires host-country citizens and the Blank______ effects arise when local suppliers hire workers as a result of the FDI.
direct, indirect
What are two benefits of FDI for a host country? (Check all that apply.)
1. Economic growth 2. Resource-transfer effects
The text notes two reasons why FDI has outpaced world trade and world output. What are those two reasons? (Check both reasons.)
1. Even though trade barriers are diminishing, firms still fear protectionist pressures. 2. FDI has been driven by political and economic changes in developing nations.
The limits of Blank______ include giving away valuable know-how to competitors and losing control over marketing, production and strategy.
licensing
What are two alternatives to FDI?
1. Licensing 2. Exporting
What are two characteristics of an oligopoly?
1. large firms 2. limited number of firms
An example of Blank______ is when firms benefit from each other's knowledge generation.
externalities
When a firm invests in plants, equipment, and R&D as a result of increased competition, it is engaging in Blank______ investment.
capital
