Chapter 8 International Business

What is the purpose of a greenfield investment?

To establish a new operation in a foreign country. Foreign direct investment takes on two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

Which account keeps track of the export and import of goods and services in a country?

Current account. The current account tracks the export and import of goods and services.

Identify the correct statement regarding the direction of FDI inflows.

Developed nations still account for the largest share of FDI inflows. Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased.

By limiting imports through quotas, governments decrease the attractiveness of FDI and licensing.

False. By limiting imports through quotas, governments increase the attractiveness of FDI and licensing.

The fast-food industry is a good example of a business sector where licensing is a poor option for FDI.

False. Licensing tends to be more common, and more profitable, in fragmented, low-technology industries in which globally dispersed manufacturing is not an option. A good example is the fast-food industry. McDonald's has expanded globally by using a franchising strategy, which is essentially the service-industry version of licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits.

The location-specific advantages argument associated with John Dunning explains why firms prefer FDI to licensing or to exporting.

False. The location-specific advantages argument associated with John Dunning does help explain the direction of FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting.

_____ is also known as the market imperfections theory.

Internalization theory. Internalization theory is also known as the market imperfections approach. It seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

_____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Licensing. Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Which of the following is a home-country policy aimed at limiting outward FDI flow?

Limiting capital outflows. Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time. One policy has been to limit capital outflows out of concern for the country's balance of payments.

_____ are controls over the behavior of the MNE's local subsidiary. The most common of these are related to local content, exports, technology transfer, and local participation in top management.

Performance requirements. Performance requirements are controls over the behavior of the MNE's local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.

A Chinese petroleum company sets up a crude oil refining facility in Vietnam. This is an example of a greenfield investment.

True. A greenfield investment involves the establishment of a new operation in a foreign country.

According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

True. According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

Direct effects arise when a foreign MNE employs a number of host-country citizens.

True. Direct effects arise when a foreign MNE employs a number of host-country citizens.

Offshore production refers to FDI undertaken to serve the home market.

True. The term offshore production refers to DFI undertaken to serve the home market. Far from reducing home-country employment, such FDI may actually stimulate economic growth (and hence employment) in the home country by freeing home-country resources to concentrate on activities where the home country has a comparative advantage.

In which of the following situations would FDI deteriorate the current account of the host country's balance of payments?

When a foreign subsidiary imports a substantial number of its inputs from abroad. A concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a debit on the current account of the host country's balance of payments.

According to the _____, international production should be distributed among countries according to the theory of comparative advantage.

free market view. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently.

If General Electric, a U.S. based corporation, purchases a 12 percent interest in a company in Italy, that purchase would be an example of a(n) _____.

minority acquisition. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).

Five airlines control 90 percent of the aviation sector of a country. The aviation industry in the country would be an example of a(n) _____.

oligopoly. An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly).

Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are _____ and performance requirements.

ownership restraints. Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements. The other items listed are all common forms of incentives governments offer to foreign firms to invest in their countries.

The _____ is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost.

pragmatic nationalist view. The pragmatic nationalist view is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost. When a foreign company rather than a domestic company produces products, the profits from that investment go abroad. Many countries are also concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country's balance-of-payments position.