INB MIDTERM 2

Mutual suspicion and rivalry are common between which two custom unions?

The Andean Community and Mercosur Correct. There is much mutual suspicion and rivalry between both organizations and within each of them. Refer to 8-5b South America: Andean Community, Mercosur, USAN/ UNASUR, and CAFTA.

What are the primary types of foreign exchange transactions made by financial companies?

swaps, spot transactions, forward transactions Correct. The primary types of foreign exchange transactions made by financial companies are: swaps, spot transactions, and forward transactions. Refer to Table 7.3 Managing Currency Risk.

A savvy global business manager must understand what concept to be considered literate about foreign exchange?

that a country's risk analysis must include a currency risk analysis and ways to hedge those risks Correct. A savvy and literate global business manager must understand that a country's risk analysis must include a currency risk analysis and ways to hedge those risks. Refer to 7.5 Management Savvy

Although the Bretton Woods system is no longer used, what is one of its most enduring legacies?

the International Monetary Fund Correct. One of the most enduring legacies of the Bretton Woods system is the International Monetary Fund—an international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements. Refer to 7-2d The International Monetary Fund (IMF).

Among the largest US firms, only approximately one-third hedge as a form of insurance

true Correct. Managers argue that currency hedging eats into profits. A simple forward contract may cost up to half a percentage point per year of the revenue being hedged. More complicated transactions may cost more. As a result, many firms believe that the ups and downs of various currencies even out in the long run. Some firms focus on strategic hedging while refraining from currency hedging. Refer to 7.4c Strategies for Nonfinancial Companies.

The difference between the offer rate and the bid rate is called the spread.

true correct. The offer rate is the price to sell currency. The bid rate is the price to buy currency. The spread is the difference between the two. Refer to 7.3a Strategies for Financial Companies.

Negotiations between host countries and MNEs bargaining over the level and purpose of FDI results in FDI often being a zero-sum game.

. False Correct. It is preferable for both sides in a negotiation to experience a win-win versus a win-lose (zero-sum) to gain buy-in by both parties. Refer to How MNEs and Host Governments Bargain.

What does the international monetary fund (IMF) do?

. The IMF promotes international monetary cooperation and provides temporary financial assistance to member countries Correct. The IMF promotes international monetary cooperation, provides temporary financial assistance to member countries, and will lend money if necessary to member countries. Refer to 7.2d The International Monetary Fund (IMF)

Many MNEs will invest abroad by adding employment overseas while simultaneously laying off employees at home.

. True Correct. It is common for MNEs to reduce labor needs in their home country to offset the additional costs from expanding or moving operations abroad. Refer to 6-6c Benefits and Costs of FDI to Home Countries.

What term BEST describes a government's seizure of a firm's foreign assets?

. expropriation Correct. The government confiscation of foreign assets is known as expropriation. Refer to 6-7 How MNEs and Host Governments Bargain.

What is a foreign portfolio investment (FPI)?

. investment in foreign stocks and bonds without the active management of foreign assets

Combating Market Failure Through FDI: One Company (MNE) in Two Countries1

1In theory, there can be two possibilities: (1) BP undertakes upstream vertical FDI by owning oil production assets in Nigeria or (2) NNPC undertakes downstream vertical FDI by owning oil refinery assets in Great Britain. In reality, the first scenario is more likely Overall, the motivations for FDI are complex. Based on resource-based and institution-based views, we can see FDI as a reflection of both 1. firms' motivation to extend firm-specific capabilities abroad and 2. their responses to overcome market imperfections and failures.

6-1d MNE versus non-MNE

An MNE, by definition, is a firm that engages in FDI when doing business abroad. An MNE is sometimes called a multinational corporation (MNC) or a transnational corporation (TNC). To avoid confusion, we will stick with the term "MNE" throughout the book. Note that non-MNE firms can also do business abroad, by exporting and importing, licensing and franchising, outsourcing, engaging in FPI, or other means (see Chapter 10). What sets MNEs apart from non-MNEs is FDI. An exporter has to undertake FDI in order to become an MNE. In other words, Tesla would not be an MNE if it made all of its cars in the United States and exported them around the world. Tesla became an MNE only when it started to directly invest abroad Although a lot of people believe that MNEs are a new organizational form that emerged recently, it is not true. MNEs have existed for at least 2,000 years, with some of the earliest traces discovered during Assyrian, Greek, Phoenician, and Roman times. in 1903 when Ford Motor Company was founded, it exported its sixth car. Ford almost immediately engaged in FDI by having a factory in Canada that produced its first output in 1904.Footnote It is true that MNEs have experienced significant growth since World War II. In 1970, there were approximately 7,000 MNEs worldwide. Recently, more than 82,000 MNEs managed approximately 810,000 foreign affiliates. Clearly, there has been a proliferation of MNEs lately.

6-6b Benefits and Costs of FDI to Host Countries Continued Part 2

A second concern is associated with the negative effects on local competition. While we have just discussed the positive effects of MNEs on local competition, it is possible that MNEs may drive some domestic firms out of business. Having driven domestic firms out of business, MNEs, in theory, may be able to monopolize local markets. While this is a relatively minor concern in developed economies, this is a legitimate concern for less-developed economies, where MNEs are of such a magnitude in size and strength and local firms tend to be significantly weaker. For example, as Coca-Cola and PepsiCo extend their "cola wars" from the United States to the rest of the world, they have almost "accidentally" wiped out much of the world's indigenous beverage companies, which are—or were—much smaller. A third concern is associated with capital outflow. When MNEs make profits in host countries and repatriate (send back) such earnings to headquarters in home countries, host countries experience a net outflow in the capital account in their balance of payments. As a result, some countries have restricted the ability of MNEs to repatriate funds. Another issue arises when MNE subsidiaries spend a lot of money to import components and services abroad, which also results in outflows of capital and reduction of tax revenue in host countries (see In Focus 6.3)

6-7 How MNEs and Host Governments Bargain

According to the institution-based view, MNEs react to various policies by bargaining with host governments. The outcome of the MNE-host government relationship, namely, the scale and scope of FDI in a host country, is a function of the relative bargaining power of both sides—the ability to extract favorable outcome from negotiations due to one party's strengths. MNEs typically prefer to minimize the intervention from host governments and maximize the incentives provided by host governments (see the Opening Case). Host governments usually want to ensure a certain degree of control and minimize the incentives provided to MNEs. Sometimes, host governments "must coerce or cajole the multinationals into undertaking roles that they would otherwise abdicate." However, host governments have to "induce, rather than command," because MNEs have options elsewhere. Different countries, in effect, are competing with each other for precious FDI dollars. FDI is not a zero-sum game. The negotiations are characterized by the "three Cs": common interests, conflicting interests, and compromises . The upshot is that despite conflicts, the interests of both sides may converge on an outcome that makes each side better off.

A firm can enter a foreign market using licensing and franchisinG

TRUE Correct. Licensing and franchising are ways a firm can enter a foreign market. Refer to 6-1d MNE versus non-MNE

6-6 c Benefits and Costs of FDI to Home Countries Continued Part 1

Approximately one-fifth of the worldwide FDI reportedly has gone to tax havens, which are jurisdictions that offer low taxes as a primary way to attract investment. Tax havens represent less than 2% of the global GDP, but their ability to attract FDI is disproportionally large. In 2021, the Group of Seven (G7)—Britain, Canada, France, Germany, Italy, Japan, and the United States—proposed a worldwide minimum corporate income tax of 15%.Footnote Such a worldwide minimum tax endeavors to (1) discourage MNEs from shifting profits to low-tax countries (especially tax havens), and (2) reduce tax competition and the race to the bottom that has lowered tax revenues in many countries. This proposal will be fiercely debated in the years to come. To home countries, the second concern is also prominent: job loss. Many MNEs simultaneously invest abroad by adding employment overseas and laying off employees domestically. It is not surprising that restrictions on FDI outflows have been increasingly vocal and called for by politicians, union members, journalists, and activists in many developed economies

6-6 c Benefits and Costs of FDI to Home Countries

As exporters of capital, technology, management, and (in some cases) jobs, home countries often reap the benefits and endure the costs associated with FDI that are opposite to those experienced by host countries. In Cell 3 of Figure 6.9, three benefits to home countries are: Repatriated earnings from profits from FDI. Increased exports of components and services to host countries. Learning via FDI from operations abroad. Shown in Cell 4 in Figure 6.9, costs of FDI to home countries primarily center on capital outflow and job loss. First, since host countries enjoy capital inflow because of FDI, home countries naturally suffer from some capital outflow. Some FDI is likely motivated by a primary reason of tax avoidance—avoiding higher taxes in home countries and moving assets to lower-tax jurisdictions. For example, the US-based Google Corporation (the parent company) lets its 100% wholly-owned subsidiary Google Ireland earn a lot of profits, but the US Internal Revenue Service (IRS) cannot tax a dime Google Ireland makes—unless it sends back (repatriate) the profits to Google Corporation. Prior to the 2017 US tax reforms, US firms would need to pay a federal corporate income tax of 35%, among the highest in the world. While the 2017 reforms brought it down to 21%, Ireland's 12.5% corporate income tax is still much more attractive.

6-8b Debate 2: Facilitating versus Confronting Inward FDI

At the heart of this debate is the age-old question discussed earlier: Can we trust foreign firms in making decisions important to our economy? First discussed in Chapter 1, the pendulum view of globalization can capture a lot of the changing sentiments on inward FDI (to simplify, this section uses "FDI" hereafter). In postwar decades, most developing economies had a radical view that was suspicious of FDI, which was often associated with colonialism. In developed economies, backlash against FDI from certain countries was not unusual. In the 1960s, Europeans were concerned about the massive US FDI in Europe. In the 1980s, Americans were alarmed by the significant Japanese inroads into the United States. Over time, as the swing of the pendulum moved toward a more proglobalization direction, which probably started in the 1980s, such concerns subsided. More developing economies became more open to FDI, and more developed economies removed restrictive policies

Debate 2: Facilitating versus Confronting Inward FDI

At the heart of this debate is the age-old question discussed earlier: Can we trust foreign firms in making decisions important to our economy? First discussed in Chapter 1, the pendulum view of globalization can capture a lot of the changing sentiments on inward FDI (to simplify, this section uses "FDI" hereafter). In postwar decades, most developing economies had a radical view that was suspicious of FDI, which was often associated with colonialism. In developed economies, backlash against FDI from certain countries was not unusual. In the 1960s, Europeans were concerned about the massive US FDI in Europe. In the 1980s, Americans were alarmed by the significant Japanese inroads into the United States. Over time, as the swing of the pendulum moved toward a more proglobalization direction, which probably started in the 1980s, such concerns subsided. More developing economies became more open to FDI, and more developed economies removed restrictive policies.

6-4a Location, Location, Location

Certain locations possess geographical features that are difficult to match by others. We may regard the continuous expansion of international business (IB), such as FDI, as an unending saga in search of location advantages. For example, Vietnam has emerged as an attractive location for multinationals to withdraw some of their operations from China. At the same time, operations in Vietnam can continue to benefit from the highly developed supply-chain infrastructure in southern China centered on the Pearl River Delta. Due to its proximity to the United States, Mexico attracts numerous automakers to set up production there. Thanks to such FDI, 82% of Mexico's vehicle production is exported—of such exports, 64% go to the United States. Beyond natural geographical advantages, location advantages may also arise from the clustering of economic activities in certain locations—referred to as agglomeration. For instance, Texas attracts numerous MNEs in search of agglomeration benefits (see In Focus 6.2). China's Pearl River Delta region—consisting of Guangdong, Hong Kong, and Macau—has 1% of the country's territory and 5% of the population. But it absorbs 20% of its FDI stock and generates 10% of GDP and a quarter of exports Overall, agglomeration benefits stem from:

Which three nations invested the most money in other countries (FDI outflows) in 2020

China, Luxembourg, and Japan have invested the most money in other countries. Refer to 6-1c FDI Flow and Stock.

Which of the following is correct about a strong dollar?

Consumers in the United States benefit from low prices on imported products. correct. With a strong dollar, US consumers benefit from low prices on imported products. Refer to 7.1a Basic Supply and Demand.

6-8a Debate 1: FDI versus Outsourcing

Despite our focus in this chapter, we need to be aware that FDI is not the only mode of foreign market entry (see Chapter 10). Especially when undertaking a value-chain analysis regarding specific activities (see Chapter 4), a decision to undertake FDI will have to be assessed relative to the benefits and costs of outsourcing. Recall from Chapter 4 that in a foreign location, overseas outsourcing becomes "offshoring," whereas FDI—that is, performing an activity in-house at an overseas location—has been recently labeled "captive sourcing" by some authors (see Figure 4.4). A strategic debate is whether FDI or outsourcing will serve firms' purposes better. The answer boils down to how critical the activity being considered to perform abroad is to the core mission of the firm, how common the activity is being undertaken by multiple end-user industries, and how readily available the overseas talents to perform this activity are. If the activity is marginal, is common (or similar) across multiple end-user industries, and is able to be provided by proven talents overseas, then outsourcing is called for. Otherwise, FDI is often necessary. For instance, most fast-fashion competitors such as Gap, H&M, and Victoria's Secret outsourced production to Asia, their rival Zara carefully considered its options. Zara eventually decided to avoid outsourcing and to initiate FDI in Portugal and Morocco in addition to maintaining its own (onshore) factories in its home country, Spain.

Which region has the largest economy?

European Union (EU) Correct. The EU is the world's largest economy, the largest exporter and importer of goods and services, and the largest trading partner with large economies such as the United States, China, and India. Refer to 8-4b The EU Today.

A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a floating exchange rate

FALSE Correct. A currency board issues notes and coins convertible into a key foreign currency at a fixed exchange rate. Floating exchange rates are more volatile than fixed rates. Refer to 7.4a Debate 1: Fixed vs Floated Exchange Rates.

Knowledge spillover refers to knowledge diffused within a firm.

FALSE Correct. Knowledge spillovers have historically been viewed negatively. However, spillovers have also been perceived as one of the primary sources of economic growth and development, given they are sources of entrepreneurial opportunities. Refer to 6.4a Location, Location, Location

ownership advantages

Ownership advantages refer to MNEs' possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas. From a resource-based view, owning proprietary technology and management know-how that goes into making a Tesla helps ensure that the newly minted MNE can beat rivals abroad.

6-1b Horizontal and Vertical FDI

FDI can be horizontal or vertical. Recall the value chain from Chapter 4, whereby firms perform value-adding activities stage-by-stage in a vertical fashion, from upstream to downstream. When a firm duplicates its home country-based activities at the same value-chain stage in a host country through FDI, we call this horizontal FD For example, Tesla makes cars in the United States. Through horizontal FDI, it does the same thing in China and Germany (see the Opening Case). Overall, horizontal FDI refers to producing the same products or offering the same services in a host country as a firm does at home. If a firm through FDI moves upstream or downstream in different value-chain stages in a host country, we label this vertical FDI (Figure 6.3). If BMW (hypothetically) only assembles cars and does not manufacture components in Germany, but in Indonesia it enters into components manufacturing through FDI (an upstream activity), this would be upstream vertical FDI. Likewise, if BMW does not engage in car distribution in Germany but invests in car dealerships in Egypt (a downstream activity), it would be downstream vertical FDI.

6-6b Benefits and Costs of FDI to Host Countries Continued Part 1

FDI creates a total of 80 million jobs, which represent approximately 4% of the global workforce. On average, $1 million in FDI creates 9.2 jobs in the textile industry and 8.6 jobs in the computer industry. FDI creates jobs both directly and indirectly. In the United States, seven million jobs have been directly created by FDI. In Ireland, more than 50% of manufacturing employees work for MNEs. In Britain, the largest private-sector employer is an MNE: India's Tata has 50,000 employees there. In China, FDI has directly contributed approximately 25 million jobs Indirect jobs are created when local suppliers increase hiring and when MNE employees spend money locally resulting in more jobs. Finally, because of higher productivity (see Figure 6.5), MNEs tend to generate better and higher-paying jobs with a wage premium. Cell 2 in Figure 6.9 outlines three primary costs of FDI to host countries: loss of sovereignty, adverse effects on competition, and capital outflow. The first concern is the loss of some (but not all) economic sovereignty associated with FDI. Because of FDI, decisions to invest, produce, and market products and/or to close plants and lay off workers in a host country are being made by foreigners—or if locals serve as heads of MNE subsidiaries, they represent the interest of foreign firms. Will foreigners and foreign firms make decisions in the best interest of host countries? This is truly a "million-dollar" question. According to the radical view, the answer is "no" because foreigners and foreign firms are likely to maximize their own profits by exploiting people and resources in host countries. Such deep suspicion of MNEs leads to policies that discourage or even ban FDI.

6-5b Overcoming Market Failure Through FDI Continued Part 2

FDI essentially transforms the international trade between two independent, profit-maximizing firms in two countries to intrafirm trade between two subsidiaries in two countries controlled by the same MNE. Note such intrafirm trade is still international trade because goods cross borders. But the MNE can coordinate cross-border activities better. Any disputes between the two subsidiaries in Britain and Nigeria will be adjudicated by the corporate headquarters with the goal of maximizing corporatewide profits. Such advantages are called internalization advantages.

Another pair of words often used is flow and stock. FDI flow is the amount of FDI moving in a given period (usually a year) in a certain direction. FDI inflow usually refers to inward FDI moving into a country in a year, and FDI outflow typically refers to outward FDI moving out of a country in a year. In 2020, the top three economies receiving FDI inflows were the United States, China, and Hong Kong (in this order), and the top three economies generating FDI outflows were China, Luxembourg, and Japan (in this order) chapter 6

FDI stock is the total accumulation of inward FDI in a country or outward FDI from a country. Hypothetically, between two countries A and B, if firms from A undertake $10 billion of FDI in B in Year 1 and another $10 billion in Year 2, then we can say that in each of these two years, B receives annual FDI inflows of $10 billion and, correspondingly, A generates annual FDI outflows of $10 billion. If we assume that firms from no other countries undertake FDI in country B and prior to Year 1 no FDI was possible, then the total stock of FDI in B, by the end of Year 2, is $20 billion. Essentially, flow is a snapshot of a given point in time, and stock represents cumulating volume.

Efforts to achieve regional economic integration in Africa has proven highly effective

False Correct. While past efforts have proven ineffective, many hope the African Continental Free Trade Area (AfCFTA) efforts formed by 54 of the 55 African countries will prove more successful in aiding in the regional economic integration of Africa. Refer to 8-6d Regional Economic Integration in Africa.

6-3b FDI versus Licensing Continued Part 3

Finally, certain knowledge (or know-how) calls for FDI, as opposed to licensing. Even if there is no opportunism on the part of licensees and if they are willing to follow the wishes of the foreign firm, certain know-how may be simply too difficult to transfer to licensees without FDI. Knowledge has two basic categories: explicit and tacit (see Chapter 13). Explicit knowledge is codifiable (i.e., it can be written down and transferred without losing much of its richness). Tacit knowledge, on the other hand, is noncodifiable and its acquisition and transfer require hands-on practice. For instance, a driving manual represents a body of explicit knowledge. However, mastering this manual without any road practice does not make you a good driver. Tacit knowledge is evidently more important and harder to transfer and learn—it can only be acquired through learning by doing (in this case, driving practice supervised by an experienced driver). Likewise, operating a Walmart store entails a great deal of knowledge, some explicit (often captured in an operational manual) and some tacit. However, simply giving foreign licensees a copy of the Walmart operational manual will not be enough. Foreign employees will need to learn from experienced Walmart personnel side-by-side (learning by doing). From a resource-based view, it is Walmart's tacit knowledge that gives it competitive advantage (see Chapter 4). Walmart owns such crucial knowledge and has no incentive to give it away to licensees without having some management control over how such tacit knowledge is used. Therefore, properly transferring and controlling tacit knowledge calls for FDI. Overall, ownership advantages enable the firm, now becoming an MNE, to more effectively extend, transfer, and leverage firm-specific capabilities abroad. Next, we discuss location advantages.

6-3b FDI versus Licensing Continued Part 1

First, FDI affords a high degree of direct management control that reduces the risk of firm-specific resources and capabilities being opportunistically taken advantage of. One of the leading risks abroad is dissemination risks, defined as the possibility of unauthorized diffusion of firm-specific know-how. If a foreign firm grants a license to a local firm to manufacture or market a product, the licensee (or an employee of the licensee) may disseminate the know-how by using it against the wishes of the foreign firm. For instance, Pizza Hut found out that its long-time licensee (franchisee) in Thailand disseminated its know-how and established a direct competitor, simply called The Pizza Company, which controlled 70% of the market in Thailand. While owning and managing proprietary assets through FDI does not completely shield firms from dissemination risks (after all, employees can quit and join competitors), FDI is better than licensing that provides no management control at all. Understandably, FDI is extensively used in knowledge-intensive industries, such as automobiles, chemicals, electronics, and information technology (IT).

6-3a The Benefits of Direct Ownership

From a resource-based view, for a firm to become an MNE, it must own VRIO resources and capabilities that can provide the basis for its competitive advantage abroad (see Chapter 4).Footnote Figure 6.5 shows that in every country, foreign MNEs have higher-quality management capabilities than domestic firms. In Sweden, the distance between these two groups is the smallest, but it is still foreign MNEs that are pulling ahead of domestic firms. In Japan, Mexico, Brazil, Greece, and India, the capabilities gap between these two groups of firms is huge. In other words, in a typical economy, most firms probably do not do business abroad, and those that do business abroad by exporting must be winners in some aspects. Among such exporters, those that choose to reach higher by undertaking FDI to become MNEs must be even stronger competitors that can outcompete local rivals (see the Opening Case and In Focus 6.1). Remember the key word of FDI is D (direct) and it requires a significant equity ownership position. The benefits of ownership lie in the combination of equity ownership rights and management control rights. It is significant ownership rights that provide much needed management control rights. In contrast, FPI represents essentially insignificant ownership rights and no management control rights. To compete successfully, firms must deploy overwhelming resources and capabilities to overcome their liability of foreignness (see Chapters 1, 4, and 10). FDI provides one of the best ways to facilitate such extension of firm-specific resources and capabilities abroad.

Owning proprietary technology and management know-how are examples of ownership, location, and internationalization (OLI).

TRUE Correct. Owning proprietary technology and management know-how are examples of OLI. Refer to 6-2 Why Do Firms Become MNEs by Engaging in FDI?

chapter 6 Why Do Firms Become MNEs by Engaging in FDI?

Having set the terms straight, we need to address a fundamental question: Why do so many firms—ranging from those in the ancient world to today's Tesla—become MNEs by engaging in FDI? Without getting into details, we can safely say that there must be economic gains from FDI. More importantly, given the tremendous complexities, such gains must significantly outweigh the costs. What are the sources of such gains? The answer, as suggested by British scholar John Dunning and colleagues and illustrated in Figure 6.4, boils down to firms' quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages—collectively known as the OLI advantages The two core perspectives introduced earlier, resource-based and institution-based views, enable us to probe into the heart of this question by leveraging our Opening Case. answer open advantages, Location advantages, Internationalization advantages ,and FDI/MNE

6-5b Overcoming Market Failure Through FDI

How do MNEs combat market failure through internalization? Let us use a simple example: an oil importer, BP in Britain, and an oil exporter, Nigerian National Petroleum Corporation (NNPC) in Nigeria. For the sake of our discussion, assume that BP does all its business in Britain and NNPC does all its business in Nigeria—in other words, none of them is an MNE for the time being. BP and NNPC negotiate a contract that specifies that NNPC will export from Nigeria a certain amount of crude oil to BP's refinery facilities in Britain for an agreed-upon price. As shown in Figure 6.7, this is both an export contract (from NNPC's perspective) and an import contract (from BP's standpoint) between two firms. However, this international market transaction between an importer and an exporter may suffer from high transaction costs. What is especially costly is the potential opportunism on both sides. For example, refusing to deliver, NNPC may demand a higher-than-agreed-upon price, citing a variety of reasons, such as inflation, natural disasters, or simply the rising oil price after the deal is signed. BP thus has to either pay more than the agreed-upon price or refuse to pay and suffer from the huge cost of keeping expensive refinery facilities idle. In other words, NNPC's opportunistic behavior can cause a lot of BP's losses.

6-6a Political Views on FDI Continued Part 1

However, in practice, a totally free market view on FDI does not really exist. Most countries practice pragmatic nationalism—viewing FDI as having both pros and cons and only approving FDI when its benefits outweigh costs. For example, in 2020 alone, governments in such countries as Australia, Britain, Canada, China, France, Germany, Hungary, India, Japan, the Netherlands, Russia, and the United States enhanced FDI restrictions in the name of national security. In the last three decades, the general trend worldwide is to see more countries change their policies to be more favorable to FDI. Even hardcore countries that practiced the radical view on FDI, such as Cuba and North Korea, are now experimenting with some opening to FDI, which is indicative of the emerging pragmatic nationalism in their new thinking. However, there is also a more recent increase of restrictive policies discouraging FDI. In 2020, 59% of the FDI policy changes worldwide were in favor of more liberalization to promote FDI, and 41% were in favor of more restrictions to regulate inward FDI—the highest share for restrictive FDI policies ever recorded.Footnote Compared with only 24% restrictive policies in 2019 and 28% in 2009 (during the Global Financial Crisis), the surge in restrictive FDI policies was clearly a nationalistic and protectionist response to an extraordinary crisis (COVID-19). Whether this represents a longer-term trend in a world trending toward more deglobalization remains to be seen (see Chapter 1). Change font size

6-8b Debate 2: Facilitating versus Confronting Inward FDI Continued part 1

However, starting in the 2000s, the swing of the pendulum started to move toward a more antiglobalization direction. In 2006, a controversy erupted when Dubai Ports World (DP World), a United Arab Emirates (UAE) government-owned firm, purchased US ports from another foreign firm, Britain's P&O. This entry gave DP World control over terminal operations at the ports of New York/New Jersey, Philadelphia, Baltimore, Miami, and New Orleans. Although the UAE had been a US ally for three decades, many politicians, journalists, and activists opposed such FDI. DP World eventually withdrew, thanks to the "largest political storm over US ports since the Boston Tea Party. If this was a relatively isolated incident, then the 2008-2009 Global Financial Crisis unleashed a series of restrictive FDI policies that were protectionist in nature. The trend of adopting more restrictive FDI policies continued throughout the 2010s and intensified in 2020 in part because of rising protectionism stemming from COVID

Debate 2: Facilitating versus Confronting Inward FDI Continued part 1

However, starting in the 2000s, the swing of the pendulum started to move toward a more antiglobalization direction. In 2006, a controversy erupted when Dubai Ports World (DP World), a United Arab Emirates (UAE) government-owned firm, purchased US ports from another foreign firm, Britain's P&O. This entry gave DP World control over terminal operations at the ports of New York/New Jersey, Philadelphia, Baltimore, Miami, and New Orleans. Although the UAE had been a US ally for three decades, many politicians, journalists, and activists opposed such FDI. DP World eventually withdrew, thanks to the "largest political storm over US ports since the Boston Tea Party.f this was a relatively isolated incident, then the 2008-2009 Global Financial Crisis unleashed a series of restrictive FDI policies that were protectionist in nature. The trend of adopting more restrictive FDI policies continued throughout the 2010s and intensified in 2020 in part because of rising protectionism stemming from COVID

What does the WTO's nondiscrimination policy mean?

If country A lowers a trade barrier, it has to do the same for all WTO member countries. correct. The WTO's nondiscrimination policy means that if country A lowers a trade barrier, it has to do the same for all WTO member countries. Refer to 8-1b Economic Benefits for Global Economic Integration.

6-9 MANAGEMENT SAVVY PART 2

Implications for Action Carefully assess whether FDI is justified, in light of other foreign entry modes such as outsourcing and licensing. Pay careful attention to the location advantages in combination with the firm's strategic goals. Be aware of the institutional constraints and enablers governing FDI and enhance legitimacy in host countries.

Nordic multinationals chapter 6

In summary, Nordic multinationals own some valuable, rare, and hard-to-imitate capabilities. They hunt for excellent locations near and far to leverage location advantages. Instead of merely relying on their export success, they internalize their operations through active FDI. In short, they endeavor to acquire, leverage, and extend OLI advantages. own some valuable, rare, and hard-to-imitate capabilities. They hunt for excellent locations near and far to leverage location advantages. Instead of merely relying on their export success, they internalize their operations through active FDI. In short, they endeavor to acquire, leverage, and extend OLI advantages.

Internalization advantages

Internalization advantages refer to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries. For example, instead of selling its technology to a Taiwanese firm active in China, Foxconn, for a fee (which would be a non-FDI-based market entry mode—licensing), Tesla assembles cars in China and Germany by itself via FDI. In other words, external market transactions (in this case, buying and selling of technology through licensing) are replaced by internalization. From an institution-based view, internalization is a response to the imperfect rules governing international transactions—known as market imperfections (or market failure). Evidently, Chinese (and Taiwanese) regulations governing the protection of intellectual property such as Tesla's proprietary technology do not give Tesla sufficient confidence that its rights will be protected. Therefore, internalization is a must.

chapter 6 notes

Knowledge spillovers (knowledge being diffused from one firm to others) among closely located firms that attempt to hire individuals from competitors.Footnote Industry demand that creates a skilled labor force whose members may work for different firms without having to move out of the region. Industry demand that facilitates a pool of specialized suppliers and buyers also located in the region.

6-1a The Key Word Is D

International investment can be made primarily in two ways: FDI and foreign portfolio investment (FPI). FPI refers to investment in a portfolio of foreign securities, such as stocks and bonds, which do not entail the active management of foreign assets. Essentially, FPI is "foreign indirect investment." For example, FPI can be made by sovereign wealth funds (SWFs), which are state-owned investment funds composed of financial assets such as stocks, bonds, real estate, and other financial instruments. While SWFs from countries such as China, Kuwait, Norway, Saudi Arabia, Singapore, and the United Arab Emirates have invested in sizable assets around the world, they do not actively manage the operations of such assets. In contrast, the key word in FDI is D (direct)—the direct hands-on management of foreign assets. While reading this book, some of you may have some FPI at the same time—that is, you own some foreign stocks and bonds. However, as a student taking this course, it is by definition impossible that you are also engaging in FDI at the same time, which requires you to be a manager getting your feet "wet" by actively managing foreign operations. For statistical purposes, the United Nations defines FDI as an equity stake of 10% or more in a foreign-based enterprise. Without a sufficiently large equity (at least 10%), it is difficult to exercise management control rights—namely, the rights to appoint key managers and establish control mechanisms. Many firms invest abroad for the explicit purpose of managing foreign operations, and they need a large equity (sometimes up to 100%) to be able to do that.

6-5a Market Failure

International transaction costs tend to be higher than domestic transaction costs. Because laws and regulations are typically enforced on a nation-state basis, if one party from country A behaves opportunistically, the other party from country B will have a hard time enforcing the contract (see the Closing Case). Suing the other party in a foreign country is not only costly, but also uncertain. In the worst case, such imperfections are so grave that markets fail to function, and many firms choose not to do business abroad to avoid being "burned." In summary, high transaction costs can result in market failure—the imperfections of the market mechanisms that make transactions prohibitively costly and sometimes make transactions unable to take place. However, recall from Chapter 5 that there are gains from trade. In response, MNEs emerge as a solution to overcome and combat such market failure through FDI.

Which statement BEST describes the effect anti-globalization has on FDI policies?

It creates more restrictive FDI policies limiting the flow of FDI. Correct. Rising anti-globalization sentiments generally result in a rise in protectionist measures including more restrictive FDI policies. Refer to 6-8b Debate 2: Facilitating versus Confronting Inward FDI.

Which of the following is a benefit of adopting the euro?

It imposes monetary disciplines on governments. Correct. Adopting the euro provides three distinct benefits. One of those benefits is that it imposes monetary discipline on governments. Refer to 8-4b The EU Today.

Which statement BEST describes foreign direct investment (FDI)

It is direct, hands-on management of foreign assets. Correct. The direct, hands-on management of foreign assets best describes FDI. Refer to 6-1a The Key Word is D.

What happened to the foreign exchange market as a result of the COVID pandemic?

It triggered a global pandemic depression. Correct. Shutdowns reduced global demand for goods, which was devastating to export-dependent countries. To keep economies running, governments borrowed and spent more but took in less. The economic impact of COVID can and did lead to turbulence in the foreign exchange market. Refer to 7-4b Debate 2: Usual versus Unusual (Post-COVID) Turbulence.

6-5 Internalization Advantages

Known as internalization, another set of advantages associated with FDI is the ability to replace the external market relationship with one firm (the MNE) owning, controlling, and managing activities in two or more countries.Footnote This is important because of significant imperfections in international market transactions. The institution-based view suggests that markets are governed by rules, regulations, and norms designed to reduce uncertainties. Uncertainties introduce transaction costs—costs associated with doing business (see Chapter 2). This section outlines 1. the necessity to combat market failure and 2. describes the benefits brought by internalization.

India's Outward Foreign Direct Investment Compared with China's Continued Part 1

Less than 10% of the employees at Indian MNE subsidiaries are expats from India, whereas almost one-fifth of the employees at Chinese MNE subsidiaries are expats from China and other East Asian countries. From a resource-based standpoint, this may be a reflection of Indian firms' higher levels of managerial capabilities (including English-speaking abilities) in managing overseas employees. The upshot? More jobs for locals. Overall, India's OFDI forays are much smaller than China's. In 2020, China was the number-one originator of OFDI in the world (with $133 billion outflows), most likely reflecting its economic strength as the first major economy having (mostly) recovered from COVID-19. India ranked 18th (with $12 billion outflow, behind Singapore, Thailand, and Chile). India's OFDI stock in developing countries is approximately 7% of China's. As OFDI consolidates Indian firms' overseas markets and brings advanced knowledge and innovation back home, the Indian government can learn from its Chinese counterpart in terms of active diplomatic and financing support for OFDI. Chinese firms can learn from their Indian peers on how to improve their capabilities to better manage local stakeholders such as employees and suppliers in order to enhance the legitimacy of their OFDI.

Location advantages

Location advantages are those advantages enjoyed by firms because they do business in a certain place. Features unique to a place, such as its natural or labor conditions or proximity to particular markets, provide such advantages. As the largest car markets and car producers in Asia and in Europe, China and Germany, respectively, present significant location advantages. In addition, from an institution-based view, preferential treatments offered by Chinese and German governments further enhance these location advantages (see the Opening Case).

The GATT, GATS, and TRIPS agreements assisted in defining the responsibilities of which organization?

World Trade Organization Correct. GATT, GATS, and TRIPS are three agreements that established the World Trade Organization. Refer to 8-2a General Agreement on Tariffs and Trade: 1948-1994

What is purchasing power parity (PPP)?

PPP is an economic theory explaining the fundamental determination of foreign exchange rates. It states that exchange rates will make the prices of goods and services the same in all countries according to currencies' real purchasing power to goods and services. Correct. Purchasing power parity (PPP) is a theory that suggests that in the absence of trade barriers (such as tariffs), the prices for identical products sold in different countries must be the same. Refer to 7-1b Relative Price Differences and Purchasing Power Parity.

Three common characteristics make Nordic multinationals stand out among global peers. The first is their commitment to relentless innovation. Second, they foster a consensus-based approach to management, which promotes trust and cooperation. Finally, they share a passion for replacing labor with machines. In some advanced farms, robots can now automatically milk cows—with no human intervention. In one Swedish farm your author has visited, two owners—with the aid of milking robots—can manage 70 productive milk cows.

Nordic countries have small populations (six million in Denmark, nine million in Sweden, five million in Finland, and five million in Norway). But they are big in breeding MNEs that actively invest abroad and compete globally. Denmark boasts world leaders in beer (Carlsberg), fur (Kopenhagen Fur), medical insulin (Novo Nordisk), shipping (Maersk), toys (Lego), and wind turbines (Vestas). Tiny Denmark is also an agricultural superpower, which is home to 30 million pigs—five pigs for every Dane. Leading global players include Arla, Danisco, Danish Crown, and Rose Poultry. Sweden is a world leader in fighter jets (SAAB), mining equipment and machine tools (Atlas Copco and Sandvik), retail (H&M and IKEA), telecom equipment (Ericsson), and trucks (Scania and Volvo). Finland leads the world in elevators and escalators (Kone), games (Ravio, the creator of Angry Birds), and telecom (Nokia, whose mobile phones had been a global sensation until pushed aside by Apple's iPhones about a decade ago). Norway has world-class competitors in oil services (Statoil) and fishing (Aker BioMarine and Havfisk—formerly Aker Seafoods). While technically not an MNE, Norway's Government Pension Fund Global (GPFG) is the largest sovereign wealth fund (SWF) in the world, which owns 1% of all listed shares globally. Small domestic markets propel many Nordic firms to go international at a relatively young age. While most of them export aggressively, they often find that merely exporting is not enough to help penetrate new markets and facilitate growth. Therefore, it is not unusual to see them directly invest abroad and manage operations in countries ranging from neighboring European countries to distant shores such as Australia, Brazil, China, India, and South Africa.

6-4 Acquiring and Neutralizing Location Advantages

Note that from a resource-based view, location advantages do not entirely overlap with geographical advantages such as factor endowments, discussed in Chapter 5. Location advantages refer to the advantages one firm obtains when operating in one location due to its firm-specific capabilities. Leveraging our Opening Case, the Berlin-Brandenberg area is not a major automaking region in Germany. It is Tesla's unique capabilities, applied to this location, that (hopefully) will enable it to acquire location advantages by operating there. Firms do not operate in a vacuum. When one firm enters a foreign country through FDI, its rivals are likely to follow by undertaking additional FDI in a host country to either 1. acquire location advantages themselves or 2. at least neutralize the first mover's location advantages. In both China and Germany, Tesla is in fact a latecomer trying to undermine other domestic and multinational automakers' location advantages. These actions to follow competitors are especially likely in industries characterized by an oligopoly—industries populated by a small number of players (such as aerospace and semiconductors).Footnote The automobile industry is a typical oligopolistic industry. In China, Volkswagen (VW) was the first foreign entrant, starting production in 1985 and enjoying a market share of 60% in the 1990s. Now, every self-respecting global automaker—including the most recent entrant, Tesla—has entered China trying to eat some of VW's lunch. Overall, competitive rivalry and imitation, especially in oligopolistic industries, underscores the importance to acquire and neutralize location advantages around the world.

6-8b Debate 2: Facilitating versus Confronting Inward FDI Continued part 2

Often in the name of national security, developed economies led the recent global movement to have more restrictive FDI policies. During 2018-2019, the United States granted more powers to the Committee on Foreign Investment in the United States (CFIUS), paying specific attention to FDI in traditionally sensitive industries such as telecom and energy as well as newly sensitive sectors centered on personal data such as health and genetic testing.Footnote Australia, Canada, the EU, and Japan have similarly tightened FDI screening. A primary motivation stems from the rise of China as a major foreign investor, whose MNEs (many of them state-owned) often acquire high-tech firms in host economies. Prior to the recent CFIUS reforms, Chinese investors were involved in approximately 10% of all US venture-capital deals—especially in start-ups in areas such as artificial intelligence (AI), augmented and virtual reality, autonomous vehicles, blockchain technology, and robotics. In 2016, China's electronics giant Midea acquired Kuka, one of Germany's most innovative engineering firms. The primary goal was to access Kuka's robotics technology—technology so advanced that Germany's deputy chancellor made a rare public appeal for alternative German and European bidders so that the technology would be kept out of Chinese hands.Footnote But no other buyer came forward and the German government lacked legal means to block the transaction. It is such FDI transactions that motivated Western governments to overhaul the regulatory framework governing FDI

Debate 2: Facilitating versus Confronting Inward FDI Continued part 2

Often in the name of national security, developed economies led the recent global movement to have more restrictive FDI policies. During 2018-2019, the United States granted more powers to the Committee on Foreign Investment in the United States (CFIUS), paying specific attention to FDI in traditionally sensitive industries such as telecom and energy as well as newly sensitive sectors centered on personal data such as health and genetic testing.Footnote Australia, Canada, the EU, and Japan have similarly tightened FDI screening. A primary motivation stems from the rise of China as a major foreign investor, whose MNEs (many of them state-owned) often acquire high-tech firms in host economies. Prior to the recent CFIUS reforms, Chinese investors were involved in approximately 10% of all US venture-capital deals—especially in start-ups in areas such as artificial intelligence (AI), augmented and virtual reality, autonomous vehicles, blockchain technology, and robotics. In 2016, China's electronics giant Midea acquired Kuka, one of Germany's most innovative engineering firms. The primary goal was to access Kuka's robotics technology—technology so advanced that Germany's deputy chancellor made a rare public appeal for alternative German and European bidders so that the technology would be kept out of Chinese hands.Footnote But no other buyer came forward and the German government lacked legal means to block the transaction. It is such FDI transactions that motivated Western governments to overhaul the regulatory framework governing FDI.

6-5b Overcoming Market Failure Through FDI Continued Part 1

Opportunistic behavior can go both ways in a market transaction. In this particular example, BP can also be opportunistic. It may refuse to accept a shipment after its arrival from Nigeria, citing unsatisfactory quality, but the real reason could be BP's inability to sell refined oil (gasoline) downstream because demand is going down (during COVID-19, people working at home do not need to commute to work). NNPC is thus forced to find a new buyer for a huge tanker load of crude oil on a last-minute, "fire sale" basis with a deep discount, losing a lot of money. Overall, in a market (export/import) transaction, once one side behaves opportunistically, the other side will not be happy and will threaten or initiate lawsuits. Because the legal and regulatory frameworks governing such international transactions are generally not as effective as those governing domestic transactions, the injured party will generally be frustrated, whereas the opportunistic party can often get away. All these are examples of transaction costs that increase international market inefficiencies and imperfections, ultimately resulting in market failure In response, FDI combats such market failure through internalization. The MNE reduces cross-border transaction costs and increases efficiencies by replacing an external market relationship with a single organization spanning both countries—in a process called internalization (transforming the external market with in-house links).Footnote In theory, there can be two possibilities: BP undertakes upstream vertical FDI by owning production assets in Nigeria, or NNPC undertakes downstream vertical FDI by owning refinery assets in Britain

India's Outward Foreign Direct Investment Compared with China's

Outward foreign direct investment (OFDI) from developing economies now represents approximately 50% of global FDI outflows. While China leads the way, India has also emerged to become a significant originator of OFDI. While Indian MNEs share a great deal of commonalities with MNEs from developed economies and from other developing economies (such as the quest for OLI advantages), how Indian OFDI differs from Chinese OFDI reveals some interesting patterns. Indian OFDI is primarily made in service (often high-tech software) industries, leveraging India's strengths in these industries. Chinese OFDI mainly targets manufacturing, energy, and mining industries, reflecting China's prowess in manufacturing. India OFDI is more global, with more projects in developed economies, most importantly Britain. Chinese OFDI is more regional, concentrating on Asia, with Hong Kong as the leading destination.A vast majority of Indian OFDI is made by private firms (often by private business groups), with state-owned enterprises (SOEs) only providing 10% of the OFDI flows. In contrast, a majority of Chinese OFDI is made by SOEs. While OFDI made by private Chinese firms is increasing, it is less than half of total Chinese OFDI stock. The previous point has major ramifications. While smaller in scale compared with Chinese OFDI, Indian OFDI enjoys much better legitimacy and less suspicion of geopolitical scheming. terms of geopolitical relations, "with the obvious exceptions of Pakistan and China, every country is kind of all right with India," In terms of benefits brought to host countries, World Bank research in Africa found that Indian MNE subsidiaries only import 20% of new machinery from India. Their Chinese peers brought 60% of new machinery from home, spending less money on local suppliers. Indian MNEs also try harder to hire locally.

TCorrect. It is preferable for both sides in a negotiation to experience a win-win versus a win-lose (zero-sum) to gain buy-in by both parties. Refer to How MNEs and Host Governments Bargain.

TRUE Correct. FDI unrestricted by government intervention is the best approach to FDI. Refer to 6-6a Political Views on FDI.

if ownership and internalization advantages are not crucial to a firm, FDI is not recommended.

TRUE Correct. If ownership and internalization advantages are deemed not crucial, then FDI is not recommended. Refer to 6-9 Management Savvy

As an OLI, location is an advantage only if it fits with a firm's strategic goals.

TRUE Correct. In business, including selecting a location, strategic fit is essential. Refer to 6-9 Management Savvy.

All of the following represent a political view of FDI except which? a. pragmatic nationalism b. radical c. free market d. social markeT

SOCIAL MARKET Correct. Social market is not one of the three political views of FDI. Refer to 6-6a Political views on FDI.

6-3b FDI versus Licensing Continued Part 2

Second, FDI provides more direct and tighter control over foreign operations. Even when licensees (and their employees) harbor no opportunistic intention to take away "secrets," they may not follow the wishes of the foreign firm that provides the know-how. Without FDI, the foreign firm cannot order or control its licensee to move ahead. For example, Starbucks entered South Korea by licensing its format to ESCO. Although ESCO soon opened ten stores, Starbucks felt that ESCO was not aggressive enough. But there was very little Starbucks could do. Eventually, Starbucks switched from licensing to FDI, which allowed Starbucks to directly call "the shots" and promote the aggressive growth of the chain in South Korea.

How does the WTO enforce trade dispute settlements

The WTO authorizes the winning country to use tariff retaliation. Correct. The WTO enforces trade dispute settlements by authorizing countries to use tariff retaliation. Refer to 8-2c Trade Dispute Settlement.

All of the following are benefits of global economic integration EXCEPT for which example?

creates a universal taxation system for business correct. This is not a benefit of global economic integration. Refer to 8-1b Economic Benefits for Global Economic Integration.

Which term refers to a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate?

currency board Correct. A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate. Refer to 7-4a Debate 1: Fixed versus Floating Exchange Rates.

6-9 Management Savvy

The big question in global business, adapted to the context of FDI, is: What determines the success and failure of FDI around the globe? The answer boils down to two components. First, from a resource-based view, why some firms are very good at FDI is because they leverage OLI advantages in a way that is valuable, unique, and hard-to-imitate by rival firms (see In Focus 6.1 and 6.3). Fuyao, for example, is able to profit from managing operations in the same Dayton, Ohio, location employing the same American workers where GM failed. Second, from an institution-based view, the political realities either enable or constrain FDI from reaching its full potential. Therefore, the success and failure of FDI also significantly depends on institutions governing FDI as "rules of the game." The recent swing of the pendulum in favor of more restrictive policies is likely to deter a lot of prospective FDI projects from being entertained, and to prevent numerous ongoing FDI operations from being successful. As a result, three implications for action emerge (Table 6.2). First, carefully assess whether FDI is justified, in light of other options such as outsourcing and licensing. This exercise must be conducted on an activity-by-activity basis as part of the value-chain analysis (see Chapter 4). If ownership and internalization advantages are deemed not crucial, then FDI is not recommended

6-8b Debate 2: Facilitating versus Confronting Inward FDI Continued part 3

The other side of the debate points out that the scale and scope of Chinese FDI in developed economies is still small. In 2019, the overall stock of Chinese FDI represents slightly over 1% of all FDI stock in the United States—down from its peak, 1.5%, in 2016. This pales in comparison with 15% of US-based FDI stock held by Japanese firms, 13% by Canadian firms, 12% by German firms, and 10% by British firms. When post-COVID recovery needs more job creation, does it make sense to restrict such relatively small (although growing) FDI? Today, China's FDI in the United States supports approximately 20,000 American jobs. Some of their faces can be seen in a Netflix documentary titled American Factory. After GM ran the factory in Dayton, Ohio, to the ground and laid off all workers in 2008, it was a Chinese MNE Fuyao that came in to revive the plant in 2015. The Fuyao factory now employs over 2,000 American workers. Few of them are likely to be in favor of a policy to restrict Chinese FDI in the United States.

6-4 Location Advantages

The second key word in FDI is F—a foreign location. Given the well-known liability of foreignness, foreign locations must offer compelling advantages This section 1. highlights the sources of location advantages and 2. outlines ways to acquire and neutralize them.

What are the three OLI advantages?

The three OLI advantages are ownership, location, internalization. Refer to 6-2 Why Do Firms Become MNEs by Engaging in FDIs?

6-6a Political Views on FDI

There are three primary political views on FDI. First, the radical view is hostile to FDI. Tracing its roots to Marxism, the radical view treats FDI as an instrument of imperialism and as a vehicle for exploitation of domestic resources by foreign capitalists and firms. Governments embracing the radical view often nationalize MNE assets, or simply ban (or discourage) FDI. Between the 1950s and the 1980s, the radical view was influential throughout Africa, Asia, Eastern Europe, and Latin America.Footnote However, the popularity of this view is in decline worldwide, because economic development in these countries was poor in the absence of FDI, and 1. many developing countries (such as Singapore) that 2.embraced FDI attained enviable growth On the other hand, the free market view suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. Similar to the win-win logic for international trade articulated by Adam Smith and David Ricardo (see Chapter 5), free market-based FDI will lead to a win-win situation for both home and host countries. Since the 1980s, many countries—such as Brazil, China, Hungary, India, Ireland, and Russia—have embraced more FDI-friendly policies.

The Bretton Woods system centered on the US dollar as the new common denominator. Only the dollar, as the official reserve currency, was convertible into gold at $35 per ounce.

True correct. The Bretton Woods system centered on the US dollar as the new common denominator. Only the dollar, as the official reserve currency, was convertible into gold at $35 per ounce. Refer to 7-2b The Bretton Woods System (1944-1973

6-7 How MNEs and Host Governments Bargain Continued Part 1

Typically, FDI bargaining is not one round only. After the initial FDI entry, both sides may continue to exercise bargaining power. A well-known phenomenon is the obsolescing bargain, referring to the deal struck by MNEs and host governments, which change their requirements after the initial FDI entry. It typically unfolds in three rounds: In Round One, the MNE and the government negotiate a deal. The MNE usually is not willing to enter in the absence of some government assurance of property rights and incentives (such as tax holidays) (see the Opening Case and In Focus 6.2). In Round Two, the MNE enters and, if all goes well, earns profits that may become visible. In Round Three, the government, often pressured by domestic political stakeholder groups, may demand renegotiations of the deal that seems to yield "excessive" profits to the foreign firm (which, of course, regards these as "fair" and "normal" profits). The previous deal, thus, becomes obsolete. The government's tactics include removing incentives, demanding more profits and taxes, and even expropriation (confiscating foreign assets).At this time, the MNE has already invested substantial sums of resources (called sunk costs). Noncompliance may result in expropriation or exit at a huge loss. Not surprisingly, MNEs do not appreciate the risk associated with such obsolescing bargains. How to resolve investment disputes between MNEs and governments—known as investor-state dispute settlement (ISDS)—has become a contentious issue.

6-6b Benefits and Costs of FDI to Host Countries

Underpinning pragmatic nationalism is the need to assess various benefits and costs of FDI to host (recipient) and home (source) countries (see Debate 2). Figure 6.9 illustrates these considerations. This section focuses on host countries, and the next one deals with home countries. Cl 1 in Figure 6.9 shows four primary benefits to host countries Capital inflow can directly help improve host countries' balance of payments (see Chapter 7). MNEs often not only produce for local consumption, but also export, thus further improving host countries' balance of payments. In the world's largest recipient of FDI, the United States, one-quarter of all merchandise exports come from FDI-based production undertaken by foreign MNEs. In the world's second-largest recipient of FDI, China, the ratio is two-thirds. Technology, especially more advanced technology from abroad, can create technology spillovers that benefit domestic firms and industries. Local rivals, after observing such technology, may recognize its feasibility and strive to imitate it. This is known as the demonstration effect—sometimes also called the contagion (or imitation) effect. It underscores the important role that MNEs play in stimulating competition in host countries. Even for Germany, a country famous for its automobile industry, Tesla's arrival has demonstrated to local incumbents that EVs can be profitably produced (see the Opening Case). Advanced management know-how may be highly valued (see Figure 6.5). It is often difficult for indigenous development of management know-how to reach a world-class level in the absence of FDI.

Which of the following is an example of a free trade area (FTA)?

United States-Mexico-Canada Agreement (USMCA correct. USMCA is an example of a free trade area (FTA). Refer to 8-3b Types of Regional Economic Integration.

6-3b FDI versus Licensing

When entering foreign markets, basic entry choices include exporting, licensing, and FDI. The Opening Case shows that successful exporting may provoke protectionist responses from host countries. Firms are thus forced to choose between licensing and FDI (see Chapters 5, 9, and 10). Between licensing and FDI, which is better? FDI reduces dissemination risks FDI provides tight control over foreign operations FDI facilitates the transfer of tacit knowledge through "learning by doing"

Which statement BEST describes an oligopoly? a. an industry dominated by a small number of competitors b. an industry dominated by a small number of customers c. an industry dominated by one player d. an industry populated by a large number of players

an industry dominated by a small number of competitors Correct. An oligopoly is an industry dominated by a small number of competitors. Refer to 6-4b Acquiring and Neutralizing Location AdvantAGES

Which term describes an industry dominated by a small number of players? a. opportunistic behavior b. a monopoly c. an oligopoly d. perfect competition

an oligopoly Correct. An industry dominated by a small number of players is an oligopoly. Refer to 6-4b Acquiring and Neutralizing Location Advantages.

Domestic firms have higher-quality management capabilities than foreign MNEs.

b. False Correct. Higher-quality management capabilities have been found in foreign MNEs in comparison to domestic firms. Refer to 6-3a The Benefits of Direct Ownership.

All of the ones below are the eras of the evolution of the international monetary system except for which one? a. the gold standard b. pre-Bretton Woods system c. Bretton Woods system d. post-Bretton Woods system

b. pre-Bretton Woods system Correct. The pre-Bretton Woods system is not one of the eras of the evolution of the international monetary system. The gold system, Bretton Woods system, and post-Bretton Woods system are all the eras of the evolution of the international monetary system. Refer to 7-2 Evolution of the International Monetary System.

A home appliance manufacturer located in the Netherlands decides to open two new manufacturing plants, one in Poland and the other in Thailand. Its purpose is to offset currency losses through which of the following strategies?

b. strategic hedging Correct. This is an example of strategic hedging. Strategic hedging can be considered as currency diversification. It reduces exposure to unfavorable foreign exchange movements. Refer to 7.3b Strategies for Nonfinancial Companies.

All of the ones below are implications for action when managing currency except which? a. A currency risk management strategy is necessary via currency hedging, strategic hedging, or both. b. Fostering foreign exchange literacy is imperative. c. Countries with high currency risk must be avoided. d. Risk analysis of any country must include an analysis of currency risks

c. Countries with high currency risk must be avoided. correct. A country's high currency risk does not necessarily mean the country must be avoided. The three implications for action are fostering foreign exchange literacy; risk analysis, including its currency risk; and a currency risk management strategy via currency hedging, strategic hedging, or both. Refer to 7-5 Management Savvy.

Which of the following is a disadvantage of FDI to a host countrY

c. loss of sovereignty Correct. Loss of sovereignty is a potential disadvantage to a host country receiving FDI. Refer to 6-6b Benefits and Costs of FDI to Host CountrieS

What does global economic integration seek to build?

confidence Correct. Confidence increases among countries trading when they can be assured trade barriers will not be enacted. Refer to 8-1a Political Benefits for Global Economic Integration.

What happens if one country's interest rate is high relative to other countries? a. This will attract foreign funds and cause the home country's exchange to depreciate. b. It has no effect because inflow of foreign funds must be converted to US dollars. c. This will have no effect on exchange rates. d. This will attract foreign funds and cause the home country's exchange to appreciate

d. This will attract foreign funds and cause the home country's exchange to appreciate Correct. If one country's interest rate is high relative to other countries, it will attract foreign funds and cause the home country's exchange to appreciate. Refer to 7-1c Interest Rates and Money Supply.

What is a benefit of FDI to a host country? a. loss of sovereignty b. adverse effects on competition c. capital outflow d. job creation

d. job creation Correct. Job creation is a benefit of FDI to a host country. Refer to 6-6b Benefits and Costs of FDI to Host Countries.

What is the exchange rate policy in which governments selectively intervene to influence exchange rates?

dirty float Correct. The exchange rate policy in which governments selectively intervene to influence exchange rates is called a dirty float. Refer to 7.1e Exchange Rate Policies.

The European Union (EU) is an example of what type of regional economic integration?

economic union Correct. The EU is an economic union. It has not been able to integrate the political affairs of its member states yet to become a political union. Refer to 8-3b Types of Regional Economic Integration.

In practice, managers should focus their attention more on a global level than a regional level

false Correct. The acceleration of regionalism requires managers to focus more attention on a regional level. Refer to 8-8 Management Savvy.

What are multinational enterprises (MNEs)?

firms that engage in foreign direct investment (FDI) when conducting business abroad Correct. An MNE is defined as a firm that engages in FDI when doing business abroad. Refer to 6-1d MNE versus non-MNE.

What is a foreign exchange transaction in which participants buy and sell currencies now for future delivery?

forward transaction Correct. A foreign exchange transaction in which participants buy and sell currencies now for future delivery is called a forward transaction. Refer to 7.3a Strategies for Financial Companies.

If an IMF member country were to find itself in a severe balance of payments crisis that threatened its financial stability, what would the IMF most likely do?

give the country a loan but require the country to make long-term policy reforms Correct. If an IMF member country were to find itself in a severe balance of payments crisis that threatened its financial stability, the IMF would most likely give the country a loan but would also require the country to make long-term policy reforms. Refer to 7-2d The International Monetary Fund (IMF).

What do opponents argue is a barrier to global integration?

regional agreements Correct. Opponents suggest regional agreements foster protectionism and an "us versus them" mentality, which will not promote global integration. Refer to 8-7a Debate 1: Building Blocks versus Stumbling Blocks.

What influences foreign exchange rates?

relative price differences and PPP, interest rates, and money supply Correct. Foreign exchange rates are influenced by all of these—supply and demand of the currencies, relative price differences and purchasing power parity, interest rates, and money supply. Refer to Figure 7.1 What Determines Foreign Exchange Rates?