International Business Chapter 8
The text notes two reasons why FDI has outpaced world trade and world output. Which of the following reasons are noted?
- FDI has been driven by political and economic changes in developing nations - Despite the decline in trade barrier, firms still fear protectionist pressures
Firms for which licensing is NOT a good option are clustered in which three industries?
- High-tech industries - industries with intense cost pressures - global oligopolies
Choose the 3 benefits from FDI to a home country.
- MNE learns skills from exposure to foreign market - inward flow of foreign earnings - foreign subsidiary creates demand for home-country exports
What are the 3 potential costs of FDI to host countries?
- Perceived loss of national sovereignty & autonomy - Adverse effects on competition within the host nation - Adverse effects on balance of payments
What are the alternatives to FDI?
- licensing - exporting
____________ barriers can impact exporting by raising the price or controlling the quantity of imports
Trade
TRUE OR FALSE: An indirect effect of FDI occurs when jobs are created because of increased total spending by employees of the MNE.
True
The______________ account tracks goods and services exports and imports in balance-of-payments accounting.
current
Ownership restraints and performance requirements are two ways governments can ________________ (encourage, restrict) FDI.
restrict
What are the most common incentives governments offer to foreign firms to invest in their country?
- subsidies - low interest loans - tax concessions
What two factors cause major adverse effects on a host country's balance of payments?
- the outflow of earnings from a foreign subsidiary to its parent company - a foreign subsidiary importing a large number of inputs from abroad
The limits on exporting include __________.
- trade barriers - transportation costs
______________ is favored over exporting when transportation costs or trade barriers are formidable.
FDI
Which of the following summarizes the rationale behind the free market view?
FDI is a benefit to both the source country and the host country.
TRUE OR FALSE: Knickerbocker's theory is attractive because of its explanation of why FDI is more efficient than exporting for expanding abroad.
False
What country has been the larges source of FDI since WWII?
United States
What international organization is involved in the governing of FDI?
WTO
A country's ___________ accounts track expenditures and receipts from other countries
balance-of-payments
Under the fall of _____________ between 1989 and 1991, Eastern European countries were opposed to FDI.
communism
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 _______________ (developing, advanced) economies
developing
The _________ of FDI describes the amount of FDI undertaken during a year.
flow
Establishing a new operation in a foreign market and acquiring or merging with a foreign business are examples of _________________.
foreign direct investment
What is it called when a company directly invests in facilities to produce or market in a foreign country?
foreign direct investment
Dell moved its assembly operations for many of its personal computers to Mexico to take advantage of lower labor costs. The _________ ___________ view of FDI states that overall efficiency of resource utilization increases in the world economy.
free market
The ____________ __________ view of FDI states that international production should be allocated based on the theory of comparative advantage.
free market
Foreign direct investment takes on two forms, a(n) ___________ investment occurs when a firm establishes a new operation in a foreign market.
greenfield
Greenfield investing spurs competition by increasing the number of players in a market and this will tend to ________ prices and _________ economic welfare.
lower, increase
When firms compete in different regional markets, national markets or industries, this is called _________-_____________ competition.
multi-point
The situation where multiple firms encounter each other in different regional markets, national markets or industries is called ______________________.
multi-point competition
The U.S. Dept of Commerce states that once a business undertakes foreign direct investment it becomes a(n) _________.
multinational enterprise
Businesses should seek out a country that has _____________ policies toward FDI.
permissive
Some countries prohibit national firms from investing in specific countries for __________ reasons, such as U.S. firms being prohibited from investing in Cuba.
political
A number of investor countries try to encourage FDI through the use of __________ to persuade host countries to ease restrictions on inbound FDI.
political influence
The only way a country can support a current account deficit, also known as a trade deficit, in the long-run is to ___________________.
sell off assets to foreigners
The WTO has based the majority of its efforts on pushing for the liberalization of regulations governing _______________ (products/services).
services
The __________ of FDI refers to the total accumulated value of foreign-owned assets of a firm at a given time.
stock
It would be more common for a ___________ to agree to market aggressively as a way of keeping foreign competitors in check.
wholly owned subsidiary
A study of FDI by the Organization for Economic Cooperation and Development (OECD) found which results? Choose all that apply.
- Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested - Foreign investors transferred technology to countries in which they invested
What are two current trends in FDI?
- an increase in FDI aimed at countries that have liberalized their FDI regimes - an increase in the volume of FDI
What positive contributions to a host country can FDI provide?
- boost a country's economic growth rate - supply capital, technology & management resources
___________ nations account for the larges share of FDI inflows.
Developed
_________________ is producing goods at home and shipping them overseas.
Exporting
The political and economic changes that have been occurring in _______________ (developing/Westernized) nations has increased interest in FDI.
developing
The British economist, John Dunning, argues in his __________ paradigm that location-specific advantages are important in analyzing FDI.
eclectic
The __________________ ________________ is based on the way location affects the direction of a company's FDI.
eclectic paradigm.
A drawback of Knickerbocker's theory is its failure to address __________.
efficiency
An example of ______________ is when firms benefit from each other's knowledge generation.
externalities
The main reason why businesses prefer acquisition as a means of FDI is because acquisitions are _________________ than greenfield investment.
faster to execute
A key benefit of FDI to a home country is from the inward _________ (flow, stock) of foreign earnings.
flow
FDI _________ (flow, stock) refers to the amount of investment over a given period of time
flow
The ________________ stresses that resource transfers benefit the host country and help stimulate the host country's economic growth.
free market view
A firm that is negotiating the terms of an investment with a host government has ___________ (high, low) bargaining power when the host government places a high value on what the firm has to offer, the number of comparable alternatives open to the firm is greater, and the firm has a long time in which to complete the negotiations.
high
After Toyota decided to open a new auto plant in France, it was suggested that 2,000 jobs in support industries would be created. Since these jobs are not located at the auto plant, they are examples of a/an _________ (direct, indirect) effect of FDI.
indirect
Toyota prefers direct investment in a foreign entity rather than licensing. This decision stems from the fact that Toyots pioneered __________ production, which enables it to produce higher quality automobiles at a lower cost than global rivals.
lean
The limits of __________ include giving away valuable know-how to competitors and losing control over marketing, production and strategy.
licensing
When ownership restraints are used to restrict FDI, it is based on the belief that _____________ (local/investor) owners can help maximize the employment benefits of FDI for the host country.
local
A(n) ______________ is an industry made up of a limited number of large firms where there is an interdependence of the major players.
oligopoly
The radical view toward FDI argues that MNE's extract ___________ from the host country and take them back to their home country.
profits
As a consequence of _____________ effects, the net number of new jobs created by FDI may not be as large as initially claimed.
substitution
Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the _________ effect where some jobs created are offset by jobs lost elsewhere.
substitution
The increase in competition in the national telecommunications market that resulted from the 1997 World Trade Organization agreement resulted in two benefits. What are these two benefits?
- lower prices - modernization of telephone networks
Which of the following are examples of location-specific advantages as categorized by the eclectic paradigm?
- natural resources - human resources
What are two measures countries can employ to restrict FDI?
- performance requirements - ownership restraints
When a firm invests in plant, equipment and R&D as a result of increased competition, this is referred to as _________ investment.
capital
Economists refer to knowledge "spillovers" as ___________________, and there is a theory that suggest firms can benefit from these "spillovers" by locating close to their source.
externalities
In a world in which firms from all advanced nations are investing in each other's markets, it is generally __________ (possible, impossible) for one country to hold another to "economic ransom" without hurting itself.
impossible
A firm with _______ transportation costs that is facing ___________ trade barriers should choose exporting over FDI.
low, low
Radical writers argue that ______________ ________________ are an instrument of imperialist domination.
multinational enterprises
Historically countries like Iran and India that are more __________ than ___________ have favored the radical position the FDI is bad.
nationalistic, socialistic
When a country maintains a current asset __________ (deficit, surplus), it is unlikely to have to sell off assets in order to balance accounts.
surplus
Countries can use various trade barriers to impact another country's exports by putting __________ on imports to raise the price and/or establish _________ to control the quantity of goods imported.
tariffs, quotas
What are the two types of FDI?
- establishing a new operation in a foreign market - acquisition or merger with an existing foreign firm
Which is true of the eclectic paradigm?
- it combines the best aspects of other theories of FDI into a single explanation - it provides a single holistic explanation of FDI
What are some of the advantages of FDI?
- it overcomes high transportation costs - it allows the firm to maintain control over technological know-how - it allows for tight control over the firm's operations
Based on the internalization theory, what are the major drawbacks to licensing?
- licensing does not allow a firm tight control over basic business operations which is necessary to maximize profitability - licensing may give away valuable technological know-how to a potential foreign competitor - licensing does not account for capabilities in management, marketing, and manufacturing
Identify the 3 costs of FDI to a home country.
- balance of payments negatively affected initially from the capital outflow to fund FDI - balance of payments negatively affected if FDI is a substitute for direct exports - balance of payments negatively affected if purpose of FDI is to develop a low-cost production location
What are the limitations of licensing?
- firm does not have tight control over producing, marketing and strategy in a foreign country - gives away valuable know-how to a potential competitor
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 FDI.
False
Which country has shown a marked increase in FDI inflows since 2004?
China
The United States, the United Kingdom, the Netherlands, France, Germany, and Japan together have accounted for _______ of all FDI outflows for 1998-2012.
60%
What is the name of an investment by a business to establish new operations in a foreign country?
Greenfield
This theory explains why firms may prefer exporting to licensing as a means of entering foreign markets
Internalization
________________ theory tries to explain why firms often prefer FDI over licensing as a strategy for entering foreign markets.
Internalization
Which of the following theories BEST explains why the first firm in an oligopoly decides to undertake FDI rather than exporting or making a licensing agreement?
Internalization theory
Which of the following companies demonstrates a successful licensing or franchising, strategy?
McDonald's
Which type of production occurs when FDI is undertaken to serve the home country?
Offshore
___________ argued that firms follow the same imitative behavior in their FDI strategies as oligopolies follow.
Knickerbocker
__________ is collecting a royalty fee from a foreign firm that you have granted the right to produce and sell your product.
Licensing
What are the advantages that are based on utilizing resource endowments or assets tied to a specific area?
Location-specific advantages
___________ of FDI describe the flow of FDI out of a country.
Outflows
___________ of FDI refers to the movement of investment out of a country, and FDI _________ are the flow of investment into a country
Outflows, inflows
_____________ nationalism should be applied when the benefits of FDI are greater than the costs.
Pragmatic
Which view of FDI states that there are benefits and costs to FDI and that countries attempt to maximize the benefits and minimize the national costs of FDI?
Pragmatic nationalism
What is true for firms considering foreign direct investment?
The host government's attitude toward FDI should be an important variable in decisions about where to invest
TRUE OR FALSE: When RCA licensed its color television product to a number of Japanese companies in the 1980s, 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
TRUE OR FALSE: When a foreign investor acquires two or more firms in a host country and then proceeds to merge them, it could result in monopoly power for the foreign investor.
True
The 2,000 employees working in Toyota's factory in France are an example of the ___________ effect of FDI on employment, while the 2,000 new jobs that were created in support industries are an example of the ________ effect of FDI on employment.
direct, indirect
FDI has a positive ___________ impact on host countries as a result of technology transfers.
economic
A key cost of FDI for the home country is when the balance of payments is adversely affected by the initial ___________ outflow required to finance FDI.
capital
Earnings from a foreign subsidiary to a parent company are recorded as ___________ on the balance-of-payments accounts.
capital outflow
