Intro to business Chapter 7-11
Why has FDI grown more rapidly than world trade? There has been a general shift toward centrally planned command economies. Privatization has made developing nations less attractive for multinational enterprises. There has been a general shift toward radical and totalitarian political institutions. Executives of business firms see FDI as a way of circumventing future trade barriers. The decline in trade barriers has erased the fear of protectionist pressures.
Executives of business firms see FDI as a way of circumventing future trade barriers.
What are two alternatives to FDI? (Check all that apply.)
Exporting Licensing
True/False For products with a high value-to-weight ratio, transportation costs have a high impact on the relative attractiveness of exporting, licensing, and FDI.
False
True/False Free trade as a government policy was first officially embraced by Germany in 1846, when the Bundestag repealed the Corn Laws.
False
True/False The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible.
False
True/False Under the gold standard, a country in balance-of-trade equilibrium will experience a net inflow of gold from other countries.
False
______ is the acronym for the multilateral agreement established in 1947 aimed at the abolition of quotas and the reduction of tariff duties among the contracting nations.
GATT
General Electric (GE) built an operation from scratch in Nigeria. This is an example of a(n) merger. acquisition. greenfield investment. FDI stock. strategic alliance.
GREENFIELD INVESTMENT
In the mid 1800s, ______ was the first nation to officially follow free trade.
Great Britain
What is a political argument for regional economic integration? It creates opportunities for entrepreneurism. It increases trade diversion. It reduces the potential for violent conflict. It stimulates economic growth. It tends to increase national sovereignty.
It reduces the potential for violent conflict.
For years, the world had used the country of Votnam as a place to assemble goods because of the country's availability of cheap labor. To shift its manufacturing base from simple assembly to full-fledged manufacture of components and finished goods, Votnam introduced a policy that 35 percent of the value of a product must be produced locally. This is an example of a(n) international allocation requirement. ad valorem portion requirement. specific quota requirement. domestic sales requirement. local content requirement.
Local content requirement
The trade pact developed in 1988, initially between Argentina and Brazil, is called ______.
Mercosur
Which view of FDI states that there are benefits and costs to FDI and that countries attempt to maximize the benefits and minimize the national costs of FDI?
Pragmatic nationalism
Which economist was a key figure in the early free trade movement in Great Britain?
Ricardo
At the end of 2015, companies from the country of Erithrea collectively owned $37 billion in assets in its neighboring country of Outflowia. The $37 billion is Erithrea's _______ of FDI. exchange flow trend outflow stock
Stock
What extended GATT rules to provide enhanced protection for intellectual property and significantly reduced barriers on trade in textiles?
The Uruguay Round
What occurs when a company practices dumping?
The firm is unloading excess production in a foreign market.
What are two potential costs of FDI to host countries? (Check all that apply.)
- Adverse effects on competition within the host nation - Adverse effects on balance of payments
Identify two costs of FDI to a home country. (Check all that apply.)
- Balance of payments are negatively affected if FDI is a substitute for direct exports. - Balance of payments are negatively affected if purpose of FDI is to develop a low-cost production location.
What are two impediments to establishing economic integration? (Check all that apply.)
- Concerns over national sovereignty - Costs of integration
What are the two major trading blocks in Europe? (Check all that apply.
- European Union - European Free Trade Association
Identify two benefits of FDI to a home country. (Check all that apply.
- Foreign subsidiary creates demand for home-country exports - MNE learns skills from exposure to foreign market
What are three advantages of regional market integration that can result in cost savings to a business? (Check all that apply.)
- Free movement of goods across borders - Simplified tax regimes - Harmonized product standards
hat are three advantages of regional market integration that can result in cost savings to a business? (Check all that apply.)
- Harmonized product standards - Free movement of goods across borders - Simplified tax regimes
Identify two benefits of FDI to a home country. (Check all that apply.)
- MNE learns skills from exposure to foreign market - Foreign subsidiary creates demand for home-country exports
True/False A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
True
True/False According to Alexander Hamilton, governments must temporarily support new industries until they have grown strong enough to meet international competition.
True
True/False If the host government is trying to attract FDI, the central issue is likely to be the kind of incentives the host government is prepared to offer to the multinational enterprise (MNE) and what the firm will commit in exchange.
True
True/False Import tariffs protect domestic producers against foreign competitors.
True
True/False Regional economic integration and the consequent increased dependence on each other create incentives for political cooperation between the neighboring states and reduce the potential for violent conflict.
True
What two positive contributions to a host country can FDI provide? (Check all that apply.)
- Supply capital, technology & management resources - Boost a country's economic growth rate
What two political factors led to the development of the European Union?
- The devastation of western Europe during the two world wars - Europe's desire to hold its own on the world's political and economic stage
Member nations hoped that the WTO would do which two of the following?
- be effective at policing global trade - facilitate future trade deals
What are four main instruments of trade policy?
- import quotas - antidumping duties - tariffs - local content requirements
What are two reasons the United States has been an attractive target for FDI?
- stable economy - large domestic markets
What two factors would indicate that a firm has little bargaining power when considering FDI in a nation?
- the host government places a low value on what the firm has to offer - the firm has only a short period of time to complete the negotiations
The theories of FDI try to show: (Check all that apply.)
- why firms use a combination of avoiding exporting and licensing and entering the same markets as their competitors. - why firms don't use exporting and licensing to enter foreign markets. - why competitive firms often enter the same markets at the same time.
One of the changes proposed by the Single European Act was to abolish the restrictions placed on foreign truckers who pick up and deliver goods within another member's state borders. This hauling process is known as ______.
cabotage
Assume that the interest rate on borrowings in Argentina is 3 percent, but the interest rate on deposits in British banks is 9 percent. A trader borrows 1 million Argentine pesos, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in? purchasing power parity countertrade forward exchange arbitration carry trade
carry trade
In the past, most foreign direct investment has been directed at _____ nations.
developed
Which of the following are bureaucratic rules designed to make it difficult for imports to enter a country? administrative trade policies public sector regulations voluntary export restraints consumer regulations subsidies
Administrative trade policies
Under the Andean Pact,, which two members received special concessions based on the size of these countries?
Bolivia Ecuador
In 1969, which countries created the Andean Pact that was modeled on the EU, but was not as successful in achieving regional groups objectives?
Bolivia, Chile, Colombia, Ecuador, Peru
Which of the following specifies that U.S. government agencies must give preference to U.S. products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage? Hawley-Burton Act Buy America Act Helms-Burton Act Export Administration Act Volcker Rule
Buy America Act
What are two methods a country would use to achieve economic integration?
Common market Economic union
The ______ argues that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI.
eclectic paradigm
When Crane Automotive Group developed operations in Italy, it not only built a manufacturing plant there but also imports parts from several other European nations. Which home country benefit of FDI does this represent?
employment effects
The WTO is more successful than GATT because the WTO has ______ mechanisms that make it more effective
enforcement
Which of the following groups would benefit the most from receiving subsidies? Importers international organizations such as the WTO governments foreign competitors domestic producers
Domestic producers
The most significant trading block in Europe based on economic and political influence is the _____.
European Union
One of the reasons the European Union was originally formed was because
Europeans desired a lasting peace after enduring two devastating world wars.
The WTO is more successful than GATT because the WTO has ______ mechanisms that make it more effective.
enforcement
If a country places a 20% tax on dairy products exported to other nations in order to limit exports and have sufficient supplies of dairy products for the home country, it is using a(n) ______.
export tariff
As an alternatives to FDI, firms could choose ______, which involves producing goods at home and shipping them overseas, or ______, which is granting a foreign firm the right to produce and sell a product in return for a royalty fee.
exporting; licensing
Businesses should seek out a country that has ____ policies toward FDI.
favorable
GATT was put into place by the US government as a way to
foster free trade
When the government does not use quotas, taxes or other means to restrict what its citizens can buy from or sell to another country, it is called _____ trade.
free
______ trade is the economic policy of not discriminating against exports to or imports from foreign countries.
free
The ______ view of FDI states that international production should be allocated based on the theory of comparative advantage.
free market
The United States has placed a limit on the amount of tuna in airtight containers that can be imported into this country. This is an example of a(n) _____.
import quota
The tiny South Pacific island country of Maroji produces a lot of milk and milk-based products. To protect this industry, Maroji mandates that only designated trading companies can import cheese, each of which is allocated the right to import a maximum number of pounds of cheese each year. By doing this, Maroji controls the amount of imported cheese. This is an example of a(n) local content requirement. subsidy. import duty. import quota. import tariff.
import quota
FDI occurs when a company invests in facilities
in a foreign country
During the 1980s and early 1990s, protectionism around the world ___
increased
The ______ argument for trade intervention states that developing countries need to support new industries until they are strong enough to compete globally.
infant industry
The oldest argument for government intervention in trade where developing nations must protect their domestic industries until they are ready to compete globally is the ______ argument.
infant industry
According to the _____, for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries. theory of demand efficient market hypothesis international Fisher effect law of one price purchasing power parity theory
international Fisher effect
Which of the following refers to the institutional arrangements that govern exchange rates? financial management information system generally accepted accounting principles general agreement on trade in services international monetary system general agreement on tariffs and trade
international monetary system
In a floating exchange rate, the relative value of a currency does not depend on the free play of market forces. changes infrequently only under a specific set of circumstances. is set against other currencies at some mutually agreed on exchange rate. is more predictable and less volatile. is determined by market forces.
is determined by market forces.
Country A wants to lower trade barriers with its neighbor, Country B. While both countries support free trade, they are both reluctant to lower their barriers because they are not sure the other country will reciprocate. What obstacle is preventing the advancement of free trade between these countries?
lack of trust
A(n) ______ states that some percentage of a good must be produced domestically.
local content requirement
In order to win a contract in Mexico, QVB Auto Manufacturing must make 65% of the component parts of their vehicles in Mexico. This is an example of a
local content requirement.
The ability of an individual, company, or economy to conduct an activity better than another for reasons related to location is called a(n)
location-specific advantage.
John Dunning proposed that ______ are an important factor when explaining the nature of foreign direct investment.
location-specific advantages
A host country cost of FDI could be the ____ of sovereignty and autonomy.
loss
The creation of a single market creates _____ costs of doing business.
lower
A government would impose administrative trade policies in order to
make it difficult for imports to enter a country.
Once it undertakes FDI, a firm becomes a(n) national corporation. retail chain. outsourcer. multinational enterprise. offshore company.
multinational enterprise
According to the Single European Act, a product standard developed in one EC country should be accepted in another. This is known as the principle of ______.
mutual recognition
The value of Surnum's, a developing economy, currency is fixed relative to the U.S. dollar. The exchange rate between the Surnum currency and other currencies is determined by the dollar exchange rate. Surnum's exchange rate is real. pegged. floating. flexible. dirty-float.
pegged
The radical view toward FDI argues that MNE's extract ______ from the host country and take them back to their home country.
profits
An import _____ is a type of trade restriction that sets a physical limit on the quantity of a product that can be imported into the country in a set period of time.
quota
The _____ view of foreign direct investment has its basis in Marxist theory.
radical
An example of the pragmatic nationalist view is that the host country can gain in jobs and skills and the profits go to the ______ country.
source
The rate at which a foreign exchange dealer converts one currency into another currency on a particular day is the future exchange rate. spot exchange rate. fixed exchange rate. forward exchange rate. floating exchange rate.
spot exchange rate
A(n) ______ is a payment by the government to a domestic producer to help lower production costs so they are better able to compete with foreign imports.
subsidy
The nationwide company, Nightingale Health Systems, received a tax break from the government when it was faltering and ready to declare bankruptcy. This subsidy helped the company with production costs and allowed it to have a stronger presence in the competitive health industry. This tax break is a type of _____.
subsidy
A tax on goods coming into or leaving a country is called a(n) ______.
tariff
______ constrain a firm's ability to export its products by raising the price of the exported product, which could put the firm at a competitive disadvantage with domestic firms in that country.
tariff barriers
The country of Argonia imposes an ad valorem tariff of 10 percent on 1 million tons of rice imports, after which an out-of-quota tariff of 80 percent is applied. Which of the following trade policy instruments is Argonia using? voluntary export restraint local content requirement tariff rate quota tariff ceiling subsidy
tariff rate quota
What is considered the simplest instrument of trade policy?
tariffs
An economist would say that the benefits of regional integration are determined by the formation of a political union. the location of manufacturing facilities. the amount of trade diversion. the amount of trade creation. the level of consumer involvement.
the amount of trader creation
What's the main reason a country would use export tariffs?
to ensure sufficient supply of a good within the country
Unilateral lowering of trade barriers has not occurred mostly due to a lack of _____ among governments.
trust
Which of the following statements is true about the various exchange rate systems? - In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces. - After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has operated with a fixed exchange rate system. - Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF. - In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a reference currency exchange rate. - In a clean float, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency.
Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF.
What country has been the largest source of FDI since World War II?
United states
With the formation of the ______ in 1995, there now is a multinational institution that has become involved in regulations governing FDI.
WTO
Which of the following statements is true about voluntary export restraints (VERs)? VERs benefit consumers by limiting import competition. When imports are limited to a low percentage of the market by a VER, the price is bid up for that limited foreign supply. VERs reduce the domestic price of an imported good. VERs negatively affect domestic producers by increasing import competition. Foreign producers agree to VERs because they fear economic instability in the world economy.
When imports are limited to a low percentage of the market by a VER, the price is bid up for that limited foreign supply.
The stock of foreign direct investment refers to the total
accumulated value of foreign-owned assets at a given point in time.
A country might create safety standards for certain products that other nations can't comply with. As a result, these nations can't be involved with exporting parts for those goods and trade does not exist. These safety standards are a form of _____.
administrative trade policy
A customs union differs from a free trade area because it allows for adoption of a common external trade policy. removal of barriers to the trade of goods and services among member countries. adoption of a common monetary and fiscal policy among member countries. harmonization of tax rates of member countries. mobility of factors of production among member countries.
adoption of a common external trade policy.
