Deck 4: International Trade and Foreign Direct Investment

Question 1

The theory of trade that stressed the importance of exporting while minimizing imports

A) Treated trade as a zero-sum game.
B) Stressed gaining and retaining national power and prestige.
C) Allowed some nations to amass large amounts of capital to support large armies and navies.
D) Was called mercantilism.
E) All of the statements above are correct.

Answer 1

All of the statements above are correct.

Question 2

As a counterargument against the prevailing theory of international trade in the late 18th century, Adam Smith expounded a new theory that today we call

A) The theory of comparative advantage.
B) The theory of mercantilism.
C) The theory of absolute advantage.
D) The theory of product life cycles.
E) None of the statements above.

Answer 2

The theory of absolute advantage.

Question 3

If a country decides to locate facilities in a country like Bermuda, what is its most likely motive?

A) Seeking political safety.
B) Seeking production efficiency.
C) Seeking input resources.
D) Seeking markets.
E) It could easily be seeking any of the above.

Answer 3

Seeking political safety.

Question 4

What is the difference between compensatory and noncompensatory variables in the country attractiveness scorecard?

A) Compensatory variables are factors associated with profitability and returns that compensate the company for assuming risk, while noncompensatory variables are associated with risk and are either acceptable or unacceptable.
B) Good values of one variable can be traded off against bad values of other variables if they are compensatory, but noncompensatory variables are either acceptable or unacceptable.
C) Compensatory variables are factors associated with profitability and returns that compensate the company for assuming risk, while noncompensatory variables are associated with risk and do not contribute to compensation.
D) Compensatory variables are factors associated with risk for which the company requires compensation before it will be willing to accept them, while noncompensatory variables are return factors that do not require extra compensation.
E) None of the statements above is correct.

Question 5

Which of the following statements regarding David Ricardo's trade theory of specialization is most correct?

A) Ricardo proved that even countries without an absolute advantage in the production of anything could still gain from specialization and trade.
B) Ricardo's contribution is called the theory of comparative advantage.
C) Ricardo proved that even when a country has an absolute advantage in the production of a particular good, it might be better off to import it than make it.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Question 6

The classical theories of specialization and trade developed by Adam Smith and David Ricardo remain valid today in broad terms, but they suffer from several shortcomings, among which are

A) Some countries do not "play fair" in the way theorized and may still practice mercantilism to some extent.
B) Prices today are mainly set in a free and competitive marketplace, not in an administered price environment as envisioned in the models.
C) The theories assumed that only goods could cross international borders but today we know that many factors of productions such as labor, capital, and technology are internationally mobile as well.
D) All of the statements above are correct.
E) Only statements a and c are correct.

Question 7

Multinational enterprises engage in significant amounts of international trade even when they also have other means for direct involvement abroad. The reasons they engage in trade, as enumerated in the text, include

A) The need for cheap foreign labor to remain competitive in their production.
B) The need to overcome import barriers abroad.
C) The ability to squeeze additional profits out of aging product lines.
D) All of the statements above.
E) Only statements a and b.

Question 8

Companies that engage in exporting and importing often reach a point where more direct foreign involvement is seen as a viable alternative with significant benefits to the company. Some of the reasons this evolution takes place include all except which of the following?

A) Doubts arise about the foreign agent's or distributor's diligence in looking after the best interest of the company.
B) To be effective, the company often has to share sensitive competitive information with the foreign partner, and this creates the possibility that the foreign partner will become a competitor in its own home market or elsewhere.
C) The low fixed costs and high variable costs associated with exporting and importing may not allow the company to squeeze out as much profit from a product line as would be possible with more active foreign involvement, particularly after a few years and foreign sales reach a high sustainable level.
D) Increasing familiarity with foreign markets and the way people do business in other countries leads to increased confidence that the company can succeed on its own in many places.
E) All of the statements above are correct.

Question 9

The OLI paradigm

A) Is designed to identify the single most attractive locations in which a company can build a production facility.
B) Is intended to show a company if it makes good competitive sense to locate facilities abroad.
C) Is used to determine whether an MNE should enter a particular market using a greenfield investment or should acquire an existing company.
D) Is particularly useful for distinguishing business environments in which franchising is a better strategy than licensing.
E) All of the above statements are attributes of the OLI paradigm.

Question 10

In deciding how to make a foreign direct investment in a particular country, which of the following should a company do?

A) Make a greenfield investment if there is excess productive capacity in the industry.
B) Make an acquisition if the window of opportunity is short and it is important to become a "player" in the country quickly.
C) Make a greenfield investment if existing companies have due diligence problems that would transfer to new owners.
D) Only statements b and c are correct.
E) Only statements a and b are correct.

Question 11

What is the major difference between licensing and franchising?

A) While both involve the transfer of intangible assets to a foreign entity, franchising involves a continuing infusion of assets to the franchisee while licensing does not.
B) While both involve the transfer of intangible assets to a foreign entity, licensing involves a continuing infusion of assets to the licensee while franchising does not.
C) Licensing always grants the licensee an exclusive monopoly in a particular area for a fixed time, while franchises can be awarded to multiple entities in the same geographic area.
D) Both statements a and c are correct.
E) Both statements b and c are correct

Question 12

If a company decides to go abroad but not to make a direct investment, then

A) It probably is not particularly worried about maintaining control over the operations.
B) It likely does not have a competitive advantage over a local firm in the host country.
C) The company is interested in transferring knowledge to the foreign partner.
D) Both statements a and b are correct.
E) All of the statements above are correct.

Question 13

Which of the following statements is most correct?

A) The Hyatt Hotel in Bishkek, Kyrgyzstan is owned by local Kyrgyz investors but is a part of the worldwide Hyatt chain. This is a classic example of a joint venture.
B) Bechtel Corporation won a contract to build a power station by the government of Kazakhstan and, after it was completed, remained to operate the station for a 3-year period. This is an example of a turnkey project with a management contract.
C) Coca-Cola is produced in India by a locally-owned company that buys syrup concentrate and bottles from Coca-Cola in Atlanta. This is an example of an equity alliance.
D) If two or more companies join together to form a separate entity to achieve a specific but limited objective, it is called a joint venture if it is organized as a partnership. However, it is called an equity alliance if it is organized as a corporation.
E) None of the statements above is correct.

Question 14

Assume the following information:
Which of the following statements is correct?

A) Country A has a comparative advantage in the production of grain.
B) Country A has an absolute advantage in the production of grain.
C) In this example the theory of specialization expounded by David Ricardo cannot solve for the equilibrium trade relationship but the theory of Adam Smith can.
D) In the absence of specialization and trade, Country B is behaving like a mercantilist.
E) Both statements a and d are correct.

Question 15

Assume the following information:
If the two countries specialize in the production of that commodity in which they have a comparative advantage, and trade their surplus at a price of 1.5 bushels of grain for one bolt of cloth, how many bushels of grain and bolts of cloth will be consumed by Country B? Assume that the increase in grain output will be shared equally by both countries.

A) 5,600 bushels of grain and 1,933 bolts of cloth
B) 2,900 bushels of grain and 1,500 bolts of cloth
C) 2,900 bushels of grain and 1,567 bolts of cloth
D) 2,700 bushels of grain and 1,700 bolts of cloth
E) None of the above.

Question 16

Assume the following information:
If the two countries specialize in the production of that commodity in which they have a comparative advantage, and trade their surplus at a price of 1.5 bushels of grain for one bolt of cloth, how many bushels of grain and bolts of cloth will be consumed by Country B? Assume that the increase in cloth output will be shared equally by both countries.

A) 2,500 bushels of grain and 1,300 bolts of cloth
B) 2,550 bushels of grain and 1,300 bolts of cloth
C) 2,550 bushels of grain and 1,400 bolts of cloth
D) 2,600 bushels of grain and 1,400 bolts of cloth
E) None of the above.

Question 17

Assume the following information:
If the two countries specialize in the production of that commodity in which they have a comparative advantage, and trade their surplus at a price of 2.0 bushels of grain for one bolt of cloth, how many bushels of grain and bolts of cloth will be consumed by Country B? Assume that the increase in grain output will be shared equally by both countries.

A) 2,600 bushels of grain and 1,400 bolts of cloth
B) 2,700 bushels of grain and 1,500 bolts of cloth
C) 2,700 bushels of grain and 1,600 bolts of cloth
D) 2,800 bushels of grain and 1,600 bolts of cloth
E) None of the above.

Question 18

What is mercantilism, and to what kind of trade did it lead?

Question 19

Describe the theory of absolute advantage.

Question 20

What are some shortcomings of the classical theories of trade?

Question 21

Explain what a country attractiveness scorecard is and how a firm uses it.

Question 22

Explain the OLI paradigm.

Question 23

Describe the types of collaborative arrangements into which a firm can enter discussed in the text.

Question 24

What are some motives that help determine where a firm decides to invest abroad?

Question 25

Why do companies choose to begin engaging in more direct foreign involvement?

Question 26

What are some motivations for companies to consider exporting and importing?

Question 27

Assume the following information:
If the two countries specialize in the production of that commodity in which they have a comparative advantage, and trade their surplus at a price of 1.5 bushels of grain for one bolt of cloth, how many bushels of grain and bolts of cloth will be consumed by Country A and Country B? Assume that Country A will consume the same amount of cloth as in the no trade situation.

Question 28

Assume the following information:
If the two countries specialize in the production of that commodity in which they have a comparative advantage, and trade their surplus at a price of 1 bushel of grain for one bolt of cloth, how many bushels of grain and bolts of cloth will be consumed by Country A and Country B? Assume that Country B will consume the same amount of cloth as in the no trade situation.