Deck 17: Foreign Direct Investment Theory and Strategy

Question 1

A/n ________ would be an example of an owner-specific advantage for an MNE.

A) patent
B) economy of scale
C) economy of scope
D) all of the above

Answer 1

patent

Question 2

The L in OLI refers to an advantage in a firm's home market that is a

A) liability in the domestic market.
B) location-specific advantage.
C) longevity in a particular market.
D) none of the above.

Answer 2

location-specific advantage.

Question 3

Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer political risks
B) greater agency costs
C) lower front-end investment
D) All of the above are advantages.

Answer 3

greater agency costs

Question 4

The I in OLI refers to an advantage in a firm's home market that is an ________.

A) internalization
B) industry-specific advantage
C) international abnormality
D) none of the above

Question 5

A/n ________ would be an example of an internalization advantage for an MNE.

A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

Question 6

A/n ________ would be an example of a location-specific advantage for an MNE.

A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information

Question 7

Which of the following is NOT a proactive financial strategy related to the OLI paradigm in explaining FDI?

A) strategies to gain lower global cost of capital
B) strategies to reduce global taxation
C) strategies to reduce operating and transaction exposure
D) All of the above are proactive strategies.

Question 8

The owner-specific advantages of OLI must be ________.

A) firm-specific
B) not easily copied
C) transferable to foreign subsidiaries
D) all of the above

Question 9

The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.

A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances

Question 10

FDI is

A) investment in real assets in foreign countries.
B) foreign direct investment.
C) influenced by behavioral factors.
D) all of the above.

Question 11

Which of the following is NOT a potential disadvantage of licensing relative to FDI?

A) possible loss of opportunity to enter the licensee's market with FDI later
B) risk that technology will be stolen
C) high agency costs
D) All of the above are potential disadvantages to licensing.

Question 12

The O in OLI refers to an advantage in a firm's home market that is ________.

A) operator independent
B) owner-specific
C) open-market
D) official designation

Question 13

Which of the following is NOT a form of FDI?

A) wholly-owned affiliate
B) joint venture
C) exporting
D) Greenfield investment

Question 14

Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.

Question 15

With licensing the ________ is likely to be lower than with FDI because of lower profits; however, the ________ is likely to be higher due to a greater return per dollar invested.

A) IRR; NPV
B) NPV; IRR
C) cost of capital; NPV
D) IRR; cost of capital

Question 16

Which of the following is an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer agency costs
B) fewer direct advantages from research and development
C) a greater risk of losing markets to copycat goods producers
D) an inability to exploit R&D as effectively as if also invested abroad

Question 17

Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?

A) MNEs initially invest in countries with a similar "national psychic."
B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.

Question 18

Which of the following is NOT a potential disadvantage of licensing relative to FDI?

A) possible loss of quality control
B) establishment of a potential competitor in third-country markets
C) possible improvement of the technology by the local licensee, which then enters the original firm's home market
D) All of the above are potential disadvantages to licensing.

Question 19

An example of economies of scale in financing include

A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large-scale plant and equipment.
D) all of the above.

Question 20

Which of the following is NOT a factor of Porter's "diamond of national advantage"?

A) factor conditions
B) demand conditions
C) related and supporting industries
D) All of the above are factors of the diamond of national advantage.

Question 21

Which of the following is the motivation for making foreign direct investment?

A) knowledge seeking
B) market seeking
C) raw material seeking
D) all of the above

Question 22

Greenfield investments are typically ________ and ________ than cross-border acquisition.

A) slower; more uncertain
B) faster; of greater certainty
C) slower; of greater certainty
D) faster; more uncertain

Question 23

A MNE can choose all of the following modes of entry for FDI EXCEPT:

A) a joint venture with a local partner.
B) a 100%-owned greenfield subsidiary.
C) merger with or acquisition of an existing local firm.
D) exporting products to a local firm.

Question 24

The ________ is an attempt to create and overall framework to explain why MNEs rely on FDI rather than servicing foreign markets through alternative modes.

A) OLI paradigm
B) internationalization paradigm
C) theory of competitive advantage
D) none of the above

Question 25

Strategic alliances that have firms exchanging stock and forming joint ventures are more important in

A) agricultural firms where government interference is critical for firm survival.
B) old fashioned basic industry where pure economies of scale are still dominant.
C) high tech industries where research and development costs are high and innovation is critical to success
D) none of the above.

Question 26

Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm.

Question 27

Joint ventures are motivated only by takeover defenses.

Question 28

Which of the following is NOT an advantage to a joint venture?

A) Possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) May be a realistic alternative when 100% foreign ownership is not allowed.

Question 29

All of the following may be justification for a strategic alliance EXCEPT:

A) takeover defense.
B) a joint venture to pool resources for research and development.
C) joint marketing and serving agreements.
D) All of the above are legitimate reasons for strategic alliances.

Question 30

Which of the following is NOT a potential advantage to a cross-border acquisition compared to a Greenfield investment?

A) Market imperfections may under-price local assets and allow the purchase of assets at significant discount.
B) Cross-border acquisitions take longer, thus allowing the firm a better understanding of the local market before attempting sales.
C) Acquisitions may be a cost-effective way of gaining competitive advantages such as technology or brand names.
D) All of the above are advantages of acquisition over green field investment.

Question 31

MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.

Question 32

Joint ventures are a more common FDI than wholly owned subsidiaries.

Question 33

Which of the following is NOT an advantage to a joint venture?

A) The local partner's reputation enhances access to local financial markets.
B) The local partner possesses technology that is advantageous in their market and perhaps beyond.
C) Higher agency costs than with a purely domestic firm.
D) The local partner's public image may enhance local sales.

Question 34

Which of the following combinations of cost and control reflect the choice of a greenfield foreign direct investment?

A) high cost, high control
B) medium cost, high control
C) low cost, high control
D) high cost, low control

Question 35

Which of the following are characteristics of MNEs that have successfully invested abroad?

A) economies of scale and scope
B) superior technology with heavy emphasis on research
C) demonstrated competitive advantage in their home markets
D) all of the above

Question 36

The theory of ________ is an attempt to synthesize and extend those theories of FDI that are based on market imperfections.

A) internationalization
B) externalization
C) internalization
D) diversification

Question 37

A ________ is a shared ownership in a foreign business.

A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate

Question 38

Which of the following is NOT a potential disadvantage to cross-border acquisitions?

A) the meshing of different corporate cultures
B) host government intervention in the post-acquisition process
C) mis-pricing foreign assets and paying too much for the acquisition
D) All of the above are potential disadvantages.

Question 39

Which of the following modes of serving foreign markets requires the least capital investment by the MNE but risks the loss of key technological or managerial expertise to the marketplace?

A) acquisition
B) licensing
C) Greenfield investment
D) portfolio investment

Question 40

A ________ is establishing a production or service facility from the ground up.

A) joint venture
B) licensing agreement
C) greenfield investment
D) wholly-owned facility

Question 41

Which of the following is NOT a strategy employed by the firms included in the text list of emerging market MNEs?

A) engineering to innovation
B) exporting a successful business model
C) targeting a niche market
D) All of the above are techniques used by emerging MNEs.

Question 42

The world's third largest aircraft maker after Boeing and Airbus is ________.

A) Bombardier
B) LeerJet
C) Embraer
D) Cessna

Question 43

Embraer of Brazil was able to grow internationally by developing a new type of fuselage that allows airlines to acquire an airplane that provides superior comfort to passengers, ease of flying for the pilots, and lower operating costs for the firm. This is an example of ________.

A) leveraging natural resources
B) engineering to innovation
C) exporting a business model
D) acquiring offshore assets

Question 44

The authors cite China-based Haier as an example of a firm following the strategy of ________. Haier is shown to have firmly established themselves as the top producer of home appliances in China and then using their economies of scale in an attempt to gain market share globally.

A) acquiring offshore assets
B) taking brands global
C) targeting a niche
D) engineering to innovation

Question 45

List and explain three strategic motives why firms become multinationals and give an example of each.

Question 46

Which of the following is NOT a strategy employed by the firms included in the text list of emerging market MNEs?

A) taking brands global
B) leveraging natural resources
C) acquiring offshore assets
D) All of the above are techniques used by emerging MNEs.

Question 47

What does the OLI Paradigm propose to explain? Define each component and provide an example of each.