Deck 8: Foreign Direct Investment

Question 1

The amount of FDI undertaken over a given time period is known as the flow of FDI.

Answer 1

True
Explanation: The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year).

Question 2

An oligopoly is an industry composed of a limited number of large firms.

Answer 2

True
Explanation: An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly).

Question 3

Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country.

Answer 3

True
Explanation: Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country.

Question 4

Mergers and acquisitions are quicker to execute than greenfield investments.

Question 5

FDI has been declining in the last few decades because protectionist pressures have become less intense.

Question 6

By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing.

Question 7

For the home country, the current account of the balance of payments improves if the purpose of the foreign investment is to serve the home market from a low-cost production location.

Question 8

John Dunning pioneered the eclectic paradigm.

Question 9

In practice only a few countries country have adopted the free market view in its pure form.

Question 10

In general, FDI in the form of greenfield investments should increase competition.

Question 11

According to the pragmatic nationalistic view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

Question 12

Rivals rarely imitate what a firm does in an oligopoly.

Question 13

Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance.

Question 14

Licensing involves the establishment of a new operation in a foreign country.

Question 15

Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be.

Question 16

Direct effects of FDI arise when jobs are created in local suppliers as a result of the FDI and when jobs are created because of increased local spending by employees of the MNE.

Question 17

Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs.

Question 18

Governments normally are concerned when their country is running a surplus on the current account of their balance of payments.

Question 19

Offshore production refers to FDI undertaken to serve the host market.

Question 20

The WTO supports the promotion of international trade in services.

Question 21

The _____ and Knickerbocker's theory of FDI tend to be less useful from a business perspective because they are descriptive rather than analytical.

A) noninterventionist theory
B) internalization theory
C) eclectic paradigm
D) product life-cycle theory

Question 22

An aspect of _____ is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.

A) the radical view
B) the noninterventionist principle
C) the free market view
D) pragmatic nationalism

Question 23

_____ and its extensions can help to explain imitative FDI behavior by firms in oligopolistic industries.

A) Internalization theory
B) The eclectic paradigm
C) The noninterventionist theory
D) Knickerbocker's theory

Question 24

_____ argues that FDI is a benefit to both the source country and to the host country.

A) Pragmatic nationalism
B) The free market view
C) The noninterventionist principle
D) The radical view

Question 25

A Japanese car manufacturer acquires an Italian producer of car tires. This is an example of a(n) _____.

A) acquisition
B) absolute advantage
C) greenfield investment
D) merger

Question 26

The majority of cross-border investment in the developed world is in the form of _____.

A) hostile takeovers
B) greenfield investments
C) competitive investments
D) mergers and acquisitions

Question 27

If the FDI is a substitute for imports of goods or services, the effect can be to improve the _____ of the host country's balance of payments.

A) offshore account
B) currency account
C) market imperfections
D) current account

Question 28

Host country citizens that are employed by an MNE following an FDI are an example of a(n) _____ of FDI.

A) internality
B) direct effect
C) externality
D) indirect effect

Question 29

FDI can benefit the home country's _____ if the foreign subsidiary creates demands for home-country exports of capital equipment, intermediate goods, complementary products, and the like.

A) balance of payments
B) oligopolistic industry
C) current accounts
D) licensing endeavors

Question 30

Developing nations currently account for _____ of FDI in the form of cross-border mergers and acquisitions.

A) well over half
B) about one-third or less
C) about 50 percent
D) the largest share

Question 31

_____ traces its roots to Marxist political and economic theory.

A) The radical view
B) Pragmatic nationalism
C) The free market view
D) The noninterventionist principle

Question 32

_____ seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

A) Knickerbocker's theory
B) Internalization theory
C) The noninterventionist theory
D) The eclectic paradigm

Question 33

The pragmatic nationalist view highlights _____ of FDI.

A) only the benefits
B) only the costs
C) both the benefits and costs
D) neither the benefits nor the costs

Question 34

A country's _____ keep track of both its payments to and its receipts from other countries.

A) current accounts
B) offshore accounts
C) balance-of-payments accounts
D) currency accounts

Question 35

When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance. This is particularly true of products that:

A) have a low value-to-weight ratio.
B) have a high value-to-weight ratio.
C) can be produced only in one region.
D) require locally-sourced raw materials.

Question 36

As transportation costs or trade barriers increase, exporting becomes unprofitable, and the choice is between FDI and _____.

A) subsidies
B) incentives
C) licensing
D) resource endowments

Question 37

_____ gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

A) Licensing
B) Internalization
C) Foreign direct investment
D) A merger

Question 38

Recent years have seen a _____ in the number of countries that adhere to a radical ideology regarding FDI.

A) marked decline
B) slight decline
C) marked increase
D) slight increase

Question 39

The two most common methods of restricting inward FDI are ownership restraints and _____.

A) resource endowments
B) performance requirements
C) national sovereignty
D) incentives

Question 40

The largest source country for FDI has been _____.

A) China
B) Japan
C) the United States
D) the Netherlands

Question 41

Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

A) Internalization theory
B) Product life-cycle theory
C) Perfect markets theory
D) Random walk theory

Question 42

When contemplating FDI, why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments?

A) Greenfield investments are characterized by reduced management control.
B) Mergers and acquisitions are preferred because most greenfield investments fail.
C) It is easier and less risky for a firm to build strategic assets than acquire similar assets.
D) Mergers and acquisitions are quicker to execute than greenfield investments.

Question 43

Which of the following is the prime reason why Africa has attracted FDI in recent years?

A) Growth of the services sector
B) Complete deregulation of markets
C) Wave of privatization
D) Raw material availability

Question 44

A French wind power company gives an Indonesian company the right to produce and sell wind turbines in return for a royalty fee on every unit sold. Which business practice is this an example of?

A) Acquisition
B) Licensing
C) Exporting
D) Greenfield investment

Question 45

The _____ of FDI refers to the amount of FDI undertaken over a year.

A) stock
B) net value
C) accumulated value
D) flow

Question 46

Which of the following is an example of a greenfield investment?

A) A Chinese sugar maker setting up a sugar crushing facility in Cuba.
B) A Serbian automobile company purchasing a Croatian component manufacturer.
C) A Finnish mobile phone manufacturer expanding its production facility in Finland.
D) An Indian oil exploration company acquiring an oil refining company.

Question 47

In which of the following situations does the internalization theory recommend FDI as opposed to licensing?

A) When the firm has know-how that can be adequately protected by a licensing contract
B) When the firm produces products that have a low value-to-weight ratio
C) When a firm's skills and know-how are amenable to licensing
D) When the firm needs tight control over a foreign entity

Question 48

The stock of FDI is the:

A) amount of FDI undertaken over a given period of time.
B) total accumulated value of foreign-owned assets at a given time.
C) flow of FDI out of a country.
D) amount of foreign direct investment made by domestic companies over a given period of time.

Question 49

Which of the following specifically reduces the viability of an exporting strategy specifically for products with low value-to-weight ratios?

A) Foreign exchange controls
B) Trade barriers
C) Transportation costs
D) Output quality

Question 50

Which of the following best describes an industry composed of a limited number of large firms?

A) An oligopoly
B) A monopoly
C) An oligarchy
D) A perfectly competitive market

Question 51

_____ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

A) Horizontal integration
B) Multipoint competition
C) An oligopoly
D) Vertical integration

Question 52

FDI occurs when a firm:

A) ships its products from one country to another.
B) invests directly in facilities to produce a product in a foreign country.
C) invests in the shares of another company operating in the same country.
D) grants permission to another company in a different country to use its brand name.

Question 53

Which of the following summarizes the total amount of resources invested in factories, stores, office buildings, and the like?

A) Gross capital index
B) Gross fixed capital formation
C) Gross domestic product
D) Gross national product

Question 54

Which of the following factors has made the United States an attractive target for foreign direct investment?

A) Its unstable economy
B) Its unfavorable political environment
C) Its wealthy domestic markets
D) Its closed society

Question 55

Which of the following primarily explains why developing nations are characterized by lower percentage of cross-border mergers and acquisitions compared to developed nations?

A) Fewer target firms to acquire in developing nations
B) Fierce opposition to mergers and acquisitions in developed nations
C) Unwillingness of foreign companies to invest in developing nations
D) Presence of import quotas in developing nations

Question 56

Which of the following is a direct consequence of the interdependence between firms in an oligopoly?

A) Increased regulation
B) Increased consumer welfare
C) Imitative behavior
D) Longer product life-cycles

Question 57

Which of the following is a way in which governments increase the attractiveness of FDI and licensing relative to exporting?

A) By implementing import quotas
B) By imposing FDI limits in industries
C) By increasing tax rates
D) By limiting free flow of capital

Question 58

Which of the following observations concerning Knickerbocker's theory is true?

A) It does not explain imitative FDI behavior by firms in oligopolistic industries.
B) Economists favor this theory as an explanation for FDI compared to the internalization theory.
C) It addresses the issue of whether FDI is more efficient than exporting or licensing for expanding abroad.
D) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.

Question 59

Which of the following statements is true about the growth of foreign direct investment in the world economy over the last few decades?

A) FDI has experienced a slower growth than world output.
B) FDI has accelerated faster than world trade growth.
C) FDI has remained the same over the past few decades.
D) FDI has dropped dramatically.

Question 60

Which of the following factors has had a positive effect on the volume of foreign trade investments?

A) Emerging social democracies
B) Fluctuating current rates
C) Aging demographics
D) World economy globalization

Question 61

How can FDI undertaken to serve the home market stimulate economic growth in the home country?

A) By freeing home-country resources to concentrate on activities where the home country has a comparative advantage
B) By importing more goods and services than it is exporting
C) By circumventing trade barriers that may have prevented direct exports in the past
D) By reducing demand for home-country exports of capital equipment, intermediate goods, and complementary products

Question 62

Which view of FDI traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo?

A) Imperialist
B) Conservative
C) Free market
D) Radical

Question 63

When a company brings capital and/or technology to a host country, the host country benefits from the:

A) political effect of FDI.
B) resource-transfer effect of FDI.
C) balance-of-payments effect of FDI.
D) bandwagon effect of FDI.

Question 64

According to Knickerbocker's theory:

A) when a firm has valuable know-how that cannot be adequately protected by a licensing contract it engages in FDI.
B) when a firm's skills and know-how are not amenable to licensing, it usually prefers the FDI route.
C) by placing tariffs on imported goods, governments indirectly increase the cost of exporting relative to foreign direct investment and licensing.
D) when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments.

Question 65

Advantages that arise from using resource endowments or assets that are tied to a particular place and that a firm finds valuable to combine with its own unique assets are known as:

A) location-specific advantages.
B) capital-specific advantages.
C) absolute advantages.
D) production factor advantages.

Question 66

Which of the following arises when a country is importing more goods and services than it is exporting?

A) Current account surplus
B) Trade deficit
C) Trade surplus
D) Trade balance

Question 67

FDI undertaken to serve the home market is known as:

A) outsourcing.
B) FDI substitution.
C) offshore production.
D) home market FDI.

Question 68

In which way can the source country's balance of payments benefit from an FDI made in a foreign country?

A) From cash outflow during the initial investment to finance the FDI
B) If the purpose of the foreign investment is to serve the home market from a low-cost production location
C) From the inward flow of foreign earnings
D) If FDI is a substitute for direct exports

Question 69

Which political view allows FDI so long as the benefits outweigh the costs?

A) The traditional view
B) The pragmatic nationalist view
C) The radical view
D) The free market view

Question 70

What is double taxation in the context of FDI?

A) Taxation at twice the normal rate for foreign companies
B) Taxing the producers as well as suppliers
C) Taxation of income in both home and host country
D) Taxation of both income as well as dividends paid

Question 71

A country's _____ keeps track of its payments to and its receipts from other countries.

A) federal payments ledgers
B) concurrent accounts
C) checks-and-balances accounts
D) balance-of-payments accounts

Question 72

Which of the following arises when a country is exporting more goods and services than it is importing?

A) Current account surplus
B) Trade deficit
C) Trade surplus
D) Trade balance

Question 73

How is the adverse effect of the balance of payments for the home country due to an FDI usually offset?

A) By increased imports to the home country as a result of the FDI
B) By the subsequent inflow of foreign earnings
C) By substituting direct exports made earlier from the home country
D) By further investments usually made to expand foreign operations

Question 74

Which of the following is a major drawback of using Knickerbocker's theory in explaining FDI?

A) It ignores the fact that firms invest in a foreign country when demand in that country will support local production.
B) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.
C) It fails to identify when it is profitable to invest abroad.
D) It ignores the fact that licensing as an entry strategy has its limitations.

Question 75

The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located.

A) product life-cycle theory
B) internalization theory
C) multipoint competition theory
D) eclectic paradigm

Question 76

What is the term that describes when two or more enterprises encounter each other in different regional markets, national markets, or industries?

A) Multipoint competition
B) Monopoly
C) Location-specific competition
D) Oligopoly

Question 77

Why is it said that not all the new jobs created by FDI represent net additions in employment?

A) Because of the uncertainty of the overall economic environment
B) Because most of the job creation is indirect in nature
C) Because jobs created by an investment may be offset by the jobs lost in domestic companies
D) Because the unemployment rate more or less remains constant over the short-term

Question 78

In which of the following situations would FDI improve the current account of the host country's balance of payments?

A) If the foreign subsidiary imports a substantial number of its inputs from abroad
B) If the FDI reduces existing employment opportunities
C) If the FDI is a substitute for imports of goods or services
D) If the FDI results in substitution of products produced domestically

Question 79

According to the _____ view of FDI, MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.

A) imperialist
B) conservative
C) free market
D) radical

Question 80

A country rejects FDI proposals in certain industries. It does so because the tangible advantages of such investments are lesser than potential costs like loss of employment and reduction of overall well-being. However, it aggressively pursues inviting foreign investments in sectors like infrastructure, education, and healthcare because of the benefits that accrue with them. Which political view of FDI is discussed in this example?

A) The pure market view
B) The free market view
C) The radical view
D) The pragmatic nationalist view