Deck 7: Foreign Direct Investment

Question 1

A firm becomes a multinational enterprise when it undertakes foreign direct investment.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

The total accumulated value of foreign-owned assets at a given time is the inflow of FDI.

Question 5

Classical economics and the international trade theories of Adam Smith and David Ricardo form the basis for the free market view.

Question 6

Internalization theory is also known as the market imperfections approach.

Question 7

Dunning,in the eclectic paradigm theory,suggests that a firm must establish production facilities where foreign assets or resource endowments necessary to the production of the product exist.

Question 8

FDI is seen by executives as a means of circumventing future trade barriers.

Question 9

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

Question 10

According to Vernon,location-specific advantages can help explain the rationale for and the direction of FDI.

Question 11

The largest source country for FDI has been China.

Question 12

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

Question 13

Historically,most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the markets of other advanced countries.

Question 14

When two or more enterprises encounter each other in different regional markets,national markets,or industries,regional competition occurs.

Question 15

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

Question 16

As compared to exporting and licensing,FDI may be more expensive and risky.

Question 17

In developing countries,about one-third of FDI is in the form of mergers and acquisitions.

Question 18

If a firm that makes bicycles in Germany acquires a French bicycle producer,Greenfield investment has taken place.

Question 19

The total amount of capital invested in factories,stores,office buildings and the like is referred to as the stock of FDI.

Question 20

One of the problems of licensing is that it may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

Question 21

Typically,licensing will be a common strategy in oligopolies where competitive interdependence requires that multinational firms maintain tight control over foreign operations so that they have the ability to launch coordinated attacks against their global competitors.

Question 22

The term "offshore production" refers to FDI undertaken to serve the home market.

Question 23

Pragmatic nationalism traces its roots to Marxist political and economic theory.

Question 24

An aspect of pragmatic nationalism 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.

Question 25

The WTO has been very successful in efforts to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI.

Question 26

Jobs created in local suppliers as a result of the MNE's investment and jobs created because of increased local spending by employees of the MNE are examples of direct employment effects of FDI.

Question 27

FDI does not benefit the host country's balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment,intermediate goods,or complementary products.

Question 28

A current account deficit exists when a country imports more than it exports.

Question 29

Under a 1997 agreement sponsored by the WTO,outward investment has increased competition and stimulated investment in the modernization of telephone networks around the world,leading to better service.

Question 30

Countries cannot prohibit national firms from investing in certain countries for political reasons.

Question 31

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

Question 32

The product life-cycle theory and Knickerbocker's theory of horizontal FDI tend to be very useful from a business perspective because the theories are more descriptive than analytical.

Question 33

There is research supporting the view that multinational firms often transfer significant technology when they invest in a foreign country.

Question 34

The free market view argues that FDI is a benefit to both the source country and to the host country.

Question 35

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

Question 36

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

Question 37

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

Question 38

Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors.

Question 39

Foreign direct investment can make a positive contribution to a host economy by supplying capital,technology,and management resources that would otherwise not be available and thus boost that country's economic growth rate.

Question 40

Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI.

Question 41

Historically,most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in:

A)underdeveloped; underdeveloped countries.
B)developed; underdeveloped countries.
C)developed; each other's markets.
D)underdeveloped; each other's markets.

Question 42

A greenfield investment:

A)is a form of FDI that involves the establishment of a new operation in a foreign country.
B)involves a 7 percent stock in an acquired foreign business entity.
C)involves a merger with a foreign business.
D)occurs when a firm acquires another company in a foreign country.

Question 43

The U.S.has been an attractive target for FDI because of all of the following reasons except:

A)its small and wealthy domestic markets.
B)its dynamic and stable economy.
C)its favorable political environment.
D)its openness to FDI.

Question 44

Which of the following is not a reason why firms prefer to acquire existing assets rather than undertake greenfield investments?

A)Foreign firms are acquired because those firms have valuable strategic assets.
B)Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital,technology,or management skills.
C)Even though greenfield investments are comparatively less risky for a firm,acquisitions always yield higher profits.
D)Mergers and acquisitions are quicker to execute than greenfield investments.

Question 45

According to the internalization theory,all of the following are drawbacks of licensing as a strategy for exploiting foreign market opportunities except:

A)licensing does not grant control over manufacturing,marketing,and strategy is granted to a licensee in return for a royalty fee.
B)licensing may result in a firm's giving away its know-how to a potential foreign competitor.
C)licensing does not give the firm the tight control over manufacturing,marketing,and strategy that may be required to profitably exploit its advantage.
D)a firm's capabilities such as management,marketing,and manufacturing are often not amenable to licensing.

Question 46

The total amount of capital invested in factories,stores,office buildings,and the like is summarized by:

A)gross fixed capital formation.
B)total investment capital.
C)total tangible investment.
D)gross depreciable investments.

Question 47

The rise in FDI in the services sector is a result of all of the following except:

A)the general move in many developed countries away from manufacturing and toward services.
B)accelerating regulations of services.
C)many services cannot be traded internationally.
D)many countries have liberalized their regimes governing FDI in services.

Question 48

Identify the incorrect statement regarding the direction of FDI.

A)Historically,most FDI has been directed at the developing nations of the world.
B)During the 1980s and 1990s,the United States was often the favorite target for FDI inflows.
C)The developed nations of the EU have received significant FDI inflows.
D)Recent inflows into developing nations have been targeted at the emerging economies of South,East,and Southeast Asia.

Question 49

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)Internationalization theory
C)Perfect markets theory
D)Small markets theory

Question 50

If four firms control 80 percent of a domestic market,then _____ exists.

A)an oligopoly
B)a monopoly
C)an oligarchy
D)vertical integration

Question 51

When strategic assets such as brand loyalty,customer relationships,or distribution systems are important,_____ investments are more appropriate.

A)merger and acquisition
B)greenfield
C)portfolio
D)new construction

Question 52

FDI occurs when a:

A)domestic firm imports products and services from another country.
B)firm ships its product from one country to another.
C)firm invests in the stock of another company.
D)firm invests directly in facilities to produce or market a product in a foreign country.

Question 53

The stock of FDI is:

A)the amount of FDI undertaken over a given period of time.
B)the total accumulated value of foreign-owned assets at a given time.
C)the flow of FDI out of a country.
D)the flow of FDI into a country.

Question 54

FDI has been rising for all of the following reasons except:

A)the globalization of the world economy.
B)the general increase in trade barriers over the past 30 years.
C)firms are trying to circumvent trade barriers.
D)there is a shift toward democratic political institutions and free market economies.

Question 55

In a licensing arrangement,the _____ bears the risk and cost of opening a foreign market.

A)licensee
B)licensor
C)acquiring firm
D)greenfield investor

Question 56

If General Electric,a U.S.based corporation,purchased a 50 percent interest in a company in Italy,that purchase would be an example of a(n):

A)minority acquisition.
B)outright stake.
C)majority acquisition.
D)greenfield investment.

Question 57

_____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

A)Horizontal FDI
B)Licensing
C)Vertical FDI
D)Greenfield investment

Question 58

Africa is not a popular destination for FDI because of all of the following reasons except:

A)political unrest in the region.
B)armed conflict in the region.
C)liberalization of FDI regulations.
D)frequent policy changes in the region.

Question 59

Most cross-border investment is:

A)in the form of greenfield investments.
B)made via mergers and acquisitions.
C)between American and Japanese companies.
D)involved in building new facilities.

Question 60

_____ is also known as the market imperfections theory.

A)Internationalization theory
B)Internalization theory
C)Perfect markets theory
D)Small markets theory

Question 61

A distinctive 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 dogmatic view
B)pragmatic nationalism
C)the radical view
D)the conservative view

Question 62

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

A)location-specific advantages.
B)resource-specific advantages.
C)competitive advantages.
D)directional advantages.

Question 63

Double taxation is:

A)charging double taxes in the home country.
B)charging double taxes in the host country.
C)taxation of income in both home and host country.
D)paying income taxes at twice the normal rate.

Question 64

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,the MNE has a(n)_____ effect on employment.

A)direct
B)indirect
C)inward
D)outward

Question 65

_____ is essentially the service-industry version of licensing,although it normally involves much longer term commitments.

A)Franchising
B)Subsidizing
C)Greenfield investment
D)Patenting

Question 66

John Dunning,a champion of the eclectic paradigm,argues that:

A)the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market.
B)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.
C)combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI.
D)impediments to the sale of know-how increase the profitability of FDI relative to licensing.

Question 67

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
B)strategic behavior theory
C)multipoint competition theory
D)eclectic paradigm

Question 68

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

A)competitive effect of FDI.
B)resource-transfer effect of FDI.
C)balance-of-payments effect of FDI.
D)effect on competition and economic growth.

Question 69

The product life cycle suggests that:

A)often the same firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in foreign markets.
B)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.
C)combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI.
D)impediments to the sale of know-how increase the profitability of FDI relative to licensing.

Question 70

_____ are controls over the behavior of the MNE's local subsidiary.

A)Performance requirements
B)Ownership restraints
C)Double taxation laws
D)Greenfield restrictions

Question 71

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 72

When two or more enterprises encounter each other in different regional markets,national markets,or industries,there is:

A)vertical integration.
B)horizontal integration.
C)multipoint competition.
D)monopolistic competition.

Question 73

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

A)federal payments ledger
B)current accounting system
C)checks-and-balances account
D)balance-of-payments account

Question 74

Licensing would be a good option for firms in which of the following industries?

A)High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous.
B)Global oligopolies,in which competitive interdependence requires that multinational firms maintain tight control over foreign operations.
C)Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations.
D)In fragmented,low-technology industries in which globally dispersed manufacturing is not an option.

Question 75

The _____ tracks the export and import of goods and services.

A)current account
B)debit account
C)surplus account
D)capital account

Question 76

According to Knickerbocker:

A)the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market.
B)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.
C)combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI.
D)impediments to the sale of know-how increase the profitability of FDI relative to licensing.

Question 77

Three costs of FDI concerns of host countries arise from all of the following except:

A)adverse effects on competition within the host nation.
B)adverse effects on the balance of payments.
C)the perceived loss of national sovereignty and autonomy.
D)debit on the current account of the home country's balance of payments.

Question 78

According to _____,international production should be distributed among countries according to the theory of comparative advantage.

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

Question 79

Which of the following is not a reason that the radical position of MNEs was in retreat by the end of the 1980s?

A)The strong economic performance of those developing countries that embraced capitalism rather than radical ideology
B)The collapse of communism in Eastern Europe
C)The generally abysmal economic performance of those countries that embraced the radical position
D)A growing belief in many capitalist countries that MNEs tightly control key technology and that important jobs in the MNEs' foreign subsidiaries go to home-country nationals

Question 80

FDI undertaken to serve the home market is known as:

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