Deck 8: Foreign Direct Investment

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

One way countries have encouraged firms to undertake FDI is through double taxation.

Answer 3

False

Question 4

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

Question 5

The WTO supports the promotion of international trade in services.

Question 6

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

Question 7

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

Question 8

Mergers and acquisitions are quicker to execute than greenfield investments.

Question 9

The British advanced corporation tax system taxed British companies' foreign earnings at a higher rate than their domestic earnings. This tax code created an incentive for British companies to invest abroad.

Question 10

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

Question 11

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

Question 12

Rivals rarely imitate what a firm does in an oligopoly.

Question 13

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

Question 14

Only a few countries have adopted the free market view in its pure form.

Question 15

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 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

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

Question 18

John Dunning pioneered the eclectic paradigm.

Question 19

The amount of foreign direct investment (FDI) undertaken over a given time period is known as the flow of FDI.

Question 20

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 21

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 22

Tax concessions, low-interest loans, and grants or subsidies are all incentives that governments offer to foreign firms to invest in their countries.

Question 23

Since World War II, the largest source country for FDI has been

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

Question 24

An Italian car manufacturer purchases a U.S. producer of car tires. This is an example of

A) an acquisition.
B) an absolute advantage.
C) a greenfield investment.
D) a merger.

Question 25

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 26

What is the primary reason 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 27

________ arise(s) from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

A) Multipoint competition
B) The eclectic paradigm
C) Location-specific advantages
D) Outflow of FDI

Question 28

What primarily explains why developing nations are characterized by a 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 29

What 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 30

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 31

Because licensing is more costly and more risky than FDI, other things being equal, the theories argue that FDI is preferable to licensing.

Question 32

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

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

Question 33

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

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

Question 34

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 35

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

Question 36

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 37

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

A) Comparative advantage
B) Multipoint competition
C) Competitive advantage
D) Economic advantage

Question 38

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 39

The stock of FDI refers to 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 40

________ occurs when a firm legally allows the right to produce its product, to use its production processes, or to use its brand name or trademark to another firm.

A) Licensing
B) Acquisition
C) Internalization
D) Merger

Question 41

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 42

________ 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 43

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 44

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 45

________ 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 46

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 47

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 48

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 49

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 50

________ 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 51

________ 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 52

Which branch of economic theory 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) multipoint competition theory
D) strategic behavior theory

Question 53

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 54

According to the ________ view of FDI, multinational enterprises (MNE) 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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

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 63

The country of Manystan has adopted neither a radical policy nor a free market policy, but rather one that posits that FDI has both benefits and costs. This is best described as

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

Question 64

________ 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 65

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 66

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 67

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 68

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 health care 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

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

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 71

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

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

Question 72

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 73

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 74

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

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

Question 75

The free market view argues that international production should be distributed among countries according to the

A) eclectic paradigm.
B) theory of competitive advantage.
C) new trade theory.
D) theory of comparative advantage.

Question 76

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

A) an internality.
B) a direct effect.
C) an externality.
D) an indirect effect.

Question 77

According to pragmatic nationalist view, FDI should be allowed so long as

A) the benefits outweigh the costs.
B) they do not aggressively court domestic firms.
C) the costs outweigh the benefits.
D) the MNE does not seek tax breaks or grants.

Question 78

A country's ________ keep 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 79

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 80

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