Deck 8: Foreign Direct Investment

Question 1

When a firm exports its products to a foreign country, foreign direct investment occurs.

Answer 1

False

Question 2

In terms of employment, the indirect effects of FDI are often as large as, if not larger than, the direct effects.

Answer 2

True

Question 3

Historically, most FDI has been directed at the developed nations of the world.

Answer 3

True

Question 4

The flow of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time.

Question 5

The eclectic paradigm is based on the idea that intellectual property is of considerable importance in explaining the direction of FDI.

Question 6

According to internalization theory, one drawback of licensing is that it might result in a firm giving away technological know-how to a competitor.

Question 7

The United Nations was the first multinational institution to govern FDI beginning in the 1930s.

Question 8

There are at least 30 firms that control 70 percent of the computer printer business in Europe. This is an example of an oligopoly.

Question 9

Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk like the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home.

Question 10

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

Question 11

The process of exporting grants a foreign entity the right to produce and sell a firm's product.

Question 12

According to the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.

Question 13

Mergers and acquisitions take longer to execute than a greenfield investment.

Question 14

Historically, countries have occasionally manipulated the tax rules as a way to encourage domestic companies to invest at home.

Question 15

The attractiveness of exporting is reduced when a product can easily be produced in almost any location.

Question 16

A country that follows the pragmatic nationalist view would agree that FDI can benefit a host country through capital, skills, and jobs but these come at a cost.

Question 17

An acquisition does not result in a net increase in the number of players in a market.

Question 18

The globalization of the world economy is having a negative effect on the volume of FDI.

Question 19

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

Question 20

FDI can result in a positive contribution to a host economy by supplying capital and technology which boost the country's economy.

Question 21

At the end of 2017, companies from one country collectively owned $22 billion in assets in its neighboring country. The $2 billion represents the ________ of FDI.

A) stock
B) flow
C) outflow
D) trend
E) exchange

Question 22

Rather than acquire an existing textile manufacturer in Jakarta, FauxFabric Inc. chose to establish new operations in Indonesia. This form of FDI is called

A) consolidation.
B) a greenfield investment.
C) an acquisition.
D) a licensing agreement.
E) mass customization.

Question 23

CopperCore Inc., a U.S. business, took a 31 percent equity interest in Javier Holdings, a family business based in Spain. According to the U.S. Department of Commerce, this would be an example of

A) multilateral investment.
B) foreign direct investment.
C) reciprocal foreign investment.
D) international divestment.
E) asset divestment.

Question 24

DiamondPlus Jewelers currently has $583,000 in foreign-owned assets. This represents the ________ of the company.

A) net value
B) gross national income
C) flow of FDI
D) stock of FDI
E) gross domestic product

Question 25

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of

A) an absolute advantage.
B) stock consolidation.
C) foreign direct investment.
D) product differentiation.
E) market segmentation.

Question 26

Which two nations have historically been the largest recipients of inward FDI?

A) Japan and China
B) Italy and Germany
C) Argentina and Brazil
D) the United Kingdom and France
E) the United States and Canada

Question 27

The location-specific advantages argument associated with John Dunning helps explain why firms prefer FDI to licensing or to exporting.

Question 28

Business executives view foreign direct investment as a way to

A) erase the fear of protectionist pressures.
B) circumvent future trade barriers.
C) promote totalitarian political institutions.
D) diminish privatization.
E) shift toward centrally planned command economies.

Question 29

The United States has been an attractive target for FDI partly because of its

A) abundance of cheap and skilled labor.
B) stable and dynamic economy.
C) commitment to environmental issues.
D) low corporate tax rates.
E) high trade barriers.

Question 30

Renata asked her assistant to determine the amount of foreign direct investment the company had taken over the past year. Renata is interested in the

A) state of GNI.
B) flow of FDI.
C) flow of GDP.
D) stock of FDI.
E) status of JIT.

Question 31

Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI.

Question 32

According to the U.S. Department of Commerce, what occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity?

A) multilateral investment
B) foreign direct investment
C) privatization
D) an absolute advantage
E) isolationism

Question 33

The ________ of FDI refers to the amount of FDI undertaken over a given period (normally a year).

A) portfolio
B) flow
C) status
D) stock
E) fragment

Question 34

A firm's bargaining power is low when the host government places a low value on what the firm has to offer.

Question 35

Once it undertakes FDI, a firm becomes a(n)

A) outsourcer.
B) retail chain.
C) offshore company.
D) multinational enterprise.
E) national corporation.

Question 36

A business that allows franchising licenses its brand name to a foreign firm in return for a percentage of the profits.

Question 37

Compared to the growth in world trade and world output, FDI has

A) grown at about the same rate.
B) grown more rapidly.
C) failed to match the growth of world trade.
D) grown at a slower rate.
E) remained stagnant.

Question 38

General Electric (GE) built an operation from scratch in Nigeria. This is an example of a(n)

A) merger.
B) acquisition.
C) strategic alliance.
D) FDI stock.
E) greenfield investment.

Question 39

Countries such as the United States, the United Kingdom, France, Germany, the Netherlands, and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world's largest multinationals because they

A) were the most developed countries postwar and home to the largest and best capitalized enterprises.
B) pursued a policy of blocking or restricting FDI inflow into their own economies.
C) provided subsidies for their domestic firms to protect them from foreign competition.
D) control much of the operating structure of the WTO which governs international trade.
E) were the governing body of the International Monetary Fund.

Question 40

Licensing is not a good option if the competitive advantage of a firm is based upon managerial or marketing knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints."

Question 41

Ohio Manufacturing prefers FDI over licensing to retain control over know-how, manufacturing, and marketing. Ohio Manufacturing's stance constitutes the

A) comparative advantage theory.
B) distribution theory.
C) new trade approach.
D) market imperfections approach.
E) licensing theory.

Question 42

SmartStuff Inc. grants a foreign entity the right to produce and sell the firm's microprocessors in return for a royalty fee on every product sold. SmartStuff Inc.'s approach is called

A) outsourcing.
B) licensing.
C) franchising.
D) exporting.
E) diversifying.

Question 43

According to internalization theory, one of the drawbacks of licensing is that

A) it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development.
B) it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
C) when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.
D) its use is restricted by the government through the imposition of tariffs and quotas.
E) it is less cost-effective than FDI.

Question 44

A firm will favor FDI over exporting as an entry strategy when

A) the costs of establishing production facilities are high.
B) the transportation costs or trade barriers are high.
C) there are problems associated with doing business in a different culture.
D) the products involved have a high value-to-weight ratio.
E) the firm wants to occupy a position that falls inside the efficiency frontier.

Question 45

A firm is most likely to favor foreign direct investment over exporting when

A) the firm wants its technological know-how to be widely disseminated.
B) the firm wishes to maintain control over its operations and business strategy.
C) the transportation costs are low.
D) there are no trade barriers.
E) the firm wants to customize its products as per the tastes and preferences of foreign consumers.

Question 46

When it comes to FDI, JogRight Corp. makes greenfield investments in various foreign countries and fully manages all foreign operations on its own. This approach to FDI is risky because of the problems associated with

A) sharing a valuable technological know-how with a potential competitor.
B) an increase in transportation costs, especially for those products that have a low value-to-weight ratio.
C) doing business in a different culture where the rules of the game may be very different.
D) the possibility of an increase in trade barriers such as import tariffs or quotas.
E) increased production costs.

Question 47

Gibson Electronics identifies licensees in various countries who produce and sell the company's products in their countries in return for a royalty fee on every unit sold. Gibson Electronics' approach is risky because of the problems associated with

A) sharing valuable technological know-how with a potential competitor.
B) an increase in transportation costs, especially for those products that have a low value-to-weight ratio.
C) doing business in a different culture where the rules of the game may be very different.
D) the possibility of an increase in trade barriers such as import tariffs or quotas.
E) increased production costs.

Question 48

The top management team at Kentucky-based Mumford Products collectively support the market imperfections approach. This means Mumford Products' top management team is most likely to

A) adopt a completely free market view.
B) understand why different nations import goods from other countries even when they are more capable of producing them efficiently.
C) express a preference for FDI over licensing as a strategy to enter foreign markets.
D) propagate the benefits of exercising protectionism coupled with partial adoption of free market approach.
E) abandon going overseas.

Question 49

As a company policy, Alberton Consumer Products periodically grants foreign entities the right to produce and sell its products in return for a royalty fee on every unit sold. Alberton Consumer Products' approach is

A) outsourcing.
B) exporting.
C) licensing.
D) diverging.
E) hedging.

Question 50

Pfingsten & Sons, a leading manufacturer of concrete blocks in the United States, is considering exporting as its FDI strategy. Exporting may not be a good option for Pfingsten & Sons because of the concrete blocks'

A) unattractiveness in foreign markets.
B) high value-to-weight ratio.
C) high cost of manufacture.
D) low weight-to-value ratio.
E) low value-to-weight ratio.

Question 51

Kim's GymJam Inc., based in Australia, obtained the right to produce and sell a U.S.-based company's boxing gloves. Kim's GymJam has to pay a royalty fee to the U.S. company for every pair of gloves it sells. In this example, Kim's GymJam Inc is the

A) franchisor.
B) franchisee.
C) licensor.
D) licensee.
E) competitor.

Question 52

The management team at Yum BBQ Brands has decided not to license its product because of concerns that this will create opportunities for another company to have access to their secret recipe. For this reason, the company decides that FDI is their best course of action. Which economic theory does their choice represent?

A) comparative advantage
B) distribution theory
C) new trade theory
D) internalization theory
E) difference principle

Question 53

3M, an American firm, manufactures adhesive tape in St. Paul, Minnesota, and ships the tape to South Korea for sale. According to this information, 3M uses ________ to deliver this product.

A) exporting
B) licensing
C) franchising
D) insourcing
E) outsourcing

Question 54

Incandescent Lightings, a U.S.-based firm, does not want to bear the costs of establishing production facilities in a foreign country. Incandescent Lightings should avoid

A) exporting.
B) FDI.
C) licensing.
D) franchising.
E) outsourcing.

Question 55

WoodCore Inc. produces an entire line of office furniture at its manufacturing facility in the United States and then ships its products for sale to various companies in Europe. WoodCore Inc. is involved in

A) outsourcing.
B) licensing.
C) franchising.
D) exporting.
E) diversifying.

Question 56

JumpIn Products is a market leader in playground equipment, which is typically large, bulky, and very heavy. In order to compete, JumpIn Products sells its entire line at very low prices. Although its products can be produced anywhere, it is considering exporting as a way to grow in overseas markets. The viability of JumpIn Products' exporting strategy could be constrained by transportation costs, particularly of products that can be produced in almost any location and have a

A) high local content requirement.
B) low total landed cost.
C) low value-to-weight ratio.
D) low licensing tariff.
E) high marginal cost.

Question 57

The ________ is one reason a company might prefer FDI over exporting.

A) presence or threat of trade barriers
B) costs of acquiring a foreign enterprise
C) costs of establishing production facilities in a foreign country
D) risk of giving away valuable technological know-how to a potential foreign competitor
E) possibility of diminishing returns

Question 58

Internalization theory promotes the idea that

A) licensing gives a firm tight control over manufacturing, marketing, and strategy in a foreign country.
B) licensing may result in a firm giving away valuable technological know-how to a potential foreign competitor.
C) licensing has no major drawbacks as a strategy for exploiting foreign market opportunities.
D) a problem with licensing arises when the firm's competitive advantage is based on its products rather than on the manufacturing capabilities that produce those products.
E) licensing is always more profitable than FDI.

Question 59

The market imperfections approach seeks to explain

A) the disadvantages associated with the adoption of a completely free market view.
B) why different nations import goods from other countries even when they are more capable of producing them efficiently.
C) the preference for FDI over licensing by firms as a strategy to enter foreign markets.
D) the benefits of exercising protectionism coupled with partial adoption of free market approach.
E) the pattern of sale of products from one country to another.

Question 60

Governments impose quotas to limit

A) FDI.
B) importing.
C) franchising.
D) outsourcing.
E) licensing.

Question 61

The radical view of FDI declined in popularity by the early 1990s because of

A) rising communism in Eastern Europe.
B) generally steady economic growth in countries that embraced the radical position.
C) a growing belief in many countries that FDI leads to loss of jobs.
D) a strong economic performance in developing countries that embraced capitalism.
E) the collapse of capitalism in the newly independent nations of Asia.

Question 62

ModShoes Inc. decides to move its manufacturing facility from Toledo, Ohio, to Jakarata, Indonesia, because it will have access to lower-cost but still highly skilled labor. This choice reflects the concept of

A) a planned economy.
B) supply-and-demand.
C) location-specific advantages.
D) an oligopoly.
E) a comparative advantage.

Question 63

Knickerbocker's concept of multipoint competition enhances the strategic behavior theory by making sure that

A) a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere.
B) the competitors cooperate with each other to establish a cartel.
C) no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers.
D) growing technologies or business methods in new markets are transferred to established markets.
E) the firms in an industry prefer FDI over licensing or exporting.

Question 64

The ________ view of FDI traces its roots to Marxist political and economic theory.

A) radical
B) free market
C) pragmatic nationalism
D) comparative advantage
E) pluralist

Question 65

According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country should be

A) immediately nationalized.
B) made to pay higher taxes.
C) converted into publicly traded companies.
D) banned from obtaining finance from the financial institutions in the host country.
E) immediately privatized.

Question 66

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companies located close to each other there. This provides the location-specific advantage of

A) a multipoint competition.
B) an oligopoly.
C) first movers.
D) externalities.
E) free riders.

Question 67

Geoff works in the Lagos, Nigeria, office of KleenCorp., a Baltimore-based industrial cleaning products business. He is frustrated because he wanted to interview for a management position that recently opened up in his office, but the home-country office offered the job to a home-country employee. This isn't the first time that host-country employees were bypassed for jobs. Which political ideology would be used to explain this decision?

A) pragmatic nationalism
B) comparative advantage
C) mercantilism
D) radical view
E) free market

Question 68

The textile industry in a foreign country is controlled by four major companies. Last week, one of the companies decided to cut prices as a way to expand inventory. Since this industry is an oligopoly, what will be the likely response of the other three companies?

A) They will increase production levels.
B) They will make similar price cuts.
C) They will raise prices.
D) They will seek additional market share.
E) They will not respond to the price cuts.

Question 69

Dunning's theory helps explain

A) how firms try to match each other's moves in different markets to try to hold each other in check.
B) the prevalence of imitative behavior among rivals.
C) why a greenfield investment in a new facility is better than an acquisition.
D) the problems associated with doing business in a different culture.
E) how location factors affect the direction of FDI.

Question 70

Some countries have oil as a natural resource and BronzePlate Inc., based in Illinois, is considering building a facility in one of those foreign countries since it does not have easy access to oil near its manufacturing plant. Which theory of foreign direct investment provides an explanation for this decision?

A) eclectic paradigm
B) protectionism argument
C) product life-cycle theory
D) new trade theory
E) infant industry argument

Question 71

Which political view argues that international production should be distributed among countries according to the theory of comparative advantage?

A) conservative
B) pragmatic nationalism
C) free market
D) radical
E) planned

Question 72

The strategic behavior theory is used to

A) explain the constraints of exporting and licensing.
B) explain the challenges faced by a firm during the establishment of a new operation in a foreign country.
C) explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.
D) review the theories that have been used to explain foreign direct investment.
E) explain how greenfield investments are better than FDI at determining strategic competition and dominance.

Question 73

Location-specific advantages for a firm are those that arise from

A) acquiring the home markets of foreign firms that threaten a firm's domestic market.
B) gaining a commanding position in one market and using them to subsidize competitive attacks in other markets.
C) preferring exporting over licensing in order to retain control over know-how, manufacturing, marketing, and strategy.
D) utilizing resource assets that are tied to a particular foreign location and valuable enough to be combined with the firm's own unique assets.
E) franchising and licensing.

Question 74

One way to describe the free market view is to say that

A) a country should specialize in the production of a good that it can produce most efficiently.
B) a country should focus on importing goods that it can also produce if those goods are produced at a higher cost elsewhere.
C) an MNE is an instrument of imperialist domination.
D) host-country nations of a company are never given the same consideration as a home-country nation.
E) less-developed nations are kept relatively backward and dependent on advanced capitalist nations for employment.

Question 75

When two or more enterprises encounter each other in different regional markets, national markets, or industries, it creates

A) a monopoly.
B) a planned economy.
C) immediate trade wars.
D) multipoint competition.
E) the market imperfections approach.

Question 76

The aluminum and steel industry in a foreign country is dominated by just three firms and these firms control at least 80 percent of the domestic market. The market structure in this country is a(n)

A) perfect competition.
B) democracy.
C) oligopoly.
D) monopoly.
E) monarchy.

Question 77

Michelin and Goodyear compete against each other not only in the United States, but also all across Europe and Asia. These two tire companies are

A) a monopoly.
B) engaged in cooperation.
C) a cartel.
D) engaged in multipoint competition.
E) an oligopsony.

Question 78

QFresh, a brand for energy drinks, launched a healthy lime-based drink without preservatives. Immediately after this, another brand, Fast Fizz, which manufactures energy drinks, also announced the launch of a new refreshing drink without preservatives. Then Ignite, a third brand of energy drinks, reduced the price of its apple-based drink. Which of the following is most likely to happen in this oligopolistic market setup?

A) QFresh and Fast Fizz will reduce the prices of their respective drinks.
B) Fast Fizz will launch another new drink.
C) QFresh will link up with Ignite to launch a completely new product.
D) Fast Fizz and Ignite will collaborate against QFresh.
E) QFresh will have an increased domestic consumption.

Question 79

A critical competitive feature of an oligopoly is the

A) lack of interaction among the major players.
B) presence of a domestic market which is open for foreign firms.
C) desire of all the major players to avoid the phenomenon of diminishing returns.
D) interdependence of the major players.
E) lack of imitative behavior among the major players.

Question 80

The interdependence between firms in an oligopoly leads to

A) trade wars.
B) a decrease in the supply.
C) imitative behavior.
D) higher demand.
E) increased domestic consumption.