Deck 3: Foreign Direct Investment

Question 1

What internal and external factors drove Vodafone's international expansion?

Answer 1

Internal factors:
$\bullet$ Firm-specific advantages. Vodafone has developed superior knowledge and economies of scale in wireless services. The company can further exploit these advantages in African markets. This corresponds to the Monopolistic Advantage Theory and the ownership advantage in the Eclectic Paradigm.
$\bullet$ First-mover advantages. As one of the first movers, Vodafone has made significant investments in Africa. It was able to quickly establish brand recognition, increase market share, and create switching costs for customers. The success of M-Pesa showcases such advantages.
External factors:
$\bullet$ The attractiveness of African markets. In Africa, there is a lack of telecommunication infrastructure but a growing demand for wireless services. The region has witnessed one of the strongest increases in mobile data use in the world. This market presents an attractive opportunity for MNCs like Vodafone to invest.
$\bullet$ Slow growth in home markets. For years, the company has seen declining revenues from its traditional European telecom markets. In contrast, emerging markets, with growing populations and demand, represent long-term potential for the company. Thus, Vodafone has shifted its strategic focus to penetration and expansion in attractive emerging markets

Question 2

How would you rate Africa as an investment destination for Vodafone? Why?

Answer 2

Africa presents both opportunities and challenges for international investors.
Opportunities
This region has shown great potential. Some African countries have experienced strong economic growth. Their growing demand for wireless and Internet services has created opportunities for market-seeking MNCs like Vodafone. Also, a lack of local competition allows MNCs to gain a sizable group of customers and preempt future competition. Facing a blank slate, Vodafone was able to build new infrastructures and offer new services. Moreover, the availability of natural resources, raw materials, and labor in some African countries brings opportunities for resource-seeking. MNCs may obtain certain production factors at a lower cost.
Challenges
There are some challenges that investors should be aware of. African markets generally have a high degree of uncertainty. In recent years, several once fast-growing economies ran into economic trouble and recession (e.g., Nigeria). Due to relatively low GNI per capita, the purchasing power of African consumers is still limited. MNCs may need to develop functional and affordable products for African markets. Furthermore, due to the underdevelopment of institutions and infrastructure, MNCs often spend extra money developing their businesses. For instance, Vodafone had to deal with a wide range of local regulations on construction, licensing, and telecommunications networks and services. The company also had to start everything from scratch, which requires considerable resource and time commitment.
The case suggests that Vodafone was able to take advantage of the growth opportunities in Africa and overcome the challenges by implementing appropriate strategies.

Question 3

What can be learned from the success of M-Pesa in Africa?

Answer 3

The following can be learned from the success of M-Pesa in Africa:
The main determinants of FDI activities
According to the eclectic paradigm (the OLI model), ownership, location, and internalization advantages drive firms' FDI activities. Vodafone invested in Africa because it has advanced mobile technologies, Africa is a booming market, and the company needs direct control to transfer and utilize its core competencies.
The rise of emerging markets in global FDI
As described in the section "Trends in Global FDI," developing countries, especially emerging markets, have seen continuous growth of FDI inflows. As the "last frontier" of the world economy, Africa is undergoing rapid growth and transformation. The continent may become another "hot" area or favorable market for FDI.
The unique opportunities and challenges of African markets
Facing a blank slate, Vodafone had to build without initial resources. However, the company could construct new infrastructures that are even better than those in developed markets and develop new services (like Internet banking) that it had not done before.

Question 4

Do you agree with CIFUS's decision on Huawei's acquisition of 3Leaf? Why?

Question 5

What are the impacts of Chinese companies' investments in the U.S.?

Question 6

What factors drove Huawei to invest in Silicon Valley? Was it a smart move?

Question 7

Why would GM set up production in Brazil rather than export vehicles from the United States?

Question 8

What are the advantages and disadvantages of Brazil as an investment destination for GM?

Question 9

What impact did FDI inflows have on China's economic development?

Question 10

What are the key features of Chinese government policies for FDI?

Question 11

What factors drove the changing patterns of FDI flows into China?

Question 12

What factors drove Microsoft to relocate phone production from China to Vietnam?

Question 13

What do you think of GM's increased commitment to Brazil? Was it a smart move?

Question 14

What do you think of Vietnam as an investment destination?

Question 15

What role should the government play in attracting foreign investments?

Question 16

What are the key characteristics of FDI? How is it different from portfolio investment?

Question 17

What are the main trends of global FDI? How do these trends affect the global economy?

Question 18

How do monopolistic advantage theory, product life cycle theory, and internalization theory differ from one another?

Question 19

Can the eclectic paradigm completely explain FDI activities? Does the linkage-learning-leverage framework add new insights about FDI?

Question 20

What are the main benefits that MNCs seek from FDI?

Question 21

What impacts do FDI inflows have on the host country economy?

Question 22

What impacts do FDI outflows have on the home country economy?

Question 23

How can governments encourage or restrict FDI?

Question 24

Honda, an automaker from Japan, has set up plants to manufacture cars in the United States. This is an example of:

A) Outsourcing
B) Insourcing
C) Foreign direct investment
D) Financial investment

Question 25

According to the OECD benchmark definition, FDI occurs when the direct investor generally owns _________ of the voting power of the enterprise, unless it can be proven that less ownership enables an effective voice in management.

A) 10% or more
B) 50% or more
C) 51% or more
D) 100%

Question 26

The __________ of FDI records the amount of FDI undertaken during a given period of time; and the __________ of FDI refers to the total accumulated value of FDI in a country or region.

A) portfolio, current
B) flow, stock
C) stock, flow
D) stockpile, portfolio

Question 27

The following activities are FDI except _________.

A) Wal-Mart set up a sourcing and distribution center in China.
B) Whirlpool built a refrigerator plant in Mexico.
C) Google acquired the majority shares of an Indian search website.
D) Fidelity Insurance purchased bonds issued by Airbus, a European company.

Question 28

Once a firm undertakes FDI, it becomes a _________.

A) portfolio investor
B) multinational corporation
C) foreign firm
D) investment enterprise

Question 29

The following investments are classified as FDI except _________.

A) equity capital
B) reinvestment of earnings
C) intra-company loans
D) portfolio investment

Question 30

BMW, a German automobile company, built a brand new manufacturing plant in Mexico. This is an example of ________.

A) greenfield investment
B) brownfield investment
C) cross-border acquisition
D) vertical investment

Question 31

In comparison to M&A, starting up new operations has the following advantage:

A) It involves intense integration.
B) It provides access to a local firm's proprietary assets.
C) It allows the investor to set up the operations as desired.
D) It enable fast entry into a foreign market.

Question 32

A U.S.-based computer manufacturer decided to acquire a supplier of computer parts (like motherboards and keyboards) in China. This is an example of _________.

A) greenfield investment
B) brownfield investment
C) vertical FDI
D) horizontal FDI

Question 33

Backward vertical FDI is an investment through which ___________.

A) the investor carries out the same activities abroad as it does at home
B) the investor expands market presence in its main business
C) the investor undertakes later-stage activities in the value chain
D) the investor engages upstream activities in the value chain

Question 34

In comparison to wholly owned investments, partially owned investments or joint ventures have the following advantages except __________.

A) enabling a high degree of control
B) access to complementary resources
C) shared costs and risks
D) meeting government restriction on equity ownership

Question 35

Which of the following statement is not true regarding the trends of global FDI?

A) Global FDI flows have been continuously growing every year since the 1990s.
B) There have been several downturns in global FDI due to economic recessions.
C) FDI inflows to developing countries have been steadily increasing.
D) Companies from developed countries have contributed the majority of FDI outflows.

Question 36

Which of the following statement is not true regarding the trends of global FDI?

A) Outward FDI from developing countries has seen significant growth in recent years.
B) Historically, the majority of global FDI has flowed into developing countries.
C) As for FDI sector distribution, there has been a shift from manufacturing to services.
D) In global FDI, equity capital and reinvested earnings are more common than intra-company loans.

Question 37

Between the two forms of FDI, usually ______ is more popular in developed countries, and _____ is more popular in developing countries.

A) outflow; inflow
B) merger and acquisition; greenfield investment
C) portfolio investment; equity investment
D) greenfield investment; merger and acquisition

Question 38

The monopolistic advantage theory suggests the following except _______.

A) owning firm-specific advantages enables MNCs to profit from FDI
B) FDI allows MNCs to exploit monopolistic advantages through direct control
C) FDI allows MNCs to develop new competitive advantages in overseas markets
D) monopolistic advantages can be attained via FDI but not portfolio investment

Question 39

High transportation costs and tariffs imposed on imports help explain why many firms prefer __________ over __________ for international expansion.

A) foreign direct investment, licensing
B) exporting, foreign direct investment
C) foreign direct investment, exporting
D) exporting, licensing

Question 40

Which of the following theories suggest that a company like IKEA should set up its own overseas stores rather than licensing its brand and business model to others?

A) Internalization theory
B) Internationalization theory
C) International product life cycle theory
D) The linkage-leverage-learning framework

Question 41

In comparison to licensing/franchising, FDI has the following advantages except ______.

A) FDI enables greater control over overseas operations.
B) FDI enables greater protection over key assets.
C) FDI facilitates the transfer of implicit knowledge.
D) FDI allows the utilization of location advantages.

Question 42

Which of the following best explains the concentration of domestic and foreign technology companies in the Silicon Valley?

A) To internalize and control their operations
B) To seek low-cost labor and efficient production
C) To exploit their firm-specific advantages
D) To gain access to local knowledge and talent tool

Question 43

According to the eclectic paradigm, firms' FDI activities are driven by the following factors except ____________.

A) ownership advantages
B) location advantages
C) internationalization advantages
D) internalization advantages

Question 44

Which of the following theories aimed to explain the rise of FDI outflows from emerging markets?

A) Monopolistic advantage theory
B) Internalization theory
C) International product life cycle theory
D) The linkage-leverage-learning framework

Question 45

The linkage-leverage-learning framework suggests the following except ________.

A) As a new product becomes mature, MNCs need to link up with location economies through FDI.
B) To attain successful FDI, MNCs need to leverage their firm-specific advantages.
C) Through FDI, latecomers can access and leverage existing knowledge networks and develop new capabilities.
D) Latecomers need to develop firm-specific advantages before undertaking FDI.

Question 46

A firm primarily seeks to enhance economies of scale and economies of scope through FDI. This reflect the firm's ________ motive.

A) market-seeking
B) resource-seeking
C) efficiency-seeking
D) strategic asset-seeking.

Question 47

To pursue its ________ objective, Geely, an automaker from China, acquired Volvo to access Volvo's technology base and developed new products through collaboration with Volvo.

A) market-seeking
B) resource-seeking
C) efficiency-seeking
D) strategic asset-seeking

Question 48

The host country of FDI may be concerned about the following problems of inward FDI except______.

A) foreign firms' monopoly of local markets
B) the negative impact on local employment
C) the adverse effects of increased competition
D) the loss of national economic independence

Question 49

Which of the following is not considered a benefit of inward FDI for the host country?

A) The transfer of capital and resources
B) The increase of employment
C) Innovation and productivity improvement driven by increased competition
D) The repatriation of profits earned overseas

Question 50

As for government policies on FDI, it is more common for governments to _______.

A) offer incentives to firms that invest in their countries
B) penalize firms that invest in their countries
C) change safety and environmental rules to accommodate foreign investors
D) offer special incentives to firms from developing countries only

Question 51

Which of the following is considered the main drawback of outward FDI for the home country?

A) The repatriation of profits
B) Job loss to overseas locations
C) The acquisition of resources and strategic assets
D) Increased competition

Question 52

Which of the following home-country policies limits outward FDI?

A) Reduce tax burden on foreign income
B) Remove foreign exchange restriction
C) Change tax rules to encourage domestic investment
D) Remove country restriction on overseas investment

Question 53

What is foreign direct investment? How is it different from portfolio investment?

Question 54

What are the main arguments of the monopolistic advantage theory, the product life cycle theory, and the internalization theory?

Question 55

What are the three main arguments of John Dunning's eclectic paradigm on FDI? Use a MNC's FDI to illustrate the three arguments (i.e., why the MNE pursues FDI according to the eclectic paradigm)?

Question 56

In recent years, Chinese FDI in the U.S., especially investment via acquisitions, has seen strong growth. What are the motivations of such FDI? What are the potential benefits and drawbacks of such FDI to the U.S.?

Question 57

How does the host-country government promote and restrict FDI? What kind of policies are more popular?