Deck 7: Foreign Direct Investment

Question 1

Developed countries are the prime destination for foreign direct investment because cross-border mergers and acquisitions are concentrated in developed countries.

Answer 1

True

Question 2

The international product life cycle theory is a powerful tool in understanding why firms choose foreign direct investment over other forms of market entry.

Answer 2

False

Question 3

Portfolio investment is the purchase of physical assets or a significant amount of ownership of a company in another country to gain a degree of management control.

Answer 3

False

Question 4

Two main reasons for foreign direct investment flows are globalization and diversity.

Question 5

Many early trade theories were created at a time when most factors of production either could not be moved or could not be moved easily across national borders.

Question 6

Foreign direct investment is the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control.

Question 7

European Union nations, the United States, and Japan account for the vast majority of world foreign direct investment inflows.

Question 8

Factors of production include things such as labor, financial capital, capital equipment, and land or natural resources.

Question 9

Increasing globalization is causing a growing number of international companies from emerging markets to undertake foreign direct investment.

Question 10

According to the market imperfections theory, one common market imperfection is trade barriers.

Question 11

The eclectic theory states that a company will begin by exporting its products and later undertake foreign direct investment as a product moves through its life cycle.

Question 12

Africa attracts about 3 percent of worldwide foreign direct investment inflows.

Question 13

The international product life cycle theory says that in the standardized product stage, a good is produced in the home country where it was developed because of uncertain domestic demand.

Question 14

Trade barriers and specialized knowledge are both examples of market imperfections.

Question 15

Forces causing globalization are part of the reason for long-term growth in foreign direct investment.

Question 16

A market that is said to operate at peak efficiency and where goods are readily and easily available is said to be a perfect market.

Question 17

The international product life cycle theory says that in the maturing product stage, a company builds production capacity in low-cost developing nations to serve world markets.

Question 18

At the core of foreign direct investment are international flows of capital.

Question 19

Today, all factors of production are internationally mobile.

Question 20

Industrialized countries are the source for about 35 percent of worldwide foreign direct investment.

Question 21

In industries with a limited number of large firms, foreign direct investment decisions frequently resemble a "follow the leader" scenario.

Question 22

Rationalized production is a system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest.

Question 23

If the cost of land and the tax rate on profits are lower in the local market, one can assume they will remain constant.

Question 24

A potential problem with a rationalized production model is that a work stoppage in one country can bring the entire production process to a standstill.

Question 25

According to the eclectic theory, an internalization advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Question 26

Vertical integration is the extension of company activities into stages of production that provide a firm's inputs (forward integration) or absorbs its outputs (backward integration).

Question 27

If coffee company Maxwell House were to acquire a coffee plantation in Brazil, it might achieve market power through vertical integration.

Question 28

In foreign direct investment, 100 percent ownership of a company does not guarantee its complete control.

Question 29

The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Question 30

A market imperfection that can encourage foreign direct investment is the possibility that a company will create a future competitor by charging another company for access to its knowledge.

Question 31

Building a subsidiary abroad from the ground up is called a greenfield investment.

Question 32

The practice of "following clients" can be expected in industries where many component parts are obtained from suppliers with whom a manufacturer has a close working relationship.

Question 33

The soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions.

Question 34

Factors that reduce the appeal of purchasing existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location.

Question 35

Benefits of investment by multinationals include increased unemployment, increased tax revenues, workforce training, and the transfer of technology.

Question 36

Governments never intervene in the flow of foreign direct investment since it always generates jobs.

Question 37

According to the eclectic theory, an ownership advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

Question 38

When a company's specialized knowledge is embodied in its employees, the only alternative to exploit a market opportunity in another nation may be to undertake foreign direct investment.

Question 39

The globalization of innovation and the phenomenon of foreign direct investment in research and development activities are motivated purely by demand factors such as the size of local markets.

Question 40

The Mexican maquiladora project was built upon the success of the border project between Germany and Poland.

Question 41

The purchase of physical assets or a significant amount of ownership (stock) of a company in another country to gain a measure of management control is called ________.

A) foreign direct investment
B) portfolio investment
C) mergers
D) vertical integration

Question 42

The capital account is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country.

Question 43

If a U.S. citizen invests in the Brazilian stock market, the transaction would show up on the capital accounts of both the United States and Brazil.

Question 44

Any nation's balance of payments consists of two major components: the current account and the past-due account.

Question 45

A country's balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation.

Question 46

Tax incentives and infrastructure improvements are financial incentives used by home countries to encourage outflows of foreign direct investment.

Question 47

Because foreign direct investment inflows are recorded as subtractions to the balance of payments, a nation is negatively affected from an initial foreign direct investment inflow.

Question 48

Which of the following are main drivers of foreign direct investment?

A) Diversity and telecommunications
B) Telecommunications and transportation
C) Globalization and mergers and acquisitions (M&A)
D) Diversity and globalization

Question 49

One reason a home country may discourage foreign direct investment outflows is to protect its "sunset" industries.

Question 50

Which of the following refers to investments that do NOT involve obtaining a measure of control in a company?

A) Foreign direct investment
B) Portfolio investment
C) Mergers
D) Vertical integration

Question 51

The merchandise account includes exports and imports of tangible goods.

Question 52

The two main reasons countries intervene in foreign direct investment flows are to control the balance of payments and to obtain resources and benefits.

Question 53

One method used by host countries to restrict incoming foreign direct investment is ownership restrictions.

Question 54

All of the following factors of production are internationally mobile EXCEPT ________.

A) labor
B) financial capital
C) capital equipment
D) land

Question 55

To limit the effects of outbound foreign direct investment on the national economy, home governments may impose differential tax rates that charge earnings from abroad at a higher rate than domestic earnings.

Question 56

The income payments account includes income earned on home country assets held abroad.

Question 57

The U.S. Commerce Department sets the threshold at which it classifies an international capital flow as foreign direct investment at ________ percent.

A) 4
B) 10
C) 7
D) 1

Question 58

Values, attitudes, and beliefs form the basis for much of a government's position regarding foreign direct investment.

Question 59

When a country imports more goods and services and pays more abroad than it exports and receives from abroad, it experiences a current account deficit.

Question 60

A current account deficit occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad.

Question 61

According to the international product life cycle, in which stage of a product's life does a company directly invest in production facilities in countries where demand is great enough to warrant production facilities?

A) New product stage
B) Maturing product stage
C) Standardized product stage
D) Declining product stage

Question 62

A(n) ________ is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

A) ownership advantage
B) internalization advantage
C) location advantage
D) market power advantage

Question 63

The requirement that a sufficient portion of a product's content originate within a certain market to escape tariff charges is an example of a(n) ________.

A) perfect market
B) market imperfection
C) tariff quota
D) maturing product

Question 64

Which of these created renewed determination to further reduce barriers to trade?

A) Consumer demand
B) Advancements in telecommunications
C) Foreign direct investment and portfolio investment trends
D) Uruguay Round of trade negotiations

Question 65

The ________ theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for an investment.

A) internalization
B) international product life cycle
C) market imperfections
D) eclectic

Question 66

One way a company can achieve market power is through ________.

A) ownership advantages
B) horizontal integration
C) vertical integration
D) balancing payments

Question 67

According to the international product life cycle, in which of the following stages is a good produced in the home country because of uncertain domestic demand and to keep production close to the research department?

A) Standardized product stage
B) Maturing product stage
C) Declining product stage
D) New product stage

Question 68

Which of the following is the extension of company activities into stages of production that provide a firm's inputs or absorb its outputs?

A) Horizontal integration
B) Vertical integration
C) Market penetration
D) Collaborative diversification

Question 69

Which of the following statements is NOT true?

A) Entrepreneurs and small businesses do not play an important role in expanding foreign direct investment flows.
B) Increasing globalization is causing a growing number of international companies from emerging markets to undertake foreign direct investment.
C) The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.
D) Companies may pursue mergers and acquisitions to fill gaps in their product lines.

Question 70

Companies seek cross-border mergers and acquisitions to ________.

A) get a foothold in new geographic markets
B) increase a firm's global competitiveness
C) fill in gaps in companies' product lines in a global industry
D) all of the above

Question 71

A market that is said to operate at peak efficiency and where goods are readily and easily available is said to be a(n) ________.

A) perfect market
B) eclectic market
C) imperfect market
D) greenfield market

Question 72

Which of the following is NOT one of the four main theories that attempts to explain why companies engage in foreign direct investment?

A) International product life cycle theory
B) Market imperfections theory
C) Eclectic theory
D) Mercantilism

Question 73

A(n) ________ is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

A) industry advantage
B) production advantage
C) comparative advantage
D) location advantage

Question 74

The ________ theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment.

A) market power
B) eclectic
C) market imperfections
D) trade barriers

Question 75

The ________ theory states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection.

A) market power
B) perfect market
C) international product life cycle
D) market imperfections (internalization)

Question 76

In the ________ product stage of the international product life cycle theory, increased competition pressures a company to produce in low-cost developing nations.

A) new
B) maturing
C) standardized
D) declining

Question 77

Which of these refers to the theory that a company will begin by exporting its products and later undertake foreign direct investment as a product moves through its life cycle?

A) Eclectic life cycle
B) Market imperfections life cycle
C) International product life cycle
D) Market power life cycle

Question 78

Which of these theories states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment?

A) Market power
B) International product life cycle
C) Market imperfections
D) Eclectic

Question 79

According to the eclectic theory, which of the following advantages must be present for a company to undertake foreign direct investment?

A) Location
B) Ownership
C) Internationalization
D) All of the above

Question 80

When companies realized they could produce in the most efficient and productive locations in the world and simply export to markets worldwide, a new surge of foreign direct investment flowed into ________.

A) low-cost newly industrialized nations and emerging markets
B) highly developed economies
C) the automobile and computer industries
D) totalitarian and theocratic nations only