Deck 7: Foreign Direct Investment

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The merchandise account includes exports and imports of tangible goods.

Answer 3

True

Question 4

Firms from emerging markets account for a greater share of global mergers and acquisitions than developed markets.

Question 5

Trade barriers and specialized knowledge are examples of market imperfections.

Question 6

A majority of the regulatory changes that governments around the world introduced in recent years are unfavorable to FDI.

Question 7

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 8

Developed countries have been the major participants behind cross-border mergers and acquisitions.

Question 9

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

Question 10

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

Question 11

In the maturing product stage of the international product life cycle theory,increased competition creates pressures to reduce production costs.

Question 12

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

Question 13

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

Question 14

According to the market imperfections theory,competition is a common market imperfection.

Question 15

Not all factors of production are internationally mobile.

Question 16

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

Question 17

The eclectic theory states that firms undertake foreign direct investment only when the features of a particular location make the location appealing for investment.

Question 18

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

Question 19

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

Question 20

In foreign direct investment,complete ownership of a company guarantees its complete control.

Question 21

A(n)________ advantage is the one that a company gains from incorporating a business activity within itself rather than leaving it to a relatively inefficient market.

A)ownership
B)internalization
C)location
D)comparative

Question 22

Which of the following is least likely a reason for companies to seek cross-border mergers and acquisitions?

A)to get a foothold in new geographic markets
B)to raise company budgets for increased research and development activities
C)to increase a firm's global competitiveness
D)to fill the gaps in companies' product lines in a global industry

Question 23

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

A)internalization
B)ownership
C)comparative
D)location

Question 24

In the ________ product stage of the international product life cycle theory,increased competition pressurizes a company to build production facilities in low-cost developing nations.

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

Question 25

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

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

Question 26

Which of the following is true of foreign direct investment?

A)The contributions of entrepreneurs and small businesses to foreign direct investment is insignificant.
B)Globalization has led emerging markets to undertake less foreign direct investment and industrialized nations to undertake more foreign direct investment.
C)The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.
D)Foreign direct investment does not involve obtaining a degree of control in a company.

Question 27

Performance demands made by host countries to restrict incoming FDI apply exclusively to businesses in cultural industries.

Question 28

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

A)ad valorem tariff
B)market imperfection
C)tariff-quota
D)subsidy

Question 29

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

A)perfect
B)Eurocurrency
C)foreign exchange
D)greenfield investment

Question 30

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

Question 31

According to the international product life cycle theory,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 32

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

Question 33

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

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

Question 34

The realization that companies can start production in the most efficient and productive locations in the world and export to markets worldwide led to a new surge of foreign direct investment into ________.

A)First World nations
B)low-income nations
C)high-income nations
D)newly industrialized nations

Question 35

Which of the following is a major driver of foreign direct investment?

A)vertical integration
B)horizontal integration
C)globalization
D)cultural diversity

Question 36

The ________ theory states that when an aspect of 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 efficiency-reducing aspect.

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

Question 37

________ is an investment that does not involve obtaining a degree of control in a company.

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

Question 38

According to the international product life cycle theory,in which stage of a product's life cycle 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 39

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

Question 40

Ownership restrictions is a method used by host countries to restrict incoming foreign direct investment.

Question 41

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

A)balance of payments
B)chart of accounts
C)global financial system
D)international monetary system

Question 42

Making investments in distribution in order to leapfrog channels of distribution that are tightly controlled by competitors is an example of ________.

A)an internalization advantage
B)an ownership advantage
C)forward integration
D)backward integration

Question 43

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

A)an agricultural business acquisition in South-east Asia's former agricultural region
B)the construction of an entirely new steel manufacturing subsidiary overseas
C)a merger between a U.S.and a non-U.S.company
D)the purchase of an existing business that is still in its infancy

Question 44

Partnerships between a government and a host company in the context of foreign direct investment lead to ________.

A)increased exploitation of workers in the home country
B)domination of industries in the home country by large international firms
C)increased market access for the host company
D)increased control for the host country over its operations

Question 45

Which of the following countries would a watchmaker most prefer to manufacture its watches in,in order to capitalize on buyer perceptions of high quality?

A)China
B)Thailand
C)Mexico
D)Switzerland

Question 46

Which of the following statements is true of rationalized production?

A)It depends on a large number of distribution channels which leads to inefficiency.
B)It depends on a large number of distribution channels which increases the cost of production.
C)It can bring the entire production process to a standstill,if work is stopped in one country.
D)It is an unethical method of production as it uses questionable labor practices to reduce costs.

Question 47

A firm's subsidiary built abroad from the ground up is called a(n)________.

A)greenfield investment
B)portfolio investment
C)distributive channel
D)shell corporation

Question 48

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

A)Decentralization
B)Vertical integration
C)Market penetration
D)Social stratification

Question 49

The possibility that a company will create a future competitor by charging another company for access to its knowledge is a(n)________ that can encourage FDI.

A)ownership advantage
B)internalization advantage
C)market imperfection
D)trade barrier

Question 50

Which of the following is recorded in the capital account of a country's balance of payments?

A)income payments
B)income receipts
C)foreign official assets
D)unilateral transfers

Question 51

Firms engage in FDI when the firms they supply have already invested abroad.This practice of "following clients" is observed in industries having ________.

A)a huge number of clients
B)only large companies as clients
C)suppliers who are geographically scattered around the world
D)suppliers who have close working relationships with producers

Question 52

Which of the following is the type of production illustrated in the automobile industry?

A)customized production
B)rationalized production
C)job production
D)craft production

Question 53

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 is called ________ production.

A)rationalized
B)craft
C)job
D)customized

Question 54

Which of the following accounts of a country's balance of payments records transactions involving the export of services?

A)transactional account
B)capital account
C)savings account
D)current account

Question 55

Exports and imports of tangible goods are included in the ________ account of a country's balance of payments.

A)savings
B)capital
C)merchandise
D)services

Question 56

Exports and imports of tourism and business consulting are included in the ________ account of a country's balance of payments.

A)services
B)merchandise
C)capital
D)savings

Question 57

A company can achieve market power through ________.

A)ownership advantages
B)internalization advantages
C)horizontal integration
D)vertical integration

Question 58

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

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

Question 59

Which of the following is true of a "follow the leader" scenario in the context of foreign direct investment?

A)Companies that practice "follow the leader" supply each other with inputs.
B)Companies that practice "follow the leader" pressurize each other to follow environmentally safe methods.
C)It is a frequent practice in industries with a limited number of large firms.
D)It is common in industries in which producers source component parts from suppliers.

Question 60

The extension of a company's activities into stages of production that absorb the company's outputs is known as ________.

A)forward integration
B)backward integration
C)an internalization advantage
D)an ownership advantage

Question 61

Which of the following occurs in a country's balance of payments when a country exports more goods and services and receives more income from abroad than it imports and pays abroad?

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

Question 62

When a U.S.company buys shares of stock in a French company on France's stock market,the U.S.balance of payments records the transaction as an ________.

A)outflow of capital with a plus sign
B)outflow of capital with a minus sign
C)inflow of capital with a plus sign
D)inflow of capital with a minus sign

Question 63

A home country encourages outflows of foreign direct investment because it ________.

A)helps in replacing jobs at home
B)sends resources out of the home country
C)tends to increase the long-term competitiveness of firms
D)takes the place of all the exports and imports in the country

Question 64

Scenario: Global Manufacturing Inc.(GMI)
Global Manufacturing Inc.,a fast-growing U.S.company,plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest.The components will then be taken to maquiladoras for final assembly.GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B.
Which of the following systems of production is used by GMI?

A)job
B)craft
C)rationalized
D)customized

Question 65

Ownership restrictions and performance demands are used by ________.

A)host countries to promote FDI
B)host countries to restrict FDI
C)home countries to promote FDI
D)home countries to restrict FDI

Question 66

Which of the following methods is used by a host country to restrict incoming foreign direct investment?

A)differential tax rates for earnings abroad
B)insurance to cover the risk of overseas investments
C)low-interest loans to investors
D)performance demands

Question 67

Which of the following is a reason behind intervention by a host country on matters related to FDI?

A)to keep their balance of payments under control
B)to protect their outdated technology and management skills
C)to strictly encourage the establishment of sunset industries
D)to decrease the country's competitiveness in the global market

Question 68

________ are those that use outdated and obsolete technologies or employ low-wage workers with few skills.

A)Business-agile enterprises
B)Sunset industries
C)Greenfield investments
D)Shell corporations

Question 69

Which of the following methods is being used when a host country provides lower tax rates and low-interest loans to firms from abroad for encouraging inflows of foreign direct investment?

A)financial incentives
B)sanctions
C)local content requirements
D)embargoes

Question 70

Exports and imports of computer software,electronic components,and apparel are included in the ________ account of a country's balance of payments.

A)services
B)capital
C)merchandise
D)savings

Question 71

Tax breaks on profits earned abroad and political pressures are used by ________.

A)host countries to promote FDI
B)host countries to restrict FDI
C)home countries to promote FDI
D)home countries to restrict FDI

Question 72

Which of the following is used by home country governments to limit outbound foreign direct investment?

A)ownership restrictions
B)differential tax rates
C)tax breaks
D)low-interest loans

Question 73

Home nations discourage foreign direct investment outflows because it ________.

A)discourages cooperation between countries
B)replaces jobs in the home nation
C)fails to protect the "sunset" industries in the home nation
D)decreases long-term competitiveness of companies

Question 74

Scenario: Global Manufacturing Inc.(GMI)
Global Manufacturing Inc.,a fast-growing U.S.company,plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest.The components will then be taken to maquiladoras for final assembly.GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B.
GMI's investments are examples of ________.

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

Question 75

The difference between the balances of the current and capital accounts of a country's balance of payments caused by errors in recording methods is called a(n)________.

A)round-off error
B)type I error
C)currency crisis
D)statistical discrepancy

Question 76

Which of the following accounts within the current account of the United States' balance of payments includes financial gains earned on U.S.assets held abroad?

A)income receipts account
B)income payments account
C)merchandise account
D)services account

Question 77

If a Japanese citizen invests in the Australian stock market,the transaction would show up on the capital account in the balance of payments of ________.

A)Japan
B)Australia
C)both Japan and Australia
D)neither Japan nor Australia

Question 78

The ________ account within the United States' current account includes financial gains compensated to entities in other nations that is earned on assets they hold in the United States.

A)income receipts
B)income payments
C)merchandise
D)services

Question 79

Which of the following is used by home-country governments to promote outbound foreign direct investment?

A)political pressure
B)performance demands
C)ownership restrictions
D)sanctions

Question 80

When a U.S.subsidiary in another country remits profits back to its parent company in the U.S.,the receipt of profits is recorded in the ________.

A)income receipts account and given a plus sign
B)income receipts account and given a minus sign
C)income payments account and given a plus sign
D)income payments account and given a minus sign