Deck 7: Foreign Direct Investment

Question 1

________ 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

Answer 1

A

Question 2

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

Answer 2

A

Question 3

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 subsidiary for component B in Thailand is best described as a(n)________.

A)greenfield investment
B)portfolio investment
C)acquisition
D)merger

Answer 3

A

Question 4

Scenario: Happyland
Happyland is a country characterized by beautiful beaches,vast natural resources,and a highly skilled labor force.Happyland is now encouraging foreign direct investment flows.The country has been exporting textiles,computer hardware,and software programs.The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
Transactions involving the export of Happyland's textile and computer products are included in its ________ account.

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

Question 5

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 6

Scenario: Happyland
Happyland is a country characterized by beautiful beaches,vast natural resources,and a highly skilled labor force.Happyland is now encouraging foreign direct investment flows.The country has been exporting textiles,computer hardware,and software programs.The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
Happyland's international trade situation illustrates that the country is experiencing a ________.

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

Question 7

Scenario: Blickinstock at the Crossroads
Auto parts supplier,Blickinstock Ltd. ,would like to expand its presence in Latin America.To that end,Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary.Keith Moon,Blickinstock's vice president of global business development,will be making a presentation to the board outlining the company's options.
Blickinstock has identified a company that it can acquire or merge with.Which of the following statements would represent the least likely reason for Blickinstock to go ahead with the merger?

A)The merger would help increase Blickinstock's global competitiveness.
B)The merger would allow the company to get a foothold in the nascent Latin American market.
C)The merger would help to fill the gaps in Blickinstock's product line.
D)The merger would bring in increased cash-flows that Blickinstock can use to acquire other firms.

Question 8

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 9

Scenario: Happyland
Happyland is a country characterized by beautiful beaches,vast natural resources,and a highly skilled labor force.Happyland is now encouraging foreign direct investment flows.The country has been exporting textiles,computer hardware,and software programs.The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
If Happyland advertises its beaches and attracts tourists,the tourism-related income would be recorded in its ________ account.

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

Question 10

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 11

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 12

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 purchase of the Brazilian company is best classified as a(n)________.

A)greenfield investment
B)portfolio investment
C)acquisition
D)demerger

Question 13

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 14

Not all factors of production are internationally mobile.

Question 15

Scenario: Blickinstock at the Crossroads
Auto parts supplier,Blickinstock Ltd. ,would like to expand its presence in Latin America.To that end,Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary.Keith Moon,Blickinstock's vice president of global business development,will be making a presentation to the board outlining the company's options.
If board members ask about the maquiladora industry,Keith would explain that it refers to ________.

A)Mexico's low-cost labor union
B)the cross-border drug trafficking problem that threatens to limit legitimate production in Mexico
C)the low-wage,130-mile-wide strip along the U.S.-Mexico border that comprises a special economic region
D)Latin America's new model for business that restricts foreign investors to take advantage of government incentives

Question 16

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

Question 17

Scenario: Happyland
Happyland is a country characterized by beautiful beaches,vast natural resources,and a highly skilled labor force.Happyland is now encouraging foreign direct investment flows.The country has been exporting textiles,computer hardware,and software programs.The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
If Happyland is successful in attracting foreign direct investment,transactions involving those investments would appear in the country's ________ account.

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

Question 18

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

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

Question 19

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 20

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 21

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 22

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 23

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

Question 24

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

Question 25

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 26

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 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

What two factors propel growth in foreign direct investment?

Question 34

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

Question 35

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 36

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 37

The merchandise account includes exports and imports of tangible goods.

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

________ 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 44

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 45

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 46

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 47

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 48

Using any two of the four theories that appear in your text,explain why companies engage in foreign direct investment.

Question 49

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

Question 50

Trade barriers and specialized knowledge are examples of market imperfections.

Question 51

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.

Question 52

A company can achieve market power through ________.

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

Question 53

How does the eclectic theory explain the concept of FDI? How can a host country offer incentives to attract FDI?

Question 54

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 55

Explain the market power theory of FDI,and discuss why the decision whether or not to follow rivals into a new international market is important.

Question 56

Explain the theory of market imperfections and describe the two major market imperfections.

Question 57

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 58

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 59

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

Question 60

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 61

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 62

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

Question 63

Explain the concept of balance of payments and describe its two major components.

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.
In which of the following accounts would GMI's purchase of the company in Brazil appear?

A)the current account of the United States
B)the current account of Brazil
C)the capital account of the Thailand
D)the capital accounts of Brazil and the United States

Question 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 73

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 74

Describe any three management issues involved in foreign direct investment decisions.

Question 75

Discuss the role entrepreneurs and small businesses play in the expansion of FDI.What are some of the surprises that managers face as they invest in new markets abroad?

Question 76

Why is it important to assess R&D costs when considering FDI? Given its costs,how can FDI benefit the host country with access to technology,management skills,and employment?

Question 77

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 78

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 79

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 80

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