Deck 8: Foreign Direct Investment

Question 1

When a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.

Answer 1

True
Explanation: When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. Similarly, when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.

Question 2

Since World War II, the United States has been the largest source country for FDI.

Answer 2

True
Explanation: Since World War II, the United States has been the largest source country for FDI. Other important source countries include the United Kingdom, France, Germany, the Netherlands, and Japan. Collectively, these six countries accounted for 60 percent of all FDI outflows for 1998-2012.

Question 3

Greenfield investment involves the establishment of a new operation in a foreign country.

Answer 3

True
Explanation: A greenfield investment is a form of FDI which involves the establishment of a new operation in a foreign country.

Question 4

Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

Question 5

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

Question 6

According to the United Nations, the majority of changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment have created a more favorable environment for FDI.

Question 7

According to the pragmatic nationalist view, no country should ever permit foreign corporations to undertake FDI.

Question 8

A critical competitive feature of an oligopoly is independence of the major players.

Question 9

By the early 1990s, the radical position toward FDI was in retreat due to the rise of communism in eastern Europe.

Question 10

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

Question 11

By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing.

Question 12

Economists refer to knowledge "spillovers" as externalities, and there is a well-established theory suggesting that firms can benefit from such externalities by locating close to their source.

Question 13

The attractiveness of exporting increases in comparison to FDI or licensing when products have a low value-to-weight ratio.

Question 14

The flow of foreign direct investment refers to the number of countries a firm is investing in at any given point in time.

Question 15

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

Question 16

FDI has grown significantly slower than world trade and world output.

Question 17

According to the extreme version of radical view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination.

Question 18

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

Question 19

By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing.

Question 20

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

Question 21

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

Question 22

Ownership restraints and performance requirements are the two most common ways in which host governments restrict FDI.

Question 23

Which of the following 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 24

Which of the following is most likely to involve establishment of a new operation in a foreign country?

A)Consolidation
B)Greenfield investment
C)Acquisition
D)Licensing agreement
E)Mass customization

Question 25

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

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

Question 26

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

Question 27

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

Question 28

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 29

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 30

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

Question 31

The stock of foreign direct investment refers to:

A)the total accumulated value of foreign-owned assets at a given time.
B)the number of shares of a foreign firm held by the local investors.
C)the amount of FDI undertaken over a given time period (normally a year).
D)the dividend amount paid by the foreign firm to local investors.
E)the flow of foreign direct investment out of a country.

Question 32

Franchising is essentially the service-industry version of licensing, although it normally involves much longer-term commitments than licensing.

Question 33

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

Question 34

According to the U.S. Department of Commerce, which of the following, 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)Reciprocal foreign investment
D)International divestment
E)Asset divestment

Question 35

The WTO embraces the promotion of international trade in services.

Question 36

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

Question 37

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

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

Question 38

Services such as telecommunications, retailing, and many financial services, where the service has to be produced where it is delivered, lend themselves well to exporting.

Question 39

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

Question 40

Which of the following indicates that a firm has a full outright stake in an acquisition?

A)Anderson Corporations acquires at least 75 percent of a company.
B)Sheffield Enterprises acquires at least 60 percent of a company.
C)Arthur Enterprises acquires 98 percent of a company.
D)Maximus Corporations acquires 100 percent of a company.
E)Dream Animax acquires at least 85 percent of a company.

Question 41

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 42

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 43

Which of the following involves producing goods at home and then shipping them to the receiving country for sale?

A)Outsourcing
B)Licensing
C)Franchising
D)Exporting
E)Diversifying

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

Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting?

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

Question 46

Mergers and acquisitions differ from greenfield investments in that:

A)greenfield investments are quicker to execute than mergers and acquisitions.
B)greenfield investments are undertaken to take advantage of valuable strategic assets, such as brand loyalty and trademarks or patents, of a foreign competitor.
C)the majority of FDI flows into developed nations are in the form of greenfield investments rather than mergers and acquisitions.
D)the majority of FDI flows into developing nations are in the form of cross-border mergers and acquisitions.
E)the percentage of mergers and acquisitions is lower than greenfield investments in developing nations.

Question 47

According to internalization theory:

A)licensing gives a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
B)licensing may result in a firm's 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 much on its products rather than on the management, marketing, and manufacturing capabilities that produce those products.
E)licensing is more profitable than FDI.

Question 48

Why has FDI grown more rapidly than world trade?

A)The decline in trade barriers has erased the fear of protectionist pressures.
B)Executives of business firms see FDI as a way of circumventing future trade barriers.
C)There has been a general shift toward radical and totalitarian political institutions.
D)Privatization has made developing nations less attractive for multinational enterprises.
E)There has been a general shift toward centrally planned command economies.

Question 49

The viability of an exporting strategy is often 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 50

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 51

Governments impose quotas to limit:

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

Question 52

Which of the following involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold?

A)Outsourcing
B)Exporting
C)Licensing
D)Diverging
E)Hedging

Question 53

The argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing constitutes the:

A)comparative advantage theory.
B)distribution theory.
C)new trade theory.
D)internalization theory.
E)licensing theory.

Question 54

A firm that does not want to bear the costs of establishing production facilities in a foreign country should avoid:

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

Question 55

Which of the following is true regarding the inflow of FDI?

A)Even though developing nations still account for the largest share of FDI inflows, FDI into developed nations has increased markedly.
B)Africa has historically been the largest recipient of inward FDI.
C)The United Kingdom and France have historically been the smallest recipients of inward FDI.
D)There has been an increase in the importance of China as a recipient of FDI.
E)Latin America is the least important region in the developing world for FDI inflows.

Question 56

Which of the following states that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI, and it also requires the firm to establish production facilities where those foreign assets or resource endowments are located?
A.Strategic trade policy
B.Integration approach
C.Scramble theory
D.Eclectic paradigm
E.Infant industry argument

Question 57

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 58

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 59

Which of the following products has a low value-to-weight ratio?

A)Electronic components
B)Personal computers
C)Medical equipment
D)Computer software
E)Cement

Question 60

Which of the following statements is true regarding foreign direct investment?

A)The flow of FDI refers to the total accumulated value of foreign-owned assets at a given time.
B)FDI has grown more rapidly than world trade and world output.
C)The general shift toward democratic political institutions has discouraged FDI.
D)Generally, free market economies oppose FDI.
E)The globalization of the world economy is having a negative effect on the volume of FDI.

Question 61

According to the free market view, how does FDI increase the efficiency of the world economy through MNEs?

A)The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.
B)MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale.
C)When an MNE produces products, profits from the investment go abroad, and hence the MNE helps foreign exchange to rotate.
D)A foreign-owned manufacturing plant may import many components from its home country, thus improving the balance of payments of the host country.
E)MNEs increase the efficiency of the world economy by increasing the flow of capital in the world market.

Question 62

Which of the following is true about Dunning's arguments?

A)Dunning rejects the argument of internalization theory that it is difficult for a firm to license its own unique capabilities and know-how.
B)Dunning suggests that to exploit foreign resources, such as oil and other minerals, a firm must undertake licensing rather than FDI.
C)Dunning argues that it makes sense for a firm to locate production facilities in those countries where the cost and skills of local labor is most suited to its particular production processes, since labor is not internationally mobile.
D)Dunning's theory and its extensions help explain the imitative FDI behavior by firms in oligopolistic industries.
E)Dunning argues that combining location-specific assets or resource endowments with the firm's own unique capabilities always requires licensing.

Question 63

The idea behind multipoint competition is to ensure 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

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 65

The cement market in Erbia is dominated by four firms. These firms control 85 percent of selling and buying of the domestic market. Which of the following terms explains the market structure of the cement industry in Erbia?

A)Perfect competition
B)Monopoly
C)Oligopoly
D)Dual monopoly
E)Monopsony

Question 66

Which of the following concepts helps explain how location factors affect the direction of FDI?

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

Question 67

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, thus offering the location-specific advantage of:

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

Question 68

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 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 interdependence between firms in an oligopoly that leads to imitative behavior among the rivals.
C)why a greenfield investment in a new facility is better than an acquisition of or a merger with an existing local firm.
D)the problems associated with doing business in a different culture where the rules of the game may be very different.
E)how location factors affect the direction of FDI.

Question 70

Which of the following is a reason for the decline in the popularity of the radical view of FDI?

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

Question 71

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.

Question 72

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 73

Which 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 74

Which 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)Keynesian economic

Question 75

Radical writers argue that:

A)a multinational enterprise (MNE) is an instrument of economic development rather than economic domination.
B)MNEs are more beneficial to host countries than to their home countries.
C)important jobs in the foreign subsidiaries of MNEs go to host-country nationals rather than to citizens of the home country.
D)FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward.
E)MNEs exploit their home countries for the exclusive benefit of their host countries.

Question 76

Which of the following arises when two or more enterprises encounter each other in different regional markets, national markets, or industries?

A)Monopoly
B)Monopsony
C)Cartel
D)Multipoint competition
E)Oligopsony

Question 77

The difference between Internalization theory and imitative theory is that:

A)internalization theory does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.
B)imitative theory addresses the issue of whether FDI is more efficient than exporting or licensing for expanding abroad.
C)most economists favor imitative theory as an explanation for FDI.
D)no important aspect of FDI is explained by imitative theory.
E)internalization theory addresses the issue of efficiency of FDI over exporting or licensing.

Question 78

If one firm in an oligopoly cuts prices, then most likely, its competitors will:

A)make profits.
B)also respond with similar price cuts.
C)correspondingly raise prices.
D)capture additional market share.
E)not be impacted by the price cuts.

Question 79

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 80

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.