Deck 8: Foreign Direct Investment

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

According to the U.S.Department of Commerce,FDI occurs whenever a U.S.citizen,organization,or affiliated group takes an interest of 10 percent or more in a foreign business entity.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Greenfield investments are quicker to execute than mergers and acquisitions.

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

According to the United Nations,majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI.

Question 18

Since World War II,the United States has been the largest source country for FDI,a position it retained during the late 1990s and early 2000s.

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 24

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

Question 25

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

Question 26

The WTO embraces the promotion of international trade in services.

Question 27

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

Question 28

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 29

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

Question 30

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 31

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

Question 32

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 33

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

Question 34

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

Question 35

According to the U.S.Department of Commerce,in the United States _____ 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 36

A firm becomes a(n)_____,once it undertakes FDI.

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

Question 37

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

Question 38

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

Question 39

World trade has been growing twice as fast as the growth in the volume of FDI worldwide.

Question 40

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

Question 41

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 is 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 42

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 43

The viability of an exporting strategy is often constrained by transportation costs,particularly of products that have a _____ and that can be produced in almost any location.

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 44

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 45

Why has FDI grown more rapidly than world trade?

A) Decline in trade barriers has made the fear of protectionist pressures redundant.
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 46

The _____ of foreign direct investment 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 47

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 48

The _____ 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 49

In the case of developing nations,about _____ of FDI is in the form of cross-border mergers and acquisitions.

A) three-fourth
B) one-third
C) one-half
D) two-third
E) three-fifth

Question 50

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 51

Countries such as the U.S.,the U.K.,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:

A) they were the most developed countries postwar and home to the largest and best capitalized enterprises.
B) they pursued a policy of blocking or restricting FDI inflow into their own economies.
C) they provided subsidies for their domestic firms to protect them from foreign competition.
D) they control much of the operating structure of the WTO which governs international trade.
E) they were the governing body of the International Monetary Fund.

Question 52

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) to 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 53

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 54

Which of the following indicates that a firm has 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 atleast 85 percent of a company.

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 underdeveloped 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

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

A) underdeveloped
B) developing
C) developed
D) emerging
E) least developed

Question 57

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 58

FDI is risky because of the problems associated with:

A) sharing a valuable technological know-how with a potential competitor.
B) increase in the 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 increase in trade barriers such as import tariffs or quotas.
E) increased production costs.

Question 59

During 1998 to 2010,which of the following countries had the highest FDI outflow?

A) United Kingdom
B) United States
C) Netherlands
D) Germany
E) Japan

Question 60

_____ 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 61

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 62

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 63

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 64

Governments impose quotas to limit _____.

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

Question 65

Deep Check
The strategic behavior theory:

A) explains the constrains of exporting and licensing.
B) seeks to explain the challenges faced by a firm during the establishment of a new operation in a foreign country.
C) seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.
D) reviews the theories that have been used to explain foreign direct investment.
E) explains how greenfield investments are better than FDI.
Strategic behavior theory is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. An early variant of this argument was expounded by

Question 66

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 by imposing tariffs and quotas.
E) it is less cost-effective than FDI.

Question 67

A critical competitive feature of an oligopoly is:

A) the lack of interaction among the major players.
B) the presence of a domestic market which is open for foreign firms.
C) the desire of all the major players to avoid the phenomenon of diminishing returns.
D) the interdependence of the major players.
E) the lack of imitative behavior among the major players.

Question 68

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 69

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 70

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 71

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 72

A(n)_____ 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 73

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 74

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 such 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 75

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 set up?

A) QFresh and Fast Fizz will reduce the prices of their respective drinks.
B) Fast Fizz will launch another new drink.
C) QFresh will tie 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 76

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

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

Question 77

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 cement industry in Erbia?

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

Question 78

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 79

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 80

Economists refer to knowledge "spillovers" that occur when companies in the same industry are located in the same area as:

A) technology flows.
B) overlaps.
C) corporate espionage.
D) externalities.
E) a free rider problem.