Deck 7: Foreign Direct Investment

Question 1

Developing nations such as Poland and Ukraine were the largest national recipients of inward investments within the EU in 2007.

Answer 1

False
Explanation: In 2007,inward investment into the EU reached a record $842 billion,although it fell to $503 billion in 2008.The United Kingdom and France were the largest national recipients.

Question 2

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

Answer 2

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

Question 3

Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit the foreign entity sells is called licensing.

Answer 3

True
Explanation: Licensing involves granting a foreign entity (the licensee)the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Question 4

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

Question 5

The largest source country for FDI is Japan.

Question 6

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 7

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

Question 8

FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different.

Question 9

Products with low value-to-weight ratios are the most viable for exporting.

Question 10

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

Question 11

Executives of foreign firms see FDI as a way of circumventing future trade barriers.

Question 12

The data suggest the majority of cross-border investment in developing countries is in the form of mergers and acquisitions.

Question 13

Many firms believe that if they do not acquire a desirable target firm,their global rivals will.

Question 14

The inability of Africa to attract greater investment is in part a reflection of the rigid and unchanging economic policy in the region.

Question 15

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

Question 16

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

Question 17

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

Question 18

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.

Question 19

With developed nations still accounting for the largest share of FDI inflows,FDI into developing nations has steadily decreased over the past decade.

Question 20

Gross fixed capital formation summarizes the total amount of capital invested in factories,stores,office buildings,and the like.

Question 21

The location-specific advantages argument associated with John Dunning does help explain the direction of FDI.

Question 22

In 1995,the OECD initiated talks to draft a multilateral agreement on investment that legalized discrimination against foreign investors by signatory states.

Question 23

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

Question 24

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

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

Question 25

A firm has full outright stake in an acquisition when it acquires:

A)at least 38 percent of a company.
B)at least 60 percent of a company.
C)at least 98 percent of a company.
D)100 percent of a company.

Question 26

The establishment of a wholly new operation in a foreign country is referred to as a(n):

A)consolidation.
B)greenfield investment.
C)acquisition.
D)licensing agreement.

Question 27

Employment restraints and profit requirements are the two most common ways host governments restrict FDI.

Question 28

One problem of licensing is that it does not give the firm tight control over manufacturing,marketing,and strategy in a foreign country that may be required to maximize its profitability.

Question 29

FDI was governed by the GATT until the 1990s.

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

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

Question 32

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

Question 33

Under the pragmatic nationalism view,no country should ever permit foreign corporations to undertake FDI.

Question 34

Raymond Vernon's product life-cycle theory offers clear explanations for why it is profitable for a firm to undertake FDI rather than continuing to export from its home base or licensing a foreign firm to produce its product.

Question 35

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

Question 36

Virtually all investor countries,including the United States,have exercised some control over outward FDI from time to time.

Question 37

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

Question 38

A hardware manufacturing firm from the United States invests directly in an assembling plant for laptops in Taiwan.This is an example of:

A)insourcing.
B)stock consolidation.
C)foreign direct investment.
D)product takeover.

Question 39

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

Question 40

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

Question 41

_____ summarizes the total amount of capital invested in factories,stores,office buildings,and the like.

A)Gross fixed capital formation
B)Gross foreign direct investment
C)Net overhead investment
D)Net infrastructure investment

Question 42

The U.S. ,the U.K. ,France,Germany,the Netherlands,and Japan account for more than half of the global stock of FDI.As might be expected,these countries also:

A)did not look at foreign markets to fuel their economic expansion.
B)have cumbersome regulations against FDI inflows into their own economies.
C)predominate in the rankings of the world's largest multinationals.
D)express similar FDI inflows as a percentage of gross fixed capital formation.

Question 43

According to the text,other things being equal,the greater the _____ in an economy,the more favorable its future growth prospects are likely to be.

A)governmental regulation
B)nationalization of loss making firms
C)costs of manufacturing
D)capital investment

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)Product divestment

Question 45

Which of the following is a risk associated with FDI?

A)Giving away valuable technological know-how to a potential competitor
B)High transportation costs,especially of 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)Actual or threatened trade barriers such as import tariffs or quotas

Question 46

_____ involves producing goods at home and then shipping them to the receiving country for sale.

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

Question 47

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 MNEs.

Question 48

The stock of foreign direct investment refers to:

A)the total accumulated value of foreign-owned assets at any time.
B)the number shares of the foreign firm held by local investors.
C)the amount of FDI undertaken over a given time period.
D)the dividend amount paid by the foreign firm to local investors.

Question 49

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

Question 50

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

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

Question 51

Countries such as the U.S. ,the U.K. ,the Netherlands,and Germany had a long history as _____ and naturally looked to foreign markets to fuel their economic expansion.

A)mercantilist economies
B)trading nations
C)protectionist cultures
D)imperialist countries

Question 52

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.

Question 53

3M,an American firm,produces adhesive tape in St.Paul,Minnesota,and ships the tape to South Korea to be sold.This is an example of:

A)exporting.
B)licensing.
C)franchising.
D)globally dispersed production.

Question 54

Most recent inflows of FDI into developing nations have been targeted at:

A)impoverished nations in AfricA.
B)the emerging economies of South,East,and Southeast Asia.
C)Latin American countries.
D)post-Communist Eastern European countries.

Question 55

As of 2009,2676 bilateral trade treaties involved more than 180 countries,a 12-fold increase from the 181 treaties that existed in 1980.These statistics prove that:

A)governments are increasingly facilitating FDI to protect and promote investment with other countries.
B)more governments are erecting restrictive trade barriers focused on extractive industries,such as oil and gas.
C)government intervention in the process of foreign direct investment has hindered economic growth over the past 30 years.
D)the increasing red-tape involved in conducting international trade between any two countries has created frictions.

Question 56

Data suggest the majority of cross-border investment is in the form of _____ for developed nations.

A)greenfield investments
B)exports
C)franchising
D)mergers and acquisitions

Question 57

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

A)three-fourths
B)one-third
C)one-half
D)two-thirds

Question 58

With respect to foreign direct investment,during the past 30 years,there has been a:

A)higher increase in world trade than FDI.
B)marked increase in both the flow and stock of FDI in the world economy.
C)steady increase in the erection of trade barriers to FDI in the form of tariffs and subsidies.
D)gradual shift toward mercantile market economies that oppose FDI in those countries.

Question 59

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)economic colonization of much of the worlD.

Question 60

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

Question 61

A critical competitive feature of oligopolistic industries is the _____ of the major players.

A)lack of interaction
B)collaboration
C)cooperation
D)interdependence

Question 62

The interdependence between firms in an oligopoly leads to _____.

A)trade wars
B)lowered supply
C)imitative behavior
D)higher demand

Question 63

An industry composed of a limited number of large firms is referred to as a(n):

A)syndicate.
B)monopoly.
C)oligopoly.
D)mushrooming industry.

Question 64

A(n)_____ arises when two or more enterprises encounter each other in different regional markets,national markets,or industries.

A)monopoly
B)oligopoly
C)cartel
D)multipoint competition

Question 65

According to Raymond Vernon,firms that have pioneered a product undertake FDI in other advanced countries when:

A)the product is saturated in markets in the developing world.
B)they wish to dump excessive production capacity in foreign markets.
C)product standardization gives rise to price competition and cost pressures.
D)local demand in those countries grows large enough to support local production.

Question 66

If one firm in an oligopolistic industry cuts prices,its competitors:

A)will make profits.
B)will also respond with similar price cuts.
C)will correspondingly raise prices.
D)will fill the gap by capturing market share.

Question 67

By limiting imports through quotas and tariffs,governments increase the attractiveness of :

A)FDI and licensing.
B)low value-to-weight ratio products.
C)globally dispersed production.
D)outsourcing and off-shoring.

Question 68

According to the text,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)products with a high value-to-weight ratio are involveD.

Question 69

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 embrace of free market approach.

Question 70

Xerox first introduced the photocopier into the U.S.market,and then set up production facilities in Japan and Great Britain.This pattern of FDI is explained by the:

A)internalization theory.
B)paradigm of pragmatic internationalism.
C)absolute advantage theory.
D)product life-cycle theory.

Question 71

Which of the following theories concerning FDI ignores alternatives such as exporting and licensing and fails to identify when it is profitable to invest abroad?

A)Investment theory
B)Multipoint competition theory
C)Eclectic paradigm
D)Product life-cycle theory

Question 72

In the 1960s,RCA licensed its leading-edge color television technology to a number of Japanese companies,which later took over the market.This demonstrates that licensing:

A)is a better alternative to help companies from emerging economies to enhance their competitiveness and achieve growth.
B)subscribes to the open source ideology which aids the development of technology unencumbered by market dynamics and fluctuations.
C)may result in a firm's giving away valuable technological know-how to a potential foreign competitor.
D)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.

Question 73

A firm wanting to avoid bearing the costs of establishing production facilities in a foreign country would do well to avoid:

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

Question 74

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 duopolistic regime,in much the same way as Boeing and Airbus have done in the aircraft industry.
C)no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers.
D)the main competitors can incubate growing technologies or business methods in new markets and transfer the gains to established markets.

Question 75

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

Question 76

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)a firm's competitive advantage is based entirely on its products with management,marketing,and manufacturing capabilities playing nominal roles.

Question 77

The argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI;it requires the firm to establish production facilities where those foreign assets or resource endowments are located,constitutes the _____ of FDI.

A)disparate elements approach
B)integration approach
C)scramble theory
D)eclectic paradigm

Question 78

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

Question 79

According to the product life-cycle theory,pioneering firms shift production to _____ countries when product standardization and market saturation give rise to price competition and cost pressures.

A)other advanced countries
B)industrialized
C)developing
D)free market

Question 80

If Kodak enters a particular market,Fuji is not far behind,and vice versa.Kodak and Fuji are:

A)FDI pioneers.
B)first-movers.
C)global partners.
D)multipoint competitors.