Deck 8: Foreign Direct Investment

Question 1

An oligopoly is an industry composed of a limited number of large firms.

Answer 1

True

Question 2

The largest source country for FDI has been China.

Answer 2

False

Question 3

Internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

Answer 3

True

Question 4

When transportation costs are added to production costs,it becomes unprofitable to ship some products over a large distance.This is particularly true of products that have a high value-to-weight ratio.

Question 5

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

Question 6

Rivals rarely imitate what a firm does in an oligopoly.

Question 7

According to the pragmatic nationalistic view,the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

Question 8

Other things being equal,the greater the capital investment in an economy,the more favorable its future growth prospects are likely to be.

Question 9

A Japanese car manufacturer acquires an Italian producer of car tires.This is an example of a greenfield investment.

Question 10

Licensing gives a firm tight control over manufacturing,marketing,and strategy in a foreign country that may be required to maximize its profitability.

Question 11

The radical view traces its roots to Marxist political and economic theory.

Question 12

FDI has been declining in the last few decades because protectionist pressures have become less intense.

Question 13

The amount of FDI undertaken over a given time period is known as the flow of FDI.

Question 14

John Dunning pioneered the eclectic paradigm.

Question 15

The majority of cross-border investment in the developed world is in the form of greenfield investments rather than mergers and acquisitions.

Question 16

Mergers and acquisitions are quicker to execute than greenfield investments.

Question 17

Developing nations currently account for the largest share of FDI inflows.

Question 18

Licensing involves the establishment of a new operation in a foreign country.

Question 19

Knickerbocker's theory explains why the first firm in an oligopoly decides to undertake FDI rather than to export or license.

Question 20

The free market view argues that FDI is a benefit to both the source country and to the host country.

Question 21

If the FDI is a substitute for imports of goods or services,the effect can be to improve the current account of the host country's balance of payments.

Question 22

As transportation costs or trade barriers increase,exporting becomes unprofitable,compared to FDI and licensing.

Question 23

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

Question 24

Recent years have seen a marked increase in the number of countries that adhere to a radical ideology regarding FDI.

Question 25

Governments normally are concerned when their country is running a surplus on the current account of their balance of payments.

Question 26

The product life-cycle theory and Knickerbocker's theory of horizontal FDI tend to be very useful from a business perspective because the theories are more descriptive than analytical.

Question 27

A country's balance of payments accounts keep track of both its payments to and its receipts from other countries.

Question 28

Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country.

Question 29

In general,FDI in the form of greenfield investments should increase competition.

Question 30

Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI.

Question 31

Direct effects of FDI arise when jobs are created in local suppliers as a result of the FDI and when jobs are created because of increased local spending by employees of the MNE.

Question 32

The pragmatic nationalist view highlights only the benefits of FDI.

Question 33

Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs.

Question 34

In practice only a few countries country have adopted the free market view in its pure form.

Question 35

For the home-country,the current account of the balance of payments improves if the purpose of the foreign investment is to serve the home market from a low-cost production location.

Question 36

The two most common methods of restricting inward FDI are ownership restraints and performance requirements.

Question 37

An aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by,for example,offering subsidies to foreign MNEs in the form of tax breaks or grants.

Question 38

Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance.

Question 39

The WTO supports the promotion of international trade in services.

Question 40

FDI does not benefit the host country's balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment,intermediate goods,or complementary products.

Question 41

Which of the following is the prime reason why Africa has attracted FDI in recent years?

A) Growth of the services sector
B) Complete deregulation of markets
C) Wave of privatization
D) Raw material availability

Question 42

In which of the following situations does the internalization theory recommend FDI as opposed to licensing?

A) When the firm has know-how that can be adequately protected by a licensing contract
B) When the firm produces products that have a low value-to-weight ratio
C) When a firm's skills and know-how are amenable to licensing
D) When the firm needs tight control over a foreign entity

Question 43

When contemplating FDI,why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments?

A) Greenfield investments are characterized by reduced management control
B) Mergers and acquisitions are preferred because most greenfield investments fail.
C) It is easier and less risky for a firm to build strategic assets than acquire similar assets.
D) Mergers and acquisitions are quicker to execute than greenfield investments.

Question 44

Which of the following is a way in which governments increase the attractiveness of FDI and licensing relative to exporting?

A) By implementing import quotas
B) By imposing FDI limits in industries
C) By increasing tax rates
D) By limiting free flow of capital

Question 45

According to Knickerbocker's theory:

A) when a firm has valuable know-how that cannot be adequately protected by a licensing contract it engages in FDI.
B) when a firm's skills and know-how are not amenable to licensing,it usually prefers the FDI route.
C) by placing tariffs on imported goods,governments indirectly increase the cost of exporting relative to foreign direct investment and licensing.
D) when a firm that is part of an oligopolistic industry expands into a foreign market,other firms in the industry will be compelled to make similar investments.

Question 46

Which of the following primarily explains why developing nations are characterized by lower percentage of cross-border mergers and acquisitions compared to developed nations?

A) Fewer target firms to acquire in developing nations
B) Fierce opposition to mergers and acquisitions in developed nations
C) Unwillingness of foreign companies to invest in developing nations
D) Presence of import quotas in developing nations

Question 47

Which of the following specifically reduces the viability of an exporting strategy specifically for products with low value-to-weight ratios?

A) Foreign exchange controls
B) Trade barriers
C) Transportation costs
D) Output quality

Question 48

Which of the following is a direct consequence of the interdependence between firms in an oligopoly?

A) Increased regulation
B) Increased consumer welfare
C) Imitative behavior
D) Longer product life-cycles

Question 49

Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

A) Internalization theory
B) Product life-cycle theory
C) Perfect markets theory
D) Random walk theory

Question 50

The stock of FDI is:

A) the amount of FDI undertaken over a given period of time.
B) the total accumulated value of foreign-owned assets at a given time.
C) the flow of FDI out of a country.
D) the amount of foreign direct investment made by domestic companies over a given period of time.

Question 51

Which of the following best describes an industry composed of a limited number of large firms?

A) An oligopoly
B) A monopoly
C) An oligarchy
D) A perfectly competitive market

Question 52

The _____ of FDI refers to the amount of FDI undertaken over a year.

A) stock
B) net value
C) accumulated value
D) flow

Question 53

Which of the following is a major drawback of using the product life-cycle theory in explaining FDI?

A) It ignores the fact that firms invest in a foreign country when demand in that country will support local production.
B) It does not explain why firms invest in developing countries when cost pressures become intense.
C) It fails to identify when it is profitable to invest abroad.
D) It ignores the fact that licensing as an entry strategy has its limitations.

Question 54

Which of the following observations was made by Raymond Vernon?

A) Firms undertake FDI at particular stages in the life cycle of a product they have pioneered.
B) Firms will favor exporting over FDI as an entry strategy when trade barriers are high.
C) FDI is prompted by imitative behavior in oligopolistic industries.
D) Impediments to the sale of know-how increase the profitability of FDI relative to licensing.

Question 55

Which of the following observations concerning Knickerbocker's theory is true?

A) It does not explain imitative FDI behavior by firms in oligopolistic industries.
B) Economists favor this theory as an explanation for FDI compared to the internalization theory.
C) It addresses the issue of whether FDI is more efficient than exporting or licensing for expanding abroad.
D) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.

Question 56

FDI occurs when a firm:

A) ships its products from one country to another.
B) invests directly in facilities to produce a product in a foreign country.
C) invests in the shares of another company operating in the same country.
D) grants permission to another company in a different country to use its brand name.

Question 57

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

A) A Chinese sugar maker setting up a sugar crushing facility in Cuba.
B) A Serbian automobile company purchasing a Croatian component manufacturer.
C) A Finnish mobile phone manufacturer expanding its production facility in Finland.
D) An Indian oil exploration company acquiring an oil refining company.

Question 58

Which of the following summarizes the total amount of resources invested in factories,stores,office buildings,and the like?

A) Gross capital index
B) Gross fixed capital formation
C) Gross domestic product
D) Gross national product

Question 59

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

A) Horizontal integration
B) Multipoint competition
C) An oligopoly
D) Vertical integration

Question 60

A French wind power company gives an Indonesian company the right to produce and sell wind turbines in return for a royalty fee on every unit sold.Which business practice is this an example of?

A) Acquisition
B) Licensing
C) Exporting
D) Greenfield investment

Question 61

In which way can the source country's balance of payments benefit from an FDI made in a foreign country?

A) From cash outflow during the initial investment to finance the FDI
B) If the purpose of the foreign investment is to serve the home market from a low-cost production location
C) From the inward flow of foreign earnings
D) If FDI is a substitute for direct exports

Question 62

A country's _____ keeps track of its payments to and its receipts from other countries.

A) federal payments ledgers
B) concurrent accounts
C) checks-and-balances accounts
D) balance-of-payments accounts

Question 63

Which of the following arises when a country is exporting more goods and services than it is importing?

A) Current account surplus
B) Trade deficit
C) Trade surplus
D) Trade balance

Question 64

Which of the following arises when a country is importing more goods and services than it is exporting?

A) Current account surplus
B) Trade deficit
C) Trade surplus
D) Trade balance

Question 65

Which of the following is a home-country policy aimed at limiting outward FDI flow?

A) Taxing domestic companies' foreign earnings at a higher rate than their domestic earnings
B) Implementation of government-backed insurance programs to cover major types of foreign investment risk
C) Eliminating double taxation of foreign income
D) Persuading host countries to relax their restrictions on inbound FDI

Question 66

Which view of FDI traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo?

A) Imperialist
B) Conservative
C) Free market
D) Radical

Question 67

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

A) Franchising
B) Subsidizing
C) Greenfield investment
D) Patenting

Question 68

In which of the following situations would FDI improve the current account of the host country's balance of payments?

A) If the foreign subsidiary imports a substantial number of its inputs from abroad
B) If the FDI reduces existing employment opportunities
C) If the FDI is a substitute for imports of goods or services
D) If the FDI results in substitution of products produced domestically

Question 69

Why is it said that not all the new jobs created by FDI represent net additions in employment?

A) Because of the uncertainty of the overall economic environment
B) Because most of the job creation is indirect in nature
C) Because jobs created by an investment may be offset by the jobs lost in domestic companies
D) Because the unemployment rate more or less remains constant over the short-term

Question 70

What is double taxation in the context of FDI?

A) Taxation at twice the normal rate for foreign companies
B) Taxing the producers as well as suppliers
C) Taxation of income in both home and host country
D) Taxation of both income as well as dividends paid

Question 71

Licensing would be a good option for firms in which of the following industries?

A) High-technology industries in which protecting firm-specific expertise is of paramount importance.
B) Global oligopolies,in which competitive interdependence requires that multinational firms maintain tight control over foreign operations.
C) Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations.
D) In fragmented,low-technology industries in which globally dispersed manufacturing is not an option.

Question 72

How is the adverse effect of the balance of payments for the home country due to an FDI usually offset?

A) By increased imports to the home country as a result of the FDI
B) By the subsequent inflow of foreign earnings
C) By substituting direct exports made earlier from the home country
D) By further investments usually made to expand foreign operations

Question 73

Advantages that arise from using resource endowments or assets that are tied to a particular place and that a firm finds valuable to combine with its own unique assets are known as:

A) location-specific advantages.
B) capital-specific advantages.
C) absolute advantages.
D) production factor advantages.

Question 74

According to the _____ view of FDI,MNEs extract profits from the host country and take them to their home country,giving nothing of value to the host country in exchange.

A) imperialist
B) conservative
C) free market
D) radical

Question 75

When a company brings capital and/or technology to a host country,the host country benefits from the:

A) political effect of FDI.
B) resource-transfer effect of FDI.
C) balance-of-payments effect of FDI.
D) bandwagon effect of FDI.

Question 76

A country rejects FDI proposals in certain industries.It does so because the tangible advantages of such investments are lesser than potential costs like loss of employment and reduction of overall well-being.However,it aggressively pursues inviting foreign investments in sectors like infrastructure,education,and healthcare because of the benefits that accrue with them.Which political view of FDI is discussed in this example?

A) The pure market view
B) The free market view
C) The radical view
D) The pragmatic nationalist view

Question 77

FDI undertaken to serve the home market is known as:

A) outsourcing.
B) FDI substitution.
C) offshore production.
D) home market FDI.

Question 78

How can FDI undertaken to serve the home market stimulate economic growth in the home country?

A) By freeing home-country resources to concentrate on activities where the home country has a comparative advantage
B) By importing more goods and services than it is exporting
C) By circumventing trade barriers that may have prevented direct exports in the past
D) By reducing demand for home-country exports of capital equipment,intermediate goods,and complementary products

Question 79

The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located.

A) product life-cycle theory
B) internalization theory
C) multipoint competition theory
D) eclectic paradigm

Question 80

Which political view allows FDI so long as the benefits outweigh the costs?

A) The traditional view
B) The pragmatic nationalist view
C) The radical view
D) The free market view