Question 1

Inward FDI Potential Index is based on
A) several economic variables indicating a country's investment infrastructure and growth potential for domestic businesses.
B) several economic variables indicating a country's investment infrastructure and growth potential for foreign businesses.
C) the ratio of a country's share in global FDI outflows to its share in world GDP
D) none of the above.

Accepted Answer

The Inward FDI Potential Index is based on several economic variables that indicate a country's investment infrastructure and growth potential for foreign businesses. It is used as a tool to assess a country's attractiveness for foreign direct investment.

Question 2

Most Japanese MNE's, for instance, begin their international expansion with _________ investment because they believe that it enables the sharing of experience, resources, and knowledge already developed at home, thus reducing risk.
A) vertical FDI
B) horizontal FDI
C) donglomerate FDI
D) none of the above

Accepted Answer

Japanese MNE's typically begin their international expansion with horizontal FDI because it allows them to leverage their existing knowledge, experience, and resources, thereby reducing risk. Vertical FDI involves investing in different stages of the production process, while conglomerate FDI involves investing in unrelated businesses.

Question 3

"The evolutionary perspective of FDI claims that international investment is an ongoing, evolutionary process shaped by an MNE's international experience, organizational capabilities, strategic objectives, and environmental dynamics", and the core of this perspective is
A) eclectic paradigm.
B) Uppsala (or Scandinavian model)
C) internalization theory.
D) none of the above.

Accepted Answer

The evolutionary perspective of FDI is closely linked to the Uppsala (or Scandinavian) model, which argues that firms gradually increase their international involvement as they gain knowledge and experience in foreign markets. This perspective emphasizes the importance of a firm's capabilities, objectives, and environmental factors in shaping its internationalization process. The other options listed (eclectic paradigm and internalization theory) are related to other perspectives on FDI.

Question 4

This theory held that firms will rather invest in host countries that are relatively close to it culturally and that they were likely to be more successful in such relatively familiar environments.
A) Familiarity theory
B) Global integration
C) both a & b
D) none of the above

Accepted Answer

The theory described is the Familiarity theory, which states that firms will prefer to invest in culturally similar host countries, as they are more likely to be successful in familiar environments. The other choices, Global integration and both a & b, do not accurately describe the theory.

Question 5

The theorists for this theory argue that internalization creates "contracting" through a unified, integrated intra-firm governance structure.
A) Internalization theory
B) Portfolio theory
C) Exporting theory
D) none of the above

Accepted Answer

The statement is describing the core idea of Internalization theory, which suggests that firms internalize certain activities to avoid market imperfections and governance issues, leading to a unified and integrated governance structure within the firm. Portfolio theory and Exporting theory do not focus on this aspect of internalization.

Question 6

This theory is more relevant to the manufacturer's initial entries into foreign markets than to the MNE's that have FDI already in place.
A) Internalization theory
B) Monopolistic Advantage theory
C) Product Life Cycle theory
D) none of the above

Accepted Answer

The Product Life Cycle theory suggests that a product goes through stages of introduction, growth, maturity, and decline. During the introduction stage, a company typically enters foreign markets with its initial products. As the theory is more relevant to the manufacturer's initial entries into foreign markets, it is not as applicable to MNEs that already have FDI in place.

Question 7

Fundamental to this theory is the idea that a sure rate of return (say, 9% per year consistent over the next five years) is preferable to a rate of return being higher on average but fluctuating through time (say average 9.5% per year but with immense fluctuations during this five year period)
A) Product Life Cycle theory
B) Portfolio theory
C) Monopolistic Advantage theory
D) none of the above

Accepted Answer

The concept of preferring a sure rate of return over a fluctuating rate of return is a key principle of portfolio theory.

Question 8

This theory advocates that the available external market does not provide an efficient environment in which the firm can profit by using its technology or production resources.
A) Monopolistic Advantage theory
B) Internalization theory
C) both A & B
D) none of above

Accepted Answer

The statement describes the Internalization theory, which suggests that a firm may choose to enter and expand into foreign markets by internalizing transactions within the firm rather than relying on the external market. Monopolistic Advantage theory talks about a firm's competitive advantage due to its unique products or technology. Therefore, option A is incorrect. Option C is incorrect as it indicates both theories, but only one theory is relevant to the given statement. Option D is also incorrect as the statement is related to a theory.

Question 9

According to _____ theory, the monopolistic advantages come from two sources: superior knowledge and economies of scale.
A) Portfolio theory
B) Monopolistic Advantage theory
C) Product Life Cycle theory
D) none of the above

Accepted Answer

The statement is referring to the Monopolistic Advantage theory, which states that companies with unique advantages, such as superior knowledge or economies of scale, can maintain a monopoly in the market. Therefore, option B is the correct answer. Options A and C are unrelated to this theory, and option D is not a valid answer as it does not provide an alternative theory.

Question 10

MNE possesses monopolistic advantages enabling it to operate subsidiaries abroad more profitably than a local competing firm is the example of which theory?
A) Internalization theory
B) Portfolio theory
C) Monopolistic Advantage theory
D) none of the above

Accepted Answer

The given example describes the Monopolistic Advantage theory which suggests that the unique advantages possessed by a multinational enterprise over local firms, such as superior technology or brand recognition, allow them to operate more profitably in foreign subsidiaries. The theory emphasizes that these advantages cannot be easily replicated by domestic firms, making the multinational enterprise a dominant player in the foreign market.

Question 11

This theory was developed by Vernon and explains why U.S. manufactures shift from exporting to FDI.
A) portfolio theory
B) product Life Cycle theory
C) internalization theory
D) exporting theory

Accepted Answer

The Product Life Cycle theory developed by Vernon suggests that as a product reaches maturity and sales decline in its home market, companies look to expand globally through FDI rather than exporting. This is because FDI allows companies to have greater control over production, distribution and marketing of their products in foreign markets, and can lead to cost savings and improved market access.

Question 12

The theory that describes the behavior of individuals or firms administering large amounts of financial assets in search of the highest possible risk-adjusted net return is called
A) familiarity theory.
B) portfolio theory.
C) internalization theory.
D) none of the above

Accepted Answer

This theory is known as portfolio theory or modern portfolio theory, which involves diversification of assets to minimize risk and maximize return on investment.

Question 13

What strategy links and integrates activities across nations in an attempt to minimize overall costs, avoid various taxes, or maximize income.
A) multifocal strategy
B) globally integrated strategy
C) locally responsive
D) none of the above

Accepted Answer

A globally integrated strategy links and integrates activities across nations in an attempt to minimize overall costs, avoid various taxes, or maximize income. This is achieved by creating a standardized product across different markets, achieving economies of scale through centralized operations, and leveraging the advantages of different countries. A multifocal strategy, on the other hand, focuses on adapting to local markets, and a locally responsive strategy prioritizes responsiveness to local needs and preferences.

Question 14

If FDI abroad is to manufacture products not manufactured by the parent company at home, it is called
A) vertical FDI.
B) conglomerate FDI.
C) horizontal FDI.
D) none of the above.

Accepted Answer

Conglomerate FDI occurs when a company invests in a foreign business that is unrelated to its core business activities, essentially diversifying its operations into new areas. This is the case when the FDI is to manufacture products not manufactured by the parent company at home.

Question 15

Which FDI attempts to acquire particular resources at a lower real cost than could be obtained in the home country?
A) market-seeking FDI
B) efficiency-seeking FDI
C) resource-seeking FDI
D) strategic asset-seeking FDI

Accepted Answer

Resource-seeking FDI attempts to acquire particular resources at a lower real cost than could be obtained in the home country. Market-seeking FDI attempts to access new markets, efficiency-seeking FDI looks to increase production efficiency, and strategic asset-seeking FDI aims to acquire strategic assets such as technology or brand recognition.

Question 16

The activity in which an MNE internalizes its globally dispersed foreign operations through a unified governance structure and common ownership.
A) internalization
B) externalization
C) global integration
D) none of the above

Accepted Answer

Internalization refers to the process in which an MNE brings together its globally dispersed foreign operations under a unified governance structure and common ownership. This allows the MNE to have more control over its operations and decision-making, and can lead to greater efficiency and cost savings. Externalization, on the other hand, refers to the process of outsourcing or divesting activities to external parties. Global integration is a broader concept that refers to the process of integrating different economies and cultures into a single global marketplace.

Question 17

Offshore extractive investments in petroleum and mineral is the example of
A) forward vertical integration.
B) backward vertical FDI.
C) horizontal FDI.
D) none of the above.

Accepted Answer

Offshore extractive investments involve investing in the production and extraction of petroleum or minerals from foreign countries. This type of investment is considered backward vertical FDI because the foreign country is supplying raw materials to the investing firm's home country. Vertical FDI involves investing in a different stage of the value chain, either forward or backward. Horizontal FDI involves investing in the same stage of the value chain, but in a different market. Therefore, the best choice is B, backward vertical FDI.

Question 18

The lack of adaptation to European ways, from transportation modes to food, by the Walt Disney Company when establishing its first park in Europe, Euro Disney (since renamed Disneyland Europe) is a example of ____.
A) liability of foreignness
B) liability of domestics
C) liability of Horizontal FDI
D) none of the above

Accepted Answer

The answer of The lack of adaptation to European ways,...

Question 19

_____________ is the benefit incurred to a firm that maintains a monopolistic power in the market.
A) Oligopolistic advantage
B) Monopolistic advantage
C) FDI advantage
D) None of the above

Accepted Answer

Monopolistic advantage refers to the benefit that a firm enjoys due to its control over a market. This control allows the firm to charge higher prices for its products or services, enjoy larger profit margins, and deter potential competitors from entering the market. This advantage is a key reason why firms seek to attain monopolies or maintain their existing power in a market.

Question 20

Location advantages are defined as the benefits arising from
A) a home country's comparative advantages accrued to foreign direct investors.
B) a host country's comparative advantages accrued to domestic direct investors.
C) a host country's comparative advantages accrued to foreign direct investors.
D) none of the above.

Accepted Answer

Location advantages refer to the economic benefits that a foreign direct investor can gain from investing in a host country that has comparative advantages, such as access to natural resources, skilled labor, or favorable government policies. Option C correctly identifies that the advantages are accrued to foreign direct investors in the host country, making it the best choice. Option A refers to benefits gained by foreign direct investors from their home country's comparative advantages, and option B refers to benefits accrued to domestic direct investors, which are both incorrect. Option D is not a valid response as it does not provide a clear answer.

Quiz 3: Foreign Direct Investment Theory and Application

Inward FDI Potential Index is based on

Most Japanese MNE's, for instance, begin their international expansion with _________ investment because they believe that it enables the sharing of experience, resources, and knowledge already developed at home, thus reducing risk.

"The evolutionary perspective of FDI claims that international investment is an ongoing, evolutionary process shaped by an MNE's international experience, organizational capabilities, strategic objectives, and environmental dynamics", and the core of this perspective is

This theory held that firms will rather invest in host countries that are relatively close to it culturally and that they were likely to be more successful in such relatively familiar environments.

The theorists for this theory argue that internalization creates "contracting" through a unified, integrated intra-firm governance structure.

This theory is more relevant to the manufacturer's initial entries into foreign markets than to the MNE's that have FDI already in place.

Fundamental to this theory is the idea that a sure rate of return (say, 9% per year consistent over the next five years) is preferable to a rate of return being higher on average but fluctuating through time (say average 9.5% per year but with immense fluctuations during this five year period)

This theory advocates that the available external market does not provide an efficient environment in which the firm can profit by using its technology or production resources.

According to _____ theory, the monopolistic advantages come from two sources: superior knowledge and economies of scale.

MNE possesses monopolistic advantages enabling it to operate subsidiaries abroad more profitably than a local competing firm is the example of which theory?

This theory was developed by Vernon and explains why U.S. manufactures shift from exporting to FDI.

The theory that describes the behavior of individuals or firms administering large amounts of financial assets in search of the highest possible risk-adjusted net return is called

What strategy links and integrates activities across nations in an attempt to minimize overall costs, avoid various taxes, or maximize income.

If FDI abroad is to manufacture products not manufactured by the parent company at home, it is called

Which FDI attempts to acquire particular resources at a lower real cost than could be obtained in the home country?

The activity in which an MNE internalizes its globally dispersed foreign operations through a unified governance structure and common ownership.

Offshore extractive investments in petroleum and mineral is the example of

The lack of adaptation to European ways, from transportation modes to food, by the Walt Disney Company when establishing its first park in Europe, Euro Disney (since renamed Disneyland Europe) is a example of ____.

_____________ is the benefit incurred to a firm that maintains a monopolistic power in the market.

Location advantages are defined as the benefits arising from