Question 1

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

Accepted Answer

International trade theory tells us that home-country concerns about the negative economic effects of offshore production may be misplaced. The term offshore production refers to FDI undertaken to serve the home market.

Question 2

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

Accepted Answer

Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements.

Question 3

Which of the following refers to the amount of FDI undertaken over a given period (normally a year)?

Accepted Answer

The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). We also talk of outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, the flow of FDI into a country.

Question 4

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

Accepted Answer

FDI takes on two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

Question 5

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

Accepted Answer

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. Once a firm undertakes FDI, it becomes a multinational enterprise.

Question 6

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

Accepted Answer

From the perspective of a firm negotiating the terms of an investment with a host government, the firm's bargaining power is high when the host government places a high value on what the firm has to offer, the number of comparable alternatives open to the firm is greater, and the firm has a long time in which to complete the negotiations. The converse also holds. The firm's bargaining power is low when the host government places a low value on what the firm has to offer, the number of comparable alternatives open to the firm is fewer, and the firm has a short time in which to complete the negotiations.

Question 7

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

Accepted Answer

The implications of the theories of FDI for business practice are straightforward. First, the location-specific advantages argument associated with John Dunning does help explain the direction of FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting.

Question 8

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.

Accepted Answer

Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. The types of risks insurable through these programs include the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home. Such programs are particularly useful in encouraging firms to undertake investments in politically unstable countries.

Question 9

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."

Accepted Answer

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." This would seem to be the case for firms based in a fairly wide range of industries.

Question 10

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

Accepted Answer

Performance requirements can also take several forms. Performance requirements are controls over the behavior of the MNE's local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.

Question 11

The stock of foreign direct investment refers to:

Accepted Answer

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

Question 12

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

Accepted Answer

Franchising is essentially the service-industry version of licensing, although it normally involves much longer-term commitments than licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor's brand name.

Question 13

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

Accepted Answer

The effects of FDI on employment are both direct and indirect. Direct effects arise when a foreign MNE employs a number of host-country citizens. Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE. The indirect employment effects are often as large as, if not larger than, the direct effects.

Question 14

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?

Accepted Answer

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. 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.

Question 15

The WTO embraces the promotion of international trade in services.

Accepted Answer

The WTO embraces the promotion of international trade in services. Because many services have to be produced where they are sold, exporting is not an option. Given this, the WTO has become involved in regulations governing FDI.

Question 16

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

Accepted Answer

An acquisition does not result in a net increase in the number of players in a market; the effect on competition may be neutral. When a foreign investor acquires two or more firms in a host country, and subsequently merges them, the effect may be to reduce the level of competition in that market, create monopoly power for the foreign firm, reduce consumer choice, and raise prices.

Question 17

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

Accepted Answer

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country.

Question 18

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.

Accepted Answer

FDI's impact on competition in domestic markets may be particularly important in the case of services, such as telecommunications, retailing, and many financial services, where exporting is often not an option because the service has to be produced where it is delivered.

Question 19

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

Accepted Answer

Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI. In such cases, a firm considering FDI must often negotiate the specific terms of the investment with the country's government.

Question 20

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

Accepted Answer

Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).

Quiz 8: Foreign Direct Investment