Question 1

According to the free market view, how does FDI increase the efficiency of the world economy through MNEs?
A)The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.
B)MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale.
C)When an MNE produces products, profits from the investment go abroad, and hence the MNE helps foreign exchange to rotate.
D)A foreign-owned manufacturing plant may import many components from its home country, thus improving the balance of payments of the host country.
E)MNEs increase the efficiency of the world economy by increasing the flow of capital in the world market.

Accepted Answer

The free market view argues that countries should specialize in the production of those goods and services that they can produce most efficiently. Within this framework, the MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. Viewed this way, FDI by the MNE increases the overall efficiency of the world economy.

Question 2

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 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.

Accepted Answer

The cost and skill of labor varies from country to country. Since labor is not internationally mobile, according to Dunning 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.

Question 3

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.

Accepted Answer

Economic theory suggests that rather like chess players jockeying for advantage, firms will try to match each other's moves in different markets to try to hold each other in check. The idea is to ensure that a rival does not gain a commanding position in one market and then use the profits generated there to subsidize competitive attacks in other markets.

Question 4

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

Accepted Answer

A critical competitive feature of oligopolistic industries is interdependence of the major players. By cutting prices, one firm in an oligopoly can take market share away from its competitors, forcing them to respond with similar price cuts to retain their market share. Thus, the interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly.

Question 5

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 the cement industry in Erbia?
A)Perfect competition
B)Monopoly
C)Oligopoly
D)Dual monopoly
E)Monopsony

Accepted Answer

An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly).

Question 6

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

Accepted Answer

The eclectic paradigm has been championed by the British economist John Dunning who argues that location-specific advantages are of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

Question 7

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companies located close to each other, thus offering the location-specific advantage of:
A)a multipoint competition.
B)an oligopoly.
C)a first mover.
D)externalities.
E)free riders.

Accepted Answer

Silicon Valley is the world center for the computer and semiconductor industry. Many of the world's major computer and semiconductor companies, such as Apple Computer, Hewlett-Packard, Oracle, Google, and Intel, are located close to each other here. According to Dunning, Silicon Valley has a location-specific advantage in the generation of knowledge related to the computer and semiconductor industries. Economists refer to such knowledge "spillovers" as externalities, and a well-established theory suggests that firms can benefit from such externalities by locating close to their source.

Question 8

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.

Accepted Answer

According to British economist John Dunning, location-specific advantages mean the advantages that arise from utilizing resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management capabilities).

Question 9

Dunning's theory helps explain:
A)how firms try to match each other's moves in different markets to try to hold each other in check.
B)the interdependence between firms in an oligopoly that leads to imitative behavior among the rivals.
C)why a greenfield investment in a new facility is better than an acquisition of or a merger with an existing local firm.
D)the problems associated with doing business in a different culture where the rules of the game may be very different.
E)how location factors affect the direction of FDI.

Accepted Answer

Evidence suggests that European, Japanese, South Korean, and Taiwanese computer and semiconductor firms are investing in the Silicon Valley region, precisely because they wish to benefit from the externalities that arise there. Others have argued that direct investment by foreign firms in the U.S. biotechnology industry has been motivated by desires to gain access to the unique location-specific technological knowledge of U.S. biotechnology firms. Dunning's theory, therefore, seems to be a useful addition to those outlined previously, because it helps explain how location factors affect the direction of FDI.

Question 10

Which of the following is a reason for the decline in the popularity of the radical view of FDI?
A)The rise of communism in Eastern Europe
B)The generally steady economic growth of those countries that embraced the radical position
C)The growing belief in many countries that FDI leads to loss of jobs
D)The strong economic performance of those developing countries that embraced capitalism
E)The collapse of capitalism in the newly independent nations of Asia

Accepted Answer

By the end of the 1980s, the radical position was in retreat almost everywhere due to: (1) the collapse of communism in Eastern Europe; (2) the generally abysmal economic performance of those countries that embraced the radical position, and their growing belief that FDI can stimulate economic growth; and (3) the strong economic performance of those developing countries that embraced capitalism.

Question 11

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.

Accepted Answer

A critical competitive feature of oligopolistic industries is interdependence of the major players. By cutting prices, one firm in an oligopoly can take market share away from its competitors, forcing them to respond with similar price cuts to retain their market share. Thus, the interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly.

Question 12

According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country should be:
A)immediately nationalized.
B)made to pay higher taxes.
C)converted into publicly traded companies.
D)banned from obtaining finance from the financial institutions in the host country.
E)immediately privatized.

Accepted Answer

According to the extreme version of the radical view, no country should ever permit foreign corporations to undertake FDI, since they can never be instruments of economic development, only of economic domination. Where MNEs already exist in a country, they should be immediately nationalized.

Question 13

Which view of FDI traces its roots to Marxist political and economic theory?
A)Radical
B)Free market
C)Pragmatic nationalism
D)Comparative advantage
E)Pluralist

Accepted Answer

The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

Question 14

Which view argues that international production should be distributed among countries according to the theory of comparative advantage?
A)Conservative
B)Pragmatic nationalism
C)Free market
D)Radical
E)Keynesian economic

Accepted Answer

The free market view traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo and argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently.

Question 15

Radical writers argue that:
A)a multinational enterprise (MNE) is an instrument of economic development rather than economic domination.
B)MNEs are more beneficial to host countries than to their home countries.
C)important jobs in the foreign subsidiaries of MNEs go to host-country nationals rather than to citizens of the home country.
D)FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward.
E)MNEs exploit their home countries for the exclusive benefit of their host countries.

Accepted Answer

The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. They argue that MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange. According to the radical view, FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward and dependent on advanced capitalist nations for investment, jobs, and technology. Thus, according to the extreme version of this view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination. Where MNEs already exist in a country, they should be immediately nationalized.

Question 16

Which of the following 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

Accepted Answer

Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. Economic theory suggests that rather like chess players jockeying for advantage, firms will try to match each other's moves in different markets to try to hold each other in check.

Question 17

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.

Accepted Answer

Although Knickerbocker's theory and its extensions can help to explain imitative FDI behavior by firms in oligopolistic industries, it does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license. Internalization theory addresses this phenomenon. The imitative theory also does not address the issue of whether FDI is more efficient than exporting or licensing for expanding abroad. Again, internalization theory addresses the efficiency issue. For these reasons, many economists favor internalization theory as an explanation for FDI, although most would agree that the imitative explanation tells an important part of the story.

Question 18

If one firm in an oligopoly cuts prices, then most likely, its competitors will:
A)make profits.
B)also respond with similar price cuts.
C)correspondingly raise prices.
D)capture additional market share.
E)not be impacted by the price cuts.

Accepted Answer

A critical competitive feature of oligopolistic industries is the interdependence of the major players: What one firm does can have an immediate impact on the major competitors, forcing a response in kind. By cutting prices, one firm in an oligopoly can take market share away from its competitors, forcing them to respond with similar price cuts to retain their market share. Thus, the interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly.

Question 19

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.

Accepted Answer

It follows that a firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm's capabilities are simply not amenable to licensing, as may often be the case.

Question 20

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

Accepted Answer

A critical competitive feature of oligopolistic industries is the interdependence of the major players: What one firm does can have an immediate impact on the major competitors, forcing a response in kind.

Quiz 8: Foreign Direct Investment

According to the free market view, how does FDI increase the efficiency of the world economy through MNEs?

Which of the following is true about Dunning's arguments?

The idea behind multipoint competition is to ensure that:

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 the cement industry in Erbia?

Which of the following concepts helps explain how location factors affect the direction of FDI?

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companies located close to each other, thus offering the location-specific advantage of:

Location-specific advantages for a firm are those that arise from:

Dunning's theory helps explain:

Which of the following is a reason for the decline in the popularity of the radical view of FDI?

The interdependence between firms in an oligopoly leads to:

According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country should be:

Which view of FDI traces its roots to Marxist political and economic theory?

Which view argues that international production should be distributed among countries according to the theory of comparative advantage?

Radical writers argue that:

Which of the following arises when two or more enterprises encounter each other in different regional markets, national markets, or industries?

The difference between Internalization theory and imitative theory is that:

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

A firm is most likely to favor foreign direct investment over exporting when:

A critical competitive feature of an oligopoly is the: