Chapter 8: Foreign Direct Investment

When a firm exports its products to a foreign country, foreign direct investment occurs.
True False
False
Greenfield investment involves the establishment of a new operation in a foreign country.
True False
True
The flow of foreign direct investment refers to the number of countries a firm is investing in at any given point in time.
True False
False
The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time.
True False
True
The globalization of the world economy is having a negative effect on the volume of FDI.
True False
False
FDI has grown significantly slower than world trade and world output.
True False
False
According to the United Nations, the majority of changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment have created a more favorable environment for FDI.
True False
True
Historically, most FDI has been directed at the least developed nations of the world.
True False
False
Since World War II, the United States has been the largest source country for FDI.
True False
True
When a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.
True False
True
The attractiveness of exporting increases in comparison to FDI or licensing when products have a low value-to-weight ratio.
True False
False
By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing.
True False
True
By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing.
True False
False
A critical competitive feature of an oligopoly is independence of the major players.
True False
False
Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.
True False
True
Economists refer to knowledge “spillovers” as externalities, and there is a well-established theory suggesting that firms can benefit from such externalities by locating close to their source.
True False
True
According to the extreme version of radical view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination.
True False
True
By the early 1990s, the radical position toward FDI was in retreat due to the rise of communism in eastern Europe.
True False
False
According to the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.
True False
True
According to the pragmatic nationalist view, no country should ever permit foreign corporations to undertake FDI.
True False
False
The indirect employment effects of FDI are often as large as, if not larger than, the direct effects.
True False
True
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.
True False
False
An acquisition does not result in a net increase in the number of players in a market.
True False
True
Offshore production refers to FDI undertaken to serve the host market.
True False
False
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.
True False
True
Ownership restraints and performance requirements are the two most common ways in which host governments restrict FDI.
True False
True
Performance requirements are controls over the behavior of the MNE’s local subsidiary.
True False
True
The location-specific advantages argument associated with John Dunning helps explain why firms prefer FDI to licensing or to exporting.
True False
False
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.”
True False
True
Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI.
True False
True
A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of:

A. insourcing.

B. stock consolidation.

C. foreign direct investment.

D. product differentiation.

E. market segmentation.

C. foreign direct investment.
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?

A. Multilateral investment

B. Foreign direct investment

C. Reciprocal foreign investment

D. International divestment

E. Asset divestment

B. Foreign direct investment
Which of the following is most likely to involve establishment of a new operation in a foreign country?

A. Consolidation

B. Greenfield investment

C. Acquisition

D. Licensing agreement

E. Mass customization

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

A. Portfolio

B. Flow

C. Status

D. Stock

E. Fragment

B. Flow
Which of the following statements is true regarding foreign direct investment?

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

B. FDI has grown more rapidly than world trade and world output.

C. The general shift toward democratic political institutions has discouraged FDI.

D. Generally, free market economies oppose FDI.

E. The globalization of the world economy is having a negative effect on the volume of FDI.

B. FDI has grown more rapidly than world trade and world output.
Why has FDI grown more rapidly than world trade?

A. The decline in trade barriers has erased the fear of protectionist pressures.

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 multinational enterprises.

E. There has been a general shift toward centrally planned command economies

B. Executives of business firms see FDI as a way of circumventing future trade barriers.
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. low corporate tax rates.

E. high trade barriers.

B. stable and dynamic economy.
Mergers and acquisitions differ from greenfield investments in that:

A. greenfield investments are quicker to execute than mergers and acquisitions.

B. greenfield investments are undertaken to take advantage of valuable strategic assets, such as brand loyalty and trademarks or patents, of a foreign competitor.

C. the majority of FDI flows into developed nations are in the form of greenfield investments rather than mergers and acquisitions.

D. the majority of FDI flows into developing nations are in the form of cross-border mergers and acquisitions.

E. the percentage of mergers and acquisitions is lower than greenfield investments in developing nations.

E. the percentage of mergers and acquisitions is lower than greenfield investments in developing nations.
Which of the following states that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI, and it also requires the firm to establish production facilities where those foreign assets or resource endowments are located?

A. Strategic trade policy

B. Integration approach

C. Scramble theory

D. Eclectic paradigm

E. Infant industry argument

D. Eclectic paradigm
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. Diverging

E. Hedging

C. Licensing
FDI is risky because of the problems associated with:

A. sharing a valuable technological know-how with a potential competitor.

B. an increase in transportation costs, especially for those 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. the possibility of an increase in trade barriers such as import tariffs or quotas.

E. increased production costs.

C. doing business in a different culture where the rules of the game may be very different.
The viability of an exporting strategy is often constrained by transportation costs, particularly of products that can be produced in almost any location and have a:

A. high local content requirement.

B. low total landed cost.

C. low value-to-weight ratio.

D. low licensing tariff.

E. high marginal cost.

C. low value-to-weight ratio.
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. the products involved have a high value-to-weight ratio.

E. the firm wants to occupy a position that falls inside the efficiency frontier.

B. the transportation costs or trade barriers are high.
Governments impose quotas to limit:

A. FDI.

B. importing.

C. franchising.

D. outsourcing.

E. licensing.

B. importing.
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.

E. licensing theory.

D. internalization theory.
According to internalization theory:

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

B. licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.

C. licensing has no major drawbacks as a strategy for exploiting foreign market opportunities.

D. a problem with licensing arises when the firm’s competitive advantage is based much on its products rather than on the management, marketing, and manufacturing capabilities that produce those products.

E. licensing is more profitable than FDI.

B. licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
The strategic behavior theory:

A. explains the constraints of exporting and licensing.

B. seeks to explain the challenges faced by a firm during the establishment of a new operation in a foreign country.

C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.

D. reviews the theories that have been used to explain foreign direct investment.

E. explains how greenfield investments are better than FDI.

C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.
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.

D. interdependence of the major players.
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

D. Multipoint competition
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

A. The eclectic paradigm
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

A. Radical
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.

A. immediately nationalized.
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.

A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.
The pragmatic nationalist view is that:

A. FDI benefits only the host country.

B. FDI does not make any positive contribution to the host economy.

C. every country should adopt the free market view.

D. FDI should not be allowed by any country as it is an instrument of economic domination rather than economic development.

E. FDI has both benefits and costs.

E. FDI has both benefits and costs.
Many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country’s:

A. free trade agreements.

B. inward FDI.

C. sovereignty.

D. balance-of-payments position.

E. gold reserves.

D. balance-of-payments position.