1. A Japanese car manufacturer acquires an Italian producer of car tires. This is an

Transcription

1 Chapter 08 Foreign Direct Investment True / False Questions 1. A Japanese car manufacturer acquires an Italian producer of car tires. This is an example of a greenfield investment. True False 2. The amount of FDI undertaken over a given time period is known as the flow of FDI. True False 3. FDI has been declining in the last few decades because protectionist pressures have become less intense. True False 4. Developing nations currently account for the largest share of FDI inflows. True False

2 5. Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. True False 6. The largest source country for FDI has been China. True False 7. The majority of cross-border investment in the developed world is in the form of greenfield investments rather than mergers and acquisitions. True False 8. Mergers and acquisitions are quicker to execute than greenfield investments. True False 9. Licensing involves the establishment of a new operation in a foreign country. True False 10. 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. True False

3 11. By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. True False 12. Internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. True False 13. Licensing gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. True False 14. An oligopoly is an industry composed of a limited number of large firms. True False 15. Rivals rarely imitate what a firm does in an oligopoly. True False 16. Knickerbocker's theory explains why the first firm in an oligopoly decides to undertake FDI rather than to export or license. True False

4 17. John Dunning pioneered the eclectic paradigm. True False 18. 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. True False 19. The radical view traces its roots to Marxist political and economic theory. True False 20. The free market view argues that FDI is a benefit to both the source country and to the host country. True False 21. In practice only a few countries country have adopted the free market view in its pure form. True False 22. The pragmatic nationalist view highlights only the benefits of FDI. True False

5 23. Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. True False 24. 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. True False 25. Recent years have seen a marked increase in the number of countries that adhere to a radical ideology regarding FDI. True False 26. Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country. True False 27. 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. True False

6 28. Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI. True False 29. A country's balance of payments accounts keep track of both its payments to and its receipts from other countries. True False 30. Governments normally are concerned when their country is running a surplus on the current account of their balance of payments. True False 31. 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. True False 32. In general, FDI in the form of greenfield investments should increase competition. True False

7 33. 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. True False 34. 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. True False 35. Offshore production refers to FDI undertaken to serve the host market. True False 36. The two most common methods of restricting inward FDI are ownership restraints and performance requirements. True False 37. The WTO supports the promotion of international trade in services. True False

8 38. As transportation costs or trade barriers increase, exporting becomes unprofitable, compared to FDI and licensing. True False 39. Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. True False 40. 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. True False Multiple Choice Questions

9 41. 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. 42. 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. 43. 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.

10 44. The of FDI refers to the amount of FDI undertaken over a year. A. stock B. net value C. accumulated value D. flow 45. 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 46. 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

11 47. 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 48. 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.

12 49. 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 50. 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 51. 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

13 52. 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 53. 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 54. 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

14 55. 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 56. 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.

15 57. 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 58. 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.

16 59. 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. 60. 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.

17 61. 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 62. 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.

18 63. 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 64. 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 65. 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

19 66. 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 67. 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 shortterm

20 68. 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. 69. 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 70. 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

21 71. 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 72. 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 73. 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

22 74. 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 75. FDI undertaken to serve the home market is known as: A. outsourcing. B. FDI substitution. C. offshore production. D. home market FDI.

23 76. 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 77. 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

24 78. 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 79. 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.

25 80. 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 Essay Questions 81. Discuss the two main forms of FDI.

26 82. Discuss the trends in FDI over the last 30 years. Be sure to differentiate between the stock of FDI and the flow if FDI. 83. Discuss the reasons for the growth in FDI over the last 30 years.

27 84. What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely choose? Explain your answer. 85. Discuss why firms selling products with low value-to-weight ratios choose FDI over exporting.

28 86. What is licensing? How does it work? 87. What are the major drawbacks of licensing according to the internalization theory? 88. What is an oligopoly? Discuss the impact of interdependence in an oligopoly.

29 89. What is multipoint competition? How do firms respond to multipoint competition? 90. Why do many economists favor internalization theory as an explanation for FDI compared to Knickerbocker's theory? 91. Explain the product life-cycle theory and its connection with FDI.

30 92. What are location-specific advantages? How do they help explain FDI? 93. Explain John Dunning's position on FDI. What is the eclectic paradigm? 94. How does the free market view support FDI?

31 95. Discuss the pragmatic nationalist view toward FDI. 96. Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.

32 97. What are the possible adverse effects of FDI on a host country's balance-ofpayments position? 98. Describe some of the home country policies that encourage outward FDI. 99. What are the ways in which host governments restrict inward FDI?

33 100. Describe the situations when licensing is not a good option for a firm.

34 Chapter 08 Foreign Direct Investment Answer Key True / False Questions 1. A Japanese car manufacturer acquires an Italian producer of car tires. This is an example of a greenfield investment. FALSE This is an example of an acquisition. A greenfield investment involves the establishment of a new operation in a foreign country. AACSB: Reflective Thinking Blooms: Apply Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Introduction

35 2. The amount of FDI undertaken over a given time period is known as the flow of FDI. TRUE The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). Blooms: Remember Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy 3. FDI has been declining in the last few decades because protectionist pressures have become less intense. FALSE Despite the general decline in trade barriers over the past 30 years, firms still fear protectionist pressures. Executives see FDI as a way of circumventing future trade barriers. Blooms: Understand Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

36 4. Developing nations currently account for the largest share of FDI inflows. FALSE Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased. Blooms: Remember Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy 5. Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. TRUE FDI can be seen as an important source of capital investment and a determinant of the future growth rate of an economy. Blooms: Remember Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

37 6. The largest source country for FDI has been China. FALSE Since World War II, the United States has been the largest source country for FDI, a position it retained during the late 1990s and early 2000s. Other important source countries include the United Kingdom, France, Germany, the Netherlands, and Japan. Blooms: Remember Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy 7. The majority of cross-border investment in the developed world is in the form of greenfield investments rather than mergers and acquisitions. FALSE The majority of cross-border investment is in the form of mergers and acquisitions rather than greenfield investments. Blooms: Remember Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

38 8. Mergers and acquisitions are quicker to execute than greenfield investments. TRUE Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Blooms: Understand Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy 9. Licensing involves the establishment of a new operation in a foreign country. FALSE Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold. Blooms: Understand Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

39 10. 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. FALSE 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 low value-to-weight ratio and that can be produced in almost any location. Blooms: Understand Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment 11. By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. TRUE By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. Blooms: Understand Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

40 12. Internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. TRUE Internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment 13. Licensing gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. FALSE Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

41 14. An oligopoly is an industry composed of a limited number of large firms. TRUE 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). Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment 15. Rivals rarely imitate what a firm does in an oligopoly. FALSE Rivals often quickly imitate what a firm does in an oligopoly. Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

42 16. Knickerbocker's theory explains why the first firm in an oligopoly decides to undertake FDI rather than to export or license. FALSE 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. Blooms: Understand Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment 17. John Dunning pioneered the eclectic paradigm. TRUE The eclectic paradigm has been championed by the British economist John Dunning. Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

43 18. 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. FALSE According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. Blooms: Remember Difficulty: 2 Medium Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment 19. The radical view traces its roots to Marxist political and economic theory. TRUE The radical view traces its roots to Marxist political and economic theory. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment

44 20. The free market view argues that FDI is a benefit to both the source country and to the host country. TRUE The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment 21. In practice only a few countries country have adopted the free market view in its pure form. FALSE In practice no country has adopted the free market view in its pure form. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment

45 22. The pragmatic nationalist view highlights only the benefits of FDI. FALSE The pragmatic nationalist view is that FDI has both benefits and costs. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment 23. Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. TRUE Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. According to this view, FDI should be allowed so long as the benefits outweigh the costs. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment

46 24. 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. TRUE 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. Blooms: Remember Difficulty: 2 Medium Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment 25. Recent years have seen a marked increase in the number of countries that adhere to a radical ideology regarding FDI. FALSE Recent years have seen a marked decline in the number of countries that adhere to a radical ideology regarding FDI. Blooms: Remember Difficulty: 1 Easy Learning Objective: Understand how political ideology shapes a government's attitudes toward FDI. Topic: Political Ideology and Foreign Direct Investment

47 26. Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country. TRUE Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country. Blooms: Remember Difficulty: 1 Easy Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI 27. 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. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI

48 28. Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI. FALSE Direct effects of FDI arise when a foreign MNE employs a number of hostcountry citizens. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI 29. A country's balance of payments accounts keep track of both its payments to and its receipts from other countries. TRUE A country's balance-of-payments accounts track both its payments to and its receipts from other countries. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI

49 30. Governments normally are concerned when their country is running a surplus on the current account of their balance of payments. FALSE Governments normally are concerned when their country is running a deficit on the current account of their balance of payments. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI 31. 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. TRUE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI

50 32. In general, FDI in the form of greenfield investments should increase competition. TRUE In general, while FDI in the form of greenfield investments should increase competition, it is less clear that this is the case when the FDI takes the form of acquisition of an established enterprise in the host nation Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI 33. 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. FALSE FDI can benefit the home country's balance of payments if the foreign subsidiary creates demands for home-country exports of capital equipment, intermediate goods, complementary products, and the like. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI

51 34. 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. FALSE The current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI 35. Offshore production refers to FDI undertaken to serve the host market. FALSE The term offshore production refers to FDI undertaken to serve the home market. Blooms: Remember Difficulty: 1 Easy Learning Objective: Describe the benefits and costs of FDI to home and host countries. Topic: Benefits and Costs of FDI

52 36. The two most common methods of restricting inward FDI are ownership restraints and performance requirements. TRUE 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. Blooms: Remember Difficulty: 2 Medium Learning Objective: Explain the range of policy instruments that governments use to influence FDI. Topic: Government Policy Instruments and FDI 37. The WTO supports the promotion of international trade in services. TRUE The WTO embraces the promotion of international trade in services. Blooms: Remember Difficulty: 2 Medium Learning Objective: Explain the range of policy instruments that governments use to influence FDI. Topic: Government Policy Instruments and FDI

53 38. As transportation costs or trade barriers increase, exporting becomes unprofitable, compared to FDI and licensing. FALSE As transportation costs or trade barriers increase, exporting becomes unprofitable, and the choice is between FDI and licensing. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the implications for management practice of the theory and government policies associated with FDI. Topic: Implications for Managers 39. Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. FALSE Licensing is usually not a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the implications for management practice of the theory and government policies associated with FDI. Topic: Implications for Managers

54 40. 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. FALSE The product life-cycle theory and Knickerbocker's theory of FDI tend to be less useful from a business perspective. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the implications for management practice of the theory and government policies associated with FDI. Topic: Implications for Managers Multiple Choice Questions

55 41. 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. Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. Blooms: Understand Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Introduction

56 42. 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. A greenfield investment involves the establishment of a new operation in a foreign country. AACSB: Reflective Thinking Blooms: Apply Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Introduction

57 43. 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. The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Blooms: Remember Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

58 44. The of FDI refers to the amount of FDI undertaken over a year. A. stock B. net value C. accumulated value D. flow The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). Blooms: Remember Difficulty: 1 Easy Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

59 45. 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 In recent years, Chinese enterprises have emerged as major investors in Africa, particularly in extraction industries where they seem to be trying to assure future supplies of valuable raw materials. Blooms: Understand Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

60 46. 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 Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like. Blooms: Remember Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

61 47. 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 In the case of developing nations, only about one-third of FDI is in the form of cross-border mergers and acquisitions. The lower percentage of mergers and acquisitions may simply reflect the fact that there are fewer target firms to acquire in developing nations. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

62 48. 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. Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Blooms: Understand Difficulty: 3 Hard Learning Objective: Recognize current trends regarding foreign direct investment in the world economy. Topic: Foreign Direct Investment in the World Economy

63 49. 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 Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold. AACSB: Reflective Thinking Blooms: Apply Difficulty: 2 Medium Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

64 50. 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 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 low value-to-weight ratio and that can be produced in almost any location. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

65 51. 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 By limiting imports through quotas, governments increase the attractiveness of FDI and licensing. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

66 52. 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 A branch of economic theory known as internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets (this approach is also known as the market imperfections approach). Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

67 53. 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 Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. When tight control over a foreign entity is desirable, foreign direct investment is preferable to licensing. Blooms: Understand Difficulty: 3 Hard Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

68 54. 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 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). Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

69 55. 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 The interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

70 56. 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. 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. Blooms: Understand Difficulty: 3 Hard Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

71 57. 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 Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries. Blooms: Remember Difficulty: 1 Easy Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

72 58. 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. Imitative behavior can take many forms in an oligopoly. One firm raises prices, the others follow; one expands into a foreign market, and the rivals imitate lest they be left at a disadvantage in the future. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment

73 59. 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. Raymond Vernon's product life-cycle theory is used to explain FDI. Vernon's view is that firms undertake FDI at particular stages in the life cycle of a product they have pioneered. Blooms: Understand Difficulty: 2 Medium Learning Objective: Explain the different theories of foreign direct investment. Topic: Theories of Foreign Direct Investment