Chap 007 Foreign Direct Investment

Chapter 07 - Foreign Direct InvestmentChapter 07 Foreign Direct Investment True / False Questions 1. When a firm exports to a foreign country, foreign direct investment occurs. True False 2. Greenfield investment involves the establishment of a new operation in a foreign country. True False 3. The stock of foreign direct investment refers to the total accumulated value of foreign- owned assets at a given time. True False 4. The flow of foreign investment refers to the number of countries a firm is investing in at any given point in time. True False 5. Executives of foreign firms see FDI as a way of circumventing future trade barriers. True False 6. FDI has grown significantly slower than world trade and world output. True False 7. According to the United Nations, majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI. True False 7-1 Chapter 07 - Foreign Direct Investment 8. Historically, most FDI has been directed at the developed nations of the world. True False 9. Developing nations such as Poland and Ukraine were the largest national recipients of inward investments within the EU in 2007. True False 10. The inability of Africa to attract greater investment is in part a reflection of the rigid and unchanging economic policy in the region. True False 11. Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like. True False 12. With developed nations still accounting for the largest share of FDI inflows, FDI into developing nations has steadily decreased over the past decade. True False 13. The largest source country for FDI is Japan. True False 14. The data suggest the majority of cross-border investment in developing countries is in the form of mergers and acquisitions. True False 7-2 Chapter 07 - Foreign Direct Investment 15. Many firms believe that if they do not acquire a desirable target firm, their global rivals will. True False 16. Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit the foreign entity sells is called licensing. True False 17. When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. True False 18. FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different. True False 19. Products with low value-to-weight ratios are the most viable for exporting. True False 20. By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing. True False 21. One problem of licensing is that it does not give the firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. True False 7-3 A critical competitive feature of an oligopoly is the independence of the major players. True False 26. Services. the direct effects.Chapter 07 . True False 25. Raymond Vernon's product life-cycle theory offers clear explanations for why it is profitable for a firm to undertake FDI rather than continuing to export from its home base or licensing a foreign firm to produce its product. Under the pragmatic nationalism view. countries should specialize in the production of those goods and services that they can produce most efficiently. True False 23. Under the free market view. True False 27. True False 24. no country should ever permit foreign corporations to undertake FDI.Foreign Direct Investment 22. and many financial services. lend themselves well to exporting. True False 7-4 . retailing. True False 28. where the service has to be produced where it is delivered. if not larger than. such as telecommunications. The indirect employment effects of FDI are often as large as. World trade has been growing twice as fast as the growth in volume of FDI worldwide. including the United States. the OECD initiated talks to draft a multilateral agreement on investment that legalized discrimination against foreign investors by signatory states. True False 32. True False 30.Chapter 07 . Offshore production refers to FDI undertaken to serve the host market. True False 7-5 . The location-specific advantages argument associated with John Dunning does help explain the direction of FDI. Employment restraints and profit requirements are the two most common ways host governments restrict FDI. True False 33. A firm's bargaining power is low when the host government places a low value on what the firm has to offer. True False 34. True False 35.Foreign Direct Investment 29. In 1995. Virtually all investor countries. True False 31. have exercised some control over outward FDI from time to time. FDI was governed by the GATT until the 1990s. C. in the United States _____ occurs whenever a U. The establishment of a wholly new operation in a foreign country is referred to as a(n): A. D.S. organization. C. C. A. A hardware manufacturing firm from the United States invests directly in an assembling plant for laptops in Taiwan. it becomes a(n) _____. 100 percent of a company. foreign direct investment C. Once a firm undertakes FDI. A firm has full outright stake in an acquisition when it acquires: A. or affiliated group takes an interest of 10 percent or more in a foreign business entity.Foreign Direct Investment Multiple Choice Questions 36. citizen. stock consolidation. at least 60 percent of a company. D. This is an example of: A. international divestment 38. 40. B. at least 98 percent of a company. A. 7-6 . multilateral investment B. insourcing. greenfield investment. 37. at least 38 percent of a company. reciprocal foreign investment D. acquisition.Chapter 07 . outsourcer B. D. Department of Commerce. foreign direct investment. B. consolidation. multinational enterprise 39.S. licensing agreement. product takeover. retail chain C. B. offshore company D. According to the U. Why has FDI grown more rapidly than world trade? A. marked increase in both the flow and stock of FDI in the world economy. D. B. Privatization has made developing nations less attractive for MNEs. 44. There has been a general shift toward radical and totalitarian political institutions. With respect to foreign direct investment. the total accumulated value of foreign-owned assets at any time. steady increase in the erection of trade barriers to FDI in the form of tariffs and subsidies. higher increase in world trade than FDI. A. B. the amount of FDI undertaken over a given time period. The _____ of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year). Executives of business firms see FDI as a way of circumventing future trade barriers. Decline in trade barriers has made the fear of protectionist pressures redundant. B. D. flow C.Chapter 07 . C. stock 42. C.Foreign Direct Investment 41. gradual shift toward mercantile market economies that oppose FDI in those countries. D. status D. during the past 30 years. portfolio B. 7-7 . there has been a: A. The stock of foreign direct investment refers to: A. the dividend amount paid by the foreign firm to local investors. 43. the number shares of the foreign firm held by local investors. C. most FDI has been directed at the _____ nations of the world. C. the increasing red-tape involved in conducting international trade between any two countries has created frictions. 46. developed D. the emerging economies of South. East. 48. underdeveloped B. developing C. As of 2009. government intervention in the process of foreign direct investment has hindered economic growth over the past 30 years. post-Communist Eastern European countries. and Southeast Asia. 2676 bilateral trade treaties involved more than 180 countries. C. more governments are erecting restrictive trade barriers focused on extractive industries.Foreign Direct Investment 45. C. such as oil and gas. stable and dynamic economy.Chapter 07 . B. commitment to environmental issues. emerging 47. abundance of cheap and skilled labor. B. a 12-fold increase from the 181 treaties that existed in 1980. impoverished nations in Africa. The United States has been an attractive target for FDI partly because of its: A. Historically. 7-8 . Most recent inflows of FDI into developing nations have been targeted at: A. These statistics prove that: A. D. governments are increasingly facilitating FDI to protect and promote investment with other countries. D. B. economic colonization of much of the world. D. Latin American countries. A. the U. D. predominate in the rankings of the world's largest multinationals. C. they were the most developed countries postwar and home to the largest and best- capitalized enterprises. _____ summarizes the total amount of capital invested in factories.K. Net overhead investment D.. Germany. 7-9 . office buildings. other things being equal. express similar FDI inflows as a percentage of gross fixed capital formation. these countries also: A. Net infrastructure investment 51. According to the text. the Netherlands. the more favorable its future growth prospects are likely to be. D. France. A. they control much of the operating structure of the WTO which governs international trade. stores. capital investment 50. the Netherlands. nationalization of loss making firms C. C.Chapter 07 . Countries such as the U. A. and the like. they pursued a policy of blocking or restricting FDI inflow into their own economies. and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world's largest multinationals because: A. the greater the _____ in an economy.. did not look at foreign markets to fuel their economic expansion. Gross foreign direct investment C.Foreign Direct Investment 49.. governmental regulation B.S. B. the U. B. and Japan account for more than half of the global stock of FDI.S..K. costs of manufacturing D. have cumbersome regulations against FDI inflows into their own economies. France. Gross fixed capital formation B. 52. Germany. The U. As might be expected. they provided subsidies for their domestic firms to protect them from foreign competition. and Germany had a long history as _____ and naturally looked to foreign markets to fuel their economic expansion. exporting. B. protectionist cultures D. and ships the tape to South Korea to be sold. C. Paul. an American firm. This is an example of: A. mergers and acquisitions 55. A. about _____ of FDI is in the form of cross-border mergers and acquisitions.Foreign Direct Investment 53. A. Licensing C. A. franchising D. greenfield investments B. Minnesota.. two-thirds 56. D. three-fourths B. one-third C. Franchising D. Data suggest the majority of cross-border investment is in the form of _____ for developed nations. franchising. the Netherlands. _____ involves producing goods at home and then shipping them to the receiving country for sale. A. 3M. exports C. produces adhesive tape in St. In the case of developing nations. Countries such as the U.. Exporting 57.S.K. Outsourcing B. imperialist countries 54. mercantilist economies B. globally dispersed production.Chapter 07 . the U. licensing. trading nations C. one-half D. 7-10 . Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting? A. 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. especially of products that have a low value-to-weight ratio C. there are problems associated with doing business in a different culture. the costs of establishing production facilities are high. B. D. C. Actual or threatened trade barriers such as import tariffs or quotas 60. low value-to-weight ratio D. The risk of giving away valuable technological know-how to a potential foreign competitor 62. a firm will favor FDI over exporting as an entry strategy when: A. low total landed cost C. 7-11 . high local content requirement B. The viability of an exporting strategy is often constrained by transportation costs. Giving away valuable technological know-how to a potential competitor B. particularly of products that have a _____ and that can be produced in almost any location. A. Exporting C. Outsourcing B. products with a high value-to-weight ratio are involved. Doing business in a different culture where the rules of the game may be very different D.Chapter 07 . Licensing D. The costs of establishing production facilities in a foreign country D. Which of the following is a risk associated with FDI? A. The presence or threat of trade barriers B. the transportation costs or trade barriers are high. High transportation costs. According to the text. low licensing tariff 61.Foreign Direct Investment 58. Product divestment 59. The costs of acquiring a foreign enterprise C. comparative advantage theory B. A. 65. A firm wanting to avoid bearing the costs of establishing production facilities in a foreign country would do well to avoid: A. C. B. globally dispersed production.Chapter 07 . distribution theory C. constitutes the _____ of FDI. internalization theory 7-12 . scramble theory D. eclectic paradigm 64. low value-to-weight ratio products. franchising. disparate elements approach B. and strategy or because some firm capabilities are not amenable to licensing constitutes the _____. A. By limiting imports through quotas and tariffs. D. D. outsourcing and off-shoring. FDI. marketing.Foreign Direct Investment 63. integration approach C. C. The argument that firms prefer FDI over licensing to retain control over know-how. governments increase the attractiveness of : A. manufacturing. FDI and licensing. 66. licensing. The argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. new trade theory D. exporting. B. it requires the firm to establish production facilities where those foreign assets or resource endowments are located. and manufacturing capabilities playing nominal roles. strategic trade B. the licensee bears the costs or risks. C. may result in a firm's giving away valuable technological know-how to a potential foreign competitor. According to internalization theory. C. 69. a firm's competitive advantage is based entirely on its products with management. does not give a firm the tight control over manufacturing. the disadvantages associated with the adoption of a completely free market view. B. when a firm allows another enterprise to produce its products under license. is a better alternative to help companies from emerging economies to enhance their competitiveness and achieve growth. strategic rivalry D. subscribes to the open source ideology which aids the development of technology unencumbered by market dynamics and fluctuations. the preference for FDI over licensing by firms as a strategy to enter foreign markets. corporate espionage 7-13 . which later took over the market. D. B. marketing. marketing. 68. A. 70. B.Chapter 07 . technological exchange C. C. it does not give a firm the tight control over manufacturing. RCA licensed its leading-edge color television technology to a number of Japanese companies. it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development. D. why different nations import goods from other countries even when they are more capable of producing them efficiently. one of the drawbacks of licensing is that: A. This demonstrates that licensing: A.Foreign Direct Investment 67. In the 1960s. The market imperfections approach seeks to explain: A. marketing. and strategy in a foreign country that may be required to maximize its profitability. The strategic behavior theory seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of _____ between firms in the global marketplace. the benefits of exercising protectionism coupled with partial embrace of free market approach. D. and strategy in a foreign country that may be required to maximize its profitability. collaboration C. cooperation D. monopoly B. higher demand 75. C. or industries. B. oligopoly C. An industry composed of a limited number of large firms is referred to as a(n): A. monopoly. A. trade wars B.Chapter 07 . will correspondingly raise prices. D. lack of interaction B. interdependence 73. its competitors: A. oligopoly. syndicate. The interdependence between firms in an oligopoly leads to _____. A. D. 74. mushrooming industry.Foreign Direct Investment 71. will make profits. lowered supply C. multipoint competition 7-14 . national markets. will fill the gap by capturing market share. cartel D. A(n) _____ arises when two or more enterprises encounter each other in different regional markets. A critical competitive feature of oligopolistic industries is the _____ of the major players. will also respond with similar price cuts. B. 72. C. imitative behavior D. A. If one firm in an oligopolistic industry cuts prices. 77. B. in much the same way as Boeing and Airbus have done in the aircraft industry. B. global partners. the competitors cooperate with each other to establish a duopolistic regime. product standardization gives rise to price competition and cost pressures. they wish to dump excessive production capacity in foreign markets. C. other advanced countries B.Chapter 07 . a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere. free market 7-15 . According to the product life-cycle theory. local demand in those countries grows large enough to support local production. pioneering firms shift production to _____ countries when product standardization and market saturation give rise to price competition and cost pressures. the product is saturated in markets in the developing world. If Kodak enters a particular market. Kodak and Fuji are: A. industrialized C. C. multipoint competitors. B. developing D. D. first-movers. the main competitors can incubate growing technologies or business methods in new markets and transfer the gains to established markets. D. A. and vice versa. According to Raymond Vernon. 79. The idea behind multipoint competition is to ensure that: A. Fuji is not far behind. FDI pioneers.Foreign Direct Investment 76. firms that have pioneered a product undertake FDI in other advanced countries when: A. C. D. 78. no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers. Foreign Direct Investment 80. B. internalization theory. This pattern of FDI is explained by the: A. The product life-cycle theory D. The eclectic paradigm B. 7-16 . gaining a commanding position in one market and using them to subsidize competitive attacks in other markets. The theory of pragmatic nationalism C. paradigm of pragmatic internationalism. utilizing resource assets tied to host countries and valuable enough to be combined with the firm's own unique assets. C. market. manufacturing. The new trade theory 83. Which of the following theories concerning FDI ignores alternatives such as exporting and licensing and fails to identify when it is profitable to invest abroad? A. and then set up production facilities in Japan and Great Britain. preferring exporting over licensing in order to retain control over know-how.S. Investment theory B. D. product life-cycle theory. marketing. and strategy. B. C. absolute advantage theory. acquiring the home markets of foreign firms that threaten a firm's domestic market. D. 81. Which theory helps explain how location factors affect the direction of FDI? A. Multipoint competition theory C. Product life-cycle theory 82. Location-specific advantages for a firm are those that arise from: A. Eclectic paradigm D. Xerox first introduced the photocopier into the U.Chapter 07 . B. Economists refer to knowledge "spillovers" that occur when companies in the same industry are located in the same area as: A. 85. multi-point competition. D.Foreign Direct Investment 84. C. they can thus avoid the pitfall of knowledge "spillovers. externalities. C. The _____ view of FDI traces its roots to Marxist political and economic theory. pragmatic nationalism D. 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 because: A. C.Chapter 07 . D. an oligopoly. externalities. it is part of the social responsibility of businesses. radical B." B. A. corporate espionage. labor is not internationally mobile. technology flows. According to Dunning. free market C. comparative advantage 7-17 . first movers. this would ensure goodwill and support from the local community. B. overlaps. D. 86. 87. 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. In its extreme version. capitalist home countries 91. The rise of communism in Eastern Europe. corruption. national integration B. The radical view propounds the idea that multinational enterprises (MNEs) that already exist in a country should be immediately ______. the radical view advances the idea that foreign direct investment can only ever be an instrument of _____. derecognized C. which of the following countries would benefit the most from FDI? A. economic development. cultural impoverishment. 7-18 . Host countries B. Third world countries C. The generally steady economic growth of those countries that embraced the radical position. B. The growing belief in many countries which embraced radicalism that FDI can stimulate growth. According to the radical view.Chapter 07 . Advanced. economic domination C. D. never of _____. nationalized B. A. democracy 89. The strong economic performance of those developing countries that embraced mercantilism.Foreign Direct Investment 88. political division. Less developed FDI destinations D. Which of the following is a reason for the decline in the popularity of the radical view? A. A. C. expatriated 90. international peace D. illegalized D. A foreign-owned manufacturing plant may import many components from its home country. Free market view has helped liberate inward FDI but restrictions on outward FDI have largely remained unaffected.Chapter 07 . According to the free market view. prohibiting FDIs over and above a certain fixed annual amount. how does FDI by the MNE increase the efficiency of world economy? A. B. free market D. 7-19 . C. radical 93. imposing economic sanctions against specific countries. A.Foreign Direct Investment 92. but fails to address the benefits of FDI for the home country. Free market view advances the idea that FDI is beneficial to the host country. thus improving the balance of payments of the host country. 94. According to the text. Free market view has been endorsed by fewer countries in the last decade than in the 1990s. No country has adopted the free market view in its pure form. B. and hence the MNE helps foreign exchange to rotate. MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale. The _____ view argues that international production should be distributed among countries according to the theory of comparative advantage. 95. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. D. D. pragmatic nationalism C. D. which of the following statements regarding the free market view is true? A. profits from the investment go abroad. C. C. reserving the right to block foreign takeovers of domestic firms in certain situations. Britain reserves the right to intervene in FDI by: A. conservative B. When an MNE produces products. B. nationalizing certain industries that provide essential goods and services. B. D. aggressively court domestic investment. D. FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs. 98. pragmatic nationalism D. A. which has negative implications for the host country's _____. aggressively compete to invest in the country. B.Foreign Direct Investment 96. eclectic B. C. inward FDI C. free market C. mercantilism. many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country. transfer profits to their home countries. socialism. According to the _____ view. According to the pragmatic nationalistic view.Chapter 07 . the radical view. pragmatic nationalism. The tendency to aggressively court FDI believed to be in the national interest of a country is an aspect of: A. radical 99. sovereignty D. take skilled workers out of the country. 7-20 . C. free trade B. balance-of-payments position 97. One of the concerns harbored by host nations regarding FDI is that foreign firms will: A. A. the technology effect. first-mover advantage effect. developed countries do not feel the need to court FDIs. adopting a retaliatory stance in bilateral trade. and the currency-exchange effect C. D. blocking FDI inflows into the country. a global company controlled by the Indian entrepreneur Lakshmi Mittal. Japan adopted the _____ view of FDI. B. FDI flow from developing countries to developed ones is largely unwelcome. it can be inferred that. there was a hostile political reaction to the attempted takeover of Europe's largest steel company. A. free market C. In Europe in 2006. from the perspective of the Japanese government. adopting a radical stance to FDI. radical B. The labor-transfer effect.) firms with ample managerial resources into the Japanese markets as detrimental to the development and growth of their own industry and technology. Japan perceived direct entry of foreign (especially U.S. by Mittal Steel. developed nations. eclectic 101. hostile reactions to inward FDI are not restricted to developing nations. are hostile to FDI than developing nations. The resource-transfer effect. Until the 1980s. and economic development effect D. From this. and the balance-of-payments effect B. C. Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of: A. 103. The foreign exchange reserves effect. 102. leading Japan to block the majority of applications to invest in Japan. courting FDI believed to be in national interest. The cultural awareness effect. to a far greater extent. B. the benefits of FDI outweighed the perceived costs. and the reverse resource transfer effect 7-21 . knowledge flow effect. Which of the following sets form three of the main benefits of inward FDI for a host country? A. where.Foreign Direct Investment 100. there were always exceptions to this policy.Chapter 07 . pragmatic nationalist D. In mid-2005 China National Offshore Oil Company withdrew a takeover bid for Unocal of the United States after highly negative reactions in Congress about the proposed takeover of a "strategic asset" by a Chinese company. However. D. These incidents are evidence to the fact that: A. Arcelor. the employment effect. C. creates jobs because of increased local spending by employees of the MNE. the MNE brings in managers from the home country for its operations. D. C. technology has ensured that R&D is much less skill-intensive than it was two decades ago. B. A study of FDI by the Organization for Economic Cooperation and Development (OECD) found that foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. B. developed countries lack the R&D resources and skills required to develop their own indigenous technology. Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country. employment effects B. causes local suppliers to hire more people. this finding of the study suggests that: A. upgrading. a foreign MNE employs a number of host-country citizens. C. or creating new technology in those countries. whether those operations are acquired or greenfield developments. resource transfer effects 106. brings in managers trained in the latest management techniques from the home country. C. 107. effects on competition D. According to the text.Chapter 07 . This constitutes a benefit of FDI related to _____. Direct effects of FDI on employment in the host country arise when a foreign MNE: A. 105. D. foreign firms are transferring. a number of employees of the MNE are deputed in subsidiaries in other countries.Foreign Direct Investment 104. D. One of the indirect effects of FDI on employment in a host country arises when: A. B. A. jobs are created because of increased local spending by employees of the MNE. balance-of-payments effects C. R&D opportunities in less developed countries are more profitable than those in developed countries. employs a number of host country citizens. 7-22 . technology flow between MNEs and their domestic competitors. use of profits earned in the host country to subsidize competitive attacks elsewhere. C. likely net gain in employment in the host country. FDI by Japanese auto companies in the United States has resulted in U. most jobs in MNEs are of a contract nature and hence. reduce employment to cut costs and control prices. A. B. install local personnel in key management positions C. B. D. C. jobs created by this FDI have been more than offset by the jobs lost in U. C. thereby bringing down the net employment statistics. 110. engage in downsizing and retrenchment. majority of employees of an MNE in a host country migrate to more developed countries.S. 7-23 . B. research suggests that once the initial period of restructuring is over. the immediate effect may be to _____ as the multinational tries to restructure the operations of the acquired unit to improve its operating efficiency. grow their employment base at a faster rate than domestic rivals.Foreign Direct Investment 108. aggressively recruit local personnel B. 109. enterprises acquired by foreign firms tend to: A.S.Chapter 07 . D. A potentially major negotiating point between an MNE wishing to undertake FDI and the host government is the issue of: A. This forms the basis for critics of employment benefits of FDI to argue that: A. reduce their pay scales to match those of local companies.-owned auto companies losing market share to their Japanese competitors. level of involvement of host government in top management decisions of the MNE. cannot be counted as actual employment statistics. D. When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment. apply for public funding through an initial public offering D. When FDI takes the form of an acquisition of an established enterprise in the host economy. direct employment effects of FDI are far larger than the indirect effects. auto firms. reduce employment 111. How does increased competition through FDI in the form of greenfield investments impact the host country? A. Greenfield investment B. D. Foreign account C. C. 115. It causes firms to fight for scarce capital investments. It leads to a monopolistic market and unfair pricing. Current account B. D. It raises retrenchments and unemployment levels. C. Dematerialized C. divesting stock in domestic corporations. D. In the balance of payments. bonds. current account deficit. and real estate in other countries. It drives down prices and increases the economic welfare of consumers. 7-24 . When a country is importing more goods and services than it is exporting. B. C. economic recession. trade surplus.Chapter 07 .Foreign Direct Investment 112. Capitalized D. B. Internal account D. it is incurring a(n): A. borrowing from the IMF. The only way in which a current account deficit can be supported in the long run is by: A. _____ accounts are national accounts that track both payments to and receipts from other countries. positive balance of payment. B. Balance-of-payments 113. 116. Tariff account 114. purchasing stocks. selling assets to foreigners. which of the following records transactions involving the export and import of goods and services? A. A. greenfield investments. Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. B. In the context of costs to a host country from FDI. government-backed insurance programs 119. B. reinvested in the host-market. D. 120. A. profitable returns on their investments. B. Subsequent outflow of earnings from the foreign subsidiary to its parent company. A foreign subsidiary exports a substantial number of its outputs abroad. Which of the following is a possible adverse effect of FDI on a host country's balance-of- payments position? A. 7-25 . local content requirements C. A foreign subsidiary gets a substantial number of its inputs from the host country. investment in the education and health of the population. import quotas. Increased competition in the domestic markets. invested in businesses concerning national security and sovereignty. repatriated to a foreign subsidiary's home country. economic interest in their host countries. C. acquisitions of established firms D. Some host countries fear a loss of economic independence through FDI as key decisions that can affect their economies will be made by foreign parents that have no: A. while _____ should increase competition. Some governments have responded to such outflows by restricting the amount of earnings that can be: A. C. mergers with domestic firms. subsidies. 118. real commitment to their host countries.Chapter 07 . earned by the foreign subsidiaries. it is less clear that this is the case with _____ in the host nation. D. tariffs B. D. C. Such outflows show up as capital outflow on balance-of-payments accounts.Foreign Direct Investment 117. Migration of skilled labor from host-countries improves the available pool of human resources and creates new jobs. the most serious concerns arise when FDI is seen as a substitute for _____. in shipping industries. domestic production D. C. in service industries with a large migrant employee base. greenfield investments 124." 123. 7-26 . D.Chapter 07 . With regard to employment effects in home countries. A. According to the text. the most important concerns regarding the costs of FDI for the home-country center on: A.Foreign Direct Investment 121. with focus on extractive industries. Home country MNE learns valuable skills from its exposure to foreign markets. to serve the home market. such as oil and gas. licensing C. the balance-of-payments and employment effects of outward FDI. B. B. It raises the ethnic profile of a country by assimilating a diverse group of employees into production facilities in the home country. It can be assured of reciprocal FDI from the host countries. the reverse-resource transfer effect and the exposure to foreign markets caused by FDI. 122. According to the text. C. B. D. capital investments B. Offshore production refers to FDI undertaken: A. the technology capture effect and the perceived loss of national sovereignty. D. which of the following is a home-country benefit source to FDI? A. C. the import of substantial input from abroad and being held to "economic ransom. Chapter 07 - Foreign Direct Investment 125. Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. One of the types of risks insurable through these programs is the risk of: A. substitution of domestic production. B. domestic competition. C. poor strategic tie-ups. D. the inability to transfer profits back home. 126. As a further incentive to encourage domestic firms to undertake FDI, many countries have eliminated double taxation of foreign income, or the: A. taxation of income in both the host country and the home country. B. tax on the amount of earnings of the firm and tax on interest earned from such earnings. C. tax on the income of the corporate workforce and the tax on the dividend earned by shareholders. D. taxation of an MNE's employee's salary in both the host- and home-country. 127. Which of the following is a home-country policy for limiting outward FDI? A. Eliminating double taxation of foreign income B. Manipulating tax rules to encourage their firms to invest at home C. Withdrawing government-backed insurance programs to local investors D. Reducing interest rates earned on domestic investments 128. To encourage inward FDI, it is increasingly common for governments to: A. offer tax concessions to firms that invest in their countries. B. exclude foreign companies from specific industries. C. require that local investors own significant proportion of the equity. D. establish control over the behavior of the MNE's local subsidiary. 129. Which of the following is NOT a common incentive that governments offer foreign firms to invest in their countries? A. Grants or subsidies B. Ownership restraints C. Low-interest loans D. Tax concessions 7-27 Chapter 07 - Foreign Direct Investment 130. Host governments use a range of controls to restrict inward FDI. The two most common are: A. monetary restraints and prohibition on investing in certain countries. B. voluntary export restrictions and employment restraints. C. ownership restraints and performance requirements. D. tax concessions and government-backed insurance. 131. Many services have to be produced where they are sold; hence _____ is not an option. A. FDI B. franchising C. greenfield investment D. exporting 132. In 1995, the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would: A. liberalize rules governing FDI between OECD states. B. contain environmental and labor agreements that were binding on the signatories. C. free signatory states to pick and choose their individual FDI policies. D. make it legal for signatory states to discriminate against foreign investors. 133. In 1995, the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors. These talks broke down in early 1998, primarily because _____ refused to sign the agreement. A. Malaysia and India B. Germany C. Japan D. the United States 7-28 Chapter 07 - Foreign Direct Investment 134. The United States refused to sign the multilateral agreement on investment (MAI) in 1998 because it: A. would not have allowed restricting foreign television programs and music in the name of preserving culture. B. contained binding environmental and labor agreements that the U.S. found to be too restrictive. C. contained too many exceptions that would weaken its powers. D. would have barred discriminatory taxation of foreign-owned companies. 135. Firms for which licensing is not a good option include: A. low-technology industries. B. global oligopolies. C. industries characterized by low cost pressures. D. industries where transportation costs are high. 136. Although it normally involves much longer-term commitments, franchising is essentially the service industry version of: A. exporting. B. licensing. C. foreign direct investment. D. greenfield investment. 137. Which of the following is NOT one of the factors that a party's bargaining power depends upon when negotiating? A. Each party's time horizon. B. The value each side places on what the other has to offer. C. The number of people on the negotiation panel. D. The number of comparable alternatives available to each side. 7-29 FDI has been described as an "expensive" and "risky" international growth strategy. When contemplating FDI. Other things being equal. What is meant by the term foreign direct investment? Describe the difference between the flow of foreign direct investment and the stock of foreign direct investment. 139. Despite its advantages.Chapter 07 . why is FDI expensive and risky when compared to licensing and exporting? 7-30 .Foreign Direct Investment Essay Questions 138. why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments? 140. Describe what is meant by the eclectic paradigm? Who is its principal champion? Does this paradigm make sense as a rationale for FDI? 7-31 . Exporting. and it can reduce the risks associated with selling abroad by using a native sales agent. What is multipoint competition? What typically occurs when two or more enterprises are multipoint competitors? 144. however.Foreign Direct Investment 141. When a firm exports. 142. it need not bear the costs associated with FDI. is not without its limitations. Name three reasons why licensing may not be an attractive option.Chapter 07 . 143. Discuss the most common limitations of exporting as compared to FDI. Describe the three political ideologies relating to foreign direct investment.Foreign Direct Investment 145. Briefly describe the trends in the ideological shift in attitudes toward FDI as evidenced in countries across the globe. How can governments restrict outward flow of FDI? 7-32 .Chapter 07 . 147. Briefly describe on any two main benefits of FDI for a host-country. 146. 148. What has been the role of international organizations in the liberalization of FDI? 151.Chapter 07 . Briefly explain the two most common types of control exercised by host-governments to restrict the inward flow of FDI.Foreign Direct Investment 149. 7-33 . 150. explain how franchising can be a profitable alternative to FDI. What is franchising? With a suitable example. What are the types of industries for which licensing is not a good option? 152. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 7-34 . 242) When a firm exports to a foreign country. TRUE A greenfield investment is a form of FDI which involves the establishment of a new operation in a foreign country. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 2.Chapter 07 . (p. foreign direct investment occurs. 243) Greenfield investment involves the establishment of a new operation in a foreign country.Foreign Direct Investment Chapter 07 Foreign Direct Investment Answer Key True / False Questions 1. FALSE Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. TRUE Despite the general decline in trade barriers over the past 30 years. (p. (p. TRUE The total accumulated value of foreign-owned assets at a given time is known as the stock of foreign direct investment.Foreign Direct Investment 3. 243) The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time. FALSE The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). 243) Executives of foreign firms see FDI as a way of circumventing future trade barriers. (p.Chapter 07 . AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 5. Executives see FDI as a way of circumventing future trade barriers. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 4. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-35 . 243) The flow of foreign investment refers to the number of countries a firm is investing in at any given point in time. business firms still fear protectionist pressures. TRUE Historically.600 changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment created a more favorable environment for FDI.Chapter 07 . (p. 245) Historically. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-36 . TRUE According to the United Nations. including the general shift toward democratic political institutions and free market economies. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 8.Foreign Direct Investment 6. FALSE FDI has grown more rapidly than world trade and world output for several reasons. some 90 percent of the 2. (p.S. most FDI has been directed at the developed nations of the world. 243) FDI has grown significantly slower than world trade and world output. Most significantly. the U. most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets. majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI. 243) According to the United Nations. (p. and developed nations of the European Union have been the target for FDI inflows. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-37 . and the like. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 10. (p. 246) Gross fixed capital formation summarizes the total amount of capital invested in factories. TRUE Gross fixed capital formation summarizes the total amount of capital invested in factories. inward investment into the EU reached a record $842 billion. office buildings. (p. FALSE The inability of Africa to attract greater investment is in part a reflection of the political unrest.Chapter 07 . stores. (p. Other things being equal. the more favorable its future growth prospects are likely to be. 246) The inability of Africa to attract greater investment is in part a reflection of the rigid and unchanging economic policy in the region. The United Kingdom and France were the largest national recipients. and frequent changes in economic policy in the region. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 11. 245) Developing nations such as Poland and Ukraine were the largest national recipients of inward investments within the EU in 2007. armed conflict. although it fell to $503 billion in 2008. office buildings. FALSE In 2007. stores. and the like.Foreign Direct Investment 9. the greater the capital investment in an economy. From 1985 to 1990. France. FALSE Even though developed nations still account for the largest share of FDI inflows. the United States has been the largest source country for FDI. (p. In the mid. FDI into developing nations has steadily decreased over the past decade. (p.4 billion. the inflow into developing nations was generally between 35 and 40 percent of the total.to late 1990s. FALSE Since World War II. the Netherlands. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 13. before falling back to account for about 25 percent of the total in the 2000-2002 period and then rising to 31 to 40 percent between 2004 and 2008.Foreign Direct Investment 12.Chapter 07 . a position it retained during the late 1990s and early 2000s. 248) The largest source country for FDI is Japan. Germany. and Japan. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-38 . FDI into developing nations has increased. the annual inflow of FDI into developing nations averaged $27. 245) With developed nations still accounting for the largest share of FDI inflows. Other important source countries include the United Kingdom. only about one-third of FDI is in the form of cross-border mergers and acquisitions. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-39 . TRUE 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. (p. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 15. (p. 249) Many firms believe that if they do not acquire a desirable target firm. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 16. their global rivals will. Many firms apparently believe that if they do not acquire a desirable target firm. 249) The data suggest the majority of cross-border investment in developing countries is in the form of mergers and acquisitions. 250) Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit the foreign entity sells is called licensing. then their global rivals will. However. This is an important consideration in the modern business world where markets evolve very rapidly. In the case of developing nations. FDI flows into developed nations differ markedly from those into developing nations. TRUE Mergers and acquisitions are quicker to execute than greenfield investments.Foreign Direct Investment 14. FALSE The data suggest the majority of cross-border investment is in the form of mergers and acquisitions rather than greenfield investments.Chapter 07 . (p. When a firm exports. and it can reduce the risks associated with selling abroad by using a native sales agent. 250) Products with low value-to-weight ratios are the most viable for exporting. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 19. (p. For such products. 250) When a firm exports. relative to either FDI or licensing.Chapter 07 . it becomes unprofitable to ship some products over a large distance. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 18. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-40 . TRUE Exporting involves producing goods at home and then shipping them to the receiving country for sale. FALSE When transportation costs are added to production costs. the attractiveness of exporting decreases.Foreign Direct Investment 17. TRUE FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different. it need not bear the costs associated with FDI. This is particularly true of products that have a low value-to- weight ratio and that can be produced in almost any location. it need not bear the costs associated with FDI. Relative to indigenous firms. and it can reduce the risks associated with selling abroad by using a native sales agent. 250) FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different. (p. there is a greater probability that a foreign firm undertaking FDI in a country for the first time will make costly mistakes due to its ignorance. governments increase the attractiveness of FDI and licensing. Unlike a wholly owned subsidiary. 252) One problem of licensing is that it does not give the firm tight control over manufacturing. the wave of FDI by Japanese auto companies in the United States during the 1980s and 1990s was partly driven by protectionist threats from Congress and by quotas on the importation of Japanese cars. and strategic processes. and strategy in a foreign country that may be required to maximize its profitability. these factors decreased the profitability of exporting and increased that of foreign direct investment.Chapter 07 . marketing. (p. and strategy in a foreign country that may be required to maximize its profitability. marketing.Foreign Direct Investment 20. marketing. TRUE According to the internalization theory. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-41 . a licensee would probably not appreciate the firm controlling its manufacturing. (p. licensing does not give a firm the tight control over manufacturing. governments reduce the attractiveness of FDI and licensing. 250) By limiting imports through quotas. For example. For Japanese auto companies. FALSE By limiting imports through quotas. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 21. (p. (p.Chapter 07 . FALSE Raymond Vernon's product life-cycle theory fails to explain why it is profitable for a firm to undertake FDI at such times. forcing a response in kind. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 23. FALSE An oligopoly is an industry composed of a limited number of large firms. A critical competitive feature of such industries is interdependence of the major players: What one firm does can have an immediate impact on the major competitors. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-42 . 253) A critical competitive feature of an oligopoly is the independence of the major players. 254) Raymond Vernon's product life-cycle theory offers clear explanations for why it is profitable for a firm to undertake FDI rather than continuing to export from its home base or licensing a foreign firm to produce its product.Foreign Direct Investment 22. rather than continuing to export from its home base or licensing a foreign firm to produce its product. (p. since they can never be instruments of economic development. FALSE With most nations gravitating towards a free market policy stance from their earlier radical or pragmatic nationalism stance. 258) World trade has been growing twice as fast as the growth in volume of FDI worldwide. no country should ever permit foreign corporations to undertake FDI. countries should specialize in the production of those goods and services that they can produce most efficiently. 256) Under the pragmatic nationalism view. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-43 . The pragmatic nationalism view is that FDI has both benefits and costs. TRUE The free market view argues that international production should be distributed among countries according to the theory of comparative advantage.Foreign Direct Investment 24. Countries should specialize in the production of those goods and services that they can produce most efficiently. 257) Under the free market view. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 26. no country should ever permit foreign corporations to undertake FDI. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 25. the volume of FDI worldwide has been growing twice as fast as the growth in world trade. FALSE According to the radical view. only of economic domination.Chapter 07 . (p. (p. (p. Direct effects arise when a foreign MNE employs a number of host country citizens. lend themselves well to exporting. (p. 265) Offshore production refers to FDI undertaken to serve the host market. retailing. and many financial services. 260) The indirect employment effects of FDI are often as large as. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-44 . if not larger than. where exporting is often not an option because the service has to be produced where it is delivered.Chapter 07 . FALSE The term offshore production refers to FDI undertaken to serve the home market. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 29. where the service has to be produced where it is delivered. FALSE FDI's impact on competition in domestic markets may be particularly important in the case of services. and many financial services. the direct effects. 262) Services. such as telecommunications. such as telecommunications. 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. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 28. TRUE The effects of FDI on employment are both direct and indirect.Foreign Direct Investment 27. The indirect employment effects are often as large as. retailing. the direct effects. if not larger than. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 32. 266) Employment restraints and profit requirements are the two most common ways host governments restrict FDI. including the United States. (p. (p. including the United States. have exercised some control over outward FDI from time to time. This changed with the formation of the World Trade Organization in 1995. (p. which has become involved in regulations governing FDI. TRUE Virtually all investor countries. The two most common are ownership restraints and performance requirements. 267) FDI was governed by the GATT until the 1990s. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-45 . One policy has been to limit capital outflows out of concern for the country's balance of payments.Chapter 07 .Foreign Direct Investment 30. have exercised some control over outward FDI from time to time. there was no consistent involvement by multinational institutions in the governing of FDI. 265) Virtually all investor countries. FALSE Until the 1990s. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 31. FALSE Host governments use a wide range of controls to restrict FDI in one way or another. (p. FALSE In an attempt to make some progress on the issue of FDI liberalization. 267) In 1995. the OECD in 1995 initiated talks between its members to draft a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors. TRUE It is worth noting that the location-specific advantages argument associated with John Dunning does help explain the direction of FDI. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-06 Topic: Focus on Managerial Implications 7-46 . This would liberalize rules governing FDI between OECD states.Chapter 07 .Foreign Direct Investment 33. the OECD initiated talks to draft a multilateral agreement on investment that legalized discrimination against foreign investors by signatory states. the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 34. However. 268) The location-specific advantages argument associated with John Dunning does help explain the direction of FDI. TRUE From the perspective of a firm negotiating the terms of an investment with a host government. B. insourcing. This is an example of: A.Foreign Direct Investment 35. foreign direct investment. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-06 Topic: Focus on Managerial Implications Multiple Choice Questions 36. the number of comparable alternatives open to the firm is greater. Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. the firm's bargaining power is high when the host government places a high value on what the firm has to offer. D. 242) A hardware manufacturing firm from the United States invests directly in an assembling plant for laptops in Taiwan. and the firm has a long time in which to complete the negotiations. product takeover. C. AACSB: Reflective Thinking Bloom's: Apply Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 7-47 . stock consolidation. 270) A firm's bargaining power is low when the host government places a low value on what the firm has to offer.Chapter 07 . (p. (p. 242) Once a firm undertakes FDI. retail chain C. it becomes a(n) _____. it becomes a multinational enterprise.Chapter 07 . citizen. outsourcer B. citizen. organization. (p. reciprocal foreign investment D. multinational enterprise 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. foreign direct investment C. A. Department of Commerce. offshore company D. (p. organization. or affiliated group takes an interest of 10 percent or more in a foreign business entity.Foreign Direct Investment 37. multilateral investment B. 242) According to the U. According to the U.S. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 7-48 . in the United States FDI occurs whenever a U. international divestment Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country.S.S. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 38. A. in the United States _____ occurs whenever a U. Department of Commerce.S. or affiliated group takes an interest of 10 percent or more in a foreign business entity. 243) The establishment of a wholly new operation in a foreign country is referred to as a(n): A. majority (foreign interest of 50 percent to 99 percent). (p. (p. 100 percent of a company. 243) A firm has full outright stake in an acquisition when it acquires: A.Foreign Direct Investment 39. acquisition. B. B. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 7-49 . C. greenfield investment. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock). AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction 40. at least 60 percent of a company. consolidation. or full outright stake (foreign interest of 100 percent). D. C. D.Chapter 07 . at least 38 percent of a company. A greenfield investment involves the establishment of a new operation in a foreign country. at least 98 percent of a company. licensing agreement. Chapter 07 . We also talk of outflows of FDI. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 42. the flow of FDI into a country. meaning the flow of FDI out of a country. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-50 . the dividend amount paid by the foreign firm to local investors.Foreign Direct Investment 41. C. (p. flow C. stock The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). portfolio B. the number shares of the foreign firm held by local investors. the total accumulated value of foreign-owned assets at any time. 243) The _____ of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year). B. and inflows of FDI. the amount of FDI undertaken over a given time period. A. 243) The stock of foreign direct investment refers to: A. (p. The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. status D. D. (p. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-51 . Despite the general decline in trade barriers over the past 30 years. Executives see FDI as a way of circumventing future trade barriers. C. (p. there has been a: A. marked increase in both the flow and stock of FDI in the world economy.8 trillion in 2007. D. The average yearly outflow of FDI increased from $25 billion in 1975 to a record $1. C. These factors have helped FDI grow more rapidly than world trade. In general. B. 243) Why has FDI grown more rapidly than world trade? A. D. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 44. gradual shift toward mercantile market economies that oppose FDI in those countries. The general shift toward democratic political institutions and free market economies has encouraged FDI. business firms still fear protectionist pressures. Executives of business firms see FDI as a way of circumventing future trade barriers. The past 30 years have seen a marked increase in both the flow and stock of FDI in the world economy. during the past 30 years. Privatization has made developing nations less attractive for MNEs. There has been a general shift toward radical and totalitarian political institutions.Foreign Direct Investment 43. 243) With respect to foreign direct investment.Chapter 07 . Decline in trade barriers has made the fear of protectionist pressures redundant. higher increase in world trade than FDI. over the past three decades the flow of FDI has accelerated faster than the growth in world trade and world output. B. steady increase in the erection of trade barriers to FDI in the form of tariffs and subsidies. Much of the increase in FDI has been driven by the political and economic changes that have been occurring in many of the world's developing nations. most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets. These statistics prove that: A. the United States was often the favorite target for FDI inflows. government intervention in the process of foreign direct investment has hindered economic growth over the past 30 years. underdeveloped B. a 12-fold increase from the 181 treaties that existed in 1980. C. a 12-fold increase from the 181 treaties that existed in 1980. D. emerging Historically. During the 1980s and 1990s.Chapter 07 . more governments are erecting restrictive trade barriers focused on extractive industries. A. developed D. 245) Historically.676 such treaties involved more than 180 countries.Foreign Direct Investment 45. such as oil and gas. Notwithstanding recent adverse developments in some nations. governments are increasingly facilitating FDI to protect and promote investment with other countries. developing C. (p. (p. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 46. 245) As of 2009. As of 2009. B. 2. 2676 bilateral trade treaties involved more than 180 countries. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-52 . the general desire of governments to facilitate FDI also has been reflected in a sharp increase in the number of bilateral investment treaties designed to protect and promote investment between two countries. the increasing red-tape involved in conducting international trade between any two countries has created frictions. most FDI has been directed at the _____ nations of the world. (p. which attracted around $60 billion of FDI in 2004 and rose steadily to hit $108 billion in 2008. The United States has been an attractive target for FDI because of its large and wealthy domestic markets. abundance of cheap and skilled labor. (p. stable and dynamic economy. East. C. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-53 . D. the emerging economies of South. and Southeast Asia. D. 246) Most recent inflows of FDI into developing nations have been targeted at: A. B. Driving much of the increase has been the growing importance of China as a recipient of FDI. impoverished nations in Africa. Most recent inflows into developing nations have been targeted at the emerging economies of South.Chapter 07 . commitment to environmental issues. its dynamic and stable economy. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 48. post-Communist Eastern European countries. and the openness of the country to FDI. and Southeast Asia. C.Foreign Direct Investment 47. economic colonization of much of the world. a favorable political environment. East. B. 245) The United States has been an attractive target for FDI partly because of its: A. Latin American countries. (p. office buildings. the greater the _____ in an economy. capital investment Other things being equal. 246) _____ summarizes the total amount of capital invested in factories. the more favorable its future growth prospects are likely to be. costs of manufacturing D. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-54 . Net infrastructure investment Another way of looking at the importance of FDI inflows is to express them as a percentage of gross fixed capital formation. FDI can be seen as an important source of capital investment and a determinant of the future growth rate of an economy. governmental regulation B. Gross fixed capital formation B. office buildings. stores. Viewed this way. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 50. the greater the capital investment in an economy. the more favorable its future growth prospects are likely to be. A. and the like. Gross fixed capital formation summarizes the total amount of capital invested in factories. nationalization of loss making firms C. A.Foreign Direct Investment 49. Net overhead investment D. other things being equal. and the like. (p. 246) According to the text. Gross foreign direct investment C. stores.Chapter 07 . France. Germany. B. the U. 248) The U. these six countries accounted for 56 percent of all FDI outflows for the 1998-2008 period and 61 percent of the total global stock of FDI in 2008. the Netherlands. C. followed by the United Kingdom.S. these countries also: A.S.Chapter 07 . they control much of the operating structure of the WTO which governs international trade. have cumbersome regulations against FDI inflows into their own economies. C.. France. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 52. predominate in the rankings of the world's largest multinationals. and other developed nations dominate in total global stock of FDI. and rankings of largest multinationals primarily because they were the most developed nations with the largest economies during much of the postwar period and therefore home to many of the largest and best-capitalized enterprises. 249) Countries such as the U. As might be expected.K.. they pursued a policy of blocking or restricting FDI inflow into their own economies. did not look at foreign markets to fuel their economic expansion. the Netherlands. the U. they provided subsidies for their domestic firms to protect them from foreign competition. France. (p. and Japan. (p.S. express similar FDI inflows as a percentage of gross fixed capital formation. the United States has been the largest source country for FDI. and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world's largest multinationals because: A. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-55 . Since World War II. FDI outflows.K. and Japan account for more than half of the global stock of FDI. the Netherlands. they were the most developed countries postwar and home to the largest and best- capitalized enterprises.. 248. Germany. Germany. these countries also predominate in rankings of the world's largest multinationals.. As might be expected. Collectively. B. D. The U. D.Foreign Direct Investment 51. and Germany had a long history as _____ and naturally looked to foreign markets to fuel their economic expansion. Many of these countries also had a long history as trading nations and naturally looked to foreign markets to fuel their economic expansion. 249) Data suggest the majority of cross-border investment is in the form of _____ for developed nations.S. Germany..Foreign Direct Investment 53.S. (p. UN estimates indicate that some 40 to 80 percent of all FDI inflows per annum were in the form of mergers and acquisitions between 1998 and 2008.K. (p.. protectionist cultures D. the Netherlands.K... AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 7-56 . imperialist countries Countries such as the U. A. A. the Netherlands. mercantilist economies B. franchising D. the U. mergers and acquisitions Data suggest the majority of cross-border investment is in the form of mergers and acquisitions rather than greenfield investments. exports C. France.Chapter 07 . greenfield investments B. and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world's largest multinationals. the U. trading nations C. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 54. 249) Countries such as the U. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-57 . three-fourths B. one-half D. (p. as opposed to importing. involves producing goods at home and then shipping them to the receiving country for sale. 249) In the case of developing nations. Franchising D. (p. Exporting Exporting.Chapter 07 . Licensing C. A. This differs markedly from those into developing nations where only about one-third of FDI is in the form of cross-border mergers and acquisitions.Foreign Direct Investment 55. two-thirds The majority of FDI flows into developed nations are in the form of mergers and acquisitions rather than greenfield investments. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 56. A. Outsourcing B. 250) _____ involves producing goods at home and then shipping them to the receiving country for sale. one-third C. about _____ of FDI is in the form of cross-border mergers and acquisitions. Minnesota. Licensing D. C. (p. B. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-58 . 250) 3M. franchising. (p. and ships the tape to South Korea to be sold. Exporting C. Exporting involves producing goods at home and then shipping them to the receiving country for sale. This is an example of: A. Paul. AACSB: Reflective Thinking Bloom's: Apply Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 58. Product divestment Licensing involves granting a foreign entity (the licensee or franchisee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold. globally dispersed production. D.Chapter 07 . exporting. licensing. Outsourcing B.Foreign Direct Investment 57. produces adhesive tape in St. an American firm. 250) 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. High transportation costs. Doing business in a different culture where the rules of the game may be very different D.Foreign Direct Investment 59. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-59 . particularly of products that have a _____ and that can be produced in almost any location. it becomes unprofitable to ship some products over a large distance. (p. low value-to-weight ratio D. A. low licensing tariff The viability of an exporting strategy is often constrained by transportation costs. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 60. there is a greater probability that a foreign firm undertaking FDI in a country for the first time will make costly mistakes due to its ignorance. This is particularly true of products that have a low value-to- weight ratio and that can be produced in almost any location. Giving away valuable technological know-how to a potential competitor B. Actual or threatened trade barriers such as import tariffs or quotas FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different. especially of products that have a low value-to-weight ratio C. 250) The viability of an exporting strategy is often constrained by transportation costs. Relative to indigenous firms. (p. high local content requirement B. 250) Which of the following is a risk associated with FDI? A. When transportation costs are added to production costs. low total landed cost C.Chapter 07 . When transportation costs are added to production costs. there are problems associated with doing business in a different culture. the transportation costs or trade barriers are high. (p. The desire to reduce the threat that trade barriers might be imposed is enough to justify foreign direct investment as an alternative to exporting. products with a high value-to-weight ratio are involved. The presence or threat of trade barriers B. The costs of establishing production facilities in a foreign country D. 250) According to the text. (p. AACSB: Reflective Thinking Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 62. D. the costs of establishing production facilities are high. C. 250) Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting? A. a firm will favor FDI over exporting as an entry strategy when: A.Chapter 07 . The costs of acquiring a foreign enterprise C. B. The desire to reduce the threat that trade barriers might be imposed is enough to justify foreign direct investment as an alternative to exporting. The risk of giving away valuable technological know-how to a potential foreign competitor Some firms undertake foreign direct investment as a response to actual or threatened trade barriers such as import tariffs or quotas. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-60 .Foreign Direct Investment 61. it becomes unprofitable to ship some products over a large distance. The viability of an exporting strategy is often constrained by transportation costs and trade barriers. constitutes the _____ of FDI. It argues that combining location- specific assets or resource endowments and the s own unique assets often requires FDI—it requires the firm to establish production facilities where those foreign assets or resource endowments are located. disparate elements approach B. C. FDI. The eclectic paradigm attempts to combine the two other perspectives into a single holistic explanation of foreign direct investment. 250) The argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. it requires the firm to establish production facilities where those foreign assets or resource endowments are located. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-61 . D.Foreign Direct Investment 63. licensing. A. 250) A firm wanting to avoid bearing the costs of establishing production facilities in a foreign country would do well to avoid: A. integration approach C. (p. B. exporting. franchising. as opposed to exporting or licensing.Chapter 07 . (p. FDI. scramble theory D. is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise. eclectic paradigm Several theories exist that approach the various phenomena of FDI from three complementary perspectives. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 64. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-62 . D. It argues that firms prefer FDI over licensing to retain control over know-how. 252) The argument that firms prefer FDI over licensing to retain control over know-how. FDI and licensing. governments increase the attractiveness of : A. new trade theory D. (p. manufacturing. and strategy or because some firm capabilities are not amenable to licensing constitutes the _____. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 66. governments can increase the cost of exporting relative to foreign direct investment and licensing.Foreign Direct Investment 65. internalization 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). outsourcing and off-shoring. low value-to-weight ratio products. by limiting imports through quotas. comparative advantage theory B. A. marketing. globally dispersed production. manufacturing. B. marketing. (p. C. By placing tariffs on imported goods. governments increase the attractiveness of FDI and licensing. Similarly. and strategy or because some firm capabilities are not amenable to licensing. 250) By limiting imports through quotas and tariffs.Chapter 07 . distribution theory C. (p. the preference for FDI over licensing by firms as a strategy to enter foreign markets. RCA licensed its leading-edge color television technology to a number of Japanese companies. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 68. RCA licensed its leading-edge color television technology to a number of Japanese companies. 252) In the 1960s. C. This demonstrates that licensing: A. (p. does not give a firm the tight control over manufacturing. which later took over the market. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-63 . D.S. including Matsushita and Sony. 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). who quickly assimilated RCA's technology and used it to enter the U.Chapter 07 . in the 1960s. subscribes to the open source ideology which aids the development of technology unencumbered by market dynamics and fluctuations.Foreign Direct Investment 67. C. may result in a firm's giving away valuable technological know-how to a potential foreign competitor. and strategy in a foreign country that may be required to maximize its profitability. why different nations import goods from other countries even when they are more capable of producing them efficiently. the benefits of exercising protectionism coupled with partial embrace of free market approach. market to compete directly against RCA reducing it to a minor player in its home market. B. D. marketing. For example. Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. the disadvantages associated with the adoption of a completely free market view. 252) The market imperfections approach seeks to explain: A. is a better alternative to help companies from emerging economies to enhance their competitiveness and achieve growth. B. unlike a wholly owned subsidiary. a firm's competitive advantage is based entirely on its products with management. (p. or it might even cause the licensee to take a loss. T. one of the drawbacks of licensing is that: A. a licensee would probably not accept impositions. it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 70. and strategy in a foreign country that may be required to maximize its profitability. because it would likely reduce the licensee's profit. strategic rivalry D. technological exchange C. the licensee bears the costs or risks. An early variant of this argument was expounded by F.Foreign Direct Investment 69. (p. it does not give a firm the tight control over manufacturing. marketing. 253) The strategic behavior theory seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of _____ between firms in the global marketplace. who looked at the relationship between FDI and rivalry in oligopolistic industries. C. A. A problem with licensing is that it does not give a firm the tight control over manufacturing.Chapter 07 . B. 252) According to internalization theory. when a firm allows another enterprise to produce its products under license. marketing. D. marketing. The rationale for wanting control over the strategy of a foreign entity is that. and manufacturing capabilities playing nominal roles. Knickerbocker. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-64 . and strategy in a foreign country that may be required to maximize its profitability. strategic trade B. corporate espionage Strategic behavior theory is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. Chapter 07 . interdependence A critical competitive feature of oligopolistic industries is interdependence of the major players: What one firm does can have an immediate impact on the major competitors. cooperation D. collaboration C. B. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-65 . mushrooming industry. An oligopoly is an industry composed of a limited number of large firms (e. forcing a response in kind. 253) An industry composed of a limited number of large firms is referred to as a(n): A. oligopoly.g. C. 253) A critical competitive feature of oligopolistic industries is the _____ of the major players. D. (p. monopoly. A. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 72..Foreign Direct Investment 71. (p. lack of interaction B. syndicate. an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly). imitative behavior D. A. higher demand A critical competitive feature of oligopolistic industries is interdependence of the major players. forcing them to respond with similar price cuts to retain their market share. will also respond with similar price cuts. (p. By cutting prices.Chapter 07 . lowered supply C. C. one firm in an oligopoly can take market share away from its competitors. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 74. its competitors: A.Foreign Direct Investment 73. 253) The interdependence between firms in an oligopoly leads to _____. Thus. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-66 . one firm in an oligopoly can take market share away from its competitors. trade wars B. rivals often quickly imitate what a firm does in an oligopoly. forcing a response in kind. A critical competitive feature of oligopolistic industries is interdependence of the major players: What one firm does can have an immediate impact on the major competitors. will correspondingly raise prices. the interdependence between firms in an oligopoly leads to imitative behavior. forcing them to respond with similar price cuts to retain their market share. will fill the gap by capturing market share. 253) If one firm in an oligopolistic industry cuts prices. will make profits. B. D. (p. By cutting prices. Foreign Direct Investment 75. national markets. 254) A(n) _____ arises when two or more enterprises encounter each other in different regional markets. the main competitors can incubate growing technologies or business methods in new markets and transfer the gains to established markets. D. Economic theory suggests that rather like chess players jockeying for advantage. Economic theory suggests that rather like chess players jockeying for advantage. 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. 254) The idea behind multipoint competition is to ensure that: A. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-67 . a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 76. cartel D. in much the same way as Boeing and Airbus have done in the aircraft industry. or industries. national markets. monopoly B. firms will try to match each other's moves in different markets to try to hold each other in check. the competitors cooperate with each other to establish a duopolistic regime. multipoint competition Multipoint competition arises when two or more enterprises encounter each other in different regional markets. C. oligopoly C. A. firms will try to match each other's moves in different markets to try to hold each other in check. or industries. B. (p.Chapter 07 . no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers. 254) According to Raymond Vernon. Vernon's view is that firms undertake FDI at particular stages in the life cycle of a product they have pioneered. B. D. 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. global partners. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-68 . (p. and vice versa. first-movers. where labor costs are lower. is seen as the best way to reduce costs. or industries. Fuji is not far behind. C. firms that have pioneered a product undertake FDI in other advanced countries when: A. They invest in other advanced countries when local demand in those countries grows large enough to support local production. Kodak and Fuji are: A. (p. Investment in developing countries. multipoint competitors. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 78. They subsequently shift production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. FDI pioneers. D. Multipoint competition arises when two or more enterprises encounter each other in different regional markets. local demand in those countries grows large enough to support local production. national markets. B.Chapter 07 . C. product standardization gives rise to price competition and cost pressures.Foreign Direct Investment 77. the product is saturated in markets in the developing world. they wish to dump excessive production capacity in foreign markets. 254) If Kodak enters a particular market. where labor costs are lower. developing D. product life-cycle theory. industrialized C. A. market. 254) According to the product life-cycle theory. C. pioneering firms shift production to _____ countries when product standardization and market saturation give rise to price competition and cost pressures. The product life-cycle theory states that often the same firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in foreign markets. other advanced countries B. B.Chapter 07 . (p.S. paradigm of pragmatic internationalism. This pattern of FDI is explained by the: A. 254) Xerox first introduced the photocopier into the U. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 80. absolute advantage theory. free market Raymond Vernon argues that pioneering firms subsequently shift production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. and it was Xerox that set up production facilities in Japan (Fuji Xerox) and Great Britain (Rank Xerox) to serve those markets. is seen as the best way to reduce costs.Foreign Direct Investment 79. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-69 . Xerox introduced the photocopier in the United States. and then set up production facilities in Japan and Great Britain. D. Thus. (p. Investment in developing countries. internalization theory. simply arguing that once a foreign market is large enough to support local production. Eclectic paradigm D.Foreign Direct Investment 81. FDI will occur. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 82. Multipoint competition theory C. Investment theory B. Product life-cycle theory The product life-cycle theory ignores alternatives to FDI. 255) Which theory helps explain how location factors affect the direction of FDI? A. The theory of pragmatic nationalism C.Chapter 07 . The new trade theory The eclectic paradigm has been championed by the British economist John Dunning who argues that location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment. 254) Which of the following theories concerning FDI ignores alternatives such as exporting and licensing and fails to identify when it is profitable to invest abroad? A. instead. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-70 . (p. 254. The eclectic paradigm B. The product life-cycle theory D. such as exporting and licensing. This limits its explanatory power and its usefulness to business in that it fails to identify when it is profitable to invest abroad. (p. Chapter 07 . 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. According to British economist John Dunning. it is part of the social responsibility of businesses. gaining a commanding position in one market and using them to subsidize competitive attacks in other markets. marketing. (p. or management capabilities). manufacturing. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-71 ." B. 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. C. labor is not internationally mobile. The cost and skill of labor varies from country to country. D. B.Foreign Direct Investment 83. this would ensure goodwill and support from the local community. marketing. 255) According to Dunning. utilizing resource assets tied to host countries and valuable enough to be combined with the firm's own unique assets. 255) Location-specific advantages for a firm are those that arise from: A. Since labor is not internationally mobile. acquiring the home markets of foreign firms that threaten a firm's domestic market. (p. C. preferring exporting over licensing in order to retain control over know-how. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 84. they can thus avoid the pitfall of knowledge "spillovers. 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 because: A. D. and strategy. Many of the world's major computer and semiconductor companies. externalities. Economists refer to such knowledge "spillovers" as externalities. Silicon Valley is the world center for the computer and semiconductor industry. this means that Silicon Valley has a location-specific advantage in the generation of knowledge related to the computer and semiconductor industries. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-72 . C. such as Apple Computer. are located close to each other here. According to Dunning. overlaps. D. 255) 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. In Dunning's language. and arises from a network of informal contacts that allows firms to benefit from each others' knowledge generation. an oligopoly. multi-point competition. and a well-established theory suggests that firms can benefit from such externalities by locating close to their source. externalities. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 86. C. D. B. thus offering the location-specific advantage of: A. and Intel. 255) Economists refer to knowledge "spillovers" that occur when companies in the same industry are located in the same area as: A. (p. (p. technology flows. Economists refer to such knowledge "spillovers" as externalities. Hewlett- Packard. first movers. Silicon Valley has a location-specific advantage in the generation of knowledge related to the computer and semiconductor industries that comes from the sheer concentration of intellectual talent in this area. B.Foreign Direct Investment 85.Chapter 07 . corporate espionage. Chapter 07 . national integration B. and technology. political division. jobs. (p. pragmatic nationalism D. democracy According to the radical view. cultural impoverishment. corruption. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination and MNEs already existing in a country should be immediately nationalized. A. radical B. free market C. economic domination C. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 88. only of economic domination. 256) In its extreme version. no country should ever permit foreign corporations to undertake FDI. A. FDI by the firms of advanced capitalist nations keeps the less developed countries of the world relatively backward and dependent on advanced capitalist nations for investment. since they can never be instruments of economic development. economic development. comparative advantage The radical view traces its roots to Marxist political and economic theory. the radical view advances the idea that foreign direct investment can only ever be an instrument of _____. never of _____. according to the extreme version of this view. (p.Foreign Direct Investment 87. Thus. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-73 . 256) The _____ view of FDI traces its roots to Marxist political and economic theory. international peace D. they should be immediately nationalized. which of the following countries would benefit the most from FDI? A. jobs. 256) According to the radical view. Where MNEs already exist in a country. derecognized C. A. illegalized D. Host countries B. 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. and technology. no country should ever permit foreign corporations to undertake FDI. only of economic domination. Advanced. expatriated According to the extreme version of the radical view. 256) The radical view propounds the idea that multinational enterprises (MNEs) that already exist in a country should be immediately ______. Third world countries C. Less developed FDI destinations D. Radical writers see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. since they can never be instruments of economic development. (p. (p.Chapter 07 . nationalized B. capitalist home countries According to the radical view. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-74 . AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 90.Foreign Direct Investment 89. By the end of the 1980s. C.Chapter 07 . The rise of communism in Eastern Europe.Foreign Direct Investment 91. D. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-75 . (p. pragmatic nationalism C. (p. 256) Which of the following is a reason for the decline in the popularity of the radical view? A. the radical position was in retreat almost everywhere due to: (1) the collapse of communism in Eastern Europe. 257) The _____ view argues that international production should be distributed among countries according to the theory of comparative advantage. B. radical 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 by specializing in the production of those goods and services that they can produce most efficiently. and their growing belief that FDI can stimulate economic growth. A. and (3) the strong economic performance of those developing countries that embraced capitalism. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 92. (2) the generally abysmal economic performance of those countries that embraced the radical position. The growing belief in many countries which embraced radicalism that FDI can stimulate growth. The generally steady economic growth of those countries that embraced the radical position. free market D. The strong economic performance of those developing countries that embraced mercantilism. conservative B. The free market view has been ascendant worldwide in recent years. D. Free market view has been endorsed by fewer countries in the last decade than in the 1990s. spurring a global move toward the removal of restrictions on inward and outward foreign direct investment. MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale. the MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. in practice no country has adopted the free market view in its pure form. profits from the investment go abroad. (p. but fails to address the benefits of FDI for the home country. and hence the MNE helps foreign exchange to rotate. B. Viewed this way. The free market view argues that countries should specialize in the production of those goods and services that they can produce most efficiently. A foreign-owned manufacturing plant may import many components from its home country. However. (p. which of the following statements regarding the free market view is true? A. C. Free market view has helped liberate inward FDI but restrictions on outward FDI have largely remained unaffected. C. When an MNE produces products. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 94. No country has adopted the free market view in its pure form. 257) According to the text. Free market view advances the idea that FDI is beneficial to the host country. Within this framework. how does FDI by the MNE increase the efficiency of world economy? A. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-76 . B.Chapter 07 . The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.Foreign Direct Investment 93. D. thus improving the balance of payments of the host country. FDI by the MNE increases the overall efficiency of the world economy. 257) According to the free market view. balance-of-payments position Many countries are also concerned that a foreign-owned manufacturing plant may import many components from its home country. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-77 . inward FDI C.Foreign Direct Investment 95. sovereignty D.Chapter 07 . Britain does so by reserving the right to block foreign takeovers of domestic firms if the takeovers are seen as "contrary to national security interests" or if they have the potential for "reducing competition. which has negative implications for the host country's balance-of-payments position. prohibiting FDIs over and above a certain fixed annual amount. 257) Britain reserves the right to intervene in FDI by: A. A. reserving the right to block foreign takeovers of domestic firms in certain situations. imposing economic sanctions against specific countries. (p. 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 _____. nationalizing certain industries that provide essential goods and services." AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 96. D. B. Governments of countries such as Great Britain and the United States both have still reserved the right to intervene in FDI. C. (p. free trade B. 257) According to the pragmatic nationalistic view. When a foreign company rather than a domestic company produces products. 257) One of the concerns harbored by host nations regarding FDI is that foreign firms will: A. transfer profits to their home countries. According to this view. aggressively court domestic investment. C. The pragmatic nationalist view is that FDI has both benefits and costs.Foreign Direct Investment 97. skills. radical Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. aggressively compete to invest in the country. FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs. the profits from that investment go abroad.Chapter 07 . but those benefits come at a cost. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 98. FDI should be allowed so long as the benefits outweigh the costs. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-78 . D. eclectic B. (p. free market C. pragmatic nationalism D. and jobs. take skilled workers out of the country. A. (p. FDI can benefit a host country by bringing capital. technology. B. 258) According to the _____ view. the benefits of FDI outweighed the perceived costs.S. However. where. 258) Until the 1980s. Japan perceived direct entry of foreign (especially U. pragmatic nationalism. socialism. However. B. D. free market C. the benefits of FDI outweighed the perceived costs.) firms with ample managerial resources into the Japanese markets as detrimental to the development and growth of their own industry and technology. 258) The tendency to aggressively court FDI believed to be in the national interest of a country is an aspect of: A. Japan adopted the _____ view of FDI. This was due to Japan's perception that direct entry of foreign (especially U. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-79 .) firms with ample managerial resources into the Japanese markets could hamper the development and growth of their own industry and technology. where. radical B. leading Japan to block the majority of applications to invest in Japan. offering subsidies to foreign MNEs in the form of tax breaks or grants. This belief led Japan to block the majority of applications to invest in Japan.S.Chapter 07 . there were always exceptions to this policy. it can be inferred that. from the perspective of the Japanese government. for example. One aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by. there were always exceptions to this policy. mercantilism. C. from the perspective of the Japanese government.Foreign Direct Investment 99. Japan's policy was probably one of the most restrictive among countries adopting a pragmatic nationalist stance. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 100. A. eclectic Until the 1980s. From this. (p. the radical view. (p. pragmatic nationalist D. there is increasing evidence of hostile reactions to inward FDI. hostile reactions to inward FDI are not restricted to developing nations. developed nations. there was a hostile political reaction to the attempted takeover of Europe's largest steel company. There is recent evidence of the beginnings of what might become a shift to a more hostile approach to foreign direct investment. In mid-2005 China National Offshore Oil Company withdrew a takeover bid for Unocal of the United States after highly negative reactions in Congress about the proposed takeover of a "strategic asset" by a Chinese company.Chapter 07 .Foreign Direct Investment 101. are hostile to FDI than developing nations. Arcelor. C. blocking FDI inflows into the country. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 7-80 . for example. One aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by. (p. by Mittal Steel. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Topic: Political Ideology and Foreign Investment 102. to a far greater extent. D. D. a global company controlled by the Indian entrepreneur Lakshmi Mittal. In some developed nations. B. 258) In Europe in 2006. adopting a retaliatory stance in bilateral trade. 258) Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of: A. adopting a radical stance to FDI. FDI flow from developing countries to developed ones is largely unwelcome. Venezuela and Bolivia have become increasingly hostile to foreign direct investment. B. C. courting FDI believed to be in national interest. These incidents are evidence to the fact that: A. too. (p. offering subsidies to foreign MNEs in the form of tax breaks or grants. developed countries do not feel the need to court FDIs. The cultural awareness effect. knowledge flow effect. 259) Which of the following sets form three of the main benefits of inward FDI for a host country? A. technology has ensured that R&D is much less skill-intensive than it was two decades ago. developed countries lack the R&D resources and skills required to develop their own indigenous technology. this finding of the study suggests that: A. C. and the reverse resource transfer effect The main benefits of inward FDI for a host country arise from resource-transfer effects. or creating new technology in those countries. and economic development effect D. employment effects. foreign firms are transferring. A study of FDI by OECD found that foreign investors invested significant amounts of capital in R&D in host-countries. first-mover advantage effect. and the balance-of-payments effect B. upgrading.Chapter 07 . (p. 260) A study of FDI by the Organization for Economic Cooperation and Development (OECD) found that foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. B. and the currency-exchange effect C. the employment effect. The resource-transfer effect. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-81 .Foreign Direct Investment 103. The foreign exchange reserves effect. but they may also have been upgrading existing technology or creating new technology. balance-of-payments effects. D. R&D opportunities in less developed countries are more profitable than those in developed countries. suggesting that not only were they transferring technology to those countries. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 104. and effects on competition and economic growth. Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country. the technology effect. According to the text. (p. The labor-transfer effect. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 106. C. resource transfer effects Foreign direct investment can make a positive contribution to a host economy by supplying capital. brings in managers trained in the latest management techniques from the home country. causes local suppliers to hire more people. effects on competition D. whether those operations are acquired or greenfield developments.Foreign Direct Investment 105. whether those operations are acquired or greenfield developments. balance-of-payments effects C. 260) Direct effects of FDI on employment in the host country arise when a foreign MNE: A. Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country. D. Direct effects arise when a foreign MNE employs a number of host-country citizens. This constitutes a benefit of FDI related to _____. employment effects B. (p. and management resources that would otherwise not be available and thus boost that country's economic growth rate. creates jobs because of increased local spending by employees of the MNE. A. technology. employs a number of host country citizens. (p. B. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-82 .Chapter 07 . The effects of FDI on employment are both direct and indirect. thus rendering benefits through a resource transfer effect. 260) Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country. The effects of FDI on employment are both direct and indirect. 261) FDI by Japanese auto companies in the United States has resulted in U.. (p. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-83 . This forms the basis for critics of employment benefits of FDI to argue that: A. direct employment effects of FDI are far larger than the indirect effects. D. a number of employees of the MNE are deputed in subsidiaries in other countries. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 108. the MNE brings in managers from the home country for its operations.owned auto companies. which have lost market share to their Japanese competitors. (p. cannot be counted as actual employment statistics. most jobs in MNEs are of a contract nature and hence. auto firms.Foreign Direct Investment 107.S. C. the net number of new jobs created by FDI may not be as great as initially claimed by an MNE.S.S. Indirect effects arise when jobs are created with local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE.Chapter 07 . 260) One of the indirect effects of FDI on employment in a host country arises when: A. thereby bringing down the net employment statistics. The jobs created by the Japanese auto FDI in the U.- owned auto companies losing market share to their Japanese competitors. a foreign MNE employs a number of host-country citizens. jobs are created because of increased local spending by employees of the MNE.S. majority of employees of an MNE in a host country migrate to more developed countries. B. B. jobs created by this FDI have been more than offset by the jobs lost in U. As a consequence of such substitution effects. 260. C. Cynics argue that not all the "new jobs" created by FDI represent net additions in employment. D. have been more than offset by the jobs lost in U. B. use of profits earned in the host country to subsidize competitive attacks elsewhere. (p. level of involvement of host government in top management decisions of the MNE. 261) A potentially major negotiating point between an MNE wishing to undertake FDI and the host government is the issue of: A. 261) When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment. The issue of the likely net gain in employment may be a major negotiating point between an MNE wishing to undertake FDI and the host government.Chapter 07 . Substitution effects caused by displacement of jobs in domestic firms result in the net number of new jobs created by FDI being significantly lower than what is claimed by the MNE. likely net gain in employment in the host country. reduce employment When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-84 . (p. install local personnel in key management positions C. apply for public funding through an initial public offering D. technology flow between MNEs and their domestic competitors. A. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 110. the immediate effect may be to reduce employment as the multinational tries to restructure the operations of the acquired unit to improve its operating efficiency. the immediate effect may be to _____ as the multinational tries to restructure the operations of the acquired unit to improve its operating efficiency.Foreign Direct Investment 109. D. aggressively recruit local personnel B. C. enterprises acquired by foreign firms tend to grow their employment base at a faster rate than domestic rivals. C. research suggests that once the initial period of restructuring is over. Balance-of-payments A country's balance-of-payments accounts track both its payments to and its receipts from other countries. 261) When FDI takes the form of an acquisition of an established enterprise in the host economy. Greenfield investment B. research suggests that once the initial period of restructuring is over. enterprises acquired by foreign firms tend to: A. even in such cases. (p. (p. B. When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-85 . reduce their pay scales to match those of local companies. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 112. D. the immediate effect may be to reduce employment as the multinational tries to restructure the operations of the acquired unit to improve its operating efficiency. A. engage in downsizing and retrenchment. However. grow their employment base at a faster rate than domestic rivals. Dematerialized C.Chapter 07 . 261) _____ accounts are national accounts that track both payments to and receipts from other countries.Foreign Direct Investment 111. Capitalized D. reduce employment to cut costs and control prices. Governments normally are concerned when their country is running a deficit on the current account of their balance of payments. Current account B. Governments typically prefer to see a current account surplus rather than a deficit. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-86 . economic recession. (p. current account deficit. trade surplus. C. 261) In the balance of payments.Chapter 07 . Tariff account The current account tracks the export and import of goods and services. Internal account D. D. 261) When a country is importing more goods and services than it is exporting. or trade deficit as it is often called. arises when a country is importing more goods and services than it is exporting. positive balance of payment. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 114. A current account deficit. which of the following records transactions involving the export and import of goods and services? A. it is incurring a(n): A.Foreign Direct Investment 113. B. Foreign account C. It raises retrenchments and unemployment levels. bonds. B. C. B. D. and real estate in other countries. 262) How does increased competition through FDI in the form of greenfield investments impact the host country? A. It drives down prices and increases the economic welfare of consumers. (p.Chapter 07 . The efficient functioning of markets depends on an adequate level of competition between producers. (p. borrowing from the IMF. When FDI takes the form of a greenfield investment. D. It causes firms to fight for scarce capital investments. In turn. The only way in which a current account deficit can be supported in the long run is by selling assets to foreigners. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 116. this can increase the level of competition in a national market. 261) The only way in which a current account deficit can be supported in the long run is by: A. divesting stock in domestic corporations. thereby driving down prices and increasing the economic welfare of consumers. selling assets to foreigners. increasing the number of players in a market and thus consumer choice. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-87 . Governments typically prefer to see a current account surplus rather than a deficit. C. It leads to a monopolistic market and unfair pricing.Foreign Direct Investment 115. the result is to establish a new enterprise. purchasing stocks. greenfield investments. tariffs B. (p.Foreign Direct Investment 117. import quotas. Such outflows adversely affect balance-of-payments accounts by showing up as capital outflow on them. B. A foreign subsidiary gets a substantial number of its inputs from the host country. 263) Which of the following is a possible adverse effect of FDI on a host country's balance-of-payments position? A. A. local content requirements C. 263) In the context of costs to a host country from FDI. while _____ 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. mergers with domestic firms. Subsequent outflow of earnings from the foreign subsidiary to its parent company. Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 118. government-backed insurance programs While FDI in the form of greenfield investments should increase competition. Increased competition in the domestic markets. A foreign subsidiary exports a substantial number of its outputs abroad. (p. subsidies. acquisitions of established firms D. Because an acquisition does not result in a net increase in the number of players in a market. it is less clear that this is the case with _____ in the host nation. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-88 .Chapter 07 . D. the effect on competition may be neutral. C. Some governments have responded to outflow of earnings from the foreign subsidiary to its parent company which show up as capital outflows on balance-of-payment accounts by restricting the amount of earnings that can be repatriated to a foreign subsidiary's home country. D. profitable returns on their investments. (p. invested in businesses concerning national security and sovereignty. Such outflows show up as capital outflow on balance-of-payments accounts. reinvested in the host-market. economic interest in their host countries.Foreign Direct Investment 119. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 120. repatriated to a foreign subsidiary's home country. 263) Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Some governments have responded to such outflows by restricting the amount of earnings that can be: A. C. The concern is that key decisions that can affect the host country's economy will be made by a foreign parent that has no real commitment to the host country. C. earned by the foreign subsidiaries. 263) Some host countries fear a loss of economic independence through FDI as key decisions that can affect their economies will be made by foreign parents that have no: A. investment in the education and health of the population. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-89 . D. (p. Some host governments worry that FDI is accompanied by some loss of economic independence. real commitment to their host countries.Chapter 07 . and over which the host country's government has no real control. B. B. C. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-90 . Migration of skilled labor from host-countries improves the available pool of human resources and creates new jobs. It raises the ethnic profile of a country by assimilating a diverse group of employees into production facilities in the home country. It can be assured of reciprocal FDI from the host countries. which of the following is a home-country benefit source to FDI? A. D. Benefits from FDI arise when the home-country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 122. B." The most important concerns center on the balance-of-payments and employment effects of outward FDI. an MNE can learn about superior management techniques and superior product and process technologies. Through its exposure to a foreign market. the most important concerns regarding the costs of FDI for the home-country center on: A. (p. Home country MNE learns valuable skills from its exposure to foreign markets. the import of substantial input from abroad and being held to "economic ransom. B. 264) According to the text.Foreign Direct Investment 121. the technology capture effect and the perceived loss of national sovereignty. 264) According to the text.Chapter 07 . C. (p. the reverse-resource transfer effect and the exposure to foreign markets caused by FDI. D. the balance-of-payments and employment effects of outward FDI. in shipping industries. If the labor market in the home country is already tight. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-91 . B. the most serious concerns arise when FDI is seen as a substitute for _____. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Topic: Benefits and Costs of FDI 124. to serve the home market. domestic production D. if the home country is suffering from unemployment. greenfield investments With regard to employment effects. D. the most serious concerns arise when FDI is seen as a substitute for domestic production. 265) Offshore production refers to FDI undertaken: A. licensing C. with little unemployment. 264) With regard to employment effects in home countries.Chapter 07 . (p.Foreign Direct Investment 123. Far from reducing home-country employment. (p. C. A. in service industries with a large migrant employee base. such as oil and gas. this concern may not be that great. with focus on extractive industries. concern about the export of jobs may arise. However. capital investments B. The term offshore production refers to FDI undertaken to serve the home market. such FDI may actually stimulate economic growth (and hence employment) in the home country by freeing home-country resources to concentrate on activities where the home country has a comparative advantage. C. and the inability to transfer profits back home. B. war losses. The types of foreign investment risks insurable through government-backed programs include the risks of expropriation (nationalization). 265) As a further incentive to encourage domestic firms to undertake FDI. (p. C. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-92 . tax on the income of the corporate workforce and the tax on the dividend earned by shareholders.Chapter 07 . tax on the amount of earnings of the firm and tax on interest earned from such earnings. One of the types of risks insurable through these programs is the risk of: A. domestic competition. the inability to transfer profits back home. or the: A. substitution of domestic production.e. D. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 126.Foreign Direct Investment 125. 265) Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. Such programs are particularly useful in encouraging firms to undertake investments in politically unstable countries. taxation of income in both the host country and the home country. many countries have eliminated double taxation of foreign income. taxation of an MNE's employee's salary in both the host. As a further incentive to encourage domestic firms to undertake FDI.and home-country. (p. B. poor strategic tie-ups. many countries have eliminated double taxation of foreign income (i.. taxation of income in both the host country and the home country). D. Such incentives take many forms. and grants or subsidies. The objective behind such policies is to create jobs at home rather than in other nations. Reducing interest rates earned on domestic investments Virtually all investor countries. It is common for governments to offer incentives to foreign firms to invest in their countries. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-93 . have exercised some control over outward FDI from time to time. low-interest loans. but the most common are tax concessions. Eliminating double taxation of foreign income B. require that local investors own significant proportion of the equity. Withdrawing government-backed insurance programs to local investors D. (p. (p. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 128. Manipulating tax rules to encourage their firms to invest at home C. B. 266) To encourage inward FDI. Countries have occasionally manipulated tax rules to try to encourage their firms to invest at home. 266) Which of the following is a home-country policy for limiting outward FDI? A. exclude foreign companies from specific industries. offer tax concessions to firms that invest in their countries.Chapter 07 . establish control over the behavior of the MNE's local subsidiary. D. it is increasingly common for governments to: A. including the United States. C.Foreign Direct Investment 127. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 130. but the most common are tax concessions. and (2) performance requirements related to local content. Grants or subsidies B. Ownership restraints C. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-94 . Such incentives take many forms. Tax concessions It is common for governments to offer incentives to foreign firms to invest in their countries. B. 266) Which of the following is NOT a common incentive that governments offer foreign firms to invest in their countries? A.Chapter 07 . voluntary export restrictions and employment restraints. and grants or subsidies. D. ownership restraints and performance requirements. Low-interest loans D. (p. The two most common are: A. C. low-interest loans.Foreign Direct Investment 129. monetary restraints and prohibition on investing in certain countries. exports. often in the form of excluding foreign firms from specific fields or limiting foreign ownership stake in local subsidiaries. The two most common types of control exercised by host governments to restrict FDI are: (1) ownership restraints. 266) Host governments use a range of controls to restrict inward FDI. and technology transfer. (p. tax concessions and government-backed insurance. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 132. 267) Many services have to be produced where they are sold. Given this. hence _____ is not an option.Chapter 07 . contain environmental and labor agreements that were binding on the signatories. FDI B.Foreign Direct Investment 131. (p. liberalize rules governing FDI between OECD states. free signatory states to pick and choose their individual FDI policies. the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors. the WTO has become involved in regulations governing FDI. the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would: A. make it legal for signatory states to discriminate against foreign investors. (p. greenfield investment D. D. This would liberalize rules governing FDI between OECD states. exporting is not an option (for example. exporting The WTO embraces the promotion of international trade in services. 267) In 1995. A. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-95 . one cannot export McDonald's hamburgers or consumer banking services). Since many services have to be produced where they are sold. B. In 1995. C. franchising C. S. primarily because _____ refused to sign the agreement. found to be too restrictive. contained too many exceptions that would weaken its powers. 267) In 1995. the United States OECD-initiated talks for liberalizing rules governing FDI between OECD states through the multilateral agreement on investment (MAI) broke down in early 1998 primarily because the United States refused to sign the agreement. C. Japan D. contained binding environmental and labor agreements that the U.Chapter 07 . These talks broke down in early 1998. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-96 . 267) The United States refused to sign the multilateral agreement on investment (MAI) in 1998 because it: A. Malaysia and India B. the proposed agreement contained too many exceptions that would weaken its powers. Germany C. A.Foreign Direct Investment 133. (p. According to the United States. would not have allowed restricting foreign television programs and music in the name of preserving culture. would have barred discriminatory taxation of foreign-owned companies. the proposed agreement contained too many exceptions that would weaken its powers. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 134. the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors. B. According to the United States. OECD-initiated talks for liberalizing rules governing FDI between OECD states through the multilateral agreement on investment (MAI) broke down in early 1998 primarily because the United States refused to sign the agreement. (p. D. Chapter 07 . global oligopolies. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-06 Topic: Focus on Managerial Implications 7-97 . licensing. foreign direct investment. 268) Firms for which licensing is not a good option include: A. C. and (3) Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations. (p. industries where transportation costs are high. 269) Although it normally involves much longer-term commitments. the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits. industries characterized by low cost pressures. Franchising is essentially the service-industry version of licensing. D. D. exporting. Firms for which licensing is not a good option tend to be clustered in three types of industries: (1) High-technology industries. B. although it normally involves much longer-term commitments than licensing. greenfield investment. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-06 Topic: Focus on Managerial Implications 136. (p. (2) Global oligopolies. C. low-technology industries. With franchising.Foreign Direct Investment 135. franchising is essentially the service industry version of: A. B. To be more precise. (p. citizen.Foreign Direct Investment 137. B. the U. The number of comparable alternatives available to each side. Department of Commerce describes FDI as follows: FDI occurs whenever a U. Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. the outcome of any negotiated agreement depends on the relative bargaining power of both parties. and (3) each party's time horizon. D. Foreign Direct Investment in the World Economy 7-98 . Each party's time horizon. The value each side places on what the other has to offer. 242. organization. The flow of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year). Each side's bargaining power depends on three factors: (1) the value each side places on what the other has to offer.S. or affiliated group takes an interest of 10 percent or more in a foreign business entity. (p. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Topic: Introduction.S. 270) Which of the following is NOT one of the factors that a party's bargaining power depends upon when negotiating? A. C. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 07-06 Topic: Focus on Managerial Implications Essay Questions 138. 243) What is meant by the term foreign direct investment? Describe the difference between the flow of foreign direct investment and the stock of foreign direct investment. The number of people on the negotiation panel. The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time. (2) the number of comparable alternatives available to each side.Chapter 07 . To a large degree. it need not bear the costs or risks of FDI. or management skills. Second. foreign firms are acquired because those firms have valuable strategic assets. First. Similarly.Chapter 07 . there is a greater probability that a firm undertaking FDI in a foreign culture will make costly mistakes due to ignorance. since these are borne by the native firm that licenses the know-how. when a firm licenses its know-how. Other things being equal. relative to firms native to a culture. it need not bear the costs of FDI. technology. (p. customer relationships.Foreign Direct Investment 139. 249) When contemplating FDI. and the like. why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments? There are several factors that dictate that acquiring existing assets rather than undertaking greenfield investments is a more profitable way to enter a foreign market. and the risks associated with selling abroad can be reduced by using a native sales agent. Third. This is an important consideration in the modern business world where markets evolve very rapidly. then their global rivals will. FDI is risky because of the problems associated with doing business in another culture where the "rules of the game" may be very different. As a result. (p. mergers and acquisitions are quicker to execute than greenfield investments. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Topic: Foreign Direct Investment in the World Economy 140. distribution systems. It is easier and perhaps less risky for a firm to acquire those assets than to build them from the ground up through a greenfield investment. production systems. When a firm exports. Many firms apparently believe that if they do not acquire a desirable target firm. trademarks or patents. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-99 . such as brand loyalty. FDI has been described as an "expensive" and "risky" international growth strategy. firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital. 250) Despite its advantages. why is FDI expensive and risky when compared to licensing and exporting? FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise. it becomes unprofitable to ship some products over a large distance. a firm may want to retain control over these functions. and manufacturing capabilities that produce those products. Discuss the most common limitations of exporting as compared to FDI. (p. governments increase the attractiveness of FDI. 250) When a firm exports. For such products. is not without its limitations. (p. Often. First. 252) Name three reasons why licensing may not be an attractive option. However. When transportation costs are added to production costs. governments can increase the cost of exporting relative to foreign direct investment and licensing. marketing. The problem is that a firm's know-how may not be amenable to licensing. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-100 . By placing tariffs on imported goods.Chapter 07 . AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 142. Exporting. and strategy in a foreign country that may be required to profitably exploit its advantage in know-how. and strategy is granted to a licensee in return for a royalty fee. Similarly. A third problem with licensing arises when the firm's competitive advantage is based not as much on its products as on the management. marketing. licensing does not give a firm the tight control over manufacturing. Second. relative to FDI. by limiting imports through quotas. licensing may result in a firm's giving away its know-how to a potential foreign competitor. This is particularly true of products that have a low value-to-weight ratio and that can be produced in almost any location. Trade barriers do not have to be physically in place for FDI to be favored over exporting. marketing. the desire to reduce the threat that trade barriers might be imposed is enough to justify foreign direct investment as an alternative to exporting. for both strategic and operational reasons. The viability of an exporting strategy is often constrained by transportation costs and trade barriers. and it can reduce the risks associated with selling abroad by using a native sales agent. control over production. some firms undertake foreign direct investment as a response to actual or threatened trade barriers such as import tariffs or quotas.Foreign Direct Investment 141. Transportation costs aside. With licensing. it need not bear the costs associated with FDI. the attractiveness of exporting decreases. This is particularly true of management and marketing know-how. however. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 7-101 . (p.Foreign Direct Investment 143. The eclectic paradigm attempts to combine the two other perspectives of FDI into a single holistic explanation (this theoretical perspective is eclectic because the best aspects of other theories are taken and combined into a single explanation).The principal champion of the eclectic paradigm is British economist John Dunning. 254) What is multipoint competition? What typically occurs when two or more enterprises are multipoint competitors? Multipoint competition arises when two or more enterprises encounter each other in different regional markets. it requires the firm to establish production facilities where those foreign assets or resource endowments are located. 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. national markets.Chapter 07 . 254) Describe what is meant by the eclectic paradigm? Who is its principal champion? Does this paradigm make sense as a rationale for FDI? The eclectic paradigm argues that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. or industries. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Topic: Theories of Foreign Direct Investment 144. 250. Economic theory suggests that these firms will try to match each other's moves in different markets to try to hold each other in check. (p. Foreign Direct Investment 145. only of economic domination. (p. The pragmatic nationalist view is that FDI has both benefits and costs. many countries have adopted neither a radical policy nor a free market policy toward FDI. In practice. According to this view. and technology. according to the radical view. 257. technology. Thus. Countries should specialize in the production of those goods and services that they can produce most efficiently. 258) Describe the three political ideologies relating to foreign direct investment. Viewed this way. FDI by the MNE increases the overall efficiency of the world economy. no country should ever permit foreign corporations to undertake FDI. countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. jobs. Because of this. Recognizing this. The free market view of FDI traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo. skills. 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. Where MNEs already exist in a country. since they can never be instruments of economic development. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. The radical view of FDI traces its views to Marxist political and economic theory. but instead a policy that can best be described as pragmatic nationalism. the MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. according to the extreme version of this view. Within this framework. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. but those benefits come at a cost.Chapter 07 . 256. and jobs. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Direct Investment 7-102 . They argue that MNEs extract profits from the host country and take them to their home country. FDI can benefit a host country by bringing capital. FDI should be allowed so long as the benefits outweigh the costs. they should be immediately nationalized. giving nothing of value to the host country in exchange. Chapter 07 - Foreign Direct Investment 146. (p. 258, 259) Briefly describe the trends in the ideological shift in attitudes toward FDI as evidenced in countries across the globe. Recent years have seen a marked decline in the number of countries that adhere to a radical ideology. Although few countries have adopted a pure free market policy stance an increasing number of countries are gravitating toward the free market end of the spectrum and have liberalized their foreign investment regime. This includes many countries that less than two decades ago were firmly in the radical camp (e.g. the former communist countries of Eastern Europe and many of the socialist countries of Africa) and several countries that until recently could best be described as pragmatic nationalists with regard to FDI (e.g. Japan, South Korea, Italy, Spain, and most Latin American countries). One result has been the surge in the volume of FDI worldwide, which, as noted earlier, has been growing twice as fast as the growth in world trade. Another result has been an increase in the volume of FDI directed at countries that have recently liberalized their FDI regimes, such as China, India, and Vietnam. As a counterpoint, there is recent evidence of the beginnings of what might become a shift to a more hostile approach to foreign direct investment. Venezuela and Bolivia have become increasingly hostile to foreign direct investment. In some developed nations, too, there is increasing evidence of hostile reactions to inward FDI in the form of extreme political reactions to attempted takeovers of firms originating from these countries by firms based in developing nations. So far, these countertrends are nothing more than isolated incidents, but if they become more widespread, the 30-year movement toward lower barriers to cross-border investment could be in jeopardy. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Topic: Political Ideology and Foreign Direct Investment 7-103 Chapter 07 - Foreign Direct Investment 147. (p. 259, 260, 261, 262) Briefly describe on any two main benefits of FDI for a host-country. The main benefits of FDI for the host country are the resource-transfer effect, the employment effect, the balance-of-payments effect, and effects on competition and economic growth. These potential benefits are explained in more detail below. The Resource-Transfer Effect: FDI can make a positive contribution to a host country by supplying capital, technology, and management resources that would otherwise not be available. The Employment Effects: Another beneficial employment effect claimed for FDI is that it brings jobs to a host country that would otherwise not be created there. 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 Balance-of-Payment Effects: The effect of FDI on a country's balance-of- payments account is an important policy issue for most host governments. Governments typically like to see a balance-of-payments surplus rather than a deficit. There are two ways that FDI can help a host country experience a balance-of-payments surplus. First, if the FDI is a substitute for imports of goods or services, it can improve a country's balance of payments. A second potential benefit arises when the MNE uses a foreign subsidiary to export goods and services to other countries. Effect on competition and economic growth: Economic theory tells us that the efficient functioning of markets depends on an adequate level of competition between producers. When FDI takes the form of a greenfield investment, the result is to establish a new enterprise, increasing the number of players in a market and thus consumer choice. In turn, this can increase the level of competition in a national market, thereby driving down prices and increasing the economic welfare of consumers. Increased competition tends to stimulate capital investments by firms in plant, equipment, and R&D as they struggle to gain an edge over their rivals. The long-term results may include increased productivity growth, product and process innovations, and greater economic growth. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-04 Topic: Benefits and Costs of FDI 7-104 Chapter 07 - Foreign Direct Investment 148. (p. 265, 266) How can governments restrict outward flow of FDI? Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time. One policy has been to limit capital outflows out of concern for the country's balance of payments. Although such measures are intended to improve a country's balance of payments, an important secondary intent is usually to make it difficult for domestic firms to undertake FDI. In addition, countries have occasionally manipulated tax rules to try to encourage their firms to invest at home. The objective behind such policies is to create jobs at home rather than in other nations. Finally, countries sometimes prohibit national firms from investing in certain countries for political reasons. Such restrictions can be formal or informal. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-105 (p. In other industries. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 7-106 . technology transfer. They are excluded from tobacco and mining in Sweden and from the development of certain natural resources in Brazil. First. foreign firms are often excluded from certain sectors on the grounds of national security or competition. and local participation in top management. The most common performance requirements are related to local content. 266. The two most common ways are: (1) Ownership restraints can take several forms. exports.Foreign Direct Investment 149. ownership restraints seem to be based on a belief that local owners can help to maximize the resource- transfer and employment benefits of FDI for the host country.Chapter 07 . foreign ownership may be permitted although a significant proportion of the equity of the subsidiary must be owned by local investors. The rationale underlying ownership restraints seems to be twofold. the feeling seems to be that local firms might not be able to develop unless foreign competition is restricted by a combination of import tariffs and controls on FDI. and Morocco. performance requirements tend to be more common in less developed countries than in advanced industrialized nations. 267) Briefly explain the two most common types of control exercised by host- governments to restrict the inward flow of FDI. Host governments use a wide range of controls to restrict FDI in one way or another. However. Many countries employ some form of performance requirements when it suits their objectives. foreign companies are excluded from specific fields. Performance requirements are controls over the behavior of the MNE's local subsidiary. (2) Performance requirements can also take several forms. Finland. Second. Particularly in less developed countries. In some countries. 268) What are the types of industries for which licensing is not a good option? Firms for which licensing is not a good option tend to be clustered in three types of industries: (1) High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous. 267) What has been the role of international organizations in the liberalization of FDI? Until the 1990s. (p. (2) Global oligopolies. Both these agreements contained detailed clauses that require signatories to liberalize their regulations governing inward FDI. particularly in services. two extensive multinational agreements were reached in 1997 to liberalize trade in telecommunications and financial services. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-06 Topic: Focus on Managerial Implications 7-107 .Chapter 07 . primarily because the United States refused to sign the agreement. essentially opening their markets to foreign telecommunications and financial services companies. would liberalize rules governing FDI between OECD states. The WTO has become involved in regulations governing FDI. This changed with the formation of the World Trade Organization in 1995. the thrust of the WTO's efforts has been to push for the liberalization of regulations governing FDI.Foreign Direct Investment 150. The aim of the talks was to draft a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors and thus. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 07-05 Topic: Government Policy Instruments and FDI 151. there was no consistent involvement by multinational institutions in the governing of FDI. (p. In an attempt to make some progress on this issue of WTO and developing nations. As might be expected for an institution created to promote free trade. These talks broke down in early 1998. the Organization for Economic Cooperation and Development in 1995 initiated talks between its members. in which competitive interdependence requires that multinational firms maintain tight control over foreign operations so that they have the ability to launch coordinated attacks against their global competitors. The WTO embraces the promotion of international trade in services. (3) Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations (so that they can disperse manufacturing to locations around the globe where factor costs are most favorable in order to minimize costs). Under the auspices of the WTO. (4) there is no compelling reason for McDonald's to have tight control over franchisees. With franchising. 269. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor's brand name.Chapter 07 . This strategy makes sense for McDonald's because (1) like many services.g. fast food cannot be exported. 270) What is franchising? With a suitable example.Foreign Direct Investment 152. is amenable to being specified in a written contract (e. Franchising is essentially the service-industry version of licensing. (p. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Hard Learning Objective: 07-06 Topic: Focus on Managerial Implications 7-108 . (2) franchising economizes the costs and risks associated with opening up foreign markets. a firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits.. the contract specifies the details of how to run a McDonald's restaurant). and (5) McDonald's know-how. (3) unlike technological know-how. brand names are relatively easy to protect using a contract. McDonald's has expanded globally by using a franchising strategy. explain how franchising can be a profitable alternative to FDI. in terms of how to run a fast-food restaurant. although it normally involves much longer-term commitments than licensing. McDonald's allows foreign firms to use its brand name so long as they agree to run their restaurants on exactly the same lines as McDonald's restaurants elsewhere in the world. A good example is the fast-food industry.