Foreign Direct Investment

Foreign Direct Investment

1.A firm becomes a multinational enterprise when it undertakes foreign direct investment.

2.Licensing involves the establishment of a new operation in a foreign country.

3.If a firm that makes bicycles in Germany acquires a French bicycle producer, Greenfield investment has taken place.

4.The amount of FDI undertaken over a given time period is known as the flow of FDI.

5.The total accumulated value of foreign-owned assets at a given time is the inflow of FDI.

6.FDI is seen by executives as a means of circumventing future trade barriers.

7.Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets.

8.The total amount of capital invested in factories, stores, office buildings and the like is referred to as the stock of FDI.

9.The largest source country for FDI has been China.

10.About 27 percent of the world's largest 100 nonfinancial multinationals in 2004 were American companies.

11.In developing countries, about one third of FDI is in the form of mergers and acquisitions.

12.In 2004, about two thirds of FDI stock was in service industries.

13.As compared to exporting and licensing, FDI is the more expensive and risky.

14.Internalization theory is also known as the market imperfections approach.

15.One of the problems of licensing is that it may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

16.An oligopoly is an industry composed of a limited number of large firms.

17.When two or more enterprises encounter each other in different regional markets, national markets or industries regional competition occurs.

18.According to Vernon, location specific advantages can help explain the nature and direction of FDI.

19.Dunning, in the eclectic paradigm theory, suggests that a firm must establish production facilities where foreign assets or resource endowments necessary to the production of the product exist.

20.Pragmatic nationalism traces its roots to Marxist political and economic theory.

21.Classical economics and the international trade theories of Adam Smith and David Ricardo form the basis for the free market view.

22.The free market view argues that FDI is a benefit to both the source country and to the host country.

23.Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs.

24.An aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.

25.Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology and management resources that would otherwise not be available and thus boost that country's economic growth rate.

26.There is research supporting the view that multinational firms often transfer significant technology when they invest in a foreign country.

27.Jobs created in local suppliers as a result of the MNE's investment and jobs created because of increased local spending by employees of the MNE are examples of direct employment effects of FDI.

28.Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI.

29.A country's balance of payments accounts keep track of both its payments to and its receipts from other countries.

30.A current account deficit exists when a country imports more than it exports.

31.In recent years, the U.S. has run a persistent balance of payments surplus.

32.Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors.

33.FDI does not benefit the host country's balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate goods or complementary products.

34.The term offshore production refers to FDI undertaken to serve the home market.

35.Countries cannot prohibit national firms from investing in certain countries for political reasons.

36.The two most common methods of restricting inward FDI are ownership restraints and performance requirements.

37.The WTO has been very successful in efforts to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI.

38.Licensing is a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance.

39.Typically licensing will be a common strategy in oligopolies where 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.

40.Licensing is more common in fragmented, low-tech industries in which globally dispersed manufacturing is not an option.

Multiple Choice Questions

41.FDI occurs when a
A.Domestic firm imports products and services from another country
B.Firm ships its product from one country to another
C.Firm invests in the stock of another company
D.Firm invests directly in facilities to produce and/or market a product in a foreign country

42.A Greenfield investment
A.Is a form of FDI that involves the establishment of a new operation in a foreign country
B.Involves a 7 percent stock in an acquired foreign business entity
C.Involves a merger with a foreign business
D.Occurs when a firm acquires another company in a foreign country

43.If General Electric, a U.S. based corporation, purchased a 50% interest in a company in Italy, that purchase would be an example of a(n)
A.Minority acquisition
B.Outright stake
C.Majority acquisition
D.Greenfield investment

44.The amount of FDI undertaken over a given time period is
A.The flow of FDI
B.The stock of FDI
C.The FDI outflow
D.The FDI inflow

45.The stock of FDI is
A.The amount of FDI undertaken over a given period of time
B.The total accumulated value of foreign owned assets at a given time
C.The flow of FDI out of a country
D.The flow of FDI into a country

46.FDI has been rising for all of the following reasons, except
A.The globalization of the world economy
B.The general increase in trade barriers over the past 30 years
C.Firms are trying to circumvent trade barriers
D.There is a shift toward democratic political institutions and free market economies

47.Historically, most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in
A.Underdeveloped, underdeveloped countries
B.Developed, underdeveloped countries
C.Developed, each other's markets
D.Underdeveloped, each other's markets

48.The U.S. has been an attractive target for FDI because of all of the following reasons, except
A.Its small and wealthy domestic markets
B.Its dynamic and stable economy
C.Its favorable political environment
D.Its openness to FDI

49.Identify the incorrect statement regarding the direction of FDI.
A.Historically, most FDI has been directed at the developing nations of the world
B.During the 1980s and 1990s, the United States was often the favorite target for FDI inflows
C.The developed nations of the EU have received significant FDI inflows
D.Recent inflows into developing nations have been targeted at the emerging economies of South, East and Southeast Asia

50.Africa is not a popular destination for FDI because of all of the following reasons, except
A.Political unrest in the region
B.Armed conflict in the region
C.Liberalization of FDI regulations
D.Frequent policy changes in the region

51.The total amount of capital invested in factories, stores, office buildings and the like is summarized by
A.Gross fixed capital formation
B.Total investment capital
C.Total tangible investment
D.Gross depreciable investments

52.The largest source country for FDI since World War II has been
A.Japan
B.China
C.The United States
D.The United Kingdom

53.Most cross-border investment is
A.In the form of Greenfield investments
B.Made via mergers and acquisitions
C.Between American and Japanese companies
D.Involved in building new facilities

54.Which of the following is not a reason why firms prefer to acquire existing assets rather than undertake green-field investments?
A.Foreign firms are acquired because those firms have valuable strategic assets
B.Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital, technology or management skills
C.Even though Greenfield investments are comparatively less risky for a firm acquisitions always yield higher profits
D.Mergers and acquisitions are quicker to execute than green-field investments

55.In developing nations most FDI inflows are in the form of
A.Mergers
B.Greenfield investments
C.Acquisitions
D.Non-profit organizations

56.The sector composition of FDI shows that by 2004 approximately _____ of FDI stock was in service industries.
A.One fourth
B.One third
C.Two third
D.Half

57.The rise in FDI in the services sector is a result of all of the following, except
A.The general move in many developed countries away from manufacturing and toward services
B.Accelerating regulations of services
C.Many services cannot be traded internationally
D.Many countries have liberalized their regimes governing FDI in services

58.When strategic assets such as brand loyalty, customer relationships or distribution systems are important, _____ investments are more appropriate.
A.Merger and acquisition
B.Greenfield
C.Portfolio
D.New construction

59._____ 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.Horizontal FDI
B.Licensing
C.Vertical FDI
D.Greenfield investment

60.In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market.
A.Licensee
B.Licensor
C.Acquiring firm
D.Greenfield investor

61.Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
A.Internalization theory
B.Internationalization theory
C.Perfect markets theory
D.Small markets theory

62.According to the internalization theory, all of the following are drawbacks of licensing as a strategy for exploiting foreign market opportunities, except
A.Licensing does not grant control over manufacturing, marketing and to a licensee in return for a royalty fee
B.Licensing may result in a firm's giving away its know-how to a potential foreign competitor
C.Licensing does not give the firm the tight control over manufacturing, marketing and strategy that may be required to profitably exploit its advantage
D.A firms capabilities such as the management, marketing and manufacturing are often not amenable to licensing

63.______is also known as market imperfections theory.
A.Internationalization theory
B.Internalization theory
C.Perfect markets theory
D.Small markets theory

64.If four firms control 80 percent of a domestic market, then ______exists.
A.An oligopoly
B.A monopoly
C.An oligarchy
D.Vertical integration

65.According to Knickerbocker
A.The firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market
B.When a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments
C.Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI
D.Impediments to the sale of know-how increase the profitability of FDI relative to licensing

66.The eclectic paradigm was developed by
A.F. T. Knickerbocker
B.Adam Smith
C.Raymond Vernon
D.John Dunning

67.When two or more enterprises encounter each other in different regional markets, national markets or industries, there is
A.Vertical integration
B.Horizontal integration
C.Multipoint competition
D.Monopolistic competition

68.The product life cycle suggests that
A.Often the same firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in foreign markets
B.When a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments
C.Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI
D.Impediments to the sale of know-how increase the profitability of FDI relative to licensing

69.The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located.
A.Product life cycle
B.Strategic behavior theory
C.Multipoint competition theory
D.Eclectic paradigm

70.Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are known as
A.Location specific advantages
B.Resource specific advantages
C.Competitive advantages
D.Directional advantages

71.John Dunning, a champion of the eclectic paradigm, argues that
A.The firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market
B.When a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments
C.Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI
D.Impediments to the sale of know-how increase the profitability of FDI relative to licensing

72.According to the _____ view of FDI, MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
A.Imperialist
B.Conservative
C.Free market
D.Radical

73.Which of the following is not a reason that the radical position of MNEs was in retreat by the end of the 1980s?
A.The strong economic performance of those developing countries that embraced capitalism rather than radical ideology
B.The collapse of communism in Eastern Europe
C.The generally abysmal economic performance of those countries that embraced the radical position
D.A growing belief in many capitalist countries that MNE's tightly controls key technology and that important jobs in the MNEs' foreign subsidiaries go to home-country nationals

74.According to _____ international production should be distributed among countries according to the theory of comparative advantage.
A.The radical view
B.The eclectic view
C.Pragmatic nationalism
D.The free market view

75.A distinctive aspect of _____ is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.
A.The dogmatic view
B.Pragmatic nationalism
C.The radical view
D.The conservative view

76.When a company brings capital and/or technology to a host country, the host country benefits from the
A.Competitive effect of FDI
B.The resource transfer effect of FDI
C.The balance of payments effect of FDI
D.The effect on competition and economic growth

77.When jobs are created in local suppliers as a result of the FDI and when jobs are created because of increased local spending by employees of the MNE, the MNE has a _____ effect on employment.
A.Direct
B.Indirect
C.Inward
D.Outward

78.A _____ keeps track of a country's payments to and its receipts from other countries.
A.Federal payments ledger
B.Current accounting system
C.Checks and balances account
D.Balance of payments account

79.The _____ tracks the export and import of goods and services. A current account deficit or trade deficit as it is often called, arises when a country is importing more goods and services than it is exporting.
A.Current account
B.Debit account
C.Surplus account
D.Capital account

80.Three costs of FDI concerns of host countries arise from all of the following except
A.Adverse effects on competition within the host nation
B.Adverse effects on the balance of payments
C.The perceived loss of national sovereignty and autonomy
D.Debit on the current account of the home country's balance of payments

81.FDI undertaken to serve the home market is known as
A.Greenfield investment
B.FDI substitution
C.Offshore production
D.Home market FDI

82.Double taxation is
A.Charging double taxes in the home country
B.Charging double taxes in the host country
C.Taxation of income in both home and host country
D.Paying income taxes at twice the normal rate

83._____ are controls over the behavior of the MNE's local subsidiary.
A.Performance requirements
B.Ownership restraints
C.Double taxation laws
D.Greenfield restrictions

84.Licensing would be a good option for firms in which of the following industries?
A.High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous
B.Global oligopolies, in which competitive interdependence requires that multinational firms maintain tight control over foreign operations
C.Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations
D.In fragmented, low technology industries in which globally dispersed manufacturing is not an option

85._____ is essentially the service industry version of licensing, although it normally involves much longer term commitments.
A.Franchising
B.Subsidizing
C.Greenfield investment
D.Patenting

Essay Questions

86.Discuss the connection between foreign direct investment and multinational enterprises?

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market a product in a foreign country. The U.S. Department of Commerce states that FDI occurs whenever a U.S. citizen, organization or affiliated group takes an interest of 10 percent or more in a foreign business entity. Once affirm undertakes FDI, it becomes a multinational enterprise.

87.What are the two forms of foreign direct investment?

The two forms of FDI are Greenfield investment or establishing a new operation in a foreign country and mergers and acquisitions whereby a company expands internationally through an existing firm. Acquisitions can be minority, majority or a 100% ownership position.

88.Discuss the trends in FDI over the last 30 years. Be sure to differentiate between the stock of FDI and the flow if FDI.

The flow of FDI refers to the amount of FDI undertaken over a given period, while the stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Over the last 30 years there has been a marked increase in both the flow and the stock of FDI in the world economy. Over this period, the flow of FDI accelerated faster than the growth in world trade and world output.

89.Discuss the reasons for the growth in FDI over the last 30 years.

FDI has grown more rapidly than world trade and world output for several reasons. First, many companies see FDI as a means of circumventing potential trade barriers. Second, political and economic changes in many of the world developing nations has been encouraging FDI. Finally, the globalization of the world economy is having a positive impact on the volume of FDI as firms now see the whole world as their market.