Question Bank International Business Essay

Chapter 07Foreign Direct Investment truthful / False Questions1. (p. 242) A rigid becomes a multinational enterprise when it undertakes extraneous admit enthronement. legitimate2. (p. 242) Licensing involves the presidential term of a new operation in a irrelevant state of matter. FALSE3. (p. 242) If a firm that mentions bi bikes in Ger some acquires a French bicycle make upr, Greenfield enthronement has taken place. FALSE4. (p. 242) The kernel of FDI undertaken oer a precondition time period is cognise as the persist of FDI. rightful(a)5. (p. 242) The total collect value of conflicting-owned assets at a given time is the inflow of FDI. FALSE6. (p. 242) FDI is seen by executives as a means of circumventing emerging trade barriers. accredited7. (p. 244) Historic altogethery, near FDI has been necessitateed at the au accordinglytic nations of the macrocosm as firms based in advanced countries invested in the seduceer(a)s grocerys. confessedly8. (p. 246) The to tal amount of enceinte invested in factories, stores, office buildings and the like is referred to as the line of FDI. FALSE9. (p. 246) The largest source outlandish for FDI has been China. FALSE10. (p. 247) About 27 percent of the worlds largest 100 nonfinancial multinationals in 2004 were American companies. true up11. (p. 247) In growing countries, about one leash of FDI is in the form of mergers and achievements. full-strength12. (p. 248) In 2004, about two thirds of FDI stock was in receipts industries. veritable13. (p. 249) As comp ard to exporting and licensing, FDI is the more(prenominal) expensive and risk of infectiony. TRUE14. (p. 250) Internalization possibleness is in like manner known as the marketplace imperfections approach. TRUE15. (p. 250) One of the problems of licensing is that it may result in a firms well-favored away valuable technological know-how to a potential contrasted competitor. TRUE16. (p. 251) An oligopoly is an intentness composed of a limited number of large firms. TRUE17. (p. 252) When two or more enterprises encounter each different in different regional markets, national markets or industries regional competition occurs. FALSE18. (p. 252) check to Vernon, pickle limited advantages can help explain the nature and takeion of FDI. FALSE19. (p. 253) Dunning, in the eclectic persona scheme, suggests that a firm must establish work facilities where foreign assets or option endowments necessary to the increaseion of the ingathering exist. TRUE20. (p. 254) Pragmatic patriotism traces its roots to Marxist semipolitical and frugal theory. FALSE21. (p. 254) immaculate scotchs and the planetary trade theories of Adam Smith and David Ricardo form the basis for the exhaust market expression. TRUE22. (p. 255) The free market view argues that FDI is a benefit to both(prenominal)(prenominal) the source realm and to the host terra firma. TRUE23. (p. 255) Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national be. TRUE24. (p. 256) An aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national affaire by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants. TRUE25. (p. 257) Foreign direct investiture can make a confident(p) contribution to a host economy by give heavy(p), applied science and management resources that would otherwise not be available and thus boost that unsophisticateds economic growth rate. TRUE26. (p. 258) There is research supporting the view that multinational firms oftentimes air significant technology when they invest in a foreign res publica. TRUE27. (p. 258) Jobs created in local suppliers as a result of the MNEs investment and trades created because of increased local spending by employees of the MNE be examples of direct purpose effectuate of FDI. FALSE28. (p. 258) array country citizens that arg on employed by an MNE following an FDI argon an example of an indirect effect of FDI. FALSE29. (p. 259) A countrys rest period of payments accounts keep excision of both its payments to and its receipts from other countries. TRUE30. (p. 259) A current account deficit exists when a country imports more than it exports. TRUE31. (p. 259) In recent years, the U.S. has run a persistent balance of payments surplus. FALSE32. (p. 260) Host governments sometimes worry that the subsidiaries of foreign MNEs may seduce greater economic power than indigenous competitors. TRUE33. (p. 261) FDI does not benefit the host countrys balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate skillfuls or complementary reapings. FALSE34. (p. 262) The term offshore intersection refers to FDI undertaken to servethe home market. TRUE35. (p. 263) Countries cannot prohibit national firms from investing in certain countries for political rea sons. FALSE36. (p. 264) The two most crude methods of restricting inward FDI argon self-possession restraints and performance requirements. TRUE37. (p. 265) The WTO has been very successful in efforts to start talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI. FALSE38. (p. 266) Licensing is a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. FALSE39. (p. 266-267) Typic completelyy licensing lead be a common strategy in oligopolies where competitive interdependence requires that multinational firms maintain idiotic bind over foreign trading operations so that they have the ability to launch coordinated attacks against their orbicular competitors. FALSE40. (p. 267) Licensing is more common in fragmented, low-tech industries in which orbicularly dispersed manufacturing is not an option. TRUEMultiple Choice Questions41. (p. 242) FDI occurs when aA. Domestic firm im ports products and services from another country B. Firm ships its product from one country to anotherC. Firm invests in the stock of another caller-upD. Firm invests at present in facilities to maturate and/or market a product in a foreign country42. (p. 242) A Greenfield investmentA. 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 businessD. Occurs when a firm acquires another company in a foreign countr 43. (p. 242) If General Electric, a U.S. based corporation, purchased a 50% touch in a company in Italy, that purchase would be an example of a(n) A. Minority acquisitionB. Outright stakeC. Majority acquisitionD. Greenfield investment44. (p. 242) The amount of FDI undertaken over a given time period is A. The flow of FDIB. The stock of FDIC. The FDI natural springD. The FDI inflow45. (p. 242) The stock of FDI isA. The amount of FDI undertaken over a given period of timeB. The total accumulated value of foreign owned assets at a given time C. The flow of FDI out of a countryD. The flow of FDI into a country46. (p. 242) FDI has been rising for all of the following reasons, get out A. The globalization of the world economyB. The general increase in trade barriers over the past 30 years C. Firms atomic number 18 trying to circumvent trade barriersD. There is a shift toward democratic political institutions and free market economies47. (p. 244) Historically, most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in A. Underdeveloped, evolution countriesB. Developed, underdeveloped countriesC. Developed, each others marketsD. Underdeveloped, each others markets48. (p. 244) The U.S. has been an attractive target for FDI because of all of the following reasons, except A. Its small and wealthy interior(prenominal) marketsB. Its dynamic and stable economyC. Its f riendly political environmentD. Its openness to FDI49. (p. 244) 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. (p. 246) Africa is not a popular destination for FDI because of all of the following reasons, except A. Political unrest in the regionB. build up conflict in the regionC. Liberalization of FDI regulationsD. Frequent policy changes in the region51. (p. 246) The total amount of capital invested in factories, stores, office buildings and the like is summarized by A. Gross fixed capital formationB. descend investment capitalC. Total tangible investmentD. Gross depreciable investments52. ( p. 246) The largest source country for FDI since World fight II has been A. JapanB. ChinaC. The United StatesD. The United Kingdom53. (p. 247) Most cross-border investment isA. In the form of Greenfield investmentsB. Made via mergers and acquisitionsC. Between American and Japanese companiesD. Involved in building new facilities54. (p. 247) Which of the following is not a reason wherefore firms prefer toacquire existing assets or else 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 change overring 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. (p. 247) In developing nations most FDI inflows are in the form of A . MergersB. Greenfield investmentsC. AcquisitionsD. Non-profit organizations56. (p. 248) The sector composition of FDI shows that by 2004 approximately _____ of FDI stock was in service industries. A. One fourthB. One thirdC. Two thirdD. Half57. (p. 248) 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 servicesC. some(prenominal) services cannot be traded internationallyD. Many countries have liberalized their regimes governing FDI in services 58. (p. 248) When strategic assets such as brand loyalty, customer relationships or distribution systems are important, _____ investments are more appropriate. A. Merger and acquisitionB. GreenfieldC. PortfolioD. New construction59. (p. 249) _____ involves granting a foreign entity the right to produce and sell the firms product in return for a royal house fee on every unit sold. A. Hori zontal FDIB. LicensingC. Vertical FDID. Greenfield investment60. (p. 249) In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market. A. LicenseeB. LicensorC. Acquiring firmD. Greenfield investor61. (p. 250) Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for debut foreign markets. A. Internalization theoryB. internationalisation theoryC. Perfect markets theoryD. Small markets theory62. (p. 250) fit in 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 bear over manufacturing, market and to a licensee in return for a royal family fee B. Licensing may result in a firms 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. (p. 250) ______ is also known as market imperfections theory. A. Internationalization theoryB. Internalization theoryC. Perfect markets theoryD. Small markets theory64. (p. 251) If four firms control 80 percent of a domestic market, then ______ exists. A. An oligopolyB. A monopolyC. An oligarchyD. Vertical integration65. (p. 251) According to KnickerbockerA. The firms that pioneer a product in their home markets undertake FDI toproduce 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 entrust be compelled to make similar investments C. Combining location-specific assets or resource endowments and the firms own eccentric assets often requires FDI D. Impediments to the sale of know-how increase the profitability of FDI relative to licens ing 66. (p. 252) The eclectic paradigm was developed byA. F. T. KnickerbockerB. Adam SmithC. irradiationmond VernonD. John Dunning67. (p. 252) When two or more enterprises encounter each other in different regional markets, national markets or industries, in that respect is A. Vertical integrationB. Horizontal integrationC. Multipoint competitionD. Monopolistic competition68. (p. 252) The product life cycle suggests thatA. 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 firms own unique assets often requires FDI D. Impediments to the sale of know-how increase the profitability of FDI relative to licensing 69. (p. 253) The _____ suggests that a firm will establish mat hematical product facilities where foreign assets or resource endowments that are important to the firm are located. A. Product life cycleB. Strategic behavior theoryC. Multipoint competition theoryD. Eclectic paradigm70. (p. 253) Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combination with its own unique assets are known as A. Location specific advantagesB. Resource specific advantagesC. militant advantagesD. Directional advantages71. (p. 253) 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 firms own unique assets often re quires FDI D. Impediments to the sale of know-how increase the profitability of FDI relative to licensing72. (p. 254) 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. ImperialistB. blimpishC. Free marketD. Radical73. (p. 254) 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 quite an than radical ideology B. The collapse of communism in Eastern EuropeC. The generally abysmal economic performance of those countries that embraced the radical position D. A growing belief in many capitalist countries that MNEs tightly controls key technology and that important jobsin the MNEs foreign subsidiaries go to home-country nationals74. (p. 255) According to _____ international production should be distributed among co untries according to the theory of comparative advantage. A. The radical viewB. The eclectic viewC. Pragmatic nationalismD. The free market view75. (p. 256) 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 despotic viewB. Pragmatic nationalismC. The radical viewD. The conservative view76. (p. 257) When a company brings capital and/or technology to a host country, the host country benefits from the A. Competitive effect of FDIB. The resource transfer effect of FDIC. The balance of payments effect of FDID. The effect on competition and economic growth77. (p. 258) 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. DirectB. IndirectC. InwardD. Outward78. (p. 259) A _____ keeps track of a countrys payments to and its receipts from other countries. A. Federal payments ledgerB. Current accounting systemC. Checks and balances accountD. remnant of payments account79. (p. 259) 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 accountB. debit entry accountC. Surplus accountD. Capital account80. (p. 261) Three costs of FDI concerns of host countries arise from all of the following except A. indecorous effects on competition within the host nationB. Adverse effects on the balance of paymentsC. The perceived loss of national sovereignty and autonomyD. Debit on the current account of the home countrys balance of payments81. (p. 262) FDI undertaken to serve the home market is known as A. Greenfield investmentB. FDI substitutionC. Offshore productionD. Home market FDI82. (p. 263) Double taxation isA. Chargin g triple taxes in the home countryB. Charging double taxes in the host countryC. Taxation of income in both home and host countryD. Paying income taxes at twice the normal rate83. (p. 264) _____ are controls over the behavior of the MNEs local subsidiary. A. Performance requirementsB. Ownership restraintsC. Double taxation lawsD. Greenfield restrictions84. (p. 267) Licensing would be a good option for firms in which of thefollowing industries? A. High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous B. spheric 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 option85. (p. 267) _____ is basically the service indu stry version of licensing, although it normally involves much longer term commitments. A. FranchisingB. SubsidizingC. Greenfield investmentD. PatentingEssay Questions86. (p. 242) reason 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 state undertakes FDI, it becomes a multinational enterprise.87. (p. 242) 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. (p. 242) plow 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 30years 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 immobileer than the growth in world trade and world take. 89. (p. 242) 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. 90. (p. 242-248) What is a Greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely choose? excuse your answer. FDI can take the form of a Greenfield investment in a new facility or an acquisition of or a merger with an existing local firm. Research shows that most FDI takes the form of mergers and acquisitions alternatively than Greenfield investment.Mergers and acquisitions are more popular for three reasons. First, mergers and acquisitions are quicker to execute than Greenfield investments. Second, foreign firms are acquired because those firms have valuable strategic assets. Third, firms make acquisitions because they believe they can increase the efficiency of the acquired firm by transferring capital, technology or management skills. 91. (p. 248) Discuss the shift in FDI from manufacturing to services. What is driving the trend? Over the last twenty dollar bill years, the sector composition of FDI has shifte d from extractive industries and manufacturing toward services. By 2004, some 66 percent of the stock of FDI was in services. Four factors are driving the shift to services. First, the shift reflects the general move in many developed economies away from manufacturing and toward service industries. Second, many services cannot be traded internationally and FDI is a principal was to bring services to foreign markets. Third, many countries have liberalized their regimes governing FDI in services making the option more attractive to firms. Finally, the rise of Internet-based global telecommunications networks has allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs.92. (p. 249) Consider why firms selling products with low value-to-weightratios choose FDI over exporting. Products with low value-to-weight ratios such as soft drinks or cement are frequently produced in the market where they ar e consumed. When transportation costs are added to production costs, it becomes unprofitable to shift such products over a long distance. For firms that can produce low value-to-weight products at almost any location the attractiveness of exporting decreases and FDI or licensing becomes more appealing. 93. (p. 250) Discuss the market imperfections explanation of FDI. What is its relationship with internalization theory? Market imperfections or factors that inhibit markets from working perfectly, volunteer a major explanation of why firms prefer FDI to either exporting or licensing. In the international business literature, the marketing imperfections approach is referred to as internalization theory. According to the theory, FDI will be preferred when there are impediments that make both exporting and the sale of know-how difficult and/or expensive. 94. (p. 250) What is licensing? How does it work?Licensing occurs when a domestic firm, the licensor, licenses to a foreign firm, the licensee, the right to produce its product, to use its production processes or to use its brand rear or trademark. In return, the licensor collects royalty fees on every unit the licensee sells or on total licensee revenues. The licensor also benefits from the arrangement in that the licensee bears the cost and risk of expanding into a foreign market. 95. (p. 250) Compare and contrast the advantages of foreign direct investment over exporting and licensing. A firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how or over its operations and business strategy or when the firms capabilities are simply not amenable to licensing, as may often be the case. 96. (p. 251) Consider the imprint that FDI flows are a reflection of strategic riv alry between firms in the global marketplace. What is the main limit of the theory? The strategic behavior approach to explain FDI was initially expounded by Knickerbockers who argued that in an oliogopolistic industry, a follow the leader mentality will prompt firms to pursue FDI when another firm in the industryhas already done so. However, the theory fails to explain why the first firm decided to undertake FDI, rather than export or license. 97. (p. 252)What is multipoint competition? How do firms respond to multipoint competition? Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets or industries. Economic theory suggests that firms will try to match each others moves in different markets to try to reach each other in check. If a firm is successful with this strategy, the firm will ensure that a rival does not take a commanding position in one market and then use the profits generated in that market to underwrite competitive attacks in other markets. 98. (p. 252) Explain the product life cycle theory and its connection with FDI. The product life cycle theory, developed by Ray Vernon, suggests that the same firms that pioneer a product in their home country will undertake FDI to produce a product for consumption in foreign markets. According to the theory, firms will invest in modify countries when demand in those countries is sufficient to support local production. They subsequently shift production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. Investment in developing countries, where labor costs are lower is seen as the best way to reduce costs. 99. (p. 252-253) What are location-specific advantages? How do they help explain FDI? Location specific advantages are advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuabl e to feature with its own unique assets. Natural resources such as oil and minerals for example, are specific to certain locations. Firms must undertake FDI to exploit such foreign resources. 100. (p. 253) Explain John Dunnings position on FDI. What is the eclectic paradigm? John Dunning has argued that to fully understand FDI it is important to consider the role of location specific advantages.According to Dunning, a firm will be prompted to undertake FDI in an effort to exploit assets that are specific to a particular location. Dunnings theory, the eclectic paradigm, combines the arguments of internalization theory with the notion of location-specific advantages to suggest that combining location-specific assets or resource endowments and the firms own unique capabilities often requires the firm to establish production facilities where the foreign assets or resource endowments arelocated. 101. (p. 254-256) Discuss the various political ideologies and their impact on foreign direc t investment. The radical view writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage.The pragmatic nationalist view is that FDI has both benefits and costs. The radical view has a dogmatic radical stance that is hostile to all inward FDI The free market view is at the other extreme and based on noninterventionist principle of free market economics. Between these two extremes is an approach called pragmatic nationalism. 102. (p. 257-262) Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country. The main benefits of inward FDI for a host country arise from resource-transfer effects, employment effects, balance-of-payments effects and effects on competition and economic growth. Three costs of FDI concern host countries. They arise from executable adverse effects on competition within the host nation, adverse effects on the balance of payments and the perceived loss of national sovereignty and autonomy. The benefits of FDI to the home (source) country arise from three sources. First, the home countrys balance of payments benefits from the inward flow of foreign earnings. Second, benefits to the home country from outward FDI arise from employment effects. Third, benefits 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. The most important cost/concern of FDI for the home country centers on the balance-of-payments and employment effects of outward FDI.103. (p. 266-267) exposit the situations when licensing is not a good option for a firm. Licensing is not a good option in three situations. First, licensing is hazardous in high-tech industries where protecting firm-specific expertise is very important. Second, li censing is not attractive in global oligopolies where tight control is necessary so that firms have the ability to launch coordinated attacks against global competitors. Finally, in industries where intense cost pressures require that MNEs maintain tight control over foreign operations, licensing is not the best option. 104. (p. 267) What is franchising? What type of firm usesfranchising as a means of expanding into foreign markets? Franchising is essentially the service-industry version of licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisees profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisors brand name. Franchise agreements usually have a longer time commitment than do licensing arrangements. Franchising is common in the fast food industry because fast food cannot be exported, because franchising minimizes the costs and risks associated w ith opening a foreign market, because brand names are comparatively easy to protect, because there is no compelling reason for a firm to have tight control over franchisees and because fast food know-how is easily transferred.105. (p. 267) How useful are the product life cycle theory and Knickerbockers theory of horizontal FDI to business? The product life cycle theory and Knickerbockers theory of horizontal FDI to business are not particularly useful from a business perspective because the theories are descriptive rather than analytical. The theories are useful for explaining historical patterns of FDI, but they do a poor job of identifying the factors that influence the relative probability of FDI, licensing and exporting.