San Francisco State University

IBUS 330

International Business: The Challenges of Globalization, 7e (Wild)

Chapter 7 Foreign Direct Investment

1)Not all factors of production are internationally mobile.

2. Portfolio investment is the purchase of physical assets of a company in another country to gain a degree of management control.

3. Increasing globalization is causing a growing number of international companies from emerging markets to undertake FDI.

4. Developed countries have been the major participants behind cross-border mergers and acquisitions.

5. Firms from emerging markets account for a greater share of global mergers and acquisitions than developed markets.

6. In the maturing product stage of the international product life cycle theory, increased competition creates pressures to reduce production costs.

7. According to the market imperfections theory, competition is a common market imperfection.

8. Trade barriers and specialized knowledge are examples of market imperfections.

9. The possibility that a company will create a future competitor by charging another company for access to its knowledge is a market imperfection that can encourage foreign direct investment.

10. The eclectic theory states that firms undertake foreign direct investment only when the features of a particular location make the location appealing for investment.

11. According to the eclectic theory that explains FDI, an ownership advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

12. According to the eclectic theory that explains FDI, an internalization advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

13. In foreign direct investment, complete ownership of a company guarantees its complete control.

14. Building a subsidiary abroad from the ground up is called a greenfield investment.

15. Rationalized production is a system of production in which each of a product's components is produced in the same location so that the cost of producing that product is lowest.

 Skill: Concept

16. A potential problem with a rationalized production model is that a work stoppage in one country can bring the entire production process to a standstill.

17. The soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions.

18. In industries having a limited number of small firms, foreign direct investment decisions frequently resemble a "follow the leader" scenario.

19. A majority of the regulatory changes that governments around the world introduced in recent years are unfavorable to FDI.

20. The merchandise account includes exports and imports of tangible goods.

21. The income payments account includes income earned on home country assets held abroad.

22. A current account deficit occurs when a country exports more goods and receives more income from abroad than it imports and pays abroad.

23. One reason a home country may discourage foreign direct investment outflows is to protect its "sunset" industries.

24. Ownership restrictions is a method used by host countries to restrict incoming foreign direct investment.

25. Performance demands made by host countries to restrict incoming FDI apply exclusively to businesses in cultural industries.

26. The purchase of physical assets or a significant amount of ownership of a company in another country to gain a measure of management control is called                                                                    .
    1. portfolio investment
    2. foreign direct investment
    3. horizontal integration
    4. vertical integration

27.                        is an investment that does not involve obtaining a degree of control in a company.
    1. Portfolio investment
    2. Foreign direct investment
    3. Horizontal integration
    4. Vertical integration

28. Which of the following is a major driver of foreign direct investment?
    1. vertical integration
    2. horizontal integration
    3. globalization
    4. cultural diversity

29. The realization that companies can start production in the most efficient and productive locations in the world and export to markets worldwide led to a new surge of foreign direct investment into   .
    1. First World nations
    2. low-income nations
    3. high-income nations
    4. newly industrialized nations

30. Which of the following is least likely a reason for companies to seek cross-border mergers and acquisitions?
    1. to get a foothold in new geographic markets
    2. to raise company budgets for increased research and development activities
    3. to increase a firm's global competitiveness
    4. to fill the gaps in companies' product lines in a global industry

31. Which of the following is true of foreign direct investment?
    1. The contributions of entrepreneurs and small businesses to foreign direct investment is insignificant.
    2. Globalization has led emerging markets to undertake less foreign direct investment and industrialized nations to undertake more foreign direct investment.
    3. The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.
    4. Foreign direct investment does not involve obtaining a degree of control in a company.

32. According to the international product life cycle theory, in which of the following stages is a good produced in the home country because of uncertain domestic demand and to keep production close to the research department?
    1. standardized product stage
    2. maturing product stage
    3. declining product stage
    4. new product stage

33. According to the international product life cycle theory, in which stage of a product's life cycle does a company directly invest in production facilities in countries where demand is great enough to warrant production facilities?
    1. new product stage
    2. maturing product stage
    3. standardized product stage
    4. declining product stage

34. In the                        product stage of the international product life cycle theory, increased competition pressurizes a company to build production facilities in low-cost developing nations.
    1. new
    2. maturing
    3. standardized
    4. declining 

35. A market that is said to operate at peak efficiency and where goods are readily and easily available is said to be a(n)                                                                 market.
    1. perfect
    2. Eurocurrency
    3. foreign exchange
    4. greenfield investment

36. The                        theory states that when an aspect of the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the efficiency-reducing aspect.
    1. market power
    2. eclectic
    3. international product life cycle
    4. market imperfections

37. The requirement that a sufficient portion of a product's content must originate within a certain market to escape tariff charges is an example of a(n)                                                                 .
    1. ad valorem tariff
    2. market imperfection
    3. tariff-quota
    4. subsidy

38. Which of the following theories states that firms undertake foreign direct investment, when the features of a particular location combine with ownership and internalization advantages, to make the location appealing for investment?
    1. market power theory
    2. international product life cycle theory
    3. market imperfections theory
    4. eclectic theory

39. A(n)                         advantage is the advantage of conducting a particular economic activity in a specific area because of the characteristics of that area.
    1. internalization
    2. ownership
    3. comparative
    4. location 

40. A(n)                         advantage is the one that a company gains from incorporating a business activity within itself rather than leaving it to a relatively inefficient market.
    1. ownership
    2. internalization
    3. location
    4. comparative 

41. The possibility that a company will create a future competitor by charging another company for access to its knowledge is a(n)                                                                      that can encourage FDI.
    1. ownership advantage
    2. internalization advantage
    3. market imperfection
    4. trade barrier

42. The                        theory states that a firm tries to establish a dominant presence in an industry by undertaking foreign direct investment.
    1. eclectic
    2. market power
    3. market imperfections
    4. international product life cycle

43. A company can achieve market power through                            .
    1. ownership advantages
    2. internalization advantages
    3. horizontal integration
    4. vertical integration

44.                        is the extension of company activities into stages of production that provide a firm's inputs or absorb its outputs.
    1. Decentralization
    2. Vertical integration
    3. Market penetration
    4. Social stratification

45. The extension of a company's activities into stages of production that absorb the company's outputs is known as                                                .
    1. forward integration
    2. backward integration
    3. an internalization advantage
    4. an ownership advantage

46. Making investments in distribution in order to leapfrog channels of distribution that are tightly controlled by competitors is an example of                                                                .
    1. an internalization advantage
    2. an ownership advantage
    3. forward integration
    4. backward integration

47. Partnerships between a government and a host company in the context of foreign direct investment lead to    .
    1. increased exploitation of workers in the home country

1. 2. domination of industries in the home country by large international firms
   3. increased market access for the host company
   4. increased control for the host country over its operations

48. A firm's subsidiary built abroad from the ground up is called a(n)                                 .
    1. greenfield investment
    2. portfolio investment
    3. distributive channel
    4. shell corporation

49. Which of the following is an example of a greenfield investment?
    1. an agricultural business acquisition in South-east Asia's former agricultural region
    2. the construction of an entirely new steel manufacturing subsidiary overseas
    3. a merger between a U.S. and a non-U.S. company
    4. the purchase of an existing business that is still in its infancy

50. A system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest is called                                                                                production.
    1. rationalized
    2. craft
    3. job
    4. customized 

51. Which of the following statements is true of rationalized production?
    1. It depends on a large number of distribution channels which leads to inefficiency.
    2. It depends on a large number of distribution channels which increases the cost of production.
    3. It can bring the entire production process to a standstill, if work is stopped in one country.
    4. It is an unethical method of production as it uses questionable labor practices to reduce costs.

52. Which of the following is the type of production illustrated in the automobile industry?
    1. customized production
    2. rationalized production
    3. job production
    4. craft production

53. Which of the following countries would a watchmaker most prefer to manufacture its watches in, in order to capitalize on buyer perceptions of high quality?
    1. China
    2. Thailand
    3. Mexico
    4. Switzerland

54. Firms engage in FDI when the firms they supply have already invested abroad. This practice of "following clients" is observed in industries having                                                       .
    1. a huge number of clients
    2. only large companies as clients
    3. suppliers who are geographically scattered around the world
    4. suppliers who have close working relationships with producers

55. Which of the following is true of a "follow the leader" scenario in the context of foreign direct investment?
    1. Companies that practice "follow the leader" supply each other with inputs.
    2. Companies that practice "follow the leader" pressurize each other to follow environmentally safe methods.
    3. It is a frequent practice in industries with a limited number of large firms.
    4. It is common in industries in which producers source component parts from suppliers.

56. A country's                          is a national accounting system that records all monetary transactions to entities in other countries and all receipts coming into the nation.
    1. balance of payments
    2. chart of accounts
    3. global financial system
    4. international monetary system

57. Which of the following accounts of a country's balance of payments records transactions involving the export of services?
    1. transactional account
    2. capital account
    3. savings account
    4. current account

58. Which of the following is recorded in the capital account of a country's balance of payments?
    1. income payments
    2. income receipts
    3. foreign official assets
    4. unilateral transfers

59. Exports and imports of tourism and business consulting are included in the                                

account of a country's balance of payments.

1. 1. services
   2. merchandise
   3. capital
   4. savings 

60. Exports and imports of tangible goods are included in the                               account of a country's balance of payments.
    1. savings
    2. capital
    3. merchandise
    4. services 

61. Exports and imports of computer software, electronic components, and apparel are included in the        account of a country's balance of payments.
    1. services
    2. capital
    3. merchandise
    4. savings 

62. Which of the following accounts within the current account of the United States' balance of payments includes financial gains earned on U.S. assets held abroad?
    1. income receipts account
    2. income payments account
    3. merchandise account
    4. services account

63. The                        account within the United States' current account includes financial gains compensated to entities in other nations that is earned on assets they hold in the United

States.

1. 1. income receipts
   2. income payments
   3. merchandise
   4. services 

64. When a U.S. subsidiary in another country remits profits back to its parent company in the U.S., the receipt of profits is recorded in the                                                      .
    1. income receipts account and given a plus sign
    2. income receipts account and given a minus sign
    3. income payments account and given a plus sign
    4. income payments account and given a minus sign

65. Which of the following occurs in a country's balance of payments when a country exports more goods and services and receives more income from abroad than it imports and pays abroad?
    1. current account deficit
    2. capital account surplus
    3. current account surplus
    4. capital account deficit

66. When a U.S. company buys shares of stock in a French company on France's stock market, the U.S. balance of payments records the transaction as an                                                               .
    1. outflow of capital with a plus sign
    2. outflow of capital with a minus sign
    3. inflow of capital with a plus sign
    4. inflow of capital with a minus sign

67. If a Japanese citizen invests in the Australian stock market, the transaction would show up on the capital account in the balance of payments of                                                               .
    1. Japan
    2. Australia
    3. both Japan and Australia
    4. neither Japan nor Australia

68. The difference between the balances of the current and capital accounts of a country's balance of payments caused by errors in recording methods is called a(n)                                                     .
    1. round-off error
    2. type I error
    3. currency crisis
    4. statistical discrepancy

69. Which of the following is a reason behind intervention by a host country on matters related to FDI?
    1. to keep their balance of payments under control
    2. to protect their outdated technology and management skills
    3. to strictly encourage the establishment of sunset industries
    4. to decrease the country's competitiveness in the global market

70.                        are those that use outdated and obsolete technologies or employ low-wage workers with few skills.
    1. Business-agile enterprises
    2. Sunset industries
    3. Greenfield investments
    4. Shell corporations

71. Home nations discourage foreign direct investment outflows because it                              .
    1. discourages cooperation between countries
    2. replaces jobs in the home nation
    3. fails to protect the "sunset" industries in the home nation
    4. decreases long-term competitiveness of companies

72. A home country encourages outflows of foreign direct investment because it                              .
    1. helps in replacing jobs at home
    2. sends resources out of the home country
    3. tends to increase the long-term competitiveness of firms
    4. takes the place of all the exports and imports in the country

73. Which of the following methods is being used when a host country provides lower tax rates and low-interest loans to firms from abroad for encouraging inflows of foreign direct investment?
    1. financial incentives
    2. sanctions
    3. local content requirements
    4. embargoes

AACSB: Dynamics of the global economy Skill: Application

74. Ownership restrictions and performance demands are used by                           .
    1. host countries to promote FDI
    2. host countries to restrict FDI
    3. home countries to promote FDI
    4. home countries to restrict FDI

75. Tax breaks on profits earned abroad and political pressures are used by                              .
    1. host countries to promote FDI
    2. host countries to restrict FDI
    3. home countries to promote FDI
    4. home countries to restrict FDI

76. Which of the following methods is used by a host country to restrict incoming foreign direct investment?
    1. differential tax rates for earnings abroad
    2. insurance to cover the risk of overseas investments
    3. low-interest loans to investors
    4. performance demands

77. Which of the following is used by home-country governments to promote outbound foreign direct investment?
    1. political pressure
    2. performance demands
    3. ownership restrictions
    4. sanctions

78. Which of the following is used by home country governments to limit outbound foreign direct investment?
    1. ownership restrictions
    2. differential tax rates
    3. tax breaks
    4. low-interest loans

79. GMI's investments are examples of                          .
    1. foreign direct investment
    2. portfolio investment
    3. vertical integration
    4. horizontal integration

80. Which of the following systems of production is used by GMI?
    1. job
    2. craft
    3. rationalized
    4. customized

81. GMI's purchase of the Brazilian company is best classified as a(n)                                 .
    1. greenfield investment
    2. portfolio investment
    3. acquisition
    4. demerger

82. GMI's subsidiary for component B in Thailand is best described as a(n)                                  .
    1. greenfield investment
    2. portfolio investment
    3. acquisition
    4. merger

83. In which of the following accounts would GMI's purchase of the company in Brazil appear?
    1. the current account of the United States
    2. the current account of Brazil
    3. the capital account of the Thailand
    4. the capital accounts of Brazil and the United States

84. Happyland's international trade situation illustrates that the country is experiencing a

                     .

1. 1. current account deficit
   2. capital account deficit
   3. current account surplus
   4. capital account surplus

85. Transactions involving the export of Happyland's textile and computer products are

included in its

1. 1. capital
   2. merchandise
   3. services
   4. income payments

86. If Happyland advertises its beaches and attracts tourists, the tourism-related income

would be recorded in its

1. 1. capital
   2. services
   3. income payments
   4. merchandise 

87. If Happyland is successful in attracting foreign direct investment, transactions involving those investments would appear in the country's                                                                  account.
    1. capital
    2. services
    3. income payments
    4. merchandise 

88. Which of the following methods will Happyland use to encourage foreign direct investment inflows?
    1. tax incentives
    2. sanctions
    3. ownership restrictions
    4. performance demands

89. Which of the following methods will Happyland use to discourage foreign direct investment inflows?
    1. tax incentives
    2. low-interest loans
    3. performance demands
    4. tax breaks 

90. Blickinstock has identified a company that it can acquire or merge with. Which of the following statements would represent the least likely reason for Blickinstock to go ahead with the merger?
    1. The merger would help increase Blickinstock's global competitiveness.
    2. The merger would allow the company to get a foothold in the nascent Latin American market.
    3. The merger would help to fill the gaps in Blickinstock's product line.
    4. The merger would bring in increased cash-flows that Blickinstock can use to acquire other firms.

91. If board members ask about the maquiladora industry, Keith would explain that it refers to              .
    1. Mexico's low-cost labor union
    2. the cross-border drug trafficking problem that threatens to limit legitimate production in Mexico
    3. the low-wage, 130-mile-wide strip along the U.S.-Mexico border that comprises a special economic region
    4. Latin America's new model for business that restricts foreign investors to take advantage of government incentives

92. If Blickinstock's home government tries to stop the company from investing in Latin America, the government is most likely trying to                                                         .
    1. protect its balance of payments
    2. prevent a monopoly situation from occurring
    3. discourage the entry of a "sunset" company
    4. protect the "sunset" companies in Latin America

93. What two factors propel growth in foreign direct investment?

94. Using any two of the four theories that appear in your text, explain why companies engage in foreign direct investment.

95. Explain the theory of market imperfections and describe the two major market imperfections.

96. Describe any three management issues involved in foreign direct investment decisions.

97. Discuss the role entrepreneurs and small businesses play in the expansion of FDI. What are some of the surprises that managers face as they invest in new markets abroad?

98. Explain the market power theory of FDI, and discuss why the decision whether or not to follow rivals into a new international market is important.

99. Explain the concept of balance of payments and describe its two major components.

100. Discuss why a host country might promote or restrict foreign direct investment.

101. Why is it important to assess R&D costs when considering FDI? Given its costs, how can FDI benefit the host country with access to technology, management skills, and employment?

102. Identify why a home country might support or discourage outgoing foreign direct investment.