Ch 7: Foreign Direct Investment

CHAPTER 7
FOREIGN DIRECT INVESTMENT
TRUE/FALSE QUESTIONS
1. Many early trade theories were created at a time when most factors of production either could
not be moved or could not be moved easily across national borders.
(True; Moderate; p. 204; L1!
2. "actors of production include thin#s such as labor$ financial capital$ capital e%uipment$ and
land or natural resources.
(True; &asy; p. 204; L1!
'. Today$ all factors of production are internationally mobile.
("alse; &asy; p. 204; L1!
4. (ortfolio investment is the purchase of physical assets or a si#nificant amount of ownership
of a company in another country to #ain a de#ree of mana#ement control.
("alse; Moderate; p. 204; L1!
). "orei#n direct investment is the purchase of physical assets or a si#nificant amount of the
ownership (stoc*! of a company in another country to #ain a measure of mana#ement control.
(True; &asy; p. 204; L1!
+. ,t the core of forei#n direct investment are international flows of capital.
(True; Moderate; p. 204; L1!
-. Two main reasons for increasin# forei#n direct investment flows over the past decade are
#lobali.ation and diversity.
("alse; Moderate; p. 204; L1!
/. "orces causin# #lobali.ation are part of the reason for lon#0term #rowth in forei#n direct
investment.
(True; Moderate; p. 20); L1!

1. 2ncreasin# #lobali.ation is causin# a #rowin# number of international companies from
emer#in# mar*ets to underta*e forei#n direct investment.
(True; Moderate; p. 20); L1!
10. 3eveloped countries are the prime destination for forei#n direct investment because cross0
border mer#ers and ac%uisitions are concentrated in developed countries.
(True; Moderate; p. 20+; L1!
11. Trade barriers and speciali.ed *nowled#e are both e4amples of mar*et imperfections.
(True; &asy; p. 20/; L2!
12. Mar*et imperfection that can encoura#e forei#n direct investment is the possibility that a
company will create a future competitor by char#in# another company for access to its
*nowled#e.
Ch 7: Foreign Direct Investment
(True; 3ifficult; p. 20/; L2!
1'. The eclectic theory states that firms underta*e forei#n direct investment when the features of
a particular location combine with ownership and internali.ation advanta#es to ma*e a
location appealin# for investment.
(True; &asy; p. 201; L2!
14. ,ccordin# to the eclectic theory$ an internali.ation advanta#e is the advanta#e that arises
from internali.in# a business activity rather than leavin# it to a relatively inefficient mar*et.
(True; &asy; p. 201; L2!
1). ,ccordin# to the eclectic theory$ an ownership advanta#e is the advanta#e of locatin# a
particular economic activity in a specific location because of the characteristics of that
location.
("alse; &asy; p. 201; L2!
1+. 5ertical inte#ration is the e4tension of company activities into sta#es of production that
provide a firm6s inputs (forward inte#ration! or absorbs its outputs (bac*ward inte#ration!.
("alse; 3ifficult; p. 201; L2!
1-. 2f coffee company Ma4well 7ouse were to ac%uire a coffee plantation in 8ra.il$ it mi#ht
achieve mar*et power throu#h vertical inte#ration.
(True; 3ifficult; p. 201; L2!
1/. 2n forei#n direct investment$ 100 percent ownership of a company does not #uarantee its
complete control.
(True; Moderate; p. 210; L2!
11. 8enefits of investment by multinationals include increased unemployment$ increased ta4
revenues$ wor*force trainin#$ and the transfer of technolo#y.
("alse; Moderate; p. 210; L'!
20. 9overnments never intervene in the flow of forei#n direct investment since it always
#enerates :obs.
("alse; &asy; p. 214; L'!
21. 5alues$ attitudes$ and beliefs form the basis for much of a #overnment6s position re#ardin#
forei#n direct investment.
(True; Moderate; p. 214021); L4!
22. , country6s balance of payments is a national accountin# system that records all payments to
entities in other countries and all receipts comin# into the nation.
(True; &asy; p. 21); L4!
2'. ,ny nation6s balance of payments consists of two ma:or components; the current account and
the past0due account.
("alse; &asy; p. 21); L4!
24. The merchandise account includes e4ports and imports of tan#ible #oods.
(True; Moderate; p. 21+; L4!
Ch 7: Foreign Direct Investment
2). The income payment account includes income earned on home country assets held abroad.
("alse; Moderate; p. 21+; L4!
2+. , current account deficit occurs when a country e4ports more #oods and services and
receives more income from abroad than it imports and pays abroad.
("alse; Moderate; p. 21+; L4!
2-. <hen a country imports more #oods and services and pays more abroad than it e4ports and
receives from abroad$ it e4periences a current account deficit.
(True; Moderate; p. 21+; L4!
2/. The capital account is a national account that records transactions involvin# the import and
e4port of #oods and services$ income receipts on assets abroad$ and income payments on
forei#n assets inside the country.
("alse; 3ifficult; p. 21+; L4!
21. 2f a =.>. citi.en invests in the 8ra.ilian stoc* mar*et$ the transaction would show up on the
capital accounts of both the =nited >tates and 8ra.il.
(True; 3ifficult; p. 21+; L4!
'0. The two main reasons countries intervene in forei#n direct investment flows are to control the
balance of payments and to obtain resources and benefits.
(True; Moderate; p. 21+; L4!
'1. 8ecause forei#n direct investment inflows are recorded as subtractions to the balance of
payments$ a nation is ne#atively affected from an initial forei#n direct investment inflow.
("alse; 3ifficult; p. 21+; L4!
'2. ne reason a home country may discoura#e forei#n direct investment outflows is to protect
its ?sunset@ industries.
("alse; 3ifficult; p. 21/; L4!
''. ne method used by host countries to restrict incomin# forei#n direct investment is
ownership restrictions.
(True; &asy; p. 211; L4!
'4. Ta4 incentives and infrastructure improvements are financial incentives used by home
countries to encoura#e outflows of forei#n direct investment.
("alse; Moderate; p. 211; L)!
'). To limit the effects of outbound forei#n direct investment on the national economy$ home
#overnments may impose differential ta4 rates that char#e earnin#s from abroad at a hi#her
rate than domestic earnin#s.
(True; Moderate; p. 220; L)!
MULTIPLE CHOICE QUESTIONS
1. <hich of the followin# are main drivers of risin# forei#n direct investment over the
foreseeable futureA
a. 3iversity and telecommunications
Ch 7: Foreign Direct Investment
b. Telecommunications and transportation
c. 9lobali.ation and mer#ers and ac%uisitions (MB,!
d. 3iversity and #lobali.ation
(c; Moderate; p. 204; L1!
2. <hich of these created renewed determination to further reduce barriers to tradeA
a. Consumer demand
b. ,dvancements in telecommunications
c. "orei#n direct investment and portfolio investment trends
d. =ru#uay Dound of trade ne#otiations
(d; Moderate; p. 20); L1!
'. Companies see* cross0border mer#ers and ac%uisitions to EEEEEEEE.
a. #et a foothold in new #eo#raphic mar*ets
b. increase a firm6s #lobal competitiveness
c. fill in #aps in companies6 product lines in a #lobal industry
d. all of the above
(d; Moderate; p. 20); L1!

4. <hich of the followin# statements is FT trueA
a. &ntrepreneurs and small businesses do not play an important role in e4pandin#
forei#n direct investment flows.
b. 2ncreasin# #lobali.ation is causin# a #rowin# number of international companies
from emer#in# mar*ets to underta*e forei#n direct investment.
c. The desire to increase a firm6s #lobal competitiveness drives many cross0border
mer#ers and ac%uisitions.
d. Companies may pursue mer#ers and ac%uisitions to fill #aps in their product lines.
(a; Moderate; p. 20)020+; L1!
). <hen companies reali.ed they could produce in the most efficient and productive locations in
the world and simply e4port to mar*ets worldwide$ a new sur#e of forei#n direct investment
flowed into EEEEEEEE.
a. low0cost newly industriali.ed nations and emer#in# mar*ets
b. hi#hly developed economies
c. the automobile and computer industries
d. totalitarian and theocratic nations only
(a; Moderate; p. 20); L1!
+. <hich of the followin# is FT one of the four main theories that attempts to e4plain why
companies en#a#e in forei#n direct investmentA
a. 2nternational product life cycle theory
b. Mar*et imperfections theory
c. &clectic theory
d. Mercantilism
(d; Moderate; p. 20-; L2!
-. <hich of these refers to the theory that a company will be#in by e4portin# its products and
later underta*e forei#n direct investment as a product moves throu#h its life cycleA
a. &clectic life cycle
b. Mar*et imperfections life cycle
c. 2nternational product life cycle
Ch 7: Foreign Direct Investment
d. Mar*et power life cycle
(c; &asy; p. 20/; L2!
/. ,ccordin# to the international product life cycle$ in which of the followin# sta#es is a #ood
produced in the home country because of uncertain domestic demand and to *eep production
close to the research departmentA
a. >tandardi.ed product sta#e
b. Maturin# product sta#e
c. 3eclinin# product sta#e
d. Few product sta#e
(d; Moderate; p. 20/; L2!
1. ,ccordin# to the international product life cycle$ in which sta#e of a product6s life does a
company directly invest in production facilities in countries where demand is #reat enou#h to
warrant production facilitiesA
a. Few product sta#e
b. Maturin# product sta#e
c. >tandardi.ed product sta#e
d. 3eclinin# product sta#e
(b; Moderate; p. 20/; L2!
10. The EEEEEEEE theory states that a firm tries to establish a dominant mar*et presence in an
industry by underta*in# forei#n direct investment.
a. mar*et power
b. eclectic
c. mar*et imperfections
d. trade barriers
(a; &asy; p. 201; L2!
11. <hich of the followin# is the e4tension of company activities into sta#es of production that
provide a firm6s inputs or absorb its outputsA
a. 7ori.ontal inte#ration
b. 5ertical inte#ration
c. Mar*et penetration
d. Collaborative diversification
(b; Moderate; p. 201; L2!
12. , company that inte#rates bac*ward or forward can achieve mar*et power throu#h
EEEEEEEE.
a. ownership advanta#es
b. hori.ontal inte#ration
c. vertical inte#ration
d. internali.ation
(c; Moderate; p. 201; L2!
1'. Complete ownership of a business in another country EEEEEEEE.
a. #uarantees profits
b. does not count as forei#n direct investment
c. does not #uarantee control
d. #uarantees #overnment support
(c; Moderate; p. 2010210; L'!
Ch 7: Foreign Direct Investment
14. 2nvestment by multinational companies benefits developin# and newly industriali.ed
countries in all the followin# ways &GC&(T EEEEEEEE.
a. transfer of technolo#y
b. decreased ta4 revenues
c. decreased unemployment
d. trainin# to create a more hi#hly s*illed wor*force
(b; Moderate; p. 210; L'!
1). 8uildin# a subsidiary abroad from the #round up is called a(n! EEEEEEEE.
a. portfolio investment
b. vertical inte#ration investment
c. ac%uisition
d. #reenfield investment
(d; &asy; p. 211; L'!
1+. , #reenfield investment is EEEEEEEE.
a. an investment in >outheast ,sia6s former a#ricultural re#ion
b. the buildin# of a subsidiary abroad from the #round up
c. an investment in the =nited >tates by a non0=.>. company
d. the purchase of an e4istin# business that is still in its infancy
(b; Moderate; p. 211; L'!
1-. <hich of the followin# factors reduces the appeal of purchasin# e4istin# facilitiesA
a. bsolete e%uipment
b. =nsuitable location
c. (oor relations with wor*ers
d. ,ll of the above
(d; &asy; p. 211; L'!
1/. ,ll of the followin# are benefits of ac%uisitions &GC&(T the EEEEEEEE.
a. ac%uisition of #oodwill the company has built up over the years
b. ac%uisition of the brand reco#nition of the e4istin# company
c. ability to use alternate methods to finance the purchase of the company
d. ac%uisition of an obsolete plant
(d; Moderate; p. 211; L'!
11. "actors that affect the cost of production in any national mar*et include all of the followin#
&GC&(T EEEEEEEE.
a. labor re#ulations
b. employee benefits pac*a#es
c. wor*er trainin# pro#rams
d. ta4 rates that were assumed to be constant in the local mar*et
(d; Moderate; p. 211; L'!
20. The EEEEEEEE account records transactions involvin# the import and e4port of #oods and
services$ income receipts on assets abroad$ and income payments on forei#n assets inside the
country.
a. income receipts account
b. capital account
c. income payments account
Ch 7: Foreign Direct Investment
d. current account
(d; Moderate; p. 21+; L4!
21. <hen a =.>. company buys 40 percent of the publicly traded stoc* of a "rench company on
"rance6s stoc* mar*et$ the =.>. balance of payments records the transaction as an EEEEEEEE.
a. inflow of capital recorded with a plus si#n
b. inflow of capital recorded with a minus si#n
c. outflow of capital recorded with a plus si#n
d. outflow of capital recorded with a minus si#n
(d; 3ifficult; p. 21+; L4!
22. &4ports and imports of tourism and business consultin# are included in which of theseA
a. >ervices within the current account
b. Capital account
c. Merchandise account within the current account
d. Corporate account
(a; Moderate; p. 21+; L4!
2'. &4ports and imports of tan#ible #oods are included in the EEEEEEEE account within the
current account.
a. e4ports
b. capital
c. merchandise
d. corporate
(c; Moderate; p. 21+; L4!
24. &4ports and imports of computer software$ electronic components$ and apparel would be
reflected in the EEEEEEEE account within the current account.
a. services
b. capital
c. merchandise
d. corporate
(c; Moderate; p. 21+; L4!
2). <hich of these occurs when a country e4ports more #oods and services and receives more
income from abroad than it importsA
a. Current account deficit
b. Capital account surplus
c. Current account surplus
d. Capital account deficit
(c; &asy; p. 21+; L4!
2+. <hich of the followin# is a national account that records transactions involvin# the purchase
or sale of assetsA
a. Current account
b. Merchandise account
c. >ervice account
d. Capital account
(d; Moderate; p. 21+; L4!
Ch 7: Foreign Direct Investment
2-. 2f a Hapanese citi.en invests in the ,ustralian stoc* mar*et$ the transaction would show up on
the capital account of EEEEEEEE.
a. Hapan
b. ,ustralia
c. neither Hapan nor ,ustralia because it is a current account item
d. both Hapan and ,ustralia
(d; 3ifficult; p. 21+; L4!
2/. <hen a =.>. subsidiary in another country remits profits bac* to its parent in the =.>.$ the
receipt of profits is recorded in the EEEEEEEE.
a. income receipts account and #iven a plus si#n
b. income receipts account and #iven a minus si#n
c. income payments account and #iven a plus si#n
d. income payments account and #iven a minus si#n
(a; 3ifficult; p. 21+; L4!
21. <hich of the followin# is a reason for host country intervention in forei#n direct investment
("32! flowsA
a. "32 sends resources out of the home country
b. utflows of "32 always cause a loss of :obs
c. To improve the nation6s balance of payments
d. To prevent loss of technolo#y to other countries
(c; Moderate; p. 21+021-; L4!
'0. 7ome #overnments may use which of the followin# to limit the effects of outbound forei#n
direct investmentA
a. 2nsurance
b. 3ifferential ta4 rates
c. Low0interest loans
d. 2nfrastructure improvements
(b; Moderate; p. 220; L)!
'1. <hich of these do home0country #overnments FT use to promote outbound forei#n direct
investmentA
a. fferin# ta4 brea*s on profits earned abroad.
b. 9rantin# loans to firms wishin# to increase their investments abroad.
c. &stablishin# ownership restrictions on investments abroad.
d. fferin# insurance to cover the ris*s of investments abroad.
(c; Moderate; p. 2110220; L)!
SHORT-ANSWER QUESTIONS
1. The purchase of physical assets or a si#nificant amount of ownership (stoc*! of a company in
another country to #ain a measure of mana#ement control is called EEEEEEEE.
(forei#n direct investment ("32!; &asy; p. 204; L1!
2. The two main drivers of risin# forei#n direct investment flows for the foreseeable future are
EEEEEEEE and EEEEEEEE.
(#lobali.ation$ mer#ers and ac%uisitions; Moderate; p. 204; L1!
Ch 7: Foreign Direct Investment
'. The number of EEEEEEEE and their e4plodin# value contribute to the #rowth in forei#n direct
investment flows.
(mer#ers and ac%uisitions; Moderate; p. 20); L1!
4. The destination of most forei#n direct investment inflows is EEEEEEEE countries.
(developed; Moderate; p. 20+; L1!
). The EEEEEEEE theory states that a company will be#in by e4portin# its product and later
underta*e forei#n direct investment as a product moves throu#h its life cycle.
(international product life cycle; &asy; p. 20/; L2!
+. 2n the EEEEEEEE sta#e of the international product life cycle$ a #ood is produced in the home
country because of uncertain domestic demand and to *eep production close to the research
department that developed the product.
(new product; Moderate; p. 20/; L2!
-. 2n the EEEEEEEE sta#e of the international product life cycle$ a company directly invests in
production facilities in countries where demand is #reat enou#h to warrant its own production
facilities.
(maturin# product; Moderate; p. 20/; L2!
/. 2n the EEEEEEEE sta#e of the international product life cycle$ increased competition creates
pressures to reduce production costs.
(standardi.ed product; Moderate; p. 20/; L2!
1. EEEEEEEE theory states that when an imperfection in the mar*et ma*es a transaction less
efficient than it could be$ a company will underta*e forei#n direct investment to internali.e
the transaction and thereby remove the imperfection.
(Mar*et imperfections; &asy; p. 20/; L2!
10. , mar*et that operates at pea* efficiency and where #oods are readily and easily available is
said to be a(n! EEEEEEEE.
(perfect mar*et; Moderate; p. 201; L2!
11. The EEEEEEEE theory states that firms underta*e forei#n direct investment when the features
of a particular location combine with ownership and internali.ation advanta#es to ma*e a
location appealin# for investment.
(eclectic; Moderate; p. 201; L2!
12. The advanta#e of locatin# a particular economic activity in a specific location because of the
characteristics of that location is called a(n! EEEEEEEE.
(location advanta#e; Moderate; p. 201; L2!
1'. ,(n! EEEEEEEE is the advanta#e that arises from internali.in# a business activity rather than
leavin# it to a relatively inefficient mar*et.
(internali.ation advanta#e; &asy; p. 201; L2!
14. ,(n! EEEEEEEE is the advanta#e that a company has due to its ownership of some special
asset.
(ownership; &asy; p. 201; L2!
Ch 7: Foreign Direct Investment
1). The e4tension of company activities into sta#es of production that provide a firm6s inputs or
absorb its output is called EEEEEEEE.
(vertical inte#ration; Moderate; p. 201; L2!
1+. The EEEEEEEE theory states that a firm tries to establish a dominant mar*et presence in an
industry by underta*in# forei#n direct investment.
(mar*et power; Moderate; p. 201; L2!
1-. The benefit of EEEEEEEE is #reater profit because the firm is far better able to dictate the cost
of its inputs andIor the price of its output.
(mar*et power; Moderate; p. 201; L2!
1/. 8uildin# a subsidiary abroad from the #round up is called a(n! EEEEEEEE.
(#reenfield investment; &asy; p. 211; L'!
11. , system of production in which each of a product6s components is produced in the location
where the cost of producin# the component is lowest is called EEEEEEEE.
(rationali.ed production; Moderate; p. 212; L'!
20. , country6s EEEEEEEE is a national accountin# system that records all payments to entities in
other countries and all receipts comin# into the nation.
(balance of payments; &asy; p. 21); L4!
21. The EEEEEEEE is a national account that records transactions involvin# the import and e4port
of #oods and services$ income receipts on assets abroad$ and income payments on forei#n
assets inside the country.
(current account; Moderate; p. 21+; L4!
22. The EEEEEEEE account within the current account includes e4ports and imports of tan#ible
#oods.
(merchandise; &asy; p. 21+; L4!
2'. The EEEEEEEE account within the current account includes e4ports and imports of services.
(services; &asy; p. 21+; L4!
24. The EEEEEEEE account within the current account includes income earned on =.>. assets held
abroad.
(income receipts; 3ifficult; p. 21+; L4!
ESSAY QUESTIONS
1. <hat factors have propelled #rowth in forei#n direct investment in recent yearsA
(Moderate; p. 204020+; L1!
2. <hich #roups of nations are the main sources and destinations of forei#n direct investmentA
(Moderate; p. 20+020-; L1!
'. =sin# any two of the four theories that appear in your te4t$ e4plain why companies en#a#e in
forei#n direct investment.
(3ifficult; p. 20-0201; L1!
Ch 7: Foreign Direct Investment
4. &4plain the theory of mar*et imperfections and describe the two mar*et imperfections.
(3ifficult; p. 20/; L2!
1+). 3istin#uish between the different advanta#es identified by the eclectic theory.
(Moderate; p. 201; L2!
+. 3iscuss the mar*et power theory and e4plain how a company can achieve mar*et power.
(Moderate; p. 201; L2!
-. 3escribe any three mana#ement issues involved in forei#n direct investment decisions.
(&asy; p. 2010214; L'!
/. 3iscuss some surprises that may face mana#ers as they invest in new mar*ets. 7ow can
mana#ers minimi.e the disadvanta#es of doin# business abroadA
(Moderate; p. 212; L'!
1. 3escribe how the ma%uiladora concept wor*s. <hat are the advanta#es and disadvanta#es of
Me4ico6s ma%uiladoraA
(&asy; p. 21'; L'!
10. <hat is meant by the term ?followin# clientsA@ 2n which industries would the strate#y be
commonA
(&asy; p. 21'0214; L'!
11. 3iscuss the balance of payments usin# its two ma:or components.
(3ifficult; p. 21)021+; L4!
12. 2dentify why a home country mi#ht support or discoura#e out#oin# forei#n direct investment.
(3ifficult; p. 21-021/; L4!
1'. <hy mi#ht a host country promote or restrict forei#n direct investmentA
(3ifficult; p. 21+021-; L4!
14. &4plain the methods of restrictin# and promotin# forei#n direct investment that home and
host countries can use.
(3ifficult; p. 21/0220; L)!