Chapter 07 - Foreign Direct Investment

Chapter 07 Foreign Direct Investment

/ Questions

1. (p. 242) A firm becomes a multinational enterprise when it underta es foreign direct investment.

Difficulty: Easy

!. (p. 242) "icensing involves the establishment of a new operation in a foreign countr#.

Difficulty: Easy

$. (p. 242) If a firm that ma es bic#cles in %erman# ac&uires a French bic#cle producer' %reenfield investment has ta en place.

Difficulty: Medium

(. (p. 242) )he amount of FDI underta en over a given time period is nown as the flow of FDI.

Difficulty: Easy

*. (p. 242) )he total accumulated value of foreign-owned assets at a given time is the inflow of FDI.

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

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Chapter 07 - Foreign Direct Investment

+. (p. 242) FDI is seen b# e,ecutives as a means of circumventing future trade barriers.

Difficulty: Medium

7. (p. 244) -istoricall#' most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others. mar ets.

Difficulty: Medium

/. (p. 246) )he total amount of capital invested in factories' stores' office buildings and the li e is referred to as the stoc of FDI.

Difficulty: Medium

0. (p. 246) )he largest source countr# for FDI has been China.

Difficulty: Medium

10. (p. 247) About !7 percent of the world.s largest 100 nonfinancial multinationals in !00( were American companies.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

11. (p. 247) In developing countries' about one third of FDI is in the form of mergers and ac&uisitions.

Difficulty: Hard

1!. (p. 248) In !00(' about two thirds of FDI stoc was in service industries.

Difficulty: Hard

1$. (p. 249) As compared to e,porting and licensing' FDI is the more e,pensive and ris #.

Difficulty: Medium

1(. (p. 250) Internali1ation theor# is also nown as the mar et imperfections approach.

Difficulty: Medium

1*. (p. 250) 2ne of the problems of licensing is that it ma# result in a firm.s giving awa# valuable technological now-how to a potential foreign competitor.

Difficulty: Medium

1+. (p. 25 ) An oligopol# is an industr# composed of a limited number of large firms.

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

17. (p. 252) 3hen two or more enterprises encounter each other in different regional mar ets' national mar ets or industries regional competition occurs.

Difficulty: Medium

1/. (p. 252) According to 4ernon' location specific advantages can help e,plain the nature and direction of FDI.

Difficulty: Hard

10. (p. 25!) Dunning' in the eclectic paradigm theor#' suggests that a firm must establish production facilities where foreign assets or resource endowments necessar# to the production of the product e,ist.

Difficulty: Medium

!0. (p. 254) 5ragmatic nationalism traces its roots to 6ar,ist political and economic theor#.

Difficulty: Medium

!1. (p. 254) Classical economics and the international trade theories of Adam 7mith and David 8icardo form the basis for the free mar et view.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

!!. (p. 255) )he free mar et view argues that FDI is a benefit to both the source countr# and to the host countr#.

Difficulty: Medium

!$. (p. 255) Countries adopting a pragmatic stance pursue policies designed to ma,imi1e the national benefits and minimi1e the national costs.

Difficulty: Easy

!(. (p. 256) An aspect of pragmatic nationalism is the tendenc# to aggressivel# court FDI believed to be in the national interest b#' for e,ample' offering subsidies to foreign 69:s in the form of ta, brea s or grants.

Difficulty: Medium

!*. (p. 257) Foreign direct investment can ma e a positive contribution to a host econom# b# suppl#ing capital' technolog# and management resources that would otherwise not be available and thus boost that countr#.s economic growth rate.

Difficulty: Medium

!+. (p. 258) )here is research supporting the view that multinational firms often transfer significant technolog# when the# invest in a foreign countr#.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

!7. (p. 258) ;obs created in local suppliers as a result of the 69:.s investment and <obs created because of increased local spending b# emplo#ees of the 69: are e,amples of direct emplo#ment effects of FDI.

Difficulty: Medium

!/. (p. 258) -ost countr# citi1ens that are emplo#ed b# an 69: following an FDI are an e,ample of an indirect effect of FDI.

Difficulty: Medium

!0. (p. 259) A countr#.s balance of pa#ments accounts eep trac of both its pa#ments to and its receipts from other countries.

Difficulty: Medium

$0. (p. 259) A current account deficit e,ists when a countr# imports more than it e,ports.

Difficulty: Easy

$1. (p. 259) In recent #ears' the =.7. has run a persistent balance of pa#ments surplus.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

$!. (p. 260) -ost governments sometimes worr# that the subsidiaries of foreign 69:s ma# have greater economic power than indigenous competitors.

Difficulty: Easy

$$. (p. 26 ) FDI does not benefit the host countr#.s balance of pa#ments if the foreign subsidiar# creates demand for home-countr# e,ports of capital e&uipment' intermediate goods or complementar# products.

Difficulty: Medium

$(. (p. 262) )he term offshore production refers to FDI underta en to serve the home mar et.

Difficulty: Easy

$*. (p. 26!) Countries cannot prohibit national firms from investing in certain countries for political reasons.

Difficulty: Medium

$+. (p. 264) )he two most common methods of restricting inward FDI are ownership restraints and performance re&uirements.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

$7. (p. 265) )he 3)2 has been ver# successful in efforts to initiate tal s aimed at establishing a universal set of rules designed to promote the liberali1ation of FDI.

Difficulty: Medium

$/. (p. 266) "icensing is a good option for firms in high-tech industries where protecting firmspecific e,pertise is of paramount importance.

Difficulty: Medium

$0. (p. 266"267) )#picall# licensing will be a common strateg# in oligopolies where competitive interdependence re&uires that multinational firms maintain tight control over foreign operations so that the# have the abilit# to launch coordinated attac s against their global competitors.

Difficulty: Medium

(0. (p. 267) "icensing is more common in fragmented' low-tech industries in which globall# dispersed manufacturing is not an option.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

Multiple Choice Questions

(1. (p. 242) FDI occurs when a A. Domestic firm imports products and services from another countr# >. Firm ships its product from one countr# to another C. Firm invests in the stoc of another compan# D. Firm invests directl# in facilities to produce and?or mar et a product in a foreign countr#

Difficulty: Easy

(!. (p. 242) A %reenfield investment A. Is a form of FDI that involves the establishment of a new operation in a foreign countr# >. Involves a 7 percent stoc in an ac&uired foreign business entit# C. Involves a merger with a foreign business D. 2ccurs when a firm ac&uires another compan# in a foreign countr#

Difficulty: Easy

($. (p. 242) If %eneral :lectric' a =.7. based corporation' purchased a *0@ interest in a compan# in Ital#' that purchase would be an e,ample of aAnB A. 6inorit# ac&uisition >. 2utright sta e C. 6a<orit# ac&uisition D. %reenfield investment

Difficulty: Medium

((. (p. 242) )he amount of FDI underta en over a given time period is A. )he flow of FDI >. )he stoc of FDI C. )he FDI outflow D. )he FDI inflow

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

(*. (p. 242) )he stoc of FDI is A. )he amount of FDI underta en over a given period of time B. )he total accumulated value of foreign owned assets at a given time C. )he flow of FDI out of a countr# D. )he flow of FDI into a countr#

Difficulty: Easy

(+. (p. 242) FDI has been rising for all of the following reasons' e,cept A. )he globali1ation of the world econom# B. )he general increase in trade barriers over the past $0 #ears C. Firms are tr#ing to circumvent trade barriers D. )here is a shift toward democratic political institutions and free mar et economies

Difficulty: Hard

(7. (p. 244) -istoricall#' most FDI has been directed at the CCCCC nations of the world as firms based in advanced countries invested in A. =nderdeveloped' underdeveloped countries >. Developed' underdeveloped countries C. Developed' each other.s mar ets D. =nderdeveloped' each other.s mar ets

Difficulty: Easy

(/. (p. 244) )he =.7. has been an attractive target for FDI because of all of the following reasons' e,cept A. Its small and wealth# domestic mar ets >. Its d#namic and stable econom# C. Its favorable political environment D. Its openness to FDI

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

(0. (p. 244) Identif# the incorrect statement regarding the direction of FDI. A. -istoricall#' most FDI has been directed at the developing nations of the world >. During the 10/0s and 1000s' the =nited 7tates was often the favorite target for FDI inflows C. )he developed nations of the := have received significant FDI inflows D. 8ecent inflows into developing nations have been targeted at the emerging economies of 7outh' :ast and 7outheast Asia

Difficulty: Hard

*0. (p. 246) Africa is not a popular destination for FDI because of all of the following reasons' e,cept A. 5olitical unrest in the region >. Armed conflict in the region C. "iberali1ation of FDI regulations D. Fre&uent polic# changes in the region

Difficulty: Easy

*1. (p. 246) )he total amount of capital invested in factories' stores' office buildings and the li e is summari1ed b# A. %ross fi,ed capital formation >. )otal investment capital C. )otal tangible investment D. %ross depreciable investments

Difficulty: Easy

*!. (p. 246) )he largest source countr# for FDI since 3orld 3ar II has been A. ;apan >. China C. )he =nited 7tates D. )he =nited Dingdom

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

*$. (p. 247) 6ost cross-border investment is A. In the form of %reenfield investments B. 6ade via mergers and ac&uisitions C. >etween American and ;apanese companies D. Involved in building new facilities

Difficulty: Medium

*(. (p. 247) 3hich of the following is not a reason wh# firms prefer to ac&uire e,isting assets rather than underta e green-field investmentsE A. Foreign firms are ac&uired because those firms have valuable strategic assets >. Firms ma e ac&uisitions because the# believe the# can increase the efficienc# of the ac&uired unit b# transferring capital' technolog# or management s ills C. :ven though %reenfield investments are comparativel# less ris # for a firm ac&uisitions alwa#s #ield higher profits D. 6ergers and ac&uisitions are &uic er to e,ecute than green-field investments

Difficulty: Medium

**. (p. 247) In developing nations most FDI inflows are in the form of A. 6ergers B. %reenfield investments C. Ac&uisitions D. 9on-profit organi1ations

Difficulty: Medium

*+. (p. 248) )he sector composition of FDI shows that b# !00( appro,imatel# CCCCC of FDI stoc was in service industries. A. 2ne fourth >. 2ne third C. )wo third D. -alf

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

*7. (p. 248) )he rise in FDI in the services sector is a result of all of the following' e,cept A. )he general move in man# developed countries awa# from manufacturing and toward services B. Accelerating regulations of services C. 6an# services cannot be traded internationall# D. 6an# countries have liberali1ed their regimes governing FDI in services

Difficulty: Medium

*/. (p. 248) 3hen strategic assets such as brand lo#alt#' customer relationships or distribution s#stems are important' CCCCC investments are more appropriate. A. 6erger and ac&uisition >. %reenfield C. 5ortfolio D. 9ew construction

Difficulty: Medium

*0. (p. 249) CCCCC involves granting a foreign entit# the right to produce and sell the firm.s product in return for a ro#alt# fee on ever# unit sold. A. -ori1ontal FDI B. "icensing C. 4ertical FDI D. %reenfield investment

Difficulty: Easy

+0. (p. 249) In a licensing arrangement' the CCCCC bears the ris and cost of opening a foreign mar et. A. "icensee >. "icensor C. Ac&uiring firm D. %reenfield investor

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

+1. (p. 250) Identif# the theor# that see s to e,plain wh# firms often prefer foreign direct investment over licensing as a strateg# for entering foreign mar ets. A. Internali1ation theor# >. Internationali1ation theor# C. 5erfect mar ets theor# D. 7mall mar ets theor#

Difficulty: Medium

+!. (p. 250) According to the internali1ation theor#' all of the following are drawbac s of licensing as a strateg# for e,ploiting foreign mar et opportunities' e,cept A. "icensing does not grant control over manufacturing' mar eting and to a licensee in return for a ro#alt# fee >. "icensing ma# result in a firm.s giving awa# its now-how to a potential foreign competitor C. "icensing does not give the firm the tight control over manufacturing' mar eting and strateg# that ma# be re&uired to profitabl# e,ploit its advantage D. A firms capabilities such as the management' mar eting and manufacturing are often not amenable to licensing

Difficulty: Medium

+$. (p. 250) CCCCCC is also nown as mar et imperfections theor#. A. Internationali1ation theor# B. Internali1ation theor# C. 5erfect mar ets theor# D. 7mall mar ets theor#

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

+(. (p. 25 ) If four firms control /0 percent of a domestic mar et' then CCCCCC e,ists. A. An oligopol# >. A monopol# C. An oligarch# D. 4ertical integration

Difficulty: Medium

+*. (p. 25 ) According to Dnic erboc er A. )he firms that pioneer a product in their home mar ets underta e FDI to produce a product for consumption in a foreign mar et B. 3hen a firm that is part of an oligopolistic industr# e,pands into a foreign mar et' other firms in the industr# will be compelled to ma e similar investments C. Combining location-specific assets or resource endowments and the firm.s own uni&ue assets often re&uires FDI D. Impediments to the sale of now-how increase the profitabilit# of FDI relative to licensing

Difficulty: Hard

++. (p. 252) )he eclectic paradigm was developed b# A. F. ). Dnic erboc er >. Adam 7mith C. 8a#mond 4ernon D. ;ohn Dunning

Difficulty: Easy

+7. (p. 252) 3hen two or more enterprises encounter each other in different regional mar ets' national mar ets or industries' there is A. 4ertical integration >. -ori1ontal integration C. 6ultipoint competition D. 6onopolistic competition

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

+/. (p. 252) )he product life c#cle suggests that A. 2ften the same firms that pioneer a product in their home mar ets underta e FDI to produce a product for consumption in foreign mar ets >. 3hen a firm that is part of an oligopolistic industr# e,pands into a foreign mar et' other firms in the industr# will be compelled to ma e similar investments C. Combining location-specific assets or resource endowments and the firm.s own uni&ue assets often re&uires FDI D. Impediments to the sale of now-how increase the profitabilit# of FDI relative to licensing

Difficulty: Medium

+0. (p. 25!) )he CCCCC suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located. A. 5roduct life c#cle >. 7trategic behavior theor# C. 6ultipoint competition theor# D. :clectic paradigm

Difficulty: Easy

70. (p. 25!) 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 uni&ue assets are nown as A. "ocation specific advantages >. 8esource specific advantages C. Competitive advantages D. Directional advantages

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

71. (p. 25!) ;ohn Dunning' a champion of the eclectic paradigm' argues that A. )he firms that pioneer a product in their home mar ets underta e FDI to produce a product for consumption in a foreign mar et >. 3hen a firm that is part of an oligopolistic industr# e,pands into a foreign mar et' other firms in the industr# will be compelled to ma e similar investments C. Combining location-specific assets or resource endowments and the firm.s own uni&ue assets often re&uires FDI D. Impediments to the sale of now-how increase the profitabilit# of FDI relative to licensing

Difficulty: Hard

7!. (p. 254) According to the CCCCC view of FDI' 69:s e,tract profits from the host countr# and ta e them to their home countr#' giving nothing of value to the host countr# in e,change. A. Imperialist >. Conservative C. Free mar et D. 8adical

Difficulty: Medium

7$. (p. 254) 3hich of the following is not a reason that the radical position of 69:s was in retreat b# the end of the 10/0sE A. )he strong economic performance of those developing countries that embraced capitalism rather than radical ideolog# >. )he collapse of communism in :astern :urope C. )he generall# ab#smal economic performance of those countries that embraced the radical position D. A growing belief in man# capitalist countries that 69:.s tightl# controls e# technolog# and that important <obs in the 69:s. foreign subsidiaries go to home-countr# nationals

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

7(. (p. 255) According to CCCCC international production should be distributed among countries according to the theor# of comparative advantage. A. )he radical view >. )he eclectic view C. 5ragmatic nationalism D. )he free mar et view

Difficulty: Medium

7*. (p. 256) A distinctive aspect of CCCCC is the tendenc# to aggressivel# court FDI believed to be in the national interest b#' for e,ample' offering subsidies to foreign 69:s in the form of ta, brea s or grants. A. )he dogmatic view B. 5ragmatic nationalism C. )he radical view D. )he conservative view

Difficulty: Medium

7+. (p. 257) 3hen a compan# brings capital and?or technolog# to a host countr#' the host countr# benefits from the A. Competitive effect of FDI B. )he resource transfer effect of FDI C. )he balance of pa#ments effect of FDI D. )he effect on competition and economic growth

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

77. (p. 258) 3hen <obs are created in local suppliers as a result of the FDI and when <obs are created because of increased local spending b# emplo#ees of the 69:' the 69: has a CCCCC effect on emplo#ment. A. Direct B. Indirect C. Inward D. 2utward

Difficulty: Medium

7/. (p. 259) A CCCCC eeps trac of a countr#.s pa#ments to and its receipts from other countries. A. Federal pa#ments ledger >. Current accounting s#stem C. Chec s and balances account D. >alance of pa#ments account

Difficulty: Easy

70. (p. 259) )he CCCCC trac s the e,port and import of goods and services. A current account deficit or trade deficit as it is often called' arises when a countr# is importing more goods and services than it is e,porting. A. Current account >. Debit account C. 7urplus account D. Capital account

Difficulty: Medium

/0. (p. 26 ) )hree costs of FDI concerns of host countries arise from all of the following e,cept A. Adverse effects on competition within the host nation >. Adverse effects on the balance of pa#ments C. )he perceived loss of national sovereignt# and autonom# D. Debit on the current account of the home countr#.s balance of pa#ments

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

/1. (p. 262) FDI underta en to serve the home mar et is nown as A. %reenfield investment >. FDI substitution C. 2ffshore production D. -ome mar et FDI

Difficulty: Medium

/!. (p. 26!) Double ta,ation is A. Charging double ta,es in the home countr# >. Charging double ta,es in the host countr# C. )a,ation of income in both home and host countr# D. 5a#ing income ta,es at twice the normal rate

Difficulty: Easy

/$. (p. 264) CCCCC are controls over the behavior of the 69:.s local subsidiar#. A. 5erformance re&uirements >. 2wnership restraints C. Double ta,ation laws D. %reenfield restrictions

Difficulty: Easy

/(. (p. 267) "icensing would be a good option for firms in which of the following industriesE A. -igh-technolog# industries in which protecting firm-specific e,pertise is of paramount importance and licensing is ha1ardous >. %lobal oligopolies' in which competitive interdependence re&uires that multinational firms maintain tight control over foreign operations C. Industries in which intense cost pressures re&uire that multinational firms maintain tight control over foreign operations D. In fragmented' low technolog# industries in which globall# dispersed manufacturing is not an option

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

/*. (p. 267) CCCCC is essentiall# the service industr# version of licensing' although it normall# involves much longer term commitments. A. Franchising >. 7ubsidi1ing C. %reenfield investment D. 5atenting

Difficulty: Easy

Essay Questions

/+. (p. 242) Discuss the connection between foreign direct investment and multinational enterprisesE Foreign direct investment AFDIB occurs when a firm invests directl# in new facilities to produce and?or mar et a product in a foreign countr#. )he =.7. Department of Commerce states that FDI occurs whenever a =.7. citi1en' organi1ation or affiliated group ta es an interest of 10 percent or more in a foreign business entit#. 2nce affirm underta es FDI' it becomes a multinational enterprise.

Difficulty: Easy

/7. (p. 242) 3hat are the two forms of foreign direct investmentE )he two forms of FDI are %reenfield investment or establishing a new operation in a foreign countr# and mergers and ac&uisitions whereb# a compan# e,pands internationall# through an e,isting firm. Ac&uisitions can be minorit#' ma<orit# or a 100@ ownership position.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

//. (p. 242) Discuss the trends in FDI over the last $0 #ears. >e sure to differentiate between the stoc of FDI and the flow if FDI. )he flow of FDI refers to the amount of FDI underta en over a given period' while the stoc of FDI refers to the total accumulated value of foreign-owned assets at a given time. 2ver the last $0 #ears there has been a mar ed increase in both the flow and the stoc of FDI in the world econom#. 2ver this period' the flow of FDI accelerated faster than the growth in world trade and world output.

Difficulty: Hard

/0. (p. 242) Discuss the reasons for the growth in FDI over the last $0 #ears. FDI has grown more rapidl# than world trade and world output for several reasons. First' man# companies see FDI as a means of circumventing potential trade barriers. 7econd' political and economic changes in man# of the world developing nations has been encouraging FDI. Finall#' the globali1ation of the world econom# is having a positive impact on the volume of FDI as firms now see the whole world as their mar et.

Difficulty: Medium

00. (p. 242"248) 3hat is a %reenfield investmentE -ow does it compare to an ac&uisitionE 3hich form of FDI is a firm more li el# chooseE :,plain #our answer. FDI can ta e the form of a %reenfield investment in a new facilit# or an ac&uisition of or a merger with an e,isting local firm. 8esearch shows that most FDI ta es the form of mergers and ac&uisitions rather than %reenfield investment. 6ergers and ac&uisitions are more popular for three reasons. First' mergers and ac&uisitions are &uic er to e,ecute than %reenfield investments. 7econd' foreign firms are ac&uired because those firms have valuable strategic assets. )hird' firms ma e ac&uisitions because the# believe the# can increase the efficienc# of the ac&uired firm b# transferring capital' technolog# or management s ills.

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

01. (p. 248) Discuss the shift in FDI from manufacturing to services. 3hat is driving the trendE 2ver the last twent# #ears' the sector composition of FDI has shifted from e,tractive industries and manufacturing toward services. ># !00(' some ++ percent of the stoc of FDI was in services. Four factors are driving the shift to services. First' the shift reflects the general move in man# developed economies awa# from manufacturing and toward service industries. 7econd' man# services cannot be traded internationall# and FDI is a principal was to bring services to foreign mar ets. )hird' man# countries have liberali1ed their regimes governing FDI in services ma ing the option more attractive to firms. Finall#' the rise of Internet-based global telecommunications networ s has allowed some service enterprises to relocate some of their value creation activities to different nations to ta e advantage of favorable factor costs.

Difficulty: Medium

0!. (p. 249) Consider wh# firms selling products with low value-to-weight ratios choose FDI over e,porting. 5roducts with low value-to-weight ratios such as soft drin s or cement are fre&uentl# produced in the mar et where the# are consumed. 3hen 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 an# location the attractiveness of e,porting decreases and FDI or licensing becomes more appealing.

Difficulty: Medium

0$. (p. 250) Discuss the mar et imperfections e,planation of FDI. 3hat is its relationship with internali1ation theor#E 6ar et imperfections or factors that inhibit mar ets from wor ing perfectl#' provide a ma<or e,planation of wh# firms prefer FDI to either e,porting or licensing. In the international business literature' the mar eting imperfections approach is referred to as internali1ation theor#. According to the theor#' FDI will be preferred when there are impediments that ma e both e,porting and the sale of now-how difficult and?or e,pensive.

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

0(. (p. 250) 3hat is licensingE -ow does it wor E "icensing 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 name or trademar . In return' the licensor collects ro#alt# fees on ever# unit the licensee sells or on total licensee revenues. )he licensor also benefits from the arrangement in that the licensee bears the cost and ris of e,panding into a foreign mar et.

Difficulty: Medium

0*. (p. 250) Compare and contrast the advantages of foreign direct investment over e,porting and licensing. A firm will favor foreign direct investment over e,porting as an entr# strateg# when transportation costs or trade barriers ma e e,porting unattractive. Furthermore' the firm will favor foreign direct investment over licensing Aor franchisingB when it wishes to maintain control over its technological now-how or over its operations and business strateg# or when the firm.s capabilities are simpl# not amenable to licensing' as ma# often be the case.

Difficulty: Easy

0+. (p. 25 ) Consider the notion that FDI flows are a reflection of strategic rivalr# between firms in the global mar etplace. 3hat is the main limitation of the theor#E )he strategic behavior approach to e,plain FDI was initiall# e,pounded b# Dnic erboc ers who argued that in an oliogopolistic industr#' a Ffollow the leaderF mentalit# will prompt firms to pursue FDI when another firm in the industr# has alread# done so. -owever' the theor# fails to e,plain wh# the first firm decided to underta e FDI' rather than e,port or license.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

07. (p. 252) 3hat is multipoint competitionE -ow do firms respond to multipoint competitionE 6ultipoint competition arises when two or more enterprises encounter each other in different regional mar ets' national mar ets or industries. :conomic theor# suggests that firms will tr# to match each other.s moves in different mar ets to tr# to hold each other in chec . If a firm is successful with this strateg#' the firm will ensure that a rival does not ta e a commanding position in one mar et and then use the profits generated in that mar et to underwrite competitive attac s in other mar ets.

Difficulty: Easy

0/. (p. 252) :,plain the product life c#cle theor# and its connection with FDI. )he product life c#cle theor#' developed b# 8a# 4ernon' suggests that the same firms that pioneer a product in their home countr# will underta e FDI to produce a product for consumption in foreign mar ets. According to the theor#' firms will invest in industriali1ed countries when demand in those countries is sufficient to support local production. )he# subse&uentl# shift production to developing countries when product standardi1ation and mar et saturation give rise to price competition and cost pressures. Investment in developing countries' where labor costs are lower is seen as the best wa# to reduce costs.

Difficulty: Medium

00. (p. 252"25!) 3hat are location-specific advantagesE -ow do the# help e,plain FDIE "ocation 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 valuable to combine with its own uni&ue assets. 9atural resources such as oil and minerals for e,ample' are specific to certain locations. Firms must underta e FDI to e,ploit such foreign resources.

Difficulty: Easy

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Chapter 07 - Foreign Direct Investment

100. (p. 25!) :,plain ;ohn Dunning.s position on FDI. 3hat is the eclectic paradigmE ;ohn Dunning has argued that to full# understand FDI it is important to consider the role of location specific advantages. According to Dunning' a firm will be prompted to underta e FDI in an effort to e,ploit assets that are specific to a particular location. Dunning.s theor#' the eclectic paradigm' combines the arguments of internali1ation theor# with the notion of location-specific advantages to suggest that combining location-specific assets or resource endowments and the firm.s own uni&ue capabilities often re&uires the firm to establish production facilities where the foreign assets or resource endowments are located.

Difficulty: Hard

101. (p. 254"256) Discuss the various political ideologies and their impact on foreign direct investment. )he radical view writers argue that the multinational enterprise A69:B is an instrument of imperialist domination. )he free mar et view argues that international production should be distributed among countries according to the theor# of comparative advantage. )he pragmatic nationalist view is that FDI has both benefits and costs. )he radical view has a dogmatic radical stance that is hostile to all inward FDI )he free mar et view is at the other e,treme and based on noninterventionist principle of free mar et economics. >etween these two e,tremes is an approach called pragmatic nationalism.

Difficulty: Hard

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Chapter 07 - Foreign Direct Investment

10!. (p. 257"262) Discuss the benefits and costs of FDI from the perspective of a host countr# and from the perspective of the home countr#. )he main benefits of inward FDI for a host countr# arise from resource-transfer effects' emplo#ment effects' balance-of-pa#ments effects and effects on competition and economic growth. )hree costs of FDI concern host countries. )he# arise from possible adverse effects on competition within the host nation' adverse effects on the balance of pa#ments and the perceived loss of national sovereignt# and autonom#. )he benefits of FDI to the home AsourceB countr# arise from three sources. First' the home countr#.s balance of pa#ments benefits from the inward flow of foreign earnings. 7econd' benefits to the home countr# from outward FDI arise from emplo#ment effects. )hird' benefits arise when the home-countr# 69: learns valuable s ills from its e,posure to foreign mar ets that can subse&uentl# be transferred bac to the home countr#. )he most important cost?concern of FDI for the home countr# centers on the balance-of-pa#ments and emplo#ment effects of outward FDI.

Difficulty: Hard

10$. (p. 266"267) Describe the situations when licensing is not a good option for a firm. "icensing is not a good option in three situations. First' licensing is ha1ardous in high-tech industries where protecting firm-specific e,pertise is ver# important. 7econd' licensing is not attractive in global oligopolies where tight control is necessar# so that firms have the abilit# to launch coordinated attac s against global competitors. Finall#' in industries where intense cost pressures re&uire that 69:s maintain tight control over foreign operations' licensing is not the best option.

Difficulty: Medium

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Chapter 07 - Foreign Direct Investment

10(. (p. 267) 3hat is franchisingE 3hat t#pe of firm uses franchising as a means of e,panding into foreign mar etsE Franchising is essentiall# the service-industr# version of licensing. 3ith franchising' the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee.s profits. )he franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor.s brand name. Franchise agreements usuall# have a longer time commitment than do licensing arrangements. Franchising is common in the fast food industr# because fast food cannot be e,ported' because franchising minimi1es the costs and ris s associated with opening a foreign mar et' because brand names are relativel# eas# to protect' because there is no compelling reason for a firm to have tight control over franchisees and because fast food now-how is easil# transferred.

Difficulty: Medium

10*. (p. 267) -ow useful are the product life c#cle theor# and Dnic erboc er.s theor# of hori1ontal FDI to businessE )he product life c#cle theor# and Dnic erboc er.s theor# of hori1ontal FDI to business are not particularl# useful from a business perspective because the theories are descriptive rather than anal#tical. )he theories are useful for e,plaining historical patterns of FDI' but the# do a poor <ob of identif#ing the factors that influence the relative probabilit# of FDI' licensing and e,porting.

Difficulty: Medium

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