CH 7

ch7
Student: ___________________________________________________________________________
1.
A firm becomes a multinational enterprise when it undertakes foreign direct investment. True False
2.
If a firm that makes bicycles in Germany acquires a French bicycle producer, Greenfield investment has taken place. True False
3.
The amount of FDI undertaken over a given time period is known as the flow of FDI. True False
4.
The total accumulated value of foreign-owned assets at a given time is the inflow of FDI. True False
5.
FDI is seen by executives as a means of circumventing future trade barriers. True False
6.
The total amount of capital invested in factories, stores, office buildings and the like is referred to as the stock of FDI. True False
7.
Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the markets of other advanced countries. True False
8.
Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. True False
9.
The largest source country for FDI has been China. True False
10. In developing countries, about one-third of FDI is in the form of mergers and acquisitions. True False
11. Licensing involves the establishment of a new operation in a foreign country. True False
12. As compared to exporting and licensing, FDI may be more expensive and risky. True False
13. Internalization theory is also known as the market imperfections approach. True False
14. One of the problems of licensing is that it may result in a firm's giving away valuable technological knowhow to a potential foreign competitor. True False
15. Licensing gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. True False
16. An oligopoly is an industry composed of a limited number of large firms. True False
17. When two or more enterprises encounter each other in different regional markets, national markets, or industries, regional competition occurs. True False
18. According to Vernon, location-specific advantages can help explain the rationale for and the direction of FDI. True False
19. Dunning, in the eclectic paradigm theory, suggests that a firm must establish production facilities where foreign assets or resource endowments necessary to the production of the product exist. True False
20. Classical economics and the international trade theories of Adam Smith and David Ricardo form the basis for the free market view. True False
21. The free market view argues that FDI is a benefit to both the source country and to the host country. True False
22. Pragmatic nationalism traces its roots to Marxist political and economic theory. True False
23. Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. True False
24. An aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants. True False
25. Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate. True False
26. There is research supporting the view that multinational firms often transfer significant technology when they invest in a foreign country. True False
27. Jobs created in local suppliers as a result of the MNE's investment and jobs created because of increased local spending by employees of the MNE are examples of direct employment effects of FDI. True False
28. Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI. True False
29. A country's balance of payments accounts keep track of both its payments to and its receipts from other countries. True False
30. A current account deficit exists when a country imports more than it exports. True False
31. Under a 1997 agreement sponsored by the WTO, outward investment has increased competition and stimulated investment in the modernization of telephone networks around the world, leading to better service. True False
32. Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. True False
33. FDI does not benefit the host country's balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate goods, or complementary products. True False
34. The term "offshore production" refers to FDI undertaken to serve the home market. True False
35. Countries cannot prohibit national firms from investing in certain countries for political reasons. True False
36. The two most common methods of restricting inward FDI are ownership restraints and performance requirements. True False
37. The WTO has been very successful in efforts to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI. True False
38. Licensing is a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. True False
39. Typically, licensing will be a common strategy in oligopolies where competitive interdependence requires that multinational firms maintain tight control over foreign operations so that they have the ability to launch coordinated attacks against their global competitors. True False
40. The product life-cycle theory and Knickerbocker's theory of horizontal FDI tend to be very useful from a business perspective because the theories are more descriptive than analytical. True False
41. FDI occurs when a: A. B. C. D. domestic firm imports products and services from another country. firm ships its product from one country to another. firm invests in the stock of another company. firm invests directly in facilities to produce or market a product in a foreign country.
42. A greenfield investment: A. B. C. D. is a form of FDI that involves the establishment of a new operation in a foreign country. involves a 7 percent stock in an acquired foreign business entity. involves a merger with a foreign business. occurs when a firm acquires another company in a foreign country.
43. If General Electric, a U.S. based corporation, purchased a 50 percent interest in a company in Italy, that purchase would be an example of a(n): A. B. C. D. minority acquisition. outright stake. majority acquisition. greenfield investment.
44. The stock of FDI is: A. B. C. D. the amount of FDI undertaken over a given period of time. the total accumulated value of foreign-owned assets at a given time. the flow of FDI out of a country. the flow of FDI into a country.
45. FDI has been rising for all of the following reasons except: A. B. C. D. the globalization of the world economy. the general increase in trade barriers over the past 30 years. firms are trying to circumvent trade barriers. there is a shift toward democratic political institutions and free market economies.
46. Historically, most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in: A. B. C. D. underdeveloped; underdeveloped countries. developed; underdeveloped countries. developed; each other's markets. underdeveloped; each other's markets.
47. The U.S. has been an attractive target for FDI because of all of the following reasons except: A. B. C. D. its small and wealthy domestic markets. its dynamic and stable economy. its favorable political environment. its openness to FDI.
48. 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. 49. Africa is not a popular destination for FDI because of all of the following reasons except: A. B. C. D. political unrest in the region. armed conflict in the region. liberalization of FDI regulations. frequent policy changes in the region.
50. The total amount of capital invested in factories, stores, office buildings, and the like is summarized by: A. B. C. D. gross fixed capital formation. total investment capital. total tangible investment. gross depreciable investments.
51. Most cross-border investment is: A. B. C. D. in the form of greenfield investments. made via mergers and acquisitions. between American and Japanese companies. involved in building new facilities.
52. Which of the following is not a reason why firms prefer to acquire existing assets rather than undertake greenfield investments? A. Foreign firms are acquired because those firms have valuable strategic assets. B Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by . transferring capital, technology, or management skills. C. Even though greenfield investments are comparatively less risky for a firm, acquisitions always yield higher profits. D. Mergers and acquisitions are quicker to execute than greenfield investments. 53. The rise in FDI in the services sector is a result of all of the following except: A. B. C. D. the general move in many developed countries away from manufacturing and toward services. accelerating regulations of services. many services cannot be traded internationally. many countries have liberalized their regimes governing FDI in services.
54. When strategic assets such as brand loyalty, customer relationships, or distribution systems are important, _____ investments are more appropriate. A. B. C. D. merger and acquisition greenfield portfolio new construction
55. _____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold. A. B. C. D. Horizontal FDI Licensing Vertical FDI Greenfield investment
56. In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market. A. B. C. D. licensee licensor acquiring firm greenfield investor
57. Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. A. B. C. D. Internalization theory Internationalization theory Perfect markets theory Small markets theory
58. _____ is also known as the market imperfections theory. A. B. C. D. Internationalization theory Internalization theory Perfect markets theory Small markets theory
59. According to the internalization theory, all of the following are drawbacks of licensing as a strategy for exploiting foreign market opportunities except: A. licensing does not grant control over manufacturing, marketing, and strategy is granted to a licensee in return for a royalty fee. B. licensing may result in a firm's giving away its know-how to a potential foreign competitor. C licensing does not give the firm the tight control over manufacturing, marketing, and strategy that may be . required to profitably exploit its advantage. D. a firm's capabilities such as management, marketing, and manufacturing are often not amenable to licensing. 60. If four firms control 80 percent of a domestic market, then _____ exists. A. B. C. D. an oligopoly a monopoly an oligarchy vertical integration
61. According to Knickerbocker: A. the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing. 62. When two or more enterprises encounter each other in different regional markets, national markets, or industries, there is: A. B. C. D. vertical integration. horizontal integration. multipoint competition. monopolistic competition.
63. The product life cycle suggests that: A often the same firms that pioneer a product in their home markets undertake FDI to produce a product for . consumption in foreign markets. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing.
64. The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located. A. B. C. D. product life cycle strategic behavior theory multipoint competition theory eclectic paradigm
65. Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are known as: A. B. C. D. location-specific advantages. resource-specific advantages. competitive advantages. directional advantages.
66. John Dunning, a champion of the eclectic paradigm, argues that: A. the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing. 67. 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. B. C. D. imperialist conservative free market radical
68. Which of the following is not a reason that the radical position of MNEs was in retreat by the end of the 1980s? A. The strong economic performance of those developing countries that embraced capitalism rather than radical ideology B. The collapse of communism in Eastern Europe C. The generally abysmal economic performance of those countries that embraced the radical position DA growing belief in many capitalist countries that MNEs tightly control key technology and that . important jobs in the MNEs' foreign subsidiaries go to home-country nationals 69. According to _____, international production should be distributed among countries according to the theory of comparative advantage. A. B. C. D. the radical view the eclectic view pragmatic nationalism the free market view
70. 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. B. C. D. the dogmatic view pragmatic nationalism the radical view the conservative view
71. When a company brings capital and/or technology to a host country, the host country benefits from the: A. B. C. D. competitive effect of FDI. resource-transfer effect of FDI. balance-of-payments effect of FDI. effect on competition and economic growth.
72. 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(n) _____ effect on employment. A. B. C. D. direct indirect inward outward
73. A _____ keeps track of a country's payments to and its receipts from other countries. A. B. C. D. federal payments ledger current accounting system checks-and-balances account balance-of-payments account
74. The _____ tracks the export and import of goods and services. A. B. C. D. current account debit account surplus account capital account
75. Three costs of FDI concerns of host countries arise from all of the following except: A. B. C. D. adverse effects on competition within the host nation. adverse effects on the balance of payments. the perceived loss of national sovereignty and autonomy. debit on the current account of the home country's balance of payments.
76. FDI undertaken to serve the home market is known as: A. B. C. D. greenfield investment. FDI substitution. offshore production. home market FDI.
77. Double taxation is: A. B. C. D. charging double taxes in the home country. charging double taxes in the host country. taxation of income in both home and host country. paying income taxes at twice the normal rate.
78. _____ are controls over the behavior of the MNE's local subsidiary. A. B. C. D. Performance requirements Ownership restraints Double taxation laws Greenfield restrictions
79. Licensing would be a good option for firms in which of the following industries? A. High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous. B Global oligopolies, in which competitive interdependence requires that multinational firms maintain tight . control over foreign operations. C. Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations. D. In fragmented, low-technology industries in which globally dispersed manufacturing is not an option. 80. _____ is essentially the service-industry version of licensing, although it normally involves much longer term commitments. A. B. C. D. Franchising Subsidizing Greenfield investment Patenting
81. Discuss the connection between foreign direct investment and multinational enterprises?
82. What are the two forms of foreign direct investment?
83. Discuss the trends in FDI over the last 30 years. Be sure to differentiate between the stock of FDI and the flow of FDI.
84. Discuss the reasons for the growth in FDI over the last 30 years.
85. What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely to choose? Explain your answer.
86. Discuss the shift in FDI from manufacturing to services. What is driving the trend?
87. Consider why firms selling products with low value-to-weight ratios choose FDI over exporting.
88. Discuss the market imperfections explanation of FDI. What is its relationship with internalization theory?
89. What is licensing? How does it work?
90. Compare and contrast the advantages of foreign direct investment over exporting and licensing.
91. Consider the notion that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. What is the main limitation of the theory?
92. What is multipoint competition? How do firms respond to multipoint competition?
93. Explain the product life cycle theory and its connection with FDI.
94. What are location-specific advantages? How do they help explain FDI?
95. Explain John Dunning's position on FDI. What is the eclectic paradigm?
96. Discuss the various political ideologies and their impact on foreign direct investment.
97. Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.
98. Describe the situations when licensing is not a good option for a firm.
99. What is franchising? What type of firm uses franchising as a means of expanding into foreign markets?
100.How useful are the product life-cycle theory and Knickerbocker's theory of horizontal FDI to business?
ch7 Key
1.
(p. 232)
A firm becomes a multinational enterprise when it undertakes foreign direct investment. TRUE
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Knowledge Difficulty: Easy Hill - Chapter 07 #1 Learning Objective: 07-1
2.
(p. 232)
If a firm that makes bicycles in Germany acquires a French bicycle producer, Greenfield investment has taken place. FALSE
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Comprehension Difficulty: Medium Hill - Chapter 07 #2 Learning Objective: 07-1
3.
(p. 232)
The amount of FDI undertaken over a given time period is known as the flow of FDI. TRUE
4.
(p. 232)
The total accumulated value of foreign-owned assets at a given time is the inflow of FDI. FALSE
5.
(p. 232)
FDI is seen by executives as a means of circumventing future trade barriers. TRUE

AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Knowledge Difficulty: Medium Hill - Chapter 07 #5 Learning Objective: 07-1
6.
(p. 232)
The total amount of capital invested in factories, stores, office buildings and the like is referred to as the stock of FDI. FALSE
7.
(p. 234)
Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the markets of other advanced countries. TRUE
AACSB: Domestic and Global Economic Environments Bloom's: Knowledge Difficulty: Medium Hill - Chapter 07 #7 Learning Objective: 07-1
8.
(p. 235)
Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. TRUE
AACSB: Value Creation Bloom's: Knowledge Difficulty: Medium Hill - Chapter 07 #8 Learning Objective: 07-1
9.
(p. 237)
The largest source country for FDI has been China. FALSE
10.
(p. 237)
In developing countries, about one-third of FDI is in the form of mergers and acquisitions. TRUE
11.
(p. 239)
Licensing involves the establishment of a new operation in a foreign country. FALSE

AACSB: Domestic and Global Economic Environments Bloom's: Knowledge Difficulty: Easy Hill - Chapter 07 #11 Learning Objective: 07-2
12.
(p. 239)
As compared to exporting and licensing, FDI may be more expensive and risky. TRUE
AACSB: Analytic Skills Bloom's: Knowledge Difficulty: Medium Hill - Chapter 07 #12 Learning Objective: 07-2
13.
(p. 240)
Internalization theory is also known as the market imperfections approach. TRUE

14.
(p. 240)
One of the problems of licensing is that it may result in a firm's giving away valuable technological know-how to a potential foreign competitor. TRUE
AACSB: Reflective Thinking Skills Bloom's: Comprehension Difficulty: Medium Hill - Chapter 07 #14 Learning Objective: 07-2
15.
(p. 241)
Licensing gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. FALSE
16.
(p. 243)
An oligopoly is an industry composed of a limited number of large firms. TRUE

AACSB: Analytic Skills Bloom's: Knowledge Difficulty: Easy Hill - Chapter 07 #16 Learning Objective: 07-2
17.
(p. 243)
When two or more enterprises encounter each other in different regional markets, national markets, or industries, regional competition occurs. FALSE
18.
(p. 244)
According to Vernon, location-specific advantages can help explain the rationale for and the direction of FDI. FALSE
19.
(p. 244)
Dunning, in the eclectic paradigm theory, suggests that a firm must establish production facilities where foreign assets or resource endowments necessary to the production of the product exist. TRUE
20.
(p. 246)
Classical economics and the international trade theories of Adam Smith and David Ricardo form the basis for the free market view. TRUE
21.
(p. 246)
The free market view argues that FDI is a benefit to both the source country and to the host country. TRUE
22.
(p. 247)
Pragmatic nationalism traces its roots to Marxist political and economic theory. FALSE
23.
(p. 247)
Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. TRUE
AACSB: Value Creation Bloom's: Knowledge Difficulty: Easy Hill - Chapter 07 #23 Learning Objective: 07-3
24.
(p. 247)
An aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants. TRUE
AACSB: Analytic Skills Bloom's: Application Difficulty: Medium Hill - Chapter 07 #24 Learning Objective: 07-3
25.
(p. 249)
Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate. TRUE
26.
(p. 249)
There is research supporting the view that multinational firms often transfer significant technology when they invest in a foreign country. TRUE
27.
(p. 250)
Jobs created in local suppliers as a result of the MNE's investment and jobs created because of increased local spending by employees of the MNE are examples of direct employment effects of FDI. FALSE
28.
(p. 250)
Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI. FALSE
29.
(p. 250)
A country's balance of payments accounts keep track of both its payments to and its receipts from other countries. TRUE
30.
(p. 250)
A current account deficit exists when a country imports more than it exports. TRUE
31.
(p. 251)
Under a 1997 agreement sponsored by the WTO, outward investment has increased competition and stimulated investment in the modernization of telephone networks around the world, leading to better service. FALSE
32.
(p. 252)
Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. TRUE
33.
(p. 253)
FDI does not benefit the host country's balance of payments if the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate goods, or complementary products. FALSE
AACSB: Domestic and Global Economic Environments Bloom's: Comprehension Difficulty: Medium Hill - Chapter 07 #33 Learning Objective: 07-4
34.
(p. 253)
The term "offshore production" refers to FDI undertaken to serve the home market. TRUE
35.
(p. 255)
Countries cannot prohibit national firms from investing in certain countries for political reasons. FALSE
36.
(p. 255)
The two most common methods of restricting inward FDI are ownership restraints and performance requirements. TRUE
37.
(p. 256)
The WTO has been very successful in efforts to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI. FALSE
38.
(p. 257)
Licensing is a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. FALSE
39.
(p. 257)
Typically, licensing will be a common strategy in oligopolies where competitive interdependence requires that multinational firms maintain tight control over foreign operations so that they have the ability to launch coordinated attacks against their global competitors. FALSE
40.
(p. 258)
The product life-cycle theory and Knickerbocker's theory of horizontal FDI tend to be very useful from a business perspective because the theories are more descriptive than analytical. FALSE
41.
(p. 232)
FDI occurs when a: A. B. C. D. domestic firm imports products and services from another country. firm ships its product from one country to another. firm invests in the stock of another company. firm invests directly in facilities to produce or market a product in a foreign country.
Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country.
42.
(p. 232)
A greenfield investment: A. B. C. D. is a form of FDI that involves the establishment of a new operation in a foreign country. involves a 7 percent stock in an acquired foreign business entity. involves a merger with a foreign business. occurs when a firm acquires another company in a foreign country.
FDI takes on two main forms, one of which is a greenfield investment, which involves establishing a new operation in a foreign country.
43.
(p. 232)
If General Electric, a U.S. based corporation, purchased a 50 percent interest in a company in Italy, that purchase would be an example of a(n): A. B. C. D. minority acquisition. outright stake. majority acquisition. greenfield investment.
Acquisitions can involve a minority stake (in which the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), majority stake (a foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Application Difficulty: Medium Hill - Chapter 07 #43 Learning Objective: 07-1
44.
(p. 232)
The stock of FDI is: A. B. C. D. the amount of FDI undertaken over a given period of time. the total accumulated value of foreign-owned assets at a given time. the flow of FDI out of a country. the flow of FDI into a country.
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time.
45.
(p. 232)
FDI has been rising for all of the following reasons except: A. B. C. D. the globalization of the world economy. the general increase in trade barriers over the past 30 years. firms are trying to circumvent trade barriers. there is a shift toward democratic political institutions and free market economies.
There has been a general decline in trade barriers over the past 30 years.
AACSB: Reflective Thinking Skills Bloom's: Comprehension Difficulty: Hard Hill - Chapter 07 #45 Learning Objective: 07-1
46.
(p. 234)
Historically, most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in: A. B. C. D. underdeveloped; underdeveloped countries. developed; underdeveloped countries. developed; each other's markets. underdeveloped; each other's markets.
Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the markets of other advanced countries.
AACSB: Reflective Thinking Skills Bloom's: Comprehension Difficulty: Easy Hill - Chapter 07 #46 Learning Objective: 07-1
47.
(p. 234)
The U.S. has been an attractive target for FDI because of all of the following reasons except: A. B. C. D. its small and wealthy domestic markets. its dynamic and stable economy. its favorable political environment. its openness to FDI.
The United States has been an attractive target for FDI because of its large and wealthy domestic markets, its dynamic and stable economy, a favorable political environment, and the openness of the country to FDI.
48.
(p. 234)
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. Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the markets of other advanced countries.
49.
(p. 235)
Africa is not a popular destination for FDI because of all of the following reasons except: A. B. C. D. political unrest in the region. armed conflict in the region. liberalization of FDI regulations. frequent policy changes in the region.
The inability of Africa to attract greater investment is in part a reflection of the political unrest, armed conflict, and frequent changes in economic policy in the region.
AACSB: Reflective Thinking Skills Bloom's: Comprehension Difficulty: Easy Hill - Chapter 07 #49 Learning Objective: 07-1
50.
(p. 235)
The total amount of capital invested in factories, stores, office buildings, and the like is summarized by: A. B. C. D. gross fixed capital formation. total investment capital. total tangible investment. gross depreciable investments.
Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like. Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be.
51.
(p. 237)
Most cross-border investment is: A. B. C. D. in the form of greenfield investments. made via mergers and acquisitions. between American and Japanese companies. involved in building new facilities.
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. The data suggest the majority of cross-border investments are in the form of mergers and acquisitions rather than greenfield investments.
52.
(p. 238)
Which of the following is not a reason why firms prefer to acquire existing assets rather than undertake greenfield investments? A. Foreign firms are acquired because those firms have valuable strategic assets. B Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by . transferring capital, technology, or management skills. C. Even though greenfield investments are comparatively less risky for a firm, acquisitions always yield higher profits. D. Mergers and acquisitions are quicker to execute than greenfield investments. Foreign firms are acquired because those firms have valuable strategic assets. It is easier and perhaps less risky for a firm to acquire those assets than to build them from the ground up through a greenfield investment.
53.
(p. 238)
The rise in FDI in the services sector is a result of all of the following except: A. B. C. D. the general move in many developed countries away from manufacturing and toward services. accelerating regulations of services. many services cannot be traded internationally. many countries have liberalized their regimes governing FDI in services.
Many countries have liberalized their regimes governing FDI in services. This liberalization has made large inflows possible.
54.
(p. 238)
When strategic assets such as brand loyalty, customer relationships, or distribution systems are important, _____ investments are more appropriate. A. B. C. D. merger and acquisition greenfield portfolio new construction
Mergers and acquisitions are quicker to execute than greenfield investments. Foreign firms are acquired because those firms have valuable strategic assets, such as brand loyalty, customer relationships, trademarks or patents, distribution systems, production systems, and the like. It is easier and perhaps less risky for a firm to acquire those assets than to build them from the ground up through a greenfield investment.
55.
(p. 239)
_____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold. A. B. C. D. Horizontal FDI Licensing Vertical FDI Greenfield investment
With licensing, control over manufacturing, marketing, and strategy is granted to a licensee in return for a royalty fee.
56.
(p. 239)
In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market. A. B. C. D. licensee licensor acquiring firm greenfield investor
When a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.
57.
(p. 240)
Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. A. B. C. D. Internalization theory Internationalization theory Perfect markets theory Small markets theory
A branch of economic theory known as internalization theory (also known as the market imperfections approach) seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
58.
(p. 240)
_____ is also known as the market imperfections theory. A. B. C. D. Internationalization theory Internalization theory Perfect markets theory Small markets theory
A branch of economic theory known as internalization theory (also known as the market imperfections approach) seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
59.
(p. 241)
According to the internalization theory, all of the following are drawbacks of licensing as a strategy for exploiting foreign market opportunities except: A. licensing does not grant control over manufacturing, marketing, and strategy is granted to a licensee in return for a royalty fee. B. licensing may result in a firm's giving away its know-how to a potential foreign competitor. C licensing does not give the firm the tight control over manufacturing, marketing, and strategy that . may be required to profitably exploit its advantage. D. a firm's capabilities such as management, marketing, and manufacturing are often not amenable to licensing. With licensing, control over manufacturing, marketing, and strategy is granted to a licensee in return for a royalty fee.
60.
(p. 243)
If four firms control 80 percent of a domestic market, then _____ exists. A. B. C. D. an oligopoly a monopoly an oligarchy vertical integration
An oligopoly is an industry composed of a limited number of large firms.

61.
(p. 243)
According to Knickerbocker: A. the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing. The interdependence between firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an oligopoly. Imitative behavior can take many forms in an oligopoly. One firm raises prices, the others follow; one expands capacity, and the rivals imitate lest they be left at a disadvantage in the future. Knickerbocker argued that the same kind of imitative behavior characterizes FDI.
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Knowledge Difficulty: Hard Hill - Chapter 07 #61 Learning Objective: 07-2
62.
(p. 243)
When two or more enterprises encounter each other in different regional markets, national markets, or industries, there is: A. B. C. D. vertical integration. horizontal integration. multipoint competition. monopolistic competition.
Knickerbocker's theory can be extended to embrace the concept of multipoint competition. Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.
63.
(p. 243)
The product life cycle suggests that: A often the same firms that pioneer a product in their home markets undertake FDI to produce a product . for consumption in foreign markets. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing. According to Raymond Vernon's product life-cycle theory, firms undertake FDI at particular stages in the life cycle of a product they have pioneered. They invest in other advanced countries when local demand in those countries grows large enough 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.
64.
(p. 244)
The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located. A. B. C. D. product life cycle strategic behavior theory multipoint competition theory eclectic paradigm
The eclectic paradigm attempts to combine two sets of perspectives of foreign direct investment into a single holistic explanation of foreign direct investment (this theoretical perspective is eclectic because it combines the best aspects of other theories into a single explanation).
65.
(p. 244)
Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are known as: A. B. C. D. location-specific advantages. resource-specific advantages. competitive advantages. directional advantages.
John Dunning argues that in addition to various other factors, location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.
66.
(p. 244)
John Dunning, a champion of the eclectic paradigm, argues that: A. the firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign market. B when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the . industry will be compelled to make similar investments. C. combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI. D. impediments to the sale of know-how increase the profitability of FDI relative to licensing. John Dunning argues that combining location-specific assets or resource endowments with the firm's own unique capabilities often requires the firm to establish production facilities where those foreign assets or resource endowments are located.
67.
(p. 245)
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. B. C. D. imperialist conservative free market radical
Radical writers see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
68.
(p. 246)
Which of the following is not a reason that the radical position of MNEs was in retreat by the end of the 1980s? A. The strong economic performance of those developing countries that embraced capitalism rather than radical ideology B. The collapse of communism in Eastern Europe C. The generally abysmal economic performance of those countries that embraced the radical position D A growing belief in many capitalist countries that MNEs tightly control key technology and that . important jobs in the MNEs' foreign subsidiaries go to home-country nationals One of the reasons the radical position was in retreat almost everywhere was the generally abysmal economic performance of those countries that embraced the radical position and a growing belief by many of these countries that FDI can be an important source of technology and jobs and can stimulate economic growth.
69.
(p. 246)
According to _____, international production should be distributed among countries according to the theory of comparative advantage. A. B. C. D. the radical view the eclectic view pragmatic nationalism the free market view
The free market view traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo. The intellectual case for this view has been strengthened by the internalization explanation of FDI.
70.
(p. 247)
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. B. C. D. the dogmatic view pragmatic nationalism the radical view the conservative view
The pragmatic nationalist view is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost.
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Application Difficulty: Medium Hill - Chapter 07 #70 Learning Objective: 07-3
71.
(p. 249)
When a company brings capital and/or technology to a host country, the host country benefits from the: A. B. C. D. competitive effect of FDI. resource-transfer effect of FDI. balance-of-payments effect of FDI. effect on competition and economic growth.
Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate.
AACSB: Value Creation Bloom's: Knowledge Difficulty: Easy Hill - Chapter 07 #71 Learning Objective: 07-4
72.
(p. 250)
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(n) _____ effect on employment. A. B. C. D. direct indirect inward outward
One beneficial employment effect claimed for FDI is that it brings jobs to a host country that would otherwise not be created there. The effects of FDI on employment are both direct and indirect.
73.
(p. 250)
A _____ keeps track of a country's payments to and its receipts from other countries. A. B. C. D. federal payments ledger current accounting system checks-and-balances account balance-of-payments account
FDI's effect on a country's balance-of-payments accounts is an important policy issue for most host governments.
74.
(p. 250)
The _____ tracks the export and import of goods and services. A. B. C. D. current account debit account surplus account capital account
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.
75.
(p. 252)
Three costs of FDI concerns of host countries arise from all of the following except: A. B. C. D. adverse effects on competition within the host nation. adverse effects on the balance of payments. the perceived loss of national sovereignty and autonomy. debit on the current account of the home country's balance of payments.
A concern that arises when a foreign subsidiary imports a substantial number of its inputs from abroad is that it results in a debit on the current account of the host country's balance of payments.
76.
(p. 253)
FDI undertaken to serve the home market is known as: A. B. C. D. greenfield investment. FDI substitution. offshore production. home market FDI.
According to international trade theory, home-country concerns about the negative economic effects of offshore production may be misplaced. Offshore production may actually stimulate economic growth in the home country by freeing home-country resources to concentrate on activities where the home country has a comparative advantage.
77.
(p. 254)
Double taxation is: A. B. C. D. charging double taxes in the home country. charging double taxes in the host country. taxation of income in both home and host country. paying income taxes at twice the normal rate.
As a further incentive to encourage domestic firms to undertake FDI, many countries have eliminated double taxation of foreign income (i.e., taxation of income in both the host country and the home country).
78.
(p. 256)
_____ are controls over the behavior of the MNE's local subsidiary. A. B. C. D. Performance requirements Ownership restraints Double taxation laws Greenfield restrictions
The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.
79.
(p. 257)
Licensing would be a good option for firms in which of the following industries? A. High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardous. B. Global oligopolies, in which competitive interdependence requires that multinational firms maintain tight control over foreign operations. C. Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations. D. In fragmented, low-technology industries in which globally dispersed manufacturing is not an option. Licensing tends to be more common, and more profitable, in fragmented, low-technology industries in which globally dispersed manufacturing is not an option.
80.
(p. 257)
_____ is essentially the service-industry version of licensing, although it normally involves much longer term commitments. A. B. C. D. Franchising Subsidizing Greenfield investment Patenting
With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits.
81.
(p. 232)
Discuss the connection between foreign direct investment and multinational enterprises? Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce 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 a firm undertakes FDI, it becomes a multinational enterprise.
AACSB: Analytic Skills Bloom's: Comprehension Difficulty: Easy Hill - Chapter 07 #81 Learning Objective: 07-1
82.
(p. 232)
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 percent ownership position.
83.
(p. 232)
Discuss the trends in FDI over the last 30 years. Be sure to differentiate between the stock of FDI and the flow of FDI. The flow of FDI refers to the amount of FDI undertaken over a given period, while the stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Over the last 30 years, there has been a marked increase in both the flow and the stock of FDI in the world economy. Over this period, the flow of FDI accelerated faster than the growth in world trade and world output.
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Comprehension Difficulty: Hard Hill - Chapter 07 #83 Learning Objective: 07-1
84.
(p. 232234)
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.
85.
(p. 237238)
What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely to choose? Explain 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 rather than greenfield investments. 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.
86.
(p. 238)
Discuss the shift in FDI from manufacturing to services. What is driving the trend? Over the last 20 years, the sector composition of FDI has shifted from extractive industries and manufacturing toward services. By 2004, some 54 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 the principal way 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.
87.
(p. 239)
Consider why firms selling products with low value-to-weight ratios 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 are 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.
88.
(p. 240)
Discuss the market imperfections explanation of FDI. What is its relationship with internalization theory? Market imperfections, or factors that inhibit markets from working perfectly, provide 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.
89.
(p. 239)
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 name 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.
90.
(p. 242)
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 firm's capabilities are simply not amenable to licensing, as may often be the case.
AACSB: Financial Theories, Analysis, Reporting, and Markets Bloom's: Comprehension Difficulty: Easy Hill - Chapter 07 #90 Learning Objective: 07-2
91.
(p. 242243)
Consider the notion that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. What is the main limitation of the theory? The strategic behavior approach to explain FDI was initially expounded by Knickerbocker who argued that in an oligopolistic industry, a "follow the leader" mentality will prompt firms to pursue FDI when another firm in the industry has already done so. However, the theory fails to explain why the first firm decided to undertake FDI, rather than export or license.
92.
(p. 243)
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 other's moves in different markets to try to hold 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.
93.
(p. 243244)
Explain the product life cycle theory and its connection with FDI. The product life cycle theory, developed by Raymond 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 industrialized 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.
94.
(p. 244)
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 valuable to combine 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.
95.
(p. 244)
Explain John Dunning's 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 locationspecific 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. Dunning's 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 firm's own unique capabilities often requires the firm to establish production facilities where the foreign assets or resource endowments are located.
96.
(p. 245247)
Discuss the various political ideologies and their impact on foreign direct 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.
AACSB: Domestic and Global Economic Environments Bloom's: Knowledge Difficulty: Hard Hill - Chapter 07 #96 Learning Objective: 07-3
97.
(p. 249253)
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 possible 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 country's 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.
AACSB: Domestic and Global Economic Environments Bloom's: Knowledge Difficulty: Hard Hill - Chapter 07 #97 Learning Objective: 07-4
98.
(p. 257)
Describe 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, licensing 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.
99.
(p. 257258)
What is franchising? What type of firm uses franchising 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 franchisee's profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor's 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 with opening a foreign market, because brand names are relatively 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.
100.
(p. 258)
How useful are the product life-cycle theory and Knickerbocker's theory of horizontal FDI to business? The product life-cycle theory and Knickerbocker's 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.
ch7 Summary
Category AACSB: Analytic Skills AACSB: Domestic and Global Economic Environments AACSB: Financial Theories, Analysis, Reporting, and Markets AACSB: Reflective Thinking Skills AACSB: Value Creation Bloom's: Application Bloom's: Comprehension Bloom's: Knowledge Difficulty: Easy Difficulty: Hard Difficulty: Medium Hill - Chapter 07 Learning Objective: 07-1 Learning Objective: 07-2 Learning Objective: 07-3 Learning Objective: 07-4 Learning Objective: 07-5 Learning Objective: 07-6 # of Questions 23 12 44 16 5 6 26 68 28 12 60 100 30 30 10 17 5 8

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

89. What is licensing? How does it work?

92. What is multipoint competition? How do firms respond to multipoint competition?

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

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

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

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

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

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