Chapter 07 – Foreign Direct Investment

41. (p. 242) FDI occurs when a

A. Domestic firm imports products and services from another country
B. Firm ships its product from one country to another
C. Firm invests in the stock of another company
D. Firm invests directly in facilities to produce and/or market a product in a foreign country

42. (p. 242) A Greenfield investment

A. Is a form of FDI that involves the establishment of a new operation in a foreign country
B. Involves a 7 percent stock in an acquired foreign business entity
C. Involves a merger with a foreign business
D. Occurs when a firm acquires another company in a foreign country

43. (p. 242) If General Electric, a U.S. based corporation, purchased a 50% interest in a company in Italy,
that purchase would be an example of a(n)
A. Minority acquisition
B. Outright stake
C. Majority acquisition
D. Greenfield investment

44. (p. 242) The amount of FDI undertaken over a given time period is
A. The flow of FDI
B. The stock of FDI
C. The FDI outflow
D. The FDI inflow

45. (p. 242) The stock of FDI is

A. The amount of FDI undertaken over a given period of time
B. The total accumulated value of foreign owned assets at a given time
C. The flow of FDI out of a country
D. The flow of FDI into a country

46. (p. 242) FDI has been rising for all of the following reasons, except
A. The globalization of the world economy
B. The general increase in trade barriers over the past 30 years
C. Firms are trying to circumvent trade barriers
D. There is a shift toward democratic political institutions and free market economies

47. (p. 244) Historically, most FDI has been directed at the _____ nations of the world as firms based in
advanced countries invested in
A. Underdeveloped, underdeveloped countries
B. Developed, underdeveloped countries
C. Developed, each other's markets
D. Underdeveloped, each other's markets

48. (p. 244) The U.S. has been an attractive target for FDI because of all of the following reasons, except
A. Its small and wealthy domestic markets
B. Its dynamic and stable economy
C. Its favorable political environment
D. Its openness to FDI
Chapter 07 – Foreign Direct Investment

49. (p. 244) Identify the incorrect statement regarding the direction of FDI.
A. Historically, most FDI has been directed at the developing nations of the world
B. During the 1980s and 1990s, the United States was often the favorite target for FDI inflows
C. The developed nations of the EU have received significant FDI inflows
D. Recent inflows into developing nations have been targeted at the emerging economies of South, East
and Southeast Asia

50. (p. 246) Africa is not a popular destination for FDI because of all of the following reasons, except
A. Political unrest in the region
B. Armed conflict in the region
C. Liberalization of FDI regulations
D. Frequent policy changes in the region

51. (p. 246) The total amount of capital invested in factories, stores, office buildings and the like is
summarized by
A. Gross fixed capital formation
B. Total investment capital
C. Total tangible investment
D. Gross depreciable investments

52. (p. 246) The largest source country for FDI since World War II has been
A. Japan
B. China
C. The United States
D. The United Kingdom

53. (p. 247) Most cross-border investment is

A. In the form of Greenfield investments
B. Made via mergers and acquisitions
C. Between American and Japanese companies
D. Involved in building new facilities

54. (p. 247) Which of the following is not a reason why firms prefer to acquire existing assets rather than
undertake green-field investments?
A. Foreign firms are acquired because those firms have valuable strategic assets
B. Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by
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 green-field investments

55. (p. 247) In developing nations most FDI inflows are in the form of
A. Mergers
B. Greenfield investments
C. Acquisitions
D. Non-profit organizations

56. (p. 248) The sector composition of FDI shows that by 2004 approximately _____ of FDI stock was in
service industries.
A. One fourth
B. One third
C. Two third
D. Half
Chapter 07 – Foreign Direct Investment

57. (p. 248) The rise in FDI in the services sector is a result of all of the following, except
A. The general move in many developed countries away from manufacturing and toward services
B. Accelerating regulations of services
C. Many services cannot be traded internationally
D. Many countries have liberalized their regimes governing FDI in services

58. (p. 248) When strategic assets such as brand loyalty, customer relationships or distribution systems are
important, _____ investments are more appropriate.
A. Merger and acquisition
B. Greenfield
C. Portfolio
D. New construction

59. (p. 249) _____ 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. Horizontal FDI
B. Licensing
C. Vertical FDI
D. Greenfield investment

60. (p. 249) In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market.
A. Licensee
B. Licensor
C. Acquiring firm
D. Greenfield investor

61. (p. 250) Identify the theory that seeks to explain why firms often prefer foreign direct investment over
licensing as a strategy for entering foreign markets.
A. Internalization theory
B. Internationalization theory
C. Perfect markets theory
D. Small markets theory

62. (p. 250) 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 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 firms capabilities such as the management, marketing and manufacturing are often not amenable to
licensing

63. (p. 250) ______ is also known as market imperfections theory.

A. Internationalization theory
B. Internalization theory
C. Perfect markets theory
D. Small markets theory
Chapter 07 – Foreign Direct Investment

64. (p. 251) If four firms control 80 percent of a domestic market, then ______ exists.
A. An oligopoly
B. A monopoly
C. An oligarchy
D. Vertical integration

65. (p. 251) 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

66. (p. 252) The eclectic paradigm was developed by

A. F. T. Knickerbocker
B. Adam Smith
C. Raymond Vernon
D. John Dunning

67. (p. 252) When two or more enterprises encounter each other in different regional markets, national
markets or industries, there is
A. Vertical integration
B. Horizontal integration
C. Multipoint competition
D. Monopolistic competition

68. (p. 252) 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

69. (p. 253) The _____ suggests that a firm will establish production facilities where foreign assets or
resource endowments that are important to the firm are located.
A. Product life cycle
B. Strategic behavior theory
C. Multipoint competition theory
D. Eclectic paradigm

70. (p. 253) Advantages that arise from using resource endowments or assets that are tied to a particular
location and that a firm finds valuable to combine with its own unique assets are known as
A. Location specific advantages
B. Resource specific advantages
C. Competitive advantages
D. Directional advantages
Chapter 07 – Foreign Direct Investment

71. (p. 253) John Dunning, a champion of the eclectic paradigm, argues that
A. The firms that pioneer a product in their home markets undertake FDI to produce a product for
consumption in a foreign market
B. When a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the
industry will be compelled to make similar investments
C. Combining location-specific assets or resource endowments and the firm's own unique assets often
requires FDI
D. Impediments to the sale of know-how increase the profitability of FDI relative to licensing

72. (p. 254) According to the _____ view of FDI, MNEs extract profits from the host country and take
them to their home country, giving nothing of value to the host country in exchange.
A. Imperialist
B. Conservative
C. Free market
D. Radical

73. (p. 254) Which of the following is not a reason that the radical position of MNEs was in retreat by the
end of the 1980s?
A. The strong economic performance of those developing countries that embraced capitalism 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 MNE's tightly controls key technology and that
important jobs in the MNEs' foreign subsidiaries go to home-country nationals

74. (p. 255) According to _____ international production should be distributed among countries according
to the theory of comparative advantage.
A. The radical view
B. The eclectic view
C. Pragmatic nationalism
D. The free market view

75. (p. 256) A distinctive aspect of _____ is the tendency to aggressively court FDI believed to be in the
national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.
A. The dogmatic view
B. Pragmatic nationalism
C. The radical view
D. The conservative view

76. (p. 257) When a company brings capital and/or technology to a host country, the host country benefits
from the
A. Competitive effect of FDI
B. The resource transfer effect of FDI
C. The balance of payments effect of FDI
D. The effect on competition and economic growth

77. (p. 258) When jobs are created in local suppliers as a result of the FDI and when jobs are created
because of increased local spending by employees of the MNE, the MNE has a _____ effect on
employment.
A. Direct
B. Indirect
C. Inward
D. Outward
Chapter 07 – Foreign Direct Investment

78. (p. 259) A _____ keeps track of a country's payments to and its receipts from other countries.
A. Federal payments ledger
B. Current accounting system
C. Checks and balances account
D. Balance of payments account

79. (p. 259) The _____ tracks the export and import of goods and services. A current account deficit or
trade deficit as it is often called, arises when a country is importing more goods and services than it is
exporting.
A. Current account
B. Debit account
C. Surplus account
D. Capital account

80. (p. 261) Three costs of FDI concerns of host countries arise from all of the following except
A. Adverse effects on competition within the host nation
B. Adverse effects on the balance of payments
C. The perceived loss of national sovereignty and autonomy
D. Debit on the current account of the home country's balance of payments

81. (p. 262) FDI undertaken to serve the home market is known as
A. Greenfield investment
B. FDI substitution
C. Offshore production
D. Home market FDI

82. (p. 263) Double taxation is

A. Charging double taxes in the home country
B. Charging double taxes in the host country
C. Taxation of income in both home and host country
D. Paying income taxes at twice the normal rate

83. (p. 264) _____ are controls over the behavior of the MNE's local subsidiary.
A. Performance requirements
B. Ownership restraints
C. Double taxation laws
D. Greenfield restrictions

84. (p. 267) 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

85. (p. 267) _____ is essentially the service industry version of licensing, although it normally involves
much longer term commitments.
A. Franchising
B. Subsidizing
C. Greenfield investment
D. Patenting