Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Chapter 7 - QUIZ
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Chapter 7 - QUIZ
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International Business, 8e (Wild/Wild)
Chapter 7 Foreign Direct Investment
1) The purchase of physical assets or a significant amount of ownership of a company in another country to gain a measure of management control is called ________.
- A) portfolio investment
- B) foreign direct investment
- C) horizontal integration
- D) vertical integration
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
2) ________ is an investment that does not involve obtaining a degree of control in a company.
- A) Portfolio investment
- B) Foreign direct investment
- C) Horizontal integration
- D) Vertical integration
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
3) Which of the following is a major driver of foreign direct investment?
- A) vertical integration
- B) horizontal integration
- C) globalization
- D) cultural diversity
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
4) A(n) ________ advantage is the one that a company gains from incorporating a business activity within itself rather than leaving it to a relatively inefficient market.
- A) ownership
- B) internalization
- C) location
- D) comparative
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
5) Exports and imports of tourism and business consulting are included in the ________ account of a country's balance of payments.
- A) services
- B) merchandise
- C) capital
- D) savings
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
6) Exports and imports of tangible goods are included in the ________ account of a country's balance of payments.
- A) savings
- B) capital
- C) merchandise
- D) services
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
7) Exports and imports of computer software, electronic components, and apparel are included in the ________ account of a country's balance of payments.
- A) services
- B) capital
- C) merchandise
- D) savings
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
8) When a U.S. company buys shares of stock in a French company on France's stock market, the U.S. balance of payments records the transaction as an ________.
- A) outflow of capital with a plus sign
- B) outflow of capital with a minus sign
- C) inflow of capital with a plus sign
- D) inflow of capital with a minus sign
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
Scenario: Global Manufacturing Inc. (GMI)
Global Manufacturing Inc., a fast-growing U.S. company, plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest. The components will then be taken to maquiladoras for final assembly. GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B.
9) GMI's investments are examples of ________.
- A) foreign direct investment
- B) portfolio investment
- C) vertical integration
- D) horizontal integration
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
10) Which of the following systems of production is used by GMI?
- A) job
- B) craft
- C) rationalized
- D) customized
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
11) GMI's purchase of the Brazilian company is best classified as a(n) ________.
- A) greenfield investment
- B) portfolio investment
- C) acquisition
- D) demerger
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
12) GMI's subsidiary for component B in Thailand is best described as a(n) ________.
- A) greenfield investment
- B) portfolio investment
- C) acquisition
- D) merger
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
Scenario: Happyland
Happyland is a country characterized by beautiful beaches, vast natural resources, and a highly skilled labor force. Happyland is now encouraging foreign direct investment flows. The country has been exporting textiles, computer hardware, and software programs. The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
13) Happyland's international trade situation illustrates that the country is experiencing a ________.
- A) current account deficit
- B) capital account deficit
- C) current account surplus
- D) capital account surplus
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
14) Transactions involving the export of Happyland's textile and computer products are included in its ________ account.
- A) capital
- B) merchandise
- C) services
- D) income payments
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
15) If Happyland advertises its beaches and attracts tourists, the tourism-related income would be recorded in its ________ account.
- A) capital
- B) services
- C) income payments
- D) merchandise
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
16) If Happyland is successful in attracting foreign direct investment, transactions involving those investments would appear in the country's ________ account.
- A) capital
- B) services
- C) income payments
- D) merchandise
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
Scenario: Blickinstock at the Crossroads
Auto parts supplier, Blickinstock Ltd., would like to expand its presence in Latin America. To that end, Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary. Keith Moon, Blickinstock's vice president of global business development, will be making a presentation to the board outlining the company's options.
17) Blickinstock has identified a company that it can acquire or merge with. Which of the following statements would represent the least likely reason for Blickinstock to go ahead with the merger?
- A) The merger would help increase Blickinstock's global competitiveness.
- B) The merger would allow the company to get a foothold in the nascent Latin American market.
- C) The merger would help to fill the gaps in Blickinstock's product line.
- D) The merger would bring in increased cash-flows that Blickinstock can use to acquire other firms.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
18) If board members ask about the maquiladora industry, Keith would explain that it refers to ________.
- A) Mexico's low-cost labor union
- B) the cross-border drug trafficking problem that threatens to limit legitimate production in Mexico
- C) the low-wage, 130-mile-wide strip along the U.S.-Mexico border that comprises a special economic region
- D) Latin America's new model for business that restricts foreign investors to take advantage of government incentives
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
19) Not all factors of production are internationally mobile.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
20) Portfolio investment is the purchase of physical assets of a company in another country to gain a degree of management control.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
21) Increasing globalization is causing a growing number of international companies from emerging markets to undertake FDI.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
22) Developed countries have been the major participants behind cross-border mergers and acquisitions.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
23) Firms from emerging markets account for a greater share of global mergers and acquisitions than developed markets.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
24) In foreign direct investment, complete ownership of a company guarantees its complete control.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
25) Building a subsidiary abroad from the ground up is called a greenfield investment.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
26) The soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
27) In industries having a limited number of small firms, foreign direct investment decisions frequently resemble a "follow the leader" scenario.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
28) A majority of the regulatory changes that governments around the world introduced in recent years are unfavorable to FDI.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
29) The merchandise account includes exports and imports of tangible goods.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
30) The income payments account includes income earned on home country assets held abroad.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
31) A current account deficit occurs when a country exports more goods and receives more income from abroad than it imports and pays abroad.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
32) One reason a home country may discourage foreign direct investment outflows is to protect its "sunset" industries.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
33) What two factors propel growth in foreign direct investment?
Answer: The two main drivers of FDI flows are globalization and international mergers and acquisitions.
Globalization-Years ago, barriers to trade were not being reduced, and new, creative barriers seemed to be popping up in many nations. This presented a problem for companies that were trying to export their products to markets around the world. This resulted in a wave of FDI as many companies entered promising markets to get around growing trade barriers. But then the Uruguay Round of GATT negotiations created renewed determination to further reduce barriers to trade. As countries lowered their trade barriers, companies realized that they could now produce in the most efficient and productive locations and simply export to their markets worldwide. This set off another wave of FDI flows into low-cost, newly industrialized nations and emerging markets. Forces causing globalization to occur are, therefore, part of the reason for long-term growth in foreign direct investment. Increasing globalization is also causing a growing number of international companies from emerging markets to undertake FDI.
Mergers and Acquisitions-The number of mergers and acquisitions (M&As) and their rising values also underlie long-term growth in foreign direct investment. In fact, cross-border M&As are the main vehicle through which companies undertake foreign direct investment. Companies based in developed nations have historically been the main participants behind cross-border M&As, but firms from emerging nations are accounting for an ever greater share of global M&A activity.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).
34) The realization that companies can start production in the most efficient and productive locations in the world and export to markets worldwide led to a new surge of foreign direct investment into ________.
- A) First World nations
- B) low-income nations
- C) high-income nations
- D) newly industrialized nations
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
35) Which of the following is least likely a reason for companies to seek cross-border mergers and acquisitions?
- A) to get a foothold in new geographic markets
- B) to raise company budgets for increased research and development activities
- C) to increase a firm's global competitiveness
- D) to fill the gaps in companies' product lines in a global industry
Answer: B
Skill: Concept
Difficulty: Moderate
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
36) Which of the following is true of foreign direct investment?
- A) The contributions of entrepreneurs and small businesses to foreign direct investment is insignificant.
- B) Globalization has led emerging markets to undertake less foreign direct investment and industrialized nations to undertake more foreign direct investment.
- C) The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.
- D) Foreign direct investment does not involve obtaining a degree of control in a company.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
37) According to the international product life cycle theory, in which of the following stages is a good produced in the home country because of uncertain domestic demand and to keep production close to the research department?
- A) standardized product stage
- B) maturing product stage
- C) declining product stage
- D) new product stage
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
38) According to the international product life cycle theory, in which stage of a product's life cycle does a company directly invest in production facilities in countries where demand is great enough to warrant production facilities?
- A) new product stage
- B) maturing product stage
- C) standardized product stage
- D) declining product stage
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
39) In the ________ product stage of the international product life cycle theory, increased competition pressurizes a company to build production facilities in low-cost developing nations.
- A) new
- B) maturing
- C) standardized
- D) declining
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
40) A market that is said to operate at peak efficiency and where goods are readily and easily available is said to be a(n) ________ market.
- A) perfect
- B) Eurocurrency
- C) foreign exchange
- D) greenfield investment
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
41) The ________ theory states that when an aspect of the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the efficiency-reducing aspect.
- A) market power
- B) eclectic
- C) international product life cycle
- D) market imperfections
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
42) The requirement that a sufficient portion of a product's content must originate within a certain market to escape tariff charges is an example of a(n) ________.
- A) ad valorem tariff
- B) market imperfection
- C) tariff-quota
- D) subsidy
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
43) Which of the following theories states that firms undertake foreign direct investment, when the features of a particular location combine with ownership and internalization advantages, to make the location appealing for investment?
- A) market power theory
- B) international product life cycle theory
- C) market imperfections theory
- D) eclectic theory
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
44) A(n) ________ advantage is the advantage of conducting a particular economic activity in a specific area because of the characteristics of that area.
- A) internalization
- B) ownership
- C) comparative
- D) location
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
45) The possibility that a company will create a future competitor by charging another company for access to its knowledge is a(n) ________ that can encourage FDI.
- A) ownership advantage
- B) internalization advantage
- C) market imperfection
- D) trade barrier
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
46) The ________ theory states that a firm tries to establish a dominant presence in an industry by undertaking foreign direct investment.
- A) eclectic
- B) market power
- C) market imperfections
- D) international product life cycle
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
47) Which of the following is an example of a greenfield investment?
- A) an agricultural business acquisition in South-east Asia's former agricultural region
- B) the construction of an entirely new steel manufacturing subsidiary overseas
- C) a merger between a U.S. and a non-U.S. company
- D) the purchase of an existing business that is still in its infancy
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
48) In the maturing product stage of the international product life cycle theory, increased competition creates pressures to reduce production costs.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
49) According to the market imperfections theory, competition is a common market imperfection.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
50) Trade barriers and specialized knowledge are examples of market imperfections.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
51) The possibility that a company will create a future competitor by charging another company for access to its knowledge is a market imperfection that can encourage foreign direct investment.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
52) The eclectic theory states that firms undertake foreign direct investment only when the features of a particular location make the location appealing for investment.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
53) According to the eclectic theory that explains FDI, an ownership advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
54) According to the eclectic theory that explains FDI, an internalization advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
55) Using any two of the four theories that appear in your text, explain why companies engage in foreign direct investment.
Answer: International Product Life Cycle Theory-The international product life cycle is used to explain foreign direct investment. The international product life cycle theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world.
Market Imperfections (Internalization)-A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry-called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge.
Eclectic Theory-The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI.
Market Power Theory-Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
56) Explain the theory of market imperfections and describe the two major market imperfections.
Answer: A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry–called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge.
Trade Barriers-One common market imperfection in international business is trade barriers, such as tariffs. For example, the North American Free Trade Agreement stipulates that a sufficient portion of a product's content must originate within Canada, Mexico, or the United States for the product to avoid tariff charges when it is imported to any of these three markets.
Specialized Knowledge-The unique competitive advantage of a company sometimes consists of specialized knowledge. This knowledge could be the technical expertise of engineers or the special marketing abilities of managers. When the knowledge is technical expertise, companies can charge a fee to companies in other countries for use of the knowledge in producing the same or a similar product. But when a company's specialized knowledge is embodied in its employees, the only way to exploit a market opportunity in another nation may be to undertake FDI.
The possibility that a company will create a future competitor by charging another company for access to its knowledge is another market imperfection that can encourage FDI. Rather than trade a short-term gain (the fee charged another company) for a long-term loss (lost competitiveness), a company will prefer to undertake investment.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
57) Explain the market power theory of FDI, and discuss why the decision whether or not to follow rivals into a new international market is important.
Answer: Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.
One way a company can achieve market power (or dominance) is through vertical integration- the extension of company activities into stages of production that provide a firm's inputs (backward integration) or absorb its output (forward integration). Sometimes a company can effectively control the world supply of an input needed by its industry if it has the resources or ability to integrate backward into supplying that input. Companies may also be able to achieve a great deal of market power if they can integrate forward to increase control over output. For example, they could perhaps make investments in distribution to leapfrog channels of distribution that are tightly controlled by competitors.
Whether or not to follow rivals into a new international market is an important managerial decision. FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market. When firms based in industrial countries moved back into South Africa after the end of apartheid, their competitors followed. Of course, each market can sustain only a certain number of rivals. Firms that cannot compete choose the "least damaging option."
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
58) How does the eclectic theory explain the concept of FDI? How can a host country offer incentives to attract FDI?
Answer: The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI.
Host countries offer a variety of incentives to encourage FDI inflows. These take two general forms–financial incentives and infrastructure improvements.
Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time–extending as far out as five years or more. A country may also offer low-interest loans to investors.
Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements–better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.
59) A company can achieve market power through ________.
- A) ownership advantages
- B) internalization advantages
- C) horizontal integration
- D) vertical integration
Answer: D
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
60) ________ is the extension of company activities into stages of production that provide a firm's inputs or absorb its outputs.
- A) Decentralization
- B) Vertical integration
- C) Market penetration
- D) Social stratification
Answer: B
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
61) The extension of a company's activities into stages of production that absorb the company's outputs is known as ________.
- A) forward integration
- B) backward integration
- C) an internalization advantage
- D) an ownership advantage
Answer: A
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
62) Making investments in distribution in order to leapfrog channels of distribution that are tightly controlled by competitors is an example of ________.
- A) an internalization advantage
- B) an ownership advantage
- C) forward integration
- D) backward integration
Answer: C
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
63) Which of the following countries would a watchmaker most prefer to manufacture its watches in, in order to capitalize on buyer perceptions of high quality?
- A) China
- B) Thailand
- C) Mexico
- D) Switzerland
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
64) Firms engage in FDI when the firms they supply have already invested abroad. This practice of "following clients" is observed in industries having ________.
- A) a huge number of clients
- B) only large companies as clients
- C) suppliers who are geographically scattered around the world
- D) suppliers who have close working relationships with producers
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
65) Which of the following is true of a "follow the leader" scenario in the context of foreign direct investment?
- A) Companies that practice "follow the leader" supply each other with inputs.
- B) Companies that practice "follow the leader" pressurize each other to follow environmentally safe methods.
- C) It is a frequent practice in industries with a limited number of large firms.
- D) It is common in industries in which producers source component parts from suppliers.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
66) A country's ________ is a national accounting system that records all monetary transactions to entities in other countries and all receipts coming into the nation.
- A) balance of payments
- B) chart of accounts
- C) global financial system
- D) international monetary system
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
67) Which of the following accounts of a country's balance of payments records transactions involving the export of services?
- A) transactional account
- B) capital account
- C) savings account
- D) current account
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
68) Which of the following is recorded in the capital account of a country's balance of payments?
- A) income payments
- B) income receipts
- C) foreign official assets
- D) unilateral transfers
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
69) Which of the following accounts within the current account of the United States' balance of payments includes financial gains earned on U.S. assets held abroad?
- A) income receipts account
- B) income payments account
- C) merchandise account
- D) services account
Answer: A
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
70) The ________ account within the United States' current account includes financial gains compensated to entities in other nations that is earned on assets they hold in the United States.
- A) income receipts
- B) income payments
- C) merchandise
- D) services
Answer: B
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
71) When a U.S. subsidiary in another country remits profits back to its parent company in the U.S., the receipt of profits is recorded in the ________.
- A) income receipts account and given a plus sign
- B) income receipts account and given a minus sign
- C) income payments account and given a plus sign
- D) income payments account and given a minus sign
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
72) Which of the following occurs in a country's balance of payments when a country exports more goods and services and receives more income from abroad than it imports and pays abroad?
- A) current account deficit
- B) capital account surplus
- C) current account surplus
- D) capital account deficit
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.3: Outline the important management issues in the FDI decision.
Scenario: Global Manufacturing Inc. (GMI)
Global Manufacturing Inc., a fast-growing U.S. company, plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest. The components will then be taken to maquiladoras for final assembly. GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B.
73) In which of the following accounts would GMI's purchase of the company in Brazil appear?
- A) the current account of the United States
- B) the current account of Brazil
- C) the capital account of the Thailand
- D) the capital accounts of Brazil and the United States
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.3: Outline the important management issues in the FDI decision.
74) Rationalized production is a system of production in which each of a product's components is produced in the same location so that the cost of producing that product is lowest.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
75) A potential problem with a rationalized production model is that a work stoppage in one country can bring the entire production process to a standstill.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
76) Describe any three management issues involved in foreign direct investment decisions.
Answer:
- Control-Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Perhaps the company wants to be certain that its product is being marketed in the same way in the local market as it is at home. Or maybe it wants to ensure that the selling price remains the same in both markets. Some companies try to maintain ownership of a large portion of the local operation, say, even up to 100 percent, in the belief that greater ownership gives them greater control. Yet for a variety of reasons, even complete ownership does not guarantee control.
- Purchase-or-Build Decision-Another important matter for managers is whether to purchase an existing business or to build a subsidiary abroad from the ground up–called a greenfield investment. An acquisition generally provides the investor with an existing plant, equipment, and personnel. The acquiring firm may also benefit from the goodwill the existing company has built up over the years and, perhaps, brand recognition of the existing firm. The purchase of an existing business may also allow for alternative methods of financing the purchase, such as an exchange of stock ownership between the companies. Factors that can reduce the appeal of purchasing existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location.
- Production Costs-Many factors contribute to production costs in every national market. Labor regulations can add significantly to the overall cost of production. Companies may be required to provide benefits packages for their employees that are over and above hourly wages. More time than was planned for might be required to train workers adequately to bring productivity up to an acceptable standard. Although the cost of land and the tax rate on profits can be lower in the local market (or purposely lowered to attract multinationals), it cannot be assumed that they will remain constant.
- Customer Knowledge-The behavior of buyers is frequently an important issue in the decision of whether to undertake foreign direct investment. A local presence can help companies gain valuable knowledge about customers that could not be obtained from the home market. For example, when customer preferences for a product differ a great deal from country to country, a local presence might help companies to better understand such preferences and tailor their products accordingly.
- Following Clients-Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs.
- Following Rivals-FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
77) Discuss the role entrepreneurs and small businesses play in the expansion of FDI. What are some of the surprises that managers face as they invest in new markets abroad?
Answer: Entrepreneurs and small businesses also play a role in the expansion of FDI inflows. There is no data on the portion of FDI contributed by small businesses, but we know from anecdotal evidence that these companies are engaged in FDI. Unhindered by many of the constraints of a large company, entrepreneurs investing in other markets often demonstrate an inspiring can-do spirit mixed with ingenuity and bravado.
Building facilities in a market abroad can be difficult. Managers can minimize risk by preparing their companies for a number of surprises they might face.
- Human Resource Policies-Companies cannot always import home country policies without violating local laws or offending local customs. Countries have differing requirements for plant operations and their own regulations regarding business operations.
- Labor Costs-France has a minimum wage of about $12 an hour, whereas Mexico has a minimum wage of nearly $5 a day. But Mexico's real minimum wage is nearly double that due to government-mandated benefits and employment practices. Such differences are not always obvious.
- Mandated Benefits-These include company supplied clothing and meals, required profit sharing, guaranteed employment contracts, and generous dismissal policies. These costs can exceed an employee's wages and are typically not negotiable.
- Labor Unions-In some countries, organized labor is found in nearly every industry and at almost every company. Rather than dealing with a single union, managers may need to negotiate with five or six different unions, each of which represents a distinct skill or profession.
- Information-Sometimes there simply is no reliable data on factors such as labor availability, cost of energy, and national inflation rates. These data are generally high quality in developed countries and suspect in emerging and developing ones.
- Personal and Political Contacts-These contacts can be extremely important in developing and emerging markets and can be the only way to establish operations. But complying with locally accepted practices can cause ethical dilemmas for managers.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 7.3: Outline the important management issues in the FDI decision.
78) Explain the concept of balance of payments and describe its two major components.
Answer: A country's balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation. International transactions that result in payments (outflows) to entities in other nations are reductions in the balance of payments accounts and are therefore recorded with a minus sign. International transactions that result in receipts (inflows) from other nations are additions to the balance of payments accounts and thus are recorded with a plus sign.
Any nation's balance of payments consists of two major components-the current account and capital account. The current account is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. The merchandise account includes exports and imports of tangible goods such as computer software, electronic components, and apparel. The services account includes exports and imports of services such as tourism, business consulting, and banking services. Suppose a company in the United States receives payment for consulting services provided to a company in another country. The receipt is recorded as an "export of services" and assigned a plus sign in the services account in the balance of payments.
The capital account is a national account that records transactions involving the purchase or sale of assets. Suppose a U.S. citizen buys shares of stock in a Mexican company on Mexico's stock market. The transaction would show up on the capital accounts of both the United States and Mexico-as an outflow of assets from the United States and an inflow of assets to Mexico. Conversely, suppose a Mexican investor buys real estate in the United States. That transaction also shows up on the capital accounts of both nations-as an inflow of assets to the United States and as an outflow of assets from Mexico.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.3: Outline the important management issues in the FDI decision.
79) Why is it important to assess R&D costs when considering FDI? Given its costs, how can FDI benefit the host country with access to technology, management skills, and employment?
Answer: R&D costs are important production costs for companies considering FDI, and they have increased in recent years. As technology becomes an increasingly powerful competitive factor, the soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions. For instance, huge multinational pharmaceutical companies are intensely interested in the pioneering biotechnology work done by smaller, entrepreneurial startups.
One indicator of technology's significance in foreign direct investment is the amount of R&D conducted by companies' affiliates in other countries. The globalization of innovation and the phenomenon of foreign direct investment in R&D are not necessarily motivated by demand factors such as the size of local markets. They instead appear to be encouraged by supply factors, including gaining access to high-quality scientific and technical human capital.
Even given its costs, FDI can benefit a host country by providing new technology and labor skills to its citizens. Investment in technology, whether in products or processes, tends to increase the productivity and the competitiveness of a nation. That is why host nations have a strong incentive to encourage the importation of technology. For years, developing countries in Asia were introduced to expertise in industrial processes as multinationals set up factories within their borders.
Many formerly communist nations suffer from a lack of management skills needed to succeed in the global economy. By encouraging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of their domestic companies. Furthermore, locals who are trained in modern management techniques may eventually start their own local businesses–further expanding employment opportunities. Yet detractors argue that, although FDI may create jobs, it may also destroy jobs because less competitive local firms may be forced out of business.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 7.3: Outline the important management issues in the FDI decision.
80) Partnerships between a government and a host company in the context of foreign direct investment lead to ________.
- A) increased exploitation of workers in the home country
- B) domination of industries in the home country by large international firms
- C) increased market access for the host company
- D) increased control for the host country over its operations
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.4: Explain why governments intervene in FDI.
81) A firm's subsidiary built abroad from the ground up is called a(n) ________.
- A) greenfield investment
- B) portfolio investment
- C) distributive channel
- D) shell corporation
Answer: A
Skill: Concept
Difficulty: Easy
LO: 7.4: Explain why governments intervene in FDI.
82) Which of the following is a reason behind intervention by a host country on matters related to FDI?
- A) to keep their balance of payments under control
- B) to protect their outdated technology and management skills
- C) to strictly encourage the establishment of sunset industries
- D) to decrease the country's competitiveness in the global market
Answer: A
Skill: Concept
Difficulty: Moderate
LO: 7.4: Explain why governments intervene in FDI.
83) ________ are those that use outdated and obsolete technologies or employ low-wage workers with few skills.
- A) Business-agile enterprises
- B) Sunset industries
- C) Greenfield investments
- D) Shell corporations
Answer: B
Skill: Concept
Difficulty: Easy
LO: 7.4: Explain why governments intervene in FDI.
84) Ownership restrictions and performance demands are used by ________.
- A) host countries to promote FDI
- B) host countries to restrict FDI
- C) home countries to promote FDI
- D) home countries to restrict FDI
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.4: Explain why governments intervene in FDI.
Scenario: Blickinstock at the Crossroads
Auto parts supplier, Blickinstock Ltd., would like to expand its presence in Latin America. To that end, Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary. Keith Moon, Blickinstock's vice president of global business development, will be making a presentation to the board outlining the company's options.
85) If Blickinstock's home government tries to stop the company from investing in Latin America, the government is most likely trying to ________.
- A) protect its balance of payments
- B) prevent a monopoly situation from occurring
- C) discourage the entry of a "sunset" company
- D) protect the "sunset" companies in Latin America
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.4: Explain why governments intervene in FDI.
86) A system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest is called ________ production.
- A) rationalized
- B) craft
- C) job
- D) customized
Answer: A
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
87) Which of the following statements is true of rationalized production?
- A) It depends on a large number of distribution channels which leads to inefficiency.
- B) It depends on a large number of distribution channels which increases the cost of production.
- C) It can bring the entire production process to a standstill, if work is stopped in one country.
- D) It is an unethical method of production as it uses questionable labor practices to reduce costs.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
88) Which of the following is the type of production illustrated in the automobile industry?
- A) customized production
- B) rationalized production
- C) job production
- D) craft production
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
89) If a Japanese citizen invests in the Australian stock market, the transaction would show up on the capital account in the balance of payments of ________.
- A) Japan
- B) Australia
- C) both Japan and Australia
- D) neither Japan nor Australia
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
90) The difference between the balances of the current and capital accounts of a country's balance of payments caused by errors in recording methods is called a(n) ________.
- A) round-off error
- B) type I error
- C) currency crisis
- D) statistical discrepancy
Answer: D
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
91) Home nations discourage foreign direct investment outflows because it ________.
- A) discourages cooperation between countries
- B) replaces jobs in the home nation
- C) fails to protect the "sunset" industries in the home nation
- D) decreases long-term competitiveness of companies
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
92) A home country encourages outflows of foreign direct investment because it ________.
- A) helps in replacing jobs at home
- B) sends resources out of the home country
- C) tends to increase the long-term competitiveness of firms
- D) takes the place of all the exports and imports in the country
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
93) Which of the following methods is being used when a host country provides lower tax rates and low-interest loans to firms from abroad for encouraging inflows of foreign direct investment?
- A) financial incentives
- B) sanctions
- C) local content requirements
- D) embargoes
Answer: A
AACSB: Application of knowledge
Skill: Application
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
94) Tax breaks on profits earned abroad and political pressures are used by ________.
- A) host countries to promote FDI
- B) host countries to restrict FDI
- C) home countries to promote FDI
- D) home countries to restrict FDI
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
95) Which of the following methods is used by a host country to restrict incoming foreign direct investment?
- A) differential tax rates for earnings abroad
- B) insurance to cover the risk of overseas investments
- C) low-interest loans to investors
- D) performance demands
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
96) Which of the following is used by home-country governments to promote outbound foreign direct investment?
- A) political pressure
- B) performance demands
- C) ownership restrictions
- D) sanctions
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
97) Which of the following is used by home country governments to limit outbound foreign direct investment?
- A) ownership restrictions
- B) differential tax rates
- C) tax breaks
- D) low-interest loans
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
Scenario: Happyland
Happyland is a country characterized by beautiful beaches, vast natural resources, and a highly skilled labor force. Happyland is now encouraging foreign direct investment flows. The country has been exporting textiles, computer hardware, and software programs. The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.
98) Which of the following methods will Happyland use to encourage foreign direct investment inflows?
- A) tax incentives
- B) sanctions
- C) ownership restrictions
- D) performance demands
Answer: A
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
99) Which of the following methods will Happyland use to discourage foreign direct investment inflows?
- A) tax incentives
- B) low-interest loans
- C) performance demands
- D) tax breaks
Answer: C
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
100) Ownership restrictions is a method used by host countries to restrict incoming foreign direct investment.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
101) Performance demands made by host countries to restrict incoming FDI apply exclusively to businesses in cultural industries.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
102) Discuss why a host country might promote or restrict foreign direct investment.
Answer: Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs. When Mercedes opened its first international car plant in Tuscaloosa County, Alabama, auto-parts suppliers also moved to the area from Germany–bringing with them additional investment in the millions of dollars.
Nations often intervene in the flow of FDI to protect their cultural heritages, domestic companies, and jobs. They can enact laws, create regulations, or construct administrative hurdles that companies from other nations must overcome if they want to invest in the nation. Yet rising competitive pressure is forcing nations to compete against each other to attract multinational companies. The increased national competition for investment is causing governments to enact regulatory changes that encourage investment. The majority of regulatory changes that governments introduced in recent years are more favorable to FDI.
In a general sense, a bias toward protectionism or openness is rooted in a nation's culture, history, and politics. Values, attitudes, and beliefs form the basis for much of a government's position regarding foreign direct investment. For example, South American nations with strong cultural ties to a European heritage (such as Argentina) are generally enthusiastic about investment received from European nations. South American nations with stronger indigenous influences (such as Ecuador) are generally less enthusiastic.
Opinions vary widely on the appropriate amount of foreign direct investment a country should encourage. At one extreme are those who favor complete economic self-sufficiency and oppose any form of FDI. At the other extreme are those who favor no governmental intervention and booming FDI inflows. Between these two extremes lie most countries, which believe a certain amount of FDI is desirable to raise national output and enhance the standard of living for their people.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
103) Identify why a home country might support or discourage outgoing foreign direct investment.
Answer: Home nations (those from which international companies launch their investments) may also seek to encourage or discourage outflows of FDI for a variety of reasons. But home nations tend to have fewer concerns because they are often prosperous, industrialized nations. For these countries, an outward investment seldom has a national impact–unlike the impact on developing or emerging nations that receive the FDI. Nevertheless, among the most common reasons for discouraging outward FDI are the following:
- Investing in other nations sends resources out of the home country-As a result, fewer resources are used for development and economic growth at home. On the other hand, profits on assets abroad that are returned home increase both a home country's balance of payments and its available resources.
- Outgoing FDI may ultimately damage a nation's balance of payments by taking the place of its exports-This can occur when a company creates a production facility in a market abroad, the output of which replaces exports that used to be sent there from the home country.
- Jobs resulting from outgoing investments may replace jobs at home-This is often the most contentious issue for home countries. The relocation of production to a low-wage nation can have a strong impact on a locale or region. However, the impact is rarely national, and its effects are often muted by other job opportunities in the economy. In addition, there may be an offsetting improvement in home country employment if additional exports are needed to support the activity represented by the outgoing FDI.
But foreign direct investment is not always a negative influence on home nations. In fact, under certain circumstances, governments might encourage it. Countries promote outgoing FDI for the following reasons:
- Outward FDI can increase long-term competitiveness-Businesses today frequently compete on a global scale. The most competitive firms tend to be those that conduct business in the most favorable location anywhere in the world, continuously improve their performance relative to competitors, and derive technological advantages from alliances formed with other companies.
- Nations may encourage FDI in industries identified as "sunset" industries-Sunset industries are those that use outdated and obsolete technologies or employ low-wage workers with few skills. These jobs are not greatly appealing to countries having industries that pay skilled workers high wages. By allowing some of these jobs to go abroad and retraining workers in higher-paying skilled work, they can upgrade their economies toward "sunrise" industries. This represents a trade-off for governments between a short-term loss of jobs and the long-term benefit of developing workers' skills.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
104) Explain the various methods that host countries use to restrict and promote foreign direct investment.
Answer: Financial Incentives-Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time–extending as far out as five years or more. A country may also offer low-interest loans to investors.
The downside of these types of incentives is they can allow multinationals to create bidding wars between locations that are vying for the investment. In such cases, the company typically invests in the most appealing region after the locations endure rounds of escalating incentives. Companies have even been accused of engaging other governments in negotiations to force concessions from locations already selected for investment. The cost to taxpayers of attracting FDI can be several times what the actual jobs themselves pay–especially when nations try to one-up each other to win investment.
Infrastructure Improvements-Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements–better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.
Host countries also have a variety of methods to restrict incoming FDI. Again, these take two general forms–ownership restrictions and performance demands.
Ownership Restrictions-Governments can impose ownership restrictions that prohibit nondomestic companies from investing in certain industries or from owning certain types of businesses. Such prohibitions typically apply to businesses in cultural industries and companies vital to national security. Also, most nations do not allow FDI in their domestic weapons or national defense firms. Another ownership restriction is a requirement that nondomestic investors hold less than a 50 percent stake in local firms when they undertake foreign direct investment.
But nations are eliminating such restrictions because companies today often can choose another location that has no such restriction in place. When General Motors was deciding whether to invest in an aging automobile plant in Jakarta, Indonesia, the Indonesian government scrapped its ownership restriction of an eventual forced sale to Indonesians because China and Vietnam were also courting GM for the same financial investment.
Performance Demands-More common than ownership requirements are performance demands that influence how international companies operate in the host nation. Although typically viewed as intrusive, most international companies allow for them in the same way they allow for home country regulations. Performance demands include ensuring that a portion of the product's content originates locally, stipulating the portion of output that must be exported, or requiring that certain technologies be transferred to local businesses.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.
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