International Business: The Challenges of Globalization, 9e (Wild)
Chapter 7 Foreign Direct Investment
1) Which type of investment involves the acquisition of foreign assets for the purpose of
controlling them?
A) foreign direct investment
B) foreign portfolio investment
C) capital investment
D) controlling ownership
2) ________ represents passive holdings of securities such as foreign stocks, bonds, or other
financial assets.
A) Direct investment
B) Portfolio investment
C) Capital investment
D) Controlling ownership
3) Which of the following is a major driver of foreign direct investment?
A) vertical integration
B) horizontal integration
C) globalization
D) cultural diversity
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
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
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
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
8) The balance of payments is useful to international business people for which of the following
reasons?
A) warning of new policies that could affect a country’s business climate
B) indicating stability in a country’s foreign policy
C) signaling increased riskiness of lending to countries
D) predicting future technological changes
9) GMI’s investments are examples of ________.
A) foreign direct investment
B) portfolio investment
C) vertical integration
D) horizontal integration
10) Which of the following systems of production is used by GMI?
A) job
B) craft
C) rationalized
D) customized
11) GMI’s purchase of the Brazilian company is best classified as a(n) ________.
A) greenfield investment
B) portfolio investment
C) acquisition
D) merger
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
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
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
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
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
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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.
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
19) All factors of production are internationally mobile.
20) Portfolio investment is the purchase of physical assets of a company in another country to
gain a degree of management control.
21) Increasing globalization is causing a growing number of international companies from
emerging markets to undertake FDI.
22) Developed countries have historically been the major participants behind cross-border
mergers and acquisitions.
23) Firms from emerging markets account for a greater share of global mergers and acquisitions
than developed markets.
24) Foreign direct investment is acquisition of foreign assets for the purpose of controlling them.
25) Building a subsidiary abroad from the ground up is called a greenfield investment.
26) The soaring cost of developing subsequent stages of technology has led multinationals to
engage in cross-border alliances and acquisitions.
27) In industries having a limited number of small firms, foreign direct investment decisions
frequently resemble a “follow the leader” scenario.
28) A majority of the regulatory changes that governments around the world introduced in recent
years are unfavorable to FDI.
29) The merchandise account includes exports and imports of tangible goods.
30) The income payments account includes income earned on home country assets held abroad.
31) A current account surplus occurs when a country exports more goods and receives more
income from abroad than it imports and pays abroad.
32) One reason a home country may discourage foreign direct investment outflows is to protect
its “sunset” industries.
33) What two factors propel growth in foreign direct investment?
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
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
36) Which of the following is a form of foreign direct investment?
A) participating a contract manufacturing arrangement
B) foreign bond ownership
C) participation in a joint venture
D) mutual fund ownership
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
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
39) In which stage of the international product life cycle does the innovating firm’s country
become a net importer of the product?
A) new product stage
B) maturing product stage
C) standardized product stage
D) never
40) Which international trade theory originated in the marketing field?
A) new trade theory
B) product life cycle theory
C) country similarity theory
D) theory of competitive advantage
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
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
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
44) Which theory explains why a firm would choose to enter a foreign market via FDI rather
than exploit its ownership advantages internationally through other means?
A) eclectic theory
B) internalization theory
C) relative factor endowments
D) national competitive advantage
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
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
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
48) In the maturing product stage of the international product life cycle theory, increased
competition creates pressures to reduce production costs.
49) According to the market imperfections theory, competition is a common market
imperfection.
50) Trade barriers and specialized knowledge are examples of market imperfections.
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.
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.
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.
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.
55) Using any two of the four theories that appear in your text, explain why companies engage in
foreign direct investment.
56) Explain the theory of market imperfections and describe the two major market imperfections.
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.
58) How does the eclectic theory explain the concept of FDI? How can a host country offer
incentives to attract FDI?
59) A company can achieve market power through ________.
A) ownership advantages
B) internalization advantages
C) horizontal integration
D) vertical integration