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Chapter 10: Foreign Direct Investment and Intra-Firm Trade
MULTIPLE CHOICE
1. Forward integration along a value chain refers to:
a. The addition of facilities to further process a product currently produced.
b. The introduction of a new material to be used in producing a product.
c. The consolidation of facilities to reduce production costs.
d. None of the above.
2. Firms choose to forward integrate because:
a. They are not competitive in sales of the product made from the primary source.
b. They wish to drive out other competing products in the home country.
c. They want to gain efficiency by spreading the costs of firm-specific assets over more
processes.
3. Why do firms choose not to license production of a particular product but rather to
internalize it?
a. The domestic firm would be uncompetitive.
b. They fear the loss of production technologies or intellectual property to the licensee.
c. The foreign firm would be uncompetitive.
d. There would be an efficiency loss.
4. Intra-firm trade is:
a. An arms-length transaction between firms.
b. A transaction that takes place between elements of one firm.
c. Trade between firms in two different countries.
d. None of the above.
5. An investment by a firm in a previous stage of its global production network in a foreign
country is called:
a. Forward vertical FDI.
b. Backward vertical FDI.
c. Horizontal FDI.
d. None of the above.
6. An investment by a firm in the same stage of its global production network in a foreign
country is called:
a. Forward vertical FDI.
b. Backward vertical FDI.
c. Horizontal FDI.
d. None of the above.
7. Which of the following is an example of an intangible, firm-specific asset?
a. Brand loyalty.
b. Access to advanced materials.
c. Advanced machinery.
d. Intra-firm trade.
8. Which of the following is not a component of the OLI framework?
a. Ownership advantage.
b. Location advantage.
c. Intra-firm advantage.
d. Internalization advantage.
TRUE/FALSE
1. A paper company might choose to forward integrate into cardboard box liner production
in order to gain firm-level economies.
2. A paper company’s tangible firm-specific asset would be the forest resources it owned.
3. An example of Intel’s tangible firm-specific assets would be “Intel Inside.”
4. When a firm operates in more than one country, it becomes a multinational enterprise.
5. An arms-length transaction takes place between two different units within the same firm.
6. Trade between two firms in the same industry is called inter-industry trade.
7. Trade that takes place between two different firms in two different industries is called
inter-firm, inter-industry trade.
8. Location advantages in the OLI Framework help to explain why a home-based MNE
chooses FDI rather than licensing to achieve production in a foreign country.
9. Ownership advantages in the OLI Framework help to explain how a firm’s tangible and
intangible assets help it to overcome the extra costs of doing business internationally.
SHORT ANSWER
1. What do we mean by firm-specific assets?
2. What do we mean by firm-level economies?
3. Instead of internalizing a link in a global production network through FDI, why might a
firm instead consider licensing?
4. Instead of considering licensing, why might a firm internalize a link in a global
production network through FDI?
5. What does ownership advantage contribute to the OLI framework?
6. What does location advantage contribute to the OLI framework?
7. What does internalization advantage contribute to the OLI framework?
8. Contrast forward vertical FDI from backward vertical FDI.
