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49) 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) product life-cycle theory
C) perfect markets theory
D) random walk theory
50) In which of the following situations does the internalization theory recommend FDI as
opposed to licensing?
A) when the firm has know-how that can be adequately protected by a licensing contract
B) when the firm produces products that have a low value-to-weight ratio
C) when a firm's skills and know-how are amenable to licensing
D) when the firm needs tight control over a foreign entity
51) Which of the following best describes an industry composed of a limited number of large
firms?
A) an oligopoly
B) a monopoly
C) an oligarchy
D) a perfectly competitive market
52) Which of the following is a direct consequence of the interdependence between firms in an
oligopoly?
A) increased regulation
B) increased consumer welfare
C) imitative behavior
D) longer product life cycles
53) Which of the following observations concerning Knickerbocker's theory is true?
A) It does not explain imitative FDI behavior by firms in oligopolistic industries.
B) Economists favor this theory as an explanation for FDI compared to the internalization theory.
C) It addresses the issue of whether FDI is more efficient than exporting or licensing for expanding
abroad.
D) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to
export or license.
54) ________ arises when two or more enterprises encounter each other in different regional
markets, national markets, or industries.
A) Horizontal integration
B) Multipoint competition
C) An oligopoly
D) Vertical integration
55) According to Knickerbocker's theory
A) when a firm has valuable know-how that cannot be adequately protected by a licensing
contract, it engages in FDI.
B) when a firm's skills and know-how are not amenable to licensing, it usually prefers the FDI
route.
C) by placing tariffs on imported goods, governments indirectly increase the cost of exporting
relative to foreign direct investment and licensing.
D) 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.
56) What is the term that describes when two or more enterprises encounter each other in different
regional markets, national markets, or industries?
A) multipoint competition
B) monopoly
C) location-specific competition
D) oligopoly
57) Which of the following is a major drawback of using Knickerbocker's theory in explaining
FDI?
A) It ignores the fact that firms invest in a foreign country when demand in that country will
support local production.
B) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to
export or license.
C) It fails to identify when it is profitable to invest abroad.
D) It ignores the fact that licensing as an entry strategy has its limitations.
58) 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 theory
B) internalization theory
C) multipoint competition theory
D) eclectic paradigm
59) Advantages that arise from using resource endowments or assets that are tied to a particular
place and that a firm finds valuable to combine with its own unique assets are known as
A) location-specific advantages.
B) capital-specific advantages.
C) absolute advantages.
D) production factor advantages.
60) According to the ________ view of FDI, multinational enterprises (MNE) 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
61) Which view of FDI traces its roots to classical economics and the international trade theories
of Adam Smith and David Ricardo?
A) imperialist
B) conservative
C) free market
D) radical
62) Which political view allows FDI so long as the benefits outweigh the costs?
A) the traditional view
B) the pragmatic nationalist view
C) the radical view
D) the free market view
63) A country rejects FDI proposals in certain industries. It does so because the tangible
advantages of such investments are lesser than potential costs like loss of employment and
reduction of overall well-being. However, it aggressively pursues inviting foreign investments in
sectors like infrastructure, education, and health care because of the benefits that accrue with them.
Which political view of FDI is discussed in this example?
A) the pure market view
B) the free market view
C) the radical view
D) the pragmatic nationalist view
64) The country of Manystan has adopted neither a radical policy nor a free market policy, but
rather one that posits that FDI has both benefits and costs. This is best described as
A) pragmatic nationalism.
B) postmodernism.
C) the free market view.
D) the noninterventionist principle.
65) ________ traces its roots to Marxist political and economic theory.
A) The radical view
B) Pragmatic nationalism
C) The free market view
D) The noninterventionist principle
66) ________ argues that FDI is a benefit to both the source country and the host country.
A) Pragmatic nationalism
B) The free market view
C) The noninterventionist principle
D) The radical view
67) The pragmatic nationalist view highlights ________ of FDI.
A) only the benefits
B) only the costs
C) both the benefits and costs
D) neither the benefits nor the costs
68) An 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 radical view
B) the noninterventionist principle
C) the free market view
D) pragmatic nationalism
