Chapter 6: Investing Abroad Directly
TRUE/FALSE
1. FPI refers to investment in a portfolio of foreign securities such as stocks and bonds that do not entail
the active management of foreign assets.
2. A type of FDI in which the firm moves upstream or downstream in different value chain stages in a
host country is called horizontal FDI.
3. Vertical FDI refers to producing the same products or offering the same services in a host country as
firms do at home.
4. FDI stock refers to accumulation of inbound FDI in a country or outbound FDI from a country.
5. FDI flow means foreign duty-free investment a country in a year.
6. Downstream vertical FDI refers to using FDI in an earlier activity in the value chain.
7. Internalization refers to the replacement of cross-border markets (such as importing and exporting)
with one firm (the MNE) locating in two or more countries.
8. The resource-based view argues that recent expansion of FDI is indicative of generally friendlier
policies, norms, and values associated with FDI.
9. An external market transaction in which firms buy and sell technology is called market imperfections.
10. Ownership advantages are resources and capabilities that enable a firm to attain competitive
advantages in another country.
11. Obsolescing bargains refers to the requirements of a deal previously struck between an MNE and a
home government is changed after the initial FDI entry.
12. Markets governed by rules, regulation, and norms are designed to reduce costs associated with doing
business.
13. The key advantage of FDI is the ability to internalize external market relationships in two or more
countries.
14. The acquisition of a supplier firm is an example of horizontal FDI.
15. FDI may be viewed as a reflection of firm motivation to extend firm-specific capabilities abroad and
their responses to overcome imperfections and failures.
16. Large and growing markets are a form of locational advantage.
17. A country’s institutional framework can be a locational advantage, or dis-advantage.
18. Internalization decisions are essentially about the relative costs of doing an activity inside an MNE, or
on cross-border markets.
19. Outsourcing is a form of FDI.
20. FDI can create jobs both directly and indirectly.
21. Host country’s institutional frameworks rarely constrain FDI.
22. MNEs usually are not willing to enter a country in the absence of some protection of property rights.
23. Tactics used by some governments in developing economies include removing incentives, demanding
a higher share of profits and taxes, and confiscating foreign assets.
24. MNEs often invest in agglomerations of other companies in their industry.
25. Technology spillover is the domestic diffusion of foreign technical knowledge and processes.
26. Technology spillovers are harmful to domestic firms and industries.
27. MNEs are able to coordinate cross-border activities better with intrafirm trade.
28. The replacement of cross-border markets (such as exporting and importing) with one firm locating and
operating in two or more countries is called internationalization.
29. Dissemination risk is the risk of unauthorized diffusion of firm-specific know-how.
30. One of the location advantages is agglomeration.
31. Intra-firm trade happens between two MNEs in the same country.
32. A sovereign wealth fund invests in sovereign assets such as port, railway and road infrastructure.
33. MNEs with high sunk costs are more likely to face obsolescing bargain positions.
34. Horizontal FDI outsources final assembly to a foreign country.
MULTIPLE CHOICE
1. A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host
county is identified as:
a.
Horizontal FDI
c.
Radial FDI
b.
Vertical FDI
d.
FDI outflow
2. Which of the following statements is correct?
a.
MNEs are firms that engage in FDI.
b.
Stock is a total accumulation of inbound FDI in a country or outbound FDI from a
country.
c.
FDI refers to directly investing in activities that control and manage value creation in other
countries.
d.
All of these answers are correct.
3. The amount of FDI moving in a given period in a certain direction is:
a.
Downstream vertical FDI
c.
Upstream vertical FDI
b.
FDI flow
d.
Horizontal FDI
4. Non-MNE firms can also do business abroad by:
a.
Licensing and franchising
c.
Exporting and importing
b.
Outsourcing and engaging in FDI
d.
All of these answers
5. The possibility of unauthorized diffusion of firm-specific know-how is called:
a.
Agglomeration
c.
Knowledge spillover
b.
Dissemination risk
d.
Oligopoly
6. If BMW chooses to sell its technology to a Chinese firm for a fee, it would be an example of:
a.
Ownership advantage
c.
Licensing
b.
Market imperfection
d.
Location advantage
7. MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally
embedded (VRIO) assets overseas in the context of FDI refer to:
a.
Location advantage
c.
Internalization
b.
Ownership advantage
d.
Market imperfections
8. What arguments may induce a firm to choose FDI rather than licensing?
a.
FDI facilitates the transfer of implicit knowledge through “learning by doing.”
b.
FDI reduces dissemination risks.
c.
FDI provides tight control over foreign operations.
d.
All of these answers
9. When entering foreign markets, basic entry choices include:
a.
Exporting and FDI
c.
Exporting, licensing, and FDI
b.
Exporting and licensing
d.
Exporting and importing
10. Knowledge that can be written down and transferred without losing much of its richness is known as:
a.
Implicit
c.
Legible
b.
Valid
d.
Explicit
11. Industry agglomerations are attractive for MNEs to invest in because they offer:
a.
Location advantage
c.
Industry demand
b.
Knowledge spillovers
d.
None of these answers
12. Agglomeration advantages stem from:
a.
Industry demand that facilitates a pool of specialized suppliers and buyers also located in
the region.
b.
Industry demand that creates a skilled labor force whose members may work for different
firms without having to move out of the region.
c.
Knowledge spillovers among closely located firms that attempt to hire individuals from
competitors.
d.
All of these answers
13. Firms undertake FDI when:
a.
They have ownership advantages that they can exploit abroad
b.
They see benefits of internalizing operations at home and abroad in one firm
c.
The host country offers locational advantages that the MNE wishes to tap into
d.
All these conditions are met simultaneously
14. Based on resource and institution based views, FDI is a reflection of:
a.
Firms’ motivation to extend firm-specific capabilities abroad
b.
Firms’ responses to overcome market imperfections and failures
c.
International trade between two subsidiaries in two countries controlled by the same MNE
d.
Both firms’ responses to market imperfections and their motivation to extend firm-specific
capabilities abroad
15. Which groups in the host country are potentially benefitting from the arrival of foreign direct
investment?
a.
Suppliers
c.
Consumer
b.
Workers
d.
All of these answers
16. Governments wishing to encourage MNEs to invest in their country are using the following policy
instruments:
a.
Bans of FDI
c.
Restrictions on foreign ownership
b.
Case-by-case approvals of FDI
d.
None of these policy instruments
17. Local content requirements are an example of:
a.
A host government policy requiring outward investors also to import
b.
A home government policy requiring outward investors not to export too much
c.
A host government policy requiring outward investors not to import too much
d.
A home government policy requiring outward investors also to export
18. The USA, being one of the most free market economies, is using the following institutional pressures
to discourage FDI:
a.
Formal institutional constraints such as ownership restrictions in specific sectors such as
airlines and defense equipment
b.
As a free market economy, the USA do not restrict inward FDI.
c.
A combination of formal and informal constraints are used.
d.
Informal institutional constraints deterring investors from countries not viewed favorably
by US politicians
19. Which of the following statements is correct?
a.
FDI creates jobs directly and indirectly.
b.
Capital inflow can help improve a host country’s balance of payments.
c.
Technology, especially more advanced technology from abroad, can create technology
spillovers.
d.
All of these answers
20. Possible negative side-effects of inward FDI include:
a.
Local consumers may have to pay lower prices
b.
Local suppliers may benefit from new orders
c.
Locally owned competitors may be crowded out
d.
All of these answers
21. What are the likely benefits of FDI to home countries?
a.
Increased exports of components and services to host countries
b.
Learning via FDI from operations abroad
c.
Repatriated earnings from profits from FDI
d.
All of these answers
22. Home country Institutions attitudes towards FDI can be described as:
a.
Unfavourable and unsupportive
c.
Favourable and supportive
b.
Both of these
d.
Neither of these
23. Government actions that include removing incentives, demanding a higher share of profits and taxes,
and confiscating foreign assets are known as:
a.
Expropriation
c.
Compromises
b.
Obsolescing bargains
d.
Conflicting interests
24. Some countries with large balance of payment surpluses have established special vehicles to invest in
assets overseas. These vehicles are known as:
a.
Sovereign wealth funds
c.
Servitude wealth funds
b.
Sovereign wealth foundations
d.
Servitude wealth foundations
25. Knowledge that is non-codifiable and its acquisition and transfer requires hands-on practice is known
as:
a.
Explicit and written down
c.
Legible and communicable
b.
Valid
d.
Implicit and tacit
26. Which statement regarding the relationship between FDI and local competitors is correct?
a.
Local firms face the opportunities of learning from foreign investors, and thus to become
foreign investors themselves.
b.
Both these statements are correct.
c.
Local firms face the threat of being crowded out, and having to close down their business.
d.
None of these statements are correct.
27. ________ is the amount of FDI moving in a given period in a certain direction.
a.
Radical FDI
c.
Horizontal FDI
b.
Vertical FDI
d.
FDI flow
28. ________ is the total accumulation of inbound FDI in a country and outbound FDI from a country.
a.
FDI flow
c.
Vertical FDI
b.
Horizontal FDI
d.
FDI stock
29. Using FDI to invest in an earlier activity in the value chain is:
a.
Downstream vertical FDI
c.
Upstream vertical FDI
b.
FDI flow
d.
Horizontal FDI
30. ________ refers to the replacement of cross-border markets (such as exporting and importing) with
one firm (the MNE) locating and operating in two or more countries.
a.
Internalization
c.
Internationalization
b.
Dissemination
d.
Licensing
31. FDI essentially transforms the international trade between two independent firms in two countries to
________ between two subsidiaries in two countries controlled by the same MNE.
a.
Intra-firm trade
c.
Licensing trade
b.
Informal trade
d.
Direct trade
32. Which of the following underscores the important role MNEs play in stimulating competition in host
countries?
a.
They create employment, direct and indirectly
b.
They facilitate economic growth
c.
They contribute to government tax revenues
d.
All of these answers
33. ________ is the ability to extract favorable outcome from negotiations due to one party’s strengths.
a.
Bargaining power
c.
Expropriation
b.
Internalization
d.
Obsolescing bargain
ESSAY
1. Differentiate the primary characteristics of horizontal and vertical FDI.
2. Why do larger multi-national firms prefer FDI to licensing?
3. Explain the location advantages of FDI. Discuss the value of acquiring and neutralizing location
advantages with an example that highlights how a location advantage does not necessarily overlap a
country-level advantage.
1. Knowledge spillovers among closely located firms that attempt to hire individuals from competitors.
2. Industry demand that creates a skilled labor force whose members may work for different firms
without having to move out of the region.
4. Analyze the process of overcoming market failure through FDI.
5. Identify the benefits and costs of FDI to home countries.
6. What are the cost and benefits that different groups of stakeholders may gain from inward FDI in a
country?
7. Why do some large MNEs engage in direct negotiations with host governments before committing to
an FDI?
8. What determines the success and failure of FDI around the globe?
