International Business: The Challenges of Globalization, 7e (Wild)
Chapter 7 Foreign Direct Investment
1) Not all factors of production are internationally mobile.
2) Portfolio investment is the purchase of physical assets of a company in another country to gain
a degree of management control.
3) Increasing globalization is causing a growing number of international companies from
emerging markets to undertake FDI.
4) Developed countries have been the major participants behind cross-border mergers and
acquisitions.
5) Firms from emerging markets account for a greater share of global mergers and acquisitions
than developed markets.
6) In the maturing product stage of the international product life cycle theory, increased
competition creates pressures to reduce production costs.
7) According to the market imperfections theory, competition is a common market imperfection.
8) Trade barriers and specialized knowledge are examples of market imperfections.
9) 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.
10) The eclectic theory states that firms undertake foreign direct investment only when the
features of a particular location make the location appealing for investment.
11) 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.
12) 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.
13) In foreign direct investment, complete ownership of a company guarantees its complete
control.
14) Building a subsidiary abroad from the ground up is called a greenfield investment.
15) 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.
16) 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.
17) The soaring cost of developing subsequent stages of technology has led multinationals to
engage in cross-border alliances and acquisitions.
18) In industries having a limited number of small firms, foreign direct investment decisions
frequently resemble a “follow the leader” scenario.
19) A majority of the regulatory changes that governments around the world introduced in recent
years are unfavorable to FDI.
20) The merchandise account includes exports and imports of tangible goods.
21) The income payments account includes income earned on home country assets held abroad.
22) A current account deficit occurs when a country exports more goods and receives more
income from abroad than it imports and pays abroad.
23) One reason a home country may discourage foreign direct investment outflows is to protect
its “sunset” industries.
24) Ownership restrictions is a method used by host countries to restrict incoming foreign direct
investment.
25) Performance demands made by host countries to restrict incoming FDI apply exclusively to
businesses in cultural industries.
26) 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
27) ________ 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
28) Which of the following is a major driver of foreign direct investment?
A) vertical integration
B) horizontal integration
C) globalization
D) cultural diversity
29) 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
30) 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
31) 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.
32) 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
33) 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
34) 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
35) 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
36) 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
37) 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
38) 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
39) 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
40) 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
41) 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
42) 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
43) A company can achieve market power through ________.
A) ownership advantages
B) internalization advantages
C) horizontal integration
D) vertical integration
44) ________ 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
45) 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
46) 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
47) 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
48) 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
49) 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
50) 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
51) 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.
52) 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
53) 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
54) 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
55) 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.
56) 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
57) 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
58) 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
59) 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
60) 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
61) 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
62) 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
63) 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
64) 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
65) 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
66) 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
67) 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
68) 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
69) 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
70) ________ 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
71) 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