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Student name:__________
1) Discuss the two main forms of FDI.
2) Discuss the trends in FDI over the past 30 years. Be sure to differentiate between the
stock of FDI and the flow of FDI.
3) Discuss the reasons for the growth in FDI over the past 30 years.
4) What is a greenfield investment? How does it compare to an acquisition? Which form of
FDI is a firm more likely to choose? Explain your answer.
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5) Discuss why firms selling products with low value-to-weight ratios choose FDI over
exporting.
6) What are the major drawbacks of licensing according to the internalization theory?
7) What is an oligopoly? Discuss the impact of interdependence in an oligopoly.
8) Why do many economists favor internalization theory as an explanation for FDI
compared to Knickerbocker’s theory?
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9) Discuss an example that substantiates Dunning’s argument about location-specific
advantages.
10) Discuss the benefits and costs of FDI from the perspective of a host country and from the
perspective of the home country.
11) What are the possible adverse effects of FDI on a host country’s balance-of-payments
position?
12) Describe some home-country policies that encourage outward FDI.
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13) What are the ways in which host governments restrict inward FDI?
14) Describe the situations when licensing is not a good option for a firm.
15) When a firm is considering FDI, what are some of the negotiating points it must weigh
before making its decision?
16) FDI occurs when a firm
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A) ships its products from one country to another.
B) invests directly in facilities to produce a product in a foreign country.
C) invests in the shares of another company operating in the same country.
D) grants permission to another company in a different country to use its brand name.
17) Which of the following is an example of a greenfield investment?
A) A Chinese sugar maker sets up a sugar crushing facility in Cuba.
B) A Serbian automobile company purchases a Croatian component manufacturer.
C) A Finnish mobile phone manufacturer expands its production facility in Finland.
D) An Indian oil exploration company acquires an oil refining company.
18) Which of the following statements is true about the growth of foreign direct investment in
the world economy over the last few decades?
A) FDI has experienced a slower growth than world output.
B) FDI has accelerated faster than world trade growth.
C) FDI has remained the same over the past few decades.
D) FDI has dropped dramatically.
19) The majority of cross-border investment in the developed world is in the form of
A) hostile takeovers.
B) greenfield investments.
C) competitive investments.
D) mergers and acquisitions.
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20) An Italian car manufacturer purchases a U.S. producer of car tires. This is an example of
A) an acquisition.
B) an absolute advantage.
C) a greenfield investment.
D) a merger.
21) Since World War II, the largest source country for FDI has been
A) China.
B) Japan.
C) the United States.
D) the Netherlands.
22) Which of the following factors has had a positive effect on the volume of foreign trade
investments?
A) emerging social democracies
B) fluctuating current rates
C) aging demographics
D) world economy globalization
23) What has made the United States an attractive target for foreign direct investment?
A) its unstable economy
B) its unfavorable political environment
C) its wealthy domestic consumer markets
D) its closed society
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24) The stock of FDI refers to the
A) amount of FDI undertaken over a given period of time.
B) total accumulated value of foreign-owned assets at a given time.
C) flow of FDI out of a country.
D) amount of foreign direct investment made by domestic companies over a given
period of time.
25) The _____ of FDI refers to the amount of FDI undertaken over a year.
A) stock
B) net value
C) accumulated value
D) flow
26) What is the primary reason Africa has attracted FDI in recent years?
A) growth of the services sector
B) complete deregulation of markets
C) wave of privatization
D) raw material availability
27) What primarily explains why developing nations are characterized by a lower percentage
of cross-border mergers and acquisitions compared to developed nations?
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A) fewer target firms to acquire in developing nations
B) fierce opposition to mergers and acquisitions in developed nations
C) unwillingness of foreign companies to invest in developing nations
D) presence of import quotas in developing nations
28) When contemplating FDI, why do firms apparently prefer to acquire existing assets rather
than undertake greenfield investments?
A) Greenfield investments are characterized by reduced management control.
B) Mergers and acquisitions are preferred because most greenfield investments fail.
C) It is easier and less risky for a firm to build strategic assets than acquire similar
assets.
D) Mergers and acquisitions are quicker to execute than greenfield investments.
29) ________ arises when two or more enterprises encounter each other in different regional
markets, national markets, or industries.
A) Comparative advantage
B) Multipoint competition
C) Competitive advantage
D) Economic advantage
30) _____ arise(s) from using resource endowments or assets that are tied to a particular
foreign location and that a firm finds valuable to combine with its own unique assets.
A) Multipoint competition
B) The eclectic paradigm
C) Location-specific advantages
D) Outflow of FDI
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31) _____ occurs when a firm legally allows the right to produce its product, to use its
production processes, or to use its brand name or trademark to another firm.
A) Licensing
B) Acquisition
C) Internalization
D) Merger
32) Which branch of economic theory 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) multipoint competition theory
D) strategic behavior theory
33) A French wind power company gives an Indonesian company the right to produce and
sell wind turbines in return for a royalty fee on every unit sold. Which business practice is this an
example of?
A) acquisition
B) licensing
C) exporting
D) greenfield investment
34) When transportation costs are added to production costs, it becomes unprofitable to ship
some products over a large distance. This is particularly true of products that
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A) have a low value-to-weight ratio.
B) have a high value-to-weight ratio.
C) can be produced only in one region.
D) require locally sourced raw materials.
35) _____ seeks to explain why firms often prefer foreign direct investment over licensing as
a strategy for entering foreign markets.
A) Knickerbocker’s theory
B) Internalization theory
C) The noninterventionist theory
D) The eclectic paradigm
36) _____ gives a firm tight control over manufacturing, marketing, and strategy in a foreign
country that may be required to maximize its profitability.
A) Licensing
B) Internalization
C) Foreign direct investment
D) A merger
37) _____ and its extensions can help to explain imitative FDI behavior by firms in
oligopolistic industries.
A) Internalization theory
B) The eclectic paradigm
C) The noninterventionist theory
D) Knickerbocker’s theory
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38) Which of the following specifically reduces the viability of an exporting strategy
specifically for products with low value-to-weight ratios?
A) foreign exchange controls
B) trade barriers
C) transportation costs
D) output quality
39) Which of the following is a way in which governments increase the attractiveness of FDI
and licensing relative to exporting?
A) by implementing import quotas
B) by imposing FDI limits in industries
C) by increasing tax rates
D) by limiting free flow of capital
40) 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
41) In which of the following situations does the internalization theory recommend FDI as
opposed to licensing?
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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
42) Which of the following best describes an industry composed of a few large firms?
A) an oligopoly
B) a monopoly
C) an oligarchy
D) a perfectly competitive market
43) 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
44) 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.
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45) _____ 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
46) 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.
47) 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
48) Which of the following is a major drawback of using Knickerbocker’s theory in
explaining FDI?
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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.
49) 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
50) 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.
51) 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.
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A) imperialist
B) conservative
C) free market
D) radical
52) 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
53) 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
54) 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
55) 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.
56) _____ 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
57) _____ 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