81.
Discuss the two main forms of FDI.
FDI takes on two main forms. The first is a greenfield investment, which
involves the establishment of a new operation in a foreign country. The
second involves acquiring or merging with an existing firm in the foreign
country. Acquisitions can be a minority (where the foreign firm takes a 10
percent to 49 percent interest in the firm’s voting stock), majority (foreign
interest of 50 percent to 99 percent), or full outright stake (foreign interest
of 100 percent). The majority of cross-border investment is in the form of
mergers and acquisitions rather than greenfield investments.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Introduction
82.
Discuss the trends in FDI over the last 30 years. Be sure to differentiate
between the stock of FDI and the flow if FDI.
The flow of FDI refers to the amount of FDI undertaken over a given period,
while the stock of FDI refers to the total accumulated value of foreign-
owned assets at a given time. Over the last 30 years, there has been a
marked increase in both the flow and the stock of FDI in the world
economy. Over this period, the flow of FDI accelerated faster than the
growth in world trade and world output.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
83.
Discuss the reasons for the growth in FDI over the last 30 years.
FDI has grown more rapidly than world trade and world output for several
reasons. First, many companies see FDI as a means of circumventing
potential trade barriers. Second, political and economic changes in many of
the world developing nations has been encouraging FDI. Finally, the
globalization of the world economy is having a positive impact on the
volume of FDI as firms now see the whole world as their market.
Difficulty: 2 Medium
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
84.
What is a greenfield investment? How does it compare to an acquisition?
Which form of FDI is a firm more likely choose? Explain your answer.
FDI can take the form of a greenfield investment in a new facility or an
acquisition of or a merger with an existing local firm. Research shows that
most FDI takes the form of mergers and acquisitions rather than greenfield
investments. Mergers and acquisitions are more popular for three reasons.
First, mergers and acquisitions are quicker to execute than greenfield
investments. Second, foreign firms are acquired because those firms have
valuable strategic assets. Third, firms make acquisitions because they
believe they can increase the efficiency of the acquired firm by transferring
capital, technology, or management skills.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
85.
Discuss why firms selling products with low value-to-weight ratios choose
FDI over exporting.
Products with low value-to-weight ratios such as soft drinks or cement are
frequently produced in the market where they are consumed. When
transportation costs are added to production costs, it becomes unprofitable
to shift such products over a long distance. For firms that can produce low
value-to-weight products at almost any location, the attractiveness of
exporting decreases and FDI or licensing becomes more appealing.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
86.
What is licensing? How does it work?
Licensing occurs when a domestic firm, the licensor, licenses to a foreign
firm, the licensee, the right to produce its product, to use its production
processes, or to use its brand name or trademark. In return, the licensor
collects royalty fees on every unit the licensee sells, or on total licensee
revenues. The licensor also benefits from the arrangement in that the
licensee bears the cost and risk of expanding into a foreign market.
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
87.
What are the major drawbacks of licensing according to the internalization
theory?
According to the internalization theory, licensing has three major drawbacks
as a strategy for exploiting foreign market opportunities. First, licensing may
result in a firm’s giving away valuable technological know-how to a potential
foreign competitor. A second problem is that licensing does not give a firm
the tight control over manufacturing, marketing, and strategy in a foreign
country that may be required to maximize its profitability. A third problem
with licensing arises when the firm’s competitive advantage is based not as
much on its products as on the management, marketing, and manufacturing
capabilities that produce those products. The problem here is that such
capabilities are often not amenable to licensing.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
88.
What is an oligopoly? Discuss the impact of interdependence in an
oligopoly.
An oligopoly is an industry composed of a limited number of large firms. A
critical competitive feature of such industries is interdependence of the
major players: What one firm does can have an immediate impact on the
major competitors, forcing a response in kind. By cutting prices, one firm in
an oligopoly can take market share away from its competitors, forcing them
to respond with similar price cuts to retain their market share. Thus, the
interdependence between firms in an oligopoly leads to imitative behavior;
rivals often quickly imitate what a firm does in an oligopoly. Imitative
behavior can take many forms in an oligopoly. One firm raises prices, the
others follow; one expands capacity, and the rivals imitate lest they be left
at a disadvantage in the future.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
89.
What is multipoint competition? How do firms respond to multipoint
competition?
Multipoint competition arises when two or more enterprises encounter each
other in different regional markets, national markets, or industries.
Economic theory suggests that firms will try to match each other’s moves in
different markets to try to hold each other in check. If a firm is successful
with this strategy, the firm will ensure that a rival does not take a
commanding position in one market and then use the profits generated in
that market to underwrite competitive attacks in other markets.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
90.
Why do many economists favor internalization theory as an explanation for
FDI compared to Knickerbocker’s theory?
Although Knickerbocker’s theory and its extensions can help to explain
imitative FDI behavior by firms in oligopolistic industries, it does not explain
why the first firm in an oligopoly decides to undertake FDI rather than to
export or license. Internalization theory addresses this phenomenon. The
imitative theory also does not address the issue of whether FDI is more
efficient than exporting or licensing for expanding abroad. Again,
internalization theory addresses the efficiency issue. For these reasons,
many economists favor internalization theory as an explanation for FDI.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
91.
Explain the product life-cycle theory and its connection with FDI.
The product life-cycle theory, developed by Raymond Vernon, suggests that
the same firms that pioneer a product in their home country will undertake
FDI to produce a product for consumption in foreign markets. According to
the theory, firms will invest in industrialized countries when demand in
those countries is sufficient to support local production. They subsequently
shift production to developing countries when product standardization and
market saturation give rise to price competition and cost pressures.
Investment in developing countries, where labor costs are lower, is seen as
the best way to reduce costs.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
92.
What are location-specific advantages? How do they help explain FDI?
Location-specific advantages are advantages that arise 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. Natural
resources such as oil and minerals, for example, are specific to certain
locations. Firms must undertake FDI to exploit such foreign resources.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
93.
Explain John Dunning’s position on FDI. What is the eclectic paradigm?
John Dunning argued that to fully understand FDI it is important to consider
the role of location-specific advantages. According to Dunning, a firm will
be prompted to undertake FDI in an effort to exploit assets that are specific
to a particular location. Dunning’s theory, the eclectic paradigm, combines
the arguments of internalization theory with the notion of location-specific
advantages to suggest that combining location-specific assets or resource
endowments and the firm’s own unique capabilities often requires the firm
to establish production facilities where the foreign assets or resource
endowments are located.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
94.
How does the free market view support FDI?
The intellectual case for the free market view has been strengthened by the
internalization explanation of FDI. The free market view argues that
international production should be distributed among countries according to
the theory of comparative advantage. Countries should specialize in the
production of those goods and services that they can produce most
efficiently. Within this framework, the MNE is an instrument for dispersing
the production of goods and services to the most efficient locations around
the globe. Viewed this way, FDI by the MNE increases the overall efficiency
of the world economy.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
95.
Discuss the pragmatic nationalist view toward FDI.
The pragmatic nationalist view is that FDI has both benefits and costs. FDI
can benefit a host country by bringing capital, skills, technology, and jobs,
but those benefits come at a cost.
According to this view, FDI should be allowed so long as the benefits
outweigh the costs. Another aspect of pragmatic nationalism 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
96.
Discuss the benefits and costs of FDI from the perspective of a host country
and from the perspective of the home country.
The main benefits of inward FDI for a host country arise from resource-
transfer effects, employment effects, balance-of–payments effects, and
effects on competition and economic growth. Three costs of FDI concern
host countries. They arise from possible adverse effects on competition
within the host nation, adverse effects on the balance of payments, and the
perceived loss of national sovereignty and autonomy.
The benefits of FDI to the home (source) country arise from three sources.
First, the home country’s balance of payments benefits from the inward
flow of foreign earnings. Second, benefits to the home country from
outward FDI arise from employment effects. Third, benefits arise when the
home-country MNE learns valuable skills from its exposure to foreign
markets that can subsequently be transferred back to the home country.
97.
What are the possible adverse effects of FDI on a host country’s balance–
of-payments position?
The possible adverse effects of FDI on a host country’s balance-of–
payments position are twofold. First, set against the initial capital inflow
that comes with FDI must be the subsequent outflow of earnings from the
foreign subsidiary to its parent company. Such outflows show up as capital
outflow on balance-of-payments accounts. Some governments have
responded to such outflows by restricting the amount of earnings that can
be repatriated to a foreign subsidiary’s home country. A second concern
arises when a foreign subsidiary imports a substantial number of its inputs
from abroad, which results in a debit on the current account of the host
country’s balance of payments.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
98.
Describe some of the home country policies that encourage outward FDI.
Many investor nations now have government-backed insurance programs to
cover major types of foreign investment risk. The types of risks insurable
through these programs include the risks of expropriation, war losses, and
the inability to transfer profits back home.
In addition, several advanced countries also have special funds or banks
that make government loans to firms wishing to invest in developing
countries. As a further incentive to encourage domestic firms to undertake
FDI, many countries have eliminated double taxation of foreign income.
Last, and perhaps most significant, a number of investor countries
(including the United States) have used their political influence to persuade
host countries to relax their restrictions on inbound FDI.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 08-05 Explain the range of policy instruments that governments use to influence FDI.
Topic: Government Policy Instruments and FDI
99.
What are the ways in which host governments restrict inward FDI?
Host governments use a wide range of controls to restrict FDI in one way or
another. The two most common are ownership restraints and performance
requirements. Ownership restraints can take several forms. In some
countries, foreign companies are excluded from specific fields. In other
industries, foreign ownership may be permitted although a significant
proportion of the equity of the subsidiary must be owned by local investors.
Performance requirements can also take several forms. Performance
requirements are controls over the behavior of the MNE’s local subsidiary.
The most common performance requirements are related to local content,
exports, technology transfer, and local participation in top management.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 08-05 Explain the range of policy instruments that governments use to influence FDI.
Topic: Government Policy Instruments and FDI
100.
Describe the situations when licensing is not a good option for a firm.
Licensing is not a good option in three situations. First, licensing is
hazardous in high-tech industries where protecting firm-specific expertise
is very important. Second, licensing is not attractive in global oligopolies
where tight control is necessary so that firms have the ability to launch
coordinated attacks against global competitors.
Finally, in industries where intense cost pressures require that MNEs
maintain tight control over foreign operations, licensing is not the best
option.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 08-06 Identify the implications for management practice of the theory and government policies
associated with FDI.
Topic: Implications for Managers