Chapter 08 Foreign Direct Investment
True / False Questions
1.
A Japanese car manufacturer acquires an Italian producer of car tires. This
is an example of a greenfield investment.
FALSE
This is an example of an acquisition. A greenfield investment involves the
establishment of a new operation in a foreign country.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Introduction
2.
The amount of FDI undertaken over a given time period is known as the
flow of FDI.
TRUE
The flow of FDI refers to the amount of FDI undertaken over a given time
period (normally a year).
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Topic: Foreign Direct Investment in the World Economy
3.
FDI has been declining in the last few decades because protectionist
pressures have become less intense.
FALSE
Despite the general decline in trade barriers over the past 30 years, firms
still fear protectionist pressures. Executives see FDI as a way of
circumventing future trade barriers.
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
4.
Developing nations currently account for the largest share of FDI inflows.
FALSE
Even though developed nations still account for the largest share of FDI
inflows, FDI into developing nations has increased.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
5.
Other things being equal, the greater the capital investment in an economy,
the more favorable its future growth prospects are likely to be.
TRUE
FDI can be seen as an important source of capital investment and a
determinant of the future growth rate of an economy.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
6.
The largest source country for FDI has been China.
FALSE
Since World War II, the United States has been the largest source country
for FDI, a position it retained during the late 1990s and early 2000s. Other
important source countries include the United Kingdom, France, Germany,
the Netherlands, and Japan.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
7.
The majority of cross-border investment in the developed world is in the
form of greenfield investments rather than mergers and acquisitions.
FALSE
The majority of cross-border investment is in the form of mergers and
acquisitions rather than greenfield investments.
AACSB: Analytic
Blooms: Remember
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
8.
Mergers and acquisitions are quicker to execute than greenfield
investments.
TRUE
Mergers and acquisitions are quicker to execute than greenfield
investments. This is an important consideration in the modern business
world where markets evolve very rapidly.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment in the world economy.
Topic: Foreign Direct Investment in the World Economy
9.
Licensing involves the establishment of a new operation in a foreign
country.
FALSE
Licensing involves granting a foreign entity (the licensee) the right to
produce and sell the firm’s product in return for a royalty fee on every unit
sold.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
10.
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 have a high value-to-weight ratio.
FALSE
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 have a low value-to-weight ratio and that can be
produced in almost any location.
AACSB: Analytic
11.
By placing tariffs on imported goods, governments can increase the cost of
exporting relative to foreign direct investment and licensing.
TRUE
By placing tariffs on imported goods, governments can increase the cost of
exporting relative to foreign direct investment and licensing.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
12.
Internalization theory seeks to explain why firms often prefer foreign direct
investment over licensing as a strategy for entering foreign markets.
TRUE
Internalization theory seeks to explain why firms often prefer foreign direct
investment over licensing as a strategy for entering foreign markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
13.
Licensing gives a firm tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to maximize its
profitability.
FALSE
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
14.
An oligopoly is an industry composed of a limited number of large firms.
TRUE
An oligopoly is an industry composed of a limited number of large firms
(e.g., an industry in which four firms control 80 percent of a domestic
market would be defined as an oligopoly).
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
15.
Rivals rarely imitate what a firm does in an oligopoly.
FALSE
Rivals often quickly imitate what a firm does in an oligopoly.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
16.
Knickerbocker’s theory explains why the first firm in an oligopoly decides to
undertake FDI rather than to export or license.
FALSE
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
17.
John Dunning pioneered the eclectic paradigm.
TRUE
The eclectic paradigm has been championed by the British economist John
Dunning.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Explain the different theories of foreign direct investment.
Topic: Theories of Foreign Direct Investment
18.
According to the pragmatic nationalistic view, the MNE is a tool for
exploiting host countries to the exclusive benefit of their capitalist-
imperialist home countries.
FALSE
According to the radical view, the MNE is a tool for exploiting host countries
to the exclusive benefit of their capitalist-imperialist home countries.
AACSB: Analytic
Blooms: Remember
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
19.
The radical view traces its roots to Marxist political and economic theory.
TRUE
The radical view traces its roots to Marxist political and economic theory.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
20.
The free market view argues that FDI is a benefit to both the source country
and to the host country.
TRUE
The free market view argues that international production should be
distributed among countries according to the theory of comparative
advantage.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
21.
In practice only a few countries country have adopted the free market view
in its pure form.
FALSE
In practice no country has adopted the free market view in its pure form.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
22.
The pragmatic nationalist view highlights only the benefits of FDI.
FALSE
The pragmatic nationalist view is that FDI has both benefits and costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
23.
Countries adopting a pragmatic stance pursue policies designed to
maximize the national benefits and minimize the national costs.
TRUE
Countries adopting a pragmatic stance pursue policies designed to
maximize the national benefits and minimize the national costs. According
to this view, FDI should be allowed so long as the benefits outweigh the
costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
24.
An 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.
TRUE
An 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
25.
Recent years have seen a marked increase in the number of countries that
adhere to a radical ideology regarding FDI.
FALSE
Recent years have seen a marked decline in the number of countries that
adhere to a radical ideology regarding FDI.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Understand how political ideology shapes a government’s attitudes toward FDI.
Topic: Political Ideology and Foreign Direct Investment
26.
Research supports the view that multinational firms often transfer
significant technology when they invest in a foreign country.
TRUE
Research supports the view that multinational firms often transfer
significant technology when they invest in a foreign country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
27.
Direct effects of FDI arise when jobs are created in local suppliers as a
result of the FDI and when jobs are created because of increased local
spending by employees of the MNE.
FALSE
Indirect effects arise when jobs are created in local suppliers as a result of
the investment and when jobs are created because of increased local
spending by employees of the MNE.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
28.
Host country citizens that are employed by an MNE following an FDI are an
example of an indirect effect of FDI.
FALSE
Direct effects of FDI arise when a foreign MNE employs a number of host-
country citizens.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
29.
A country’s balance of payments accounts keep track of both its payments
to and its receipts from other countries.
TRUE
A country’s balance-of-payments accounts track both its payments to and
its receipts from other countries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
30.
Governments normally are concerned when their country is running a
surplus on the current account of their balance of payments.
FALSE
Governments normally are concerned when their country is running a deficit
on the current account of their balance of payments.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
31.
If the FDI is a substitute for imports of goods or services, the effect can be
to improve the current account of the host country’s balance of payments.
TRUE
If the FDI is a substitute for imports of goods or services, the effect can be
to improve the current account of the host country’s balance of payments.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
32.
In general, FDI in the form of greenfield investments should increase
competition.
TRUE
In general, while FDI in the form of greenfield investments should increase
competition, it is less clear that this is the case when the FDI takes the
form of acquisition of an established enterprise in the host nation
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
33.
FDI does not benefit the host country’s balance of payments if the foreign
subsidiary creates demand for home-country exports of capital equipment,
intermediate goods, or complementary products.
FALSE
FDI can benefit the home country’s balance of payments if the foreign
subsidiary creates demands for home-country exports of capital equipment,
intermediate goods, complementary products, and the like.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
34.
For the home-country, the current account of the balance of payments
improves if the purpose of the foreign investment is to serve the home
market from a low-cost production location.
FALSE
The current account of the balance of payments suffers if the purpose of
the foreign investment is to serve the home market from a low-cost
production location.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
35.
Offshore production refers to FDI undertaken to serve the host market.
FALSE
The term offshore production refers to FDI undertaken to serve the home
market.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Topic: Benefits and Costs of FDI
36.
The two most common methods of restricting inward FDI are ownership
restraints and performance requirements.
TRUE
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the range of policy instruments that governments use to influence FDI.
Topic: Government Policy Instruments and FDI
37.
The WTO supports the promotion of international trade in services.
TRUE
The WTO embraces the promotion of international trade in services.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the range of policy instruments that governments use to influence FDI.
Topic: Government Policy Instruments and FDI
38.
As transportation costs or trade barriers increase, exporting becomes
unprofitable, compared to FDI and licensing.
FALSE
As transportation costs or trade barriers increase, exporting becomes
unprofitable, and the choice is between FDI and licensing.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-06 Identify the implications for management practice of the theory and government policies
associated with FDI.
Topic: Implications for Managers
39.
Licensing is usually a good option for firms in high-tech industries where
protecting firm-specific expertise is of paramount importance.
FALSE
Licensing is usually not a good option for firms in high-tech industries
where protecting firm-specific expertise is of paramount importance.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-06 Identify the implications for management practice of the theory and government policies
associated with FDI.
Topic: Implications for Managers
40.
The product life-cycle theory and Knickerbocker’s theory of horizontal FDI
tend to be very useful from a business perspective because the theories are
more descriptive than analytical.
FALSE
The product life-cycle theory and Knickerbocker’s theory of FDI tend to be
less useful from a business perspective.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-06 Identify the implications for management practice of the theory and government policies
associated with FDI.
Topic: Implications for Managers