Multiple Choice Questions
41.
FDI occurs when a firm:
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.
Foreign direct investment (FDI) occurs when a firm invests directly in
facilities to produce or market a product in a foreign country.
42.
Which of the following is an example of a greenfield investment?
A.
A Chinese sugar maker setting up a sugar crushing facility in Cuba.
B.
A Serbian automobile company purchasing a Croatian component
manufacturer.
C.
A Finnish mobile phone manufacturer expanding its production facility in
Finland.
D.
An Indian oil exploration company acquiring an oil refining company.
A greenfield investment involves the establishment of a new operation in a
foreign country.
43.
The stock of FDI is:
A.
the amount of FDI undertaken over a given period of time.
B.
the total accumulated value of foreign-owned assets at a given time.
C.
the flow of FDI out of a country.
D.
the amount of foreign direct investment made by domestic companies
over a given period of time.
The stock of FDI refers to the total accumulated value of foreign-owned
assets at a given time.
44.
The _____ of FDI refers to the amount of FDI undertaken over a year.
A.
stock
B.
net value
C.
accumulated value
D.
flow
The flow of FDI refers to the amount of FDI undertaken over a given time
period (normally a year).
45.
Which of the following is the prime reason why 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
In recent years, Chinese enterprises have emerged as major investors in
Africa, particularly in extraction industries where they seem to be trying to
assure future supplies of valuable raw materials.
46.
Which of the following summarizes the total amount of resources invested
in factories, stores, office buildings, and the like?
A.
Gross capital index
B.
Gross fixed capital formation
C.
Gross domestic product
D.
Gross national product
Gross fixed capital formation summarizes the total amount of capital
invested in factories, stores, office buildings, and the like.
47.
Which of the following primarily explains why developing nations are
characterized by lower percentage of cross-border mergers and acquisitions
compared to developed nations?
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
In the case of developing nations, only about one-third of FDI is in the form
of cross-border mergers and acquisitions. The lower percentage of mergers
and acquisitions may simply reflect the fact that there are fewer target
firms to acquire in developing nations.
48.
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.
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.
49.
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
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.
50.
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
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.
51.
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
By limiting imports through quotas, governments increase the
attractiveness of FDI and licensing.
52.
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
A branch of economic theory known as internalization theory seeks to
explain why firms often prefer foreign direct investment over licensing as a
strategy for entering foreign markets (this approach is also known as the
market imperfections approach).
53.
In which of the following situations does the internalization theory
recommend FDI as opposed to licensing?
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
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. When tight control over a foreign entity is
desirable, foreign direct investment is preferable to licensing.
54.
Which of the following best describes an industry composed of a limited
number of large firms?
A.
An oligopoly
B.
A monopoly
C.
An oligarchy
D.
A perfectly competitive market
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).
55.
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
The interdependence between firms in an oligopoly leads to imitative
behavior; rivals often quickly imitate what a firm does in an oligopoly.
56.
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.
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.
57.
_____ 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
Multipoint competition arises when two or more enterprises encounter each
other in different regional markets, national markets, or industries.
58.
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.
Imitative behavior can take many forms in an oligopoly. One firm raises
prices, the others follow; one expands into a foreign market, and the rivals
imitate lest they be left at a disadvantage in the future.
59.
Which of the following observations was made by Raymond Vernon?
A.
Firms undertake FDI at particular stages in the life cycle of a product
they have pioneered.
B.
Firms will favor exporting over FDI as an entry strategy when trade
barriers are high.
C.
FDI is prompted by imitative behavior in oligopolistic industries.
D.
Impediments to the sale of know-how increase the profitability of FDI
relative to licensing.
Raymond Vernon’s product life-cycle theory is used to explain FDI. Vernon’s
view is that firms undertake FDI at particular stages in the life cycle of a
product they have pioneered.
60.
Which of the following is a major drawback of using the product life-cycle
theory in explaining FDI?
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 firms invest in developing countries when cost
pressures become intense.
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.
The product life-cycle theory simply argues that once a foreign market is
large enough to support local production, FDI will occur. This limits its
explanatory power and its usefulness to business in that it fails to identify
when it is profitable to invest abroad.
61.
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
According to the eclectic paradigm, it requires the firm to establish
production facilities where those foreign assets or resource endowments
are located.