Quick Study Questions
Quick Study 1
1. Q: The purchase of physical assets or significant ownership of a company abroad to gain a
measure of management control is called what?
A: Foreign direct investment is the purchase of physical assets or a significant amount of the
ownership (stock) of a company in another country to gain a measure of management control. It
2. Q: What are the main drivers of foreign direct investment flows?
A: Three main reasons for the large increases in FDI flows over the past couple of decades are:
entrepreneurs and small businesses.
3. Q: Why might a company engage in a cross-border merger or acquisition?
A: Many cross border M&A deals are driven by a desire of companies to: (1) get a foothold in
a new geographic market, (2) increase a firm’s global competitiveness, (3) fill gaps in
Quick Study 2
1. Q: What imperfections are relevant to the discussion of market imperfections theory?
A: Market imperfections theory states that when an imperfection in the market makes a
transaction less efficient than it could be, a company will undertake FDI to internalize the
transaction and thereby remove the imperfection. Two important market imperfections are trade
barriers and specialized knowledge, such as technical expertise of engineers or the special
2. Q: Location, ownership, and internationalization advantages combine which FDI theory?
A: The eclectic theory states that firms undertake foreign direct investment when the features of
a particular location combine with ownership and internalization advantages to make a location
appealing for investment. A location advantage is the advantage of locating a particular
economic activity in a specific location because of the characteristics (natural or acquired) of
3. Q: Which FDI theory depicts a firm establishing a dominant market presence in an
industry?
A: The market power theory states that a firm tries to establish a dominant market
or the price of its output.
Quick Study 3
1. Q: Where adequate facilities are not present in a market, a firm may decide to undertake what?
A: Building a subsidiary abroad from the ground up is called a greenfield investment. This is
2. Q: A system in which a product’s components are made where cost of producing a component
is lowest is called what?
A: Rationalized production is when each of a good’s components is produced where the cost of
work stoppage in one country can bring the entire production process to a standstill.
3. Q: What do we call the situation in which a company engages in FDI because the firm it
supplies has already invested abroad?
A: Firms commonly engage in FDI when the firms they supply have already invested abroad.
The practice of “following clients” is common in industries in which producer source
Quick Study 4
1. Q: The national accounting system that records all receipts coming in to a nation and all
payments to entities in other countries is called what?
A: A country’s balance of payments is a national accounting system that records all payments to
entities in other countries and all receipts coming into the nation. The balance of payments
2. Q: Why might a host country intervene in foreign direct investment?
A: One reason host governments intervene in FDI is to control their balance of payments. (1)
Countries get a balance-of-payments boost from initial FDI flow into their economies. (2) Local
content requirements can lower imports, thereby providing a balance-of-payments boost. (3)
Exports generated by production resulting from FDI can help the balance-of-payments position.
3. Q: Why might a home country intervene in foreign direct investment?
A: There are generally fewer concerns regarding the outflow of FDI among home nations
because they tend to be prosperous, industrialized nations. FDI outflows do not drastically
affect the domestic economy. Nevertheless, there are reasons why home countries discourage
Home countries also promote outgoing FDI. (1) They may do so because outward FDI
Quick Study 5
1. Q: What policy instruments can host countries use to promote FDI?
A: Host countries promote FDI by giving tax incentives, low-interest loans, and infrastructure
improvements.
2. Q: What policy instruments can home countries use to promote FDI?
A: To promote FDI, home countries can offer insurance, low-interest loans, tax breaks, and
apply political pressure.
3. Q: Ownership restrictions and performance demands are policy instruments used by whom to
do what?
A: Host nations restrict FDI through ownership restrictions and performance demands.
4. Q: Differential tax rates and sanctions are policy instruments used by whom to do what?
A: Home countries may try to restrict FDI by using differential tax rates and performance
demands.
Ethical Challenge
You are the U.S. senator deciding whether to vote yes or no on a new legislation. The potential new
law places restrictions on the practice of outsourcing work to low-wage countries and is designed to
protect U.S. workers’ jobs. These days it is increasingly common for companies to promise
manufacturing contracts to overseas suppliers in exchange for access to that country’s market. Labor
union representatives argue that these kinds of deals cost jobs as factories close and parts are made in
lower cost China. They also say that the transfer of technology will breed strong competitors in other
nations and thereby threaten even more jobs at home in the future. Yet, others argue that market
access will translate to increased sales of products mad at home and, therefore create new jobs at
home.
A. 7-5 Do you think companies bear an ethical burden when the contract production to
factories abroad and reduce jobs at home? Students responses will vary. However, if a
company shifts production overseas because of corporate greed and selfishness, then it
7-6 As senator, do you vote yes or no on the pending legislation? Explain.
A. The response to this question would be similar to response to question 7-5. Students would
probably suggest an amendment to the legislation taking into account that would approve
7-7 Depending on how you voted what policy instruments might you suggest that your government
introduce?
A: Students approach this issue from a variety of perspectives ranging from a total free-market
ideology to a protectionist one. Students must balance the short-term gains of new business and
greater profits against the short-term loss of jobs and potential long-term loss of creating future
Teaming Up
Research Project. Imagine that you work for a car manufacturer and your team is charged with
evaluating the viability of a greenfield auto assembly plant in Mexico.
7-8 Q: What management issues should your team consider in making the evaluation? Explain.
A: Foreign direct investment is the purchase of physical assets or a significant amount of the
ownership (stock) of a company in another country to gain a measure of management control. It
differs from portfolio investment—an investment that does not involve obtaining a degree of
7-9 Q: For each FDI theory in this chapter, briefly describe a scenario in which the theory explains
why the company investment in Mexico.
A: Students should review the international product life cycle theory, market imperfections
theory, eclectic theory, and then relate it after some research to the noted situation.
7-10 Q: What policy instruments can Mexico use to attract additional FDI inflows?
A: Mexico can provide financial incentives, either tax incentives or low interest loans, or
systems.
Practicing International Management Case
World Class in the Deep South
7-19 Q: What are the pros and cons of Mercedes’ decision to abandon the culture and some of its
home country practices?
A: The major advantage of the investment is potential for increased sales and market share. The
place.
7-20 Q: What do you think were the chief factors involved in Mercedes’ decision to undertake FDI in
the United States rather than build the M-class in Germany?
A: Mercedes chose the United States over Germany because U.S. labor costs were lower.
ultra-modern plant that would be a model for its future international facilities.
7-21 Q: Why do you think Mercedes decided to build the plant from the ground up in Alabama
rather than buying an existing plant in, say, Detroit? List as many reasons as you can and
explain your answers.
A: First, Mercedes probably chose to build from the ground up because existing facilities would
not supply the cutting-edge environment it wanted for its latest efforts in car-manufacturing
technology, organizational design, and HRM techniques. Second, it probably chose Alabama