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Chapter 07 - Foreign Direct Investment
Chapter 07Foreign Direct Investment
True / False Questions
1. (p. 242) A firm becomes a multinational enterprise when it undertakes foreign direct investment. TRUE
Difficulty: Easy
2. (p. 242) Licensing involves the establishment of a new operation in a foreign country. FALSE
Difficulty: Easy
3. (p. 242) If a firm that makes bicycles in Germany acquires a French bicycle producer, Greenfield investment has taken place. FALSE
Difficulty: Medium
4. (p. 242) The amount of FDI undertaken over a given time period is known as the flow of FDI. TRUE
Difficulty: Easy
5. (p. 242) The total accumulated value of foreign-owned assets at a given time is the inflow of FDI. FALSE
Difficulty: Easy
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Chapter 07 - Foreign Direct Investment
6. (p. 242) FDI is seen by executives as a means of circumventing future trade barriers. TRUE
Difficulty: Medium
7. (p. 244) Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets. TRUE
Difficulty: Medium
8. (p. 246) The total amount of capital invested in factories, stores, office buildings and the like is referred to as the stock of FDI. FALSE
Difficulty: Medium
9. (p. 246) The largest source country for FDI has been China. FALSE
Difficulty: Medium
10. (p. 247) About 27 percent of the world's largest 100 nonfinancial multinationals in 2004 were American companies. TRUE
Difficulty: Medium
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11. (p. 247) In developing countries, about one third of FDI is in the form of mergers and acquisitions. TRUE
Difficulty: Hard
12. (p. 248) In 2004, about two thirds of FDI stock was in service industries. TRUE
Difficulty: Hard
13. (p. 249) As compared to exporting and licensing, FDI is the more expensive and risky. TRUE
Difficulty: Medium
14. (p. 250) Internalization theory is also known as the market imperfections approach. TRUE
Difficulty: Medium
15. (p. 250) One of the problems of licensing is that it may result in a firm's giving away valuable technological know-how to a potential foreign competitor. TRUE
Difficulty: Medium
16. (p. 251) An oligopoly is an industry composed of a limited number of large firms. TRUE
Difficulty: Easy
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17. (p. 252) When two or more enterprises encounter each other in different regional markets, national markets or industries regional competition occurs. FALSE
Difficulty: Medium
18. (p. 252) According to Vernon, location specific advantages can help explain the nature and direction of FDI. FALSE
Difficulty: Hard
19. (p. 253) Dunning, in the eclectic paradigm theory, suggests that a firm must establish production facilities where foreign assets or resource endowments necessary to the production of the product exist. TRUE
Difficulty: Medium
20. (p. 254) Pragmatic nationalism traces its roots to Marxist political and economic theory. FALSE
Difficulty: Medium
21. (p. 254) Classical economics and the international trade theories of Adam Smith and David Ricardo form the basis for the free market view. TRUE
Difficulty: Medium
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22. (p. 255) The free market view argues that FDI is a benefit to both the source country and to the host country. TRUE
Difficulty: Medium
23. (p. 255) Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. TRUE
Difficulty: Easy
24. (p. 256) 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
Difficulty: Medium
25. (p. 257) Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology and management resources that would otherwise not be available and thus boost that country's economic growth rate. TRUE
Difficulty: Medium
26. (p. 258) There is research supporting the view that multinational firms often transfer significant technology when they invest in a foreign country. TRUE
Difficulty: Medium
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27. (p. 258) Jobs created in local suppliers as a result of the MNE's investment and jobs created because of increased local spending by employees of the MNE are examples of direct employment effects of FDI. FALSE
Difficulty: Medium
28. (p. 258) Host country citizens that are employed by an MNE following an FDI are an example of an indirect effect of FDI. FALSE
Difficulty: Medium
29. (p. 259) A country's balance of payments accounts keep track of both its payments to and its receipts from other countries. TRUE
Difficulty: Medium
30. (p. 259) A current account deficit exists when a country imports more than it exports. TRUE
Difficulty: Easy
31. (p. 259) In recent years, the U.S. has run a persistent balance of payments surplus. FALSE
Difficulty: Medium
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32. (p. 260) Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. TRUE
Difficulty: Easy
33. (p. 261) 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
Difficulty: Medium
34. (p. 262) The term offshore production refers to FDI undertaken to serve the home market. TRUE
Difficulty: Easy
35. (p. 263) Countries cannot prohibit national firms from investing in certain countries for political reasons. FALSE
Difficulty: Medium
36. (p. 264) The two most common methods of restricting inward FDI are ownership restraints and performance requirements. TRUE
Difficulty: Medium
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Chapter 07 - Foreign Direct Investment
37. (p. 265) The WTO has been very successful in efforts to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI. FALSE
Difficulty: Medium
38. (p. 266) Licensing is a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance. FALSE
Difficulty: Medium
39. (p. 266-267) Typically licensing will be a common strategy in oligopolies where competitive interdependence requires that multinational firms maintain tight control over foreign operations so that they have the ability to launch coordinated attacks against their global competitors. FALSE
Difficulty: Medium
40. (p. 267) Licensing is more common in fragmented, low-tech industries in which globally dispersed manufacturing is not an option. TRUE
Difficulty: Medium
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Multiple Choice Questions
41. (p. 242) FDI occurs when a A. Domestic firm imports products and services from another countryB. Firm ships its product from one country to anotherC. Firm invests in the stock of another companyD. Firm invests directly in facilities to produce and/or market a product in a foreign country
Difficulty: Easy
42. (p. 242) A Greenfield investment A. Is a form of FDI that involves the establishment of a new operation in a foreign countryB. Involves a 7 percent stock in an acquired foreign business entityC. Involves a merger with a foreign businessD. Occurs when a firm acquires another company in a foreign country
Difficulty: Easy
43. (p. 242) If General Electric, a U.S. based corporation, purchased a 50% interest in a company in Italy, that purchase would be an example of a(n) A. Minority acquisitionB. Outright stakeC. Majority acquisitionD. Greenfield investment
Difficulty: Medium
44. (p. 242) The amount of FDI undertaken over a given time period is A. The flow of FDIB. The stock of FDIC. The FDI outflowD. The FDI inflow
Difficulty: Easy
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Chapter 07 - Foreign Direct Investment
45. (p. 242) The stock of FDI is A. The amount of FDI undertaken over a given period of timeB. The total accumulated value of foreign owned assets at a given timeC. The flow of FDI out of a countryD. The flow of FDI into a country
Difficulty: Easy
46. (p. 242) FDI has been rising for all of the following reasons, except A. The globalization of the world economyB. The general increase in trade barriers over the past 30 yearsC. Firms are trying to circumvent trade barriersD. There is a shift toward democratic political institutions and free market economies
Difficulty: Hard
47. (p. 244) Historically, most FDI has been directed at the _____ nations of the world as firms based in advanced countries invested in A. Underdeveloped, underdeveloped countriesB. Developed, underdeveloped countriesC. Developed, each other's marketsD. Underdeveloped, each other's markets
Difficulty: Easy
48. (p. 244) The U.S. has been an attractive target for FDI because of all of the following reasons, except A. Its small and wealthy domestic marketsB. Its dynamic and stable economyC. Its favorable political environmentD. Its openness to FDI
Difficulty: Medium
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49. (p. 244) Identify the incorrect statement regarding the direction of FDI. A. Historically, most FDI has been directed at the developing nations of the worldB. During the 1980s and 1990s, the United States was often the favorite target for FDI inflowsC. The developed nations of the EU have received significant FDI inflowsD. Recent inflows into developing nations have been targeted at the emerging economies of South, East and Southeast Asia
Difficulty: Hard
50. (p. 246) Africa is not a popular destination for FDI because of all of the following reasons, except A. Political unrest in the regionB. Armed conflict in the regionC. Liberalization of FDI regulationsD. Frequent policy changes in the region
Difficulty: Easy
51. (p. 246) The total amount of capital invested in factories, stores, office buildings and the like is summarized by A. Gross fixed capital formationB. Total investment capitalC. Total tangible investmentD. Gross depreciable investments
Difficulty: Easy
52. (p. 246) The largest source country for FDI since World War II has been A. JapanB. ChinaC. The United StatesD. The United Kingdom
Difficulty: Medium
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53. (p. 247) Most cross-border investment is A. In the form of Greenfield investmentsB. Made via mergers and acquisitionsC. Between American and Japanese companiesD. Involved in building new facilities
Difficulty: Medium
54. (p. 247) Which of the following is not a reason why firms prefer to acquire existing assets rather than undertake green-field investments? A. Foreign firms are acquired because those firms have valuable strategic assetsB. Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital, technology or management skillsC. Even though Greenfield investments are comparatively less risky for a firm acquisitions always yield higher profitsD. Mergers and acquisitions are quicker to execute than green-field investments
Difficulty: Medium
55. (p. 247) In developing nations most FDI inflows are in the form of A. MergersB. Greenfield investmentsC. AcquisitionsD. Non-profit organizations
Difficulty: Medium
56. (p. 248) The sector composition of FDI shows that by 2004 approximately _____ of FDI stock was in service industries. A. One fourthB. One thirdC. Two thirdD. Half
Difficulty: Hard
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57. (p. 248) The rise in FDI in the services sector is a result of all of the following, except A. The general move in many developed countries away from manufacturing and toward servicesB. Accelerating regulations of servicesC. Many services cannot be traded internationallyD. Many countries have liberalized their regimes governing FDI in services
Difficulty: Medium
58. (p. 248) When strategic assets such as brand loyalty, customer relationships or distribution systems are important, _____ investments are more appropriate. A. Merger and acquisitionB. GreenfieldC. PortfolioD. New construction
Difficulty: Medium
59. (p. 249) _____ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold. A. Horizontal FDIB. LicensingC. Vertical FDID. Greenfield investment
Difficulty: Easy
60. (p. 249) In a licensing arrangement, the _____ bears the risk and cost of opening a foreign market. A. LicenseeB. LicensorC. Acquiring firmD. Greenfield investor
Difficulty: Medium
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61. (p. 250) 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 theoryB. Internationalization theoryC. Perfect markets theoryD. Small markets theory
Difficulty: Medium
62. (p. 250) According to the internalization theory, all of the following are drawbacks of licensing as a strategy for exploiting foreign market opportunities, except A. Licensing does not grant control over manufacturing, marketing and to a licensee in return for a royalty feeB. Licensing may result in a firm's giving away its know-how to a potential foreign competitorC. Licensing does not give the firm the tight control over manufacturing, marketing and strategy that may be required to profitably exploit its advantageD. A firms capabilities such as the management, marketing and manufacturing are often not amenable to licensing
Difficulty: Medium
63. (p. 250) ______ is also known as market imperfections theory. A. Internationalization theoryB. Internalization theoryC. Perfect markets theoryD. Small markets theory
Difficulty: Medium
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64. (p. 251) If four firms control 80 percent of a domestic market, then ______ exists. A. An oligopolyB. A monopolyC. An oligarchyD. Vertical integration
Difficulty: Medium
65. (p. 251) According to Knickerbocker A. The firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign marketB. 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 investmentsC. Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDID. Impediments to the sale of know-how increase the profitability of FDI relative to licensing
Difficulty: Hard
66. (p. 252) The eclectic paradigm was developed by A. F. T. KnickerbockerB. Adam SmithC. Raymond VernonD. John Dunning
Difficulty: Easy
67. (p. 252) When two or more enterprises encounter each other in different regional markets, national markets or industries, there is A. Vertical integrationB. Horizontal integrationC. Multipoint competitionD. Monopolistic competition
Difficulty: Easy
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68. (p. 252) The product life cycle suggests that A. Often the same firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in foreign marketsB. 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 investmentsC. Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDID. Impediments to the sale of know-how increase the profitability of FDI relative to licensing
Difficulty: Medium
69. (p. 253) 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 cycleB. Strategic behavior theoryC. Multipoint competition theoryD. Eclectic paradigm
Difficulty: Easy
70. (p. 253) Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are known as A. Location specific advantagesB. Resource specific advantagesC. Competitive advantagesD. Directional advantages
Difficulty: Easy
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71. (p. 253) John Dunning, a champion of the eclectic paradigm, argues that A. The firms that pioneer a product in their home markets undertake FDI to produce a product for consumption in a foreign marketB. 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 investmentsC. Combining location-specific assets or resource endowments and the firm's own unique assets often requires FDID. Impediments to the sale of know-how increase the profitability of FDI relative to licensing
Difficulty: Hard
72. (p. 254) According to the _____ view of FDI, MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange. A. ImperialistB. ConservativeC. Free marketD. Radical
Difficulty: Medium
73. (p. 254) Which of the following is not a reason that the radical position of MNEs was in retreat by the end of the 1980s? A. The strong economic performance of those developing countries that embraced capitalism rather than radical ideologyB. The collapse of communism in Eastern EuropeC. The generally abysmal economic performance of those countries that embraced the radical positionD. A growing belief in many capitalist countries that MNE's tightly controls key technology and that important jobs in the MNEs' foreign subsidiaries go to home-country nationals
Difficulty: Medium
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74. (p. 255) According to _____ international production should be distributed among countries according to the theory of comparative advantage. A. The radical viewB. The eclectic viewC. Pragmatic nationalismD. The free market view
Difficulty: Medium
75. (p. 256) A distinctive aspect of _____ 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. A. The dogmatic viewB. Pragmatic nationalismC. The radical viewD. The conservative view
Difficulty: Medium
76. (p. 257) When a company brings capital and/or technology to a host country, the host country benefits from the A. Competitive effect of FDIB. The resource transfer effect of FDIC. The balance of payments effect of FDID. The effect on competition and economic growth
Difficulty: Easy
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77. (p. 258) 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, the MNE has a _____ effect on employment. A. DirectB. IndirectC. InwardD. Outward
Difficulty: Medium
78. (p. 259) A _____ keeps track of a country's payments to and its receipts from other countries. A. Federal payments ledgerB. Current accounting systemC. Checks and balances accountD. Balance of payments account
Difficulty: Easy
79. (p. 259) The _____ tracks the export and import of goods and services. A current account deficit or trade deficit as it is often called, arises when a country is importing more goods and services than it is exporting. A. Current accountB. Debit accountC. Surplus accountD. Capital account
Difficulty: Medium
80. (p. 261) Three costs of FDI concerns of host countries arise from all of the following except A. Adverse effects on competition within the host nationB. Adverse effects on the balance of paymentsC. The perceived loss of national sovereignty and autonomyD. Debit on the current account of the home country's balance of payments
Difficulty: Hard
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81. (p. 262) FDI undertaken to serve the home market is known as A. Greenfield investmentB. FDI substitutionC. Offshore productionD. Home market FDI
Difficulty: Medium
82. (p. 263) Double taxation is A. Charging double taxes in the home countryB. Charging double taxes in the host countryC. Taxation of income in both home and host countryD. Paying income taxes at twice the normal rate
Difficulty: Easy
83. (p. 264) _____ are controls over the behavior of the MNE's local subsidiary. A. Performance requirementsB. Ownership restraintsC. Double taxation lawsD. Greenfield restrictions
Difficulty: Easy
84. (p. 267) Licensing would be a good option for firms in which of the following industries? A. High-technology industries in which protecting firm-specific expertise is of paramount importance and licensing is hazardousB. Global oligopolies, in which competitive interdependence requires that multinational firms maintain tight control over foreign operationsC. Industries in which intense cost pressures require that multinational firms maintain tight control over foreign operationsD. In fragmented, low technology industries in which globally dispersed manufacturing is not an option
Difficulty: Hard
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85. (p. 267) _____ is essentially the service industry version of licensing, although it normally involves much longer term commitments. A. FranchisingB. SubsidizingC. Greenfield investmentD. Patenting
Difficulty: Easy
Essay Questions
86. (p. 242) Discuss the connection between foreign direct investment and multinational enterprises?
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market a product in a foreign country. The U.S. Department of Commerce states that FDI occurs whenever a U.S. citizen, organization or affiliated group takes an interest of 10 percent or more in a foreign business entity. Once affirm undertakes FDI, it becomes a multinational enterprise.
Difficulty: Easy
87. (p. 242) What are the two forms of foreign direct investment?
The two forms of FDI are Greenfield investment or establishing a new operation in a foreign country and mergers and acquisitions whereby a company expands internationally through an existing firm. Acquisitions can be minority, majority or a 100% ownership position.
Difficulty: Medium
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88. (p. 242) 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.
Difficulty: Hard
89. (p. 242) 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: Medium
90. (p. 242-248) 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 investment. 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.
Difficulty: Hard
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91. (p. 248) Discuss the shift in FDI from manufacturing to services. What is driving the trend?
Over the last twenty years, the sector composition of FDI has shifted from extractive industries and manufacturing toward services. By 2004, some 66 percent of the stock of FDI was in services. Four factors are driving the shift to services. First, the shift reflects the general move in many developed economies away from manufacturing and toward service industries. Second, many services cannot be traded internationally and FDI is a principal was to bring services to foreign markets. Third, many countries have liberalized their regimes governing FDI in services making the option more attractive to firms. Finally, the rise of Internet-based global telecommunications networks has allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs.
Difficulty: Medium
92. (p. 249) Consider 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.
Difficulty: Medium
93. (p. 250) Discuss the market imperfections explanation of FDI. What is its relationship with internalization theory?
Market imperfections or factors that inhibit markets from working perfectly, provide a major explanation of why firms prefer FDI to either exporting or licensing. In the international business literature, the marketing imperfections approach is referred to as internalization theory. According to the theory, FDI will be preferred when there are impediments that make both exporting and the sale of know-how difficult and/or expensive.
Difficulty: Hard
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94. (p. 250) 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: Medium
95. (p. 250) Compare and contrast the advantages of foreign direct investment over exporting and licensing.
A firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how or over its operations and business strategy or when the firm's capabilities are simply not amenable to licensing, as may often be the case.
Difficulty: Easy
96. (p. 251) Consider the notion that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. What is the main limitation of the theory?
The strategic behavior approach to explain FDI was initially expounded by Knickerbockers who argued that in an oliogopolistic industry, a "follow the leader" mentality will prompt firms to pursue FDI when another firm in the industry has already done so. However, the theory fails to explain why the first firm decided to undertake FDI, rather than export or license.
Difficulty: Medium
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97. (p. 252) 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.
Difficulty: Easy
98. (p. 252) Explain the product life cycle theory and its connection with FDI.
The product life cycle theory, developed by Ray 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.
Difficulty: Medium
99. (p. 252-253) 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.
Difficulty: Easy
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100. (p. 253) Explain John Dunning's position on FDI. What is the eclectic paradigm?
John Dunning has 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.
Difficulty: Hard
101. (p. 254-256) Discuss the various political ideologies and their impact on foreign direct investment.
The radical view writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. The pragmatic nationalist view is that FDI has both benefits and costs.The radical view has a dogmatic radical stance that is hostile to all inward FDIThe free market view is at the other extreme and based on noninterventionist principle of free market economics. Between these two extremes is an approach called pragmatic nationalism.
Difficulty: Hard
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102. (p. 257-262) 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. The most important cost/concern of FDI for the home country centers on the balance-of-payments and employment effects of outward FDI.
Difficulty: Hard
103. (p. 266-267) 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.
Difficulty: Medium
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104. (p. 267) What is franchising? What type of firm uses franchising as a means of expanding into foreign markets?
Franchising is essentially the service-industry version of licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor's brand name.Franchise agreements usually have a longer time commitment than do licensing arrangements. Franchising is common in the fast food industry because fast food cannot be exported, because franchising minimizes the costs and risks associated with opening a foreign market, because brand names are relatively easy to protect, because there is no compelling reason for a firm to have tight control over franchisees and because fast food know-how is easily transferred.
Difficulty: Medium
105. (p. 267) How useful are the product life cycle theory and Knickerbocker's theory of horizontal FDI to business?
The product life cycle theory and Knickerbocker's theory of horizontal FDI to business are not particularly useful from a business perspective because the theories are descriptive rather than analytical. The theories are useful for explaining historical patterns of FDI, but they do a poor job of identifying the factors that influence the relative probability of FDI, licensing and exporting.
Difficulty: Medium
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