CH 3 IB

Question 1

FDI

Answer 1

directly investing in activities that control and manage value creation in other countries

Question 2

FPI (foreign portfolio investment)

Answer 2

investing in a portfolio of foreign securities such as stocks and bonds. no direct management is needed

Question 3

FDI stock

Answer 3

Foreign Direct Investment (FDI) stocks measure the total level of direct investment at a given point in time, usually the end of a quarter or of a year.

The outward FDI stock is the value of the resident investors’ equity in and net loans to enterprises in foreign economies.

The inward FDI stock is the value of foreign investors’ equity in and net loans to enterprises resident in the reporting economy. FDI stocks are measured in USD and as a share of GDP. FDI creates stable and long-lasting links between economies.

Question 4

OLI paradigm

Answer 4

O ownership, L location, I internalization

theoretical framework positing that OLI advantages combine to induce firms to engage in FDI

Question 5

O ownership advantages

Answer 5

resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad. Not location bound.

Question 6

L Location advantages

Answer 6

• Market advantages of markets where future demand is expected
• Resource advantages are location-bound
• agglomeration (knowledge spillover)
• institutions (countries that have free access for foreign investors are attractive)

Question 7

I Internalization advantages

Answer 7

organizing activities within a multinational firm rather than using a market transaction

replacement of cross-border markets with one firm

Question 8

FDI or exporting? –> market failure

Answer 8

market failure: imperfections of the market mechanism that make some transactions prohibitively costly –> MNEs overcome market failure

Question 9

asset specificity

Answer 9

investments specific to a business relationship –> market failure; FDI can overcome this

This may lead to one sided dependence of one partner on the other, and market failure is likely.

(from slimstuderen: asset specificity is high if the buyer/sell decides to locate the operation within physical proximity of each other)

Question 10

FDI or licensing

Answer 10

FDI is preferred over licensing when the dissemination risk is high

Question 11

dissemination risks

Answer 11

risks associated with unauthorized diffusion of firm-specific knowledge

Question 12

FDI or offshore outsourcing? 3 disadvantages of offshore outsourcing

Answer 12

• asset specificity leading to dependence of the one partner on the other
• unauthorized dissemination of technology
• costs of monitoring quality and standards

Question 13

3 restrictive institutions on FDI

Answer 13

• outright bans on FDI
• case-by-case approvals of FDI
• Ownership requirements: often disallowing full foreign ownership but joint venture with local firm

Question 14

3 regulations on FDI

Answer 14

1. general regulatory institutions of business: foreign investor is subject to the host country’s institutional framework
2. FDI specific regulation: e.g. local content requirements
3. corporate taxation: companies pay tax in each country of operation

Question 15

local content requirements

Answer 15

that require a certain proportion of the value of the goods that originate from that country

Question 16

obsolescing (veraltend) bargaining

Answer 16

deal struck by MNE and host country. Host country changes the deal after the initial FDI entry.

Question 17

When did emerging economies become major players?

Answer 17

beginning of 21st century

Question 18

Sovereign wealth fund (SWF)

Answer 18

state-owned investment fund