Chapter 13 (Final Exam)

Question 1

What is foreign direct investment (FDI)?

Answer 1

When a company invests directly in facilities to produce or market goods in a foreign country.

Question 2

What are revenue-related motives for FDI?

Answer 2

Attract new sources of demand.
Enter profitable markets.
Exploit monopolistic advantages.
React to trade restrictions.
Diversify internationally to stabilize cash flows.

Question 3

What are cost-related motives for FDI?

Answer 3

Benefit from economies of scale.
Use cheaper foreign labor or land.
Access foreign raw materials.
Utilize foreign technology.
React to undervalued exchange rates.

Question 4

How can FDI benefit from international diversification?

Answer 4

Reduces dependence on domestic economic conditions.
Stabilizes cash flows.
Lowers risk by targeting countries with economies unrelated to the home country.

Question 5

How can host governments encourage FDI?

Answer 5

Offer tax breaks.
Provide subsidies or incentives.
Support employment or technology transfer.

Question 6

How can host governments discourage FDI?

Answer 6

Protective barriers like restrictions on acquisitions.
Regulatory barriers like taxes or labor laws.
Environmental and ethical restrictions.
Political instability.

Question 7

What factors should MNCs consider when assessing FDI feasibility?

Answer 7

Licensing and regulatory requirements.
Labor costs and laws.
Tax incentives or breaks.
Government stake in investments.
Potential market risks and benefits.

Question 8

Why is international diversification important for MNCs?

Answer 8

Reduces exposure to risks in a single economy.
Stabilizes cash flows.
Lowers financing costs while maintaining expected returns.

Question 9

What should an MNC evaluate before pursuing FDI?

Answer 9

Diversification benefits.
Host government incentives.
Barriers and risks associated with the target country.