Chapter 7 - Foreign Direct Investment

Question 1

The acquisition or construction of physical capital by a firm from one country in another country.

Answer 1

Foreign Direct Investment

Question 2

Most authoritative and reliable source of information about global FDI by country and by activity.

Answer 2

United Nations Conference on Trade and Development (UNCTAD)

Question 3

Business expands its domestic operation to foreign country.

Answer 3

Horizontal FDI

Question 4

Multinational company acquires or builds an operation to fulfill the role of a supplier.

Answer 4

Backward Vertical FDI

Question 5

Multinational company fulfills the role of a distributor.

Answer 5

Vertical FDI

Question 6

Grants the rights for use of intellectual property/business method for royalties.

Answer 6

Licensing and Franchising

Question 7

Forms of FDI:

Answer 7

1) Acquisition of, or a merger or Joint Venture with, an existing local firm in the destination market
2) Green Field Investment

Question 8

Amount of FDI undertaken over a given time period.

Answer 8

Flow of FDI

Question 9

Total accumulated value of foreign-owned assets at a given time.

Answer 9

Stock of FDI

Question 10

Flow of FDI out of a count.

Answer 10

FDI Outflows

Question 11

Flow of FDI into a country.

Answer 11

FDI Inflows

Question 12

Reasons for FDI growth:

Answer 12

1) Fear of protectionism
2) Shift towards democratic political institutions and free market economies
3) Globalization of world economy

Question 13

Limitations of exporting:

Answer 13

1) Transportation cost
2) Trade barriers

Question 14

3 major drawbacks of licensing:

Answer 14

1) Giving away valuable technological know-how
2) Loss of tight control over manufacturing, marketing, and strategy to maximize its profitability
3) Firm’s skills and know-how are not amenable to licensing

Question 15

FDI flows are reflection of strategic rivalry between firms in oligopolistic industries.

Answer 15

Strategic Behaviour Theory
(by Knickerbocker)

Question 16

Product is first introduced in a developed nation, soon finds market in other developed nations.

Answer 16

The Product Life Cycle Theory
(by Raymond Vernon)

Question 17

Two or more enterprises encounter each other in different regional markets, national markets, or industries.

Answer 17

Multipoint competition

Question 18

Explains rationale for and direction of FDI in addition to strategic behavior and product life cycle patterns.

Answer 18

The Eclectic Paradigm Theory
(by John Dunning)

Question 19

Knowledge spillovers that occur when companies in the same industry locate in the same area.

Answer 19

Externalities

Question 20

A political ideology that roots to Marxist political and economic theory; multinational companies are a tool for exploiting host countries.

Answer 20

The Radical View

Question 21

A political ideology that international production should be distributed among countries according to the theory of comparative advantage.

Answer 21

The Free Market View

Question 22

A political ideology where FDI has both benefits, such as inflows of capital, technology, skills and jobs, as well as costs.

Answer 22

Pragmatic Nationalism

Question 23

Benefits of FDI:

Answer 23

1) Resource transfer effects
2) Employment effects
3) Balance-of-Payments effects

Question 24

Positive contribution to economy by supplying capital, technology, and management resources otherwise not available.

Answer 24

Resource transfer effects

Question 25

Creates jobs that are otherwise not available.

Answer 25

Employment effects

Question 26

FDIs help a country achieve current account surplus for country’s balance of payment.

Answer 26

Balance-of-Payments effects

Question 27

Costs of FDI:

Answer 27

1) Adverse effects on competition
2) Adverse effects on the Balance of Payments
3) National sovereignty and autonomy

Question 28

Multinational companies’ foreign subsidiaries have greater economic power to kill indigenous competition.

Answer 28

Adverse effects on competition

Question 29

Foreign subsidiary repatriates earnings to its parent country.

Answer 29

Adverse effects on the Balance of Payments

Question 30

Multinational companies can keep country to economic ransom.

Answer 30

National sovereignty and autonomy

Question 31

Many investor nations now have government-backed insurance programs to cover foreign investment risk.

Answer 31

Encouraging Outward FDI

Question 32

All nations exercise this to some degree.

Answer 32

Restricting Outward FDI

Question 33

Tax concessions, low-interest loans, grants/subsidies.

Answer 33

Encouraging Inward FDI