Introduction to IB chapter 6

Question 1

Emerging economy MNEs

Answer 1

MNEs that originate from an emerging economy and are HQ’d there

Question 2

Foreign Portfolio Investment (FPI)

Answer 2

Investment in a portfolio of foreign securities such as stocks and bonds

Question 2

Upstream Vertical FDI

Answer 2

FDI in an usptream stage of the value

Question 2

Horizontal FDI

Answer 2

FDI that creates operations abroad at the same position in the value chain as the operation in the home country

Question 3

Joint ventures

Answer 3

operations with shared ownership by several domestic or foreign companies

Question 3

Vertical FDI

Answer 3

FDI in operations in different stages of the value chain, upstream or downstream

Question 4

FDI stock

Answer 4

the value of the assets of foreign-owned firms in a country, or controlled by a country’s firms abroad, at a particular point in time.

Question 4

Downstream vertical FDI

Answer 4

FDI in a downstream stage of the value chain in two different countries

Question 4

FDI flow

Answer 4

The amount of FDI moving in a given period (usually a year) in a certain direction

Question 5

OLI paradigm

Answer 5

a theoretical framework which proposes that FDI is the most appropriate form of international business if three conditions are met: a company possesses Ownership, Locational and Internalization advantages (O-, L, and I-advantages)

Question 6

L-advantages

Answer 6

advantages enjoyed by firms operating in certain locations

Question 6

Location-bound resources

Answer 6

Resources that can’t be transferred abroad

Question 6

O-advantages

Answer 6

Resources of the firm that are transferable across borders, and that enable the firm to attain competitive advantages abroad

Question 7

Agglomeration

Answer 7

the location advantages that arise from the clustering of economic activities in certain locations

Question 8

Knowledge spillovers

Answer 8

Knowledge diffused from one firm to others among closely located firms

Question 8

Intra-firm trade

Answer 8

International trade between two subsidiaries in two countries controlled by the same MNE

Question 9

Asset specificity

Answer 9

an investment that is specific to a business relationship

Question 9

I-advantages

Answer 9

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

Question 9

Market failure

Answer 9

is when the market mechanism doesn’t function efficiently, making certain transactions too costly or difficult to complete.

Question 10

licensing

Answer 10

a contract by which a firm allows another firm to use its intellectual property rights in return for a fee

Question 11

Franchising

Answer 11

A contract by which a firm allows another firm to use its branded service or products in return for a fee

Question 12

Dissemination risk

Answer 12

The risk associated with unauthorized diffusion of firm-specific knowledge

Question 13

Local content requirements

Answer 13

Requirements that a certain proportion of the value of the goods made in a country originates from that country

Question 14

Tax avoidance

Answer 14

reducing tax liability by legally moving profits to jurisdictions where tax rates are lower

Question 15

Bargaining power

Answer 15

the ability to extract a favorable outcome from negotiations due to one party’s strengths

Question 16

Obsolescing bargain

Answer 16

when a host government changes the terms of a deal with a multinational company after the company has already invested in the country.

Question 16

Sunk costs

Answer 16

Up-front investments that are non-recoverable if a project is abandoned

Question 17

Expropriation

Answer 17

Government confiscation of private (foreign-owned) assets

Question 18

Soft budget constraint

Answer 18

Phenomenon that SOEs tend to receive extra resources from the state when facing financial difficulties

Question 19

State-owned enterprises (SOEs)

Answer 19

Companies with direct ownership by the state

Question 20

Sovereign wealth fund (SWF)

Answer 20

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments