Quiz 2: Chapters 7

Question 1

what is FDI?

what is Flow of FDI?

what is Stock of FDI?

what is outflows of FDI?

what is Inflows of FDI?

Answer 1

• Foreign Direct investment, it is a form of international expansions that includes investing in a firm/country within a foreign market. it is different from foreign market entry.
• amount of FDI undertaken given a certain period (a year…)
• Total accumulated value of foreign owned assets at a GIVEN TIME
• flow of FDI out a country
• Flow of FDI into a country

Question 2

Is FDI increasing or decrease in trend?

who are the top sources of FDI (2)

Answer 2

• Increasing in trend
• CHINA #1, America #2

Question 3

what are the two main forms of FDI?

Answer 3

1.GREENFIELD INVESTMENT: establishment of a new operation in a foreign country

2. ACQUIRING OR MERGING: taking over/ buying out the firm in the foreign country

Question 4

what are the limitations of exporting?

Answer 4

• transportation costs are added to production costs and can become unprofitable over long distances (for low value to weight ratio products (soda etc)

-Transportation costs are minimal for total landed costs (for high value to weight ratio like medical equipment)

Question 5

What are the limitations of licensing

Answer 5

• internalization = why firms often prefer FDI as a strategy for entering foreign markets
• Licensing may result in a firm giving away valuable technological know-how to a potential foreign competitor

Question 6

knickerblocker theory?

Answer 6

something to do with multipoint competition: when two firms from the same host country become competitors in the same foreign market

Question 7

Eclectic paradigm advantages

Answer 7

Location-specific advantages: like building a software engineering company in silicone valley.

Question 8

What are the 3 political ideologies that affect FDI?

Answer 8

• “Radical ideology”: Marxist, MNEs are exploiting foreign host countries and taking profits to their own home country
• Freemarket ideology: comparative advantage, countries should specialize in what they’re good at and trade for everything else
• Pragmatic nationalism:
  centrist view, FDI has pros and cons

Question 9

what is HORIZONTAL foreign direct investment?

Answer 9

company establishes the same type of business operation in a foreign country as it operates in its home country. A U.S.-based cellphone provider buying a chain of phone stores in China is an example.

Question 10

Host country benefits? (5)

Answer 10

Resource-transfer effects

Employment effects - FDI brings jobs to a host country

Balance of payment effects.

FDI is a substitute for imports of goods and services

MNE uses the subsidiary in the host country to export goods and services to other countries

Question 11

home country benefits?(3)

Answer 11

Balance of payments from inward flow of foreign earnings.

Positive employment effects when a subsidiary demands home country exports of capital equipment.

Home country MNE learns skills transferable in technologies for use in the home country.

Question 12

host country cons (3)

Answer 12

Adverse effects on competition
Foreign subsidiaries have strong economic power to put local competitors out of market

Adverse effects on the balance of payments.
Against the initial capital inflow that comes with FDI must be the outflow of earnings to be repatriated

National sovereignty and autonomy

Question 13

Home country costs

Answer 13

Balance of payments from outward FDI

Employment effect from outward FDI
Most serious concerns arise when FDI is seen as a substitute for domestic production

Question 14

Decision Framework for FDI:

Answer 14

Are tarrifs low? yes? Export
no?
Is know-how amenable to licensing? no? Hori FDI
Yes?
Is tight control over foreign operation required? YES? H FDI
No?
can know how be protected by licensing Contract? no? hor FDI
Yes
Licensing.