Chapter 7 -FDI MCQ.doc

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Ch 7: Foreign Direct Investment

CHAPTER 7

FOREIGN DIRECT INVESTMENT

TRUE/FALSE QUESTIONS

1. Many early trade theories were created at a time when most factors of production either could

not be moved or could not be moved easily across national borders.

(True; Moderate; p. 204; L1!

2. "actors of production include thin#s such as labor$ financial capital$ capital e%uipment$ and

land or natural resources.

(True; &asy; p. 204; L1!

'. Today$ all factors of production are internationally mobile.("alse; &asy; p. 204; L1!

4. ortfolio investment is the purchase of physical assets or a si#nificant amount of ownershipof a company in another country to #ain a de#ree of mana#ement control.("alse; Moderate; p. 204; L1!

). "orei#n direct investment is the purchase of physical assets or a si#nificant amount of the

ownership (stoc*! of a company in another country to #ain a measure of mana#ement control.

(True; &asy; p. 204; L1!

+. ,t the core of forei#n direct investment are international flows of capital.


-. Two main reasons for increasin# forei#n direct investment flows over the past decade are

#lobaliation and diversity.("alse; Moderate; p. 204; L1!

/. "orces causin# #lobaliation are part of the reason for lon#term #rowth in forei#n directinvestment.

(True; Moderate; p. 20); L1!

. ncreasin# #lobaliation is causin# a #rowin# number of international companies from

emer#in# mar*ets to underta*e forei#n direct investment.


10. 3eveloped countries are the prime destination for forei#n direct investment because cross

border mer#ers and ac%uisitions are concentrated in developed countries.

(True; Moderate; p. 20+; L1!

11. Trade barriers and specialied *nowled#e are both eamples of mar*et imperfections.

(True; &asy; p. 20/; L2!

12. Mar*et imperfection that can encoura#e forei#n direct investment is the possibility that a

company will create a future competitor by char#in# another company for access to its

*nowled#e.




(True; 3ifficult; p. 20/; L2!

1'. The eclectic theory states that firms underta*e forei#n direct investment when the features of

a particular location combine with ownership and internaliation advanta#es to ma*e a

location appealin# for investment.(True; &asy; p. 20; L2!

14. ,ccordin# to the eclectic theory$ an internaliation advanta#e is the advanta#e that arises

from internaliin# a business activity rather than leavin# it to a relatively inefficient mar*et.

(True; &asy; p. 20; L2!

1). ,ccordin# to the eclectic theory$ an ownership advanta#e is the advanta#e of locatin# a

particular economic activity in a specific location because of the characteristics of that

location.

("alse; &asy; p. 20; L2!

1+. 5ertical inte#ration is the etension of company activities into sta#es of production that

provide a firm6s inputs (forward inte#ration! or absorbs its outputs (bac*ward inte#ration!.

("alse; 3ifficult; p. 20; L2!

1-. f coffee company Mawell 7ouse were to ac%uire a coffee plantation in 8rail$ it mi#ht

achieve mar*et power throu#h vertical inte#ration.

(True; 3ifficult; p. 20; L2!

1/. n forei#n direct investment$ 100 percent ownership of a company does not #uarantee its

complete control.


1. 8enefits of investment by multinationals include increased unemployment$ increased ta

revenues$ wor*force trainin#$ and the transfer of technolo#y.

("alse; Moderate; p. 210; L'!

20. 9overnments never intervene in the flow of forei#n direct investment since it always

#enerates :obs.

("alse; &asy; p. 214; L'!

21. 5alues$ attitudes$ and beliefs form the basis for much of a #overnment6s position re#ardin#forei#n direct investment.


22. , country6s balance of payments is a national accountin# system that records all payments toentities in other countries and all receipts comin# into the nation.

(True; &asy; p. 21); L4!

2'. ,ny nation6s balance of payments consists of two ma:or components the current account and

the pastdue account.

("alse; &asy; p. 21); L4!

24. The merchandise account includes eports and imports of tan#ible #oods.





2). The income payment account includes income earned on home country assets held abroad.

("alse; Moderate; p. 21+; L4!

2+. , current account deficit occurs when a country eports more #oods and services and

receives more income from abroad than it imports and pays abroad.("alse; Moderate; p. 21+; L4!

2-. <hen a country imports more #oods and services and pays more abroad than it eports and

receives from abroad$ it eperiences a current account deficit.


2/. The capital account is a national account that records transactions involvin# the import and

eport of #oods and services$ income receipts on assets abroad$ and income payments on

forei#n assets inside the country.

("alse; 3ifficult; p. 21+; L4!

2. f a =.>. citien invests in the 8railian stoc* mar*et$ the transaction would show up on the

capital accounts of both the =nited >tates and 8rail.

(True; 3ifficult; p. 21+; L4!

'0. The two main reasons countries intervene in forei#n direct investment flows are to control the

balance of payments and to obtain resources and benefits.


'1. 8ecause forei#n direct investment inflows are recorded as subtractions to the balance of

payments$ a nation is ne#atively affected from an initial forei#n direct investment inflow.

("alse; 3ifficult; p. 21+; L4!

'2. ne reason a home country may discoura#e forei#n direct investment outflows is to protect

its ?sunset@ industries.

("alse; 3ifficult; p. 21/; L4!

''. ne method used by host countries to restrict incomin# forei#n direct investment is

ownership restrictions.

(True; &asy; p. 21; L4!

'4. Ta incentives and infrastructure improvements are financial incentives used by homecountries to encoura#e outflows of forei#n direct investment.

("alse; Moderate; p. 21; L)!

'). To limit the effects of outbound forei#n direct investment on the national economy$ home#overnments may impose differential ta rates that char#e earnin#s from abroad at a hi#her

rate than domestic earnin#s.(True; Moderate; p. 220; L)!

MULTIPLE CHOICE QUESTIONS

1. <hich of the followin# are main drivers of risin# forei#n direct investment over the

foreseeable futureA

a. 3iversity and telecommunications




b. Telecommunications and transportation

c. 9lobaliation and mer#ers and ac%uisitions (MB,!

d. 3iversity and #lobaliation

(c; Moderate; p. 204; L1!

2. <hich of these created renewed determination to further reduce barriers to tradeA

a. Consumer demand b. ,dvancements in telecommunications

c. "orei#n direct investment and portfolio investment trends

d. =ru#uay Dound of trade ne#otiations

(d; Moderate; p. 20); L1!

'. Companies see* crossborder mer#ers and ac%uisitions to EEEEEEEE.

a. #et a foothold in new #eo#raphic mar*ets

b. increase a firm6s #lobal competitiveness

c. fill in #aps in companies6 product lines in a #lobal industry

d. all of the above

(d; Moderate; p. 20); L1!

4. <hich of the followin# statements is FT trueA

a. &ntrepreneurs and small businesses do not play an important role in epandin#

forei#n direct investment flows.

b. ncreasin# #lobaliation is causin# a #rowin# number of international companiesfrom emer#in# mar*ets to underta*e forei#n direct investment.

c. The desire to increase a firm6s #lobal competitiveness drives many crossborder

mer#ers and ac%uisitions.

d. Companies may pursue mer#ers and ac%uisitions to fill #aps in their product lines.

(a; Moderate; p. 20)20+; L1!

). <hen companies realied they could produce in the most efficient and productive locations in

the world and simply eport to mar*ets worldwide$ a new sur#e of forei#n direct investmentflowed into EEEEEEEE.

a. lowcost newly industrialied nations and emer#in# mar*ets

b. hi#hly developed economies

c. the automobile and computer industries

d. totalitarian and theocratic nations only

(a; Moderate; p. 20); L1!

+. <hich of the followin# is FT one of the four main theories that attempts to eplain why

companies en#a#e in forei#n direct investmentA

a. nternational product life cycle theory b. Mar*et imperfections theory

c. &clectic theoryd. Mercantilism

(d; Moderate; p. 20-; L2!

-. <hich of these refers to the theory that a company will be#in by eportin# its products and

later underta*e forei#n direct investment as a product moves throu#h its life cycleA

a. &clectic life cycle

b. Mar*et imperfections life cycle

c. nternational product life cycle




d. Mar*et power life cycle

(c; &asy; p. 20/; L2!

/. ,ccordin# to the international product life cycle$ in which of the followin# sta#es is a #ood

produced in the home country because of uncertain domestic demand and to *eep productionclose to the research departmentA

a. >tandardied product sta#e b. Maturin# product sta#e

c. 3eclinin# product sta#e

d. Few product sta#e

(d; Moderate; p. 20/; L2!

. ,ccordin# to the international product life cycle$ in which sta#e of a product6s life does a

company directly invest in production facilities in countries where demand is #reat enou#h to

warrant production facilitiesA

a. Few product sta#e

b. Maturin# product sta#e

c. >tandardied product sta#e

d. 3eclinin# product sta#e(b; Moderate; p. 20/; L2!

10. The EEEEEEEE theory states that a firm tries to establish a dominant mar*et presence in an

industry by underta*in# forei#n direct investment.a. mar*et power

b. eclectic

c. mar*et imperfections

d. trade barriers

(a; &asy; p. 20; L2!

11. <hich of the followin# is the etension of company activities into sta#es of production that

provide a firm6s inputs or absorb its outputsAa. 7oriontal inte#ration

b. 5ertical inte#ration

c. Mar*et penetration

d. Collaborative diversification

(b; Moderate; p. 20; L2!

12. , company that inte#rates bac*ward or forward can achieve mar*et power throu#h

EEEEEEEE.

a. ownership advanta#es

b. horiontal inte#rationc. vertical inte#ration

d. internaliation(c; Moderate; p. 20; L2!

1'. Complete ownership of a business in another country EEEEEEEE.

a. #uarantees profits

b. does not count as forei#n direct investment

c. does not #uarantee control

d. #uarantees #overnment support

(c; Moderate; p. 20210; L'!




14. nvestment by multinational companies benefits developin# and newly industrialied

countries in all the followin# ways &GC&T EEEEEEEE.

a. transfer of technolo#y

b. decreased ta revenuesc. decreased unemployment

d. trainin# to create a more hi#hly s*illed wor*force(b; Moderate; p. 210; L'!

1). 8uildin# a subsidiary abroad from the #round up is called a(n! EEEEEEEE.

a. portfolio investment

b. vertical inte#ration investment

c. ac%uisition

d. #reenfield investment

(d; &asy; p. 211; L'!

1+. , #reenfield investment is EEEEEEEE.

a. an investment in >outheast ,sia6s former a#ricultural re#ion

b. the buildin# of a subsidiary abroad from the #round upc. an investment in the =nited >tates by a non=.>. company

d. the purchase of an eistin# business that is still in its infancy

(b; Moderate; p. 211; L'!

1-. <hich of the followin# factors reduces the appeal of purchasin# eistin# facilitiesA

a. bsolete e%uipment

b. =nsuitable location

c. oor relations with wor*ers

d. ,ll of the above

(d; &asy; p. 211; L'!

1/. ,ll of the followin# are benefits of ac%uisitions &GC&T the EEEEEEEE.a. ac%uisition of #oodwill the company has built up over the years

b. ac%uisition of the brand reco#nition of the eistin# company

c. ability to use alternate methods to finance the purchase of the company

d. ac%uisition of an obsolete plant

(d; Moderate; p. 211; L'!

1. "actors that affect the cost of production in any national mar*et include all of the followin#

&GC&T EEEEEEEE.

a. labor re#ulations

b. employee benefits pac*a#esc. wor*er trainin# pro#rams

d. ta rates that were assumed to be constant in the local mar*et(d; Moderate; p. 211; L'!

20. The EEEEEEEE account records transactions involvin# the import and eport of #oods and

services$ income receipts on assets abroad$ and income payments on forei#n assets inside the

country.

a. income receipts account

b. capital account

c. income payments account




d. current account

(d; Moderate; p. 21+; L4!

21. <hen a =.>. company buys 40 percent of the publicly traded stoc* of a "rench company on

"rance6s stoc* mar*et$ the =.>. balance of payments records the transaction as an EEEEEEEE.a. inflow of capital recorded with a plus si#n

b. inflow of capital recorded with a minus si#nc. outflow of capital recorded with a plus si#n

d. outflow of capital recorded with a minus si#n

(d; 3ifficult; p. 21+; L4!

22. &ports and imports of tourism and business consultin# are included in which of theseA

a. >ervices within the current account

b. Capital account

c. Merchandise account within the current account

d. Corporate account

(a; Moderate; p. 21+; L4!

2'. &ports and imports of tan#ible #oods are included in the EEEEEEEE account within thecurrent account.

a. eports

b. capital

c. merchandised. corporate

(c; Moderate; p. 21+; L4!

24. &ports and imports of computer software$ electronic components$ and apparel would be

reflected in the EEEEEEEE account within the current account.

a. services

b. capital

c. merchandised. corporate

(c; Moderate; p. 21+; L4!

2). <hich of these occurs when a country eports more #oods and services and receives more

income from abroad than it importsA

a. Current account deficit b. Capital account surplus

c. Current account surplus

d. Capital account deficit

(c; &asy; p. 21+; L4!

2+. <hich of the followin# is a national account that records transactions involvin# the purchaseor sale of assetsA

a. Current account

b. Merchandise account

c. >ervice account

d. Capital account

(d; Moderate; p. 21+; L4!




2-. f a Hapanese citien invests in the ,ustralian stoc* mar*et$ the transaction would show up on

the capital account of EEEEEEEE.

a. Hapan

b. ,ustralia

c. neither Hapan nor ,ustralia because it is a current account itemd. both Hapan and ,ustralia

(d; 3ifficult; p. 21+; L4!

2/. <hen a =.>. subsidiary in another country remits profits bac* to its parent in the =.>.$ the

receipt of profits is recorded in the EEEEEEEE.

a. income receipts account and #iven a plus si#n

b. income receipts account and #iven a minus si#n

c. income payments account and #iven a plus si#n

d. income payments account and #iven a minus si#n

(a; 3ifficult; p. 21+; L4!

2. <hich of the followin# is a reason for host country intervention in forei#n direct investment

("3! flowsA

a. "3 sends resources out of the home country b. utflows of "3 always cause a loss of :obs

c. To improve the nation6s balance of payments

d. To prevent loss of technolo#y to other countries

(c; Moderate; p. 21+21-; L4!

'0. 7ome #overnments may use which of the followin# to limit the effects of outbound forei#n

direct investmentA

a. nsurance

b. 3ifferential ta rates

c. Lowinterest loans

d. nfrastructure improvements

(b; Moderate; p. 220; L)!

'1. <hich of these do homecountry #overnments FT use to promote outbound forei#n direct

investmentA

a. fferin# ta brea*s on profits earned abroad.

b. 9rantin# loans to firms wishin# to increase their investments abroad.

c. &stablishin# ownership restrictions on investments abroad.d. fferin# insurance to cover the ris*s of investments abroad.

(c; Moderate; p. 21220; L)!

SHORT-ANSWER QUESTIONS

1. The purchase of physical assets or a si#nificant amount of ownership (stoc*! of a company inanother country to #ain a measure of mana#ement control is called EEEEEEEE.

(forei#n direct investment ("3!; &asy; p. 204; L1!

2. The two main drivers of risin# forei#n direct investment flows for the foreseeable future are

EEEEEEEE and EEEEEEEE.

(#lobaliation$ mer#ers and ac%uisitions; Moderate; p. 204; L1!




'. The number of EEEEEEEE and their eplodin# value contribute to the #rowth in forei#n direct

investment flows.

(mer#ers and ac%uisitions; Moderate; p. 20); L1!

4. The destination of most forei#n direct investment inflows is EEEEEEEE countries.(developed; Moderate; p. 20+; L1!

). The EEEEEEEE theory states that a company will be#in by eportin# its product and later

underta*e forei#n direct investment as a product moves throu#h its life cycle.

(international product life cycle; &asy; p. 20/; L2!

+. n the EEEEEEEE sta#e of the international product life cycle$ a #ood is produced in the home

country because of uncertain domestic demand and to *eep production close to the research

department that developed the product.

(new product; Moderate; p. 20/; L2!

-. n the EEEEEEEE sta#e of the international product life cycle$ a company directly invests in

production facilities in countries where demand is #reat enou#h to warrant its own production

facilities.(maturin# product; Moderate; p. 20/; L2!

/. n the EEEEEEEE sta#e of the international product life cycle$ increased competition creates

pressures to reduce production costs.(standardied product; Moderate; p. 20/; L2!

. EEEEEEEE theory states that when an imperfection in the mar*et ma*es a transaction less

efficient than it could be$ a company will underta*e forei#n direct investment to internalie

the transaction and thereby remove the imperfection.

(Mar*et imperfections; &asy; p. 20/; L2!

10. , mar*et that operates at pea* efficiency and where #oods are readily and easily available issaid to be a(n! EEEEEEEE.

(perfect mar*et; Moderate; p. 20; L2!

11. The EEEEEEEE theory states that firms underta*e forei#n direct investment when the features

of a particular location combine with ownership and internaliation advanta#es to ma*e a

location appealin# for investment.(eclectic; Moderate; p. 20; L2!

12. The advanta#e of locatin# a particular economic activity in a specific location because of the

characteristics of that location is called a(n! EEEEEEEE.(location advanta#e; Moderate; p. 20; L2!

1'. ,(n! EEEEEEEE is the advanta#e that arises from internaliin# a business activity rather than

leavin# it to a relatively inefficient mar*et.

(internaliation advanta#e; &asy; p. 20; L2!

14. ,(n! EEEEEEEE is the advanta#e that a company has due to its ownership of some special

asset.

(ownership; &asy; p. 20; L2!




1). The etension of company activities into sta#es of production that provide a firm6s inputs or

absorb its output is called EEEEEEEE.

(vertical inte#ration; Moderate; p. 20; L2!

1+. The EEEEEEEE theory states that a firm tries to establish a dominant mar*et presence in anindustry by underta*in# forei#n direct investment.

(mar*et power; Moderate; p. 20; L2!

1-. The benefit of EEEEEEEE is #reater profit because the firm is far better able to dictate the cost

of its inputs andIor the price of its output.

(mar*et power; Moderate; p. 20; L2!

1/. 8uildin# a subsidiary abroad from the #round up is called a(n! EEEEEEEE.

(#reenfield investment; &asy; p. 211; L'!

1. , system of production in which each of a product6s components is produced in the location

where the cost of producin# the component is lowest is called EEEEEEEE.

(rationalied production; Moderate; p. 212; L'!

20. , country6s EEEEEEEE is a national accountin# system that records all payments to entities in

other countries and all receipts comin# into the nation.

(balance of payments; &asy; p. 21); L4!

21. The EEEEEEEE is a national account that records transactions involvin# the import and eport

of #oods and services$ income receipts on assets abroad$ and income payments on forei#n

assets inside the country.

(current account; Moderate; p. 21+; L4!

22. The EEEEEEEE account within the current account includes eports and imports of tan#ible

#oods.

(merchandise; &asy; p. 21+; L4!

2'. The EEEEEEEE account within the current account includes eports and imports of services.

(services; &asy; p. 21+; L4!

24. The EEEEEEEE account within the current account includes income earned on =.>. assets held

abroad.(income receipts; 3ifficult; p. 21+; L4!

ESSAY QUESTIONS

1. <hat factors have propelled #rowth in forei#n direct investment in recent yearsA(Moderate; p. 20420+; L1!

2. <hich #roups of nations are the main sources and destinations of forei#n direct investmentA

(Moderate; p. 20+20-; L1!

'. =sin# any two of the four theories that appear in your tet$ eplain why companies en#a#e in

forei#n direct investment.

(3ifficult; p. 20-20; L1!




4. &plain the theory of mar*et imperfections and describe the two mar*et imperfections.

(3ifficult; p. 20/; L2!

1+). 3istin#uish between the different advanta#es identified by the eclectic theory.(Moderate; p. 20; L2!

+. 3iscuss the mar*et power theory and eplain how a company can achieve mar*et power.

(Moderate; p. 20; L2!

-. 3escribe any three mana#ement issues involved in forei#n direct investment decisions.

(&asy; p. 20214; L'!

/. 3iscuss some surprises that may face mana#ers as they invest in new mar*ets. 7ow can

mana#ers minimie the disadvanta#es of doin# business abroadA

(Moderate; p. 212; L'!

. 3escribe how the ma%uiladora concept wor*s. <hat are the advanta#es and disadvanta#es of

Meico6s ma%uiladoraA(&asy; p. 21'; L'!

10. <hat is meant by the term ?followin# clientsA@ n which industries would the strate#y be

commonA(&asy; p. 21'214; L'!

11. 3iscuss the balance of payments usin# its two ma:or components.

(3ifficult; p. 21)21+; L4!

12. dentify why a home country mi#ht support or discoura#e out#oin# forei#n direct investment.

(3ifficult; p. 21-21/; L4!

1'. <hy mi#ht a host country promote or restrict forei#n direct investmentA

(3ifficult; p. 21+21-; L4!

14. &plain the methods of restrictin# and promotin# forei#n direct investment that home and

host countries can use.

(3ifficult; p. 21/220; L)!

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