Deck 3: Foreign Direct Investment Theory and Application

Question 1

Inward FDI Potential Index is based on

A) several economic variables indicating a country's investment infrastructure and growth potential for domestic businesses.
B) several economic variables indicating a country's investment infrastructure and growth potential for foreign businesses.
C) the ratio of a country's share in global FDI outflows to its share in world GDP
D) none of the above.

Answer 1

B

Question 2

Most Japanese MNE's, for instance, begin their international expansion with _________ investment because they believe that it enables the sharing of experience, resources, and knowledge already developed at home, thus reducing risk.

A) vertical FDI
B) horizontal FDI
C) donglomerate FDI
D) none of the above

Answer 2

B

Question 3

"The evolutionary perspective of FDI claims that international investment is an ongoing, evolutionary process shaped by an MNE's international experience, organizational capabilities, strategic objectives, and environmental dynamics", and the core of this perspective is

A) eclectic paradigm.
B) Uppsala (or Scandinavian model)
C) internalization theory.
D) none of the above.

Answer 3

B

Question 4

This theory held that firms will rather invest in host countries that are relatively close to it culturally and that they were likely to be more successful in such relatively familiar environments.

A) Familiarity theory
B) Global integration
C) both a & b
D) none of the above

Question 5

The theorists for this theory argue that internalization creates "contracting" through a unified, integrated intra-firm governance structure.

A) Internalization theory
B) Portfolio theory
C) Exporting theory
D) none of the above

Question 6

This theory is more relevant to the manufacturer's initial entries into foreign markets than to the MNE's that have FDI already in place.

A) Internalization theory
B) Monopolistic Advantage theory
C) Product Life Cycle theory
D) none of the above

Question 7

Fundamental to this theory is the idea that a sure rate of return (say, 9% per year consistent over the next five years) is preferable to a rate of return being higher on average but fluctuating through time (say average 9.5% per year but with immense fluctuations during this five year period)

A) Product Life Cycle theory
B) Portfolio theory
C) Monopolistic Advantage theory
D) none of the above

Question 8

This theory advocates that the available external market does not provide an efficient environment in which the firm can profit by using its technology or production resources.

A) Monopolistic Advantage theory
B) Internalization theory
C) both A & B
D) none of above

Question 9

According to _____ theory, the monopolistic advantages come from two sources: superior knowledge and economies of scale.

A) Portfolio theory
B) Monopolistic Advantage theory
C) Product Life Cycle theory
D) none of the above

Question 10

MNE possesses monopolistic advantages enabling it to operate subsidiaries abroad more profitably than a local competing firm is the example of which theory?

A) Internalization theory
B) Portfolio theory
C) Monopolistic Advantage theory
D) none of the above

Question 11

This theory was developed by Vernon and explains why U.S. manufactures shift from exporting to FDI.

A) portfolio theory
B) product Life Cycle theory
C) internalization theory
D) exporting theory

Question 12

The theory that describes the behavior of individuals or firms administering large amounts of financial assets in search of the highest possible risk-adjusted net return is called

A) familiarity theory.
B) portfolio theory.
C) internalization theory.
D) none of the above

Question 13

What strategy links and integrates activities across nations in an attempt to minimize overall costs, avoid various taxes, or maximize income.

A) multifocal strategy
B) globally integrated strategy
C) locally responsive
D) none of the above

Question 14

If FDI abroad is to manufacture products not manufactured by the parent company at home, it is called

A) vertical FDI.
B) conglomerate FDI.
C) horizontal FDI.
D) none of the above.

Question 15

Which FDI attempts to acquire particular resources at a lower real cost than could be obtained in the home country?

A) market-seeking FDI
B) efficiency-seeking FDI
C) resource-seeking FDI
D) strategic asset-seeking FDI

Question 16

The activity in which an MNE internalizes its globally dispersed foreign operations through a unified governance structure and common ownership.

A) internalization
B) externalization
C) global integration
D) none of the above

Question 17

Offshore extractive investments in petroleum and mineral is the example of

A) forward vertical integration.
B) backward vertical FDI.
C) horizontal FDI.
D) none of the above.

Question 18

The lack of adaptation to European ways, from transportation modes to food, by the Walt Disney Company when establishing its first park in Europe, Euro Disney (since renamed Disneyland Europe) is a example of ____.

A) liability of foreignness
B) liability of domestics
C) liability of Horizontal FDI
D) none of the above

Question 19

_____________ is the benefit incurred to a firm that maintains a monopolistic power in the market.

A) Oligopolistic advantage
B) Monopolistic advantage
C) FDI advantage
D) None of the above

Question 20

Location advantages are defined as the benefits arising from

A) a home country's comparative advantages accrued to foreign direct investors.
B) a host country's comparative advantages accrued to domestic direct investors.
C) a host country's comparative advantages accrued to foreign direct investors.
D) none of the above.

Question 21

Market-seeking FDI attempts to secure market share and sales growth in the target foreign market. Apart from market size and the prospects for market growth, the reasons for market-seeking FDI include situations in which

A) the firm's main suppliers or customers have set up foreign producing facilities abroad and the firm needs to follow them overseas.
B) the firm's products need to be adapted to local tastes or needs, and to indigenous resources and capabilities.
C) the firm considers it necessary, as part of its global production and marketing strategy, to maintain a physical presence in the leading markets served by its competitors.
D) all of the above.

Question 22

Resource-seeking FDI

A) attempts to acquire particular resources at a higher real cost than could be obtained in the home country.
B) attempts to acquire particular resources at a lower real cost than could be obtained in the home country.
C) attempts to acquire particular resources at a lower real cost than could be obtained in the host country.
D) all of the above

Question 23

AOL incurred above anticipated costs when they started their business in to South America. This is an example of _____.

A) Vertical FDI
B) Horizontal FDI
C) Liability of Foreignness
D) Liability of FDI

Question 24

_______ occurs when the MNE enters a foreign country to produce intermediate goods that are intended for use as inputs in its home country (or in other subsidiaries) production process to market its homemade products overseas, or to produce final outputs in a host country using its home-supplied intermediate goods or materials.

A) Vertical FDI
B) Horizontal FDI
C) Backward FDI
D) Horizontal Integration

Question 25

_______________ is investment by individuals, firms, or public organs (e.g., governments or non-profit organizations) in foreign financial instruments such as government bonds, corporate bonds, mutual funds, and foreign stocks.

A) Foreign portfolio investment
B) Outflow of FDI
C) Inflow of FDI
D) None of the above

Question 26

The __________ refers to the total accumulated value of foreign owned assets at a given time (which takes into account possible divestment along the way)

A) stock of FDI
B) outflow of FDI
C) inflow of FDI
D) None of the above

Question 27

Honda has created a subsidiary in the United States for auto parts. This is an example of

A) foreign subsidiary.
B) affiliates.
C) joint venture.
D) both a and b.

Question 28

________________ occurs when a firm invests directly in production or other facilities in a foreign country over which it has effective control.

A) Foreign Direct Investment
B) Partnership
C) Joint Venture
D) Foreign Deposit Investment

Question 29

An example of _____ is that McDonald's overseas success had been built on the firm's ability to rapidly transfer the capacity to operate its entire complex business system to foreign entrepreneurs.

A) location advantages
B) culture advantages
C) transferability
D) none of the above

Question 30

IBM's breakthrough development in voice recognition system did not generate much income until this system was deployed and adapted to such markets as Singapore, Hong Kong, Taiwan, China, and Korea through its subsidiaries there. This is an example of ____.

A) transferability
B) dynamic capability perspective
C) the eclectic paradigm
D) the evolutionary perspective

Question 31

IBM generates significant income from its voice recognition software used by many Chinese. This software, first developed in the U.S., actually did not generate sizable income until a Chinese version was developed by the company's subsidiary in Beijing. This is an example of _____.

A) location advantages
B) ownership advantages
C) both a & b
D) none of the above

Question 32

An example of ____ that Compaq undertook FDI in the Middle East, Latin America, and Europe because the competition in the computer industry overseas is less intense than that in the US.

A) location advantages
B) structural discrepancies
C) both a & b
D) none of the above

Question 33

PepsiCo Inc., for example, invested heavily in Brazil, Argentina, and Mexico to seek out benefits resulting from economic liberalization in these economies. What term was illustrated here?

A) culture advantages
B) monopolistic advantages
C) location advantages
D) none of the above

Question 34

Which advantages are benefits derived from the proprietary knowledge, resources, or assets possessed only by the owner (MNE)?

A) location advantages
B) ownership advantage
C) monopolistic advantage
D) none of the above

Question 35

Identify the term "It is defined as the benefits arising from a host country's comparative advantages accrued for foreign direct investors."

A) location advantages
B) custom advantages
C) culture advantages
D) currency advantages

Question 36

Internalization theory advocates that the available external market does not provide an efficient environment in which the firm can profit by using its technology or production resources.

Question 37

According to the monopolistic theory the two sources of advantages are superior knowledge and economies of scale.

Question 38

Ownership advantages are benefits derived from the proprietary knowledge, resources, or assets possessed only by the owner.

Question 39

Core competence is skills within the firm that competitors can easily match or imitate.

Question 40

Entry mode refers to how a country chooses to enter a foreign market.

Question 41

Liability of foreignness deals with the ethical issues of doing business abroad that result in a competitive disadvantage vis-à-vis indigenous firms.

Question 42

Dynamic capabilities refer to a firm's non-ability to diffuse, deploy, utilize, and rebuild firm-specific resources in order to attain a sustained competitive advantage.

Question 43

Liability of foreignness represents the costs of doing business abroad that result in a competitive disadvantage vis-à-vis indigenous firms

Question 44

FDI inflows are generally correlated with economic growth.

Question 45

Dynamic capabilities refer to a firm's ability to diffuse, deploy, utilize, and rebuild firm-specific resources in order to attain a sustained competitive advantage.

Question 46

Moral hazard refers to hidden detrimental action of external partners such as suppliers, buyers, and join venture partners.

Question 47

Internalization is the activity in which an MNE internalizes its local operations through a unified governance structure and common ownership.

Question 48

Foreign direct investment occurs when a firm invests directly in production or other facilities in a foreign country over which it has effective control.

Question 49

The Thailand Government requires Thai restaurants to buy at least 50 percent of their supplies from Thailand.

Question 50

Moral hazard refers to any action of external partners such as suppliers, buyers, and join venture partners.

Question 51

The eclectic program offers an exclusive framework for explaining international production activities.

Question 52

FDI's itself are non-dynamic processes in which commitment, production scales, and investment approaches are changing overtime.

Question 53

The liability that represents the costs of doing business abroad that result in a competitive disadvantage vis-à-vis indigenous firms.

A) liability of FDI
B) liability of foreignness
C) liability of domestics
D) none of the above

Question 54

Which type of FDI occurs when the MNE enters a foreign country to produce the same product(s) produced at home (or offer the same service as it does at home)?

A) horizontal FDI
B) vertical FDI
C) conglomerate FDI
D) none of the above

Question 55

Which investment occurs when a firm invests directly in projection or other facilities in a foreign country over which they have effective control?

A) foreign direct investment (FDI)
B) foreign portfolio investment (FPI)
C) domestic indirect investment
D) none of the above

Question 56

The evolutionary perspective of FDI claims that international investment is an ongoing evolutionary process shaped by an MNE's international experience, organizational capabilities, strategic objectives, and environmental dynamics.

Question 57

Centers of excellence are foreign units equipped with the worst practice of managing knowledge.

Question 58

US manufacturer's are more likely to invest in high wages than countries with low wages according to the Conference Board.

Question 59

In most countries distribution of FDI are very even.

Question 60

Locally responsive strategy is also known as multi-domestic strategy.

Question 61

Internalization advantages includes avoiding costs of moral hazard.

Question 62

FDI's benefits host countries with increased employment opportunities.

Question 63

Resource seeking FDI attempts to acquire particular resources at a higher cost than could be obtained in the home country.

Question 64

Horizontal FDIs are used by both developed and developing country MNEs.

Question 65

Sometimes, national boundaries do not provide a good indication of key criteria for the location destination.

Question 66

Internalization theory advocates that the available external market does provide an efficient environment in which firm can profit.

Question 67

FDI inflows are generally correlated with economic growth. This is why countries fight to attract FDI.