Question 1

How does the eclectic theory explain the concept of FDI? How can a host country offer incentives to attract FDI?

Accepted Answer

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Question 2

The eclectic theory states that firms undertake foreign direct investment only when the features of a particular location make the location appealing for investment.

Accepted Answer

The eclectic theory, or OLI paradigm, suggests that firms engage in foreign direct investment (FDI) when they have Ownership advantages, Location advantages, and Internalization advantages, not solely based on the appealing features of a location.

Question 3

According to the market imperfections theory,competition is a common market imperfection.

Accepted Answer

Market imperfections theory suggests that imperfections such as monopolies or oligopolies, taxes, tariffs, and asymmetric information disrupt perfect competition, rather than competition itself being an imperfection.

Question 4

Which theory explains why a firm would choose to enter a foreign market via FDI rather than exploit its ownership advantages internationally through other means?

Accepted Answer

Internalization theory suggests that a firm may choose to enter a foreign market via FDI rather than other means (such as licensing or exporting) in order to internalize and protect the firm's ownership advantages and capabilities from competitors. This can provide the firm with greater control and flexibility in the foreign market. The other options listed do not specifically address this explanation.

Question 5

Using any two of the four theories that appear in your text,explain why companies engage in foreign direct investment.

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Question 6

Coca-Cola has collaborative arrangements whereby it produces concentrate that it sells to other companies to bottle its drinks.Which of the following terms best describes this type of arrangement?

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Question 7

The possibility that a company will create a future competitor by charging another company for access to its knowledge is a market imperfection that can encourage foreign direct investment.

Accepted Answer

This statement is true. When a company shares its knowledge with another company in exchange for payment, the receiving company may use that knowledge to become a competitor in the future. This creates a market imperfection because the original company may lose its competitive advantage. To avoid this risk, companies may choose to invest directly in the foreign market by establishing their own operations.

Question 8

A company can achieve market power through ________.

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Question 9

The ________ theory states that when an aspect of the market makes a transaction less efficient than it could be,a company will undertake foreign direct investment to internalize the transaction and thereby remove the efficiency-reducing aspect.

Accepted Answer

The theory described in the question is known as the market imperfections theory. This theory suggests that when there are imperfections or inefficiencies in the market, such as high transaction costs, a company may prefer to directly invest in a foreign market rather than engage in market transactions. This allows the company to internalize the transaction and thereby remove the efficiency-reducing aspect. The other options listed (market power, eclectic, and international product life cycle) do not specifically address this issue of market imperfections.

Question 10

In the maturing product stage of the international product life cycle theory,increased competition creates pressures to reduce production costs.

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Question 11

Which of the following theories states that firms undertake foreign direct investment,when the features of a particular location combine with ownership and internalization advantages,to make the location appealing for investment?

Accepted Answer

The eclectic theory, also known as the OLI framework or ownership-location-internalization framework, states that foreign direct investment takes place when three conditions are met: ownership advantages, location advantages, and internalization advantages. The location advantage refers to the combination of factors that make a particular location attractive for investment, such as natural resources, labor markets, infrastructure, or government policies. In summary, the eclectic theory explains why firms choose to invest abroad based on the specific advantages they possess and the characteristics of the location they are targeting. The market power theory emphasizes the strategic behavior of firms seeking to gain market power through FDI. The international product life cycle theory explains the patterns of trade and investment over time based on the stages of a product's life cycle. The market imperfections theory argues that FDI arises from market failures such as imperfect competition, incomplete information, or transaction costs.

Question 12

Explain the theory of market imperfections and describe the two major market imperfections.

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Question 13

The requirement that a sufficient portion of a product's content must originate within a certain market to escape tariff charges is an example of a(n)________.

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Question 14

The possibility that a company will create a future competitor by charging another company for access to its knowledge is a(n)________ that can encourage FDI.

Accepted Answer

A market imperfection refers to a situation where free market forces are not able to efficiently allocate resources. In this case, the asymmetry of knowledge between two companies leads to a potential advantage for the one with more knowledge, and charging for access to that knowledge creates a market imperfection that encourages foreign direct investment (FDI). This is because the foreign company may need to invest in the knowledge holder's country to gain that knowledge, and once there, it may decide to set up its own operations to compete with the former knowledge holder.

Question 15

According to the eclectic theory that explains FDI,an ownership advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Accepted Answer

The eclectic theory, indeed, discusses ownership advantage, but it defines it as the specific advantage firms possess that allows them to compete effectively in foreign markets, such as proprietary technology or brand reputation, rather than the advantage arising from internalizing a business activity.

Question 16

Explain the market power theory of FDI,and discuss why the decision whether or not to follow rivals into a new international market is important.

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Question 17

Trade barriers and specialized knowledge are examples of market imperfections.

Accepted Answer

Both trade barriers and specialized knowledge can limit the efficiency and effectiveness of markets, creating imperfections in the traditional supply and demand model.

Question 18

The ________ theory states that a firm tries to establish a dominant presence in an industry by undertaking foreign direct investment.

Accepted Answer

The market power theory suggests that a firm tries to establish market dominance by undertaking foreign direct investment. The other options are different theories related to international business but don't specifically relate to a firm seeking dominance in an industry through foreign direct investment.

Question 19

According to the eclectic theory that explains FDI,an internalization advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

Accepted Answer

The eclectic theory, or OLI framework, suggests that an internalization advantage refers to a firm's preference to control its foreign operations rather than licensing, due to reasons such as reducing transaction costs or protecting proprietary technology, rather than the advantages of a specific location. Location advantages are considered separately within the framework.

Question 20

Which of the following is an example of a greenfield investment?

Accepted Answer

A greenfield investment refers to the establishment of a new business, usually through building new facilities or expanding existing ones. Option B, the construction of an entirely new steel manufacturing subsidiary overseas, fits this definition. The other options involve either acquisition or merger with an existing business, which is not a greenfield investment.

Quiz 7: Foreign Direct Investment