Complete Test Bank Ethics Chapter.5 13th Edition

Student name:__________

1) Discuss the two main forms of FDI.

2) Discuss the trends in FDI over the past 30 years. Be sure to differentiate between the stock of FDI and the flow of FDI.

3) Discuss the reasons for the growth in FDI over the past 30 years.

4) What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely to choose? Explain your answer.

5) Discuss why firms selling products with low value-to-weight ratios choose FDI over exporting.

6) What are the major drawbacks of licensing according to the internalization theory?

7) What is an oligopoly? Discuss the impact of interdependence in an oligopoly.

8) Why do many economists favor internalization theory as an explanation for FDI compared to Knickerbocker’s theory?

9) Discuss an example that substantiates Dunning’s argument about location-specific advantages.

10) Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.

11) What are the possible adverse effects of FDI on a host country’s balance-of-payments position?

12) Describe some home-country policies that encourage outward FDI.

13) What are the ways in which host governments restrict inward FDI?

14) Describe the situations when licensing is not a good option for a firm.

15) When a firm is considering FDI, what are some of the negotiating points it must weigh before making its decision?

16) FDI occurs when a firm

A) ships its products from one country to another.
B) invests directly in facilities to produce a product in a foreign country.
C) invests in the shares of another company operating in the same country.
D) grants permission to another company in a different country to use its brand name.

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

A) A Chinese sugar maker sets up a sugar crushing facility in Cuba.
B) A Serbian automobile company purchases a Croatian component manufacturer.
C) A Finnish mobile phone manufacturer expands its production facility in Finland.
D) An Indian oil exploration company acquires an oil refining company.

18) Which of the following statements is true about the growth of foreign direct investment in the world economy over the last few decades?

A) FDI has experienced a slower growth than world output.
B) FDI has accelerated faster than world trade growth.
C) FDI has remained the same over the past few decades.
D) FDI has dropped dramatically.

19) The majority of cross-border investment in the developed world is in the form of

A) hostile takeovers.
B) greenfield investments.
C) competitive investments.
D) mergers and acquisitions.

20) An Italian car manufacturer purchases a U.S. producer of car tires. This is an example of

A) an acquisition.
B) an absolute advantage.
C) a greenfield investment.
D) a merger.

21) Since World War II, the largest source country for FDI has been

A) China.
B) Japan.
C) the United States.
D) the Netherlands.

22) Which of the following factors has had a positive effect on the volume of foreign trade investments?

A) emerging social democracies
B) fluctuating current rates
C) aging demographics
D) world economy globalization

23) What has made the United States an attractive target for foreign direct investment?

A) its unstable economy
B) its unfavorable political environment
C) its wealthy domestic consumer markets
D) its closed society

24) The stock of FDI refers to the

A) amount of FDI undertaken over a given period of time.
B) total accumulated value of foreign-owned assets at a given time.
C) flow of FDI out of a country.
D) amount of foreign direct investment made by domestic companies over a given period of time.

25) The _____ of FDI refers to the amount of FDI undertaken over a year.

A) stock
B) net value
C) accumulated value
D) flow

26) What is the primary reason Africa has attracted FDI in recent years?

A) growth of the services sector
B) complete deregulation of markets
C) wave of privatization
D) raw material availability

27) What primarily explains why developing nations are characterized by a lower percentage of cross-border mergers and acquisitions compared to developed nations?

A) fewer target firms to acquire in developing nations
B) fierce opposition to mergers and acquisitions in developed nations
C) unwillingness of foreign companies to invest in developing nations
D) presence of import quotas in developing nations

28) When contemplating FDI, why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments?

A) Greenfield investments are characterized by reduced management control.
B) Mergers and acquisitions are preferred because most greenfield investments fail.
C) It is easier and less risky for a firm to build strategic assets than acquire similar assets.
D) Mergers and acquisitions are quicker to execute than greenfield investments.

29) ________ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

A) Comparative advantage
B) Multipoint competition
C) Competitive advantage
D) Economic advantage

30) _____ arise(s) from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

A) Multipoint competition
B) The eclectic paradigm
C) Location-specific advantages
D) Outflow of FDI

31) _____ occurs when a firm legally allows the right to produce its product, to use its production processes, or to use its brand name or trademark to another firm.

A) Licensing
B) Acquisition
C) Internalization
D) Merger

32) Which branch of economic theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets?

A) internalization theory
B) product life-cycle theory
C) multipoint competition theory
D) strategic behavior theory

33) A French wind power company gives an Indonesian company the right to produce and sell wind turbines in return for a royalty fee on every unit sold. Which business practice is this an example of?

A) acquisition
B) licensing
C) exporting
D) greenfield investment

34) When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance. This is particularly true of products that

A) have a low value-to-weight ratio.
B) have a high value-to-weight ratio.
C) can be produced only in one region.
D) require locally sourced raw materials.

35) _____ seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

A) Knickerbocker’s theory
B) Internalization theory
C) The noninterventionist theory
D) The eclectic paradigm

36) _____ gives a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

A) Licensing
B) Internalization
C) Foreign direct investment
D) A merger

37) _____ and its extensions can help to explain imitative FDI behavior by firms in oligopolistic industries.

A) Internalization theory
B) The eclectic paradigm
C) The noninterventionist theory
D) Knickerbocker’s theory

38) Which of the following specifically reduces the viability of an exporting strategy specifically for products with low value-to-weight ratios?

A) foreign exchange controls
B) trade barriers
C) transportation costs
D) output quality

39) Which of the following is a way in which governments increase the attractiveness of FDI and licensing relative to exporting?

A) by implementing import quotas
B) by imposing FDI limits in industries
C) by increasing tax rates
D) by limiting free flow of capital

40) Identify the theory that seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

A) internalization theory
B) product life-cycle theory
C) perfect markets theory
D) random walk theory

41) In which of the following situations does the internalization theory recommend FDI as opposed to licensing?

A) when the firm has know-how that can be adequately protected by a licensing contract
B) when the firm produces products that have a low value-to-weight ratio
C) when a firm’s skills and know-how are amenable to licensing
D) when the firm needs tight control over a foreign entity

42) Which of the following best describes an industry composed of a few large firms?

A) an oligopoly
B) a monopoly
C) an oligarchy
D) a perfectly competitive market

43) Which of the following is a direct consequence of the interdependence between firms in an oligopoly?

A) increased regulation
B) increased consumer welfare
C) imitative behavior
D) longer product life cycles

44) Which of the following observations concerning Knickerbocker’s theory is true?

A) It does not explain imitative FDI behavior by firms in oligopolistic industries.
B) Economists favor this theory as an explanation for FDI compared to the internalization theory.
C) It addresses the issue of whether FDI is more efficient than exporting or licensing for expanding abroad.
D) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.

45) _____ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

A) Horizontal integration
B) Multipoint competition
C) An oligopoly
D) Vertical integration

46) According to Knickerbocker’s theory

A) when a firm has valuable know-how that cannot be adequately protected by a licensing contract, it engages in FDI.
B) when a firm’s skills and know-how are not amenable to licensing, it usually prefers the FDI route.
C) by placing tariffs on imported goods, governments indirectly increase the cost of exporting relative to foreign direct investment and licensing.
D) when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments.

47) What is the term that describes when two or more enterprises encounter each other in different regional markets, national markets, or industries?

A) multipoint competition
B) monopoly
C) location-specific competition
D) oligopoly

48) Which of the following is a major drawback of using Knickerbocker’s theory in explaining FDI?

A) It ignores the fact that firms invest in a foreign country when demand in that country will support local production.
B) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.
C) It fails to identify when it is profitable to invest abroad.
D) It ignores the fact that licensing as an entry strategy has its limitations.

49) The _____ suggests that a firm will establish production facilities where foreign assets or resource endowments that are important to the firm are located.

A) product life-cycle theory
B) internalization theory
C) multipoint competition theory
D) eclectic paradigm

50) Advantages that arise from using resource endowments or assets that are tied to a particular place and that a firm finds valuable to combine with its own unique assets are known as

A) location-specific advantages.
B) capital-specific advantages.
C) absolute advantages.
D) production factor advantages.

51) According to the _____ view of FDI, multinational enterprises (MNE) extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.

A) imperialist
B) conservative
C) free market
D) radical

52) Which view of FDI traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo?

A) imperialist
B) conservative
C) free market
D) radical

53) Which political view allows FDI so long as the benefits outweigh the costs?

A) the traditional view
B) the pragmatic nationalist view
C) the radical view
D) the free market view

54) A country rejects FDI proposals in certain industries. It does so because the tangible advantages of such investments are lesser than potential costs like loss of employment and reduction of overall well-being. However, it aggressively pursues inviting foreign investments in sectors like infrastructure, education, and health care because of the benefits that accrue with them. Which political view of FDI is discussed in this example?

A) the pure market view
B) the free market view
C) the radical view
D) the pragmatic nationalist view

55) The country of Manystan has adopted neither a radical policy nor a free market policy, but rather one that posits that FDI has both benefits and costs. This is best described as

A) pragmatic nationalism.
B) postmodernism.
C) the free market view.
D) the noninterventionist principle.

56) _____ traces its roots to Marxist political and economic theory.

A) The radical view
B) Pragmatic nationalism
C) The free market view
D) The noninterventionist principle

57) _____ argues that FDI is a benefit to both the source country and the host country.

A) Pragmatic nationalism
B) The free market view
C) The noninterventionist principle
D) The radical view

58) The pragmatic nationalist view highlights _____ of FDI.

A) only the benefits
B) only the costs
C) both the benefits and costs
D) neither the benefits nor the costs

59) An aspect of _____ is the tendency to aggressively court FDI believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.

A) the radical view
B) the noninterventionist principle
C) the free market view
D) pragmatic nationalism

60) Recent years have seen _____ in the number of countries that adhere to a radical ideology regarding FDI.

A) decline
B) no change
C) a marked increase
D) a slight increase

61) According to pragmatic nationalist view, FDI should be allowed so long as

A) the benefits outweigh the costs.
B) they do not aggressively court domestic firms.
C) the costs outweigh the benefits.
D) the MNE does not seek tax breaks or grants.

62) Why is it said that not all the new jobs created by FDI represent net additions in employment?

A) because of the uncertainty of the overall economic environment
B) because most of the job creation is indirect in nature
C) because jobs created by an investment may be offset by the jobs lost in domestic companies
D) because the unemployment rate more or less remains constant over the short term

63) When a company brings capital and/or technology to a host country, the host country benefits from the

A) political effect of FDI.
B) resource-transfer effect of FDI.
C) balance-of-payments effect of FDI.
D) bandwagon effect of FDI.

64) A country’s _____ keep track of its payments to and its receipts from other countries.

A) federal payments ledgers
B) concurrent accounts
C) checks-and-balances accounts
D) balance-of-payments accounts

65) Host country citizens that are employed by an MNE following an FDI are an example of

A) an internality.
B) a direct effect.
C) an externality.
D) an indirect effect.

66) A country’s _____ accounts keep track of both its payments to and its receipts from other countries.

A) current
B) offshore
C) balance-of-payments
D) currency

67) If the FDI is a substitute for imports of goods or services, the effect can be to improve the _____ of the host country’s balance of payments.

A) offshore account
B) currency account
C) market imperfections
D) current account

68) FDI can benefit the home country’s _____ if the foreign subsidiary creates demands for home-country exports of capital equipment, intermediate goods, complementary products, and the like.

A) balance of payments
B) oligopolistic industry
C) current accounts
D) licensing endeavors

69) Which of the following arises when a country is importing more goods and services than it is exporting?

A) current account surplus
B) trade deficit
C) trade surplus
D) trade balance

70) In which of the following situations would FDI improve the current account of the host country’s balance of payments?

A) if the foreign subsidiary imports a substantial number of its inputs from abroad
B) if the FDI reduces existing employment opportunities
C) if the FDI is a substitute for imports of goods or services
D) if the FDI results in substitution of products produced domestically

71) In which way can the source country’s balance of payments benefit from FDI made in a foreign country?

A) from cash outflow during the initial investment to finance the FDI
B) if the purpose of the foreign investment is to serve the home market from a low-cost production location
C) from the inward flow of foreign earnings
D) if FDI is a substitute for direct exports

72) How is the adverse effect of the balance of payments for the home country due to FDI usually offset?

A) by increased imports to the home country as a result of the FDI
B) by the subsequent inflow of foreign earnings
C) by substituting direct exports made earlier from the home country
D) by further investments usually made to expand foreign operations

73) FDI undertaken to serve the home market is known as

A) outsourcing.
B) FDI substitution.
C) offshore production.
D) home market FDI.

74) How can FDI undertaken to serve the home market stimulate economic growth in the home country?

A) by freeing home-country resources to concentrate on activities where the home country has a comparative advantage
B) by importing more goods and services than it is exporting
C) by circumventing trade barriers that may have prevented direct exports in the past
D) by reducing demand for home-country exports of capital equipment, intermediate goods, and complementary products

75) What is double taxation in the context of FDI?

A) taxation at twice the normal rate for foreign companies
B) taxing the producers as well as suppliers
C) taxation of income in both home and host country
D) taxation of both income as well as dividends paid

76) The two most common methods of restricting inward FDI are ownership restraints and

A) resource endowments.
B) performance requirements.
C) national sovereignty.
D) incentives.

77) Which of the following is a home-country policy aimed at restricting outward FDI flow?

A) taxing domestic companies’ foreign earnings at a higher rate than their domestic earnings
B) implementation of government-backed insurance programs to cover major types of foreign investment risk
C) eliminating double taxation of foreign income
D) persuading host countries to relax their restrictions on inbound FDI

78) _____ is essentially the service-industry version of licensing, although it normally involves much longer-term commitments.

A) Franchising
B) Subsidizing
C) Greenfield investment
D) Patenting

79) From the perspective of a firm negotiating the terms of an investment with a host government, the firm’s bargaining power is high when the

A) firm has a short time in which to complete the negotiations.
B) host government places a high value on what the firm has to offer.
C) number of comparable alternatives open to the firm is low.
D) host government does not places a high value on the firm’s offering.

80) The _____ and Knickerbocker’s theory of FDI tend to be less useful from a business perspective because they are descriptive rather than analytical.

A) noninterventionist theory
B) internalization theory
C) eclectic paradigm
D) product life-cycle theory

81) As transportation costs or trade barriers increase, exporting becomes unprofitable, and the choice is between FDI and

A) subsidies.
B) incentives.
C) licensing.
D) resource endowments.

82) Licensing would be a good option for firms in which of the following industries?

A) It would be a good option in high-technology industries in which protecting firm-specific expertise is of paramount importance.
B) It would be a good option in global oligopolies, in which competitive interdependence requires that multinational firms maintain tight control over foreign operations.
C) It would be a good option in industries in which intense cost pressures require that multinational firms maintain tight control over foreign operations.
D) It would be a good option in fragmented, low-technology industries in which globally dispersed manufacturing is not an option.

83) The amount of foreign direct investment (FDI) undertaken over a given time period is known as the flow of FDI.

⊚ true
⊚ false

84) FDI has been declining in the last few decades because protectionist pressures have become less intense.

⊚ true
⊚ false

85) Mergers and acquisitions are quicker to execute than greenfield investments.

⊚ true
⊚ false

86) Licensing involves the establishment of a new operation in a foreign country.

⊚ true
⊚ false

87) By placing tariffs on imported goods, governments increases the cost of exporting relative to foreign direct investment and licensing.

⊚ true
⊚ false

88) An oligopoly is an industry composed of a few large firms with somewhat equal market share.

⊚ true
⊚ false

89) Rivals rarely imitate what a firm does in an oligopoly.

⊚ true
⊚ false

90) John Dunning pioneered the eclectic paradigm.

⊚ true
⊚ false

91) According to the radical view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

⊚ true
⊚ false

92) Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs.

⊚ true
⊚ false

93) Research supports the view that multinational firms often transfer significant technology when they invest in a foreign country.

⊚ true
⊚ false

94) Indirect effects of FDI arise when jobs are created in local suppliers as a result of the FDI and when jobs are created because of increased local spending by employees of the MNE.

⊚ true
⊚ false

95) Governments normally are concerned when their country is running a surplus on the current account of their balance of payments.

⊚ true
⊚ false

96) In general, FDI in the form of greenfield investments should increase competition.

⊚ true
⊚ false

97) For the home country, the current account of the balance of payments improves if the purpose of the foreign investment is to serve the home market from a low-cost production location.

⊚ true
⊚ false

98) Offshore production refers to FDI undertaken to serve the host market.

⊚ true
⊚ false

99) The WTO supports the promotion of international trade in services.

⊚ true
⊚ false

100) One way countries have encouraged firms to undertake FDI is through double taxation.

⊚ true
⊚ false

101) The British advanced corporation tax system taxed British companies’ foreign earnings at a higher rate than their domestic earnings. This tax code created an incentive for British companies to invest abroad.

⊚ true
⊚ false

102) Tax concessions, low-interest loans, and grants or subsidies are all incentives that governments offer to foreign firms to invest in their countries.

⊚ true
⊚ false

103) Licensing is usually a good option for firms in high-tech industries where protecting firm-specific expertise is of paramount importance.

⊚ true
⊚ false