Ch 6 - Investing Abroad Directly

Question 1

foreign portfolio investment (FPI)

Answer 1

Investment in a portfolio of foreign securities such as stocks and bonds

Question 2

management control rights

Answer 2

The right to appoint key managers and establish control mechanisms.

Question 3

horizontal FDI

Answer 3

A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country. Producing the same products or offering the same services in a host country as firms do at home.

Question 4

vertical FDI

Answer 4

A type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country.

Question 5

upstream vertical FDI

Answer 5

A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.

Question 6

downstream vertical FDI

Answer 6

A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.

Question 7

FDI flow

Answer 7

The amount of FDI moving in a given period (usually a year) in a certain direction.

Question 8

FDI inflow

Answer 8

Inbound FDI moving into a country in a year.

Question 9

FDI outflow

Answer 9

Outbound FDI moving out of a country in a year.

Question 10

FDI stock

Answer 10

Total accumulation of inbound FDI in a country or outbound FDI from a country during a given period (usually several years).

Question 11

OLI advantages

Answer 11

A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI.

Question 12

ownership

Answer 12

An MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI.

Question 13

location

Answer 13

Advantages enjoyed by firms operating in a certain location.

Question 14

internalization

Answer 14

The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries

Question 15

licensing

Answer 15

Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee paid to A by B. This is typically done in manufacturing industries.

Question 16

market imperfections or failure

Answer 16

The imperfect rules governing international transactions.

Question 17

dissemination risks

Answer 17

The risk associated with unauthorized diffusion of firm-specific know-how.

Question 18

agglomeration

Answer 18

Clustering of economic activities in certain locations.

Question 19

knowledge spillovers

Answer 19

Knowledge diffused from one firm to others among closely located firms.

Question 20

oligopoly

Answer 20

Industry dominated by a small number of players.

Question 21

intrafirm trade

Answer 21

International transactions between two subsidiaries in two countries controlled by the same MNE.

Question 22

radical view

Answer 22

A political view that is hostile to FDI.

Question 23

free market view

Answer 23

A political view that suggests that FDI unrestricted by government intervention is the best.

Question 24

pragmatic nationalism

Answer 24

A political view that only approves FDI when its benefits outweigh its costs.

Question 25

technology spillovers

Answer 25

Technology diffused from foreign firms to domestic firms.

Question 26

demonstration (or contagion or imitation) effect

Answer 26

The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.

Question 27

bargaining power

Answer 27

Ability to extract favorable outcome from negotiations due to one party's strengths.

Question 28

obsolescing bargain

Answer 28

The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.

Question 29

expropriation

Answer 29

(1) Government's confiscation of foreign assets; (2) Activities that enrich controlling shareholders at the expense of minority shareholders.

Question 30

Sunk costs

Answer 30

Cost that a firm has to endure even when its investment turns out to be unsatisfactory.

Question 31

sovereign wealth fund (SWF)

Answer 31

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.