Chapter 6

Question 1

Foreign direct investment (FDI):

Answer 1

Investment in, controlling and managing value-added activities
in other countries

Question 2

Emerging economy MNEs:

Answer 2

MNEs that originate from an emerging economy and are
headquartered there

Question 3

Foreign portfolio investment (FPI):

Answer 3

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

Question 4

Joint ventures:

Answer 4

Operations with shared ownership by several domestic or foreign companies

Question 5

Horizontal FDI:

Answer 5

This is when a company duplicates its home-country operations in another country at the same stage of the value chain.

Question 6

Vertical FDI:

Answer 6

FDI in operations in different stages
of the value chain, upstream or downstream

Question 7

Upstream vertical FDI:

Answer 7

FDI in an upstream stage
of the value
The company invests in foreign suppliers of raw materials or inputs.

Question 8

Downstream vertical FDI:

Answer 8

FDI in a downstream
stage of the value chain in two different countries
The company invests in distribution or retail activities in a foreign country.

Question 9

FDI flow:

Answer 9

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

Question 10

FDI stock:

Answer 10

The total value of inbound FDI in a country or outbound FDI from a country operating
at a given point in time

Question 11

OLI paradigm:

Answer 11

A theoretical framework positioning that ownership (O), location (L) and
internalisation (I) advantages combine to induce firms to engage in FDI

Question 12

Liability of foreigners:

Answer 12

The inherent disadvantage a firm faces when competing with local firms in
a foreign country

Question 13

Ownership advantages (O-advantages):

Answer 13

Resources of the firm that are transferable across
borders and enable the firm to attain competitive advantages abroad

Question 14

Location-bound resources:

Answer 14

Resources that cannot be transferred abroad

Question 15

Location advantage (L-advantage):

Answer 15

An advantage enjoyed by firms operating in certain
locations

Question 16

Internalisation advantages (I-advantages):

Answer 16

Advantages of organizing activities within a
multinational firm rather than using a market transaction

Question 17

Types of O-advantages

Answer 17

• resources created in one country that can be exploited in other countries
• capabilities arising from combining business units in multiple countries
• capabilities arising from organizational structures and culture

Question 18

Types of L-advantages

Answer 18

• Markets
• Location-bound Human Resources
• Natural resources
• Agglomeration
• Institutions

Question 19

I-advantages: types of market failure

Answer 19

• Asset specificity
• Information assymetry
• Dissemination risk
• Tacit knowledge transfers

=> Its about keeping control in-house to avoid: contractual risk, opportunistic behaviour by foreign partners
- loss of proprietary knowledge
- market failures like poorly functioning legal systems

=> An FDI can overcome market failures, such as firm-specific resources being opportunistically taken advantage of under a licensing contract with a company in a different country

Question 20

Agglomeration:

Answer 20

The benefits (or external economies) firms obtain by locating near each other. These advantages arise from the clustering of economic activities in particular geographic areas.

Question 21

Knowledge spillover:

Answer 21

Knowledge diffused from one firm to others among closely located firms

Question 22

Transaction costs:

Answer 22

The costs of organizing a transaction

Question 23

Market failure:

Answer 23

Imperfections of the market mechanism that make some transactions prohibitively
costly

Question 24

Asset specificity:

Answer 24

An investment that is specific to a business relationship

Question 25

Licensing:

Answer 25

A contract by which a firm allows another firm to use its intellectual property rights in return for a fee

Question 26

Franchising:

Answer 26

A contract by which a firm allows another firm to use its branded service or products in return for a fee

Question 27

Dissemination risk:

Answer 27

The risk associated with unauthorised diffusion of firm-specific know-how

Question 28

Tacit knowledge:

Answer 28

Knowledge that is no-codifiable and whose acquisition and transfer require hands-on practice

Question 29

Local content requirements:

Answer 29

Requirement that a certain proportion of the value of the goods made in a country originated from that country

Question 30

Tax avoidance:

Answer 30

Reducing tax liability by legally moving profits to jurisdiction where tax rates are lower

Question 31

Bargaining power:

Answer 31

The ability of one party in a negotiation to influence the terms and extract favorable outcomes based on its relative strengths, resources, or alternatives

Question 32

Obsolescing bargain:

Answer 32

Refers to the deal struck by MNEs and **host governments which change their requirements after the initial FDI entry** Sunk costs: Up-front investments that are non-recoverable if the project is abandoned

Question 33

Expropriation:

Answer 33

Government confiscation of private (foreign-owned) assets

Question 34

State-owned enterprise (SOEs):

Answer 34

Companies with direct ownership by the state

Question 35

Soft budget constraint:

Answer 35

Phenomenon that SOEs tens to **receive extra resources** from the state when **facing financial difficulties**

Question 36

Sovereign wealth fund (SWF):

Answer 36

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

Question 37

Explain how home and host country institutions affect FDI

Answer 37

* Host countries may restrict FDI by outright bans, case-by-case approval, or limits on foreign ownership, but such restrictions have become less common in recent years. * Foreign investors are subject to the same regulatory institutions as local firms, plus in some countries special regulations for foreign investors. * Variations in corporate taxation rules also influence the pattern of FDI.