Week 8

Question 1

What is Foreign Direct investment?

Answer 1

When a company merges with a. firm, creates a subsidiary or an operation in a different country.

Question 2

What is the result of foreign direct investment?

Answer 2

Firm has a significant control of its foreign operation and can affect managerial decisions of the foreign operation

Question 3

What is flow?

Answer 3

Amount of FDI over a period of time

Question 4

What is stock?

Answer 4

Total accumulated value of foreign owned assets at a given point in time

Question 5

Why has FDI grown rapidly more than world trade?

Answer 5

Business fear protectionist pressures, FDI is a way to circumvent trade barriers, dramatic political and economic changes in many parts of the world, firms see entire world as their market

Question 6

Where are green field operations held?

Answer 6

Mostly in developing nations

Question 7

What are mergers and acquisitions?

Answer 7

When foreign firms have valuable strategic assets, believe they can increase efficiency of the acquired firm and its is quicker to execute

Question 8

What are the two forms of FDI

Answer 8

Horizontal Direct Investment and Vertical Direct Investment

Question 9

What are Horizontal Direct investment?

Answer 9

FDI is in the same industry abroad as company operates at home

Question 10

What are the elements of vertical direct investment?

Answer 10

Backward and Forward

Question 11

What is backward vertical direct investment?

Answer 11

Investments into industry that provides inputs into a firms domestic productions (typically extractive industries)

Question 12

What is forward vertical direct investment?

Answer 12

Investment in an industry that uses the outputs from a firms domestic production (typically sales and distribution)

Question 13

Why is FDI shifting to services?

Answer 13

a liberalization of policies governing FDI in services and the rise of internet based global telecommunication networks

Question 14

What are the reasons for choosing FDI for services?

Answer 14

Exporting
Licensing
Internalization theory

Question 15

What is exporting?

Answer 15

Producing goods at home and then shipping them in other countries to sell

Question 16

What are the limitations of exporting

Answer 16

Can be limited to transportation costs and trade barriers, may response to actual or threatened trade barriers

Question 17

What is licensing?

Answer 17

Allowing foreign entities the right to produce and sell their products in return for a royalty fee on every unit that the foreign entity sells

Question 18

What is the limitation of licensing

Answer 18

Granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit that the foreign entity sells

Question 19

What is internalization theory?

Answer 19

the process of choosing FDI over licensing strategy bc licensing has 3 major drawbacks

Question 20

Why is Internalization theory more preferred than licensing

Answer 20

Firms could give away valuable technological know how to a potential foreign competitor, does not give a firm the control over manufacturing, marketing and strategy in a foreign firm and the firms competitive advantage may be based on its management, marketing and manufacturing capabilities

Question 21

Why do firms in the same industry take on FDI at the same time and the same locations?

Answer 21

Knickerbocker and multipoint competition and Vernon

Question 22

What is Knickerbocker?

Answer 22

FDI flows are a reflection of strategic rivalry between firms in the global marketplace

Question 23

What is multipoint competition?

Answer 23

When two or more enterprises encounter each other in different regional markets, national markets or industries

Question 24

Why is it profitable for firms to undertake FDI rather than continuing to export from home base or licensing a foreign firm?

Answer 24

Dunning eclectic paradigm states that there are location specific advantages and externalities to consider

Question 25

What are location specific advantages?

Answer 25

Arise from using resource endowments or assets that are tied to a particular location and that a firm finds it valuable to combine with its own unique assets

Question 26

What are externalities?

Answer 26

Knowledge spillovers that occur when companies in the same industry locate in the same area

Question 27

What are the three types of political ideology?

Answer 27

Radical view, Pragmatic Nationalism, Free Market

Question 28

What are the different benefits of FDI to host countries?

Answer 28

Resource transfer effects and employment effect

Question 29

What are resource transfer effects and its benefits?

Answer 29

Capital, technology, management

Question 30

What are the employment effect and its benefits?

Answer 30

Direct and indirect

Question 31

What are the balance of payments effect and its benefits?

Answer 31

Current account surplus/deficit, capital account and increases competition and spurs economic growth

Question 32

What are the costs of FDI to host countries?

Answer 32

1. Adverse effects on competition 2. Adverse effects on the balance of payments 3. National sovereignty and autonomy

Question 33

Adverse effects on the balance of payments steps

Answer 33

1. After the initial capital inflow there is normally a subsequent outflow of earnings 2. Foreign subsidiaries could import a substantial number of inputs

Question 34

Why is national sovereignty and autonomy threatened by fdi

Answer 34

Some host governments worry that the FDI is accompanied by some loss of economic independence resulting in the host country's economy being controlled by a foreign corporation

Question 35

What are the benefits of FDI for the home country?

Answer 35

The effect on the home country's balance of payments from inward flow of foreign earnings, employment effects that arise from outward FDI and the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

Question 36

How can the home country's balance of payments suffer

Answer 36

1. The initial capital outflow required to finance the FDI 2. The purpose of the FDI is to serve the home market from low cost labor location 3. If the FDI is a substitute for direct exports 4. Employment may be negatively affected

Question 37

What can governments do to outwardly encourage FDI?

Answer 37

Encourage outward FDI by having government backed insurance programs to cover major types of foreign investment risk

Question 38

What can governments do to outwardly restrict FDI?

Answer 38

Limit capital outflows, manipulate tax rules or prohibit FD

Question 39

What can governments do to inwardly encourage FDI?

Answer 39

Encourage inward FDI through governments offer incentives to foreign firms to invest their countries. These incentives are motivated by a desire to gain from the resource transfer and employment effects of FDI and to capture FDI away from other potential host countries

Question 40

What can governments do to restrict inwardly encourage FDI?

Answer 40

By having governments use ownership restraints and performance requirements

Question 41

What are direct effects of employment

Answer 41

When a foreign company employs a number of host country citizens to work their operations

Question 42

What is indirect effects of employment

Answer 42

When jobs are created in local suppliers as a result of the investment and when jobs are creased because of increased local spendings by the employment of the foreign country