Chapter 8: Foreign Direct Investment

True / False Questions

1. When a firm exports its products to a foreign country, foreign direct investment occurs. 
 
True    False
 
2. According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen,
organization, or affiliated group takes an interest of 10 percent or more in a foreign business
entity. 
 
True    False
 
3. Greenfield investment involves the establishment of a new operation in a foreign country. 
 
True    False
 
4. The flow of foreign direct investment refers to the number of countries a firm is investing in
at any given point in time. 
 
True    False
 
5. The stock of foreign direct investment refers to the total accumulated value of foreign-owned
assets at a given time. 
 
True    False
 
6. The globalization of the world economy is having a negative effect on the volume of FDI. 
 
True    False
 
7. FDI has grown significantly slower than world trade and world output. 
 
True    False
 

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8. According to the United Nations, majority of changes made worldwide between 1992 and
2008 in the laws governing foreign direct investment have created a more favorable
environment for FDI. 
 
True    False
 
9. Historically, most FDI has been directed at the least developed nations of the world. 
 
True    False
 
10. Since World War II, the United States has been the largest source country for FDI, a position
it retained during the late 1990s and early 2000s. 
 
True    False
 
11. Greenfield investments are quicker to execute than mergers and acquisitions. 
 
True    False
 
12. When a firm allows another enterprise to produce its products under license, the licensee
bears the costs or risks. 
 
True    False
 
13. The attractiveness of exporting increases in comparison to FDI or licensing when products
have a low value-to-weight ratio. 
 
True    False
 
14. By placing tariffs on imported goods, governments can increase the cost of exporting relative
to foreign direct investment and licensing. 
 
True    False
 
15. By limiting imports through quotas, governments reduce the attractiveness of FDI and
licensing. 
 
True    False
 

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16. A critical competitive feature of an oligopoly is independence of the major players. 
 
True    False
 
17. Multipoint competition arises when two or more enterprises encounter each other in different
regional markets, national markets, or industries. 
 
True    False
 
18. Economists refer to knowledge “spillovers” as externalities, and there is a well-established
theory suggesting that firms can benefit from such externalities by locating close to their
source. 
 
True    False
 
19. According to the extreme version of radical view, no country should ever permit foreign
corporations to undertake FDI, because they can never be instruments of economic
development, only of economic domination. 
 
True    False
 
20. By the early 1990s, the radical position toward FDI was in retreat due to the rise of
communism in eastern Europe. 
 
True    False
 
21. According to the free market view, countries should specialize in the production of those
goods and services that they can produce most efficiently. 
 
True    False
 
22. According to the pragmatic nationalist view, no country should ever permit foreign
corporations to undertake FDI. 
 
True    False
 
23. World trade has been growing twice as fast as the growth in the volume of FDI worldwide. 
 
True    False
 

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24. The indirect employment effects of FDI are often as large as, if not larger than, the direct
effects. 
 
True    False
 
25. Services, such as telecommunications, retailing, and many financial services, where the
service has to be produced where it is delivered, lend themselves well to exporting. 
 
True    False
 
26. An acquisition does not result in a net increase in the number of players in a market. 
 
True    False
 
27. Offshore production refers to FDI undertaken to serve the host market. 
 
True    False
 
28. Many investor nations now have government-backed insurance programs to cover major
types of foreign investment risk like the risks of expropriation (nationalization), war losses,
and the inability to transfer profits back home.  
 
True    False
 
29. Ownership restraints and performance requirements are the two most common ways in which
host governments restrict FDI. 
 
True    False
 
30. Performance requirements are controls over the behavior of the MNE’s local subsidiary. 
 
True    False
 
31. The WTO embraces the promotion of international trade in services. 
 
True    False
 
32. The location-specific advantages argument associated with John Dunning helps explain why
firms prefer FDI to licensing or to exporting. 
 
True    False
 
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33. Licensing is not a good option if the competitive advantage of a firm is based upon
managerial or marketing knowledge that is embedded in the routines of the firm or the skills
of its managers, and that is difficult to codify in a “book of blueprints.” 
 
True    False
 
34. Franchising is essentially the service-industry version of licensing, although it normally
involves much longer-term commitments than licensing. 
 
True    False
 
35. Despite the move toward a free market stance in recent years, many countries still have a
rather pragmatic stance toward FDI. 
 
True    False
 
36. A firm's bargaining power is low when the host government places a low value on what the
firm has to offer. 
 
True    False
 
 

Multiple Choice Questions

 

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37. A computer manufacturing firm from the United States invests in a microprocessor
manufacturing plant in Taiwan. This is an example of: 
 

A. insourcing.

B. stock consolidation.

C. foreign direct investment.

D. product differentiation.

E. market segmentation.
 
38. According to the U.S. Department of Commerce, in the United States _____ occurs
whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or
more in a foreign business entity. 
 

A. multilateral investment

B. foreign direct investment

C. reciprocal foreign investment

D. international divestment

E. asset divestment
 
39. A firm becomes a(n) _____, once it undertakes FDI. 
 

A. outsourcer

B. retail chain

C. offshore company

D. multinational enterprise

E. national corporation
 

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40. Which of the following is most likely to involve establishment of a new operation in a
foreign country? 
 

A. Consolidation

B. Greenfield investment

C. Acquisition

D. Licensing agreement

E. Mass customization
 
41. Which of the following indicates that a  firm has full outright stake in an acquisition? 
 

A. Anderson Corporations acquires at least 75 percent of a company.

B. Sheffield Enterprises acquires at least 60 percent of a company.

C. Arthur Enterprises acquires 98 percent of a company.

D. Maximus Corporations acquires 100 percent of a company.

E. Dream Animax acquires atleast 85 percent of a company.

 
42. The _____ of foreign direct investment refers to the amount of FDI undertaken over a given
period (normally a year). 
 

A. portfolio

B. flow

C. status

D. stock

E. fragment
 

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43. The stock of foreign direct investment refers to: 
 

A. the total accumulated value of foreign-owned assets at a given time.

B. the number of shares of a foreign firm held by the local investors.

C. to the amount of FDI undertaken over a given time period (normally a year).

D. the dividend amount paid by the foreign firm to local investors.

E. the flow of foreign direct investment out of a country.

 
44. Which of the following statements is true regarding foreign direct investment? 
 

A. The flow of FDI refers to the total accumulated value of foreign-owned assets at a given
time.

B. FDI has grown more rapidly than world trade and world output. 

C. The general shift toward democratic political institutions has discouraged FDI.

D. Generally, free market economies oppose FDI.

E. The globalization of the world economy is having a negative effect on the volume of FDI.
 
45. Why has FDI grown more rapidly than world trade? 
 

A. Decline in trade barriers has made the fear of protectionist pressures redundant.

B. Executives of business firms see FDI as a way of circumventing future trade barriers.

C. There has been a general shift toward radical and totalitarian political institutions.

D. Privatization has made developing nations less attractive for multinational enterprises.

E. There has been a general shift toward centrally planned command economies.
 

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46. Historically, most FDI has been directed at the _____ nations of the world. 
 

A. underdeveloped

B. developing

C. developed

D. emerging

E. least developed
 
47. The United States has been an attractive target for FDI partly because of its: 
 

A. abundance of cheap and skilled labor.

B. stable and dynamic economy.

C. commitment to environmental issues.

D. low corporate tax rates.

E. high trade barriers

 
48. Which of the following is true regarding the inflow of FDI? 
 

A. Even though developing nations still account for the largest share of FDI inflows, FDI
into underdeveloped nations has increased markedly.

B. Africa has historically been the largest recipient of inward FDI.

C. The United Kingdom and France have historically been the smallest recipients of inward
FDI.

D. There has been an increase in the importance of China as a recipient of FDI.

E. Latin America is the least important region in the developing world for FDI inflows.
 

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49. Countries such as the U.S., the U.K., France, Germany, the Netherlands, and Japan dominate
in the share of total global stock of FDI and FDI outflows and in rankings of the world's
largest multinationals because: 
 

A. they were the most developed countries postwar and home to the largest and best
capitalized enterprises.

B. they pursued a policy of blocking or restricting FDI inflow into their own economies.

C. they provided subsidies for their domestic firms to protect them from foreign competition.

D. they control much of the operating structure of the WTO which governs international
trade.

E. they were the governing body of the International Monetary Fund.

 
50. During 1998 to 2010, which of the following countries had the highest FDI outflow?  
 

A. United Kingdom 

B. United States

C. Netherlands 

D. Germany

E. Japan
 

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51. In the case of developing nations, about _____ of FDI is in the form of cross-border mergers
and acquisitions. 
 

A. three-fourth

B. one-third

C. one-half

D. two-third

E. three-fifth
 
52. Mergers and acquisitions differ from greenfield investments in that: 
 

A. greenfield investments are quicker to execute than mergers and acquisitions.

B. greenfield investments are undertaken to take advantage of valuable strategic assets, such
as brand loyalty and trademarks or patents, of a foreign competitor.

C. the majority of FDI flows into developed nations are in the form of greenfield investments
rather than mergers and acquisitions.

D. the majority of FDI flows into developing nations is in the form of cross-border mergers
and acquisitions.

E. the percentage of mergers and acquisitions is lower than greenfield investments in

developing nations.
 

11
53. _____ involves producing goods at home and then shipping them to the receiving country for
sale. 
 

A. Outsourcing

B. Licensing

C. Franchising

D. Exporting

E. Diversifying
 
54. The _____ states that combining location-specific assets or resource endowments and the
firm's own unique assets often requires FDI and it also requires the firm to establish
production facilities where those foreign assets or resource endowments are located. 
 

A. strategic trade policy

B. integration approach

C. scramble theory

D. eclectic paradigm

E. infant industry argument

 

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55. 3M, an American firm, manufactures adhesive tapes in St. Paul, Minnesota, and ships the
tapes to South Korea for sale. According to this information, which of the following is being
done by 3M? 
 

A. Exporting

B. Licensing

C. Franchising

D. Insourcing 

E. Outsourcing
 
56. Which of the following involves granting a foreign entity the right to produce and sell the
firm's product in return for a royalty fee on every unit sold? 
 

A. Outsourcing

B. Exporting

C. Licensing

D. Diverging

E. Hedging
 
57. FDI is risky because of the problems associated with: 
 

A. sharing a valuable technological know-how with a potential competitor.

B. increase in the transportation costs, especially for those products that have a low value-to-
weight ratio.

C. doing business in a different culture where the rules of the game may be very different.

D. the possibility of increase in trade barriers such as import tariffs or quotas.

E. increased production costs.

 
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58. The viability of an exporting strategy is often constrained by transportation costs, particularly
of products that have a _____ and that can be produced in almost any location. 
 

A. high local content requirement

B. low total landed cost

C. low value-to-weight ratio

D. low licensing tariff

E. high marginal cost

 
59. Which of the following is one of the limitations of exporting that leads companies to prefer
FDI over exporting? 
 

A. The presence or threat of trade barriers

B. The costs of acquiring a foreign enterprise

C. The costs of establishing production facilities in a foreign country

D. The risk of giving away valuable technological know-how to a potential foreign

competitor

E. The possibility of diminishing returns

 
60. A firm will favor FDI over exporting as an entry strategy when: 
 

A. the costs of establishing production facilities are high.

B. the transportation costs or trade barriers are high.

C. there are problems associated with doing business in a different culture.

D. the products involved have a high value-to-weight ratio.

E. the firm wants to occupy a position that falls inside the efficiency frontier.
 

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61. Which of the following products has a low value-to-weight ratio? 
 

A. Electronic components

B. Personal computers

C. Medical equipment

D. Computer software

E. Cement
 
62. A firm that does not want to bear the costs of establishing production facilities in a foreign
country should avoid: 
 

A. exporting.

B. FDI.

C. licensing.

D. franchising.

E. outsourcing.
 
63. Governments impose quotas to limit _____. 
 

A. FDI

B. importing

C. franchising

D. outsourcing

E. licensing
 

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64. The argument that firms prefer FDI over licensing to retain control over know-how,
manufacturing, marketing, and strategy or because some firm capabilities are not amenable
to licensing constitutes the _____. 
 

A. comparative advantage theory

B. distribution theory

C. new trade theory

D. internalization theory

E. licensing theory
 
65. The market imperfections approach seeks to explain: 
 

A. the disadvantages associated with the adoption of a completely free market view.

B. why different nations import goods from other countries even when they are more capable
of producing them efficiently.

C. the preference for FDI over licensing by firms as a strategy to enter foreign markets.

D. the benefits of exercising protectionism coupled with partial adoption of free market
approach.

E. the pattern of sale of products from one country to another.

 

16
66. According to internalization theory: 
 

A. licensing gives a firm the tight control over manufacturing, marketing, and strategy in a
foreign country that may be required to maximize its profitability.

B. licensing may result in a firm’s giving away valuable technological know-how to a

potential foreign competitor.

C. licensing has no major drawbacks as a strategy for exploiting foreign market

opportunities.

D. a problem with licensing arises when the firm’s competitive advantage is based much on
its products rather than on the management, marketing, and manufacturing capabilities
that produce those products.

E. licensing is more profitable than FDI.

 
67. According to internalization theory, one of the drawbacks of licensing is that: 
 

A. it may result in a firm's technological know-how being restricted to a limited knowledge
base and stifles any future development.

B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a
foreign country that may be required to maximize its profitability.

C. when a firm allows another enterprise to produce its products under license, the licensee
bears the costs or risks.

D. its use is restricted by the government by imposing tariffs and quotas.

E. it is less cost-effective than FDI.

 

17
68. A firm is most likely to favor foreign direct investment over exporting when: 
 

A. the firm wants its technological know-how to be widely disseminated.

B. the firm wishes to maintain control over its operations and business strategy.

C. the transportation costs are low.

D. there are no trade barriers.

E. the firm wants to customize its products as per the tastes and preferences of foreign
consumers.
 
69. The strategic behavior theory: 
 

A. explains the constrains of exporting and licensing.

B. seeks to explain the challenges faced by a firm during the establishment of a new
operation in a foreign country.

C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection
of strategic rivalry between firms in the global marketplace.

D. reviews the theories that have been used to explain foreign direct investment.

E. explains how greenfield investments are better than FDI.

 

18
70. The cement market in Erbia is dominated by four firms. These firms control 85 percent of
selling and buying of the domestic market. Which of the following terms explains the market
structure of cement industry in Erbia? 
 

A. Perfect competition

B. Monopoly

C. Oligopoly

D. Dual monopoly

E. Monopsony
 
71. A critical competitive feature of an oligopoly is: 
 

A.  the lack of interaction among the major players.

B. the presence of a domestic market which is open for foreign firms.

C. the desire of all the major players to avoid the phenomenon of diminishing returns.

D. the interdependence of the major players.

E. the lack of imitative behavior among the major players.

 
72. If one firm in an oligopoly cuts prices, then most likely, its competitors: 
 

A. will make profits.

B. will also respond with similar price cuts.

C. will correspondingly raise prices.

D. will capture additional market share.

E. will not be impacted by the price cuts.

 

19
73. The interdependence between firms in an oligopoly leads to _____. 
 

A. trade wars

B. a decrease in the supply

C. imitative behavior

D. higher demand

E. increased domestic consumption

 
74. QFresh, a brand for energy drinks launched a healthy lime based drink without preservatives.
Immediately after this another brand, Fast Fizz, which manufactures energy drinks, also
announced the launch of a new refreshing drink without preservatives. Then Ignite, a third
brand of energy drinks, reduced the price of its apple based drink. Which of the following is
most likely to happen in this oligopolistic market set up? 
 

A. QFresh and Fast Fizz will reduce the prices of their respective drinks.

B. Fast Fizz will launch another new drink.

C. 
QFresh will tie up with Ignite to launch a completely new product.

D. Fast Fizz and Ignite will collaborate against QFresh.

E. QFresh will have an increased domestic consumption.

 

20
75. A(n) _____ arises when two or more enterprises encounter each other in different regional
markets, national markets, or industries. 
 

A. monopoly

B. monopsony 

C. cartel

D. multipoint competition

E. oligopsony
 
76. The idea behind multipoint competition is to ensure that: 
 

A. a rival does not dominate one market and use the profits from there to drive competitive
attacks elsewhere.

B. the competitors cooperate with each other to establish a cartel.

C. no other competitors can enter the market unless they resort to licensing or franchising
with the initial pioneers.

D. growing technologies or business methods in new markets are transferred to established

markets.

E. the firms in an industry prefer FDI over licensing or exporting.

 
 

21
77. The difference between Internalization theory and imitative theory is that: 
 

A. internalization theory does not explain why the first firm in an oligopoly decides to
undertake FDI rather than to export or license.

B. imitative theory addresses the issue of whether FDI is more efficient than exporting or
licensing for expanding abroad.

C. most economists favor imitative theory as an explanation for FDI.

D. no important aspect of FDI is explained by imitative theory.

E. internalization theory addresses the issue of efficiency of FDI over exporting or licensing.
 
78. Which of the following concepts helps explain how location factors affect the direction of
FDI? 
 

A. The eclectic paradigm

B. The protectionism argument

C. The product life-cycle theory

D. The new trade theory

E. The infant industry argument

 

22
79. Location-specific advantages for a firm are those that arise from: 
 

A. acquiring the home markets of foreign firms that threaten a firm's domestic market.

B. gaining a commanding position in one market and using them to subsidize competitive
attacks in other markets.

C. preferring exporting over licensing in order to retain control over know-how,

manufacturing, marketing, and strategy.

D. utilizing resource assets that are tied to a particular foreign location and valuable enough
to be combined with the firm's own unique assets.

E. franchising and licensing.

 
80. Which of the following is true about Dunning's arguments? 
 

A. Dunning rejects the argument of internalization theory that it is difficult for a firm to

license its own unique capabilities and know-how.

B. Dunning suggests that to exploit such foreign resources, such as oil and other minerals, a
firm must undertake licensing rather than FDI.

C. Dunning argues that it makes sense for a firm to locate production facilities in those
countries where the cost and skills of local labor is most suited to its particular production
processes, since labor is not internationally mobile.

D. Dunning’s theory and its extensions help explain the imitative FDI behavior by firms in
oligopolistic industries. 

E. Dunning argues that combining location-specific assets or resource endowments with the
firm’s own unique capabilities always requires licensing.
 

23
81. Economists refer to knowledge "spillovers" that occur when companies in the same industry
are located in the same area as: 
 

A. technology flows.

B. overlaps.

C. corporate espionage.

D. externalities.

E. a free rider problem.

 
82. Silicon Valley in California is the world center for the computer and semiconductor industry
and has many of the world's major computer and semiconductor companies located close to
each other, thus offering the location-specific advantage of: 
 

A. a multipoint competition.

B. an oligopoly.

C. a first mover.

D. externalities.

E. free riders.
 

24
83. Dunning’s theory helps explain: 
 

A. how firms try to match each other’s moves in different markets to try to hold each other in
check.

B. the interdependence between firms in an oligopoly that leads to imitative behavior among
the rivals.

C. why a greenfield investment in a new facility is better than an acquisition of or a merger

with an existing local firm.

D. the problems associated with doing business in a different culture where the rules of the
game may be very different.

E. how location factors affect the direction of FDI.

 
84. The _____ view of FDI traces its roots to Marxist political and economic theory. 
 

A. radical

B. free market

C. pragmatic nationalism

D. comparative advantage

E. pluralist
 

25
85. Radical writers argue that: 
 

A. a multinational enterprise (MNE) is an instrument of economic development rather than

economic domination.

B. MNEs are more beneficial to host countries than to their home countries.

C. important jobs in the foreign subsidiaries of MNEs go to host-country nationals rather

than to citizens of the home country.

D. FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the
world relatively backward.

E. MNEs exploit their home countries for the exclusive benefit of their host countries.
 
86. People with radical view toward FDI argue that _____ is an instrument of imperialist
domination. 
 

A. privatization

B. a multinational enterprise 

C. nationalization

D. a publicly traded company

E. outsourcing
 

26
87. According to the radical view of FDI, multinational enterprises (MNEs) that already exist in
a country: 
 

A. should be immediately nationalized.

B. should be made to pay higher taxes.

C. should be converted in to publicly traded companies.

D. should be banned from obtaining finance from the financial institutions in the host
country.

E. should be immediately privatized.

 
88. According to the radical view, which of the following countries would benefit the most from
FDI? 
 

A. Host countries of MNEs

B. Third world countries

C. Less developed FDI destinations

D. Advanced, capitalist home countries of MNEs

E. Underdeveloped countries
 

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89. Which of the following is a reason for the decline in the popularity of the radical view of
FDI? 
 

A. The rise of communism in Eastern Europe

B. The generally steady economic growth of those countries that embraced the radical
position

C. The growing belief in many countries that FDI leads to loss of jobs

D. The strong economic performance of those developing countries that embraced capitalism

E. The collapse of capitalism in the newly independent nations of Asia

 
90. The _____ view argues that international production should be distributed among countries
according to the theory of comparative advantage. 
 

A. conservative

B. pragmatic nationalism

C. free market

D. radical

E. Keynesian economic
 

28
91. According to the free market view, how does FDI increase the efficiency of world economy
through MNEs? 
 

A. The MNE is an instrument for dispersing the production of goods and services to the most
efficient locations around the globe.

B. MNEs extract profits from the host country and take them to their home country and help
all countries realize economies of scale.

C. When an MNE produces products, profits from the investment go abroad, and hence the
MNE helps foreign exchange to rotate.

D. A foreign-owned manufacturing plant may import many components from its home
country, thus improving the balance of payments of the host country.

E. MNEs increase the efficiency of world economy by increasing the flow of capital in the
world market.
 
92. Which of the following statements regarding the free market view is true? 
 

A. According to the free market view, MNEs decrease the overall efficiency of the world
economy.

B. No country has adopted the free market view in its pure form.

C. According to the free market view, MNEs can never be instruments of economic
development, only of economic domination.

D. According to the free market view, FDI is beneficial to the host country of an MNE but it
is harmful for the home country of the MNE.

E. The free market view traces its roots to Marxist political and economic theory.
 

29
93. Britain reserves the right to intervene in FDI by: 
 

A. reserving the right to block foreign takeovers of domestic firms in certain situations.

B. prohibiting FDIs over and above a certain fixed annual amount.

C. nationalizing certain industries that provide essential goods and services.

D. imposing economic sanctions against specific countries.

E. by limiting exports and licensing.

 
94. The pragmatic nationalist view is that : 
 

A. FDI benefits only the host country.

B. FDI does not make any positive contribution to the host economy.

C. every country should adopt the free market view.

D. FDI should not be allowed by any country as it is an instrument of economic domination

rather than economic development.

E. FDI has both benefits and costs.

 
95. Many host countries are concerned that a foreign-owned manufacturing plant may import
many components from its home country, which has negative implications for the host
country's _____. 
 

A. free trade agreements

B. inward FDI

C. sovereignty

D. balance-of-payments position

E. gold reserves
 

30
96. According to the _____, FDI has both benefits and costs and should be allowed only if the
benefits outweigh the costs. 
 

A. eclectic paradigm theory

B. free market view

C. pragmatic nationalist view

D. radical view

E. internalization theory
 
97. The tendency to aggressively court FDI believed to be in the national interest of a country is
an aspect of: 
 

A. pragmatic nationalism.

B. the radical view.

C. nationalism.

D. imitative theory.

E. eclectic paradigm.
 

31
98. Which of the following is true regarding the pragmatic nationalist view of FDI? 
 

A. One aspect of pragmatic nationalism 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.

B. The pragmatic nationalist view states that FDI always has a positive effect on the balance
of payments which arises from the outflow of a foreign subsidiary's earnings and from the
import of inputs from abroad.

C. According to pragmatic nationalist view, international production should be distributed

among countries based on the theory of comparative advantage.

D. According to pragmatic nationalist view, FDI should not be allowed to enter into a
country because its costs always outweigh its benefits.

E. The pragmatic nationalist view of FDI accepts the Marxist theory, and suggests that FDI
by MNEs is an instrument of imperialism.
 
99. Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of: 
 

A. adopting a retaliatory stance in bilateral trade.

B. courting FDI believed to be in national interest.

C. adopting a radical stance to FDI.

D. blocking FDI inflows into the country.

E. curbing a trade war.

 

32
100 The main benefits of inward FDI for a host country arise from:  
.  

A. the resource-transfer effect, the employment effect, and the balance-of-payments effect.

B. the labor-transfer effect, the technology effect, and the currency-exchange effect.

C. the cultural awareness effect, first-mover advantage effect, and economic development
effect.

D. the foreign exchange reserves effect, knowledge flow effect, and the reverse resource
transfer effect.

E. the employment effect, the labor-transfer effect, and the technology effect.
 
101 Foreign managers trained in the latest management techniques can often help to improve the
. efficiency of operations in the host country, whether those operations are acquired or
greenfield developments. This benefit of FDI falls into the category of _____. 
 

A. employment effects

B. balance-of-payments effects

C. effects on competition

D. resource transfer effects

E. autonomy effects
 

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102 Which of the following statements is most likely to be true regarding the effects of FDI on
. employment? 
 

A. FDI does not result in job creation.

B. FDI has only indirect effects on employment in the host country.

C. The indirect employment effects of FDI are always smaller than the direct effects.

D. When FDI takes the form of an acquisition of an established enterprise in the host
economy as opposed to a greenfield investment, the immediate effect is always an
increase in the employment.

E. A beneficial employment effect claimed for FDI is that it brings jobs to a host country
that would otherwise not be created there.
 
103 Direct effects of FDI on employment in the host country arise when a foreign MNE: 
.  

A. brings in managers trained in the latest management techniques from the home country.

B. creates jobs because of increased local spending by employees of the MNE.

C. employs a number of host country citizens.

D. causes local suppliers to hire more people.

E. creates jobs in the supporting industries.

 
104 Indirect effects of FDI on employment in a host country arise when: 
.  

A. a foreign MNE employs a number of host-country citizens.

B. jobs are created because of increased local spending by employees of an MNE.

C. an MNE brings in managers from the home country for its operations in the host country.

D. an MNE recruits people from the host country for research and development.

E. an MNE sends it home country employees to host countries for training.
 
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105 _____ accounts are national accounts that track both payments to and receipts from other
. countries. 
 

A. Equity

B. Dematerialized

C. Balance of trade

D. Asset

E. Balance-of-payments
 
106 In the balance of payments, the _____ account records transactions involving the export and
. import of goods and services. 
 

A. current

B. foreign

C. internal

D. tariff

E. savings
 
107 A current account deficit is also known as a(n) _____ deficit. 
.  

A. stock

B. inventory

C. external

D. tariff 

E. trade
 

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108 When a country is importing more goods and services than it is exporting, it is incurring
. a(n): 
 

A. trade surplus.

B. current account deficit.

C. positive balance of payment.

D. economic recession.

E. net capital inflow.

 
109 Which of the following is the only way in which a current account deficit can be supported
. in the long run? 
 

A. Borrowing from the IMF

B. Selling assets to foreigners

C. Divesting stock in domestic corporations

D. Purchasing stocks, bonds, and real estate in other countries

E. Issuing negotiable instruments like the bills of exchange

 
110 Which of the following is most likely to be the effect of FDI in the form of a greenfield
. investment on the host country? 
 

A. It drives down prices and increases the economic welfare of consumers.

B. It raises unemployment levels.

C. It causes firms to fight for scarce capital investments.

D. It leads to an oligopolistic market and unfair pricing.

E. It leads to decreased productivity, product and process innovations, and lesser economic
growth.
 
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111 Which of the following statements is most likely to be true regarding the adverse effects of
. FDI on the host country? 
 

A. It decreases the level of competition in the host country.

B. It tends to increase the prices of the products.

C. It leads to a high rate of unemployment in the long run.

D. When a foreign subsidiary imports a substantial number of its inputs from abroad, it
results in a debit on the current account of the host country’s balance of payments.

E. When a foreign subsidiary sends its profits to its home country, it results in the depletion
of gold reserves of the host country. 
 
112 The most important concerns regarding the costs of FDI for the home-country center on: 
.  

A. the balance-of-payments and employment effects of outward FDI.

B. the technology capture effect and the perceived loss of national sovereignty.

C. the reverse-resource transfer effect and the exposure to foreign markets caused by FDI.

D. the import of substantial input from abroad and being held to "economic ransom."

E. the exposure to foreign markets and the decreased costs of production.

 
113 Offshore production refers to FDI undertaken: 
.  

A. to focus on extractive industries, such as oil and gas.

B. to serve the home market.

C. in shipping industries.

D. to decrease the prices of products in the host countries.

E. to capture tax benefits in the host country.

 

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114 Which of the following is a major type of foreign investment risk that is insurable through
. government-backed programs? 
 

A. Lack of funds

B. Risk of transaction loss

C. Poor strategic tie-ups

D. Risks of expropriation

E. Losses due to natural calamities

 
115 As an incentive to encourage domestic firms to undertake FDI, many countries have: 
.  

A. eliminated double taxation of foreign income.

B. started imposing local content requirements.

C. imposed higher import tariffs.

D. abolished the use of custom duties.

E. eliminated subsidies.
 
116 Which of the following is a home-country policy for limiting outward FDI? 
.  

A. Eliminating double taxation of foreign income

B. Manipulating tax rules to encourage the firms to invest at home

C. Withdrawing government-backed insurance programs provided to local investors

D. Reducing interest rates earned on domestic investments

E. Prohibiting organizations from entering into a cartel 

 

38
117 To encourage inward FDI, it is increasingly common for governments to: 
.  

A. offer tax concessions to firms that invest in their countries.

B. exclude foreign companies from specific industries.

C. require that local investors own significant proportion of the equity in a joint venture.

D. impose high custom duties on foreign firms. 

E. prohibit MNEs from joining a cartel.

 
118 Host governments use a range of controls to restrict inward FDI. The two most common
. are: 
 

A. monetary restraints and prohibition on investing in certain countries.

B. voluntary export restrictions and employment restraints.

C. ownership restraints and performance requirements.

D. tax concessions and government-backed insurance.

E. employment restraints and tax deductions.

 
119 Many services have to be produced where they are sold; hence _____ is not an option. 
.  

A. FDI

B. franchising

C. greenfield investment

D. exporting

E. outsourcing 
 

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120 Firms for which licensing is not a good option include: 
.  

A. low-technology industries.

B. global oligopolies.

C. industries characterized by low cost pressures.

D. industries where transportation costs are high.

E. industries which need to have low control over foreign operations.

 
121 Although it normally involves much longer-term commitments, franchising is essentially the
. service industry version of: 
 

A. exporting.

B. licensing.

C. foreign direct investment.

D. greenfield investment.

E. diversifying.

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