Foreign Direct Investment and Ventures
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Questions and Answers

Which of the following is a trend seen in the modern international economy?

  • Firms in the service sector use e-commerce exclusively to enter foreign markets.
  • Firms from both advanced and emerging economies employ FDI. (correct)
  • Companies primarily use acquisitions to enter foreign markets.
  • Emerging markets are the sole recipient countries for FDI.

    • Foreign direct investment is the least risky entry strategy.

    False

    International portfolio investment refers to a firm's direct control of foreign operations and is an equity-based method of foreign market entry.

    False

    The rate of inflation is a(n) ______ factor to be considered while selecting the location for FDI.

    <p>profit retention</p> Signup and view all the answers

    Which of the following must be considered in selecting foreign direct investment locations?

    <p>all of the above</p> Signup and view all the answers

    Which of the following best explains why some service industry firms most likely enter foreign markets through FDI?

    <p>The service offered by the firm requires direct contact with customers.</p> Signup and view all the answers

    Which of the following best exemplifies corporate social responsibility?

    <p>an automotive battery firm offering free technical training to students of a deprived community</p> Signup and view all the answers

    Which of the following represents an infrastructural factor that firms must consider when selecting an FDI location?

    <p>availability and quality of local manufacturing</p> Signup and view all the answers

    Which of the following represents a human resource factor that firms must consider when selecting an FDI location?

    <p>involvement of labor unions</p> Signup and view all the answers

    The level of taxes in a country is a part of the ______ factor that is considered when selecting an FDI location.

    <p>profit retention</p> Signup and view all the answers

    International portfolio investment refers to passive ownership of foreign securities.

    <p>True</p> Signup and view all the answers

    A firm most likely enters the home market of a foreign competitor in order to ______

    <p>force the competitor to expend resources to defend its market</p> Signup and view all the answers

    Which of the following is an example of a market-seeking motive for FDI?

    <p>a firm follows its key customers abroad</p> Signup and view all the answers

    Which of the following is the most likely motive behind firms in the mining industry wanting to enter new foreign markets?

    <p>access to natural resources</p> Signup and view all the answers

    A firm that pursues foreign direct investment to take advantage of government incentives is demonstrating a(n) ______ motive.

    <p>efficiency-seeking</p> Signup and view all the answers

    A firm that pursues a collaborative venture to access raw materials is demonstrating a(n) ______ motive.

    <p>asset-seeking</p> Signup and view all the answers

    Which of the following industries considers proximity to customers especially important in the decision to enter a foreign market?

    <p>fashion</p> Signup and view all the answers

    New markets, new resources, and improved efficiency are the three main motives for firms to enter foreign markets through FDI.

    <p>True</p> Signup and view all the answers

    Avoiding trade barriers is classified as a market-seeking motive for FDI.

    <p>False</p> Signup and view all the answers

    The existence of a substantial market motivates many firms to produce offerings at or near customer locations.

    <p>True</p> Signup and view all the answers

    Firms often follow their key customers abroad to preempt other vendors from serving them.

    <p>True</p> Signup and view all the answers

    The strategic purpose behind firms competing with rivals in their own market is to force them to expend resources and thus, defend the firm's own market.

    <p>False</p> Signup and view all the answers

    Companies opt for FDI to obtain advantages associated with locating at the hub of knowledge development and innovation in a given industry.

    <p>True</p> Signup and view all the answers

    Economies of scale are decreases in per-unit cost of production resulting from decreasing output.

    <p>False</p> Signup and view all the answers

    International expansion invariably results in a decrease in a firm's economies of scale.

    <p>False</p> Signup and view all the answers

    Compared to small firms, large companies usually can access capital at lower cost.

    <p>True</p> Signup and view all the answers

    In the context of attaining economies of scope, using individual managers in each European country is more efficient that using the same base of managers all over Europe.

    <p>False</p> Signup and view all the answers

    In the fashion industry, customer needs change rapidly and managers often locate factories or assembly operations near important customers.

    <p>True</p> Signup and view all the answers

    Governments encourage inward FDI because it transfers skill and technologies.

    <p>True</p> Signup and view all the answers

    Explain why FDI is a particularly risky foreign entry strategy. How is FDI different from international portfolio investment?

    <p>Foreign direct investment (FDI) is a high-risk strategy because firms invest significant resources in establishing a physical presence abroad. This includes setting up facilities, hiring local staff, and navigating unfamiliar regulations and market dynamics. While international portfolio investment involves passive ownership of foreign securities like stocks and bonds, seeking financial returns, FDI involves taking direct control of operations in foreign markets, resulting in higher risk but also potentially significant returns.</p> Signup and view all the answers

    International portfolio investment is characterized by ______

    <p>passive ownership of foreign stocks and bonds</p> Signup and view all the answers

    Firms that anticipate close public scrutiny of their foreign operations often avoid potential difficulties by ______

    <p>locating in culturally similar countries</p> Signup and view all the answers

    Tariff and other trade barriers for exports and FDI are identical.

    <p>False</p> Signup and view all the answers

    By establishing a physical presence inside a country or an economic bloc, the foreign company obtains the same advantages as local firms.

    <p>True</p> Signup and view all the answers

    Firms that engage in FDI avoid problematic trade barriers because the physical presence of a foreign firm earns it the same privileges as a local firm.

    <p>True</p> Signup and view all the answers

    A merger is a special type of acquisition.

    <p>True</p> Signup and view all the answers

    Vertical integration is an arrangement in which the firm owns, or seeks to own, the activities performed in a single stage of its value chain.

    <p>False</p> Signup and view all the answers

    Explain why MNEs prefer acquisition instead of greenfield FDI. Why do foreign governments encourage greenfield FDI?

    <p>MNEs sometimes favor acquisitions because they gain access to existing assets, customers, and operations, including established infrastructure, market share, and trained workforce. This reduces the time and effort needed for a startup, and can quickly create revenue streams. However, greenfield FDI is often encouraged by foreign governments because it creates new jobs and production facilities, potentially stimulating local economies, attracting foreign direct investment, and fostering technological advancements.</p> Signup and view all the answers

    Explain the difference between vertical FDI and horizontal FDI. Provide an example that illustrates the difference between vertical and horizontal integration.

    <p>Vertical FDI involves owning multiple stages of the value chain within the same industry. A car manufacturer, for example, may acquire a supplier of auto parts or a distributer of automobiles, creating a vertical integration within the automotive market. Meanwhile, horizontal FDI involves owning multiple businesses within the same stage of the value chain. If the same car manufacturer decided to buy out another car manufacturer, it would be a horizontal integration. In both cases, the goal is to gain control over more aspects of the business, but vertically they extend their control across the production process, while horizontally they expand their control within a specific stage of the value chain.</p> Signup and view all the answers

    Which of the following is a characteristic of project-based, non-equity ventures?

    <p>a specific agenda and timeframe</p> Signup and view all the answers

    Which of the following is a disadvantage of equity joint ventures?

    <p>termination difficulties</p> Signup and view all the answers

    A consortium is defined as ______

    <p>multiple partners participating on a large-scale project</p> Signup and view all the answers

    Which of the following is a characteristic of an equity joint venture?

    <p>facilitates knowledge transfer between partners</p> Signup and view all the answers

    A(n) ______ is a project-based, usually nonequity venture initiated by multiple partners to fulfill a large-scale project.

    <p>consortium</p> Signup and view all the answers

    Which of the following is a key reason that a focal firm would most likely enter a collaborative venture with a foreign firm?

    <p>the foreign firm can fill an important gap in the focal firm's value chain</p> Signup and view all the answers

    Discuss three reasons for firms seeking new market opportunities. Illustrate each with an example of a firm that sought a new foreign market for that particular motive.

    <p>Firms may seek new markets for several reasons. Firstly, to access new and larger markets: Coca-Cola, with its global presence, aimed to expand into developing markets like China and India to attract a wider customer base and boost its global revenue. Secondly, to follow key customers: When Procter &amp; Gamble decided to set up production in China, its supplier Tradegar followed suit, establishing operations in China to serve P&amp;G's needs and maintain a close relationship with its important client. Thirdly, to compete with rivals directly in their home market: Caterpillar, to confront Komatsu in the earth-moving equipment industry, entered a joint venture with Mitsubishi to disrupt Komatsu's dominance and gain market share in Japan, their home market.</p> Signup and view all the answers

    Discuss resource and asset-seeking motives for FDI. Why might a company favor acquisition over greenfield investment as an FDI approach?

    <p>Resource-seeking motives for FDI involve obtaining important resources that are abundant or less costly in foreign markets. Companies may seek raw materials, cheaper labor, or specialized skills that are not readily available in their home country. A mining company may seek a foreign location with rich mineral deposits, or a manufacturing company may choose a country with lower labor costs. Meanwhile, asset-seeking motives focus on gaining access to valuable assets, such as technology know-how, patent rights, or established brands. Firms may acquire a foreign company with valuable patents to enhance their own intellectual property portfolio. Acquisitions can be preferred over greenfield investments because firms quickly access existing assets, customer base, and established operations, eliminating the need for developing these from scratch. This can accelerate market entry and generate faster returns on investment.</p> Signup and view all the answers

    A firm that develops the capacity to sell its products by investing in marketing and selling operations is ______

    <p>acquiring downstream value-chain facilities</p> Signup and view all the answers

    A firm that owns the activities performed in a single stage of its value chain is demonstrating ______

    <p>horizontal integration</p> Signup and view all the answers

    Discuss the four key differences between project-based, nonequity ventures and equity ventures.

    <p>Project-based, non-equity ventures differ from equity joint ventures in several key ways. Firstly, they typically do not involve the creation of a new, separate legal entity, relying on contractual agreements instead. Secondly, partners contribute knowledge, resources, and expertise without seeking ownership control of the venture. Thirdly, these ventures have a defined scope and timeframe for collaboration, rather than being ongoing partnerships. Finally, project-based ventures often focus on a specific project or a single task, while equity ventures may involve broader collaborations across multiple activities within the business relationship.</p> Signup and view all the answers

    Cross-licensing agreements are a type of project-based, nonequity venture in which the partners agree to allow access to licensed intellectual property developed by the other on preferential terms.

    <p>True</p> Signup and view all the answers

    Equity joint ventures have the simplest management structure.

    <p>False</p> Signup and view all the answers

    FDI is the most advanced and complex foreign market entry strategy.

    <p>True</p> Signup and view all the answers

    A form of collaboration between two firms to form a new, jointly owned enterprise is defined as a joint venture.

    <p>False</p> Signup and view all the answers

    FDI is also known as international portfolio investment.

    <p>False</p> Signup and view all the answers

    Which of the following terms is used to refer to a focal firm's partial ownership of an existing firm?

    <p>equity participation</p> Signup and view all the answers

    Collaborative ventures benefit SMEs by providing them with ______

    <p>increased amount of capital</p> Signup and view all the answers

    A(n) ______ is a special type of acquisition in which two companies join to form a larger firm.

    <p>merger</p> Signup and view all the answers

    The purchase of an existing company or facility is known as a(n) ______

    <p>acquisition</p> Signup and view all the answers

    A(n) ______ is the purchase of an existing company or facility.

    <p>acquisition</p> Signup and view all the answers

    An arrangement whereby the firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product or service is termed as ______

    <p>vertical integration</p> Signup and view all the answers

    How does the acquisition of a foreign company most likely benefit a focal firm in the foreign market?

    <p>The focal firm can extend its market reach through readily available distribution networks.</p> Signup and view all the answers

    Study Notes

    Foreign Direct Investment and Collaborative Ventures

    • Foreign direct investment (FDI) is a trend in the modern international economy, involving firms from both advanced and emerging economies. Companies often use acquisitions to enter foreign markets.

    • FDI is not the least risky entry strategy.

    • International portfolio investment is not considered a firm's direct control of foreign operations, nor is it an equity-based method of foreign market entry.

    • Factors to consider when selecting FDI location include profit retention, inflation rates, and the stability of the currency.

    • Service industry firms are more likely to enter foreign markets through FDI due to a need for direct customer contact.

    • Corporate social responsibility involves actions like automotive battery firms offering technical training to students in deprived communities.

    • Infrastructure factors, such as the size and growth of the national market and political stability, are considerations for FDI location.

    • Human resource factors, like the involvement of labor unions and the extent of bureaucracy, influence FDI location decisions.

    • International portfolio investment is the passive ownership of foreign securities.

    • Firms often enter the home market of a competitor to potentially defend their market share.

    • Market-seeking motivations for FDI include gaining access to raw materials.

    • Firms in the mining industry frequently seek access to natural resources in foreign markets.

    • Firms pursuing FDI may be motivated by government incentives.

    • A key reason firms may enter collaborative ventures is to fill critical gaps in their value chains.

    • Motives for FDI include new markets, resources, improved efficiency. Avoiding trade barriers is not considered a motive.

    • Companies choose FDI to gain advantages related to knowledge development.

    • Economies of scale don't decrease with international expansion.

    • Larger firms usually have lower capital access costs than smaller firms.

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    Description

    Explore the dynamics of Foreign Direct Investment (FDI) and its significance in the international economy. This quiz delves into factors influencing FDI decisions, risks associated with market entry, and the impact of corporate social responsibility. Test your understanding of how firms navigate foreign markets through FDI.

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