Questions and Answers
What are the two main forms of foreign direct investment (FDI)?
Which theory suggests that FDI occurs as a product moves through its life cycle?
What challenge might a company encounter even with 100 percent ownership in a foreign market?
Which type of investment is preferred when existing adequate facilities are unavailable in a market?
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Which theory states that a firm undertakes FDI to reduce inefficiencies in the marketplace?
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What has historically characterized the recipients of the majority of FDI inflows?
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What is a significant cause for the decline in FDI inflows during economic downturns?
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What is a common motivation for developing countries to increase FDI outflows?
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What is a primary reason firms engage in Foreign Direct Investment (FDI)?
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Which of the following represents a reason a host nation might accept FDI?
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What type of policy might a home country use to encourage FDI outflows?
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How do host countries typically restrict inflows of FDI?
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What impact does FDI outflow have on the home country's balance of payments?
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Which of the following best describes a method by which home countries may restrict FDI outflows?
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Which policy instrument can host nations use to promote FDI?
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What is one potential benefit of FDI outflows for the home country?
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What key factor contributes to developing nations increasingly attracting FDI inflows?
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Which aspect of the eclectic theory emphasizes the necessity for FDI?
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How does the international product life cycle theory explain the timing of a company's FDI?
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What management challenge may arise when acquiring an existing business for FDI?
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Which theory of FDI suggests that inefficiencies in the marketplace drive companies to internalize their transactions?
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What is a significant factor that has historically made developed nations major sources of FDI?
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What primary consideration might a company evaluating a greenfield investment prioritize?
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Which of the following is a consequence of FDI inflows for host countries?
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What is a potential negative impact of FDI inflows on a host nation's balance of payments?
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Which of the following is not a common policy instrument used by host countries to promote FDI inflows?
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What is a primary reason home countries might restrict FDI outflows?
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How do home countries typically promote FDI outflows?
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What is a potential benefit of FDI outflows for the home country?
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Which scenario might lead a host nation to refuse an FDI proposal?
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What could be a common expectation from host nations when accepting FDI?
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What might prompt a home country to negotiate special tax treaties?
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Study Notes
Nature of Foreign Direct Investment (FDI)
- FDI has two principal forms: establishing new facilities or merging/acquiring existing companies in foreign markets.
- FDI inflows have risen over time but faced declines during economic downturns.
- The Covid-19 pandemic caused a significant setback in FDI inflows, with recovery projected to take several years.
- Developed nations are historically the largest recipients of FDI, dominating the global FDI stock.
- Developing nations are increasingly attracting larger portions of global FDI.
- Developed countries are the major sources of FDI, though developing nations are becoming notable outflows as their firms seek global expansion.
Theories Explaining FDI Occurrence
- International Product Life Cycle Theory: Companies start by exporting products, then engage in FDI as products progress through their life cycle.
- Market Imperfections Theory: Firms pursue FDI to internalize transactions and mitigate market inefficiencies.
- Eclectic Theory: FDI occurs when location factors, ownership advantages, and internalization benefits converge favorably for investment.
- Market Power Theory: Firms engage in FDI to establish market dominance in specific industries.
Management Issues in FDI Decisions
- Firms often aim for control in local markets, but full ownership does not guarantee operational control.
- Acquiring existing businesses is favored when they possess contemporary infrastructure and good employee relations.
- Greenfield investments are necessary where no suitable facilities exist.
- Companies often seek FDI to gain insights into local consumer behavior and proximity to competitors and clients.
Government Intervention in FDI
- Host nations benefit from FDI through improved balance of payments from initial investments and subsequent exports but face a decline when profits are repatriated.
- FDI is accepted in host nations for technology transfer, managerial training for locals, and job creation.
- Home countries may restrict FDI outflows to protect domestic balance of payments, especially if it leads to job losses.
- FDI outflows can enhance national competitiveness or create domestic jobs if supported by requisite exports.
Policy Instruments for Promoting and Restricting FDI
- Host countries promote FDI by offering tax incentives, low-interest loans, and developing local infrastructure.
- Restrictions on FDI inflows can include ownership limitations and performance requirements on foreign companies.
- Home countries support FDI outflows by providing investment risk insurance, loans, tax incentives, and negotiating favorable tax treaties.
- Governments could impose higher tax rates on foreign earnings or sanctions to limit domestic firms from investing overseas.
Nature of Foreign Direct Investment (FDI)
- FDI has two principal forms: establishing new facilities or merging/acquiring existing companies in foreign markets.
- FDI inflows have risen over time but faced declines during economic downturns.
- The Covid-19 pandemic caused a significant setback in FDI inflows, with recovery projected to take several years.
- Developed nations are historically the largest recipients of FDI, dominating the global FDI stock.
- Developing nations are increasingly attracting larger portions of global FDI.
- Developed countries are the major sources of FDI, though developing nations are becoming notable outflows as their firms seek global expansion.
Theories Explaining FDI Occurrence
- International Product Life Cycle Theory: Companies start by exporting products, then engage in FDI as products progress through their life cycle.
- Market Imperfections Theory: Firms pursue FDI to internalize transactions and mitigate market inefficiencies.
- Eclectic Theory: FDI occurs when location factors, ownership advantages, and internalization benefits converge favorably for investment.
- Market Power Theory: Firms engage in FDI to establish market dominance in specific industries.
Management Issues in FDI Decisions
- Firms often aim for control in local markets, but full ownership does not guarantee operational control.
- Acquiring existing businesses is favored when they possess contemporary infrastructure and good employee relations.
- Greenfield investments are necessary where no suitable facilities exist.
- Companies often seek FDI to gain insights into local consumer behavior and proximity to competitors and clients.
Government Intervention in FDI
- Host nations benefit from FDI through improved balance of payments from initial investments and subsequent exports but face a decline when profits are repatriated.
- FDI is accepted in host nations for technology transfer, managerial training for locals, and job creation.
- Home countries may restrict FDI outflows to protect domestic balance of payments, especially if it leads to job losses.
- FDI outflows can enhance national competitiveness or create domestic jobs if supported by requisite exports.
Policy Instruments for Promoting and Restricting FDI
- Host countries promote FDI by offering tax incentives, low-interest loans, and developing local infrastructure.
- Restrictions on FDI inflows can include ownership limitations and performance requirements on foreign companies.
- Home countries support FDI outflows by providing investment risk insurance, loans, tax incentives, and negotiating favorable tax treaties.
- Governments could impose higher tax rates on foreign earnings or sanctions to limit domestic firms from investing overseas.
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Description
This quiz explores the nature of Foreign Direct Investment (FDI), detailing its two primary forms—establishing new facilities or merging with existing companies abroad. It also discusses the trends in FDI inflows, highlighting their growth over the years and the impact of economic crises, particularly the Covid-19 pandemic on global investment. Understanding these concepts is crucial for comprehending the dynamics of international business.
