Foreign Direct Investment Overview
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Questions and Answers

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

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

    • 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) involves establishing a physical presence in a foreign market through direct ownership of productive assets. It is riskier than international portfolio investment due to its significant investment, which exposes firms to potential risks such as political instability, regulatory changes, and cultural differences. International portfolio investment involves passive ownership of foreign securities, such as stocks and bonds, without direct control over foreign operations.</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 often prefer acquisitions because they provide access to existing assets such as plant, equipment, and human resources, as well as established customer relationships and suppliers. Acquisitions also offer quicker access to the market. Governments encourage greenfield FDI because it creates new jobs, facilities technological transfer, and improves linkages to the global marketplace.</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 a firm acquiring or controlling different stages of the value chain, whereas horizontal FDI involves a firm operating at the same stage of the value chain in different geographical locations. For example, a car manufacturer acquiring a car parts supplier is vertical integration; an automobile manufacturer opening a car assembly plant in another country is horizontal integration.</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>The three main motives for firms seeking new market opportunities are: 1. Gaining access to new markets or opportunities. 2. Following key customers. 3. Competing with rivals. Coca-Cola, Siemens, and Samsung all generate more sales abroad than in their home markets. Procter &amp; Gamble follows its key customer, Tradegar Industries, to ensure continued supply of its products. Caterpillar entered a joint venture with Mitsubishi to compete with Komatsu.</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 are driven by the need to acquire resources that are abundant or less costly in a foreign market. Asset-seeking motives involve acquiring assets such as knowledge, intellectual property, or brand recognition. Firms often favor acquisitions over greenfield investments because it provides immediate access to existing assets, customer relationships, and revenue streams.</p> Signup and view all the answers

    A firm that builds a new manufacturing facility in a foreign market is participating in a(n) ______.

    <p>greenfield investment</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

    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

    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 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 ventures are typically characterized by: 1. No new legal entity is created. 2. Parent companies do not seek ownership. 3. Collaboration has a defined timetable. 4. Collaboration is narrowly focused. Equity ventures, on the other hand, involve the creation of a new legal entity, provide ownership to partners, and usually have a longer-term focus.</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

    Study Notes

    Foreign Direct Investment and Collaborative Ventures

    • Foreign direct investment (FDI) is a trend in the modern international economy, with firms from both developed and emerging economies engaging in it. Emerging markets are not the sole recipients of FDI.
    • Companies primarily use acquisitions to enter foreign markets.
    • FDI is not the least risky entry strategy.
    • International portfolio investment is not a firm's direct control of foreign operations and is not an equity-based method of foreign market entry.
    • The rate of inflation is a profit retention factor to be considered when selecting FDI locations.
    • Other factors to consider include tax rates for profit repatriation, and the stability of currency.
    • Service industry firms often use FDI due to the need for direct customer contact.
    • Corporate social responsibility is exemplified by an automotive firm offering free technical training to underprivileged students.
    • Infrastructural factors to consider when selecting an FDI location include size and growth of a national market, political stability, availability, and quality of local manufacturing, and stability of currency.
    • A key human resource factor for firms considering FDI locations is the extent of bureaucracy and red tape, as well as involvement of labor unions.
    • International portfolio investment involves passive ownership of foreign securities.
    • Firms might enter a competitor's home market to force the competitor into expending resources.
    • The primary motive for firms in the mining industry when entering foreign markets is access to natural resources.
    • FDI is often undertaken to take advantage of government incentives.
    • Firms frequently use collaborative ventures to gain access to raw materials.

    Motives for Firms to Enter Foreign Markets

    • New markets, new resources, and improved efficiency are the three main motives for firms to enter foreign markets through FDI.
    • Avoiding trade barriers is classified as a market-seeking motive for FDI.
    • Customer proximity is important for businesses in the fashion industry when considering entering new foreign markets.
    • Governments encourage inward FDI because it transfers skills and technologies.
    • The existence of a large market motivates firms to produce goods or services in the vicinity of customers.
    • Firms might follow their key customers overseas to deter other vendors.

    Types of FDI

    • Firms might select FDI projects based on the possibility of acquiring production factors that are less costly or more abundant in a foreign country.
    • Firms might choose to acquire existing facilities in a foreign country.
    • Firms also might utilize greenfield investments to build new facilities.
    • Acquisitions are a form of integrating into an existing business.
    • Vertical integration refers to an arrangement where a firm seeks control over various phases of production or distribution.
    • Horizontal integration refers to a firms' control over activities at one stage of production, sales, and/or distribution.
    • Vertical FDI and Horizontal FDI- these are two different ways a firm can use FDI for its own advantages.

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    Chapter 14 FDI Q with Answers PDF

    Description

    Explore the fundamental aspects of Foreign Direct Investment (FDI) and collaborative ventures. This quiz covers key considerations such as entry strategies, risk factors, and the impact of inflation and tax rates on FDI decisions. Test your knowledge on how firms engage in international markets and the role of corporate social responsibility.

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