Chapter 14 FDI Q with Answers PDF

Chapter 14 Foreign Direct Investment and Collaborative Ventures 1) Which of the following is a trend seen in the modern international economy? A) Firms from both advanced and emerging economies employ FDI. B) Emerging markets are the sole recipient countries for FDI. C) Companies primarily use acqu...

Chapter 14 Foreign Direct Investment and Collaborative Ventures 1) Which of the following is a trend seen in the modern international economy? A) Firms from both advanced and emerging economies employ FDI. B) Emerging markets are the sole recipient countries for FDI. C) Companies primarily use acquisitions to enter foreign markets. D) Firms in the service sector use e-commerce exclusively to enter foreign markets. Answer: A 2) Foreign direct investment is the least risky entry strategy. Answer: FALSE 3) International portfolio investment refers to a firm's direct control of foreign operations and is an equity-based method of foreign market entry. Answer: FALSE 4) The rate of inflation is a(n) ________ factor to be considered while selecting the location for FDI. A) profit retention B) market C) infrastructural D) human resource Answer: A 5) Which of the following must be considered in selecting foreign direct investment locations? A) rate of inflation B) tax rates for profit repatriation C) stability of currency D) all of the above Answer: D 6) Which of the following best explains why some service industry firms most likely enter foreign markets through FDI? A) The market abroad is saturated, therefore, the other entry strategies are most likely to fail. B) The service of the firm requires tough intellectual property laws. C) The service offered by the firm requires direct contact with customers. D) The firm's service is not successful domestically, so globalization is required. Answer: C 7) Which of the following best exemplifies corporate social responsibility? A) a computer firm charging a high fee for recycling old computers B) an automobile manufacturer selling low-fuel economy cars and trucks C) a telecommunications firm charging high-rates to low-income customers D) an automotive battery firm offering free technical training to students of a deprived community Answer: D 8) Which of the following represents an infrastructural factor that firms must consider when selecting an FDI location? A) size and growth of national market B) political stability C) availability and quality of local manufacturing D) stability of currency Answer: C 9) Which of the following represents a human resource factor that firms must consider when selecting an FDI location? A) intellectual property protection B) transparency and corruption C) extent of bureaucracy and red tape D) involvement of labor unions Answer: D 10) The level of taxes in a country is a part of the ________ factor that is considered when selecting an FDI location. A) political B) profit retention C) market D) infrastructural Answer: B 11) International portfolio investment refers to passive ownership of foreign securities. Answer: TRUE 12) A firm most likely enters the home market of a foreign competitor in order to ________. A) enter a collaborative venture with the competitor B) gain access to the competitor's government contracts C) force the competitor to expend resources to defend its market D) interfere with the competitor's marketing campaign Answer: C 13) Which of the following is an example of a market-seeking motive for FDI? A) a firm wishes to gain access to raw materials B) a firm follows its key customers abroad C) a company wishes to gain access to knowledge D) a company intends to avoid trade barriers Answer: B 14) Which of the following is the most likely motive behind firms in the mining industry wanting to enter new foreign markets? A) access to natural resources B) availability of excessive non-skilled labor force C) increase in refining capacity D) payment of wages remain the same in both the new market as well as the existing market Answer: A 15) A firm that pursues foreign direct investment to take advantage of government incentives is demonstrating a(n) ________ motive. A) efficiency-seeking B) novelty-seeking C) asset-seeking D) market-seeking Answer: A 16) A firm that pursues a collaborative venture to access raw materials is demonstrating a(n) ________ motive. A) efficiency-seeking B) novelty-seeking C) asset-seeking D) market-seeking Answer: C 17) Which of the following industries considers proximity to customers especially important in the decision to enter a foreign market? A) fashion B) automotive C) biotechnology D) mining Answer: A 18) New markets, new resources, and improved efficiency are the three main motives for firms to enter foreign markets through FDI. Answer: TRUE 19) Avoiding trade barriers is classified as a market-seeking motive for FDI. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking 20) The existence of a substantial market motivates many firms to produce offerings at or near customer locations. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking 21) Firms often follow their key customers abroad to preempt other vendors from serving them. Answer: TRUE 22) 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. Answer: FALSE AACSB: Analytical Thinking 23) Companies opt for FDI to obtain advantages associated with locating at the hub of knowledge development and innovation in a given industry. Answer: TRUE 24) Economies of scale are decreases in per-unit cost of production resulting from decreasing output. Answer: FALSE 25) International expansion invariably results in a decrease in a firm's economies of scale. Answer: FALSE 26) Compared to small firms, large companies usually can access capital at lower cost. Answer: TRUE 27) 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. Answer: FALSE 28) In the fashion industry, customer needs change rapidly and managers often locate factories or assembly operations near important customers. Answer: TRUE 29) Governments encourage inward FDI because it transfers skill and technologies. Answer: TRUE 30) Explain why FDI is a particularly risky foreign entry strategy. How is FDI different from international portfolio investment? Answer: Foreign direct investment (FDI) is an internationalization strategy where the firm establishes a physical presence abroad through direct ownership of productive assets such as capital, technology, labor, land, plant, and equipment. FDI is the most advanced and complex foreign market entry strategy. It entails establishing manufacturing plants, marketing subsidiaries, or other facilities in target countries. Because this involves investing substantial resources to establish a physical presence abroad, FDI is riskier than other entry strategies. International portfolio investment refers to passive ownership of foreign securities, such as stocks and bonds, for the purpose of generating financial returns. International portfolio investment is a form of international investment, but it is not FDI, which seeks ownership control of a business abroad and represents a long-term commitment. The United Nations uses the benchmark of at least 10 percent ownership in the enterprise to differentiate FDI from portfolio investment. However, this percentage may be misleading, because control is not usually achieved unless the investor owns at least 50 percent of a foreign venture. 31) International portfolio investment is characterized by ________. A) short-term foreign market speculation B) long-term administration of MNE stocks C) active control of a foreign business D) passive ownership of foreign stocks and bonds Answer: D 32) Firms that anticipate close public scrutiny of their foreign operations often avoid potential difficulties by ________. A) locating in culturally similar countries B) investing in international securities C) hiring additional local personnel D) diversifying their corporate activities Answer: A 33) Tariff and other trade barriers for exports and FDI are identical. Answer: FALSE 34) By establishing a physical presence inside a country or an economic bloc, the foreign company obtains the same advantages as local firms. Answer: TRUE 35) 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. Answer: TRUE 36) A merger is a special type of acquisition. Answer: TRUE 37) 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. Answer: FALSE 38) Explain why MNEs prefer acquisition instead of greenfield FDI. Why do foreign governments encourage greenfield FDI? Answer: Multinational enterprises may favor acquisition over greenfield FDI because, by acquiring an existing company, they gain ownership of existing assets such as plant, equipment, and human resources, as well as access to existing suppliers and customers. Unlike greenfield FDI, acquisition provides an immediate stream of revenue and accelerates the MNE's return on investment. However, host-country governments often pressure MNEs to undertake greenfield FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and know-how transfer to locals, and improves linkages to the global marketplace. Many governments offer incentives to encourage greenfield investments. They may be sufficient to offset the advantages of acquisition-based entry. 39 ) Explain the difference between vertical FDI and horizontal FDI. Provide an example that illustrates the difference between vertical and horizontal integration Answer: Vertical integration is 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. The firm may acquire downstream value-chain facilities-that is, in marketing and selling operations. Or the firm may acquire upstream facilities, such as factories or assembly plants. Horizontal integration is an arrangement in which the firm owns, or seeks to own, the activities performed in a single stage of its value chain. Microsoft's primary business is developing computer software. In addition to producing word processing and spreadsheet software, it has developed foreign subsidiaries that make other types of software, such as a Montreal-based firm that produces software for creating movie animations. Horizontal integration implies the firm invests in its own industry to expand its capacity and activities. In 2014, Korean appliance manufacturer Samsung Electronics acquired Quietside Corporation, a leading distributor of air conditioners in North America. Samsung bought Quietside to enhance its ability to distribute its own air conditioners in a key foreign market. The acquisition exemplifies downstream vertical integration because appliance distribution is outside Samsung's normal sphere of operations. In 2012, by contrast, Samsung acquired the manufacturing plants of Amica, a home appliance company in Poland. This acquisition represents horizontal integration because Samsung Electronics' core business is manufacturing appliances and electronic products. By buying Amica's manufacturing plants, Samsung invested in its own industry to expand its production capacity. 40) Which of the following is a characteristic of project-based, non-equity ventures? A) a broad scope of product development B) a specific agenda and timeframe C) long-term sharing of resources D) formation of a new legal entity Answer: B 41) Which of the following is a disadvantage of equity joint ventures? A) termination difficulties B) lesser control over future directions C) imbalanced relationship D) vague contractual partnership Answer: A 42) A consortium is defined as ________. A) the purchase of an existing company or facility B) two partners forming a new legal entity C) an equity venture to consolidate the value chain D) multiple partners participating on a large-scale project Answer: D 43) Which of the following is a characteristic of an equity joint venture? A) simple management structure B) facilitates knowledge transfer between partners C) easy to terminate D) lesser exposure to political risk Answer: B 44) A(n) ________ is a project-based, usually nonequity venture initiated by multiple partners to fulfill a large-scale project. A) greenfield investment B) acquisition C) merger D) consortium Answer: D 45) Which of the following is a key reason that a focal firm would most likely enter a collaborative venture with a foreign firm? A) the foreign firm can fill an important gap in the focal firm's value chain B) the foreign firm requires the focal firm's financial resources to compete locally as well C) the focal firm wants to duplicate a competitor's marketing strategies abroad D) the market abroad is saturated; there is no scope for the focal firm's products or services Answer: A 46) 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. Answer: ∙ Gain access to new markets or opportunities. The existence of a substantial market motivates many firms to produce offerings at or near customer locations. Local production improves customer service and reduces the cost of transporting goods to buyer locations. Coca-Cola, IBM, Samsung, and Siemens all generate more sales abroad than in their home markets. The opening case highlights Huawei Technologies, a Chinese firm that has invested billions in Africa to gain access to fast-growing mobile phone markets there. ∙ Follow key customers. Firms often follow their key customers abroad to preempt other vendors from serving them. Establishing local operations also positions the firm to better serve customer needs. Tradegar Industries supplies the plastic that its customer Procter & Gamble uses to manufacture disposable diapers. When P&G built a plant in China, Tradegar followed P&G there, establishing production in China as well. ∙ Compete with key rivals in their own markets. Some MNEs may choose to confront current or potential competitors directly, in the competitors' home market. The strategic purpose is to weaken the competitor by forcing it to expend resources to defend its market. In the earth- moving equipment industry, Caterpillar entered a joint venture with Mitsubishi to put pressure on the market share and profitability of their common rival, Japan's Komatsu. The need to spend substantial resources to defend its home market reduced Komatsu's ability to expand abroad. 47 ) Discuss resource and asset-seeking motives for FDI. Why might a company favor acquisition over greenfield investment as an FDI approach? Answer: Firms frequently want to acquire production factors that are more abundant or less costly in a foreign market. Or they may seek complementary resources and capabilities of partner companies headquartered abroad. Specifically, FDI or collaborative ventures may be motivated by the firm's desire to attain: 1. Raw materials needed in extractive and agricultural industries Firms in the mining, oil, and crop-growing industries have little choice but to go where the raw materials are located. In the wine industry, companies establish wineries in countries suited for growing grapes, such as France and Chile. Oil companies establish refineries in countries with abundant petroleum reserves such as Kuwait. 2. Knowledge or other assets By establishing a local presence through FDI, the firm is better positioned to deepen its understanding of target markets. FDI provides the foreign firm better access to market knowledge, customers, distribution systems, and control over local operations. By collaborating in R&D, manufacturing, and marketing, the focal firm can benefit from the partner's know-how. 3. Technological and managerial know-how The firm may benefit by establishing a presence in a key industrial cluster, such as the robotics industry in Japan, chemicals in Germany, fashion in Italy, or software in the United States. Companies can obtain many advantages from locating at the hub of knowledge development and innovation in a given industry. Denmark, Finland, Israel, New Zealand, Sweden, and the United States are considered ideal for R&D in the biotechnology industry because they all have abundant pools of biotech knowledge workers. Many firms enter a collaborative venture abroad as a prelude to operating wholly owned FDI. Collaboration with a local partner reduces the risks of entry while allowing the entrant to gain local expertise before launching operations of its own in the market. An international firm may favor acquisition over greenfield investment as an FDI approach. Greenfield investment occurs when a firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities. The investing firm typically buys an empty plot of land and builds a production plant, marketing subsidiary, or other facility there for its own use. An acquisition is the purchase of an existing company or facility. Multinational enterprises may favor acquisition over greenfield FDI because, by acquiring an existing company, they gain ownership of existing assets such as plant, equipment, and human resources, as well as access to existing suppliers and customers. Unlike greenfield FDI, acquisition provides an immediate stream of revenue and accelerates the MNE's return on investment. However, host-country governments often pressure MNEs to undertake greenfield FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and know-how transfer to locals, and improves linkages to the global marketplace. Many governments offer incentives to encourage greenfield investments. They may be sufficient to offset the advantages of acquisition-based entry. 48) A firm that builds a new manufacturing facility in a foreign market is participating in a(n) ________. A) acquisition B) merger C) greenfield investment D) equity participation Answer: C 49) The purchase of an existing company or facility is known as a(n) ________. A) greenfield investment B) licensing C) acquisition D) equity joint venture Answer: C 50) A(n) ________ is the purchase of an existing company or facility. A) greenfield investment B) outsourcing arrangement C) acquisition D) offshoring arrangement Answer: C 51) 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 ________. A) vertical integration B) horizontal integration C) decentralization D) centralization Answer: A 52) How does the acquisition of a foreign company most likely benefit a focal firm in the foreign market? A) The focal firm can extend its market reach through readily available distribution networks. B) The MNE avoids domestic and foreign taxation, which enables the firm to invest more resources in the foreign market. C) Firm managers can reduce their workload by ensuring that all decision-making responsibilities are taken up by foreign managers. D) The firm eliminates the need to train its own employees by utilizing the workers previously hired by the foreign firm. Answer: A 53) A(n)________ is a special type of acquisition in which two companies join to form a larger firm. A) merger B) acquisition C) wholly owned direct investment D) greenfield investment Answer: A 54) Which of the following terms is used to refer to a focal firm's partial ownership of an existing firm? A) turnkey operation B) greenfield investment C) direct investment D) equity participation Answer: D 55) Collaborative ventures benefit SMEs by providing them with ________. A) better trained employees B) increased amount of capital C) larger and newer facilities D) more advanced technology Answer: B 56) A firm that develops the capacity to sell its products by investing in marketing and selling operations is ________. A) acquiring downstream value-chain facilities B) acquiring upstream value-chain facilities C) engaging in centralization D) engaging in decentralization Answer: A 57) A firm that owns the activities performed in a single stage of its value chain is demonstrating ________. A) centralization B) decentralization C) horizontal integration D) reverse integration Answer: C 58) Discuss the four key differences between project-based, nonequity ventures and equity ventures. Answer: Project-based collaborations differ from the traditional equity joint ventures in four important ways: 1. No new legal entity is created. Partners carry on their activity within the guidelines of a contract. 2. Parent companies do not necessarily seek ownership of an ongoing enterprise. Instead, they contribute their knowledge, expertise, staff, and monetary resources to derive knowledge or other benefits. 3. Collaboration tends to have a well-defined timetable and end date; partners go their separate ways once they have accomplished their objectives or have no further reason for continuation. 4. Collaboration is narrower in scope than in equity joint venturing, typically emphasizing a single project, such as development, manufacturing, marketing, or distribution of a new product. 59) 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. Answer: TRUE 60) Equity joint ventures have the simplest management structure. Answer: FALSE 61) FDI is the most advanced and complex foreign market entry strategy. Answer: TRUE Diff: 1: Easy 62) A form of collaboration between two firms to form a new, jointly owned enterprise is defined as a joint venture. Answer: FALSE 9) FDI is also known as international portfolio investment. Answer: FALSE Diff: 1: Easy Skill: Concept