Chapter 17 Foreign Direct Investment Theory and Strategy 17.1 Multiple Choice and True/False Questions
1) An example of economies of scale in financing include
A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large -scale plant and equipment. D) all of the above.
Answer: A
Topic: Economies of Scale
Skill: Conceptual
2) Which of the following is NOT a factor of Porter's \"diamond of national advantage\"?
A) factor conditions
B) demand conditions
C) related and supporting industries
D) All of the above are factors of the diamond of national advantage.
Answer: D
Topic: Porter's Diamond
Skill: Recognition
3) The OLI paradigm is an attempt to create a framework to explain why MNEs choose
________ rather than some other form of international venture. A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances
Answer: C
Topic: OLI
Skill: Recognition
4) The O in OLI refers to an advantage in a firm's home market that is ________.
A) operator independent
B) owner -specific C) open -market
D) official designation
Answer: B
Topic: OLI
Skill: Recognition
5) The owner -specific advantages of OLI must be ________. A) firm -specific B) not easily copied
C) transferable to foreign subsidiaries
D) all of the above
Answer: D
Topic: OLI
Skill: Recognition
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6) A/n ________ would be an example of an owner -specific advantage for an MNE.
A) patent
B) economy of scale
C) economy of scope
D) all of the above
Answer: A
Topic: OLI
Skill: Conceptual
7) The L in OLI refers to an advantage in a firm's home market that is a
A) liability in the domestic market.
B) location -specific advantage.
C) longevity in a particular market.
D) none of the above.
Answer: B
Topic: OLI
Skill: Recognition
8) A/n ________ would be an example of a location -specific advantage for an MNE. A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information
Answer: C
Topic: OLI
Skill: Conceptual
9) The I in OLI refers to an advantage in a firm's home market that is an ________.
A) internalization
B) industry -specific advantage C) international abnormality
D) none of the above
Answer: A
Topic: OLI
Skill: Recognition
10) A/n ________ would be an example of an internalization advantage for an MNE.
A) patent
B) economy of scale
C) unique source of raw materials
D) possession of proprietary information
Answer: D
Topic: OLI
Skill: Conceptual
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11) Which of the following is NOT a proactive financial strategy related to the OLI paradigm in
explaining FDI?
A) strategies to gain lower global cost of capital
B) strategies to reduce global taxation
C) strategies to reduce operating and transaction exposure
D) All of the above are proactive strategies.
Answer: D
Topic: OLI
Skill: Conceptual
12) FDI is
A) investment in real assets in foreign countries.
B) foreign direct investment.
C) influenced by behavioral factors.
D) all of the above.
Answer: D
Topic: FDI
Skill: Recognition
13) Which of the following is NOT true regarding behavioral observations of firms making a
decision to invest internationally?
A) MNEs initially invest in countries with a similar \"national psychic.\"
B) Firms eventually take greater risks in terms of the national psychic of countries in
which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.
Answer: C
Topic: Behavioral Observations of FDI
Skill: Recognition
14) Which of the following is NOT an advantage to exporting goods to reach international
markets rather than entering into some form of FDI? A) fewer political risks
B) greater agency costs
C) lower front -end investment
D) All of the above are advantages.
Answer: B
Topic: FDI
Skill: Conceptual
15) Which of the following is an advantage to exporting goods to reach international markets
rather than entering into some form of FDI? A) fewer agency costs
B) fewer direct advantages from research and development
C) a greater risk of losing markets to copycat goods producers
D) an inability to exploit R&D as effectively as if also invested abroad
Answer: A
Topic: FDI
Skill: Conceptual
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16) Which of the following is NOT a form of FDI?
A) wholly -owned affiliate B) joint venture
C) exporting
D) Greenfield investment
Answer: C
Topic: Exporting
Skill: Recognition
17) Licensing is a popular form of foreign investment because it does not need a sizable
commitment of funds, and political risk is often minimized. Answer: TRUE
Topic: Licensing
Skill: Conceptual
18) With licensing the ________ is likely to be lower than with FDI because of lower profits;
however, the ________ is likely to be higher due to a greater return per dollar invested. A) IRR; NPV
B) NPV; IRR
C) cost of capital; NPV
D) IRR; cost of capital Answer: B
Topic: Licensing
Skill: Conceptual
19) Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of quality control
B) establishment of a potential competitor in third -country markets
C) possible improvement of the technology by the local licensee, which then enters the
original firm's home market
D) All of the above are potential disadvantages to licensing.
Answer: D
Topic: Licensing
Skill: Recognition
20) Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of opportunity to enter the licensee's market with FDI later
B) risk that technology will be stolen
C) high agency costs
D) All of the above are potential disadvantages to licensing.
Answer: D
Topic: Licensing
Skill: Recognition
21) MNEs typically used licensing with independent firms rather than with their own foreign
subsidiaries. Answer: FALSE
Topic: Licensing
Skill: Conceptual
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22) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly -owned affiliate Answer: C
Topic: Joint Venture
Skill: Recognition
23) Which of the following is NOT an advantage to a joint venture?
A) Possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) May be a realistic alternative when 100% foreign ownership is not allowed.
Answer: A
Topic: Joint Venture
Skill: Recognition
24) Which of the following is NOT an advantage to a joint venture?
A) The local partner's reputation enhances access to local financial markets.
B) The local partner possesses technology that is advantageous in their market and
perhaps beyond.
C) Higher agency costs than with a purely domestic firm.
D) The local partner's public image may enhance local sales.
Answer: C
Topic: Joint Venture
Skill: Recognition
25) Joint ventures are a more common FDI than wholly owned subsidiaries.
Answer: FALSE
Topic: Wholly Owned Subsidiaries
Skill: Recognition
26) Local partners in a foreign country and in a joint venture with an MNE are likely to make
decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm. Answer: TRUE
Topic: Joint Venture
Skill: Conceptual
27) A ________ is establishing a production or service facility from the ground up.
A) joint venture
B) licensing agreement
C) greenfield investment
D) wholly -owned facility Answer: C
Topic: Greenfield Investment
Skill: Recognition
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28) Greenfield investments are typically ________ and ________ than cross -border acquisition.
A) slower; more uncertain
B) faster; of greater certainty
C) slower; of greater certainty
D) faster; more uncertain
Answer: A
Topic: Greenfield Investment
Skill: Conceptual
29) Which of the following is NOT a potential advantage to a cross -border acquisition compared to a Greenfield investment?
A) Market imperfections may under -price local assets and allow the purchase of assets at significant discount. B) Cross -border acquisitions take longer, thus allowing the firm a better understanding of the local market before attempting sales. C) Acquisitions may be a cost -effective way of gaining competitive advantages such as technology or brand names.
D) All of the above are advantages of acquisition over green field investment.
Answer: B
Topic: Greenfield Investment
Skill: Recognition
30) Which of the following is NOT a potential disadvantage to cross -border acquisitions? A) the meshing of different corporate cultures
B) host government intervention in the post -acquisition process C) mis -pricing foreign assets and paying too much for the acquisition D) All of the above are potential disadvantages.
Answer: D
Topic: Cross -Border Acquisitions Skill: Recognition
31) All of the following may be justification for a strategic alliance EXCEPT:
A) takeover defense.
B) a joint venture to pool resources for research and development.
C) joint marketing and serving agreements.
D) All of the above are legitimate reasons for strategic alliances.
Answer: D
Topic: Strategic Alliance
Skill: Recognition
32) Joint ventures are motivated only by takeover defenses.
Answer: FALSE
Topic: Joint Venture
Skill: Conceptual
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33) Strategic alliances that have firms exchanging stock and forming joint ventures are more
important in
A) agricultural firms where government interference is critical for firm survival.
B) old fashioned basic industry where pure economies of scale are still dominant.
C) high tech industries where research and development costs are high and innovation is
critical to success D) none of the above.
Answer: C
Topic: Strategic Alliance
Skill: Conceptual
34) Which of the following combinations of cost and control reflect the choice of a greenfield
foreign direct investment? A) high cost, high control
B) medium cost, high control
C) low cost, high control
D) high cost, low control
Answer: A
Topic: Greenfield Investment
Skill: Conceptual
35) Which of the following modes of serving foreign markets requires the least capital
investment by the MNE but risks the loss of key technological or managerial expertise to the marketplace? A) acquisition
B) licensing
C) Greenfield investment
D) portfolio investment
Answer: B
Topic: Licensing
Skill: Conceptual
36) Which of the following is the motivation for making foreign direct investment?
A) knowledge seeking
B) market seeking
C) raw material seeking
D) all of the above
Answer: D
Topic: FDI
Skill: Recognition
37) The ________ is an attempt to create and overall framework to explain why MNEs rely on
FDI rather than servicing foreign markets through alternative modes. A) OLI paradigm
B) internationalization paradigm
C) theory of competitive advantage
D) none of the above
Answer: A
Topic: OLI
Skill: Recognition
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38) The theory of ________ is an attempt to synthesize and extend those theories of FDI that are
based on market imperfections. A) internationalization
B) externalization
C) internalization
D) diversification
Answer: C
Topic: Internalization
Skill: Recognition
39) Which of the following are characteristics of MNEs that have successfully invested abroad?
A) economies of scale and scope
B) superior technology with heavy emphasis on research
C) demonstrated competitive advantage in their home markets
D) all of the above
Answer: D
Topic: Successful MNEs
Skill: Recognition
40) A MNE can choose all of the following modes of entry for FDI EXCEPT:
A) a joint venture with a local partner.
B) a 100% -owned greenfield subsidiary.
C) merger with or acquisition of an existing local firm.
D) exporting products to a local firm.
Answer: D
Topic: FDI
Skill: Recognition
41) Which of the following is NOT a strategy employed by the firms included in the text list of
emerging market MNEs? A) taking brands global
B) leveraging natural resources
C) acquiring offshore assets
D) All of the above are techniques used by emerging MNEs.
Answer: D
Topic: MNEs
Skill: Recognition
42) Which of the following is NOT a strategy employed by the firms included in the text list of
emerging market MNEs?
A) engineering to innovation
B) exporting a successful business model
C) targeting a niche market
D) All of the above are techniques used by emerging MNEs.
Answer: D
Topic: MNEs
Skill: Recognition
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43) The authors cite China -based Haier as an example of a firm following the strategy of
________. Haier is shown to have firmly established themselves as the top producer of home appliances in China and then using their economies of scale in an attempt to gain market share globally.
A) acquiring offshore assets
B) taking brands global
C) targeting a niche
D) engineering to innovation
Answer: B
Topic: MNEs
Skill: Recognition
44) The world's third largest aircraft maker after Boeing and Airbus is ________. A) Bombardier
B) LeerJet
C) Embraer
D) Cessna
Answer: C
Topic: MNEs
Skill: Recognition
45) Embraer of Brazil was able to grow internationally by developing a new type of fuselage that
allows airlines to acquire an airplane that provides superior comfort to passengers, ease of flying for the pilots, and lower operating costs for the firm. This is an example of ________.
A) leveraging natural resources
B) engineering to innovation
C) exporting a business model
D) acquiring offshore assets
Answer: B
Topic: MNEs
Skill: Recognition
17.2 Essay Questions
1) List and explain three strategic motives why firms become multinationals and give an
example of each.
Answer: On page 336 the authors provide 5 strategic motives for firms to become
multinationals; market seekers, raw materials seekers, production efficiency seekers, knowledge seekers, and political safety seekers. Market seekers are looking for more consumers for their products such as automobiles, or steel. Knowledge seekers may be looking for an educated workforce similar to the way firms seeking R and D set up shop in university towns. Raw materials seekers may be after commodities such as oil or copper. Production efficiencies may occur in countries like Mexico that have capable workers and lower wages. Political safety seekers are looking for countries that will not expropriate their assets, so they may stay away from countries that in the post have engaged in such activities.
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2) What does the OLI Paradigm propose to explain? Define each component and provide an
example of each.
Answer: The OLI Paradigm is an attempt to develop an overall framework to explain why
MNEs choose FDI to serve foreign markets rather than alternatives such as licensing or exporting. The letters of the paradigm are O for owner-specific advantages, L for location-specific advantages, and I for internalization. Owner-specific advantages require that the firm have a comparative
advantage in its home market that it feels it can exploit internationally. To be most effective, the advantages should be difficult to copy. Location specific advantages may be due to market imperfections or genuine comparative advantages such as a source of a particularly high quality natural resource. With internalization the firm has in its possession some proprietary information or product such as software or personnel that may provide an advantage in the international marketplace.
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