Chapter 07
Foreign Direct Investment

True / False Questions

1. ( p. 242 ) A house becomes a transnational endeavor when it undertakes foreign direct investing. True
2. ( p. 242 ) Licensing involves the constitution of a new operation in a foreign state. FALSE

3. ( p. 242 ) If a house that makes bikes in Germany acquires a Gallic bike manufacturer. Greenfield investing has taken topographic point. FALSE
4. ( p. 242 ) The sum of FDI undertaken over a given clip period is known as the flow of FDI. True

5. ( p. 242 ) The sum accumulated value of foreign-owned assets at a given clip is the influx of FDI. FALSE

6. ( p. 242 ) FDI is seen by executives as a agency of besieging future trade barriers. True

7. ( p. 244 ) Historically. most FDI has been directed at the developed states of the universe as houses based in advanced states invested in the others’ markets. True

8. ( p. 246 ) The entire sum of capital invested in mills. shops. office edifices and the similar is referred to as the stock of FDI. FALSE

9. ( p. 246 ) The largest beginning state for FDI has been China. FALSE

10. ( p. 247 ) About 27 per centum of the world’s largest 100 nonfinancial multinationals in 2004 were American companies. True

11. ( p. 247 ) In developing states. about one tierce of FDI is in the signifier of amalgamations and acquisitions. True
12. ( p. 248 ) In 2004. about two tierces of FDI stock was in service industries. True
13. ( p. 249 ) As compared to exporting and licensing. FDI is the more expensive and hazardous. True
14. ( p. 250 ) Internalization theory is besides known as the market imperfectnesss approach. True
15. ( p. 250 ) One of the jobs of licensing is that it may ensue in a firm’s giving off valuable technological know-how to a possible foreign rival. True
16. ( p. 251 ) An oligopoly is an industry composed of a limited figure of big houses. True

17. ( p. 252 ) When two or more endeavors encounter each other in different regional markets. national markets or industries regional competition occurs. FALSE
18. ( p. 252 ) Harmonizing to Vernon. location specific advantages can assist explicate the nature and way of FDI. FALSE
19. ( p. 253 ) Tormenting. in the eclectic paradigm theory. suggests that a house must set up production installations where foreign assets or resource gifts necessary to the production of the merchandise be. True

20. ( p. 254 ) Matter-of-fact patriotism traces its roots to Marxist political and economic theory. FALSE

21. ( p. 254 ) Classical economic sciences and the international trade theories of Adam Smith and David Ricardo organize the footing for the free market position. True

22. ( p. 255 ) The free market position argues that FDI is a benefit to both the beginning state and to the host state. True
23. ( p. 255 ) Countries following a matter-of-fact stance pursue policies designed to maximise the national benefits and minimise the national costs. True
24. ( p. 256 ) An facet of matter-of-fact patriotism is the inclination to sharply tribunal FDI believed to be in the national involvement by. for illustration. offering subsidies to foreign MNEs in the signifier of revenue enhancement interruptions or grants. True

25. ( p. 257 ) Foreign direct investing can do a positive part to a host economic system by providing capital. engineering and direction resources that would otherwise non be available and therefore hike that country’s economic growing rate. True

26. ( p. 258 ) There is research back uping the position that transnational houses frequently transfer important engineering when they invest in a foreign state. True

27. ( p. 258 ) Jobs created in local providers as a consequence of the MNE’s investing and occupations created because of increased local disbursement by employees of the MNE are illustrations of direct employment effects of FDI. FALSE

28. ( p. 258 ) Host state citizens that are employed by an MNE following an FDI are an illustration of an indirect consequence of FDI. FALSE

29. ( p. 259 ) A country’s balance of payments histories maintain path of both its payments to and its grosss from other states. True

30. ( p. 259 ) A current history shortage exists when a state imports more than it exports. True

31. ( p. 259 ) In recent old ages. the U. S. has run a relentless balance of payments excess. FALSE

32. ( p. 260 ) Host authoritiess sometimes worry that the subordinates of foreign MNEs may hold greater economic power than autochthonal rivals. True

33. ( p. 261 ) FDI does non profit the host country’s balance of payments if the foreign subordinate creates demand for home-country exports of capital equipment. intermediate goods or complementary merchandises. FALSE

34. ( p. 262 ) The term offshore production refers to FDI undertaken to function
the place market. True
35. ( p. 263 ) Countries can non forbid national houses from puting in certain states for political grounds. FALSE

36. ( p. 264 ) The two most common methods of curtailing inward FDI are ownership restraints and public presentation demands. True

37. ( p. 265 ) The WTO has been really successful in attempts to originate negotiations aimed at set uping a cosmopolitan set of regulations designed to advance the liberalisation of FDI. FALSE

38. ( p. 266 ) Licensing is a good option for houses in high-tech industries where protecting firm-specific expertness is of paramount importance. FALSE

39. ( p. 266-267 ) Typically licencing will be a common scheme in oligopolies where competitory mutuality requires that transnational houses maintain tight control over foreign operations so that they have the ability to establish co-ordinated onslaughts against their planetary rivals. FALSE

40. ( p. 267 ) Licensing is more common in disconnected. low-tech industries in which globally dispersed fabrication is non an option. True

Multiple Choice Questions

41. ( p. 242 ) FDI occurs when a
A. Domestic house imports merchandises and services from another state B. Firm ships its merchandise from one state to another
C. Firm invests in the stock of another company
D. Firm invests straight in installations to bring forth and/or market a merchandise in a foreign state

42. ( p. 242 ) A Greenfield investing
A. Is a signifier of FDI that involves the constitution of a new operation in a foreign state B. Involves a 7 per centum stock in an acquired foreign concern entity C. Involves a amalgamation with a foreign concern

D. Occurs when a house acquires another company in a foreign countr 43. ( p. 242 ) If General Electric. a U. S. based corporation. purchased a 50 % involvement in a company in Italy. that purchase would be an illustration of a ( N ) A. Minority acquisition

B. Outright interest
C. Majority acquisition
D. Greenfield investing

44. ( p. 242 ) The sum of FDI undertaken over a given clip period is A. The flow of FDI
B. The stock of FDI
C. The FDI escape
D. The FDI influx

45. ( p. 242 ) The stock of FDI is
A. The sum of FDI undertaken over a given period of clip
B. The sum accumulated value of foreign owned assets at a given clip C. The flow of FDI out of a state
D. The flow of FDI into a state

46. ( p. 242 ) FDI has been lifting for all of the undermentioned grounds. except A. The globalisation of the universe economic system
B. The general addition in trade barriers over the past 30 old ages C. Firms are seeking to besiege trade barriers
D. There is a displacement toward democratic political establishments and free market economic systems

47. ( p. 244 ) Historically. most FDI has been directed at the _____ states of the universe as houses based in advanced states invested in A. Underdeveloped. developing states
B. Developed. developing states
C. Developed. each other’s markets
D. Underdeveloped. each other’s markets
48. ( p. 244 ) The U. S. has been an attractive mark for FDI because of all of the undermentioned grounds. except A. Its little and affluent domestic markets
B. Its dynamic and stable economic system
C. Its favourable political environment
D. Its openness to FDI
49. ( p. 244 ) Identify the wrong statement sing the way of FDI. A. Historically. most FDI has been directed at the developing states of the universe B. During the 1980s and 1990s. the United States was frequently the favourite mark for FDI influxs C. The developed states of the EU have received important FDI influxs D. Recent inflows into developing states have been targeted at the emerging economic systems of South. East and Southeast Asia 50. ( p. 246 ) Africa is non a popular finish for FDI because of all of the undermentioned grounds. except A. Political agitation in the part

B. Armed struggle in the part
C. Liberalization of FDI ordinances
D. Frequent policy alterations in the part
51. ( p. 246 ) The entire sum of capital invested in mills. shops. office edifices and the similar is summarized by A. Gross fixed capital formation
B. Entire investing capital
C. Total touchable investing
D. Gross depreciable investings
52. ( p. 246 ) The largest beginning state for FDI since World War II has been A. Japan
B. China
C. The United States
D. The United Kingdom

53. ( p. 247 ) Most cross-border investing is
A. In the signifier of Greenfield investings
B. Made via amalgamations and acquisitions
C. Between American and Nipponese companies
D. Involved in constructing new installations
54. ( p. 247 ) Which of the followers is non a ground why houses prefer to
get bing assets instead than set about green-field investings? A. Foreign houses are acquired because those houses have valuable strategic assets B. Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by reassigning capital. engineering or direction accomplishments C. Even though Greenfield investings are relatively less hazardous for a steadfast acquisitions ever yield higher net incomes D. Mergers and acquisitions are quicker to put to death than green-field investings 55. ( p. 247 ) In developing states most FDI influxs are in the signifier of A. Amalgamations

B. Greenfield investings
C. Acquisitions
D. Non-profit organisations
56. ( p. 248 ) The sector composing of FDI shows that by 2004 about _____ of FDI stock was in service industries. A. One 4th
B. One 3rd
C. Two tierce
D. Half
57. ( p. 248 ) The rise in FDI in the services sector is a consequence of all of the following. except A. The general move in many developed states off from fabricating and toward services B. Accelerating ordinances of services

C. Many services can non be traded internationally
D. Many states have liberalized their governments regulating FDI in services 58. ( p. 248 ) When strategic assets such as trade name trueness. client relationships or distribution systems are of import. _____ investings are more appropriate. A. Amalgamation and acquisition

B. Greenfield
C. Portfolio
D. New building
59. ( p. 249 ) _____ involves allowing a foreign entity the right to bring forth and sell the firm’s merchandise in return for a royalty fee on every unit sold. A. Horizontal FDI
B. Licensing
C. Vertical FDI
D. Greenfield investing
60. ( p. 249 ) In a licensing agreement. the _____ bears the hazard and cost of opening a foreign market. A. Licensee
B. Licensor
C. Acquiring house
D. Greenfield investor
61. ( p. 250 ) Identify the theory that seeks to explicate why houses frequently prefer foreign direct investing over licensing as a scheme for come ining foreign markets. A. Internalization theory
B. Internationalization theory
C. Perfect markets theory
D. Small markets theory
62. ( p. 250 ) Harmonizing to the internalisation theory. all of the following are drawbacks of licensing as a scheme for working foreign market chances. except A. Licensing does non allow control over fabrication. selling and to a licensee in return for a royalty fee B. Licensing may ensue in a firm’s giving away its know-how to a possible foreign rival C. Licensing does non give the house the tight control over fabrication. selling and scheme that may be required to productively work its advantage D. A houses capablenesss such as the direction. selling and fabrication are frequently non conformable to licencing 63. ( p. 250 ) ______ is besides known as market imperfectnesss theory. A. Internationalization theory

B. Internalization theory
C. Perfect markets theory
D. Small markets theory
64. ( p. 251 ) If four houses control 80 per centum of a domestic market. so ______ exists. A. An oligopoly
B. A monopoly
C. An oligarchy
D. Vertical integrating
65. ( p. 251 ) Harmonizing to Knickerbocker
A. The houses that pioneer a merchandise in their place markets undertake FDI to
bring forth a merchandise for ingestion in a foreign market B. When a house that is portion of an oligopolistic industry expands into a foreign market. other houses in the industry will be compelled to do similar investings C. Combining location-specific assets or resource gifts and the firm’s ain alone assets frequently requires FDI D. Impediments to the sale of know-how addition the profitableness of FDI relative to licencing 66. ( p. 252 ) The eclectic paradigm was developed by

A. F. T. Knickerbocker
B. Adam Smith
C. Raymond Vernon
D. John Dunning

67. ( p. 252 ) When two or more endeavors encounter each other in different regional markets. national markets or industries. there is A. Vertical integrating
B. Horizontal integrating
C. Multipoint competition
D. Monopolistic competition

68. ( p. 252 ) The merchandise life rhythm suggests that
A. Often the same houses that pioneer a merchandise in their place markets undertake FDI to bring forth a merchandise for ingestion in foreign markets B. When a house that is portion of an oligopolistic industry expands into a foreign market. other houses in the industry will be compelled to do similar investings C. Combining location-specific assets or resource gifts and the firm’s ain alone assets frequently requires FDI D. Impediments to the sale of know-how addition the profitableness of FDI relative to licencing 69. ( p. 253 ) The _____ suggests that a house will set up production installations where foreign assets or resource gifts that are of import to the house are located. A. Product life rhythm

B. Strategic behaviour theory
C. Multipoint competition theory
D. Eclectic paradigm

70. ( p. 253 ) Advantages that arise from utilizing resource gifts or assets that are tied to a peculiar location and that a steadfast finds valuable to unite with its ain alone assets are known as A. Location specific advantages

B. Resource specific advantages
C. Competitive advantages
D. Directional advantages

71. ( p. 253 ) John Dunning. a title-holder of the eclectic paradigm. argues that A. The houses that pioneer a merchandise in their place markets undertake FDI to bring forth a merchandise for ingestion in a foreign market B. When a house that is portion of an oligopolistic industry expands into a foreign market. other houses in the industry will be compelled to do similar investings C. Combining location-specific assets or resource gifts and the firm’s ain alone assets frequently requires FDI D. Impediments to the sale of know-how addition the profitableness of FDI relative to licensing

72. ( p. 254 ) Harmonizing to the _____ position of FDI. MNEs extract net incomes from the host state and take them to their place state. giving nil of value to the host state in exchange. A. Imperialist

B. Conservative
C. Free market
D. Radical

73. ( p. 254 ) Which of the followers is non a ground that the extremist place of MNEs was in retreat by the terminal of the 1980s? A. The strong economic public presentation of those developing states that embraced capitalist economy instead than extremist political orientation B. The prostration of communism in Eastern Europe

C. The by and large abysmal economic public presentation of those states that embraced the extremist place D. A turning belief in many capitalist states that MNE’s tightly controls cardinal engineering and that of import occupations
in the MNEs’ foreign subordinates go to home-country subjects

74. ( p. 255 ) Harmonizing to _____ international production should be distributed among states harmonizing to the theory of comparative advantage. A. The extremist position
B. The eclectic position
C. Pragmatic patriotism
D. The free market position
75. ( p. 256 ) A typical facet of _____ is the inclination to sharply tribunal FDI believed to be in the national involvement by. for illustration. offering subsidies to foreign MNEs in the signifier of revenue enhancement interruptions or grants. A. The dogmatic position

B. Matter-of-fact patriotism
C. The extremist position
D. The conservative position

76. ( p. 257 ) When a company brings capital and/or engineering to a host state. the host state benefits from the A. Competitive consequence of FDI
B. The resource transportation consequence of FDI
C. The balance of payments consequence of FDI
D. The consequence on competition and economic growing

77. ( p. 258 ) When occupations are created in local providers as a consequence of the FDI and when occupations are created because of increased local disbursement by employees of the MNE. the MNE has a _____ consequence on employment. A. Direct

B. Indirect
C. Inward
D. Outward

78. ( p. 259 ) A _____ keeps path of a country’s payments to and its grosss from other states. A. Federal payments leger
B. Current accounting system
C. Checks and balances account
D. Balance of payments account

79. ( p. 259 ) The _____ tracks the export and import of goods and services. A current history shortage or trade shortage as it is frequently called. arises when a state is importing more goods and services than it is exporting. A. Current history

B. Debit history
C. Surplus history
D. Capital history

80. ( p. 261 ) Three costs of FDI concerns of host states arise from all of the undermentioned except A. Adverse effects on competition within the host state
B. Adverse effects on the balance of payments
C. The sensed loss of national sovereignty and liberty
D. Debit on the current history of the place country’s balance of payments
81. ( p. 262 ) FDI undertaken to function the place market is known as A. Greenfield investing
B. FDI permutation
C. Offshore production
D. Home market FDI
82. ( p. 263 ) Double revenue enhancement is
A. Charging dual revenue enhancements in the place state
B. Charging dual revenue enhancements in the host state
C. Taxation of income in both place and host state
D. Paying income revenue enhancements at twice the normal rate

83. ( p. 264 ) _____ are controls over the behaviour of the MNE’s local subordinate. A. Performance demands
B. Ownership restraints
C. Double revenue enhancement Torahs
D. Greenfield limitations

84. ( p. 267 ) Licensing would be a good option for houses in which of the
following industries? A. High-technology industries in which protecting firm-specific expertness is of paramount importance and licensing is risky B. Global oligopolies. in which competitory mutuality requires that transnational houses maintain tight control over foreign operations C. Industries in which intense cost force per unit areas require that transnational houses maintain tight control over foreign operations D. In fragmented. low engineering industries in which globally dispersed fabrication is non an option

85. ( p. 267 ) _____ is basically the service industry version of licensing. although it usually involves much longer term committednesss. A. Franchising
B. Subsidizing
C. Greenfield investing
D. Patenting

Essay Questions
86. ( p. 242 ) Discuss the connexion between foreign direct investing and transnational endeavors?

Foreign direct investing ( FDI ) occurs when a house invests straight in new installations to bring forth and/or market a merchandise in a foreign state. The U. S. Department of Commerce provinces that FDI occurs whenever a U. S. citizen. organisation or affiliated group takes an involvement of 10 per centum or more in a foreign concern entity. Once affirm undertakes FDI. it becomes a transnational endeavor.

87. ( p. 242 ) What are the two signifiers of foreign direct investing? The two signifiers of FDI are Greenfield investing or set uping a new operation in a foreign state and amalgamations and acquisitions whereby a company expands internationally through an existing house. Acquisitions can be minority. bulk or a 100 % ownership place. 88. ( p. 242 ) Discuss the tendencies in FDI over the last 30 old ages. Be certain to distinguish between the stock of FDI and the flow if FDI. The flow of FDI refers to the sum of FDI undertaken over a given period. while the stock of FDI refers to the sum accumulated value of foreign-owned assets at a given clip. Over the last 30
old ages at that place has been a pronounced addition in both the flow and the stock of FDI in the universe economic system. Over this period. the flow of FDI accelerated faster than the growing in universe trade and universe end product. 89. ( p. 242 ) Discuss the grounds for the growing in FDI over the last 30 old ages. FDI has grown more quickly than universe trade and universe end product for several grounds. First. many companies see FDI as a agency of besieging possible trade barriers. Second. political and economic alterations in many of the universe developing states has been promoting FDI. Finally. the globalisation of the universe economic system is holding a positive impact on the volume of FDI as houses now see the whole universe as their market. 90. ( p. 242-248 ) What is a Greenfield investing? How does it compare to an acquisition? Which signifier of FDI is a house more likely choose? Explain your reply. FDI can take the signifier of a Greenfield investing in a new installation or an acquisition of or a amalgamation with an bing local house. Research shows that most FDI takes the signifier of amalgamations and acquisitions instead than Greenfield investing.

Amalgamations and acquisitions are more popular for three grounds. First. amalgamations and acquisitions are quicker to put to death than Greenfield investings. Second. foreign houses are acquired because those houses have valuable strategic assets. Third. houses make acquisitions because they believe they can increase the efficiency of the acquired house by reassigning capital. engineering or direction accomplishments. 91. ( p. 248 ) Discuss the displacement in FDI from fabricating to services. What is driving the tendency? Over the last 20 old ages. the sector composing of FDI has shifted from extractive industries and fabricating toward services. By 2004. some 66 per centum of the stock of FDI was in services. Four factors are driving the displacement to services. First. the displacement reflects the general move in many developed economic systems off from fabricating and toward service industries. Second. many services can non be traded internationally and FDI is a principal was to convey services to foreign markets. Third. many states have liberalized their governments regulating FDI in services doing the option more attractive to houses. Finally. the rise of Internet-based planetary telecommunications webs has allowed some service endeavors to relocate some of their value creative activity activities to different states to take advantage of favourable factor costs.

92. ( p. 249 ) See why houses selling merchandises with low value-to-weight
ratios choose FDI over exporting. Merchandises with low value-to-weight ratios such as soft drinks or cement are often produced in the market where they are consumed. When transit costs are added to production costs. it becomes unprofitable to switch such merchandises over a long distance. For houses that can bring forth low value-to-weight merchandises at about any location the attraction of exporting lessenings and FDI or licencing becomes more appealing. 93. ( p. 250 ) Discuss the market imperfectnesss account of FDI. What is its relationship with internalisation theory? Market imperfectnesss or factors that inhibit markets from working absolutely. supply a major account of why houses prefer FDI to either exporting or licensing. In the international concern literature. the selling imperfectnesss attack is referred to as internalisation theory. Harmonizing to the theory. FDI will be preferred when there are hindrances that make both exportation and the sale of know-how hard and/or expensive. 94. ( p. 250 ) What is licencing? How does it work?

Licensing occurs when a domestic house. the licensor. licenses to a foreign house. the licensee. the right to bring forth its merchandise. to utilize its production processes or to utilize its trade name name or hallmark. In return. the licensor collects royalty fees on every unit the licensee sells or on entire licensee grosss. The licensor besides benefits from the agreement in that the licensee bears the cost and hazard of spread outing into a foreign market. 95. ( p. 250 ) Compare and contrast the advantages of foreign direct investing over exporting and licensing. A house will prefer foreign direct investing over exporting as an entry scheme when transit costs or trade barriers make exporting unattractive. Furthermore. the house will prefer foreign direct investing over licensing ( or franchising ) when it wishes to keep control over its technological know-how or over its operations and concern scheme or when the firm’s capablenesss are merely non conformable to licencing. as may frequently be the instance. 96. ( p. 251 ) See the impression that FDI flows are a contemplation of strategic competition between houses in the planetary market place. What is the chief restriction of the theory? The strategic behaviour attack to explicate FDI was ab initio expounded by Breechess who argued that in an oliogopolistic industry. a “follow the leader” outlook will motivate houses to prosecute FDI when another house in the industry has already done so. However. the theory fails to explicate why the first house decided to set about FDI. instead than export or licence. 97. ( p. 252 )

What is multipoint competition? How do houses react to multipoint competition? Multipoint competition arises when two or more endeavors encounter each other in different regional markets. national markets or industries. Economic theory suggests that houses will seek to fit each other’s moves in different markets to seek to keep each other in cheque. If a house is successful with this scheme. the house will guarantee that a challenger does non take a dominating place in one market and so utilize the net incomes generated in that market to subvention competitory onslaughts in other markets. 98. ( p. 252 ) Explain the merchandise life rhythm theory and its connexion with FDI. The merchandise life rhythm theory. developed by Ray Vernon. suggests that the same houses that pioneer a merchandise in their place state will set about FDI to bring forth a merchandise for ingestion in foreign markets. Harmonizing to the theory. houses will put in industrialised states when demand in those states is sufficient to back up local production. They later switch production to developing states when merchandise standardisation and market impregnation give rise to monetary value competition and cost force per unit areas. Investing in developing states. where labour costs are lower is seen as the best manner to cut down costs. 99. ( p. 252-253 ) What are location-specific advantages? How do they assist explicate FDI? Location specific advantages are advantages that arise from utilizing resource gifts or assets that are tied to a peculiar foreign location and that a steadfast finds valuable to unite with its ain alone assets. Natural resources such as oil and minerals for illustration. are specific to certain locations. Firms must set about FDI to work such foreign resources. 100. ( p. 253 ) Explain John Dunning’s place on FDI. What is the eclectic paradigm? John Dunning has argued that to to the full understand FDI it is of import to see the function of location specific advantages.

Harmonizing to Dunning. a house will be prompted to set about FDI in an attempt to work assets that are specific to a peculiar location. Dunning’s theory. the eclectic paradigm. combines the statements of internalisation theory with the impression of location-specific advantages to propose that uniting location-specific assets or resource gifts and the firm’s ain alone capablenesss frequently requires the house to set up production installations where the foreign assets or resource gifts are located. 101. ( p. 254-256 ) Discuss the assorted political political orientations and their impact on foreign direct investing. The extremist position authors argue that the transnational endeavor ( MNE ) is an instrument of imperialist domination. The free market position argues that international production should be distributed among states harmonizing to the theory of comparative advantage.

The matter-of-fact patriot position is that FDI has both benefits and costs. The extremist position has a dogmatic extremist stance that is hostile to all inward FDI The free market position is at the other extreme and based on noninterventionist rule of free market economic sciences. Between these two extremes is an attack called matter-of-fact patriotism. 102. ( p. 257-262 ) Discuss the benefits and costs of FDI from the position of a host state and from the position of the place state. The chief benefits of inward FDI for a host state arise from resource-transfer effects. employment effects. balance-of-payments effects and effects on competition and economic growing. Three costs of FDI concern host states. They arise from possible inauspicious effects on competition within the host state. inauspicious effects on the balance of payments and the sensed loss of national sovereignty and liberty. The benefits of FDI to the place ( beginning ) state arise from three beginnings. First. the place country’s balance of payments benefits from the inward flow of foreign net incomes. Second. benefits to the place state from outward FDI arise from employment effects. Third. benefits arise when the home-country MNE learns valuable accomplishments from its exposure to foreign markets that can later be transferred back to the place state. The most of import cost/concern of FDI for the place state centres on the balance-of-payments and employment effects of outward FDI.

103. ( p. 266-267 ) Describe the state of affairss when licensing is non a good option for a house. Licensing is non a good option in three state of affairss. First. licensing is risky in hi-tech industries where protecting firm-specific expertness is really of import. Second. licensing is non attractive in planetary oligopolies where tight control is necessary so that houses have the ability to establish co-ordinated onslaughts against planetary rivals. Finally. in industries where intense cost force per unit areas require that MNEs keep tight control over foreign operations. licensing is non the best option. 104. ( p. 267 ) What is franchising? What type of house utilizations
franchising as a agency of spread outing into foreign markets? Franchising is basically the service-industry version of licensing. With franchising. the house licenses its trade name name to a foreign house in return for a per centum of the franchisee’s net incomes. The franchising contract specifies the conditions that the franchisee must carry through if it is to utilize the franchisor’s trade name name. Franchise understandings normally have a longer clip committedness than do licencing agreements. Franchising is common in the fast nutrient industry because fast nutrient can non be exported. because franchising minimizes the costs and hazards associated with opening a foreign market. because trade name names are comparatively easy to protect. because there is no compelling ground for a house to hold tight control over franchisees and because fast nutrient know-how is easy transferred.

105. ( p. 267 ) How utile are the merchandise life rhythm theory and Knickerbocker’s theory of horizontal FDI to concern? The merchandise life rhythm theory and Knickerbocker’s theory of horizontal FDI to concern are non peculiarly utile from a concern position because the theories are descriptive instead than analytical. The theories are utile for explicating historical forms of FDI. but they do a hapless occupation of placing the factors that influence the comparative chance of FDI. licensing and exportation.