- Subsidies are a trade policy instrument.
True False
- Tariffs are the most complex instrument of trade policy.
True False
- Tariffs are the instrument that the GATT and WTO have been most successful in limiting.
True False
- In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a corresponding fall in nontariff barriers.
True False
- Nontariff barriers include subsidies, quotas, voluntary export restraints, and antidumping duties.
True False
- Specific tariffs are levied as a proportion of the value of the imported good.
True False
- Ad valorem tariffs reduce the cost of imported products relative to domestic products.
True False
- Tariffs are largely pro-producer and anti-consumer.
True False
- Tariffs increase the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products more efficiently at home that, in theory, could be produced abroad.
True False
- Export tariffs are far less common than import tariffs.
True False
- The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies.
True False
- Japan has a long history of supporting inefficient domestic producers with farm subsidies.
True False
- A direct restriction on the quantity of some good that may be imported into a country is a quota rent.
True False
- Quotas benefit consumers the most.
True False
- The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage.
True False
- Administrative trade policies are bureaucratic rules that are designed to make it easy for imports to enter a country.
True False
- Dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their “fair” market value.
True False
- Antidumping policies are designed to punish foreign firms that engage in dumping industrial waste into the environment.
True False
- The fair market value of a good is normally judged to be lesser than the costs of producing that good.
True False
- Countries sometimes argue that it is necessary to protect certain industries because they are important for national security.
True False
- Protecting consumers from “dangerous” products and furthering the goals of foreign policy are types of economic arguments for intervention.
True False
- The relationship between pollution and income levels follows a linear pattern.
True False
- The infant industry argument is the oldest economic argument for government intervention.
True False
- Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy.
True False
- Brazil’s auto industry, once the world’s tenth-largest and built behind tariff barriers and quotas, has been proven as one of the world’s most inefficient.
True False
- Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient.
True False
- The roots of strategic trade policy arguments can be traced back to the late 18th century and the works of Adam Smith and David Ricardo.
True False
- Several economists, including Paul Krugman, point out that although free trade policy looks appealing in theory, in practice it may be unworkable.
True False
- The Smoot-Hawley Act was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas.
True False
- In the Uruguay Round of the WTO, member countries sought to exempt trade in services from GATT rules.
True False
- The United States wanted the WTO to allow governments to impose tariffs on goods imported from countries that did not abide by what the United States saw as fair labor practices during a WTO meeting at the end of November 1999.
True False
- Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment.
True False
- The biggest defenders of agricultural subsidies are the developed nations of the world.
True False
- Free trade in agriculture could help to jump-start economic growth among the world’s poorer nations and alleviate global poverty.
True False
- The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country.
True False
- Government intervention may invite retaliation and trigger a trade war.
True False
Multiple Choice Questions
- Which of the following is one of the seven main instruments utilized in trade policy?
A. Local content requirements
B. Licensing
C. Foreign direct investment
D. Employment guarantees
- While _____ tariffs are levied as a fixed charge for each unit of a good imported, _____ tariffs are levied as a proportion of the value of the imported good.
A. ground; ceiling
B. ad hoc; nonconvertible
C. posited; floating
D. specific; ad valorem
- Tariffs cause damage to _____ because this group must pay more for certain imports.
A. investors
B. governments
C. consumers
D. producers
- According to experts, which of the following groups most benefits from the imposition of tariffs?
A. Government and producers
B. Consumers and trade associations
C. Exporters and importers
D. Producers and foreign competitors
- A protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. This results in:
A. an establishment of a comparative advantage over firms from other countries.
B. improved productivity of the labor workforce in that country.
C. higher mobility of resources within the country.
D. an inefficient utilization of resources.
- The U.S. government imposed an eight to thirty percent tariff on steel imports into the United States in March 2002. This belongs to which of the following categories?
A. General
B. Ad valorem
C. Specific
D. Ad hoc
- Tariffs:
A. reduce the price of foreign goods.
B. reduce the overall efficiency of the world economy.
C. help in efficient utilization of resources.
D. are unambiguously pro-consumer and anti-producer.
- One of the objectives of export tariffs is to:
A. improve the efficiency of utilization of resources.
B. curb the competition offered by foreign firms to domestic firms.
C. reduce exports from a sector, often for political reasons.
D. maintain a positive trade deficit.
- Which of the following is a government payment to a domestic producer?
A. Duty
B. Subsidy
C. Quota
D. Tariff
- _____ take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.
A. Ad valorem tariffs
B. Subsidies
C. Quota rents
D. Specific tariffs
- By lowering production costs, subsidies help domestic producers in:
A. gaining export markets.
B. curtailing exports to other countries.
C. meeting voluntary export restraints.
D. regulating the quality of services they offer.
- _____ tend(s) to be one of the largest beneficiaries of subsidies in most countries.
A. Banks
B. Commercial airlines
C. Agriculture
D. Defense
- By lowering production costs, _____ help domestic producers compete against foreign imports.
A. tariffs
B. custom duties
C. quotas
D. subsidies
- Governments typically pay for subsidies by:
A. selling junk bonds.
B. taxing individuals and corporations.
C. foreign direct investment in poorer countries.
D. privatization of public holdings.
- Advocates of _____ believe that subsidies can help a firm achieve a first-mover advantage in an emerging industry.
A. strategic trade policy
B. free trade
C. open market system
D. justice theories
- Which of the following groups would most benefit from receiving subsidies?
A. Governments
B. Consumers
C. Domestic producers
D. Importers
- An import quota is a direct restriction on the quantity of some good that may be __________ by a country.
A. subsidized
B. imported
C. dumped
D. produced
- Under a(n) _____, a lower tariff rate is applied to imports within the quota than those over the quota.
A. tariff rate quota
B. voluntary import restraint
C. import tariff rent
D. quota rent
- A(n) _____ is a quota on trade imposed by the exporting country, typically at the request of the importing country’s government.
A. tariff rate quota
B. quota rent
C. import quota
D. voluntary export restraint (VER)
- Foreign producers agree to VERs because they fear:
A. a fall in demand for their products in foreign markets.
B. the aggravation of protectionist pressures in their home markets.
C. more damaging punitive tariffs or import quotas might follow if they do not.
D. political and economic instability in foreign markets.
- Agreeing to a VER is seen by foreign producers as a way to make the best of a bad situation by appeasing _____ pressures in a country.
A. free trade
B. protectionist
C. libertarian
D. consumer
- The Multi-Fiber Agreement (MFA) of 1974 fixed upper limits on exports of textiles from all major exporting countries to all major importing countries. The MFA is an example of:
A. voluntary export restraint.
B. local content requirement.
C. subsidy.
D. specific tariff.
- The extra profit that producers make when supply is artificially limited by an import quota is referred to as a:
A. trade surplus.
B. quota rent.
C. trade reconciliation.
D. profit hike margin.
- Both import quotas and VERs benefit _____ by limiting import competition, but they result in higher prices, which hurt _____.
A. domestic producers; consumers
B. governments; domestic producers
C. importers; foreign producers
D. consumers; governments
- A(n) _____ requires that some specific fraction of a good must be produced domestically.
A. international allocation requirement
B. local content requirement
C. specific quota requirement
D. ad valorem portion requirement
- Local content regulations have been widely used by developing countries to shift their manufacturing base from the simple _____ of goods whose parts are manufactured elsewhere into the local _____ of component parts.
A. production; integration
B. assembly; manufacture
C. design; assembly
D. generation; packaging
- Local content regulations provide protection for a domestic producer of parts in much the same way a(n) _____ does, by limiting foreign competition.
A. greenfield investment
B. international content requirement
C. specific content requirement
D. import quota
- If Apple won an order to sell 500 new minicomputers to Australia, but the Australian government stipulated that 20 percent of the component parts of the minicomputers it purchased must be produced in Australia, that stipulation would be an example of a(n):
A. voluntary export restraint.
B. administrative policy.
C. import quota.
D. local content requirement.
- The _____ in the U.S. specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage.
A. Export Administration Act
B. Helms-Burton Act
C. Hawley-Burton Act
D. Buy America Act
- In addition to the formal instruments of trade policy, informal bureaucratic rules that are designed to make it difficult for imports to enter a country are referred to as:
A. regional trade inhibitors.
B. back-door trade policies.
C. domestic trade hurdles.
D. administrative trade policies.
- At one time, the French government required that all imported videotape recorders arrive in France through a small customs entry point that was both remote and poorly staffed. This is an example of a(n):
A. regional trade inhibitor.
B. domestic business hurdle.
C. administrative trade policy.
D. ad hoc red tape.
- _____ are specific duties representing a special tariff for punishing foreign firms engaged in dumping, which can be fairly substantial and stay in place for up to five years.
A. Punitive damages
B. Civil duties
C. Import damages
D. Countervailing duties
- In the context of international trade, _____ is defined as selling goods in a foreign market at a price below their costs of production or as selling goods in a foreign market at below their “fair” market price.
A. monopolizing
B. dumping
C. slashing
D. subsidizing
- If China were to export vast quantities of cheap toys to India, selling them at below their costs of production, it would constitute:
A. monopolism.
B. dumping.
C. slashing.
D. safeguarding.
- In the context of dumping, predatory behavior can be described as foreign producers:
A. attempting hostile takeovers of domestic firms and usurping the available resources for production.
B. indiscriminately exploiting the natural resources of a foreign country to create a later demand that can be met only by imports.
C. eliminating competition by subsidizing prices in a foreign market with home market profits and eventually raising prices to earn substantial profits.
D. buying goods of competing domestic firms and hoarding them to create an artificial demand, and exporting those goods at higher prices.
- One of the motives for foreign firms engaged in dumping may be:
A. unloading excess production in foreign markets.
B. cutting labor costs to reduce the costs of production.
C. offering a wider range of products for consumers in foreign markets.
D. offering competitive pricing for goods that are not produced in foreign countries.
- An alleged example of _____ occurred in 1997, when two Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips in the U.S. market at below their costs of production.
A. dumping
B. monopolizing
C. slicing
D. subsidizing
- The two US agencies that deal with antidumping complaints are the:
A. Economic Offences Wing and Conciliation Services.
B. International Trade Commission and the Industry Council.
C. Commerce Department and the International Trade Commission.
D. Federal Trade Commission and the Economic Council.
- Which of the following is considered to be the ultimate objective of antidumping policies?
A. Protect consumers from competitive pricing
B. Prevent domestic firms from unloading their excess production in domestic markets
C. Protect domestic producers from unfair foreign competition
D. Protect consumers from substandard and hazardous products
- In general, what are the two paths of arguments for government intervention into the free flow of trade?
A. Political and cultural
B. Economic and legal
C. Political and economic
D. Legal and social
- Furthering the goals of foreign policy and advancing the human rights of individuals in exporting countries are examples of issues covered by _____ for government intervention.
A. political arguments
B. humanitarian arguments
C. legal arguments
D. economic arguments
- _____ arguments for government intervention into international trade are typically concerned with boosting the overall wealth of a nation.
A. Economic
B. Political
C. Legal
D. Commercial
- Which of the following is perhaps the most common political argument for government intervention into the free flow of trade?
A. Protecting national identity
B. Protecting national sovereignty from being usurped by supranational organizations
C. Protecting jobs and industries from unfair foreign competition
D. Improving efficiency of domestic labor
- At times, countries contend that it is necessary to protect industries such as those related to defense—aerospace, advanced electronics, and semiconductors—because these industries are important for:
A. retaining innovation.
B. national entrepreneurial spirit.
C. national security.
D. diplomatic reasons.
- Some argue that governments should use the threat of _____ to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to “play by the rules of the game.”
A. free trade
B. deregulation
C. retaliation
D. liberalization
- Why is retaliation by government intervention a risky strategy?
A. It may liberalize trade and bring with it resulting economic gains.
B. A country that is being pressured may respond by raising trade barriers of its own.
C. It may expose certain industries that are important for national security to foreign competition.
D. It allows firms to sell goods in foreign market at below their fair market value.
- In 2006, several countries of the European Union and U.S. banned imports of Mattel toys with high levels of lead, manufactured in China. The underlying motive for such a move could be:
A. protecting domestic businesses from unfair pricing.
B. protesting the pricing of toys below their costs of production.
C. protecting consumers from unsafe products.
D. increasing the trade surplus of the U.S.
- Which of the following would be a likely action motivated by the desire of governments to protect their consumers from unsafe products?
A. Placing tariffs on imports of foreign steel, by the Bush administration in 2002
B. Threatening 100 percent tariffs on a range of Chinese products violating intellectual property laws
C. Outlawing importation, sale, or use of genetically modified organisms by Austria and Luxembourg
D. Passing legislations such as the D’Amato Act and the Helms-Burton Act targeting products from Libya, Iran, and Cuba
- Which of the following actions reflect the use of trade policies by governments to further their foreign policy objectives?
A. Pressuring “rogue states” that do not abide by international law or norms
B. Enforcing tougher intellectual property regulations
C. Threatening high tariffs and quotas
D. Limiting or banning imports of unsafe or substandard products
- U.S. trade sanctions against Cuba, Libya, and Iran are examples of:
A. governments protecting domestic consumers from unsafe products.
B. governments using trade policy to support their foreign policy objectives.
C. governments protecting local businesses from international competition.
D. governments punishing foreign companies for dumping products in their markets.
- Legislation that allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution is known as the:
A. Frederick-Peterson Act.
B. D’Amato-Perkins Act.
C. Perkins-Dole Act.
D. Helms-Burton Act.
- Which one of the following Acts represents U.S. legislation that is similar to the Helms-Burton Act, but is aimed at Libya and Iran?
A. Perkin’s Act
B. D’Amato Act
C. Williams Act
D. Cato Act
- _____ status allows countries to export goods to the U.S. under favorable terms.
A. Most favored nation
B. Preferred trade partner
C. Strategic ally
D. Friendly state
- China did not join the WTO until 2001, so historically the decision of whether to grant MFN status to China was a real one. The decision was made more difficult by the perception that China had a(n) _____.
A. unskilled and unemployable population
B. high-cost labor structure
C. poor human rights record
D. large population
- Environmental organizations pushing for greater regulation of international trade argue that there is a strong relationship between _____ and environmental pollution and degradation.
A. dumping
B. trade sanctions
C. income levels
D. factor endowments
- Empirical evidence suggests the relationship between income levels and pollution is not a linear one—rather it is an inverted U-shaped relationship—implying that international trade, and the growth that results from it, may not be damaging to the environment. Important exceptions to this trend are:
A. pollution levels evidenced in burgeoning economies like China and India.
B. incidents like the Chernobyl disaster and Tokaimura nuclear accident.
C. results revealing rise in carbon dioxide emissions with rise in income levels.
D. frequent oil spills occurring in various seas across the world.
- Which of the following is one of the reasons offered to explain the high levels of carbon dioxide emissions in developed countries like the U.S.?
A. Richer societies are more energy intensive and use carbon dioxide rich hydrocarbons extensively.
B. Developed countries tend to be more densely populated than other countries and hence reflect higher carbon dioxide emissions.
C. Companies in developed countries are less likely to take up social responsibility initiatives than those in developing countries.
D. Developed countries generally have environmental pollution regulations less stringent than those in developing countries.
- If countries do not meet their targets for reducing carbon emissions specified in international treaties, they may find themselves the targets of _____.
A. dumping
B. inflation
C. economic crisis
D. retaliatory action
- According to the text, which of the following factors is likely to be the least important in determining location decisions for businesses?
A. Labor productivity
B. Transportation costs
C. Pollution abatement costs
D. Access to technological know-how
- With the development of the _____ and _____, the economic arguments for government intervention have undergone a renaissance in recent years.
A. technology; WTO
B. free trade; democratic governments
C. new trade theory; strategic trade policy
D. democratic governments; anti-globalization movement
- Which of the following is by far, the oldest economic argument for government intervention into the free flow of trade?
A. Impoverished industry argument
B. Infant industry argument
C. Sick industry argument
D. National security-related industry argument
- According to _____, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well-established industries in developed countries.
A. mercantilism
B. comparative advantage theory
C. product life-cycle theory
D. infant industry argument
- _____ has recognized the infant industry argument as a legitimate reason for protectionism.
A. GATT
B. North Atlantic Treaty Organization
C. United Nations
D. International Monetary Fund
- One of the main reasons why many economists remain critical of the infant industry argument is its assumption that:
A. protection of manufacturing from foreign competition is harmful.
B. absolute advantage cannot sustain productivity of an industry.
C. foreign firms too come under the definition of infant industry when they newly enter a foreign market.
D. firms are unable to make efficient long-term investments through domestic or international capital markets.
- Protection of manufacturing from foreign competition does no good unless the protection:
A. helps make the industry efficient.
B. provides guaranteed employment for the citizens.
C. affects the standards of living and per capita income of the people.
D. promotes foreign direct investment.
- Given financial support, firms based in countries with a potential comparative advantage have an incentive to endure the necessary initial losses in order to make long-run gains without requiring _____.
A. good governance
B. latest technology
C. government protection
D. regular monitoring
- According to the text, given efficient global capital markets, the only industries that would require government protection would be:
A. those that are not worthwhile.
B. defense-related, such as aerospace and semiconductors.
C. chemical and processing industries.
D. those that require efficient administration.
- A government should use subsidies to support promising firms that are active in newly emerging industries, according to the _____ argument.
A. strategic trade policy
B. infant industry
C. absolute advantage
D. product life-cycle
- According to the text, governments should target technologies that may be important in the future and use _____ to support development work aimed at commercializing those technologies.
A. subsidies
B. sanctions
C. factor endowments
D. personnel
- An important component of strategic trade policy is that it might pay governments to intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already reaped _____.
A. all available profits
B. first-mover advantages
C. comparative advantage
D. foreign direct investment
- To try and establish Airbus as a global competitor against Boeing, the governments of Britain, France, Germany, and Spain:
A. threatened 100% tariffs on the import of Boeing aircraft.
B. drafted legislations that required 25% of Boeing’s aircraft by value to be manufactured in Europe.
C. imposed import quotas on American-manufactured Boeing aircraft.
D. pooled in subsidies worth $15 billion.
- The strategic trade policy arguments of the new trade theorists challenge the rationale for unrestricted free trade found in the work of classic trade theorists. In response to this challenge to economic orthodoxy, a number of economists—including some of those responsible for the development of the new trade theory, such as Paul Krugman are:
A. advocating a world-wide swing toward mixed economies.
B. debunking assertions made by Adam Smith and David Ricardo.
C. making a revised case for free trade.
D. pointing out that in practice free trade may be unworkable.
- According to Paul Krugman, a country that attempts to use strategic trade policy to establish a domestic firm in a dominant position in a global industry will probably:
A. dominate the industry.
B. move away from protectionism.
C. provoke retaliation.
D. incur huge financial debts.
- According to Krugman, the ideal way for a country to respond when one’s competitors are already being supported by government subsidies is probably not to engage in retaliatory action but to:
A. help establish rules that minimize the use of trade-distorting subsidies.
B. adopt the strategic trade policy as a way to establish domestic firms in a dominant position in the global industry.
C. move to an industry where the competitors have not had the benefit of such strategic trade policies.
D. use a combination of home-market protection and export-promoting subsidies.
- According to Krugman, one of the reasons for not embracing strategic trade policy is that such a policy might:
A. hamper the chances of a country’s firms to effectively exploit first-mover advantages.
B. be captured by special-interest groups within the economy for personal benefits.
C. be used to establish rules of the game that minimize use of trade-distorting subsidies.
D. divert attention from the need to establish domestic firms in a dominant position in the global industry.
- Which of the following historical events signified the first official embracing of free trade as a government policy by Great Britain?
A. The Union of the Crowns in 1603
B. The repeal of the Corn Laws by the British Parliament in 1846
C. The Treaty of American Independence in 1783
D. The Industrial Revolution of the 18th and 19th centuries
- Which of the following represents the reason for the British Parliament repealing the Corn Laws in 1846?
A. Opium wars that polarized world opinion against Great Britain
B. Prospect of harvest failure in Britain and famine in Ireland
C. Imminent threat of rebellions in most of its colonies
D. Labor party taking over the government from the Liberal Conservatives
- According to the text, the only reason Great Britain pushed the case for trade liberalization for as long as 80 years in the 19th century was that:
A. it was starting to lose the military stranglehold over much of its colonies.
B. the emergence of the U.S. threatened its position as the most industrialized nation.
C. it stood to lose the most from a trade war.
D. it had experienced severe famines and droughts in the earlier part of the 19th century.
- The economically damaging effects of the Great Depression were worsened in 1929 by the _____.
A. First World War
B. U.S. stock market collapse
C. spread of communism through Europe
D. Cold War between the world’s superpowers
- Which one of the following aimed at avoiding rising unemployment by protecting domestic industry and diverting consumer demand away from foreign products, erected an enormous wall of tariff barriers?
A. Smoot-Hawley Act
B. D’Amato Act
C. Helms-Burton Act
D. Buy America Act
- A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the United States was running a balance-of-payment surplus at the time and it was the world’s largest _____ nation.
A. debtor
B. free-trade
C. importing
D. creditor
- Established under U.S. leadership in 1947, which of the following was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like?
A. General Agreement of Tariffs and Trade (GATT)
B. North American Free Trade Agreement (NAFTA)
C. Central American Free Trade Agreement (CAFTA)
D. Free Trade Areas of the Americas (FTAA)
- Which of the following statements regarding GATT is true?
A. GATT attempted to liberalize trade restrictions in one go.
B. In its early years, GATT was unsuccessful and hence was superseded by the WTO.
C. GATT regulations failed as they were enforced by an unshared monitoring mechanism.
D. Tariff reductions through negotiations were spread over eight rounds.
- One of the reasons that protectionist pressures arose around the world during the 1980s was:
A. that many countries found ways to get around GATT regulations.
B. the opening up of national markets to cheap products from China.
C. the fall of the Soviet Union.
D. the persistent trade lead taken by the United States.
- _____ is one of the ways in which countries can circumvent GATT regulations and is exemplified by the agreement between Japan and America under which Japanese producers promised to limit their auto imports into the United States.
A. Voluntary export restraint
B. Import quota
C. Specific tariff
D. Quota rent
- Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because:
A. these nations withdrew their membership to the GATT.
B. the member nations had ceased to recognize GATT as a regulatory body for international trade.
C. VERs were not a recognized trade barrier under the GATT constitution.
D. neither the importing country nor the exporting country complained to the GATT bureaucracy.
- The main effect of the Uruguay Round Agreement on agricultural products was that:
A. caps were imposed on textile exports.
B. farm subsidies were reduced.
C. tariffs on industrial goods were increased.
D. a wide range of agricultural services were exempted from GATT rules.
- All of the following were provisions of the Uruguay Round Agreement EXCEPT:
A. clearer and stronger GATT rules.
B. extension of GATT fair trade and market access rules to cover a wider range of services.
C. substantial reduction in agricultural subsidies.
D. increase in tariffs on industrial goods in lieu of the reduction in agricultural subsidies.
- Which of the following has taken over responsibility to arbitrate trade disputes and monitor the trade policies of member countries and resulted because of the Uruguay Round agreement?
A. World Bank
B. World Trade Organization
C. International Trade Commission
D. International Monetary Fund
- The WTO’s Agreement on _____ is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules.
A. International Body on Intellectual Property (IBIP)
B. Court of Arbitration of Intellectual Property (CAIP)
C. Trade-Related Aspects of Intellectual Property Rights (TRIPS)
D. Intellectual Property Rights Enforcement and Resolution (IPER)
- Countries that have been found by the arbitration panel to violate GATT rules may appeal to _____ of the World Trade Organization, but its verdict is binding.
A. human rights commission
B. permanent appellate body
C. International Court of Justice
D. Security Council
- The millennium round of talks of WTO attempted to get the assembled countries to agree to work toward:
A. agreeing on raising barriers to cross-border trade.
B. strengthening their defense ties and carry on with their war against terror.
C. reducing barriers to cross-border trade in agricultural products and trade and investment in services.
D. increasing average tariff rates imposed by developing nations on manufactured goods to more than four percent of value, the highest level in modern history.
- Two of the first industries targeted for reform by the WTO with a view to encompass regulations governing foreign direct investment were:
A. global telecommunication and financial services industries.
B. scientific research and defense sector.
C. pharmaceuticals and heavy metal industry.
D. agriculture and biotechnology.
- Which of the following countries, with minor exceptions, is fully open to inward investment by foreign banks, insurance, and security companies?
A. Russia
B. Cuba
C. Venezuela
D. The United States
- Human rights activists see WTO rules as _____ the ability of nations to stop imports from countries where child labor is used or working conditions are hazardous.
A. enabling
B. outlawing
C. supplementing
D. facilitating
- One of the loopholes in antidumping laws that is being exploited by many countries to pursue protectionism is the:
A. toothlessness of the enforcement agencies.
B. WTO’s non-committal approach to antidumping laws.
C. bilateral VERs which subvert antidumping laws.
D. rather vague definition of what constitutes “dumping.”
- Which of the following is NOT true about agricultural subsidies?
A. They clear distortions in the production and international trade of agricultural products.
B. They encourage countries to overproduce heavily subsidized agricultural products.
C. They reduce international trade in agricultural products.
D. They raise the prices of agricultural products to consumers.
- _____ are the highest rate that can be charged, which is often, but not always, the rate that is charged.
A. Ceiling rates
B. Specific tariffs
C. Bound tariff rates
D. Ad maximum rates
- Which of the following has been excluded from the agenda for the Doha round of WTO talks that began in 2001?
A. Reducing barriers to cross-border investment
B. Phasing out subsidies to agricultural producers
C. Limiting the use of antidumping laws
D. Attempts to tie trade to labor standards in a country
- The threat of antidumping action limits the ability of a firm to:
A. raise capital in the primary market.
B. raise prices in response to high demand.
C. disperse its productive activities in an efficient manner.
D. use aggressive pricing to gain market share in a country.
- According to the text, most economists would probably argue that the best interests of international business are served by a free trade stance, but not a _____ stance.
A. facilitating
B. open market
C. laissez-faire
D. ad valorem
Essay Questions
- What is a tariff? Describe the difference between specific tariffs and ad valorem tariffs, illustrating each with an example.
- Who gains and who loses from the imposition of a tariff on imported goods? How can it be determined whether the net gain from the tariff exceeds the net loss?
- What is a subsidy? Provide some examples of the forms that subsidies take. How do subsidies help domestic producers?
- What is a voluntary export restraint? Why do exporting countries agree to VERs? Explain with an example.
- What is local content requirement? How can local content requirements typically be expressed? How have local content requirements been used as trade barriers?
- What are the principle political arguments for government intervention into international trade?
- Describe briefly, with examples, the use of trade policies by governments to support their foreign policy objectives.
- What is the “infant industry argument”? What are its implications for the world economy? What are the criticisms of this argument?
- Briefly describe the implications of the strategic trade policy as applied to international trade.
- Give a brief description of the origin, functions, and successes of GATT from 1947 to 1979, before protectionist trends gained momentum across the world.
- Describe how the world trade system erected by GATT came under strain from protectionist trends that dominated the world economy from 1980 to 1993.
- State the provisions that were formed after the completion of the Uruguay Round of talks.
- Explain the organizational structure of the WTO and mention the functions of its key organs.
- Why is the WTO meeting in Seattle considered a watershed?
- List the fours issues at the forefront of the current agenda of the WTO.
Chapter 06 The Political Economy of International Trade Answer Key
True / False Questions
- (p. 205)Subsidies are a trade policy instrument.
TRUE
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 205)Tariffs are the most complex instrument of trade policy.
FALSE
Tariffs are the oldest and simplest instrument of trade policy.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 205, 206)Tariffs are the instrument that the GATT and WTO have been most successful in limiting.
TRUE
Tariffs are the instrument of trade policy that GATT and WTO have been most successful in limiting.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a corresponding fall in nontariff barriers.
FALSE
A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties.
AACSB: Reflective Thinking
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)Nontariff barriers include subsidies, quotas, voluntary export restraints, and antidumping duties.
TRUE
A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)Specific tariffs are levied as a proportion of the value of the imported good.
FALSE
Specific tariffs are levied as a fixed charge for each unit of a good imported.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)Ad valorem tariffs reduce the cost of imported products relative to domestic products.
FALSE
Tariffs, specific and ad valorem, are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods.
AACSB: Reflective Thinking
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)Tariffs are largely pro-producer and anti-consumer.
TRUE
Tariffs are pro-producer and anti-consumer. While they protect producers from foreign competitors, this restriction of supply also raises domestic prices.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 206)Tariffs increase the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products more efficiently at home that, in theory, could be produced abroad.
FALSE
Import tariffs reduce the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 207)Export tariffs are far less common than import tariffs.
TRUE
Sometimes tariffs are levied on exports of a product from a country. Export tariffs are far less common than import tariffs.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 207)The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies.
FALSE
The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 207)Japan has a long history of supporting inefficient domestic producers with farm subsidies.
TRUE
Agriculture tends to be one of the largest beneficiaries of subsidies in most countries. Japan has long history of supporting inefficient domestic producers with farm subsidies. Even the European Union and the U.S. are not exempt from this rule.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 208)A direct restriction on the quantity of some good that may be imported into a country is a quota rent.
FALSE
An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 209, 210)Quotas benefit consumers the most.
FALSE
As with all restrictions on trade, quotas do not benefit consumers. An import quota or voluntary export restraint always raises the domestic price of an imported good.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 210)The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage.
TRUE
A little-known law in the United States, the Buy America Act, specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 210)Administrative trade policies are bureaucratic rules that are designed to make it easy for imports to enter a country.
FALSE
In addition to the formal instruments of trade policy, governments of all types sometimes use informal or administrative policies to restrict imports and boost exports. Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 211)Dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their “fair” market value.
TRUE
Dumping is defined as selling goods in a foreign market at below their costs of production or “fair” market value. Dumping is viewed as a method by which firms unload excess production in foreign markets.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 211)Antidumping policies are designed to punish foreign firms that engage in dumping industrial waste into the environment.
FALSE
Dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their “fair” market value. Antidumping policies are designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 211)The fair market value of a good is normally judged to be lesser than the costs of producing that good.
FALSE
The fair market value of a good is normally judged to be greater than the costs of producing that good as the former includes a “fair” profit margin.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
- (p. 213)Countries sometimes argue that it is necessary to protect certain industries because they are important for national security.
TRUE
Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics, semiconductors, etc.).
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 213)Protecting consumers from “dangerous” products and furthering the goals of foreign policy are types of economic arguments for intervention.
FALSE
Political arguments for government intervention cover a range of issues, including protecting consumers from “dangerous” products, furthering the goals of foreign policy.
AACSB: Reflective Thinking
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 217)The relationship between pollution and income levels follows a linear pattern.
FALSE
Empirical evidence suggests the relationship between income levels and pollution is not a linear one—rather it is an inverted U-shaped relationship. To begin with, as countries start to climb the ladder of economic progress, pollution levels do increase, but past some threshold, they start to decline.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 219)The infant industry argument is the oldest economic argument for government intervention.
TRUE
The infant industry argument is by far the oldest economic argument for government intervention.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 219)Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy.
TRUE
Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy. This position has changed at the margins with the development of strategic trade policy, although there are still strong economic arguments for sticking to a free trade stance.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 219)Brazil’s auto industry, once the world’s tenth-largest and built behind tariff barriers and quotas, has been proven as one of the world’s most inefficient.
TRUE
Brazil built the world’s tenth-largest auto industry behind tariff barriers and quotas. Once those barriers were removed in the late 1980s, however, foreign imports soared, and the industry was forced to face up to the fact that after 30 years of protection, Brazil had one of the world’s most inefficient industry.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 219)Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient.
TRUE
Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 06-02
Topic: The Case for Government Intervention
- (p. 221)The roots of strategic trade policy arguments can be traced back to the late 18th century and the works of Adam Smith and David Ricardo.
FALSE
The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade which challenges the rationale for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and David Ricardo.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-03
Topic: The Revised Case for Free Trade
- (p. 221)Several economists, including Paul Krugman, point out that although free trade policy looks appealing in theory, in practice it may be unworkable.
FALSE
In response to the challenge to economic orthodoxy posed by new trade theory, which argues for government intervention, a number of economists—including some of those responsible for the development of the new trade theory, such as Paul Krugman—point out that although strategic trade policy looks appealing in theory, in practice it may be unworkable.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 06-03
Topic: The Revised Case for Free Trade
- (p. 223)The Smoot-Hawley Act was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas.
FALSE
Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an enormous wall of tariff barriers.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-04
Topic: Development of the World Trading System
- (p. 224)In the Uruguay Round of the WTO, member countries sought to exempt trade in services from GATT rules.
FALSE
Against the background of rising pressures for protectionism, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs, the Uruguay Round. Until then, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 06-04
Topic: Development of the World Trading System
Chapter 07
Foreign Direct Investment
True / False Questions
- When a firm exports to a foreign country, foreign direct investment occurs.
True False
- Greenfield investment involves the establishment of a new operation in a foreign country.
True False
- The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time.
True False
- The flow of foreign investment refers to the number of countries a firm is investing in at any given point in time.
True False
- Executives of foreign firms see FDI as a way of circumventing future trade barriers.
True False
- FDI has grown significantly slower than world trade and world output.
True False
- According to the United Nations, majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI.
True False
- Historically, most FDI has been directed at the developed nations of the world.
True False
- Developing nations such as Poland and Ukraine were the largest national recipients of inward investments within the EU in 2007.
True False
- The inability of Africa to attract greater investment is in part a reflection of the rigid and unchanging economic policy in the region.
True False
- Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like.
True False
- With developed nations still accounting for the largest share of FDI inflows, FDI into developing nations has steadily decreased over the past decade.
True False
- The largest source country for FDI is Japan.
True False
- The data suggest the majority of cross-border investment in developing countries is in the form of mergers and acquisitions.
True False
- Many firms believe that if they do not acquire a desirable target firm, their global rivals will.
True False
- Granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit the foreign entity sells is called licensing.
True False
- When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent.
True False
- FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different.
True False
- Products with low value-to-weight ratios are the most viable for exporting.
True False
- By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing.
True False
- One problem of licensing is that it does not give the firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
True False
- A critical competitive feature of an oligopoly is the independence of the major players.
True False
- Raymond Vernon’s product life-cycle theory offers clear explanations for why it is profitable for a firm to undertake FDI rather than continuing to export from its home base or licensing a foreign firm to produce its product.
True False
- Under the pragmatic nationalism view, no country should ever permit foreign corporations to undertake FDI.
True False
- Under the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.
True False
- World trade has been growing twice as fast as the growth in volume of FDI worldwide.
True False
- The indirect employment effects of FDI are often as large as, if not larger than, the direct effects.
True False
- Services, such as telecommunications, retailing, and many financial services, where the service has to be produced where it is delivered, lend themselves well to exporting.
True False
- Offshore production refers to FDI undertaken to serve the host market.
True False
- Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time.
True False
- Employment restraints and profit requirements are the two most common ways host governments restrict FDI.
True False
- FDI was governed by the GATT until the 1990s.
True False
- In 1995, the OECD initiated talks to draft a multilateral agreement on investment that legalized discrimination against foreign investors by signatory states.
True False
- The location-specific advantages argument associated with John Dunning does help explain the direction of FDI.
True False
- A firm’s bargaining power is low when the host government places a low value on what the firm has to offer.
True False
Multiple Choice Questions
- A hardware manufacturing firm from the United States invests directly in an assembling plant for laptops in Taiwan. This is an example of:
A. insourcing.
B. stock consolidation.
C. foreign direct investment.
D. product takeover.
- According to the U.S. Department of Commerce, in the United States _____ occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity.
A. multilateral investment
B. foreign direct investment
C. reciprocal foreign investment
D. international divestment
- Once a firm undertakes FDI, it becomes a(n) _____.
A. outsourcer
B. retail chain
C. offshore company
D. multinational enterprise
- The establishment of a wholly new operation in a foreign country is referred to as a(n):
A. consolidation.
B. greenfield investment.
C. acquisition.
D. licensing agreement.
- A firm has full outright stake in an acquisition when it acquires:
A. at least 38 percent of a company.
B. at least 60 percent of a company.
C. at least 98 percent of a company.
D. 100 percent of a company.
- The _____ of foreign direct investment refers to the amount of FDI undertaken over a given period (normally a year).
A. portfolio
B. flow
C. status
D. stock
- The stock of foreign direct investment refers to:
A. the total accumulated value of foreign-owned assets at any time.
B. the number shares of the foreign firm held by local investors.
C. the amount of FDI undertaken over a given time period.
D. the dividend amount paid by the foreign firm to local investors.
- With respect to foreign direct investment, during the past 30 years, there has been a:
A. higher increase in world trade than FDI.
B. marked increase in both the flow and stock of FDI in the world economy.
C. steady increase in the erection of trade barriers to FDI in the form of tariffs and subsidies.
D. gradual shift toward mercantile market economies that oppose FDI in those countries.
- Why has FDI grown more rapidly than world trade?
A. Decline in trade barriers has made the fear of protectionist pressures redundant.
B. Executives of business firms see FDI as a way of circumventing future trade barriers.
C. There has been a general shift toward radical and totalitarian political institutions.
D. Privatization has made developing nations less attractive for MNEs.
- As of 2009, 2676 bilateral trade treaties involved more than 180 countries, a 12-fold increase from the 181 treaties that existed in 1980. These statistics prove that:
A. governments are increasingly facilitating FDI to protect and promote investment with other countries.
B. more governments are erecting restrictive trade barriers focused on extractive industries, such as oil and gas.
C. government intervention in the process of foreign direct investment has hindered economic growth over the past 30 years.
D. the increasing red-tape involved in conducting international trade between any two countries has created frictions.
- Historically, most FDI has been directed at the _____ nations of the world.
A. underdeveloped
B. developing
C. developed
D. emerging
- The United States has been an attractive target for FDI partly because of its:
A. abundance of cheap and skilled labor.
B. stable and dynamic economy.
C. commitment to environmental issues.
D. economic colonization of much of the world.
- Most recent inflows of FDI into developing nations have been targeted at:
A. impoverished nations in Africa.
B. the emerging economies of South, East, and Southeast Asia.
C. Latin American countries.
D. post-Communist Eastern European countries.
- According to the text, other things being equal, the greater the _____ in an economy, the more favorable its future growth prospects are likely to be.
A. governmental regulation
B. nationalization of loss making firms
C. costs of manufacturing
D. capital investment
- _____ summarizes the total amount of capital invested in factories, stores, office buildings, and the like.
A. Gross fixed capital formation
B. Gross foreign direct investment
C. Net overhead investment
D. Net infrastructure investment
- The U.S., the U.K., France, Germany, the Netherlands, and Japan account for more than half of the global stock of FDI. As might be expected, these countries also:
A. did not look at foreign markets to fuel their economic expansion.
B. have cumbersome regulations against FDI inflows into their own economies.
C. predominate in the rankings of the world’s largest multinationals.
D. express similar FDI inflows as a percentage of gross fixed capital formation.
- Countries such as the U.S., the U.K., France, Germany, the Netherlands, and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world’s largest multinationals because:
A. they were the most developed countries postwar and home to the largest and best-capitalized enterprises.
B. they pursued a policy of blocking or restricting FDI inflow into their own economies.
C. they provided subsidies for their domestic firms to protect them from foreign competition.
D. they control much of the operating structure of the WTO which governs international trade.
- Countries such as the U.S., the U.K., the Netherlands, and Germany had a long history as _____ and naturally looked to foreign markets to fuel their economic expansion.
A. mercantilist economies
B. trading nations
C. protectionist cultures
D. imperialist countries
- Data suggest the majority of cross-border investment is in the form of _____ for developed nations.
A. greenfield investments
B. exports
C. franchising
D. mergers and acquisitions
- In the case of developing nations, about _____ of FDI is in the form of cross-border mergers and acquisitions.
A. three-fourths
B. one-third
C. one-half
D. two-thirds
- _____ involves producing goods at home and then shipping them to the receiving country for sale.
A. Outsourcing
B. Licensing
C. Franchising
D. Exporting
- 3M, an American firm, produces adhesive tape in St. Paul, Minnesota, and ships the tape to South Korea to be sold. This is an example of:
A. exporting.
B. licensing.
C. franchising.
D. globally dispersed production.
- Which of the following involves granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold?
A. Outsourcing
B. Exporting
C. Licensing
D. Product divestment
- Which of the following is a risk associated with FDI?
A. Giving away valuable technological know-how to a potential competitor
B. High transportation costs, especially of products that have a low value-to-weight ratio
C. Doing business in a different culture where the rules of the game may be very different
D. Actual or threatened trade barriers such as import tariffs or quotas
- The viability of an exporting strategy is often constrained by transportation costs, particularly of products that have a _____ and that can be produced in almost any location.
A. high local content requirement
B. low total landed cost
C. low value-to-weight ratio
D. low licensing tariff
- Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting?
A. The presence or threat of trade barriers
B. The costs of acquiring a foreign enterprise
C. The costs of establishing production facilities in a foreign country
D. The risk of giving away valuable technological know-how to a potential foreign competitor
- According to the text, a firm will favor FDI over exporting as an entry strategy when:
A. the costs of establishing production facilities are high.
B. the transportation costs or trade barriers are high.
C. there are problems associated with doing business in a different culture.
D. products with a high value-to-weight ratio are involved.
- The argument that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located, constitutes the _____ of FDI.
A. disparate elements approach
B. integration approach
C. scramble theory
D. eclectic paradigm
- A firm wanting to avoid bearing the costs of establishing production facilities in a foreign country would do well to avoid:
A. exporting.
B. FDI.
C. licensing.
D. franchising.
- By limiting imports through quotas and tariffs, governments increase the attractiveness of :
A. FDI and licensing.
B. low value-to-weight ratio products.
C. globally dispersed production.
D. outsourcing and off-shoring.
- The argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing constitutes the _____.
A. comparative advantage theory
B. distribution theory
C. new trade theory
D. internalization theory
- The market imperfections approach seeks to explain:
A. the disadvantages associated with the adoption of a completely free market view.
B. why different nations import goods from other countries even when they are more capable of producing them efficiently.
C. the preference for FDI over licensing by firms as a strategy to enter foreign markets.
D. the benefits of exercising protectionism coupled with partial embrace of free market approach.
- In the 1960s, RCA licensed its leading-edge color television technology to a number of Japanese companies, which later took over the market. This demonstrates that licensing:
A. is a better alternative to help companies from emerging economies to enhance their competitiveness and achieve growth.
B. subscribes to the open source ideology which aids the development of technology unencumbered by market dynamics and fluctuations.
C. may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
D. does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
- According to internalization theory, one of the drawbacks of licensing is that:
A. it may result in a firm’s technological know-how being restricted to a limited knowledge base and stifles any future development.
B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
C. when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.
D. a firm’s competitive advantage is based entirely on its products with management, marketing, and manufacturing capabilities playing nominal roles.
- The strategic behavior theory seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of _____ between firms in the global marketplace.
A. strategic trade
B. technological exchange
C. strategic rivalry
D. corporate espionage
- An industry composed of a limited number of large firms is referred to as a(n):
A. syndicate.
B. monopoly.
C. oligopoly.
D. mushrooming industry.
- A critical competitive feature of oligopolistic industries is the _____ of the major players.
A. lack of interaction
B. collaboration
C. cooperation
D. interdependence
- If one firm in an oligopolistic industry cuts prices, its competitors:
A. will make profits.
B. will also respond with similar price cuts.
C. will correspondingly raise prices.
D. will fill the gap by capturing market share.
- The interdependence between firms in an oligopoly leads to _____.
A. trade wars
B. lowered supply
C. imitative behavior
D. higher demand
- A(n) _____ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.
A. monopoly
B. oligopoly
C. cartel
D. multipoint competition
- The idea behind multipoint competition is to ensure that:
A. a rival does not dominate one market and use the profits from there to drive competitive attacks elsewhere.
B. the competitors cooperate with each other to establish a duopolistic regime, in much the same way as Boeing and Airbus have done in the aircraft industry.
C. no other competitors can enter the market unless they resort to licensing or franchising with the initial pioneers.
D. the main competitors can incubate growing technologies or business methods in new markets and transfer the gains to established markets.
- If Kodak enters a particular market, Fuji is not far behind, and vice versa. Kodak and Fuji are:
A. FDI pioneers.
B. first-movers.
C. global partners.
D. multipoint competitors.
- According to Raymond Vernon, firms that have pioneered a product undertake FDI in other advanced countries when:
A. the product is saturated in markets in the developing world.
B. they wish to dump excessive production capacity in foreign markets.
C. product standardization gives rise to price competition and cost pressures.
D. local demand in those countries grows large enough to support local production.
- According to the product life-cycle theory, pioneering firms shift production to _____ countries when product standardization and market saturation give rise to price competition and cost pressures.
A. other advanced countries
B. industrialized
C. developing
D. free market
- Xerox first introduced the photocopier into the U.S. market, and then set up production facilities in Japan and Great Britain. This pattern of FDI is explained by the:
A. internalization theory.
B. paradigm of pragmatic internationalism.
C. absolute advantage theory.
D. product life-cycle theory.
- Which of the following theories concerning FDI ignores alternatives such as exporting and licensing and fails to identify when it is profitable to invest abroad?
A. Investment theory
B. Multipoint competition theory
C. Eclectic paradigm
D. Product life-cycle theory
- Which theory helps explain how location factors affect the direction of FDI?
A. The eclectic paradigm
B. The theory of pragmatic nationalism
C. The product life-cycle theory
D. The new trade theory
- Location-specific advantages for a firm are those that arise from:
A. acquiring the home markets of foreign firms that threaten a firm’s domestic market.
B. gaining a commanding position in one market and using them to subsidize competitive attacks in other markets.
C. preferring exporting over licensing in order to retain control over know-how, manufacturing, marketing, and strategy.
D. utilizing resource assets tied to host countries and valuable enough to be combined with the firm’s own unique assets.
- According to Dunning, it makes sense for a firm to locate production facilities in those countries where the cost and skills of local labor is most suited to its particular production processes because:
A. they can thus avoid the pitfall of knowledge “spillovers.”
B. this would ensure goodwill and support from the local community.
C. labor is not internationally mobile.
D. it is part of the social responsibility of businesses.
- Economists refer to knowledge “spillovers” that occur when companies in the same industry are located in the same area as:
A. technology flows.
B. overlaps.
C. corporate espionage.
D. externalities.
- Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world’s major computer and semiconductor companies located close to each other, thus offering the location-specific advantage of:
A. multi-point competition.
B. an oligopoly.
C. first movers.
D. externalities.
- The _____ view of FDI traces its roots to Marxist political and economic theory.
A. radical
B. free market
C. pragmatic nationalism
D. comparative advantage
- In its extreme version, the radical view advances the idea that foreign direct investment can only ever be an instrument of _____, never of _____.
A. cultural impoverishment; national integration
B. economic development; economic domination
C. political division; international peace
D. corruption; democracy
- The radical view propounds the idea that multinational enterprises (MNEs) that already exist in a country should be immediately ______.
A. nationalized
B. derecognized
C. illegalized
D. expatriated
- According to the radical view, which of the following countries would benefit the most from FDI?
A. Host countries
B. Third world countries
C. Less developed FDI destinations
D. Advanced, capitalist home countries
- Which of the following is a reason for the decline in the popularity of the radical view?
A. The rise of communism in Eastern Europe.
B. The generally steady economic growth of those countries that embraced the radical position.
C. The growing belief in many countries which embraced radicalism that FDI can stimulate growth.
D. The strong economic performance of those developing countries that embraced mercantilism.
- The _____ view argues that international production should be distributed among countries according to the theory of comparative advantage.
A. conservative
B. pragmatic nationalism
C. free market
D. radical
- According to the free market view, how does FDI by the MNE increase the efficiency of world economy?
A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.
B. MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale.
C. When an MNE produces products, profits from the investment go abroad, and hence the MNE helps foreign exchange to rotate.
D. A foreign-owned manufacturing plant may import many components from its home country, thus improving the balance of payments of the host country.
- According to the text, which of the following statements regarding the free market view is true?
A. Free market view has been endorsed by fewer countries in the last decade than in the 1990s.
B. No country has adopted the free market view in its pure form.
C. Free market view has helped liberate inward FDI but restrictions on outward FDI have largely remained unaffected.
D. Free market view advances the idea that FDI is beneficial to the host country, but fails to address the benefits of FDI for the home country.
- Britain reserves the right to intervene in FDI by:
A. reserving the right to block foreign takeovers of domestic firms in certain situations.
B. prohibiting FDIs over and above a certain fixed annual amount.
C. nationalizing certain industries that provide essential goods and services.
D. imposing economic sanctions against specific countries.
- According to the pragmatic nationalistic view, many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country’s _____.
A. free trade
B. inward FDI
C. sovereignty
D. balance-of-payments position
- One of the concerns harbored by host nations regarding FDI is that foreign firms will:
A. aggressively court domestic investment.
B. transfer profits to their home countries.
C. take skilled workers out of the country.
D. aggressively compete to invest in the country.
- According to the _____ view, FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs.
A. eclectic
B. free market
C. pragmatic nationalism
D. radical
- The tendency to aggressively court FDI believed to be in the national interest of a country is an aspect of:
A. pragmatic nationalism.
B. the radical view.
C. mercantilism.
D. socialism.
- Until the 1980s, Japan perceived direct entry of foreign (especially U.S.) firms with ample managerial resources into the Japanese markets as detrimental to the development and growth of their own industry and technology, leading Japan to block the majority of applications to invest in Japan. However, there were always exceptions to this policy, where, from the perspective of the Japanese government, the benefits of FDI outweighed the perceived costs. From this, it can be inferred that, Japan adopted the _____ view of FDI.
A. radical
B. free market
C. pragmatic nationalist
D. eclectic
- Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of:
A. adopting a retaliatory stance in bilateral trade.
B. courting FDI believed to be in national interest.
C. adopting a radical stance to FDI.
D. blocking FDI inflows into the country.
- In Europe in 2006, there was a hostile political reaction to the attempted takeover of Europe’s largest steel company, Arcelor, by Mittal Steel, a global company controlled by the Indian entrepreneur Lakshmi Mittal. In mid-2005 China National Offshore Oil Company withdrew a takeover bid for Unocal of the United States after highly negative reactions in Congress about the proposed takeover of a “strategic asset” by a Chinese company. These incidents are evidence to the fact that:
A. FDI flow from developing countries to developed ones is largely unwelcome.
B. developed countries do not feel the need to court FDIs.
C. developed nations, to a far greater extent, are hostile to FDI than developing nations.
D. hostile reactions to inward FDI are not restricted to developing nations.
- Which of the following sets form three of the main benefits of inward FDI for a host country?
A. The resource-transfer effect, the employment effect, and the balance-of-payments effect
B. The labor-transfer effect, the technology effect, and the currency-exchange effect
C. The cultural awareness effect, first-mover advantage effect, and economic development effect
D. The foreign exchange reserves effect, knowledge flow effect, and the reverse resource transfer effect
- A study of FDI by the Organization for Economic Cooperation and Development (OECD) found that foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. According to the text, this finding of the study suggests that:
A. R&D opportunities in less developed countries are more profitable than those in developed countries.
B. foreign firms are transferring, upgrading, or creating new technology in those countries.
C. technology has ensured that R&D is much less skill-intensive than it was two decades ago.
D. developed countries lack the R&D resources and skills required to develop their own indigenous technology.
- Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country, whether those operations are acquired or greenfield developments. This constitutes a benefit of FDI related to _____.
A. employment effects
B. balance-of-payments effects
C. effects on competition
D. resource transfer effects
- Direct effects of FDI on employment in the host country arise when a foreign MNE:
A. brings in managers trained in the latest management techniques from the home country.
B. creates jobs because of increased local spending by employees of the MNE.
C. employs a number of host country citizens.
D. causes local suppliers to hire more people.
- One of the indirect effects of FDI on employment in a host country arises when:
A. a foreign MNE employs a number of host-country citizens.
B. jobs are created because of increased local spending by employees of the MNE.
C. the MNE brings in managers from the home country for its operations.
D. a number of employees of the MNE are deputed in subsidiaries in other countries.
- FDI by Japanese auto companies in the United States has resulted in U.S.-owned auto companies losing market share to their Japanese competitors. This forms the basis for critics of employment benefits of FDI to argue that:
A. jobs created by this FDI have been more than offset by the jobs lost in U.S. auto firms.
B. direct employment effects of FDI are far larger than the indirect effects.
C. majority of employees of an MNE in a host country migrate to more developed countries, thereby bringing down the net employment statistics.
D. most jobs in MNEs are of a contract nature and hence, cannot be counted as actual employment statistics.
- A potentially major negotiating point between an MNE wishing to undertake FDI and the host government is the issue of:
A. level of involvement of host government in top management decisions of the MNE.
B. likely net gain in employment in the host country.
C. technology flow between MNEs and their domestic competitors.
D. use of profits earned in the host country to subsidize competitive attacks elsewhere.
- When FDI takes the form of an acquisition of an established enterprise in the host economy as opposed to a greenfield investment, the immediate effect may be to _____ as the multinational tries to restructure the operations of the acquired unit to improve its operating efficiency.
A. aggressively recruit local personnel
B. install local personnel in key management positions
C. apply for public funding through an initial public offering
D. reduce employment
- When FDI takes the form of an acquisition of an established enterprise in the host economy, research suggests that once the initial period of restructuring is over, enterprises acquired by foreign firms tend to:
A. grow their employment base at a faster rate than domestic rivals.
B. engage in downsizing and retrenchment.
C. reduce their pay scales to match those of local companies.
D. reduce employment to cut costs and control prices.
- _____ accounts are national accounts that track both payments to and receipts from other countries.
A. Greenfield investment
B. Dematerialized
C. Capitalized
D. Balance-of-payments
- In the balance of payments, which of the following records transactions involving the export and import of goods and services?
A. Current account
B. Foreign account
C. Internal account
D. Tariff account
- When a country is importing more goods and services than it is exporting, it is incurring a(n):
A. trade surplus.
B. current account deficit.
C. positive balance of payment.
D. economic recession.
- The only way in which a current account deficit can be supported in the long run is by:
A. borrowing from the IMF.
B. selling assets to foreigners.
C. divesting stock in domestic corporations.
D. purchasing stocks, bonds, and real estate in other countries.
- How does increased competition through FDI in the form of greenfield investments impact the host country?
A. It drives down prices and increases the economic welfare of consumers.
B. It raises retrenchments and unemployment levels.
C. It causes firms to fight for scarce capital investments.
D. It leads to a monopolistic market and unfair pricing.
- Which of the following is a possible adverse effect of FDI on a host country’s balance-of-payments position?
A. A foreign subsidiary exports a substantial number of its outputs abroad.
B. A foreign subsidiary gets a substantial number of its inputs from the host country.
C. Increased competition in the domestic markets.
D. Subsequent outflow of earnings from the foreign subsidiary to its parent company.
- In the context of costs to a host country from FDI, while _____ should increase competition, it is less clear that this is the case with _____ in the host nation.
A. subsidies; tariffs
B. import quotas; local content requirements
C. greenfield investments; acquisitions of established firms
D. mergers with domestic firms; government-backed insurance programs
- Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Such outflows show up as capital outflow on balance-of-payments accounts. Some governments have responded to such outflows by restricting the amount of earnings that can be:
A. repatriated to a foreign subsidiary’s home country.
B. reinvested in the host-market.
C. earned by the foreign subsidiaries.
D. invested in businesses concerning national security and sovereignty.
- Some host countries fear a loss of economic independence through FDI as key decisions that can affect their economies will be made by foreign parents that have no:
A. profitable returns on their investments.
B. economic interest in their host countries.
C. real commitment to their host countries.
D. investment in the education and health of the population.
- According to the text, which of the following is a home-country benefit source to FDI?
A. Home country MNE learns valuable skills from its exposure to foreign markets.
B. It raises the ethnic profile of a country by assimilating a diverse group of employees into production facilities in the home country.
C. It can be assured of reciprocal FDI from the host countries.
D. Migration of skilled labor from host-countries improves the available pool of human resources and creates new jobs.
- According to the text, the most important concerns regarding the costs of FDI for the home-country center on:
A. the balance-of-payments and employment effects of outward FDI.
B. the technology capture effect and the perceived loss of national sovereignty.
C. the reverse-resource transfer effect and the exposure to foreign markets caused by FDI.
D. the import of substantial input from abroad and being held to “economic ransom.”
- With regard to employment effects in home countries, the most serious concerns arise when FDI is seen as a substitute for _____.
A. capital investments
B. licensing
C. domestic production
D. greenfield investments
- Offshore production refers to FDI undertaken:
A. with focus on extractive industries, such as oil and gas.
B. to serve the home market.
C. in shipping industries.
D. in service industries with a large migrant employee base.
- Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. One of the types of risks insurable through these programs is the risk of:
A. substitution of domestic production.
B. domestic competition.
C. poor strategic tie-ups.
D. the inability to transfer profits back home.
- As a further incentive to encourage domestic firms to undertake FDI, many countries have eliminated double taxation of foreign income, or the:
A. taxation of income in both the host country and the home country.
B. tax on the amount of earnings of the firm and tax on interest earned from such earnings.
C. tax on the income of the corporate workforce and the tax on the dividend earned by shareholders.
D. taxation of an MNE’s employee’s salary in both the host- and home-country.
- Which of the following is a home-country policy for limiting outward FDI?
A. Eliminating double taxation of foreign income
B. Manipulating tax rules to encourage their firms to invest at home
C. Withdrawing government-backed insurance programs to local investors
D. Reducing interest rates earned on domestic investments
- To encourage inward FDI, it is increasingly common for governments to:
A. offer tax concessions to firms that invest in their countries.
B. exclude foreign companies from specific industries.
C. require that local investors own significant proportion of the equity.
D. establish control over the behavior of the MNE’s local subsidiary.
- Which of the following is NOT a common incentive that governments offer foreign firms to invest in their countries?
A. Grants or subsidies
B. Ownership restraints
C. Low-interest loans
D. Tax concessions
- Host governments use a range of controls to restrict inward FDI. The two most common are:
A. monetary restraints and prohibition on investing in certain countries.
B. voluntary export restrictions and employment restraints.
C. ownership restraints and performance requirements.
D. tax concessions and government-backed insurance.
- Many services have to be produced where they are sold; hence _____ is not an option.
A. FDI
B. franchising
C. greenfield investment
D. exporting
- In 1995, the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would:
A. liberalize rules governing FDI between OECD states.
B. contain environmental and labor agreements that were binding on the signatories.
C. free signatory states to pick and choose their individual FDI policies.
D. make it legal for signatory states to discriminate against foreign investors.
- In 1995, the OECD initiated talks between its members with the aim of drafting a multilateral agreement on investment (MAI) that would make it illegal for signatory states to discriminate against foreign investors. These talks broke down in early 1998, primarily because _____ refused to sign the agreement.
A. Malaysia and India
B. Germany
C. Japan
D. the United States
- The United States refused to sign the multilateral agreement on investment (MAI) in 1998 because it:
A. would not have allowed restricting foreign television programs and music in the name of preserving culture.
B. contained binding environmental and labor agreements that the U.S. found to be too restrictive.
C. contained too many exceptions that would weaken its powers.
D. would have barred discriminatory taxation of foreign-owned companies.
- Firms for which licensing is not a good option include:
A. low-technology industries.
B. global oligopolies.
C. industries characterized by low cost pressures.
D. industries where transportation costs are high.
- Although it normally involves much longer-term commitments, franchising is essentially the service industry version of:
A. exporting.
B. licensing.
C. foreign direct investment.
D. greenfield investment.
- Which of the following is NOT one of the factors that a party’s bargaining power depends upon when negotiating?
A. Each party’s time horizon.
B. The value each side places on what the other has to offer.
C. The number of people on the negotiation panel.
D. The number of comparable alternatives available to each side.
Essay Questions
- What is meant by the term foreign direct investment? Describe the difference between the flow of foreign direct investment and the stock of foreign direct investment.
- When contemplating FDI, why do firms apparently prefer to acquire existing assets rather than undertake greenfield investments?
- Despite its advantages, FDI has been described as an “expensive” and “risky” international growth strategy. Other things being equal, why is FDI expensive and risky when compared to licensing and exporting?
- When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. Exporting, however, is not without its limitations. Discuss the most common limitations of exporting as compared to FDI.
- Name three reasons why licensing may not be an attractive option.
- What is multipoint competition? What typically occurs when two or more enterprises are multipoint competitors?
- Describe what is meant by the eclectic paradigm? Who is its principal champion? Does this paradigm make sense as a rationale for FDI?
- Describe the three political ideologies relating to foreign direct investment.
- Briefly describe the trends in the ideological shift in attitudes toward FDI as evidenced in countries across the globe.
- Briefly describe on any two main benefits of FDI for a host-country.
- How can governments restrict outward flow of FDI?
- Briefly explain the two most common types of control exercised by host-governments to restrict the inward flow of FDI.
- What has been the role of international organizations in the liberalization of FDI?
- What are the types of industries for which licensing is not a good option?
- What is franchising? With a suitable example, explain how franchising can be a profitable alternative to FDI.
Chapter 07 Foreign Direct Investment Answer Key
True / False Questions
- (p. 242)When a firm exports to a foreign country, foreign direct investment occurs.
FALSE
Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Introduction
- (p. 243)Greenfield investment involves the establishment of a new operation in a foreign country.
TRUE
A greenfield investment is a form of FDI which involves the establishment of a new operation in a foreign country.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Introduction
- (p. 243)The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time.
TRUE
The total accumulated value of foreign-owned assets at a given time is known as the stock of foreign direct investment.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 243)The flow of foreign investment refers to the number of countries a firm is investing in at any given point in time.
FALSE
The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year).
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 243)Executives of foreign firms see FDI as a way of circumventing future trade barriers.
TRUE
Despite the general decline in trade barriers over the past 30 years, business firms still fear protectionist pressures. Executives see FDI as a way of circumventing future trade barriers.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 243)FDI has grown significantly slower than world trade and world output.
FALSE
FDI has grown more rapidly than world trade and world output for several reasons, including the general shift toward democratic political institutions and free market economies.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 243)According to the United Nations, majority of changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment have created a more favorable environment for FDI.
TRUE
According to the United Nations, some 90 percent of the 2,600 changes made worldwide between 1992 and 2008 in the laws governing foreign direct investment created a more favorable environment for FDI.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 245)Historically, most FDI has been directed at the developed nations of the world.
TRUE
Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others’ markets. Most significantly, the U.S. and developed nations of the European Union have been the target for FDI inflows.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 245)Developing nations such as Poland and Ukraine were the largest national recipients of inward investments within the EU in 2007.
FALSE
In 2007, inward investment into the EU reached a record $842 billion, although it fell to $503 billion in 2008. The United Kingdom and France were the largest national recipients.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 246)The inability of Africa to attract greater investment is in part a reflection of the rigid and unchanging economic policy in the region.
FALSE
The inability of Africa to attract greater investment is in part a reflection of the political unrest, armed conflict, and frequent changes in economic policy in the region.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 246)Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like.
TRUE
Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like. Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 245)With developed nations still accounting for the largest share of FDI inflows, FDI into developing nations has steadily decreased over the past decade.
FALSE
Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased. From 1985 to 1990, the annual inflow of FDI into developing nations averaged $27.4 billion. In the mid- to late 1990s, the inflow into developing nations was generally between 35 and 40 percent of the total, before falling back to account for about 25 percent of the total in the 2000-2002 period and then rising to 31 to 40 percent between 2004 and 2008.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 248)The largest source country for FDI is Japan.
FALSE
Since World War II, the United States has been the largest source country for FDI, a position it retained during the late 1990s and early 2000s. Other important source countries include the United Kingdom, France, Germany, the Netherlands, and Japan.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 249)The data suggest the majority of cross-border investment in developing countries is in the form of mergers and acquisitions.
FALSE
The data suggest the majority of cross-border investment is in the form of mergers and acquisitions rather than greenfield investments. However, FDI flows into developed nations differ markedly from those into developing nations. In the case of developing nations, only about one-third of FDI is in the form of cross-border mergers and acquisitions.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 249)Many firms believe that if they do not acquire a desirable target firm, their global rivals will.
TRUE
Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Many firms apparently believe that if they do not acquire a desirable target firm, then their global rivals will.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-01
Topic: Foreign Direct Investment in the World Economy
- (p. 250)Granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit the foreign entity sells is called licensing.
TRUE
Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm’s product in return for a royalty fee on every unit sold.
AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 07-02
Topic: Theories of Foreign Direct Investment
