BUSI 610 Exam Bank Solution Manual Rated A+ (Already Passed)
Two forms of FDI - Answers 1.) company acquiring or merging with a firm in a different country
2.) a firm creating a 'Greenfield' operation in a different country
portfolio investment - Answers when a company enacts in FDI but has no managerial involvement
Why FDI is important to firms - Answers Want control over growth of these foreign markets:
- to gain first mover advantages
- to ward off competitors
- to determine locations for production, advertising, and other related strategic decisions in the firm's
interest
Why has FDI grown more rapidly than world trade? - Answers - Businesses fear protectionist pressures
- FDI is seen as a way of circumventing trade barriers
- The shift toward democratic political institutions and free market economies encourages FDI
- Globalization is prompting firms to ensure they have a significant presence in many regions of the
world
Pros/cons of purchase of assets FDI - Answers Quick entry, local market know-how, local financing may
be possible, eliminate competitor
Pros/cons of new investment FDI - Answers No local entity is available for sale, local financial incentives,
no inherited problems, long lead time to generation of sales
Pros/cons of international joint-venture FDI - Answers Shared ownership with local and/or other non-
local partner, shared risk
Limitations of Licensing - Answers - licensing may result in a firm's giving away valuable technical
knowhow to a potential foreign competitor
- licensing does not give a firm the tight control of manufacturing, marketing, and strategy in a foreign
country that may be required for its profitability
- a problem arises with licensing when the firm's competitive advantage is based not on its products but
on the management, marketing, and manufacturing capabilities that produce products
Advantages of FDI - Answers - can avoid transportation costs or trade barriers associated with exporting
,- a firm will favor FDI over licensing when it wishes to maintain control over its technological know-how,
or over its operations and business strategy, or when the firm's capabilities are simply not amenable to
licensing
MNE - Answers Multi National Enterprise
Host Country FDI Benefits - Answers - Resource Transfer Effects
- Capital
- Technology
- Management Skills
- Employment Effects
- Balance of Payments
- Economic Growth
Costs of FDI to Host Countries - Answers - Can drive out local competitors or prevent their development
- Profits brought home 'hurts' (debit) a host's capital account
- Parts imported for assembly hurt trade balance
- Can affect sovereignty and national defense
Home Country FDI Benefits - Answers - Improves balance of payments for inward flow of foreign
earnings
- Creates a demand for exports
- Export demand can create jobs
- Increased knowledge from operating in a foreign environment
- Benefits the consumer through lower prices
- Frees up employees and resources for higher value activities
Home country problems with FDI - Answers - Negative effect on Balance of Payments
- Initial capital outflow
- MNC uses foreign subsidiary to sell back to home market
- MNC uses foreign subsidiary as a substitute for direct export
- Potential loss of jobs
, Regional Economic Integration - Answers Agreements among geographically proximate countries to
reduce/remove tariff and non-tariff barriers
Levels of Economic Integration - Answers Free Trade Area (NAFTA is here)
Customs Union
Common Market
Economic Union (EU 2003 is between these two)
Political Union
NAFTA
ASEAN
EFTA
CARICOM
SADC
MERCUSOR
EU
ECOWAS - Answers - North American Free Trade Agreement
- Association of Southeast Asian Nations
- European Free Trade Association
- Caribbean Community and Common Market
- Southern African Development Community
- Mercado Común del Sur
- European Union
- Economic Community of West African States
Free Trade Area - Answers No barriers to trade among member countries
ex: NAFTA, EFTA
Customs Union - Answers - No trade barriers among member countries
- Member countries have a common external trade policy
Two forms of FDI - Answers 1.) company acquiring or merging with a firm in a different country
2.) a firm creating a 'Greenfield' operation in a different country
portfolio investment - Answers when a company enacts in FDI but has no managerial involvement
Why FDI is important to firms - Answers Want control over growth of these foreign markets:
- to gain first mover advantages
- to ward off competitors
- to determine locations for production, advertising, and other related strategic decisions in the firm's
interest
Why has FDI grown more rapidly than world trade? - Answers - Businesses fear protectionist pressures
- FDI is seen as a way of circumventing trade barriers
- The shift toward democratic political institutions and free market economies encourages FDI
- Globalization is prompting firms to ensure they have a significant presence in many regions of the
world
Pros/cons of purchase of assets FDI - Answers Quick entry, local market know-how, local financing may
be possible, eliminate competitor
Pros/cons of new investment FDI - Answers No local entity is available for sale, local financial incentives,
no inherited problems, long lead time to generation of sales
Pros/cons of international joint-venture FDI - Answers Shared ownership with local and/or other non-
local partner, shared risk
Limitations of Licensing - Answers - licensing may result in a firm's giving away valuable technical
knowhow to a potential foreign competitor
- licensing does not give a firm the tight control of manufacturing, marketing, and strategy in a foreign
country that may be required for its profitability
- a problem arises with licensing when the firm's competitive advantage is based not on its products but
on the management, marketing, and manufacturing capabilities that produce products
Advantages of FDI - Answers - can avoid transportation costs or trade barriers associated with exporting
,- a firm will favor FDI over licensing when it wishes to maintain control over its technological know-how,
or over its operations and business strategy, or when the firm's capabilities are simply not amenable to
licensing
MNE - Answers Multi National Enterprise
Host Country FDI Benefits - Answers - Resource Transfer Effects
- Capital
- Technology
- Management Skills
- Employment Effects
- Balance of Payments
- Economic Growth
Costs of FDI to Host Countries - Answers - Can drive out local competitors or prevent their development
- Profits brought home 'hurts' (debit) a host's capital account
- Parts imported for assembly hurt trade balance
- Can affect sovereignty and national defense
Home Country FDI Benefits - Answers - Improves balance of payments for inward flow of foreign
earnings
- Creates a demand for exports
- Export demand can create jobs
- Increased knowledge from operating in a foreign environment
- Benefits the consumer through lower prices
- Frees up employees and resources for higher value activities
Home country problems with FDI - Answers - Negative effect on Balance of Payments
- Initial capital outflow
- MNC uses foreign subsidiary to sell back to home market
- MNC uses foreign subsidiary as a substitute for direct export
- Potential loss of jobs
, Regional Economic Integration - Answers Agreements among geographically proximate countries to
reduce/remove tariff and non-tariff barriers
Levels of Economic Integration - Answers Free Trade Area (NAFTA is here)
Customs Union
Common Market
Economic Union (EU 2003 is between these two)
Political Union
NAFTA
ASEAN
EFTA
CARICOM
SADC
MERCUSOR
EU
ECOWAS - Answers - North American Free Trade Agreement
- Association of Southeast Asian Nations
- European Free Trade Association
- Caribbean Community and Common Market
- Southern African Development Community
- Mercado Común del Sur
- European Union
- Economic Community of West African States
Free Trade Area - Answers No barriers to trade among member countries
ex: NAFTA, EFTA
Customs Union - Answers - No trade barriers among member countries
- Member countries have a common external trade policy
