Unit 2: Exercises

I. TRUE/FALSE QUESTIONS

1. Portfolio investment is the purchase of physical assets or a significant amount of ownership of a

company in another country to gain a degree of management control. F: FDI
2. There are two main reasons for the rising tide of foreign direct investment flows over the past decade
- globalization and diversity. F: M&A
3. The eclectic paradigm theory states that a company will begin by exporting its products and later under
take FDI as a product moves through its life cycle. F: international product lifecycle
4. In the standardized product stage, a good is produced in the home country because of uncertain
domestic demand and to keep the production close to the research department for new development. F: new
5. One common market imperfection in international business is trade barriers. T
6. When a company's specialized knowledge is embodied in its employees, the only alternative to exploit
a market opportunity in another nation is to undertake FDI. T
7. An ownership advantage is the advantage of locating a particular economic activity in a specific
location given its characteristics. F: location adv
8. Vertical integration is the extension of company activities into stages of product ion that provides a
firm's inputs (forward integration) or absorbs its out puts (backward integration). F
9. In foreign direct investment, a 100 percent ownership does not guarantee control for the company. T
10. Benefits of investments by multinationals include increased unemployment, increased tax revenues,
highly skilled workforce training, and transfer of technology. F: decrease
11. Building a subsidiary abroad from the ground up is called a greenfield investment. T
12. Factors that reduce the appeal of purchasing existing facilities include obsolete equipment, poor
relations with workers, and an unsuitable location. T
13. Rationalized production is a system of production in which each of a product's components is produced
in that location in which the cost of producing that component is lowest. T
14. The practice of "following clients" can be expected in industries where many component parts are
obtained from suppliers with whom a manufacturer has a close working relationship. T
15. Governments often intervene in international trade to protect their cultural heritages and jobs;
however, they never intervene in the flow of FDI since it brings jobs to the country. F
16. A country's balance of payment s is a national account that records all payments to entities in other
countries and all receipts coming into the nation. T
17. Any nation's balance of payments consists of two major components- the current account and the past-
due account. F
18. The capital account is a national account that records transactions involving the import and export of
goods and services, income receipts on assets abroad, and income payments on foreign assets inside
the country.
19. A current account deficit occurs when a country exports more goods, services, and income than it
imports.
20. When a country imports more goods, services and income than it exports, it is called a trade deficit.
21. The two main reasons countries intervene in FDI flows are the balance of payments and to obtain
resources and benefits. T
22. One method used by host countries to restrict incoming FDI is ownership restrictions. T
23. Tax incentives and infrastructure improvements are financial incentives used by host countries to
encourage outflow of FDI. F:
24. To limit the effects of outbound FDI on the national economy, home governments may impose
T differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings.

II. MULTIPLE CHOICE QUESTIONS

1. Today, all of these factors of production are internationally mobile except _____
a. labor b. financial capital c. capital equipment. d. land.
2. The purchase of physical assets or a significant amount of ownership of a company in another country
to gain a degree of management control is referred to as _____
a. foreign direct investment. b. portfolio investment. c. mergers. d. vertical integration.
3. Which of these refer to investment that does not involve obtaining a degree of control in a company?
a. Foreign direct investment b. Portfolio investment c. Mergers d. Vertical integration
4. Which of these are main reasons that account for the growth of FDI flows over the past decade?
a. Diversity and telecommunications b. Telecommunications and transportation c. Globalization and
mergers and acquisitions d. Diversity and globalization
5. Which of these refers to the theory stating that a company will begin by exporting its products and later
undertake FDI as a product moves through its life cycle?
a. Eclectic theory b. Market imperfections cycle
c. International product life cycle d. Market power life cycle theory
6. In which of these stages is a good produced in the home country because of uncertain domestic demand
and to keep production close to the research department?
a. The standardized product stage. b. The maturing product stage.
c. The declining product stage. d. The new product stage
7. In the _______ product stage, the company directly invests in production facilities in those countries
where demand is great enough to warrant its own production facilities.
a. standardized b. maturing c. declining d. new
8. During which of these product stages does a company build production capacity in low-cost developing
nations? a. Standardized b. New c. Maturing d. Emerging
9. Which of these is a market imperfection?
a. FDI b. Trade barriers c. Portfolio investment d. Greenfield barrier
10. Which of these theories states that firms undertake FDI when the features of a particular location
combine with ownership and internalization advantages to make a location appealing for investment?
a. Market power b. International product life cycle
c. Market imperfections d. The eclectic theory
11. According to the eclectic theory, which of these advantages must be present for a company to undertake
FDI? a. Location b. Ownership c. Internalization d. AII of these
12. The _____ theory states that a firm tries to establish a dominant market presence in an industry by
undertaking FDI.
a. market power b. eclectic c. market imperfections d. trade barriers
13. Which of these is the extension of company activities into stages of production that provide a firm's
inputs or absorb its outputs?
a. Horizontal integration b. Vertical integration
c. Market penetration d. Collaborative diversification
14. A complete ownership of a business in another country
a. guarantees profits. b. does not count as FDI.
c. does not guarantee control. d. guarantees government support.
15. All of these are benefits of investments by multinationals except _____.
a. transfer of technology. b. decreased tax revenues.
c. decreased unemployment. d. training to create a more highly skilled workforce.
16. Building a subsidiary abroad from the ground up is called a (n)
a. portfolio investment. b. vertical integration investment
c. acquisition. d. greenfield investment.
17. Which of these factors reduce the appeal of purchasing existing facilities?
a. Obsolete equipment b. Unsuitable location c. Poor relations with workers d. All of these.
18. A system of production in which each of a product's components are produced in that location in which
component is lowest is called
a. rationalized production. b. the greenfield investment
c. centralized production. d. the market power production.
19. Which of these represent a country's national account that records all payments to entities in other
countries and all receipts coming into the nation?
a. Balance of payments b. Trade deficit c. Capital account d. Current account
20. A nation's balance of payments consists of two major components: ____account and _____ account.
a. current ; past-due b. capital; fixed c. current; capital d. merchandise; services
21. Which of these records transactions involving the import and export of goods and services, income
receipts on assets abroad, and income payment on foreign assets ins ide the country?
a. Income receipts account b. Capital account c. Income payments account d. Current account
22. Which of these occurs when a country exports more goods, services and income than it imports? a. A
current account deficit b. A capital account surplus c. A current account surplus d. A capital account deficit
23. Which of these is a national account that records transactions involve the purchase or sale of assets?
a. Current account b. Merchandise account c. Service account d. Capital account
24. Which of these is a reason for host country intervention in FDI flows?
a. It sends resources out of the home country b. Loss of jobs
c. Balance-of -payments d. Loss of technology to other countries
25. Reasons for home nations to discourage outflows of FDI include all of these except ____.
a. investing in other nations sends resources out of the home country. b. loss of jobs at home.
c. it may destroy the "sunset" industries. d. it may damage a nation's balance of payments.
26. Which of these methods can a host county use to restrict incoming FDI?
a. Differential tax rate b. Sanctions c. Flexible ownership requirement d. Performance demands
27. When a country provides tax breaks and low- interest loans, it is using which of these to encourage
inflows of FDI?
a. Financial incentives b. Sanctions c. Infrastructure improvements d. Performance demands

III. SHORT-ANSWER QUESTIONS

1. The purchase of physical assets or a significant amount of ownership of a company in another country
to gain a degree of management control is called ______.
2. ______ is an investment that does not involve obtaining a degree of control in a company.
3. The_____ theory states that a company will begin by exporting its product and later undertake foreign
investment as a product moves through its life cycle.
4. The _____ states that firms undertake foreign direct investment when the features of a particular
location combine with ownership and internalization advantage to make a location appealing for
investment.
 5. The advantage of locating a particular economic activity in a specific location because of the
characteristics of that location is called ______.
6. An ______ is the advantage that arises from internalizing a business activity rather than leaving it to a
relatively inefficient market.
7. The extension of company activities into stages of production that provide a firm's inputs or absorb its
output is called ______.
8. The _____ theory states that a firm tries to establish a dominant market presence in an industry by
undertaking foreign direct investment.
9. The benefit of ______ is greater profit because the firm is far better able to dictate the cost of its inputs
and /or the price of its outputs.
10. The _____ refers to building a subsidiary abroad from the ground up.
11. A system of production in which each of a product's components is produced in that location in which
the cost of producing the component is lowest is called ______.
12. A country's _____ is a national account that records all payments to entities in other countries and all
receipts coming into the nation.
13. The _____ is a national account that records transactions involving the import and export of goods and
services, income receipts on assets abroad, and income payments on foreign assets inside the country.
14. When a country imports more goods, services, and income than it exports, it is called a ____.
15. A ____ occurs when a country exports more goods, services, and income than it imports.
16. The ______ is a national account that records transactions that involve the purchase or sale of assets.
17. _______ influence how international companies operate in host nations.
18. ______ prohibit non-domestic companies from investing in certain industries or owning certain types
of businesses.

1. FDI
2. PI
3.
4. electric theory
5. Loacation Adv
6. internalization adv
7. vertical integration
8. market power
9. market power
10. greenfield investment
11. rationalized production
12. balance of payments
13. current account
14. current account deficit
15. ...................surplus
16. capital acc
17. performance demands
18. ownership restriction