International Economics

Part 3. International movement of production factors and MNCs

Revision
Questions
1. Portfolio investments refer primarily to:
a. direct investments
b. bonds
c. liquid assets
d. short-term assets
2. Prior to World War 1, majority of foreign investments were in the following form:
a. direct investments
b. portfolio investments
c. horizontal integration
d. remittances
3. To buy a foreign firm is referred to as a(n):
a. Outsourcing.
b. Greenfield investment.
c. Acquisition
d. Licensing agreement
4. Which of the following is considered as international investment?
a. Export goods and services
b. Remittances from oversea residents.
c. Buy a firm overseas
d. Capital funded by an NGO of a foreign country
5. Prior to World War 1, most of foreign investments were in the forms of
a. greenfield investments
b. M&A
c. horizontal integration
d. portfolio investments.
6. Prior to World War 1, the largest home country of foreign investments was
a. China
b. United States of America
c. United Kingdom
d. Japan
7. Portfolio investors may face the risk of
a. wage adjustment in labor market
b. price variability in commodity market
c. bankruptcy and variability in market value.
d. all the above
8. Foreign direct investments are facilitated by
a. the rapid improvement of transportation and telecommunication.
b. high rate of returns on capital abroad
c. low labor cost in the host country
d. poor natural resources in the home country.

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9. Two-way international direct investments may be explained by
a. advance of industries among nations.
b. risk diversification
c. forward and backward linkages
d. horizontal and vertical integration
10. Reasons for foreign direct investments are to
a. avoid tariff
b. seek for market,
c. seek for resources
d. all the above.
11. Host governments use a range of controls to restrict FDI. The two most common measures
are:
a. ownership restraints and performance requirements.
b. monetary restraints and control on accounts.
c. financial and fiscal incentives.
d. tax concessions and repatriation limitations.
12. Multinational corporations often
a. increase the transfer of technology between nations
b. make it harder for nations to foster activities of comparative advantages
c. always cause political confliction in the host countries where their subsidiaries operate
d. None of the above
13. The existence of MNCs can be reasoned by
a. the comparative advantages of a host nation.
b. the competitive advantages of a global network of production and distribution
c. the comparative advantages of the home country
d. all the above
14. The host country often complains MNCs of
a. tax avoidance.
b. inappropriate technology transfer
c. siphon-off most of their benefits to home country
d. all the above
15. The host countries expect MNCs to bring in the following positive impact
a. siphon-off domestic benefits to home countries
b. tax avoidance through transfer pricing
c. transfer of appropriate technology
d. transfer of obsolete technology.
16. Most of MNCs can ensure the supply of foreign intermediate products and raw materials by
a. vertical integration with their foreign affiliates
b. import from foreign companies
c. inter-firm trade
d. horizontal integration with their foreign affiliates
17. By horizontal integration, MNCs can
a. exploit and retain control over their monopoly power
b. ensure the product quality
c. adapt their products to the local conditions and taste
d. all the above

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18. Foreign affiliates of MNCs are NOT usually supplied by the parent firms with the following
a. technology
b. managerial expertise
c. labor force
d. marketing organization
19. Artificially overpricing components delivered to an affiliate in tax-high nation and
underpricing products delivered from an affiliate in tax-high nation helps MNCs to
a. minimize tax bills
b. reduce prices
c. reduce production cost
d. increase production cost
20. MNCs’ artificially overpricing components delivered to an affiliate in tax-high nation and
underpricing products delivered from an affiliate in tax-high nation is called
a. intra-firm transfer of inputs
b. inter-firm transfer of outputs
c. transfer pricing
d. transfer production cost.
21. Which of the followings are NOT three of the main benefits of inward FDI for a host country
EXCEPT?
a. The capital-transfer effect, the overseas remittance effect, and the currency exchange
effect.
b. The cultural effect, imperial domination effect, and economic domination effect.
c. The industrial monopoly effect, national sovereignty effect, and the reverse resource
transfer effect.
d. The resource-transfer effect, the human development effect, and the linkage effect.
22. Which of the followings is a risk/problem associated with foreign direct investment?
a. A firm could give away a valuable technological know-how to a potential
competitor.
b. Firms must bear high transaction cost on establishing a facility in a foreign country
where regulations may be different.
c. It creates a risk of a rival getting a commanding position in one market and then using
the profit to subsidize competition in other markets.
d. It becomes unprofitable to ship low value-to-weight ratio products when
transportation costs are high.
23. Foreign investments may affect both host and home countries in regard of the followings
EXCEPT
a. redistribution of domestic income between labor and capital
b. change of terms of trade
c. improvement or difficulties of balance of payment
d. foreign exchange reserve
24. MNCs are in better bargaining power than local firms because of the followings EXCEPT
a. stronger financial position
b. control or manage global production network
c. local market channels
d. improvement the host countries’ human resource and technology capability

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25. Foreign affiliates of MNCs are usually supplied by the parent firms with the followings
EXCEPT
a. technology
b. managerial expertise
c. labor force
d. marketing organization
26. MNCs may cause the following harmfull effects to the host country EXCEPT:
a. loss of sovereign and domestic research activity
b. tax avoidance through transfer pricing
c. transfer of appropriate technology
d. transfer of obsolete technology
27. MNCs’ competitive advantages are based on the followings EXCEPT
a. economies of scale in production, and international market information
b. financing, and research and development (R&D)
c. horizontal and vertical integration
d. comparative advantages of the host countries.
28. Transfer pricing can cause such the following negative impacts on the home countries
EXCEPT
a. erode tax base
b. reduce tax revenue
c. tax avoidance
d. increase tax rate.
29. In case, corporate profit tax rates of the home and the host countries equal, the home country
can NOT collect from MNCs that much tax BUT
a. double tax revenue that the host country can.
b. no tax at all
c. as much as the host country can.
d. half of the tax revenue that the host country can.
30. The figure below illustrates the international movement of capital.

Suppose: Nation 1 owns OA capital stock, Nation 2 owns O’A capital stock
VMPK1 is Nation 1’s curve of value of marginal products of capital
VMPK2 is Nation 2’s curve of value of marginal products of capital
Free international capital movements are allowed.

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a) Capital moved from which country to which country? ……………..
b) Before the international movement of capital, Nation 1 and Nation 2 invest their entire capital
stock domestically, rate of return on capital in Nation I and Nation II are respectively denoted by
the length of……………..
c) After the free international capital movement that equalizes returns on capital (or VMPK) in
both Nations, rate of return on capital in Nation I is changed by………………

31. The figure below illustrates the international movement of capital.

Suppose: Nation 1 owns OA capital stock, Nation 2 owns O’A capital stock
VMPK1 is Nation 1’s curve of value of marginal products of capital
VMPK2 is Nation 2’s curve of value of marginal products of capital
Free international capital movements are allowed.

a) After the free international capital movement that equalizes returns on capital (or VMPK) in
both Nations, rate of return on capital in Nation II is changed by…………..
b) After the international movement of capital of AB that equalizes the yields on capital in both
Nations, change of income to Nation 1‘s owners of noncapital factors is denoted by the area
of……………..
c) After the international movement of capital of AB that equalizes the yields on capital in both
Nations, change of income to Nation 2‘s owners of capital is denoted by the area of………….
d) After the international movement of capital of AB that equalizes returns on capital in both
Nations, yields for Nation 1’s capital owners is changed by the area of……………
e) After the international movement of capital of AB that equalizes returns on capital in both
Nations, yields for Nation 2’s owners of noncapital factors is changed by the area of………….

32. What is vertical integration (VI) by MNCs? Please explain the goals of IV by MNCs?
Provide an example to illustrate the argument.
33. What is horizontal integration by MNCs? Please explain the goal of horizontal
integration by an MNC? Provide an example to illustrate the goal of the MNC

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34. Why it is said that “risk diversification theory” can explain two-way flow of foreign
portfolio investment? Provide an example to illustrate the argument
35.How can explain two-way flow of FDI? Provide examples to illustrate
36. Supposed that corporate profit tax rates are 25% and 10% in Home and Host country
respectively, and the two countries have signed Anti-Double-Tax Treaty; In case, an MNC
invests in Home country, it can gain profit before tax risk-adjusted at 16%; and in case it
makes FDI in a Host country, it can gain profit before tax risk-adjusted at 20% and then
repatriate the profit after tax. Please use the data to analyze how the MNC ’s FDI affects
Home country’s tax base and revenue? And how it affects the MNC’s tax payment and total
profit?
37. Please explain three negative impacts that MNCs may affect home/host countries; Give
examples
38. Please explain why unskilled labor migration may result in positive and negative
impacts on countries of immigration/of emigration?
39. Please analyze the positive and negative impacts on emigration and immigration
countries of skilled labor migrants
40. Please analyze what are the economic and non-economic reasons, cost and benefits for
migrants?
41. The figure below illustrates total output and welfare effects of international labor migration

Supposed: N1 with a supply of labor of OA, N2 with a supply of labor of O’A.

N1 has a real wage rate of OC; N2 has a real wage rate of O’H
The migration of AB of labor from N1 to N2 equalizes real wage rate in the two countries at EB.

Please define and explain how the international labor migration of AB affects total national
income and income of labor and non-labor owners of Nation 2.

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