Ch016 Foreign Direct Investment and CrossBorder Acquisitions.docx
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Ch016 Foreign Direct Investment and CrossBorder Acquisitions.docx
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Ch016ForeignDirectInvestmentandCrossBorderAcquisitions
Eun&Resnick4e
CHAPTER16ForeignDirectInvestmentandCross-BorderAcquisitions
GlobalTrendsinFDI
WhyDoFirmsInvestOverseas?
TradeBarriers
ImperfectLaborMarket
IntangibleAssets
VerticalIntegration
ProductLifeCycle
InternationalFinanceinPractice:
LinearSequenceinManufacturing:
Singer&Company
ShareholderDiversificationServices
Cross-BorderMergersandAcquisitions
PoliticalRiskandFDI
InternationalFinanceinPractice:
DaimlerChrysler:
TheFirstGlobalCarColossus
InternationalFinanceinPractice:
StoriesPastandPresent
Summary
MINICASE:
EnronversusBombayPoliticians
1Undera1981VoluntaryTradeAgreementJapaneseautomobilemanufacturerswerenotallowedtoincreasetheirexportstotheU.S.market.Asaresult:
a)Theyexitedthemarket
b)Hondawasmotivatedtocircumventthetradebarriers.
c)Honda’sFDImayhavebeenpartofanoverallcorporatestrategydesignedtobolstertheircompetitivepositionvis-à-vistheirdomesticrivalssuchasToyota
d)Bothb)andc)
Answer:
d)
2FollowingHonda’sFDIintheU.S.,
a)TheU.S.governmentimposedaVoluntaryTradeAgreementunderwhichJapaneseautomobilemanufacturerswerenotallowedtoincreasetheirexportstotheU.S.market.
b)ToyotaandNissanmadedirectinvestmentsinAmerica
c)SalesofHondasdeclined
d)noneoftheabove
Answer:
b)
3Honda’sdecisiontobuildaplaninOhio
a)WaswelcomedbytheUnitedAutoWorkers
b)WasencouragedbyassistancefromthestateofOhio,includingimprovedinfrastructurearoundtheplantandabatementofpropertytaxes.
c)InvolvedsettingupaspecialforeigntradezonethatallowedHondatoimportautopartsfromJapanatareducedtariffrate.
d)Alloftheabove
Answer:
d)
4
WhenfirmsundertakeFDI,
a)TheybecomeMNCs
b)Theyreducetheirtaxratesincetheycantelleachcountrythattheydobusinessinthattheypaidtheirtaxesinothercountries.
c)Thecanexploitworkersbypayingthembelow-marketwagesindepreciatingcurrencies.
d)Alloftheabove
Answer:
a)
5FDIcantaketheformof:
a)Greenfieldinvestment
b)Cross-borderM&A
c)Establishingnewproductionfacilitiesinaforeigncountry
d)Alloftheabove
Answer:
d)
6TheFordMotorCompanyrecentlyacquiredMazda,aJapaneseautomaker,andJaguar,aBritishautomaker.
a)Thisisanexampleofcross-borderM&A
b)ThiswasaGreenfieldinvestment
c)Botha)andb)
d)Noneoftheabove
Answer:
a)
7AccordingtoarecentUNsurvey,theworldFDIstockgrewatwhatraterelativetoworldwideexportsofgoodsandservices?
a)TheworldFDIstockgrewtwiceasfastasworldwideexportsofgoodsandservices.
b)TheworldFDIstockgrewatthesamerateasworldwideexportsofgoodsandservices.
c)TheworldFDIstockgrewhalfasfastasworldwideexportsofgoodsandservices.
d)Noneoftheabove
Answer:
a)
GlobalTrendsinFDI
8JapanplaysamajorroleasanexporterofFDI.AsarecipientofFDI
a)JapanreceivesasmuchFDIasitexports,makingitamajorplayeronbothfronts.
b)Japanplaysarelativelyminorrole,reflectingavarietyoflegal,economic,andculturalbarrierstoFDI.
c)Japan’sreceiptsofFDIarethirdintheworld
d)Noneoftheabove
Answer:
b)
9
ThethirdmostimportanthostcountryforFDIis
a)TheUnitedStates
b)Japan
c)China
d)Mexico
Answer:
c)
10MNCshaveinvestedinChina
a)Bylowermaterialcosts.
b)Bylowerlaborcosts.
c)ByadesiretopreempttheentryofrivalsintoChina’spotentiallyhugemarket.
d)Alloftheabove
Answer:
d)
11FDIstocks
a)Arethecommonsharesofmultinationalcompaniesthatinvestabroad
b)AremutualfundsthatinvestinFDI
c)Representtheaccumulationofpreviousyear’sFDIflows
d)AtthesumtotalofcurrentyearFDIflows
Answer:
c)
12ThedominantsourceofFDIoutflows
a)Severaldevelopedcountries
b)Afewunderdevelopedcountriesnexttowealthyneighbors,likeMexico
c)AfricaandChina
d)Noneoftheabove
Answer:
a)
WhyDoFirmsInvestOverseas?
13Thekeyfactorsthatareimportantinafirm’sdecisiontoinvestoverseasare:
a)Tradebarriers,imperfectlabormarket,andintangibleassets
b)verticalintegration,productlifecycle,andshareholderdiversificationservices
c)profitmaximization,globalprestige,andcompetition
d)a)andb)
Answer:
d)
14Whydofirmslocateproductionoverseasratherthanexportingfinishedgoods?
a)Shippingcosts
b)Firmsseektoextendcorporatecontroloverseas
c)Imperfectfactormarkets
d)Alloftheabove
Answer:
d)
15
WhilethereisnocomprehensivetheoryofFDI,manyexistingtheoriesemphasize:
a)Imperfectionsinproductmarkets.
b)Imperfectionsincapitalmarkets
c)Imperfectionsinlabormarkets
d)Alloftheabove
Answer:
d)
TradeBarriers
16Internationalmarketsforgoodsandservicesareoftenimperfect.WhichistheMOSTcommonandMOSTimportant?
a)Actsofgovernments.
b)Naturalbarrierslikedistance
c)Culturalbarriers
d)Lackofknowledge
Answer:
a)
17Whydogovernmentsregulateinternationaltrade?
a)Toraiserevenue
b)Protectdomesticindustries
c)Pursueothereconomicobjectives
d)Alloftheabove
Answer:
d)
18Tradebarrierscanarisenaturally.Whichofthefollowingrepresentanaturalbarriertotrade?
a)Transportationcosts
b)Quotas
c)Tariffs
d)Transactionscosts
Answer:
a)
ImperfectLaborMarket
19InapushtoservetheNorthAmericanmarketSamsung,aKoreanfirm,chosetolocateproductionfacilitiesinMexico,mainlybecause
a)OflowerlaborcostsinMexico
b)TocircumventtradebarriersimposedbyNAFTA
c)BecauseofcolderweatherinCanada
d)Noneoftheabove
Answer:
a)
Rationale:
thisiswhatthebooksays,butconsiderpartialcreditforb)
20
Laborservicesinacountrymightbeunderpricedrelativetoproductivitybecause:
a)Workersarenotallowedtofreelymoveracrossnationalboundariestoseekhigherwages.
b)Somecountriesdoabadjobofeducatingtheirworkforce,consequentlytheyarenotveryproductive
c)Insomecountriesthereisashortageofcapitalinvestment.
d)Alloftheaboveareequallyimportant
Answer:
a)
21Factorsofproductionincludeland,labor,capital,andentrepreneurialability.Ofallthefactormarkets,theMOSTIMPERFECTisthe
a)Labormarket
b)Capitalmarket
c)Realestatemarket
d)Marketforentrepreneurialability
Answer:
a)
22Severeimperfectionsinthelabormarketleadto
a)Persistentwagedifferentialsamongcountries
b)Persistentexchangeratevolatilityamongcountries
c)Persistentinterestratedifferentialsamongcountries
d)Noneoftheabove
Answer:
a)
23Severeimperfectionsinthelabormarketarisefromimmobilityofworkersduetoimmigrationbarriers.Asaresponse,firmsshouldconsider
a)Movingtotheworkers.
b)Movingtocountrieswherelaborservicesarethelowestinabsoluteterms.
c)Movingtocountrieswherelaborservicesareunderpricedrelativetoproductivity.
d)Hiringillegalimmigrants.
Answer:
c)
IntangibleAssets
24Coca-Colahasinvestedinbottlingplantsallovertheworldratherthanlicensinglocalfirms
a)Becausetheforeignerscan’tbetrustedtofollowthesecretrecipe.
b)BecauseCoca-Colawantedtoprotecttheformulaforitsfamoussoftdrink.
c)BecauseoftheinternalizationtheoryofFDI
d)Bothb)andc)
Answer:
b)
25
Theboomerangeffect
a)ThepossibilitythatifthesecretformulaofCoca-Colawereleaked,thatotherfirmswouldcomeupwithsimilarproductsandhurtCoca-Cola’ssales.
b)ThepossibilitythatFDIinanundevelopednationwillleadtoagroupofworkerswhohaveenoughmoneytoaffordthefirm’sproducts,leadingtoanincreaseofsalesandincreaseofworkersandsoon.
c)ThepossibilitythatFDIinanundevelopednationwillleadtoagroupofdomesticworkersnolongerhaveenoughmoneytoaffordthefirm’sproducts,leadingtoandecreaseofsales.
d)Noneoftheabove
Answer:
a)
26Inthe1960s,Coca-Cola,whichhadbottlingplantsinIndia,facedstrongpressurefromtheIndiangovernmenttorevealtheCokeformulaasaconditionforcontinuedoperationsinIndia.Asaresult
a)CokeagreedtorevealtheformulatotheIndiangovernment,whichhasmaintaineditasastatesecrettothisday.
b)Insteadofrevealingtheformula,CokewithdrewfromtheIndianmarket.
c)Cokewasabletosuccessfullylobbythegovernmenttowithdrawthisdemand.
d)Noneoftheabove
Answer:
a)
27MNCsmayundertakeoverseasinvestmentprojectsinaforeigncountry,despitethefactthatlocalfirmsmayenjoyinherentadvantages.Thisimpliesthat
a)MNCsaremakingamistakeinthiscaseandwillhavetoeventuallywithdraw
b)MNCsshouldhavesignificantadvantagesoverlocalfirmssuchascomparativeadvantagesduetointangibleassets
c)Thelocalfirmswillnothavetocompeteduetotheirinherentadvantagesovertheforeigners.
d)noneoftheabove
Answer:
b)
28Examplesofintangibleassetsinclude
a)Technological,managerial,andmarketingknow-how
b)SuperiorR&Dcapabilities
c)Brandnames
d)Alloftheabove
Answer:
d)
29Intangibleassetsareoftenhardtopackageandselltoforeigners.
a)Becausetheyusuallydefaultonthecontractsthattheysign
b)Asaresult,thereismoreFDIthantheremightotherwisebe.
c)Becausepropertyrightsinintangibleassetsaredifficulttoestablishandprotect,especiallyinforeigncountrieswherelegalrecoursemaynotbereadilyavailable.
d)b)andc)
Answer:
d)
30
AccordingtotheinternalizationtheoryofFDI
a)Firmsthathaveintangibleassetswithapublicgoodpropertytendtoinvestdirectlyinforeigncountries.
b)Propertyrightsinintangibleassetsaredifficulttoestablishandp
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