Global Business International Edition 2nd Edition by Mike Peng – Test Bank
Chapter 6—
Investing Abroad Directly
TRUE/FALSE
1. FPI refers to investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets. ANS: T PTS: 1 DIF: Easy OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management 2. A type of FDI in which the firm moves upstream or downstream in different value chain stages in a host country is called horizontal FDI. ANS: F PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 3. Vertical FDI refers to producing the same products or offering the same services in a host country as firms do at home. ANS: F PTS: 1 DIF: Easy OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 4. FDI stock refers to accumulation of inbound FDI in a country or outbound FDI from a country. ANS: T PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Communication; Tier 2 Creation of Value 5. FDI flow means FDI moving out of a country in a year. ANS: F PTS: 1 DIF: Difficult OBJ: 6.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Creation of Value 6. Downstream vertical FDI refers to using FDI in an earlier activity in the value chain. ANS: F PTS: 1 DIF: Difficult OBJ: 6.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Creation of Value 7. Internalization refers to the replacement of cross-border markets (such as importing and exporting) with one firm (the MNE) locating in two or more countries. ANS: T PTS: 1 DIF: Moderate OBJ: 6.2 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 8. The resource-based view argues that recent expansion of FDI is indicative of generally friendlier policies, norms, and values associated with FDI. ANS: F PTS: 1 DIF: Difficult OBJ: 6.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Legal Responsibilities 9. An external market transaction in which firms buy and sell technology is called market imperfections. ANS: F PTS: 1 DIF: Moderate OBJ: 6.2 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 10. The benefit of ownership lies in the combination of equity ownership rights and management control rights. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management 11. Obsolescing bargains refers to the requirements of a deal previously struck between an MNE and a home government is changed after the initial FDI entry. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 12. Markets governed by rules, regulation, and norms are designed to reduce costs associated with doing business. ANS: T PTS: 1 DIF: Easy OBJ: 6.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Legal Responsibilities 13. International transactions are generally as effective as those governing domestic transactions. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 14. A political view that is hostile to FDI is called horizontal FDI. ANS: F PTS: 1 DIF: Difficult OBJ: 6.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Legal Responsibilities 15. FDI may be viewed as a reflection of firm motivation to extend firm-specific capabilities abroad and their responses to overcome imperfections and failures. ANS: T PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 16. Between the 1950s and the early 1980s, the radical view was influential throughout Africa, Asia, Eastern Europe, and Latin America. ANS: T PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence 17. Most countries practice a totally “free market” view. ANS: F PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Communication; Tier 2 Legal Responsibilities 18. Brazil, China, India, Hungary, Russia, and Ireland have adopted more FDI-friendly policies. ANS: T PTS: 1 DIF: Easy OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 19. Capital outflow can help improve a host country’s balance of payments. ANS: F PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 20. FDI creates jobs both directly and indirectly. ANS: T PTS: 1 DIF: Easy OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Creation of Value 21. Repatriated earnings from profits is a host country benefit. ANS: F PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 22. During negotiation, the MNE usually is not willing to enter in the absence of some government assurance of property rights and incentives. ANS: T PTS: 1 DIF: Difficult OBJ: 6.5 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 23. In the 1960s, Europeans were concerned about the massive US FDI in Europe. ANS: T PTS: 1 DIF: Moderate OBJ: 6.5 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence 24. Government tactics include removing incentives, demanding a higher share of profits and taxes, and confiscating foreign assets. ANS: T PTS: 1 DIF: Moderate OBJ: 6.5 NAT: AACSB: Tier 1 Analytic; Tier 2 Legal Responsibilities 25. If a firm is searching for the best “hot spots” for innovations, certain low-cost locations that do not generate sufficient innovations will not become very attractive. ANS: T PTS: 1 DIF: Moderate OBJ: 6.6 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Creation of Value 26. Technology spillover is the domestic diffusion of foreign technical knowledge and processes. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 27. Technology spillovers are harmful to domestic firms and industries. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 28. MNEs are able to coordinate cross-border activities better with intrafirm trade. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 29. The replacement of cross-border markets (such as exporting and importing) with one firm locating and operating in two or more countries is called internationalization. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 30. Dissemination risk is the risk of unauthorized diffusion of firm-specific know-how. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 31. One of the location advantages is agglomeration. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 32. Intrafirm trade happens between two MNEs in the same country. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 33. Oligopoly happens when the industry is dominated by one company. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 34. MNEs encounter sunk costs when they face obsolescing bargain. ANS: T PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 35. Horizontal FDI outsources final assembly to a foreign country. ANS: F PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy MULTIPLE CHOICE 1. A type of FDI in which firms moves upstream or downstream in different value chain stages in a host county is identified as: a. Horizontal FDI b. Radical FDI c. Vertical FDI d. FDI flow ANS: C PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 2. Which of the following statements is correct? a. Stock is a total accumulation of inbound FDI in a country or outbound FDI from a country. b. MNEs are firms that engage in FDI. c. FDI refers to directly investing in activities that control and manage value creation in other countries. d. All of these answers are correct. ANS: D PTS: 1 DIF: Easy OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 3. The amount of FDI moving in a given period in a certain direction is: a. Downstream vertical FDI b. Upstream vertical FDI c. Horizontal FDI d. FDI inflow ANS: D PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 4. Non-MNE firms can also do business abroad by: a. Licensing and franchising b. Outsourcing and engaging in FDI c. Exporting and importing d. All of these answers ANS: D PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 5. The possibility of unauthorized diffusion of firm-specific know-how is called: a. Dissemination risk b. Knowledge spillover c. Agglomeration d. Oligopoly ANS: A PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 6. If BMW chooses to sell its technology to a Chinese firm for a fee, it would be an example of: a. Ownership advantage b. Location advantage c. Licensing d. Market imperfection ANS: C PTS: 1 DIF: Moderate OBJ: 6.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Group Dynamics 7. MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI refer to: a. Location advantage b. Ownership advantage c. Internalization d. Market imperfections ANS: B PTS: 1 DIF: Easy OBJ: 6.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 8. Firms prefer FDI to licensing because: a. FDI reduces dissemination risks. b. FDI provides tight control over foreign operations. c. FDI facilitates the transfer of implicit knowledge through “learning by doing.” d. All of these answers ANS: D PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 9. When entering foreign markets, basic entry choices include: a. Exporting and importing b. Exporting and FDI c. Exporting and licensing d. Exporting, licensing, and FDI ANS: D PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 10. Knowledge that can be written down and transferred without losing much of its richness is known as: a. Explicit b. Implicit c. Valid d. Legible ANS: A PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Communication; Tier 2 Creation of Value 11. Prague is an attractive site as MNE’s regional headquarters for Eastern Europe, is example of: a. Knowledge spillovers b. Location advantage c. Industry demand d. None of these answers ANS: B PTS: 1 DIF: Easy OBJ: 6.3 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence 12. Agglomeration advantages stem from: a. Knowledge spillovers among closely located firms that attempt to hire individuals from competitors. b. Industry demand that creates a skilled labor force whose members may work for different firms without having to move out of the region. c. Industry demand that facilitates a pool of specialized suppliers and buyers also located in the region. d. All of these answers ANS: D PTS: 1 DIF: Difficult OBJ: 6.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 13. When one firm enters a foreign country through FDI, its rivals are likely to follow by undertaking additional FDI in a host country to: a. Acquire location advantages themselves b. Neutralize the first mover’s location advantages c. Overcome and combat market failure through FDI d. Acquire location advantages and overcome and combat market failure through FDI ANS: D PTS: 1 DIF: Difficult OBJ: 6.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 14. Based on resource and institution based views, FDI is a reflection of: a. Firms’ responses to overcome market imperfections and failures. b. Firms’ motivation to extend firm-specific capabilities abroad. c. Both firms’ responses to market imperfections and their motivation to extend firm-specific capabilities abroad. d. International trade between two subsidiaries in two countries controlled by the same MNE ANS: C PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Creation of Value 15. Between the 1950s and the early 1980s, the radical view was influential throughout: a. Europe b. Asia c. Central and Latin America d. Eastern Europe, Asia, and Latin America ANS: D PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Diversity; Tier 2 Legal Responsibilities 16. ____ suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantage by specializing in the production of certain goods or services. a. The radical view b. The free-market view c. Pragmatic nationalism d. Expropriation ANS: B PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Legal Responsibilities 17. Most countries practice: a. Pragmatic nationalism b. Free-market based FDI c. Government embracing radical view d. French patriotism ANS: A PTS: 1 DIF: Easy OBJ: 6.4 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 18. Since the 1980s, countries such as Brazil, China, Hungary, India, and Russia have adopted: a. Economic patriotism b. FDI-friendly policies c. A radical view d. A strictly free-market view ANS: B PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence 19. A political view that approves FDI only when its benefit outweighs its costs is known as: a. A free-market view b. The radical view c. Pragmatic nationalism d. Economic patriotism ANS: C PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Legal Responsibilities 20. Which of the following statements is correct? a. Capital inflow can help improve a host country’s balance of payments. b. Technology, especially more advanced technology from abroad, can create technology spillovers. c. FDI creates jobs directly and indirectly. d. All of these answers are correct. ANS: D PTS: 1 DIF: Difficult OBJ: 6.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 21. The primary costs of FDI to host countries are: a. Loss of sovereignty and patriotism b. Adverse effects on competition and exports c. Capital outflow d. Loss of sovereignty, adverse effects on competition, and capital outflow ANS: D PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 22. What are the benefits of FDI to home countries? a. Repatriated earnings from profits from FDI. b. Increased exports of components and services to host countries. c. Learning via FDI from operations abroad. d. All of these answers ANS: D PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 23. Costs of FDI to home countries primarily center on: a. Capital loss b. Job loss c. Capital and job loss d. Firm’s bankruptcy ANS: C PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management 24. Government tactics that include removing incentives, demanding a higher share of profits and taxes, and confiscating foreign assets are known as: a. Expropriation b. Compromises c. Obsolescing bargains d. Conflicting interests ANS: A PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Communication; Tier 2 Legal Responsibilities 25. Which debate focuses on whether recent anti-FDI incidents represent mere aberrations in the large environment of having FDI friendlier policies or represent some routine occurrences in the future? a. FDI versus outsourcing b. Facilitating versus confronting inbound FDI c. Disinvestment versus FDI d. Managing FDI in globalizing economies debate ANS: B PTS: 1 DIF: Difficult OBJ: 6.5 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 26. Knowledge that is noncodifiable and its acquisition and transfer requires hands-on practice is known as: a. Explicit b. Implicit c. Valid d. Legible ANS: B PTS: 1 DIF: Difficult OBJ: 6.5 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 27. ____ treats FDI as an instrument of imperialism and a vehicle for exploiting domestic resources and people by foreign capitalists and firms. a. Economic patriotism b. FDI-friendly policies c. A radical view d. A free-market view ANS: C PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence 28. ____ is the amount of FDI moving in a given period in a certain direction. a. horizontal FDI b. radical FDI c. vertical FDI d. FDI flow ANS: D PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 29. ____ is the total accumulation of inbound FDI in a country and outbound FDI from a country. a. FDI stock b. FDI flow c. vertical FDI d. horizontal FDI ANS: A PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 30. Using FDI in an earlier activity in the value chain is: a. Downstream vertical FDI b. Upstream vertical FDI c. FDI flow d. horizontal FDI ANS: B PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 31. Downstream vertical FDI means using FDI in a(an) ____ in the value chain a. Earlier activity b. Later activity c. Horizontal activity d. Assembly activity ANS: A PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 32. ____ refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two ore more countries. a. Internationalization b. Internalization c. Licensing d. Dissemination ANS: B PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 33. FDI essentially transforms the international trade between two independent firms in two countries to ____ between two subsidiaries in two countries controlled by the same MNE. a. Intrafirm trade b. Licensing trade c. Direct trade d. Informal trade ANS: A PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 34. Which of the following underscores the important role MNEs play in stimulating competition in host countries. a. Demonstration effect b. Contagion effect c. Imitation effect d. All of these answers ANS: D PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 35. ____ is the ability to extract favorable outcome from negotiations due to one party’s strengths. a. Bargaining power b. Obsolescing bargain c. Expropriation d. Internalization ANS: A PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy ESSAY 1. Differentiate the primary characteristics of horizontal and vertical FDI. ANS: There are two main types of FDI: horizontal and vertical. A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country is known as horizontal FDI. Overall, horizontal FDI refers to producing the same products or offering the same services in a host country as firms do at home. A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country is known as vertical FDI. The type of vertical FDI a firm engages in depends on which direction in moves in its value chain. PTS: 1 DIF: Moderate OBJ: 6.1 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 2. Why do firms prefer FDI to licensing? ANS: FDI affords a high degree of direct management control that reduces the risk of firm-specific resources and capabilities being opportunistically taken advantage of. One of the leading risks abroad is dissemination risk, defined as the risk associated with unauthorized diffusion of firm-specific knowledge. FDI reduces dissemination risks because it provides more direct and tighter control over foreign operations. Without FDI, foreign firms cannot order or control its licensee to move ahead. Finally, FDI facilitates the transfer of implicit knowledge through “learning by doing.” Certain knowledge calls for FDI as opposed to licensing. PTS: 1 DIF: Difficult OBJ: 6.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 3. Explain the location advantages of FDI. Discuss the value of acquiring and neutralizing location advantages with an example that highlights how a location advantage does not necessarily overlap a country-level advantage. ANS: Location advantages arise from the clustering of economic activities in certain locations, referred to as agglomeration. Agglomeration advantages stem from: 1. Knowledge spillovers among closely located firms that attempt to hire individuals from competitors. 2. Industry demand that creates a skilled labor force whose members may work for different firms without having to move out of the region. It is important to recognize that location advantages refer to advantages a firm obtains when operating in one geographic location due to its firm-level advantages. When you consider the resource-based view, there is evidence that location advantages do not entirely overlap a country-level advantage. An example is the development of the Freemont, California, automobile plant. GM ran this plant to the ground, resulting in closure. Then GM and Toyota in a joint venture reopened the facility. The joint venture leveraged the plant’s location advantages by producing award-winning autos. The secret to the success is both parties agreed to be more innovative. PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Communication; Tier 2 Creation of Value 4. Analyze the process of overcoming market failure through FDI. ANS: High transactions costs can result in market failure, meaning the imperfections of the market mechanisms that make transactions prohibitively costly and sometimes prevent transactions from taking place. FDI combats such market failure through internalization. By replacing an external market relationship with a single organization spanning both countries (a process called internalization, transforming the external market with in-house links), the MNE thus reduces cross-border transaction costs and increases efficiencies. In theory, there can be two possibilities: upstream vertical FDI or downstream vertical FDI. In addition, through intrafirm trade, an MNE is able to coordinate cross-border activities better. So as a result, FDI is viewed as a reflection of firm’s motivation to extend form-specific capabilities abroad and their responses to overcome market failures and imperfections. PTS: 1 DIF: Moderate OBJ: 6.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management 5. Identify the benefits and costs of FDI to home countries. ANS: There are three benefits to home countries: 1) Repatriated earnings of profits from FDI 2) Increased exports of components and services to host countries 3) Learning via FDI from operations abroad Costs of FDI to home countries primarily center on capital loss and job loss. Since host countries enjoy capital inflow because of FDI, home countries suffer from some capital outflow. Since host countries enjoy capital inflow of FDI, home countries suffer from the capital outflow. Less confident governments (home) may impose capital controls to prevent or minimize FDI flows. In addition, many MNEs simultaneously invest abroad by adding employment overseas and curtail domestic production by laying off employees. For example, Delphi, which is in bankruptcy, planned to reduce US employment and leave the bulk of production nationally. It is not surprising that restrictions on FDI outflows have resulted in increased by politicians, union members, and social activists. PTS: 1 DIF: Moderate OBJ: 6.4 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 6. What determines the success and failure of FDI around the globe? ANS: First, from a resource-based view, some firms are very good at FDI because they leverage ownership, location, and internalization advantages in a way that is valuable, unique, and hard to imitate by rival firms. Second, from an institution-based view, the political realities either enable or constrain FDI from reaching its full economic potential. The successes and failures of FDI scientifically depend on institutions governing FDI as the” rules of the game.” 1) Carefully assess whether FDI is justified in light of other options such as outsourcing and licensing. 2) Pay careful attention to the location advantages in combination with firm’s strategic goals. 3) Be aware of the institutional constraints governing FDI and enhance legitimacy in host countries. PTS: 1 DIF: Difficult OBJ: 6.6 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 7. Discuss how FDI is not a zero sum game by using the example in the textbook on Intel Bargains with Israel on page 169. Incorporate how these negotiations are characterized by Common interests, conflicting interests, and compromise. ANS: Background Intel began operations in Israel in 1974. By 2000, Intel established a major facility in Southern Israel. Original terms were 32% of the investment for the grant funding. The company benefitted from a previous law, which awarded the company a grant. The law was then changed and the grant was reduced to 20% of the investment for new projects. Common Issues Israel is regarded as high risk due to security risks. Security risk in this country presented not only a risk but also an advantage. Israel continued to make a large investment in security and generated a high-quality workforce. This workforce was appealing to Intel. Israel on the other hand was interested in securing Intel’s further investments with the objective of attracting other MNEs. Therefore, both sides shared a common interest. Conflicting Interests Intel was aware of the new law, which reduced grant monies. Intel was ready to build a new facility in Israel. They asked Israel to specify the amount and level of support the government would commit to. During this time, the new FDI law was reduced to 20%. Intel wanted maximum support and Israel preferred to minimize the support. The issue was that Israel’s government knew that Intel was interested in expansion but also the government wanted to have the flexibility to consider other MNEs. The government had a limited budget and was faced with the opportunity cost of not being able to support other projects should they support Intel with the maximum grant. Negotiations Government of Israel counteroffered with replacing the grant with tax relief. Intel rejected since this would have a negative effect on operational profit based on tax ramifications. Israel responded by offering a grant to be paid against tax payments. This would provide impact on operational profit, allows Intel to reduce capital investment by present value and depreciation. Summary Negotiations were successful since both sides reached a number of compromises. Intel accepted the lower level of support from 32 % to 20% and agreed not to bargain for a cash grant up front. This loss of brand recognition becomes smaller in scope. PTS: 1 DIF: Difficult OBJ: 6.6 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 8. Discuss different political views on FDI. ANS: There are three primary political views on FDI: the radical view, the free market view, and the pragmatic nationalistic view. The radical view treats FDI as an instrument of imperialism and a vehicle for exploiting domestic resources and people by foreign capitalists and firms. Governments embracing the radical view often nationalize MNE assets or simply ban (or discourage) inbound MNEs. The popularity of this view is in decline worldwide, because (1) economic development in these countries was poor in the absence of FDI, and (2) the few developing countries (such as Singapore) that embraced FDI attained enviable growth. The free market view suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. Similar to the win-win logic for international trade as articulated by Adam Smith and David Ricardo, free market-based FDI should lead to a win-win situation for both home and host countries. Most countries practice pragmatic nationalism, considering both the pros and cons of FDI and approving FDI only when its benefits outweigh its costs. Overall, more and more countries in recent years have changed their policies to be more favorable to FDI. Restrictive policies towards FDI succeed only in driving out MNEs to countries with more favorable policies. This openness is indicative of the emerging pragmatic nationalism in their thinking. PTS: 1 DIF: Moderate OBJ: 6.6 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy
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