Chapter 11 – Governmental Attitudes toward Foreign Direct Investment

 

Multiple Choice Questions

 

WHAT STAKEHOLDERS MUST COMPANIES SATISFY?  WHY IS THIS PROCESS MORE DIFFICULT FOR COMPANIES OPERATING INTERNATIONALLY?

 

1.      To survive, a company ultimately must satisfy all of the following stakeholder groups EXCEPT:

a.      suppliers (moderate, page 322)

b.      stockholders

c.       employees

d.      customers

 

2.      Which of the following groups want additional sales and increased productivity, which result in higher profits and larger returns going to them?

a.       customers

b.      stockholders (easy, page 322)

c.       society at large

d.      government

 

3.      Among the many decisions MNE managers must make are those concerning all of the following EXCEPT:

a.       locations of production, decision making, and R&D

b.      methods of acquisition and operation

c.       labor markets to exploit (moderate, page 322)

d.      markets to serve

 

WHAT FACTORS MAKE IT DIFFICULT TO EVALUATE WHETHER THE OVERALL EFFECTS OF FDI ARE SUFFICIENTLY POSITIVE?

 

4.      All of the following are negative attitudes toward FDIs EXCEPT:

a.       MNEs have inequitable income and power distribution

b.      MNEs debase the environment

c.       MNEs deprive society

d.      MNEs directly affect the national tax rates (moderate, page 322)

 

5.      Proponents of FDIs indicate all of the following EXCEPT:

a.      MNEs lead to higher imports (moderate, page 322)

b.      MNEs lead to higher tax revenues

c.       MNEs lead to higher employment

d.      MNEs lead to higher exports

 

6.      All of the following are variables that complicate cause-effect analysis EXCEPT:

a.       technological developments

b.      cultural values (difficult, page 322)

c.       competitors’ actions

d.      governmental policies

 

7.      MNEs may directly affect all of the following country objectives EXCEPT:

a.       balance-of-payments

b.      growth

c.       laws (moderate, page 322)

d.      employment situations

 

 

 

HOW DOES FOREIGN DIRECT INVESTMENT USUALLY AFFECT THE BALANCE OF PAYMENTS OF A HOST AND HOME COUNTRY IN THE SHORT TERM?  IN THE LONG TERM?

 

8.      Which of the following best describes the concern of countries regarding the capital inflows and outflows resulting from increased FDIs?

a.       The balance-of-payments effect may be positive.

b.      The country’s inflation rate would increase.

c.       The country’s tax rate would increase.

d.      The balance-of-payments effect may be negative. (difficult, page 323)

 

9.      If a country runs a trade deficit, which of the following is TRUE?

a.      The country must compensate for that deficit by receiving an influx of capital. (difficult, page 323)

b.      The country must compensate for that deficit by increasing its reserves.

c.       The country must compensate for that deficit by increasing its labor force.

d.      The country must compensate for that deficit by reducing its taxes.

 

10.    Which of the following does not represent a source of the influx of capital needed to compensate for a trade deficit?

a.       unilateral transfers

b.      appeals for government subsidies (moderate, page 323)

c.       receipt of credit

d.      receipt of foreign investment

 

11.    In general, the more _______________ a country receives, the more it can _______________ and the more it can run a trade deficit.

a.       labor inflow; import

b.      capital inflow; export

c.       capital inflow; import (moderate, page 323)

d.      subsidies, import

 

UNDER WHAT CIRCUMSTANCES WILL AN INFLOW OF FDI MOST LIKELY GENERATE GROWTH?

 

12.    From the standpoint of home countries, restrictions on _______________ reduce future earnings inflows from foreign investments.

a.       capital inflow

b.      labor outflow

c.       labor inflow

d.      capital outflow (moderate, page 327)

 

13.    Most observers agree that an inflow of investment from MNEs can provide countries with all of the following gains EXCEPT:

a.      replace local companies (moderate, page 327)

b.      more optimal use of production factors

c.       use of unemployed resources

d.      upgrading of resource quality

 

14.    FDI is likely to generate growth in all of the following EXCEPT:

a.       when the product or process is highly differentiated

b.      in the more underdeveloped countries (moderate, page 327)

c.       when the foreign investors have access to scarce resources

d.      in the more advanced developing countries

 

15.    Foreign investment in _______________ is _______________ to be simply a substitute for domestic investment.

a.       developing countries; more likely

b.      Socialist economies; more likely

c.       developing countries; less likely (moderate, page 327)

d.      developed economies; less likely

 

UNDER WHAT CONDITIONS MIGHT FOREIGN DIRECT INVESTMENT HURT THE ECONOMY OF A HOST COUNTRY?

 

16.    Countries are concerned that MNEs could be all of the following EXCEPT:

a.       foreign-policy instruments of their home-country government

b.      independent of any government

c.       pawns of their host-country government

d.      suppliers of government subsidies (moderate, page 328)

 

17.    Which of the following is the foremost concern of countries with regard to powerful MNEs?

a.      The MNEs represent foreign-policy instruments of their home-country government. (difficult, page 328)

b.      The MNEs represent independence of any government.

c.       The MNEs represent pawns of their host-country government.

d.      The MNEs represent influential cultural agents.

 

18.    Which of the following statements regarding the negative effects of foreign direct investment on the economy of a host country is FALSE?

a.       Critics argue that MNEs make investments that domestic companies otherwise would have made, thereby displacing potential local entrepreneurs.

b.      The presence of MNEs often decreases the number of local companies in host-country markets because they often have the goal of economic dominance.  (difficult, page 328)

c.       Critics contend that FDI destroys local entrepreneurialism, which has an important effect on national development.

d.      Critics assert that MNEs’ use of local funds reduces the funds that are available to local companies.

 

EXPLAIN AND GIVE EXAMPLES OF EXTRATERRITORIALITY.

 

19.    _______________ occur(s) when a government applies its laws to the foreign operations of its domestic companies.

a.       Privatization

b.      Imitation lag

c.       Extraterritoriality (moderate, page 330)

d.      Country disposition

 

20.    The Act that restricts some foreign subsidiaries from making sales to such countries as Libya, Nicaragua, South Africa, and Vietnam is called the:

a.       Robinson-Patman Act.

b.      Sherman Antitrust Act.

c.       Cuban Democracy Act.

d.      Trading with the Enemy Act. (moderate, page 330)

 

21.    According to the text, which of the following countries signed a number of bilateral treaties with other industrialized countries that call for mutual consultation on restrictive business practices?

a.      The United States (moderate, page 330)

b.      China

c.       France

d.      Germany

 

 

WHAT ARE GOVERNMENT’S POLITICAL AND LEGAL CONCERNS ABOUT MNEs?

 

22.    Host nations’ political concerns include fear of all of the following EXCEPT:

a.       influence over local politics

b.      cultural diversity among developing countries (moderate, page 331)

c.       disruption of local politics

d.      foreign control of sensitive sectors of the local economy

 

23.    Aside from establishing policies that generally restrict the entry of foreign investment, countries have selectively prevented foreign domination of _______________, which affect a large segment of the economy or population by virtue of their size or influence.

a.       natural resources

b.      government subsidies

c.       key industries (moderate, page 331)

d.      unemployed resources

 

24.    Which of the following is not a motive for bribery?

a.       to secure government contracts that otherwise might not be forthcoming at all

b.      to reduce tax liabilities

c.       to keep a competitor from operating in a specific country

d.      to reduce the interest rate (moderate, page 331)

 

WHAT TYPES OF PAYMENTS ARE LEGAL AND ILLEGAL UNDER THE FOREIGN CORRUPT PRACTICES ACT OF THE UNITED STATES?

 

25.    Which of the following Acts makes certain payments to foreign officials illegal?

a.      Foreign Corrupt Practices Act (moderate, page 334)

b.      Robinson-Patman Act

c.       Sherman Antitrust Act

d.      Cuban Democracy Act

 

26.    ____________________ countries agreed not to allow tax deductions for overseas bribes as of 1997.

a.       NAFTA

b.      Organization for Economic Cooperation and Development (moderate, page 334)

c.       European Union

d.      OPEC

 

27.    Which of the following is NOT considered a legal type of payment under the Foreign Corrupt Practices Act (FCPA) of the United States?

a.       facilitation payment

b.      speed money

c.       expropriation  (moderate, page 334)

d.      grease money

 

HOW/WHY DO STAKEHOLDERS CONCERNS RELATE TO COMPANIES DEGREE OF COMMITMENT TO INTERNATIONAL OPERATIONS?

 

28.    _______________ stakeholders are generally unconcerned when a company begins to export.

a.       Host-country

b.      Tri-country

c.       Bilateral

d.      Home-country (moderate, page 337)

 

29.     _______________ stakeholders give much more attention to foreign companies that are wholly owned direct investors than those who share ownership locally.

a.      Host-country (moderate, page 337)

b.      Home-country

c.       Tri-country

d.      Bilateral

 

30.    Which of the following statements regarding the concerns related to companies degree of commitment to international operations is FALSE?

a.       The concern of home-and host-country stakeholders about MNEs’ international operations increases with their international commitment.

b.      Host-country stakeholders are generally unconcerned when a company begins to export, but they are concerned when the company begins producing abroad.  (difficult, page 337)

c.       The need for companies to justify the benefit of their local operations grows in tandem with their international commitments.

d.      Home-country stakeholders become apprehensive when the company begins producing abroad, but are content when a company begins to export. 

 

WHY ARE HOST GOVERNMENTS GENERALLY MORE CONCERNED ABOUT INVESTMENTS BY LARGE THAN ABOUT SMALL COMPANIES?

 

31.    Countries tend to be more concerned about _______________ than _______________ because of their greater potential impact on national economic and political objectives.

a.       small companies; large companies

b.      agricultural companies; nonagricultural companies

c.       large companies; small companies (moderate, page 337)

d.      service companies; manufacturing companies

 

32.    Many governments of _______________ countries prefer the entry of _______________ companies because they may be more willing to yield to host-country wishes.

a.       developed; larger

b.      developing; larger

c.       developed; technological

d.      developing; smaller (moderate, page 337)

 

33.    All of the following are reasons many governments of developing countries prefer the entry of smaller companies EXCEPT:

a.      smaller companies are more likely to offer bribes to government officials than largee companies are (moderate, page 337)

b.      they may be more willing to yield to host-country wishes

c.       increased competition because of their numbers

d.      supply smaller-scale technology more suited to developing countries needs

 

Essay Questions

 

34.    What stakeholders must companies satisfy?  Why is this process more difficult for companies operating abroad?

 

         Answer

Stakeholders include stockholders, employees, customers, and society at large. In the short term, the aims of these groups conflict. Stockholders want additional sales and increased productivity, which result in higher profits and larger returns going to them. Employees want additional compensation. Customers want lower prices. And society at large would like to see increased corporate taxes or corporate involvement in social functions. In the long term, all of these aims must be achieved adequately, or none will be attained at all because each stakeholder group is powerful enough to cause the company’s demise. Management must be aware of these various interests but serve them unevenly at any given period. At one time, gains may go to consumers; at another, to stockholders. Making necessary trade-offs is difficult enough in the domestic environment. However, abroad, where corporate managers are not so familiar with customs and power groups, the problem of choosing the best alternative is compounded—particularly if dominant interests differ among countries.

         (easy, page 322)

 

35.    What factors make it difficult to evaluate whether the overall effects of FDI are sufficiently positive?

 

         Answer

MNEs may affect countries’ balance-of-payments, growth, and employment objectives. Under different scenarios, these effects may be positive or negative for either host or home countries.

 

a.       Home-country gains—Countries want capital inflows because they allow them to increase their imports. However, because FDI brings both capital inflows and outflows, countries worry that the balance-of-payments effect may be negative. Unlike balance-of-payments effects, the effects of MNEs on growth and employment are not necessarily a zero-sum game among countries. The argument that both the home and the host countries may gain from FDI assumes that resources are not necessarily fully employed and that capital and technology cannot be easily transferred from use in one industry to another.

b.      Home-country losses—The United States is the home country for the largest amounts of foreign licensing and direct investment. Therefore, its policies understandably invite criticism. One of its critics is organized labor, which argues that foreign production often displaces what would otherwise be U.S. production. Critics also cite many examples of highly advanced technology that has been at least partially developed through governmental contracts and then transferred abroad. In fact, some MNEs are moving their most advanced technologies abroad and in some cases producing abroad before they do so in the U.S.

c.       Host-country gains—Most observers agree that an inflow of investment from MNEs can initiate greater local development through the employment of unused labor and other resources. A company will want to move resources such as capital and technology abroad when the potential return is high—especially in an area where they are in short supply. Most observers also agree that an inflow of investment from MNEs can initiate an upgrading of resources by educating local personnel to use equipment, technology, and modern production methods.

d.      Host-country losses—Some critics have claimed that there are examples of MNEs making investments that domestic companies otherwise would have undertaken. The result may be the displacement of local entrepreneurs and entrepreneurial drive. Or they may bid up prices by competing with local companies for labor and other resources. Critics also contend that FDI destroys local entrepreneurial drive, which has an important effect on development. Another argument is that investors learn abroad by observing foreign companies closely. This may give them earlier access to technology abroad that they may copy in their home countries. Critics also say that MNEs absorb local capital, either by borrowing locally or by receiving investment incentives.

         (difficult, page 322)

 

36.    Discuss the generalizations of circumstances under which foreign investment is most likely to have a positive impact on the host country.

 

         Answer

a.       Developing countries and developed countries— Developing countries are less likely than developed countries to have domestic firms capable of undertaking investments similar to those in which foreign investors from developed countries engage. Foreign investment in developing countries is therefore less likely to be simply a substitute for domestic investment; it yields more growth than if it were located in developed countries.

b.      Degree of product sophistication—When the foreign investor seeks to produce highly differentiated products or to introduce process technologies, local companies are less likely to undertake similar production on their own. The differentiation may derive from production style, quality, or brand name as well as from technology.

c.       Access to resources—A foreign investor that has access to resources local companies cannot easily acquire is more likely to generate growth than merely to substitute for what local companies would otherwise do. Some of these resources are capital, management skills, and access to external markets.

d.      Degree of development of the developing countries—Foreign investors are more likely to transfer technology and serve as role models for growth in the more economically advanced of the developing countries because they have more of a base to absorb new technology efficiently.

         (difficult, page 327)

 

37.    In a short essay, explain the idea of extraterritoriality.

 

Answer

Extraterritoriality takes place when governments apply their laws to the foreign operations of their domestic companies.  Generally, though, host countries abhor any weakening of their sovereignty over local business practices.  MNEs fear that home-country and host-country laws will conflict, because settlement inevitably must be between governments, with companies caught in the middle.  Laws need not be in complete conflict to trigger charges of extraterritoriality. Home-country laws that require companies to remit earnings or pay taxes at home on foreign earnings certainly have affected companies’ foreign expansion and host governments’ control over such expansion. Although extraterritoriality may result from legal differences between any two countries, and often does, the U.S. has been criticized the most for attempting to control what U.S. companies do abroad.

         (moderate, page 330)

 

38.    What are governments’ principal political and legal concerns about MNEs?

 

         Answer

Because many MNEs are large and powerful, there is extensive concern that they will politically undermine the sovereignty of nation-states. The foremost concern is that an MNE will be a foreign policy instrument of its home-country government. Most large MNEs have the majority of their sales and assets in their home countries and few foreigners on their executive boards. Because the home countries of most MNEs are industrial countries, it is understandable that this concern is taken most seriously in developing countries. But it is not restricted to them. Critics of MNEs raise two other sovereignty issues. One is that the MNE may become independent of both the home and the host countries, making it difficult for either country to take actions considered in its best interests. The second issue is that the MNE might become so dependent on foreign operations that the host country can use it as a foreign-policy instrument against its home country or another country.

         (moderate, page 331)

 

39.    In a short essay, discuss the issue of key sector control.

 

         Answer

Closely related to the extraterritoriality issue is the fear that if foreign ownership dominates key industries, then decisions made outside of the country may have extremely adverse effects on the local economy or may exert an influence on politics in the host country. MNEs home-country headquarters often decide on what, where, and how their foreign subsidiaries will produce and sell. These decisions might cause different rates of expansion in different countries and possible plant closings with subsequent employment disruption in some of them. Further, by withholding resources or allowing strikes, the MNE also may affect other local industries adversely. Aside from establishing policies that generally restrict the entry of foreign investment, countries have selectively prevented foreign domination of so-called key industries, which affect a large segment of the economy or population by virtue of their size or influence.

         (moderate, page 332)


 

40.    In a short essay, discuss the Trading with the Enemy Act citing specific countries that have been affected by this Act.

 

         Answer

The primary focus of criticism has been the U.S. government’s attempt to apply its Trading with the Enemy Act to foreign subsidiaries of U.S. companies to keep them from selling to certain unfriendly countries. A series of presidential orders has at times prevented some foreign subsidiaries from making sales to such countries as Libya, Nicaragua, South Africa, and Vietnam, even though the orders violated the laws of some of the countries in which the subsidiaries were operating, such as France and Canada, which require that the sales be made. The Cuban embargo has been a particularly thorny issue between Canada and the United States.

         (moderate, page 334)

 

41.    What types of payments are legal and illegal under the Foreign Corrupt Practices Act (FCPA) of the United States?

 

Answer

Payments to officials to expedite their compliance with the law are legal (officially called facilitation payments but sometimes referred to as speed money or grease money), but payments to other officials who are not directly responsible for carrying out the law are not.  Specifically, a 1988 amendment to the FCPA excluded facilitation payments from its definition of bribery.  Facilitation payments take many forms.  For example, payment to a customs official to clear legitimate merchandise is legal whereas a payment to a government minister to influence the customs official is illegal.  The FCPA allows the former payment because governmental officials in many countries delay compliance of laws indefinitely until they do receive payments, even though such payments may be illegal in those countries.

         (moderate, page 334)

 

41.    Why are there controversies concerning the Foreign Corrupt Practices Act (FCPA) of the United States?

 

         Answer

The United States has acted against domestic firms’ foreign investments when there has been concern about possible harm to U.S. consumers. At various times, the U.S. government has:

 

a.       Delayed U.S. companies from acquiring facilities in foreign countries—for example, Gillette’s purchase of Braun in Germany was held up because Braun made electric shavers and the acquisition would reduce the number of competitors in the shaving market.

b.      Prevented U.S. companies from acquiring facilities in the United States that were owned by a company they were taking over abroad—for example, Gillette’s purchase of a division of Sweden’s Stora Kopparbergs Bergslags could not include that division’s subsidiary, U.S. Wilkinson Sword because it would increase Gillette’s share of the razor blade market.

c.       Forced U.S. companies to sell their interests in foreign operations—for example, Alcoa’s spin-off of Alcan because Alcan could then compete against Alcoa.

d.      Restricted entry of goods produced by foreign countries in which U.S. companies participated—for example, Swiss watches and parts.

e.       Pressured foreign companies to allow U.S. firms to make foreign sales using technology acquired from them—for example, the British company Pilkington licenses float-glass technology to U.S. companies with the stipulation that the output could be sold only in the United States.

         (difficult, page 334)


 

42.    In a short essay, discuss the issue of bribery in international business and include specific examples to support your answer.

 

         Answer

MNEs as well as local companies have made payments to officials in industrial countries as well as developing countries. A motive for bribery is to secure government contracts that otherwise might not be forthcoming at all or to obtain them at the expense of competitors. Another motive for bribery is to facilitate governmental services that companies are entitled to receive, but that officials might otherwise delay, such as product registrations, construction permits, and import clearances. Other reported payments have been to reduce tax liabilities, to keep a competitor from operating in a specific country, and to gain governmental approval for price increases. Some companies have made payments because of extortion. Most reported payments have been in cash, but in some cases they have included products made by the company. Companies have made bribery payments directly to governmental officials, but most payments are made via intermediaries and by diverse methods. For example, the relative of a person having influence over a purchasing decision sometimes has been put on the payroll as a consultant. In other cases, the person having influence has been paid as a middleman at a fee exceeding normal commissions. Another common practice has been to overcharge a government agency and rebate the overcharge to an individual, usually in a foreign country.

         (moderate, page 334)

 

43.    Why are host governments generally more concerned about investments made by large rather than small companies?

 

         Answer

In theory, host countries may take completely restrictive or laissez-faire positions toward MNEs. In actuality, their policies fluctuate over time but are seldom completely restrictive or completely laissez-faire. Currently, countries such as Bhutan and Cuba are close to the restrictive end, and countries such as the United States and the Netherlands are near the laissez-faire end of the continuum. However, countries between these extremes have policies with varying degrees of restrictions as they attempt to attract investment and receive the most benefit from it. The concern of home- and host-country stakeholders about companies’ international operations increases with their international commitments. For example, home-country stakeholders are generally unconcerned when a company begins to export, but they are concerned when the company begins producing abroad because of fear that jobs and growth are being transferred. Likewise, host-country stakeholders give much more attention to foreign companies that are wholly owned direct investors than those who share ownership locally or those that are merely exporting into their market. Countries tend to be more concerned about large companies than small ones because of their greater potential impact on national economic and political objectives. Because smaller companies are assumed to have less impact on host societies, countries often treat their entries differently.

         (moderate, page 337)