FDI

When firms undertake FDI

• they become MNCs
• a)  they reduce their tax rate since they can tell each country that they do business in that they paid their taxes in other countries.
• a)  the can exploit workers by paying them below-market wages in depreciating currencies.
• a)  all of the above

1  FDI can take the form of

• Greenfield investment.
• cross-border M&A.
• establishing new production facilities in a foreign country
• all of the above 

1  Firms become multinational 

•  when they undertake foreign direct investments (FDI)
• with the establishment of new production facilities in foreign countries.
• when they become involved in mergers with and acquisitions of existing foreign businesses
• all of the above 

1  The third most important host country for FDI is a) . b)  c)  . d)  Mexico. Answer: c)

•  the United States
• Japan. 
• China
• India

1  MNCs have invested in China 

• by lower material costs.
•  by lower labor costs. 
• by a desire to preempt the entry of rivals into China’s potentially huge market
• all of the above 

1  The key factors that are important in a firm’s decision to invest overseas are 

• Trade barriers, imperfect labor market, and intangible assets.
• vertical integration, product life cycle, and shareholder diversification services.
•  profit maximization, global prestige, and competition. 
• both a) and b) 

1  Why do firms locate production overseas rather than exporting finished goods? 

• Shipping costs
• Firms seek to extend corporate control overseas 
• Imperfect factor markets
• All of the above

1  Governments regulate international trade

• to raise revenue (e.g. through tariffs)
• to protect domestic industries
• to pursue other economic policy objectives (e.g. North Korea forgoing trade).
• all of the above

1  Severe imperfections in the labor market lead to persistent wage differentials among countries. Some explanations include a)  . b)  c)  d)  Answer: d)

• because workers are not allowed to freely move across national boundaries to seek higher wages
• because workers may choose to not move across national boundaries to seek higher wages due to the cultural differences. 
• but these differences are offset by low productivity in low labor cost countries. 
• both a) and b) 

1  Factors of production include land, labor, capital, and entrepreneurial ability. Of all the factor markets, the MOST IMPERFECT is the

• labor market.
•  capital market.
•  real estate market
• market for entrepreneurial ability.