International Business, 8e (Griffin/Pustay)

Chapter 6 International Trade and Investment

1) The center of the international commercial flower industry is ________.

A) The Netherlands
B) The United States
C) France
D) Germany
Answer: A
Diff: 1
Skill: Concept
Objective: 1

2) The term ________ refers to the voluntary exchange of goods, services, assets, or money
between one person or organization and another.
A) sales
B) transaction
C) trade
D) strategic management
Answer: C
Diff: 1
Skill: Concept
Objective: 1

3) Since World War II, world trade has ________.

A) grown slightly
B) shrunk slightly
C) shrunk significantly
D) grown dramatically
Answer: D
Diff: 1
Skill: Concept
Objective: 1

4) In 2012, total international merchandise trade accounted for about ________ percent of the
world's GDP.
A) 12
B) 26
C) 44
D) 59
Answer: B
Diff: 2
Skill: Concept
Objective: 1

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5) In 2012, China accounted for approximately ________ of the world's merchandise exports.
A) 10%
B) 25%
C) 40%
D) 55%
Answer: A
Diff: 2
Skill: Concept
Objective: 1

6) Ellis, a manager at an MNE, is studying international trade theories. In his current position,
Ellis would most likely use this knowledge to ________.
A) lobby for trade policy changes
B) identify promising export and investment opportunities
C) predict factors that motivate trade
D) analyze foreign exchange markets
Answer: B
Diff: 2
Skill: Application
Objective: 1

7) During which century were the first theories of international trade developed?
A) sixteenth
B) seventeenth
C) eighteenth
D) nineteenth
Answer: A
Diff: 3
Skill: Concept
Objective: 2

8) The first theories of international trade used ________ as a unit of analysis.

A) individual countries
B) country clusters
C) regions
D) continents
Answer: A
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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9) What type of trade were the early country-based theories of international trade most useful in
understanding?
A) services
B) brand name goods
C) commodities
D) high-tech goods
Answer: C
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

10) The theory of ________ maintains that a country's wealth is measured by its holdings of gold
and silver.
A) mercantilism
B) neomercantilism
C) competitive advantage
D) comparative advantage
Answer: A
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

11) According to mercantilism, what should a country's primary goal be?

A) protecting citizens from unfair labor practices
B) encouraging imports to prevent resource depletion
C) promoting exports to enlarge gold and silver holdings
D) ensuring sufficient labor for low-wage jobs in the textile industry
Answer: C
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

12) Which of the following was harmed the most by mercantilist policies?
A) monarchs
B) local politicians
C) individual consumers
D) domestic manufacturers
Answer: C
Diff: 2
Skill: Concept
Objective: 2

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13) In the U.S., sugar growers, steel companies, and the AFL-CIO are supporters of mercantilist
policies. These groups are best characterized as ________.
A) protectionists
B) communists
C) isolationists
D) federalists
Answer: A
Diff: 2
Skill: Application
Objective: 2

14) Who is the father of free market economics?

A) David Ricardo
B) Michael Porter
C) Adam Smith
D) John Dunning
Answer: C
Diff: 1
Skill: Concept
Objective: 2

15) Which of the following statements is most likely true?

A) Japan eliminated all protectionist policies after WWII.
B) Nearly all countries have some neomercantilist policies.
C) China is one of the few countries with protectionist policies.
D) EU countries are supportive of U.S. neomercantilist policies.
Answer: B
Diff: 3
AACSB: Dynamics of the global economy
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

16) Adam Smith was best known as an advocate of ________.

A) low-cost manufacturing
B) free-market economics
C) mercantilism
D) labor unions
Answer: B
Diff: 1
Skill: Concept
Objective: 2

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17) What did Adam Smith believe about the ultimate effects of mercantilist policies on the health
of a country's economic situation?
A) Mercantilist policies strengthen an economy by protecting against competition.
B) Mercantilist policies result in strong rates of unemployment.
C) Mercantilist policies reduce the wealth of a country as a whole.
D) Mercantilist policies harm special interest groups.
Answer: C
Diff: 3
Skill: Concept
Objective: 2

18) Mercantilism ________.

A) suggests that a country should export those goods for which it is more productive than other
countries and trade for those goods for which other countries are more productive
B) maintains that a country's wealth is measured by its holdings of gold and silver
C) suggests that a country will have a comparative advantage in producing products that
intensively use resources it has in abundance
D) argues that most trade in manufactured goods should be between countries with similar per
capita incomes
Answer: B
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

19) Which theory suggests that a country should export those goods and services for which it is
more productive than other countries and import those goods and services for which other
countries are more productive?
A) mercantilism
B) comparative advantage
C) absolute advantage
D) specialization of countries
Answer: C
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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20) Which statement is asserted by the theory of absolute advantage?
A) A country should export those goods for which it is more productive than other countries and
trade for those goods for which other countries are more productive.
B) A country should import goods from developing economies in order to maximize returns on
profit and economies of scale.
C) A country will have a comparative advantage if it makes products that rely on global supply
networks.
D) Most trade in manufactured goods should be between countries with similar per capita
incomes.
Answer: A
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

21) The primary flaw in the theory of absolute advantage is that the theory ________.
A) confuses the acquisition of treasure with the acquisition of wealth
B) looks only at relative productivity differences rather than competitive differences
C) suggests that no trade will occur when one country has an absolute advantage in multiple
products
D) incorporates the concept of opportunity cost in determining which goods a country should
produce
Answer: C
Diff: 3
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

22) Which theory suggests that a country should produce and export those goods and services for
which it is relatively more productive than other countries and import those goods and services
for which other countries are relatively more productive?
A) relative advantage
B) comparative advantage
C) absolute advantage
D) specialization of countries
Answer: B
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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23) The ________ of a good is the value of what is given up to get the good.
A) relative cost
B) opportunity cost
C) absolute cost
D) discount cost
Answer: B
Diff: 1
Skill: Concept
Objective: 2

24) Which theory incorporates the concept of opportunity cost?

A) comparative advantage
B) mercantilism
C) absolute advantage
D) factor endowments
Answer: A
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

25) Which theory promotes the notion of specializing in what you do relatively best?
A) country similarity
B) comparative advantage
C) product life cycle
D) absolute advantage
Answer: B
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

26) Which theory answers the question, "What determines the products for which a country will
have a comparative advantage?"
A) relative advantage
B) absolute advantage
C) relative factor endowments
D) specialization of countries
Answer: C
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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27) Which theory listed below is also called the Heckscher-Ohlin theory?
A) relative advantage
B) comparative advantage
C) relative factor endowments
D) specialization of countries
Answer: C
Diff: 2
Skill: Concept
Objective: 2

28) The Heckscher-Ohlin theory ________.

A) suggests that a country should export those goods for which it is more productive than other
countries and trade for those goods for which other countries are more productive
B) states that a country should produce and export those goods for which it is relatively more
productive than other countries and import those goods for which other countries are relatively
more productive than it is
C) suggests that a country will have a comparative advantage in producing products that
intensively use resources it has in abundance
D) argues that most trade in manufactured goods should be between countries with similar per
capita incomes
Answer: C
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

29) Leontief predicted that if the Heckscher-Ohlin theory held, then the U.S. would ________.
A) import capital-intensive goods
B) import products such as steel
C) export products such as shoes
D) export bulk chemicals and steel
Answer: D
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

30) Which of the following was determined by Leontief?

A) U.S. exports were less capital intensive than imports.
B) U.S. exports were more capital intensive than imports.
C) Relative factor endowments were not a factor in determining trade patterns.
D) Specialization was not a factor in determining imports and exports.
Answer: A
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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31) Which factors of production did Leontief focus on?
A) land and labor
B) land and technology
C) capital and labor
D) labor and technology
Answer: C
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

32) The country similarity theory suggests that most trade in manufactured goods should be
between countries with similar ________.
A) labor costs
B) economic development
C) natural resources
D) cultures and languages
Answer: B
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

33) France exports wine to Japan, and Japan exports clock radios to France. This is an example
of ________.
A) mercantilism
B) diversification
C) interindustry trade
D) intraindustry trade
Answer: C
Diff: 2
Skill: Application
Objective: 3

34) Japan exports Toshiba Computers to the United States, and the United States exports Apple
Computers to Japan. This is an example of ________.
A) mercantilism
B) diversification
C) interindustry trade
D) intraindustry trade
Answer: D
Diff: 2
Skill: Application
Objective: 2

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35) The country similarity theory ________.
A) suggests that a country should export those goods for which it is more productive than other
countries and trade for those goods for which other countries are more productive
B) states that a country should produce and export those goods for which it is relatively more
productive than other countries and import those goods for which other countries are relatively
more productive than it is
C) suggests that a country will have a comparative advantage in producing products that
intensively use resources it has in abundance
D) argues that most trade in manufactured goods should be between countries with similar levels
of economic development
Answer: D
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

36) Which international trade theory originated in the marketing field?

A) new trade theory
B) product life cycle theory
C) country similarity theory
D) theory of competitive advantage
Answer: B
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

37) Which of the following is one of the stages in the international product life cycle theory?
A) pre-invention product stage
B) modified product stage
C) maturing product stage
D) fad product stage
Answer: C
Diff: 2
Skill: Concept
Objective: 3

38) In which stage of the international product life cycle does the innovating firm's country
become a net importer of the product?
A) new product stage
B) maturing product stage
C) standardized product stage
D) never
Answer: C
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade
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39) In the ________ stage of the international product life cycle, the product becomes
commodity-like and price becomes very important.
A) new product
B) maturing product
C) standardized product
D) international product
Answer: C
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

40) Which of the following is considered a form of intellectual property?

A) real estate
B) human resources
C) a brand name
D) capital investments
Answer: C
Diff: 1
Skill: Concept
Objective: 4

41) What is the primary focus of the new trade theory developed by Krugman, Helpman, and
Lancaster?
A) protecting intellectual property rights
B) expanding research and development
C) developing economies of scale
D) exploiting the experience curve
Answer: C
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

42) ________ argued that firms struggle to develop some sustainable competitive advantage
which they then exploit to dominate the global marketplace.
A) Porter
B) Vernon
C) Heckscher and Ohlin
D) Krugman and Lancaster
Answer: D
Diff: 2
Skill: Concept
Objective: 3

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43) Taylor Helmets has been able to lower the average cost of producing a bicycle helmet as it
increases the number of helmets it manufactures each day. Taylor Helmets is most likely
benefiting from ________.
A) opportunity costs
B) economies of scope
C) economies of scale
D) competitive advantages
Answer: C
Diff: 2
Skill: Application
Objective: 3

44) Which theory of international trade explains that success in international trade comes from
the interaction of four country- and firm-specific elements?
A) national competitive advantage
B) country similarity
C) absolute advantage
D) relative factor endowments
Answer: A
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

45) Who developed the theory of national competitive advantage?

A) Adam Smith
B) Raymond Vernon
C) Michael Porter
D) Eli Heckscher
Answer: C
Diff: 2
Skill: Concept
Objective: 3

46) Which of the following is one of the four elements discussed in the theory of national
competitive advantage?
A) factor conditions
B) opportunity costs
C) equity conditions
D) market saturation rates
Answer: A
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

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47) Which of the following factors are not included in Porter's view of factor endowments?
A) land
B) capital
C) work ethic of workforce
D) educational level of workforce
Answer: C
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

48) Porter's theory of national competitive advantage can best be described as a ________.
A) country-based theory
B) firm-based theory
C) hybrid of country-based and firm-based theories
D) government-focused theory based on economies of scale
Answer: C
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

49) ________ economies occur when a firm's costs of production decline as the number of firms
in that industry increase within a given area.
A) Agglomeration
B) Consolidation
C) Accommodation
D) Divergent
Answer: A
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

50) ________ represents passive holdings of securities such as foreign stocks, bonds, or other
financial assets.
A) Foreign direct investment
B) Foreign portfolio investment
C) Capital investment
D) Controlling ownership
Answer: B
Diff: 1
Skill: Concept
Objective: 4

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51) Which type of investment involves the acquisition of foreign assets for the purpose of
controlling them?
A) foreign direct investment
B) foreign portfolio investment
C) capital investment
D) controlling ownership
Answer: A
Diff: 1
Skill: Concept
Objective: 4

52) Which of the following is a form of foreign direct investment?

A) foreign stock ownership
B) foreign bond ownership
C) participation in a joint venture
D) mutual fund ownership
Answer: C
Diff: 1
Skill: Concept
Objective: 4

53) Foreign portfolio investments are most likely motivated by the desire for ________.
A) risk reduction
B) controlling ownership
C) active management
D) immediate globalization
Answer: A
Diff: 2
Skill: Concept
Objective: 4
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

54) The ________ suggests that a firm owning a valuable asset that creates a competitive
advantage domestically can use that advantage to penetrate foreign markets through FDI.
A) national competitive advantage
B) comparative advantage
C) relative factor endowments
D) ownership advantage theory
Answer: D
Diff: 1
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

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55) Which theory explains why a firm would choose to enter a foreign market via FDI rather
than exploit its ownership advantages internationally through other means?
A) eclectic theory
B) internalization theory
C) relative factor endowments
D) national competitive advantage
Answer: B
Diff: 2
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

56) ________ are the costs of negotiating, monitoring, and enforcing a contract.
A) Opportunity costs
B) Transaction costs
C) Indirect costs
D) Direct costs
Answer: B
Diff: 1
Skill: Concept
Objective: 5

57) ________ suggest(s) that FDI will be more likely to occur when transaction costs with a
second firm are high.
A) Eclectic theory
B) Internalization theory
C) Ownership advantage theory
D) National competitive advantage
Answer: B
Diff: 2
Skill: Concept
Objective: 5

58) Executives at Energex Enterprises are trying to determine whether it would be better to own
and operate a factory overseas or to contract with a foreign firm to do this through a licensing
agreement. Which theory would most likely help the Energex executives make this decision?
A) ownership advantage theory
B) internalization theory
C) eclectic theory
D) relative factor endowments
Answer: B
Diff: 2
Skill: Application
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

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59) Who developed the eclectic theory of international investment?
A) Steffan Linder
B) Raymond Vernon
C) Michael Porter
D) John Dunning
Answer: D
Diff: 1
Skill: Concept
Objective: 5

60) Which of the following is one of the conditions specified in eclectic theory for the
occurrence of foreign direct investment?
A) non-ownership advantage
B) location advantage
C) home country advantage
D) externalization advantage
Answer: B
Diff: 2
Skill: Concept
Objective: 5

61) Examples of ownership advantage include which of the following?

A) prestige
B) liability
C) intellectual property
D) benefits of outsourcing
Answer: C
Diff: 2
Skill: Concept
Objective: 5

62) For the ________ advantage to accrue, undertaking the business activity must be more
profitable overseas than undertaking it locally.
A) ownership
B) location
C) home country
D) internalization
Answer: B
Diff: 1
Skill: Concept
Objective: 5

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63) Which of the following has minimal influence on a firm's decision to undertake foreign
direct investment?
A) supply factors
B) political factors
C) demand factors
D) relative endowment factors
Answer: D
Diff: 2
Skill: Concept
Objective: 6

64) Saudi Arabia has large crude oil reserves, and Bangladesh has a large pool of skilled
workers. These are both examples of ________.
A) factor endowments
B) economies of scope
C) production factors
D) opportunity costs
Answer: A
Diff: 2
Skill: Application
Objective: 2

65) MAX Electronics produces tiny wireless speakers that can be used with computers and MP3
players. The firm has built new factories to expand capacity and meet increasing domestic and
foreign demand. Over the last six months, foreign and domestic competitors have emerged with a
similar product in an attempt to benefit from high consumer demand. MAX Electronics is most
likely in the ________ product stage of the product life cycle.
A) globalized
B) standardized
C) maturing
D) new
Answer: C
Diff: 2
Skill: Application
Objective: 3

66) Coffman Electronics produces small, portable printers. The market for the product has
stabilized, and Coffman has shifted production to Taiwan. However, Coffman's marketing
department in the U.S. remains responsible for advertising and branding decisions. Coffman
Electronics is most likely in the ________ product stage of the product life cycle.
A) globalized
B) standardized
C) maturing
D) new
Answer: B
Diff: 2
Skill: Application
Objective: 3
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67) Pandora Housewares is an MNE with production facilities in Taiwan, England, and India that
manufacture bedding, towels, clothing, and luggage. Pandora has benefited from ________
because the firm's average costs have decreased as the number of different products it sells has
increased.
A) economies of scope
B) intellectual property rights
C) economies of scale
D) experience curve exploitation
Answer: A
Diff: 2
Skill: Application
Objective: 3

68) What is the most likely characteristic of a firm that gains a first-mover advantage?
A) government contractor
B) significant capital
C) natural resources
D) niche marketer
Answer: B
Diff: 2
Skill: Concept
Objective: 3

69) According to Porter, agglomeration economies lead to which of the following?

A) decreased entrepreneurship
B) growth of innovative design
C) high reliance on foreign R&D
D) less competition among suppliers
Answer: B
Diff: 2
Skill: Concept
Objective: 3

70) Which of the following is a condition of Dunning's eclectic theory?

A) The firm must own a competitive advantage that overcomes competing against foreign firms
in their markets.
B) Research and development costs must outweigh expenses related to foreign direct investment.
C) The firm must benefit more from outsourcing a service than controlling a foreign business.
D) Business activity must be more profitable in a domestic location than in a foreign location.
Answer: A
Diff: 3
Skill: Concept
Objective: 5

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71) Which of the following is not a government incentive that often acts as a catalyst for FDI?
A) increased utility rates
B) inflation
C) infrastructure additions
D) a progressive tax system
Answer: C
Diff: 2
Skill: Concept
Objective: 6

72) Early theories of international trade focused on the patterns of exports and imports in
individual countries.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

73) World trade initially grew after World War II, but in the last decade has dropped off and
been replaced with FDI.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 1

74) An "unfavorable" balance of trade indicates that a country's exports are less than its imports.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

75) Thanks to the emergence of China as a major exporting nation, Japan, Canada, the EU, and
the U.S. accounted for just 30 percent of the world's merchandise exports in 2012.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 1

76) The firm-based theories developed after World War II help explain patterns of trade in
commodities.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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77) Brand name is an important component in a customer's purchase decision for commodities.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

78) Adam Smith attacked the intellectual basis of mercantilism in 1776.

Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

79) According to mercantilism, a nation's wealth is determined by its holdings of gold and silver.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

80) Many countries have adopted some neomercantilist policies to protect key industries.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

81) North Americans and Europeans have long applauded Japan's open door policy with regard
to imports.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

82) Adam Smith developed the theory of comparative advantage.

Answer: FALSE
Diff: 1
Skill: Concept
Objective: 2

83) The theory of absolute advantage considers relative productivity differences between
countries.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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84) The theory of comparative advantage uses the concept of opportunity cost to determine
which good a country should produce.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

85) The Heckscher-Ohlin theory is another name for the product life cycle theory.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 2

86) Leontief found that the United States was producing and exporting capital-intensive goods.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

87) Trade between two countries of goods produced by the same industry is known as
interindustry trade.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 3

88) The country similarity theory argues that most trade in manufactured goods should be
between countries with similar levels of economic development.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

89) According to the international product life cycle theory, domestic production peaks in stage
two.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

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90) According to the international product life cycle theory, the innovating firm's country is
primarily an exporter of the product in all three stages.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

91) Krugman and Lancaster predict that intraindustry trade will be rare.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3

92) Foreign direct investment is acquisition of foreign assets for the purpose of controlling them.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4

93) China is one of the primary recipients of FDI from the United States.
Answer: FALSE
Diff: 3
Skill: Concept
Objective: 4

94) Most sovereign wealth funds (SWFs) are owned by oil-rich governments.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 4

95) Most of the investments made by sovereign wealth funds (SWFs) have been passive in
nature.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4

96) International investment theories answer the question, "Why does foreign direct investment
occur?"
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

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97) According to internalization theory, firms are more likely to license their brand names when
transaction costs are high.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

98) Dunning suggests that FDI will occur when there is an ownership advantage, a location
advantage, and an internalization advantage.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

99) Heineken has used FDI extensively as part of its internationalization strategy because of the
cost of transporting its products.
Answer: TRUE
Diff: 3
Skill: Concept
Objective: 5
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

100) Political factors do not affect a firm's decision to undertake foreign direct investment.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 6

101) Agglomeration economies occur when a firm's costs of production increase as the number
of firms in that industry increase within a given area.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

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Copyright © 2015 Pearson Education, Inc.
102) What is the goal of mercantilism? How is mercantilism implemented? What are the
disadvantages of mercantilism?
Answer: Under mercantilism, a country seeks to increase its holdings of gold and silver by
maximizing exports and minimizing imports. Because countries pursuing mercantilist polices
avoid imports at all costs, they must squander resources producing goods they are not suited for.
In other words, mercantilism introduces inefficiencies, reducing the wealth of the country as a
whole.
Diff: 3
Skill: Critical Thinking
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

103) What theories are categorized as firm-based theories? Which theories are categorized as
country-based trade theories? What does each type of theory help explain?
Answer: Country similarity theory, product life cycle, and new trade theories are all firm-based
theories. Mercantilism, absolute advantage, comparative advantage, and relative factor
endowments are all country-based theories. Firms-based theories help explain trade in
differentiated products. Country-based theories help explain trade in undifferentiated goods such
as wheat, sugar, and steel.
Diff: 3
Skill: Synthesis
Objective: 2, 3
Learning Outcome: Compare and contrast theories of international trade

104) Why was Adam Smith opposed to mercantilism? What was the premise of Smith's theory?
Answer: According to Adam Smith, the Scottish economist who is viewed as the father of free-
market economics, mercantilism's basic problem is that it confuses the acquisition of treasure
with the acquisition of wealth. Smith attacked the intellectual basis of mercantilism and
demonstrated that it actually weakens a country, because it robs individuals of the ability to trade
freely and to benefit from voluntary exchanges. Moreover, in the process of avoiding imports at
all costs, a country must squander its resources producing goods it is not suited to produce. The
inefficiencies caused by mercantilism reduce the wealth of the country as a whole, even though
certain special interest groups may benefit. Absolute advantage suggests that a country should
export those goods and services for which it is more productive than other countries and import
those goods and services for which other countries are more productive.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

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Copyright © 2015 Pearson Education, Inc.
105) What is the key difference between the theory of comparative advantage and the theory of
absolute advantage? Which theory do you support? Why?
Answer: Absolute advantage looks at absolute productivity differences while comparative
advantage looks at relative productivity differences. The lesson of the theory of comparative
advantage is simple but powerful: You are better off specializing in what you do relatively best.
Produce (and export) those goods and services you are relatively best able to produce, and buy
other goods and services from people who are relatively better at producing them than you are.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

106) What is opportunity cost? Why is opportunity cost an important consideration when
determining what a country should export and import?
Answer: The opportunity cost of a good is the value of what is given up to get the good.
Opportunity cost acknowledges that a country should also consider how its efforts are best spent.
While a country may be absolutely more productive than another country, it must consider that
productivity relative to other things that the country could be producing.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 2

107) What does the relative factor endowment theory suggest about a country's comparative
advantage?
Answer: The relative factor endowment theory suggests that a country will have a comparative
advantage in the production of products that intensively use resources it has in abundance.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

108) What is the difference between interindustry trade and intraindustry trade? Provide an
example to illustrate your answer.
Answer: Interindustry trade is the exchange of goods produced by one industry in country A for
goods produced by a different industry in country B, such as clothing for computers.
Intraindustry trade is trade between two countries of goods produced by the same industry, such
as Japanese cars for German cars.
Diff: 2
Skill: Application
Objective: 3

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109) What motivates firms to become involved in international trade and foreign direct
investment?
Answer: MNEs engage in international trade for a variety of reasons but mainly because both
parties to the transaction, who happen to reside in two different countries, believe they benefit
from the voluntary exchange. Numerous factors can influence a firm's decision to undertake FDI.
Some FDI may be undertaken to reduce the firm's costs. Such supply factors include production
costs, logistics, availability of natural resources, and access to key technology. The decision to
engage in FDI may be affected by such demand factors as developing access to new customers,
obtaining marketing advantages through local production, exploiting competitive advantages,
and maintaining nearness to customers as they internationalize their operations. Political
considerations may also play a role in FDI. Often firms use FDI to avoid host country trade
barriers or to capture economic development incentives offered by host country governments.
Diff: 3
AACSB: Dynamics of the global economy
Skill: Synthesis
Objective: 1, 5

110) How can firms develop a sustainable competitive advantage?

Answer: Firms can develop sustainable competitive advantages by owning intellectual property,
investing in research and development, achieving economies of scale or scope, and exploiting the
experience curve.
Diff: 2
Skill: Application
Objective: 3

111) What is foreign direct investment?

Answer: Foreign direct investment (FDI) is acquisition of foreign assets for the purpose of
controlling them.
Diff: 1
AACSB: Analytical Thinking
Skill: Synthesis
Objective: 4
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

112) What are the primary forms of international business?

Answer: International trade and international investment are the two main forms of international
business. The two types of international investment are foreign direct investment and portfolio
investment.
Diff: 2
Skill: Synthesis
Objective: 1, 4

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113) What are sovereign wealth funds (SWFs)?
Answer: SWFs are the newest and a very controversial source of capital in the world economy.
SWFs are government-controlled pools of capital, estimated at $5 trillion in 2012. Most SWFs
are owned by oil-rich governments.
Diff: 2
Skill: Concept
Objective: 4

114) How can an understanding of international trade theories and foreign investment theories
benefit MNEs?
Answer: Because of the obvious significance of international trade to businesses, consumers,
and workers, scholars have attempted to develop theories to explain and predict the forces that
motivate such trade. Governments use these theories when they design policies they hope will
benefit their countries' industries and citizens. Managers use them to identify promising markets
and profitable internationalization strategies. Similarly, FDI theories help MNEs assess the
advantages and disadvantages of foreign investment.
Diff: 2
AACSB: Reflective Thinking
Skill: Synthesis
Objective: 1, 5

115) Briefly explain the connection between transaction costs and internalization theory.
Answer: Transaction costs are the costs of entering into a transaction- the costs connected to
negotiating, monitoring, and enforcing a contract. A firm must decide whether it is better to own
and operate its own factory overseas or to contract with a foreign firm to do this through a
franchise, licensing, or supply agreement. Internalization theory suggests that FDI is more likely
to occur - that is, international production will be internalized within the firm - when the costs of
negotiating, monitoring, and enforcing a contract with a second firm are high.
Diff: 3
Skill: Application
Objective: 5

116) Your firm is considering the idea of foreign direct investment. What supply factors and
demand factors are most relevant in this decision?
Answer: Production costs, logistics, resource availability, and access to technology are all
relevant supply factors. Customer access, marketing advantages, exploitation of competitive
advantages, and customer mobility are demand factors.
Diff: 2
Skill: Application
Objective: 6

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117) Why does Heineken rely on FDI for much of its internationalization strategy?
Answer: Heineken relies on FDI for much of its internationalization strategy because its
products are costly to transport. Making beer closer to where it will be consumed helps the
company reduce its distribution costs.
Diff: 3
AACSB: Reflective Thinking
Skill: Application
Objective: 6
Learning Outcome: Explain the implications of foreign direct investment for both host and home
country

118) What are the indirect effects of international trade? How do exports spark economic activity
in a country?
Answer: Exports are important to a country because they create work for domestic suppliers,
generate wages for workers, and dividend payments for local shareholders. This then translates
into income for grocery stores, department stores, and other establishments, which then creates
more jobs and wages, and so on.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 1

119) Why is the notion of specialization important when analyzing the benefits of free trade?
Answer: Critics of free trade worry that imports can have a negative effect on a country because
they involve an outflow of capital. Those taking this perspective argue that by substituting
locally-made goods for imports allows the country to not only have the goods, but also keep the
money. Supporters of free trade disagree. They believe that it is important to consider the role of
specialization. If countries specialize in what they do best, and trade for everything else, their
resources are more productive and ultimately, the country will be better off. Those taking this
view feel that limiting imports only forces a country to make an inefficient use of its resources.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 2
Learning Outcome: Compare and contrast theories of international trade

120) Which trade theory is best at explaining trade in differentiated goods?

Answer: Linder's country similarity theory argues that trade in manufactured goods should occur
primarily between countries with similar levels of economic development. The theory is
especially useful for explaining trade in differentiated goods where brand names and product
reputations are important in the purchase decision.
Diff: 3
AACSB: Reflective Thinking
Skill: Application
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

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121) Explain what determines the products for which a country has a comparative advantage.
Answer: Heckscher and Ohlin explored the question of which products a country will have a
comparative advantage in. They theorized that a country would have a comparative advantage in
the production of products that intensively use resources the country has in abundance. While
most economists intuitively agreed with the theory, a study by Leontief found just the opposite
occurred.
Diff: 3
Skill: Application
Objective: 2

122) Why did country-based trade theories develop? Why did firm-based trade theories develop?
Answer: The first theories of international trade developed with the rise of the great European
nation-states during the sixteenth century. Not surprisingly, these early theories focused on the
individual country in examining patterns of exports and imports. Firm-based theories developed
for three reasons: 1) the growing importance of MNCs in the postwar international economy; 2)
the inability of the country-based theories to explain and predict the existence and growth of
intraindustry trade, and 3) the failure of Leontief and others to empirically validate the country-
based Heckscher-Ohlin theory.
Diff: 3
Skill: Synthesis
Objective: 2, 3
Learning Outcome: Compare and contrast theories of international trade

123) Explain the four elements of Porter's national competitive advantage theory.
Answer: The four elements are 1) factor conditions, 2) firm strategy, structure, and rivalry, 3)
demand conditions, and 4) related and supporting industries. Factor conditions refer to the basic
factors that enable a country to compete internationally. These include land, labor, capital,
education of the workforce, and the quality of the country's infrastructure. Firm strategy,
structure, and rivalry refers to how the firm has developed its strategy and structure to compete
against competition in both the domestic and international environments. Demand conditions
refer to the strength of the consumer base domestically and abroad. Related and supporting
industries refer to the development of local suppliers in response to a firm's needs.
Diff: 3
Skill: Application
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

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124) Explain the three stages in the international product life cycle theory.
Answer:
Stage 1) New Product Stage. In stage 1, a firm develops and introduces an innovative product.
Because of the need for fast feedback, the product may only be produced in the country where
the research and development occurred.
Stage 2) Maturing Product Stage. In stage 2, demand for the product expands dramatically as
consumers recognize its value. The innovating firm may build new factories to expand its
capacity and satisfy domestic and foreign demand.
Stage 3) Standardized Product Stage. In stage 3, the market for the product stabilizes. The
product becomes more of a commodity and the firm shifts production to countries with lower
labor costs. As a result, the innovating firm's home country becomes an importer of the product,
rather than an exporter.
Diff: 3
Skill: Application
Objective: 3
Learning Outcome: Compare and contrast theories of international trade

125) Why are the islands of Caribbean so important to the United States both as a source and a
destination of investment?
Answer: These islands serve as offshore financial centers for U.S. companies that set up finance
subsidiaries to take advantage of low tax rates and business-friendly regulations.
Diff: 2
AACSB: Dynamics of the global economy
Skill: Concept
Objective: 5

126) How can an MNE gain a competitive advantage by exploiting the experience curve?
Provide an example to illustrate your answer.
Answer: Another source of firm-specific advantages in international trade is exploitation of the
experience curve. For certain types of products production costs decline as the firm gains more
experience in manufacturing the product. Experience curves may be so significant that they
govern global competition within an industry. For instance, in semiconductor chip production,
unit cost reductions of 25 to 30 percent with each doubling of a firm's cumulative chip
production are not uncommon. Any firm attempting to be a low-cost producer of so-called
commodity chips–such as DRAM memory chips–can achieve that goal only if it moves further
along the experience curve than its rivals do. Both U.S. and Asian chip manufacturers have often
priced their new products below current production costs to capture the sales necessary to
generate the production experience that will in turn enable the manufacturers to lower future
production costs.
Diff: 3
Skill: Application
Objective: 3

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