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3318 final exam questions.doc

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Chapter 7foreign direct investment FDIQuestion what is FDI and why FDIAnswerWhat is FDI Foreign Direct Investment An investment that gives the investor a controlling interest in a foreign company FDI is the acquisition or construction of physical capital by a firm from one source country in another host country Forms of FDIAcquisitionsMultinational Enterprise a firm that owns business operations in more than one country Acquisition of or merger with an existing local firmGreenfield Investment establishing a new operation in a foreign countryWhy FDITo get a greater involvement in another country such as China wants to get greater involvement in Canada in the automobilecars sector Starbucks StoryExporting sales of products produced in one country to residents of another countryPros could export moreCons 1 transportation cost when transportation add to production cost it becomes unprofitable to ship some products over a large distance This is particular true of products that have a low valuetoweight ratio and can be produced in almost any location 2 trade barrier much FDI is undertaken as a response to actual or threaten trade barrier such as import tariffs or quotas By placing tariffs on import goods governments can increase the cost of exporting relative to FDI and licensing 3 safety standard4 cost of competitionLicensing occurs when a firm or licensor licenses the right to produce its product use its production processes or use its brand name or trademark to another firm the licensee In return for giving the licensee these rights the licensor collects a royalty fee on every unit the licensee sells Pros royalty paymentBuilds and strengthens the brand image Increases awareness of the brand Attracts new customers to the brand name and increase salesAllows entry to additional or new trade channels Builds competitive advantagesProtects trademarks by broadening the trade use of marks Generates revenue beyond the normal revenue and grows market share Lends credibility to their products through brand associationCons 1 licensing may result in a firm giving away valuable technological knowhow to a potential foreign competitorintellectual proprieties and rights2 licensing does not give a firm the tight control over manufacturing marketing and strategy in a foreign country that may be required to maximize its profitability3 licensing arises when the firms competitive advantage is based not so much on its products as on the management marketing and manufacturing capabilities that produce those products
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