ER6eSM_Ch16.doc

CHAPTER 16 FOREIGN DIRECT INVESTMENT AND CROSS-BORDER ACQUISITIONS ANSWERS SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Recently, many foreign firms from both developed and developing countries acquired high-tech U.S. firms. What might have motivated these firms to acquire U.S. firms? Answer: Many foreign firms might have been motivated to gain access to technical know-how residing in U.S. firms and at the same time monopolize its use. Refer to the reverse-internalization hypothesis discussed in the text. 2. Japanese MNCs, such as Toyota, Toshiba, Matsushita, etc., made extensive investments in the Southeast Asian countries like Thailand, Malaysia and Indonesia. In your opinion, what forces are driving Japanese investments in the region? Answer: Most likely, these Japanese MNCs have invested heavily in Southeast Asia in order to take advantage of underpriced labor services and cheaper land and other factors of production. Refer to the life-cycle theory of FDI. 3. Since the NAFTA was established, many Asian firms especially those from Japan and Korea made extensive investments in Mexico. Why do you think these Asian firms decided to build production facilities in Mexico? Answer: Asian firms might have been motivated to gain access to NAFTA of which Mexico is a member and circumvent the external trade barriers maintained by NAFTA. 4. How would you explain the fact that China emerged as one of the most important recipient of FDI in recent years? Answer: China attracted a great deal of FDI recently because foreign firms want to (i) take advantage of inexpensive labor and resources, and also (ii) gain access to the Chinese market that is often not accessible otherwise. 5. Explain the internalization theory of FDI. What are the strength and weakness of the theory? Answer: According to the internalization theory, firms that have intangible assets with a public good property tend to undertake FDI to take advantage of the