ECO 305 Week 7 Quiz – Strayer

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Quiz 6 Chapter 9

INTERNATIONAL FACTOR MOVEMENTS AND MULTINATIONAL ENTERPRISES

MULTIPLE CHOICE

1. "Risk spreading" is a motive most likely to be served when firms undergo:a. Horizontal integrationb. Vertical integrationc. Conglomerate integrationd. None of the above

2. The source (home) location of most of the world's leading multinational enterprises is:a. North America and Europeb. North America and Asiac. Europe and South Americad. Europe and Asia

3. Which type of multinational diversification occurs when the parent firm establishes foreign subsidiaries to produce intermediate goods going into the production of finished goods?a. Forward vertical integrationb. Backward vertical integrationc. Forward horizontal integrationd. Backward horizontal integration

4. Suppose that an American automobile manufacturer establishes foreign subsidiaries to market the automobiles. This practice is referred to as:a. Forward vertical integrationb. Forward conglomerate integrationc. Backward vertical integrationd. Backward conglomerate integration

5. Suppose that a steel manufacturer headquartered in Japan sets up a subsidiary in Canada to produce steel. This practice is referred to as:a. Conglomerate integrationb. Forward vertical integrationc. Backward vertical integrationd. Horizontal integration

6. During the 1970s, American oil companies acquired nonenergy companies (e.g., copper, auto components) in response to anticipated decreases in investment opportunities in oil. This type of diversification is referred to as:a. Horizontal integrationb. Conglomerate integrationc. Forward vertical integrationd. Backward vertical integration

7. Which of the following best refers to the outright construction or purchase abroad of productive facilities, such as manufacturing plants, by domestic residents?a. Direct investmentb. Portfolio investmentc. Short-term capital investmentd. Long-term capital investment

8. In recent years, the largest amount of U.S. direct investment abroad has occurred in:a. Central Americab. South Americac. Europed. Japan

9. In recent years, most foreign direct investment in the United States has come from:a. Western Europeb. Central America

c. South Americad. Asia

10. Most U.S. direct investment abroad occurs in:a. Communicationsb. Petroleumc. Finance and insuranced. Manufacturing

11. Most foreign direct investment in the United States occurs in:a. Public utilitiesb. Communicationsc. Manufacturingd. Mining and smelting

12. Which of the following is not a significant motive for the formation of multinational enterprises?a. Avoiding tariffs by obtaining foreign manufacturing facilitiesb. Obtaining the benefits from overseas comparative advantagesc. The acquisition of natural resource supply sourcesd. Subsidies granted by the home government to overseas corporations

13. Suppose General Motors charges its Mexican subsidiary $1 million for auto assembly equipment that could be purchased on the open market for $800,000. This practice is best referred to as:a. International dumpingb. Cost-plus pricingc. Transfer pricingd. Technological transfer

14. Multinational enterprises may provide benefits to their source (home) countries because they may:a. Secure raw materials for the source countryb. Shift source country technology overseas via licensingc. Export products which reflect source-country comparative disadvantage

d. Result in lower wages for source-country workers

15. Trade analysis involving multinational enterprises differs from our conventional trade analysis in that multinational enterprise analysis emphasizes:a. Absolute cost differentials rather than comparative cost differentialsb. The international movement of factor inputs rather than finished goodsc. Purely competitive markets rather than imperfectly competitive marketsd. Portfolio investments rather than direct foreign investments

16. Direct foreign investment has taken all of the following forms except:a. Investors buying bonds of an existing firm overseasb. The creation of a wholly owned business enterprise overseasc. The takeover of an existing company overseasd. The construction of a manufacturing plant overseas

17. Which of the following would best explain why foreign direct investment might be attracted to the United States?a. U.S. price ceilings that hold down the price of energyb. U.S. wage rates exceeding the productivity of U.S. laborc. Artificially high prices being charged for the stock of U.S. firmsd. Anticipations of future reductions in U.S. tariff levels

18. Both Coca-Cola Co. and Pepsi-Cola Co. are multinational firms in that their soft drinks are bottled throughout the world. This practice illustrates:a. Backward vertical integrationb. Forward vertical integrationc. Horizontal integrationd. Conglomerate integration

19. The market power effect of an international joint venture can lead to welfare losses for the domestic economy unless offset by cost reductions. Which type of cost reduction would not lead to offsetting welfare gains for the overall economy?a. R&D generating improved technologyb. Development of more productive machineryc. New work rules promoting worker efficiency

d. Lower wages extracted from workers

20. All of the following are potential advantages of an international joint venture except:a. Sharing research and development costs among corporationsb. Forestalling protectionism against importsc. Establishing work rules promoting higher labor productivityd. Operating at diseconomy-of-scale output levels

21. Which term best describes the New United Motor Manufacturing Co.?a. Multinational enterpriseb. International joint venturec. Multilateral contractd. International commodity agreement

22. Multinational enterprises:a. Increase the transfer of technology between nationsb. Make it harder for nations to foster activities of comparative advantagec. Always enjoy political harmony in nations where their subsidiaries operated. Require governmental subsidies in order to conduct worldwide operations

23. Firms undertake multinational operations in order to:a. Hire low-wage workersb. Manufacture in nations they have difficulty exporting toc. Obtain necessary factor inputsd. All of the above

24. Multinational enterprises face problems since they:a. Cannot benefit from the advantages of comparative advantageb. May raise political problems in countries where their subsidiaries operatec. Can invest only at home, but not overseasd. Can invest only overseas, but not at home

25. American labor unions have recently maintained that U.S. multinational enterprises have been:a. Exporting American jobs by investing overseasb. Exporting American jobs by keeping investment in the United Statesc. Importing cheap foreign workers by shifting U.S. investment overseasd. Importing cheap foreign workers by keeping U.S. investment at home

26. American labor unions accuse U.S. multinational firms of all of the following except: that such firmsa. Enjoy unfair advantages in taxationb. Export jobs by shifting technology overseasc. Export jobs by shifting investment overseasd. Operate at output levels where scale economies occur

27. Which of the following refers to the price charged for products sold to a subsidiary of a multinational enterprise by another subsidiary in another nation?a. Transfer pricingb. International dumpingc. Price discriminationd. Full-cost pricing

28. Which business device involves the creation of a new business by two or more companies, often for a limited period of time?a. Multinational enterpriseb. International joint venturec. Horizontal mergerd. Vertical merger

29. International joint ventures can lead to welfare losses when the newly established firm:a. Adds to the preexistent productive capacityb. Enters markets neither parent could have entered individuallyc. Yields cost reductions unavailable to parent firmsd. Gives rise to increased amounts of market power

30. Multinational enterprises:a. Always produce primary goodsb. Always produce manufactured goodsc. Produce primary goods or manufactured goodsd. None of the above

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC0=AC0.

Figure 9.1. International Joint Venture

31. Consider Figure 9.1. With Sony Company and American Company behaving as competitors, the equilibrium price and output respectively equal:a. $4 and 2 unitsb. $4 and 4 unitsc. $6 and 2 unitsd. $6 and 4 units

32. Consider Figure 9.1. At the equilibrium price, domestic households attain ____ of consumer surplus:a. $4b. $8c. $12d. $16

33. Consider Figure 9.1. Suppose that Sony Company and American Company jointly form a new firm, Venture Company, whose ball bearings replace the output sold by the parents in the domestic market. Assuming that Venture Company operates as a monopoly and that its costs equal MC0=AC0, the firm's price, output, and total profit would respectively equal:a. $6, 2 units, $4b. $4, 2 units, $2c. $6, 4 units, $4d. $4, 4 units, $2

34. Consider Figure 9.1. Compared to the market equilibrium position achieved by Sony Company and American Company as competitors, Venture Company as a monopoly leads to a deadweight loss of consumer surplus of:a. $2b. $4c. $6d. $8

35. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from technological advances. Realizing that Venture Company results in a deadweight loss of consumer surplus, the net effect of Venture Company's formation on the welfare of the domestic economy is:a. No changeb. Gain of $2c. Gain of $4d. Loss of $2

36. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from wage concessions accepted by Venture Company employees. The net effect of Venture Company's formation on the welfare of the domestic economy is:a. No changeb. Gain of $2c. Loss of $2d. Loss of $4

37. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from changes in work rules by Venture Company employees that led to higher worker productivity. The net effect of Venture Company's formation on the welfare of the domestic economy is:a. No changeb. Gain of $2c. Gain of $4d. Loss of $2

Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S0 and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D0.

Figure 9.2. U.S. Labor Market

38. Consider Figure 9.2, at labor market equilibrium, workers are hired at a wage rate of $____ per hour, while total wages equal ____.a. 2, $12, $24b. 2, $12, $36c. 3, $9, $27d. 3, $9, $36

39. Consider Figure 9.2. At labor market equilibrium, the payment to U.S. capital owners equals:a. $3b. $6c. $9d. $12

40. Consider Figure 9.2. If Mexican migration to the United States results in the labor force increasing to 3 workers, denoted by schedule S1, the:a. Wage rate for native U.S. workers decreases and the payments to U.S. capital owners increasesb. Wage rate for native U.S. workers decreases and the payments to U.S. capital owners decreasesc. Wage rate for native U.S. workers increases and the payments to U.S. capital owners increasesd. Wage rate for native U.S. workers increases and the payments to U.S. capital owners decreases

41. Consider Figure 9.2. As the result of the Mexican migration to the United States:a. U.S. capital owners loseb. Native U.S. workers losec. U.S. capital owners and native U.S. workers losed. U.S. capital owners and native U.S. workers gain

42. Consider Figure 9.2. Policies that permit Mexican workers to freely migrate to the United States would likely be resisted by:a. U.S. capital ownersb. Native U.S. workersc. U.S. capital owners and native U.S. workersd. Neither U.S. capital owners nor native U.S. workers

43. ____ refers to highly educated and skilled people who migrate from poor developing countries to wealthy industrial countries.a. Direct investmentb. Portfolio investmentc. Transfer pricingd. Brain drain

44. "Guest worker" programs generally result in temporary migration of workers from:a. Wealthy nations to wealthy nationsb. Wealthy nations to impoverished nationsc. Impoverished nations to wealthy nationsd. Impoverished nations to impoverished nations

45. Mexico's ____ refer to an assemblage of U.S.-owned companies that use U.S.-owned parts and Mexican assembly to manufacture goods that are exported to the United States.a. Multinational corporationsb. International joint venturesc. Maquiladorasd. Transplants

46. Critics of U.S. trade and immigration policy maintain thata. It has depressed wages for many Americansb. It has increased the supply of less educated workers in the United Statesc. It has an adverse impact on the employment opportunities of less-skilled, American workersd. All of the above

47. American critics of U.S. multinational enterprises contend that they promotea. Runaway jobsb. Technology transfers abroadc. Tax evasiond. All of the above

48. Joint ventures may lead toa. Welfare increasesb. Welfare decreasesc. No changes in welfared. All of the above

49. Foreign direct investment typically occurs whena. The earnings of the parent company are invested in plant expansion overseasb. The parent company transfers jobs overseasc. The parent company closes its foreign production plantsd. The parent company purchases bonds of foreign governments

TRUE/FALSE

1. International trade in goods and services and flows of productive factors are substitutes for each other.

2. Most multinational corporations have a low ratio of foreign sales to total sales, usually 5 percent or less.

3. Vertical integration occurs if a parent multinational corporation establishes foreign subsidiaries to produce intermediate goods or inputs that go into the production of a finished good.

4. Exxon Oil Co. would undertake forward vertical integration if its retailing division acquired oil wells in the Middle East.

5. Forward vertical integration would occur if a U.S. automobile manufacturer acquired a German subsidiary.

6. Most vertical foreign investment, as implemented by multinational corporations, is "forward" in nature rather than "backward."

7. Horizontal integration would occur if General Motors sets up a subsidiary in Mexico to produce automobiles identical to those that it produces in the United States.

8. Multinational corporations sometimes locate manufacturing subsidiaries abroad to avoid tariff barriers which would place their products at a competitive disadvantage in a foreign country.

9. Foreign direct investment would occur if Mobile Inc. of the United States acquired sufficient common stock in a foreign oil company to assume voting control.

10. Foreign direct investment would occur if Microsoft Inc. of the United States purchased securities of the French government.

11. Conglomerate integration would occur if General Motors Inc. of the United States acquired a controlling interest in a British chemical company.

12. Both economic theory and empirical studies support the notion that foreign direct investment is conducted in anticipation of future profits.

13. Multinational corporations often locate manufacturing operations abroad in order to take advantage of foreign resource endowments or wage scales.

14. If the size of the Canadian market is large enough to permit efficient production in Canada, a U.S. firm would profit by establishing a Canadian manufacturing subsidiary or licensing rights to a Canadian firm to manufacture and sell its product in Canada.

15. There is virtually universal agreement among economists that foreign direct investment in the United States has reduced the economic welfare of the average U.S. citizen.

16. Foreign-owned companies in the United States operate under more strict antitrust, environmental, and other regulations than U.S.-owned companies.

17. During the 1980s and 1990s, Japanese auto firms established manufacturing facilities in the United States known as "transplants."

18. By establishing transplant factories in the United States, Japanese automakers were able to avoid export restrictions imposed by the Japanese government, but not import restrictions imposed by the U.S. government.

19. Mergers differ from joint ventures in that they involve the creation of a new business firm, rather than the union of two existing companies.

20. Developing countries, such as Mexico and India, often close their borders to foreign companies unless they are willing to take on partner companies in developing countries.

21. In natural-resource oriented industries, such as oil and copper, joint ventures have often been formed by several companies since the cost of resource-extraction may be prohibitively large for a particular company.

22. International joint ventures tend to yield a welfare increasing market-power effect and a welfare decreasing cost-reduction effect.

23. A joint venture leads to increases in national welfare if the cost-reduction effect is due to wage concessions and if it more than offsets the market-power effect.

24. A joint venture leads to increases in national welfare if its cost-reduction effect is due to productivity gains and if it more than offsets the market-power effect.

25. Joint ventures lead to losses in national welfare when the newly established business adds to pre-existing production capacity and fosters additional competition.

26. Joint ventures lead to national welfare gains if the newly established business yields productivity increases that would have been unavailable if each parent performed the same function separately.

27. A joint venture along two large competing companies tends to yield a market-power effect, which results in a reduction in consumer surplus, that is not offset by a corresponding gain to producers.

28. If a joint venture among competing firms is able to cut costs by extracting wage concessions from domestic workers, national welfare increases.

29. Critics of multinational corporations maintain that they often abandon domestic workers in order to take advantage of lower wage scales abroad.

30. The theory of multinational enterprise is totally inconsistent with the principle of comparative advantage.

31. Due to transfer-pricing problems, multinational corporations must shift profits away from countries with low corporate tax rates to high tax-rate countries, thus absorbing a larger tax bite.

32. Maquiladoras refer to an assemblage of U.S.-owned companies that combine Mexican parts and U.S. assembly to manufacture goods that are exported to Mexico.

33. Opposition to Mexico's maquiladoras has come from U.S. labor unions which claim that maquiladoras have resulted in job losses for U.S. workers.

34. As workers migrate from low-wage Mexico to high-wage United States, wages tend to rise in Mexico and fall in the United States.

35. The migration of workers from Mexico to the United States tends to exert downward pressure on the wages of native U.S. workers that compete against Mexican workers for jobs.

36. The effect of workers migrating from low-wage Mexico to high-wage United States is to redistribute income from capital to labor in the United States and from labor to capital in Mexico.

37. In the United States, labor unions have generally resisted efforts to implement restrictions on the number of foreigners allowed into the country.

38. Developing countries have sometimes feared open immigration policies of developed countries on the grounds that highly educated and skilled people may emigrate to the developed countries, thus limiting the growth potential of the developing countries.

39. The United States has discouraged the "brain drain" problem by permitting the immigration of unskilled workers while restricting the immigration of skilled persons.

40. Labor migration tends to increase output and decrease wages in the country of immigration while decreasing output and increasing wages in the country of emigration.

SHORT ANSWER

1. What are the typical ways in which multinational enterprises have diversified their operations?

2. What are Mexican maquiladoras?

ESSAY

1. Are there any differences between the theory of multinational enterprises and conventional trade theory?

2. What are the disadvantages of forming joint ventures?