1. “Risk spreading” is a motive most likely to be served when firms undergo:
  2. Horizontal integration
  3. Vertical integration
  4. Conglomerate integration
  5. None of the above
  6. The source (home) location of most of the world’s leading multinational enterprises is:
  7. North America and Europe
  8. North America and Asia
  9. Europe and South America
  10. Europe and Asia
  11. Which type of multinational diversification occurs when the parent firm establishes foreign subsidiaries to produce intermediate goods going into the production of finished goods?
  12. Forward vertical integration
  13. Backward vertical integration
  14. Forward horizontal integration
  15. Backward horizontal integration
  16. Suppose that an American automobile manufacturer establishes foreign subsidiaries to mar­ket the automobiles. This practice is referred to as:
  17. Forward vertical integration
  18. Forward conglomerate integration
  19. Backward vertical integration
  20. Backward conglomerate integration
  21. Suppose that a steel manufacturer headquartered in Japan sets up a subsidiary in Canada to produce steel. This practice is referred to as:
  22. Conglomerate integration
  23. Forward vertical integration
  24. Backward vertical integration
  25. Horizontal integration
  26. 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:
  27. Horizontal integration
  28. Conglomerate integration
  29. Forward vertical integration
  30. Backward vertical integration
  31. Which of the following best refers to the outright construction or purchase abroad of pro­ductive facilities, such as manufacturing plants, by domestic residents?
  32. Direct investment
  33. Portfolio investment
  34. Short-term capital investment
  35. Long-term capital investment
  36. In recent years, the largest amount of U.S. direct investment abroad has occurred in:
  37. Central America
  38. South America
  39. Europe
  40. Japan
  41. In recent years, most foreign direct investment in the United States has come from:
  42. Western Europe
  43. Central America
  44. South America
  45. Asia
  46. Most U.S. direct investment abroad occurs in:
  47. Communications
  48. Petroleum
  49. Finance and insurance
  50. Manufacturing
  51. Most foreign direct investment in the United States occurs in:
  52. Public utilities
  53. Communications
  54. Manufacturing
  55. Mining and smelting
  56. Which of the following is not a significant motive for the formation of multinational enter­prises?
  57. Avoiding tariffs by obtaining foreign manufacturing facilities
  58. Obtaining the benefits from overseas comparative advantages
  59. The acquisition of natural resource supply sources
  60. Subsidies granted by the home government to overseas corporations
  61. 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:
  62. International dumping
  63. Cost-plus pricing
  64. Transfer pricing
  65. Technological transfer
  66. Multinational enterprises may provide benefits to their source (home) countries because they may:
  67. Secure raw materials for the source country
  68. Shift source country technology overseas via licensing
  69. Export products which reflect source-country comparative disadvantage
  70. Result in lower wages for source-country workers
  71. Trade analysis involving multinational enterprises differs from our conventional trade analysis in that multinational enterprise analysis emphasizes:
  72. Absolute cost differentials rather than comparative cost differentials
  73. The international movement of factor inputs rather than finished goods
  74. Purely competitive markets rather than imperfectly competitive markets
  75. Portfolio investments rather than direct foreign investments
  76. Direct foreign investment has taken all of the following forms except:
  77. Investors buying bonds of an existing firm overseas
  78. The creation of a wholly owned business enterprise overseas
  79. The takeover of an existing company overseas
  80. The construction of a manufacturing plant overseas
  81. Which of the following would best explain why foreign direct investment might be attracted to the United States?
  82. U.S. price ceilings that hold down the price of energy
  83. U.S. wage rates exceeding the productivity of U.S. labor
  84. Artificially high prices being charged for the stock of U.S. firms
  85. Anticipations of future reductions in U.S. tariff levels
  86. Both Coca-Cola Co. and Pepsi-Cola Co. are multinational firms in that their soft drinks are bottled throughout the world. This practice illustrates:
  87. Backward vertical integration
  88. Forward vertical integration
  89. Horizontal integration
  90. Conglomerate integration
  91. 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?
  92. R&D generating improved technology
  93. Development of more productive machinery
  94. New work rules promoting worker efficiency
  95. Lower wages extracted from workers
  96. All of the following are potential advantages of an international joint venture except:
  97. Sharing research and development costs among corporations
  98. Forestalling protectionism against imports
  99. Establishing work rules promoting higher labor productivity
  100. Operating at diseconomy-of-scale output levels
  101. Which term best describes the New United Motor Manufacturing Co.?
  102. Multinational enterprise
  103. International joint venture
  104. Multilateral contract
  105. International commodity agreement
  106. Multinational enterprises:
  107. Increase the transfer of technology between nations
  108. Make it harder for nations to foster activities of comparative advantage
  109. Always enjoy political harmony in nations where their subsidiaries operate
  110. Require governmental subsidies in order to conduct worldwide operations
  111. Firms undertake multinational operations in order to:
  112. Hire low-wage workers
  113. Manufacture in nations they have difficulty exporting to
  114. Obtain necessary factor inputs
  115. All of the above
  116. Multinational enterprises face problems since they:
  117. Cannot benefit from the advantages of comparative advantage
  118. May raise political problems in countries where their subsidiaries operate
  119. Can invest only at home, but not overseas
  120. Can invest only overseas, but not at home
  121. American labor unions have recently maintained that U.S. multinational enterprises have been:
  122. Exporting American jobs by investing overseas
  123. Exporting American jobs by keeping investment in the United States
  124. Importing cheap foreign workers by shifting U.S. investment overseas
  125. Importing cheap foreign workers by keeping U.S. investment at home
  126. American labor unions accuse U.S. multinational firms of all of the following except that such firms:
  127. Enjoy unfair advantages in taxation
  128. Export jobs by shifting technology overseas
  129. Export jobs by shifting investment overseas
  130. Operate at output levels where scale economies occur
  131. 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?
  132. Transfer pricing
  133. International dumping
  134. Price discrimination
  135. Full-cost pricing
  136. Which business device involves the creation of a new business by two or more companies, often for a limited period of time?
  137. Multinational enterprise
  138. International joint venture
  139. Horizontal merger
  140. Vertical merger
  141. International joint ventures can lead to welfare losses when the newly established firm:
  142. Adds to the preexistent productive capacity
  143. Enters markets neither parent could have entered individually
  144. Yields cost reductions unavailable to parent firms
  145. Gives rise to increased amounts of market power
  146. Multinational enterprises:
  147. Always produce primary goods
  148. Always produce manufactured goods
  149. Produce primary goods or manufactured goods
  150. 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. Answer the Questions 31–37 on the basis of this information.

Figure 9.1. International Joint Venture

  1. Consider Figure 9.1. With Sony Company and American Company behaving as competi­tors, the equilibrium price and output respectively equal:
  2. $4 and 2 units
  3. $4 and 4 units
  4. $6 and 2 units
  5. $6 and 4 units
  6. Consider Figure 9.1. At the equilibrium price that was calculated in Question #31, domestic households attain ________ of consumer surplus.
  7. $4
  8. $8
  9. $12
  10. $16
  11. 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:
  12. $6, 2 units, $4
  13. $4, 2 units, $2
  14. $6, 4 units, $4
  15. $4, 4 units, $2
  16. 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:
  17. $2
  18. $4
  19. $6
  20. $8
  21. 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:
  22. No change
  23. Gain of $2
  24. Gain of $4
  25. Loss of $2
  26. Consider Figure 9.1. Refer to Question #35 and suppose the new cost reductions resulted from wage concessions accepted by Venture Company employees. The net effect of Venture Company’s formation on the welfare of the domestic economy is:
  27. No change
  28. Gain of $2
  29. Loss of $2
  30. Loss of $4
  31. Consider Figure 9.1. Refer to Question #35 and suppose the new cost reductions resulted 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:
  32. No change
  33. Gain of $2
  34. Gain of $4
  35. 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. On the basis of this information, answer the Questions 38–42.

Figure 9.2. U.S. Labor Market

  1. Consider Figure 9.2. At labor market equilibrium, workers are hired at a wage rate of $________ per hour, while total wages equal ________.
  2. 2, $12, $24
  3. 2, $12, $36
  4. 3, $9, $27
  5. 3, $9, $36
  6. Consider Figure 9.2. At labor market equilibrium, the payment to U.S. capital owners equals:
  7. $3
  8. $6
  9. $9
  10. $12
  11. 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:
  12. Wage rate for native U.S. workers decreases and the payments to U.S. capital owners increases
  13. Wage rate for native U.S. workers decreases and the payments to U.S. capital owners decreases
  14. Wage rate for native U.S. workers increases and the payments to U.S. capital owners increases
  15. Wage rate for native U.S. workers increases and the payments to U.S. capital owners decreases
  16. Consider Figure 9.2. As the result of the Mexican migration to the United States:
  17. U.S. capital owners lose
  18. Native U.S. workers lose
  19. U.S. capital owners and native U.S. workers lose
  20. U.S. capital owners and native U.S. workers gain
  21. Consider Figure 9.2. Policies that permit Mexican workers to freely migrate to the United States would likely be resisted by:
  22. U.S. capital owners
  23. Native U.S. workers
  24. U.S. capital owners and native U.S. workers
  25. Neither U.S. capital owners nor native U.S. workers
  26. ________ refers to highly educated and skilled people who migrate from poor developing countries to wealthy industrial countries.
  27. Direct investment
  28. Portfolio investment
  29. Transfer pricing
  30. Brain drain
  31. “Guest worker” programs generally result in temporary migration of workers from:
  32. Wealthy nations to wealthy nations
  33. Wealthy nations to impoverished nations
  34. Impoverished nations to wealthy nations
  35. Impoverished nations to impoverished nations
  36. 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.
  37. Multinational corporations
  38. International joint ventures
  39. Maquiladoras
  40. Transplants
  41. Critics of U.S. trade and immigration policy maintain that:
  42. It has depressed wages for many Americans
  43. It has increased the supply of less educated workers in the United States
  44. It has an adverse impact on the employment opportunities of less-skilled, American workers
  45. All of the above
  46. American critics of U.S. multinational enterprises contend that they promote:
  47. Runaway jobs
  48. Technology transfers abroad
  49. Tax evasion
  50. All of the above
  51. Joint ventures may lead to:
  52. Welfare increases
  53. Welfare decreases
  54. No changes in welfare
  55. All of the above
  56. Foreign direct investment typically occurs when:
  57. The earnings of the parent company are invested in plant expansion overseas
  58. The parent company transfers jobs overseas
  59. The parent company closes its foreign production plants
  60. The parent company purchases bonds of foreign governments


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

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

T        F       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.

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

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

T        F       6.  Most vertical foreign investment, as implemented by multinational corporations, is “forward” in nature rather than “backward.”

T        F       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.

T        F       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.

T        F       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.

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

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

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

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

T        F     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.

T        F     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.

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

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

T        F     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.

T        F     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.

T        F     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.

T        F     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.

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

T        F     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.

T        F     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.

T        F     25.  Joint ventures lead to losses in national welfare when the newly established busi­ness adds to preexisting production capacity and fosters additional competition.

T        F     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.

T        F     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.

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

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

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

T        F     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.

T        F     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.

T        F     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.

T        F     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.

T        F     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.

T        F     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.

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

T        F     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.

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

T        F     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.


Answers to Multiple-Choice Questions


  1. c
  2. a
  3. b
  4. a
  5. d
  6. b
  7. a
  8. c
  9. a
  10. d
  11. c
  12. d
  13. c
  14. a
  15. b
  16. a
  17. a
  18. c
  19. d
  20. d
  21. b
  22. a
  23. d
  24. b
  25. a
  26. d
  27. a
  28. b
  29. d
  30. c
  31. b
  32. b
  33. a
  34. a
  35. b
  36. c
  37. b
  38. a
  39. b
  40. a
  41. b
  42. b
  43. d
  44. c
  45. c
  46. d
  47. d
  48. d
  49. a


Answers to True-False Questions


  1. T
  2. F
  3. T
  4. F
  5. F
  6. F
  7. T
  8. T
  9. T
  10. F
  11. T
  12. T
  13. T
  14. T
  15. F
  16. F
  17. T
  18. F
  19. F
  20. T
  21. T
  22. F
  23. F
  24. T
  25. F
  26. T
  27. T
  28. F
  29. T
  30. F
  31. F
  32. F
  33. T
  34. T
  35. T
  36. F
  37. F
  38. T
  39. F
  40. T



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

Answer: Multinational enterprises have diversified their operations along vertical, horizon­tal, and conglomerate lines.

  1. What are Mexican maquiladoras?

Answer: Maquiladoras are assemblages of foreign-owned companies that use foreign parts and Mexican assembly to produce goods that are exported to the United States.


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

Answer: There are major differences. The conventional model assumes that commodities are traded between independent, competitive businesses. However, multinational enterprises are often vertically integrated businesses with substantial intrafirm sales. Also, multinational enterprises may use transfer pricing to maximize overall company profits of any single subsidiary.

  1. What are the disadvantages of forming joint ventures?

Answer: A joint venture is a cumbersome organization compared with a single organiza­tion. Control is divided, creating problems of “two masters.” Success or failure depends on how well companies work together despite having different objectives, corporate cultures and ways of doing things. The action of corporate chemistry is hard to predict, but it is criti­cal because joint-venture agreements usually provide both partners an ongoing role in man­agement. When joint-venture ownership is divided equally, as often occurs, deadlocks in decision making can take place. Even when negotiated balance is achieved, it can be upset by changing corporate goals or personnel.

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