A firm\'s decision to engage in vertical foreign direct investmentlong dash—to b
ID: 1105322 • Letter: A
Question
A firm's decision to engage in vertical foreign direct
investmentlong dash—to
break up its production chain and move parts of that chain to a foreign
affiliatelong dash—involves
a trade-off between
A.
per-unit trade costs associated with exporting and average fixed costs of operating the foreign affiliate.
B.
per-unit production costs for the parts of the production chain that are being moved and average fixed costs of operating the foreign affiliate.
C.
per-unit production costs for the parts of the production chain that are being moved and per-unit trade costs associated with exporting.
D.
per-unit production costs for the parts of the production chain that are being moved and average variable costs of operating the foreign affiliate.
Explanation / Answer
Answer is "B"
Vertical Foreign Direct Investment menas that the country is playing the role of distributor or supplier in any other country apart from host country.
In other words, expanding the stages of production by setting up a plant or company in foreign country is termed as vertical FDI.
As per the question, a firm is deciding to engage in vertical FDI to break up its production chain and move parts of that chain to foreign affliates. Here company will see the trade of between two things in order to see whether it is profitable to make such a move. Firm will make the trade off between "per unit production costs for the part of production chains that are being moved" and "average fixed costs of operating the foreign affliates".
If the average fixed costs of operating the affiliates is more than the per unit production costs for the part of cgain that are being moved" then it makes no sense to go for Vertical FDI.
If its the other way round then it would be profitable for the country to go for such Vertical FDI
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