5. A firm is more likely to engage in horizontal foreign direct investment if A)

Question

5. A firm is more likely to engage in horizontal foreign direct investment if A) trade costs are low and firms experience constant returns to scale in production B) trade costs are high and there are internal economies of scale. C) trade costs are low and there are external economies of scale. D) trade costs are low and there are intermal cconomies of scale. E) trade costs are high and there are external economies of scale 6. In the Brander-Spencer model (e g. Airbus vs. Bocing example in Lecture 23) the subsidy raises profits by more than the subsidy because of A) the military-industrial complex. B) the "multiplier" effect of government expenditures. C) the economies of scale once the company enters the market. D) the forward and backward linkage effects of certain industries E) the deterrent effect of the subsidy on foreign competition 7. Product differentiation and internal economies of scale yield gains from trade in the form of A) the proximity-concentration effect B) a proliferation of competitive firms C) higher profits and lower trade costs D) lower production costs and a greater variety of goods E) the substitution of immigration for foreign direct investment 8. Working conditions for clothing workers in Bangladesh are very poor. If countries refuse to buy clothing from Bangladesh in order to encourage change, the effect is likely to be that A) firms will try to comply and workers will be worse off B) firms will try to comply and workers will be better off C) firms wil, refuse to comply, but workers will be better off. D) firms will be forced to comply and workers will be better off. E) regardless of how firms respond, workers will be better ofr.

Explanation / Answer

5. Option B.

Explanation: In the case of horizontal Foreign Direct Investment (FDI), a firm invests in the same type of business in a foreign country in which the firm is currently operating in the domestic market. A firm is more likely to engage in horizontal FDI when the trade cost is high and the firm has internal economies of scale.

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