Question

1.) Which of the following best describes a characteristic of vertical FDI?

a. Behind the large increase in FDI inflows to developing countries

b. Main reason for this type of FDI is to locate production near a firm's large customers bases

c. Both the multinational parent and the affiliates are located in developed countries

d. The affiliate replicates the production process elsewhere in the world

2.) Offshoring

a. Occurs when a parent contracts with an independent firm to perform specific parts of the production process in the foreign location with the best cost advantage. -> (Wrong Answer)

b. Occurs when a firm sets an export price (net of trade costs) that is lower than its domestic price.

c. Represents the relocation of parts of the production chain abroad and groups together both foreign outsourcing and vertical FDI.

d. Is a substitute for vertical FDI

Answer 1

Ans 1. d. The affiliate replicates the production process elsewhere in the world.

In the vertical FDI , the firm exercises its different production stages in different countries (mostly low wage countries) with an aim to reduce its cost of production.

Ans 2.d. is a substitute for vertical fdi

Offshoring occurs when firms, instead of producing/ acquiring domestically, imports the intermediate goods and services. There is no official definition that would make offshoring and vertical fdi as substitutes, but by comparing the definitions we can say they both can act as substitutes for the organization.