Question

In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI. 1. Higher , Lower 2. Lower , Higher 3. None of the above 4. All of the above

Answer 1

Exporting operations generally have lower fixed production costs and higher transportation costs compared to direct foreign investment, making the correct answer option 2.

Step-by-step explanation:

When comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur lower fixed production costs and higher transportation costs than DFI. The correct answer is option 2. Exporting tends to have lower fixed production costs because the company can utilize its existing production facilities at home without the need for investing in new production facilities in the foreign country. However, exporting involves higher transportation costs as the goods must be shipped to the foreign market, which can be expensive, particularly for bulky or perishable products.

When firms engage in DFI, they typically set up production units in the target country, which increases fixed production costs due to the new facilities that need to be built or purchased. In contrast, the transportation costs for DFI are usually lower because the products are manufactured close to the market they're sold in, reducing the need to transport goods over long distances.