ECON FDI, Entry, and Strategy
Omega Inc. sells its fitness wrist band for $100. It costs the company $62 to make the product. Customers value the wrist band at $110. In this scenario, the consumer surplus is
$10
Omega Inc. sells its fitness wrist band for $100. It costs the company $62 to make the product. Customers are willing to pay $110 for the wrist band. Omega's profit per wrist band is
$38
What are the different ways in which a firm can benefit from global expansion?
Firms can benefit from global expansion because it can increase their revenue. This also will likely increase job opportunity and create relationship with businesses overseas which simply means more business in the long-run.
Which of the following is an advantage of turnkey projects as a mode of entry into foreign markets?
It is a useful strategy to earn great returns from the know-how of a technologically complex process.
Which of the following is a home-country policy for limiting outward FDI?
manipulating tax rules to encourage the firms to invest at home
How can firms avoid incurring high transport costs when exporting bulk products?
manufacturing bulk products regionally
To encourage inward FDI, it is increasingly common for governments to
offer tax concessions to foreign firms that invest in their countries.
In which of the following modes of entry into foreign markets does a firm agree to set up an operating plant when it is fully operational?
turnkey project
What is NOT an option int he service industry, due to the fact that many services have to be produced where they are sold?
exporting
The top management team at the Kentucky-based Mumford Products collectively support the market imperfections approach. This means Mumford Products' top management team is most likely to
express a preference for FDI over licensing as a strategy to enter foreign markets.
According to internalization theory, one o the drawbacks of licensing is that
it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
How do firms respond to low cost pressures and low pressures for local responsiveness?
In the case of low cost pressures and low pressures for local responsiveness, firms will use an international strategy where both cost and customization are low. Here they will move product outside of the domestic market for sale.
Why do firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries?
It allows firms to use the profits generated in one market to improve its competitive position in another market.
Which of the following is a disadvantage of franchising?
It is difficult to maintain quality control across foreign franchisees that are distant from the franchiser.
Which of the following is true of a transnational strategy?
It is used by firms that try to achieve low costs through location economies, economies of scale, and learning effects.
Which of the following is true of localization strategy?
It makes sense if the value added by customization supports higher pricing.
Which of the following is a drawback of licensing as a mode of entry into foreign markets?
Licensing does not give a firm tight control over manufacturing, marketing, and strategy.
Which of the following is an advantage of joint ventures as a mode of entry into foreign markets?
The foreign firm benefits from a local partner's knowledge of the host country.
Which of the following is a disadvantage of large-scale entry into a foreign market?
availability of fewer resources to support expansion in other desirable markets
How can a wholly owned subsidiary be established in a foreign market?
by acquiring an established firm in the host nation
An advantage of choosing exporting as a mode of entry into foreign markets is that a firm
can avoid the cost of establishing manufacturing operations in the host country.
The appropriateness of the strategy that a firm chooses to use in an international market varies with the extent of pressures for
cost reductions and local responsiveness (need for customization).
Which account in the balance of payments records transactions involving the export and import of goods and services?
current
According to Michael Porter, what are the two basic strategies for creating value and attaining a competitive advantage in an industry?
differentiation and low-cost
In a bid to compete better in a highly-competitive fitness products market, Omega is focusing primarily on increasing the attractiveness of its product. What Omega is doing is referred to as
differentiation strategy.
Which of the following concepts helps explain how location factors affect the direction of FDI?
eclectic paradigm
By producing its products in larger volume than its competitors, Omega is able to achieve substantial reductions in unit cost. Which of the following refers to Omega's advantage?
economies of scale
Which of the following shows all the different positions that a firm can adopt with regard to value creation and low cost assuming that its internal operations are configured adequately to support a particular position?
efficiency frontier
Direct effects of FDI on employment in the host country arise when a foreign MNE
employs a number of host country citizens.
The strategic behavior theory is used to
explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.
Which of the following modes of entry into foreign markets can result in a lack of control over quality?
franchising
Which of the following modes of entry is suitable for firms where the risk of losing control over the management skills or technological know-how is not much of a concern, and where the firms' valuable asset is their brand name?
franchising
General Electric built an operation from scratch in Nigeria. This is an example of a
greenfield investment
The CFO of At Home Products is unhappy with the firm's choice of wholly owned subsidiaries as the mode of foreign entry. He has pointed out a number of disadvantages to this mode. Which of the following is a disadvantage of wholly owned subsidiaries as a mode of entry into foreign markets?
high costs and risks
Dunning's theory helps explain
how location factors affect the direction of FDI.
The interdependence between firms in an oligopoly leads to
imitative behavior.
The argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing constitutes the
internalization theory
The difference between internalization theory and imitative theory is that
internalization theory addresses the issue of efficiency of FDI over exporting or licensing.
Firms that pursue a(n) _________ strategy take products first produced by their domestic market and sell them across various markets with only minimal local customization.
international
Mayer Life Systems, a manufacturer of surgical and medical appliances, invented and patented a new dialysis machine that radically reduced maintenance and operational issues. Responding to global demand, it decided to sell the machines manufactured at its plant in the United States to various markets across the globe. Since the product features provided by Mayer were not provided by any other competitor, Mayer did not feel any pressure for cost reductions. Which of the following strategies is most likely being pursued by Mayer?
international
Axiom International, an Australian company, wants to expand its operations to China, a country that is politically, culturally, and economically different. The firm needs to select a mode of entry that would give it access to local knowledge, allow sharing of development costs and risks, and also be politically acceptable. Which of the following modes of entry into foreign markets is most suitable for Axiom International?
joint venture
Ford believes that by producing its small cars in Mexico they can take advantage of lower wage rates in that country. By pursuing such a strategy, Ford is most likely to realize
location economies.
Jingo Products is a market leader in playground equipment which is typically large and bulky and weighs a lot. Because of competitive reasons, Jingo Products sells its entire line at very low prices. Although its products can be produced anywhere, it is considering exporting as a way to grow in overseas markets. The viability of Jingo Products' exporting strategy could be constrained by transportation costs, particularly of products that can be produced in almost any location and have a
low value-to-weight ratio.
By using significant standardization in the use of aircrafts and by streamlining its operations, Southwest Airlines competes by offering its flights at a lower price than the competition. According to Michael Porter, the strategy that Southwest Airlines is using is
low-cost
Omega Inc., a m aker of personal fitness trackers (like Fitbit) was the first mover into the country of Malnesia. As the first mover in a new product area, Omega Inc. had to spend a lot of money educating the population of Malnesia about fitness and tracking one's fitness. In addition, they also had to spend money in developing a distribution channel. The costs that Omega Inc. incurred in Malnesia as the first mover are called
pioneering costs.
Firms that compete in the global marketplace typically face which two types of competitive pressure?
pressures for cost reductions and pressures to be locally responsive
The rate of return that a firm makes on its invested capital is referred to as
profitability.
Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country, whether those operations are acquired or greenfield developments. This benefit of FDA falls into the category of
resource transfer effects
Which of the following is the only way to support a current account deficit in the long run?
selling assets to foreigners
Franchising as a mode of entry into foreign markets is employed primarily by
service firms.
In exporting, problems with local marketing agents can be overcome by
setting up wholly owned subsidiaries in foreign nations to handle local marketing.
The United States has been an attractive target for FDI partly because of its
stable and dynamic economy
A cooperative agreement between potential or actual competitors is called a
strategic alliance
Omega, Inc. sells its fitness wrist band for $100. It cost the company $62 to make the product. Customers value the wrist band at $110. While Omega's pricing practice results in a consumer surplus, it typically charges a lower price for the wrist band than the value placed on it by customers because
the firm is competing with other firms for the customer's business.
In general, the more value customers place on a firm's products
the higher the price the firm can charge for those products.
A firm is most likely to pursue a global standardization strategy when
there are strong pressures for cost reduction.
Spring, an American firm, recently acquired another company, Tazel Inc., in Indonesia. The high-level managers at Tazel quit because they could not cope with the domineering and straightforward approach of their American counterparts. This illustrates how acquisitions may fail because
there is a clash between the cultures of the acquired and the acquiring firm.
A current account deficit is also known as a
trade deficit
Which of the following strategies is a firm most likely to pursue when it simultaneously faces both strong cost pressures and strong pressures for local responsiveness?
transnational strategy
Which of the following entry modes into a foreign market best serves a high-tech firm?
wholly owned subsidiaries
