S354 FINAL EXAM
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
Contracting out manufacturing may be more appropriate for high-value-added manufacturing. (T/F)
FALSE
For price discrimination to work, arbitrage opportunities must be unlimited.(T/F)
FALSE
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
Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk?
Currency Swap
If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing parity theory's prediction of the dollar/euro exchange rate be?
$1 = €1.20
Steven converted $1000 to x105,000 for a trip to Japan. However, he spent only x50,000. During this period, the value of the dollar weakened against the yen. Considering a current exchange rate of $1=x100, how many dollars did Steven spend on the trip?
$450
According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual inflation is 9%, what would the "nominal" interest rate be?
13 percent
The yen/dollar exchange rate is x120=$1 in London and x123=$1 in New York at the same time. What is the net profit if a dealer takes 1,000,000 to purchase x 123,000,000 in new york and engages in arbitrage by selling it to London?
25,000
Which of the following statements is true about the current monetary system?
A combination of government intervention and speculative activity drives the current foreign exchange marker
The Fisher effect states that:
A country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent
Which of the following was a reason that led to the collapse of the gold standard in 1939?
A cycle of competitive currency devaluations by various countries
What is a firm engaging in when it insures itself against foreign exchange risk?
Hedging
Which of the following is a reason why firms often overpay for the assets of an acquired firm?
Interest of more than one party in acquiring a particular firm
For an international business, which of the following is most likely to be an outcome of protectionism and nationalism in a host-country?
Pressure for localization of production
Firms that compete in the global marketplace typically face two types of competitive pressure:
Pressures for cost reductions and pressures to be locally responsive
The value creation activities of a firm are categorized as:
Primary activities and support activities
Which of the following is a reason why a relatively poor country may be an attractive target for inward investment?
Rapid Economic Growth
Which of the following is a primary activity in the operations of a firm?
Research and Development
In international business, an advantage of being a late entrant in a foreign market is the ability to :
Ride on an early entrant's investments in learning and customer education
Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.(T/F)
TRUE
If an international firm's core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner (T/F)
TRUE
Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries(T/F)
TRUE
The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products. (T/F)
TRUE
The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.(T/F)
TRUE
The various value creation activities that a firm undertakes are referred to as operations. (T/F)
TRUE
When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency, the phenomenon is generally referred to as capital flight.(T/F)
TRUE
Turnkey projects being short-term propositions can be disadvantageous for a firm if a country subsequently proves to be a major market for the output of the process that has been exported. The firm can get around this problem by:
Taking a minority equity interest in the operation
Which of the following is an example of a first-mover advantage?
The ability to create switching costs that tie customers into one's products or services
Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?
The impact of investor psychology on short-run exchange rate movements
Which of the following is an advantage of acquisitions as a means of entering foreign markets?
They are quick to execute and help firms to rapidly build their presence in the target foreign market
In terms of foreign exchange which of the following is true of leading and lagging strategies ?
They can help firms minimize their transaction and translation exposure.
Which of the following is true of the differences in relative demand and supply of currencies?
They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.
Firms that pursue which of the following strategies differentiate their product offering across geographic markets to account for local differences?
Transnational
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
The collapse of the fixed exchange rate system has been traced to the:
U.S. macroeconomic policy package of 1965-1968
Which of the following is a risk of entering developing nations like India and China on a large scale?
Absence of prior foreign entrants
The risks associated with learning to do business in a new culture are less if the firm:
Acquires an established host-country enterprise.
Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is x120=$1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is x123=$1. Which of the following transactions would yield immediate profit?
Arbitrage
The interest rate on borrowings in Rhoda is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percents. In this scenario, a carry trade would be to:
Borrow money in rhoadian currency, convert it into Maritian currency, and deposit it in a Maritian bank
All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF?
Excessive government spending and debt
Which of the following terms best represents the systematic reductions in production costs that have been observed to occur over the life of a product?
Experience Curve
The term organizational structure refers to the totality of a firm's organization, including organization architecture, control systems and incentives, organizational culture, processes, and people. (T/F)
FALSE
Transaction exposure, a category of foreign exchange risk, refers to the impact of currency exchange rate changes on the reported financial statements of a company.(T/F)
FALSE
Under a cross-licensing agreement, a firm can either request a royalty payment or license some valuable intangible property to a foreign partner (T/F)
FALSE
Under a floating exchange rate system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity.(T/F)
FALSE
Under the gold standard, a country in balance-of-trade equilibrium will experience a net inflow of gold from other countries.(T/F)
FALSE
Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.(T/F)
FALSE
What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise. (T/F)
FALSE
When companies wish to convert currencies, they typically enter the foreign exchange market directly.(T/F)
FALSE
When the Bretton Woods participants established the World Bank, the need to lend money to third world nations was foremost in their minds.(T/F)
FALSE
When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime. (T/F)
FALSE
When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.(T/F)
FALSE
Licensing is NOT attractive to which of the following firms?
Firms requiring tight control of operations for realizing experience curve and location economies
Pressures for cost reduction are intense in firms:
In which consumers face low switching costs
Which of the following is true of the efficient market school of thought toward exchange rate forecasting?
Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random.
Which of the following is a common underlying macroeconomic cause of financial crises?
Increases in stock and property prices
A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The returns from such a strategy are likely to be greater if:
Indigenous competitors in the nations that the company enters lack comparable products.
Which of the following observations about the International Monetary Fund (IMF) is true?
Internal political problems can affect a government's commitment to taking corrective action in return for an IMF loan.
Firms that pursue which of the following strategies take products first produced for their domestic market and sell them across various markets with only minimal local customization?
International
Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the:
International Monetary Fund to agree to a currency devaluation.
Which of the following strategies focus on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets?
Localization Strategy
Which of the following is the function of a value chain that controls the transmission of physical materials through the value chain, from procurement through production into distribution?
Logistics
Which of the following conditions is most favorable to reap gains from global scale economies?
Low demand for local responsiveness
Of all the value creation activities in a firm, which of the following creates value by discovering consumer needs and communicating them back to the R & D function of the company, which can then design products that better match those needs?
Marketing and Sales
Which of the following arises when people behave recklessly because they know they will be saved if things go wrong?
Moral Hazard
To reduce the risks of failure of an acquisition, managers must:
Move rapidly after an acquisition to put an integration plan in place
Which of the following factors determines the value that an international business can create in a foreign market?
Nature of indigenous competition
In which kind of exchange rate is the value of the currency fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate?
Pegged
SHORT ANSWER: Describe the gold standard and balance-of-trade equilibrium
Pegging currencies to gold and guaranteeing convertibility is known as the gold standard. By 1880, most of the world's major trading nations, including Great Britain, Germany, Japan, and the United States, had adopted the gold standard. Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine. The great strength claimed for the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries. A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is equal to the money its residents pay to other countries for imports (the current account of its balance of payments is in balance).
Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on?
Previous market trends and waves can be used to predict future market trends and waves.
When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as:
Price Discrimination
Firms that operate internationally are able to realize location economies by dispersing individual value creation activities to locations where they are performed most efficiently and effectively. (T/F)
TRUE
Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine.(T/F)
TRUE
If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.(T/F)
TRUE
In international business, an early entrant to a foreign market may be at a disadvantage relative to a later entrant, if regulations change in a way that diminishes the value of an early entrant's investments (T/F)
TRUE
Inflation occurs when the money supply in a country increases faster than output increases.(T/F)
TRUE
It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency. (T/F)
TRUE
Maintaining the company infrastructure is a support activity.(T/F)
TRUE
Pressures for local responsiveness imply that it may not be possible to leverage skills and products associated with a firms core competencies wholesale from one another. (T/F)
TRUE
Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.(T/F)
TRUE
Successful global expansion requires the transfer of core competencies to foreign markets where indigenous competitors lack them. (T/F)
TRUE
The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit. (T/F)
TRUE
A distinction can be drawn between firms whose core competency is in which of the following?
Technological know-how and management know-how
According to the critics of the international monetary fund (IMF), how should the problem of moral hazard exhibitied by banks be resolved?
The banks should be forced to pay the price for their rash lending policies
A global car manufacturer wants to start production in China. While catering to local responsiveness, what can the firms do to get scale economies?
Use common vehicle platforms and components across many different models.
The currency of the country of Venadia falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of theis exchange rate movement?
Venadia's exports to Lutetia will increase, because Venedian goods will become cheaper in Lutetia
In which of the following situations can international business command higher prices for a particular product in a foreign market?
When the product offers greater value to customers in the foreign market
Jupiter Systems is a high-tech firm looking to set up operations in a foreign country.The firm's core competency is in technological know-how. Which of the following modes of entry would be most favorable to the firm if it wants to keep a tight control over its technology?
Wholly Owned Subsidiary
Which of the following entry modes into a foreign market best serves a high-tech firm?
Wholly owned subsidiaries
The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to :
avoid high unemployment
The IMF has been criticized for:
encouraging moral hazard among banks.
A firm's profitability is maximized when it:
ensures that it has the right organization structure in place to execute its strategy.
An early entrant find may find itself at a disadvantage if it:
faces a subsequent change in business regulations in the host-country
Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as:
relational capital
The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany?
€250
Voronda Inc., a multinational clothing and accessory brand, has been facing huge economic losses due to unpredictable exchange rate movements. In order to gain considerable immunity against such currency fluctuations, Vornada Inc. should:
Disperse production to different locations around the globe
How does possessing a core competence help a firm?
It enables a firm to reduce the costs of value creation
Which of the following refers to the gold standard?
Pegging currencies to gold and guaranteeing convertibility
The speculative element of the carry trade is that its success is based upon a belief that:
There will be no adverse movement in exchange rates or interest rates
An aspect of the Bretton Woods agreement was a commitment not to use:
devaluation as a weapon of competitive trade policy
Which of the following is an advantage of choosing exporting as a mode of entry into foreign markets?
A firm can avoid the cost of establishing manufacturing operations in the host country.
SHORT ANSWER: How does an increase in money supply in an economy lead to inflation?
A government increasing the money supply is analogous to giving people more money. An increase in the money supply makes it easier for banks to borrow from the government and for individuals and companies to borrow from banks. The resulting increase in credit causes increases in demand for goods and services. Unless the output of goods and services is growing at a rate similar to that of the money supply, the result will be inflation. This relationship has been observed time after time in country after country.
Robben Inc. converts $1,000,000 into euros when the exchange rate is $1=€0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?
A loss of $62,500
The nominal rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should:
Depreciate by 3 percent against the Japanese yen
The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:
Depreciation in its currency exchange rate.
SHORT ANSWER: All international monetary fund loan packages come with conditions attached. Elaborate
By 2013, the International Monetary Fund (IMF) was committing loans to some 52 countries that were struggling with economic and/or currency crises. All IMF loan packages come with conditions attached. Until very recently, the IMF has insisted on a combination of tight macroeconomic policies, including cuts in public spending, higher interest rates, and tight monetary policy. It has also often pushed for the deregulation of sectors formerly protected from domestic and foreign competition, privatization of state-owned assets, and better financial reporting from the banking sector. These policies are designed to cool overheated economies by reining in inflation and reducing government spending and debt. This set of policy prescriptions has come in for tough criticisms from many observers, and the IMF itself has started to change its approach.
How can firms avoid incurring high transport costs when exporting bulk products?
By manufacturing bulk products regionally
A firm's ability to increase its profitability and profit growth by expanding globally is constrained:
By the imperative of localization
Which of the following support functions is most likely to involve dealing with the organizational structure, control systems, and culture of the firm ?
Company infrastructure
Cost reduction pressures tend to be particular intense in industries that:
Create products that serve universal needs
SHORT ANSWER:What are the sources of pressures for local responsiveness?
Differences in Customer Tastes and Preferences: Strong pressures for local responsiveness emerge when customer tastes and preferences differ significantly between countries, as they often do for deeply embedded historic or cultural reasons. In such cases, a multinational's products and marketing message have to be customized to appeal to the tastes and preferences of local customers. 2. Differences in Infrastructure and Traditional Practices: Pressures for local responsiveness arise from differences in infrastructure or traditional practices among countries, creating a need to customize products accordingly. Fulfilling this need may require the delegation of manufacturing and production functions to foreign subsidiaries. 3. Differences in Distribution Channels: A firm's marketing strategies may have to be responsive to differences in distribution channels among countries, which may necessitate the delegation of marketing functions to national subsidiaries. 4. Host Government Demands: Economic and political demands imposed by host-country governments may require local responsiveness.
Which of the following is most likely to necessitate the delegation of marketing functions to national subsidiaries?
Differences in distribution channels
Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?
Differentiating otherwise identical products among nations along some line, such as design or packaging.
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
Focusing primarily on increasing the attractiveness of a product is referred to as:
Differentiation strategy
Which of the following refers to a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value?
Dirty Float
Which of the following is an argument for a floating exchange rate system?
Each country should be allowed to choose its own inflation rate.
Which of the following shows all of 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
Which of the following has no impediments to the free flor of goods and services, such as trade barriers?
Efficient Market
SHORT ANSWER: What are the advantages and disadvantages of exporting as a mode of entry into foreign markets?
Exporting has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and location economies. Exporting has a number of drawbacks. First, exporting from the firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad (i.e., if the firm can realize location economies by moving production elsewhere). Thus, particularly for firms pursuing global or transnational strategies, it may be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective and to export to the rest of the world from that location. This is not so much an argument against exporting as an argument against exporting from the firm's home country. A second drawback to exporting is that high transport costs can make exporting uneconomical, particularly for bulk products. One way of getting around this is to manufacture bulk products regionally. This strategy enables the firm to realize some economies from large-scale production and at the same time to limit its transport costs. Another drawback is that tariff barriers can make exporting uneconomical. Similarly, the threat of tariff barriers by the host-country government can make it very risky. A fourth drawback to exporting arises when a firm delegates its marketing, sales, and service in each country where it does business to another company. This is a common approach for manufacturing firms that are just beginning to expand internationally. The other company may be a local agent, or it may be another multinational with extensive international distribution operations. Local agents often carry the products of competing firms and so have divided loyalties. In such cases, the local agent may not do as good a job as the firm would if it managed its marketing itself. Similar problems can occur when another multinational takes on distribution.
A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is greater than the money its residents pay to other countries for imports.(T/F)
FALSE
A risk averse international firm that enters a foreign market on a small scale will increase its potential losses. (T/F)
FALSE
A strategy that focuses primarily on increasing the attractiveness of a product is referred to as a low-cost strategy. (T/F)
FALSE
An international firm that enters into a turnkey deal has a long-term interest in the foreign country(T/F)
FALSE
Companies engage in currency speculation to get minimal but assured returns from idle cash.(T/F)
FALSE
Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires only minimal additional costs. (T/F)
FALSE
Exporting, as a mode of entry into foreign markets, does not help a firm achieve experience curve and location economies.
FALSE
Firms that pursue and international strategy focus on increasing the profitability by reaping the cost reductions that come from economies of scale, learning effects, and location economies.(T/F)
FALSE
Franchising, a mode of entry into a foreign market, helps firms exert greater quality control over franchises in foreign locations.(T/F)
FALSE
If an international business can offer a product that has been widely available in that market, the value of that product to consumers is likely to be much greater than if the international business offers a product that has not been widely available in that market. (T/F)
FALSE
If more dollars are needed to buy an ounce of gold than before, the implication is that the dollar is worth more. (T/F)
FALSE
In International business, a strategic commitment has a short-term impact and is easily reversible
FALSE
In a fixed exchange rate system, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency. (T/F)
FALSE
In international business, a strategic commitment has a short-term impact and is easily reversible. (T/F)
FALSE
In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against the U.S. dollar.(T/F)
FALSE
Licensing, a mode of entry into a foreign market, gives an international firm high control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies. (T/F)
FALSE
Small-scale entrants are more likely to capture first-mover advantages associated with switching costs. (T/F)
FALSE
The International Monetary Fund can force countries to adopt to the policies required to correct economic mismanagement. (T/F)
FALSE
The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible. (T/F)
FALSE
The attractiveness of a country as a potential market for an international business depends solely on the size of its consumer market. (T/F)
FALSE
The disadvantage of a pegged exchanged rate regime is that it aggravates inflationary pressures in a country. (T/F)
FALSE
The euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be €36.(T/F)
FALSE
The experience curve refers to systematic increases in production costs that have been observed to occur over the life of a product. (T/F)
FALSE
The firm that moves up the experience curve most rapidly will have a cost advantage vis-à-vis its competitors. (T/F)
FALSE
The foreign exchange market offers complete insurance against foreign exchange risk.(T/F)
FALSE
The forward exchange market is an accurate predictor of future exchange rates. (T/F)
FALSE
The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro.(T/F)
FALSE
The probability of survival decreases if an international business enters a national market after several other foreign firms have already done so.(T/F)
FALSE
SHORT ANSWER: What are the different types of competitive pressures that firms competing in a global marketplace face? How can firms respond to such pressures?
Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprise. They face pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a firm. Responding to pressures for cost reductions requires that a firm try to minimize its unit costs. But responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies.
Which of the following occurs when two parties agree to exchange currency and execute the deal at some specific date in the future?
Forward Exchange
Which of the following modes of entry is suitable for service 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
Which term was not defined in the International Monetary Fund's Article of Agreement but was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products?
Fundamental disequilibrium
Firms that pursue which of the following strategies focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies?
Global Standardization
By dispersing different stages of its value chain to those locations around the world where the value aded is maximized or where the costs of value creation are minimized a firm creates a(n):
Global Web
Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?
Government intervention in cross-border trade.
SHORT ANSWER: Describe the entry modes that a firm with core competency in technological know-how can choose.
If a firm's competitive advantage (its core competence) is based on control over proprietary technological knowhow, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of losing control over that technology. Thus, if a high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how, it will probably do so through a wholly owned subsidiary. This rule should not be viewed as hard and fast, however. Sometimes a licensing or joint-venture arrangement can be structured to reduce the risk of licensees or joint-venture partners expropriating technological know-how. Another exception exists when a firm perceives its technological advantage to be only transitory, such as when it expects rapid imitation of its core technology by competitors. In such cases, the firm might want to license its technology as rapidly as possible to foreign firms to gain global acceptance for its technology before the imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. Further, by licensing its technology, the firm may establish its technology as the dominant design in the industry. This may ensure a steady stream of royalty payments. However, the attractions of licensing are frequently outweighed by the risks of losing control over technology, and if this is a risk, licensing should be avoided.
Which of the following is true of international firms considering foreign expansion?
If the firms core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner
SHORT ANSWER: Briefly describe the Bretton Woods agreement of 1944
In 1944, at the height of World War II, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system. The agreement reached at Bretton Woods established two multinational institutions—the International Monetary Fund (IMF) and the World Bank. The task of the IMF would be to maintain order in the international monetary system and that of the World Bank would be to promote general economic development. The Bretton Woods agreement also called for a system of fixed exchange rates that would be policed by the IMF. Under the agreement, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold. Only the dollar remained convertible into gold—at a price of $35 per ounce. Each country decided what it wanted its exchange rate to be vis-à-vis the dollar and then calculated the gold par value of the currency based on that selected dollar exchange rate. All participating countries agreed to try to maintain the value of their currencies within 1 percent of the par value by buying or selling currencies (or gold) as needed. Another aspect of the Bretton Woods agreement was a commitment not to use devaluation as a weapon of competitive trade policy. However, if a currency became too weak to defend, a devaluation of up to 10 percent would be allowed without any formal approval by the IMF. Larger devaluations required IMF approval.
SHORT ANSWER: How do foreign exchange markets benefit from international businesses?
International businesses have four main uses of foreign exchange markets. First, the payments a company receives for its exports, the income it receives from foreign investments, or the income it receives from licensing agreements with foreign firms may be in foreign currencies. To use those funds in its home country, the company must convert them to its home country's currency. Second, international businesses use foreign exchange markets when they must pay a foreign company for its products or services in its country's currency. Third, international businesses also use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets. Currency speculation is another use of foreign exchange markets. Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
Which of the following is a characteristic of the floating exchange rate regime?
It allows for automatic trade balance adjustments.
Which of the following is a reason for the failure of the purchasing power parity theory to predict exchange rates accurately?
It assumes away transportation costs and trade barriers
Which of the following is a great strength of the gold standard?
It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.
Which of the following was a weakness of the Bretton Woods System?
It could not work if the U.S. dollar was under speculative attack
Which of the following is a drawback of the purchasing power parity theory?
It does not appear to be a strong prediction of short-run movements in exchange rates covering time spans of five years.
Which of the following is an argument for a fixed exchange rate system?
It ensures that governments do not expand the monetary supply too rapidly, thus causing high inflation
SHORT ANSWER: In terms of monetary policy autonomy, how does a floating exchange rate system differ from a fixed system?
It is argued that under a fixed system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity. Monetary expansion can lead to inflation, which puts downward pressure on a fixed exchange rate. Similarly, monetary contraction requires high interest rates (to reduce the demand for money). Higher interest rates lead to an inflow of money from abroad, which puts upward pressure on a fixed exchange rate. Thus, to maintain exchange rate parity under a fixed system, countries were limited in their ability to use monetary policy to expand or contract their economies.
Which of the following holds true for a pegged exchange rate system?
It is necessary for a country whose currency is chosen for the peg to pursue a sound monetary policy.
One of the reasons why a firm typically charges for a good or service less than the value placed on that good or service by the customer is because:
It is normally impossible to segment a market based on each customer's reservation price
Which of the following is a disadvantage of greenfield ventures?
It is slower to establish than acquisitions
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 effect
Which of the following is true of monetary contraction in a fixed exchange rate system?
It leads to an inflow of money from abroad
Which of the following is true of a banking crisis?
It leads to individuals and companies withdrawing their deposits from banks.
Which of following occurs when a government increases the money supply?
It makes it easier for banks to borrow from the government
Which of the following is true of a localization strategy?
It makes sense if the value added by a customization supports higher pricing.
Which of the following is true of a country that is running a deficit on a balance-of-payments current account?
It may result in depreciation of the country's currency on the foreign exchange market.
Which of the following is true of inflation?
It occurs when the quantity of money in circulation rises faster than the stock of goods and services.
Which of the following is an implication of a currency crisis?
It results in the government sharply increasing interest rates to defend the prevailing exchange rate.
The two phenomena that help explain the experience curve are:
Learning effects and economies of scale
SHORT ANSWER: How do the purchasing power parity theory and the law of one price relate the commodities to exchange rate movements?
Purchasing power parity (PPP) theory and the law of one price help us understand how prices relate to exchange rate movements. The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. According to the PPP theory, if the law of one price were true for all goods and services, the PPP exchange rate could be found from any individual set of prices. By comparing the prices of identical products in different currencies, it would be possible to determine the PPP exchange rate that would exist if markets were efficient. In essence, PPP theory predicts that changes in relative prices will result in a change in exchange rates.
What gives a firm tight control for coordinating a globally dispersed value chain?
Setting up wholly owned marketing subsidiaries
In exporting, problems with local marketing agents can be overcome by:
Setting up wholly owned subsidiaries in foreign nations to handle local marketing
SHORT ANSWER: Describe the factors that explain the future of the purchasing power parity theory to predict exchange rates accurately.
Several factors explain the failure of PPP theory to predict exchange rates accurately. PPP theory assumes away transportation costs and barriers to trade. In practice, these factors are significant and they tend to create significant price differentials between countries. Transportation costs are certainly not trivial for many goods. Government intervention in cross-border trade, by violating the assumption of efficient markets, weakens the link between relative price changes and changes in exchange rates predicted by PPP theory. In addition, the PPP theory may not hold if many national markets are dominated by a handful of multinational enterprises that have sufficient market power to be able to exercise some influence over prices, control distribution channels, and differentiate their product offerings between nations. Another factor of some importance is that governments also intervene in the foreign exchange market in attempting to influence the value of their currencies. One more factor explaining the failure of PPP theory to predict short-term movements in foreign exchange rates is the impact of investor psychology and other factors on currency purchasing decisions and exchange rate movements.
What triggers the conflict of interest over strategy and goals in joint ventures?
Shifts in relative bargaining power of venture partners
SHORT ANSWER:How do firms respond to low cost pressures and low pressures for local responsiveness?
Sometimes, multinational firms find themselves in the fortunate position of being confronted with low cost pressures and low pressures for local responsiveness. Many of these enterprises pursue an international strategy, taking products first produced for their domestic market and selling them internationally with only minimal local customization. The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are not confronted with pressures to reduce their cost structure.
Which of the following allows two or more firms to share the fixed costs (and associated risks) of developing new products or processes?
Strategic alliance
A drawback of exporting is that tariff barriers can make it uneconomical as a mode of entry into a foreign market. (T/F)
TRUE
A firm contemplating expansion should choose a foreign market based on an assessment of the nation's long-run profit potential. (T/F)
TRUE
A global standardization strategy makes most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal. (T/F)
TRUE
A localization strategy involves some duplication of functions and smaller production runs. (T/F)
TRUE
Acquiring firms often overpay for the assets of the acquired firms. (T/F)
TRUE
Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.(T/F)
TRUE
An advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. (T/F)
TRUE
An international strategy involves taking products first produced for their domestic market and selling them internationally with only minimal local customization.(T/F)
TRUE
Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.(T/F)
TRUE
Consumer surplus captures some of the value of a product thereby reducing the price a firm can charge for it. (T/F)
TRUE
Economic exposure, a category of foreign exchange risk, is distinct from transaction exposure, which is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months(T/F)
TRUE
SHORT ANSWER:What are the consequences of an international firm entering a foreign market on a significant scale?
The consequences of entering on a significant scale—entering rapidly—are associated with the value of the resulting strategic commitments. A strategic commitment has a long-term impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a major strategic commitment. Strategic commitments, such as rapid large-scale market entry, can have an important influence on the nature of competition in a market. Significant strategic commitments are neither unambiguously good nor bad. Rather, they tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be. It is important for a firm to think through the implications of large-scale entry into a market and act accordingly. Of particular relevance is trying to identify how actual and potential competitors might react to large-scale entry into a market. Also, the large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs. The value of the commitments that flow from rapid large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments. But strategic inflexibility can also have value.
Which of the following is true when a government is strongly committed to controlling the rate of growth in money?
The country's future inflation rate may be low.
The amount of value a firm creates is measured by:
The difference between its costs of production and the value that the consumers perceive in its products
Which of the following is true of the determination of exchange rates?
The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not?
Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?
The dollar will appreciate against the euro.
What is meant by economic exposure?
The extent to which a firms future international earning power is affected by changes in exchange rates
Which of the following is an advantage of franchising as a mode of entry into foreign markets?
The franchiser is relieved of many of the costs and risks of opening a foreign market on its own
An American company imports laptops from Japan. The company knows that after a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must pay the Japanese supplier x 150,000 for each computer at the current dollar/yen spot exchange rate $1 = x110. The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the exchange rate after 30 days is $1= x90?
The importer will incur a loss of approx. $67 a computer
A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment?
The investment is not risk-free because foreign currency movements in the intervening period can affect the profitability of the firm.
Argonia Republic is in trade surplus with Kamboly. Under the gold standard, which of the following statements is true until a balance of trade equilibrium is achieved?
The money supply in Kamboly will be reduced due to the flow of gold in Argon Republic.
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 class between the cultures of the acquired and acquiring firms
Which of the following is a reason why governments limit convertibility of their currency?
To preserve their foreign exchange reserves
Which of the following is a function of the foreign exchange market?
To provide some insurance against foreign exchange risk
What is meant by arbitrage?
To purchase securities in one market for immediate resale in another to profit from a price discrepancy
Which of the following refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values?
Transaction exposure
Which of the following statements is true about a currency board system?
Under a strict currency board system, interest rates adjust automatically based on the supply and demand of domestic currency.
Small-Scale entry into a foreign market makes it difficult to build market share because it:
is associated with a lack of commitment demonstrated by the foreign firm.
If a value creation activity of a firm can take place in Mexico most effectively, then that activity of the firm must be based in Mexico. Firms that pursue such a strategy are most likely to realize:
location economies