International Business CH 12
63) Juanita recently purchased a FDX Computer. She needs assistance setting it up and contacts the firm's customer service center, which is located in Bangalore, India. FDX Computer most likely engages in which of the following? A) business process outsourcing B) foreign direct investment C) brownfield strategies D) B-O-T projects
A
15) Delvin Pharmaceuticals, a U.S. firm, is considering the idea of entering the Japanese market. Which entry mode will Delvin most likely use? A) exporting B) licensing C) turnkey D) franchising
B
59) Bechtel, a construction and engineering firm, has a contract with the Indian government to expand the airport in New Delhi. Bechtel will design, construct, and equip the airport before turning the facility over to the Indian government upon completion. Which entry mode for international business is used by Bechtel? A) B-O-T project B) turnkey project C) contract manufacturing D) foreign direct investment
B
13) ________ are those factors that make it desirable for a firm to produce a good or service itself rather than contracting with another firm to produce it. A) Ownership advantages B) National competitive advantages C) Internalization advantages D) Resource availabilities
C
22) Which of the following is a characteristic of foreign direct investment? A) relatively low financial investment B) low exposure to political risk C) high profit potential D) simple management
C
37) Which of the following statements about Webb-Pomerene associations is most likely true? A) The number of Webb-Pomerene associations is growing due to globalization. B) Most Webb-Pomerene associations facilitate trade in the garment industry. C) Webb-Pomerene associations participate in marketing and promotion. D) Webb-Pomerene associations are unable to negotiate contracts.
C
38) A(n) ________ is a firm directly engaged in importing and exporting a wide variety of goods for its own account. A) Webb-Pomerene association B) export management company C) international trading company D) management broker
C
41) A sogo shosha is best described as a(n) ________. A) export management company B) freight forwarder C) international trading company D) manufacturers' agent
C
53) Vinson Bicycles, a U.S. firm, is considering the idea of entering the EU market through an international licensing agreement. What is the main disadvantage of this entry method for Vinson? A) significant financial and political risks B) foreign investment restrictions C) limited market opportunities D) high tariff costs
C
56) International franchising is most likely to succeed when the franchisor has ________. A) specialized machinery B) exported other products C) succeeded in the domestic market D) implemented a diversification strategy
C
57) Kodak focuses on developing photo editing software, and the firm has agreements with a Chinese manufacturer to assemble most Kodak cameras. Which entry mode for international business is used by Kodak? A) management contracting B) international franchising C) contract manufacturing D) international licensing
C
6) Gameware recently entered the German market. Gameware incurred significant costs associated with setting up a business operation in Frankfurt, transferring managers to Germany, and shipping equipment to the German facility. Gameware's expenses are best described as ________. A) opportunity costs B) setup costs C) direct costs D) indirect costs
C
62) Which country is the market leader in providing international business process outsourcing? A) South Africa B) Brazil C) India D) China
C
71) Firms should use both objective and subjective measures when considering the potential for growth in an economy.
TRUE
31) What are the third parties that specialize in facilitating imports and exports called? A) intermediaries B) wholesalers C) exporters D) distributors
A
32) ________ offer services including export management companies, Webb-Pomerene associations, and international trading companies. A) Intermediaries B) Wholesalers C) Exporters D) Distributors
A
34) Tanya is employed by an export management company that provides its services to many exporters in the Chicago area. Tanya would likely be responsible for ________. A) shipping goods B) advertising C) creating strategic marketing plans D) customer service
A
36) A(n) ________ is a group of U.S. firms that operate within the same industry and are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws. A) Webb-Pomerene association B) Greenfield organization C) export management company D) international trading company
A
42) Which of the following best explains the success of the sogo shosha? A) access to information about global economic conditions B) ability to generate e-commerce profits and sales C) support from local and foreign governments D) acquisition of intellectual property rights
A
43) Which of the following solicits domestic orders for foreign manufacturers on a commission basis? A) manufacturers' agent B) export and import broker C) freight forwarder D) manufacturers' export agent
A
51) Sub-Saharan Africa accounts for ________ of world GDP. A) 2% B) 12% C) 20% D) 32%
A
54) Carmichael Candies, a U.S. firm, is considering the idea of entering the EU market through an international franchising agreement. What is the main advantage to Carmichael if the firm chooses this entry method? A) avoidance of tariffs B) independence from franchisee C) potential public relations problems D) high managerial and financial risks
A
58) British Airways has an arrangement with a state-owned airline headquartered in Brazil. British Airways provides the Brazilian airline with advice on reservation services and scheduling. Which entry mode for international business is used by British Airways? A) management contract B) turnkey project C) greenfield strategy D) licensing
A
115) What is the difference between a brownfield strategy and a greenfield strategy? Do you think one strategy is better than the other? Explain.
Answer: A brownfield strategy involves buying existing assets in a foreign country. The greenfield strategy involves starting a new operation from scratch (the word greenfield arises from the image of starting with a virgin green site and then building on it). The firm buys or leases land, constructs new facilities, hires and/or transfers in managers and employees, and then launches the new operation.
112) What is the difference between a B-O-T project and a turnkey project? What are the benefits of each to an international business?
Answer: A turnkey project is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation. The turnkey contract may be for a fixed price, in which case the firm makes its profit by keeping its costs below the fixed price. A B-O-T project is a variation of the turnkey project in which the firm builds a facility, operates it, and later transfers ownership of the project to some other party. Turnkey projects are extremely lucrative, and B-O-T projects enable firms to profit from operating and owning a facility at least for some time.
106) What is an export management company? Why would an exporter hire an EMC? What are the two ways that EMCs operate?
Answer: An export management company (EMC) is a firm that acts as its client's export department. Most are small operations that rely on the services of a handful of professionals. An EMC's staff typically is knowledgeable about the legal, financial, and logistical details of exporting and so frees the exporter from having to develop this expertise in-house. The EMC may also provide advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate EMCs can act as commission agents where they handle the details of shipping, clearing customs, and documentation in exchange for an agreed-upon fee, or they can take title to the goods and resell them at a higher price.
119) Describe the specialized entry modes for international business.
Answer: Companies can take advantage of international business opportunities without making long-term investments by using specialized entry modes like contract manufacturing, management contracts, and turnkey projects. Contract manufacturing involves outsourcing manufacturing to other companies. A management contract is an agreement whereby one firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon time in return for monetary compensation. A turnkey project is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation.
111) How is compensation typically addressed in international licensing and franchising contracts? What basic issues should be addressed in such contracts?
Answer: Compensation under a licensing agreement is called a royalty. The royalty is usually paid to the licensor in the form of a flat fee, a fixed amount per unit sold, or, most commonly, a percentage of the sales of the licensed product or service. Although the royalty amount is often determined by prevailing market forces, royalties of 3-5 percent of sales are typical and have long been viewed as reasonable and appropriate. Like licensing agreements, franchising agreements are spelled out in formal contracts, with a typical set of terms. The franchisor generally receives a fixed payment plus a royalty based on the franchisee's sales for the rights to use the franchisor's name, trademarks, formulas, and operating procedures. The franchisee usually agrees to adhere to the franchisor's requirements for appearance, financial reporting, and operating procedures. The basic issues covered in the legal contract should include 1) specifying the boundaries of the agreement, 2) determining compensation, 3) establishing rights, privileges, and constraints, and 4) specifying the duration of the contract.
107) What is contract manufacturing? What are the advantages and disadvantages of contract manufacturing?
Answer: Contract manufacturing is used by firms, both large and small, that outsource most or all of their manufacturing needs to other companies. Its advantages are low financial risk, minimal required resources devoted to manufacturing, and the ability to focus firm's resources on other areas of the value chain. Its disadvantages are reduced control, reduced learning potential, and potential public relations problems.
101) What is the difference between direct costs and opportunity costs?
Answer: Direct costs are those the firm incurs in entering a new foreign market and include costs associated with setting up a business operation. Opportunity costs are the costs of missing other opportunities by virtue of entering one market rather than another.
118) Explain the licensing process.
Answer: In a licensing agreement, the licensor leases the rights to use its intellectual property to the licensee. The licensee uses the intellectual property to create products for local sale. It then pays a royalty back to the licensor. The licensor is able to earn new revenues with relatively low investment.
108) What is indirect exporting?
Answer: Indirect exporting occurs when a firm sells its product to a domestic customer, which in turn exports the product, either in its original form or a modified form.
105) Explain the meaning of internalization advantages.
Answer: Internalization advantages are those that make it desirable for a firm to produce a good or service in-house rather than contracting with another firm to produce it.
110) What is the difference between international licensing and international franchising? What are the advantages of each entry mode?
Answer: International licensing occurs when one firm leases the right to use its intellectual property to another firm. International franchising is an arrangement whereby an independent organization or entrepreneur operates a business under the name of another. Both carry relatively low financial risk and allow the investor to learn more about the sales potential of its products in a new market without significant commitment of financial and managerial resources.
113) Why are international turnkey projects usually administered by large construction firms?
Answer: International turnkey projects are usually administered by large construction firms because they often involve large, complex, multiyear projects like the construction of a nuclear power plant, an airport, or an oil refinery.
103) What is liability of foreignness?
Answer: Liability of foreignness reflects the informational, political, and cultural disadvantages that foreign firms face when competing against local firms in the host market.
109) Briefly describe the services provided by manufacturers' agents, manufacturers' export agents, export and import brokers, and freight forwarders.
Answer: Manufacturers' agents solicit domestic orders for foreign manufacturers, usually on a commission basis. Manufacturer's export agents act as foreign sales departments for domestic manufacturers, selling those firms' goods in foreign markets. Export and import brokers bring together international buyers and sellers of such standardized commodities as coffee, cocoa, and grains. Freight forwarders specialize in the physical transportation of goods, arranging customs documentation, and obtaining transportation services for their clients.
99) Describe the basic components of foreign market analysis.
Answer: Most international businesses have the fundamental goals of expanding market share, revenues and profits. Firms must normally follow three steps: (1) assess alternative markets, (2) evaluate the respective costs, benefits, and risk of entering each, and (3) select those that hold the most potential for entry or expansion.
104) What is the meaning of ownership advantages? Give an example.
Answer: Ownership advantages are tangible or intangible resources owned by a firm which grant a competitive advantage over its industry rivals. An example is the brand image and luxurious reputation of Dom Perignon champagne.
102) What are the five primary types of entry modes for foreign markets? What types of risks should international firms consider before entering a foreign market?
Answer: The five primary ways to enter a foreign market include exporting, international licensing, international franchising, specialized modes, and foreign direct investment. A firm entering a new market should be aware of the risks of exchange rate fluctuations, additional operating complexity, and direct financial losses resulting from inaccurate assessment of market potential.
121) Compare and contrast the three forms of foreign direct investment.
Answer: The three methods are building new facilities or making a greenfield investment, buying existing assets or making an acquisition, and participating in a joint venture. Building new facilities allows a firm to select the best possible site and construct the best facility. However, it does require time and patience. Acquisition provides quick control and the ability to continue to generate revenues. Joint ventures are created when two or more firms agree to work together and create a jointly owned separate firm to promote their mutual interests.
100) What types of government actions may encourage licensing?
Answer: The use of licensing may be encouraged by high tariffs or non-tariff barriers to trade, or restrictions on FDI or repatriation of profits.
120) Turnkey projects and foreign direct investment are both risky modes for entering foreign markets. Briefly describe the risks associated with each mode.
Answer: Turnkey projects are risky because of possible financial risks such as cost overruns. Construction risks, such as delays and problems with suppliers, are also an issue with turnkey projects. FDI involves high financial and managerial investments, high exposure to political risk, and vulnerability to restrictions placed on FDI by host country governments.
122) What are the advantages and disadvantages of acquisition?
Answer: When a firm acquires another company, the firm obtains control of the acquired firm's factories, employees, technology, brand names, and distribution networks, and can continue to generate a revenue stream while the new operations are being integrated into the existing ones. Acquisition is also attractive because it maintains industry capacity, and because it allows a firm to quickly establish a presence in a foreign market. However, when a firm makes an acquisition it needs large sums of money and also gains the liabilities of the acquired firm.
114) Which form of market entry should a firm use when it needs to coordinate the activities of its foreign subsidiaries to achieve strategic synergies?
Answer: When a firm needs to coordinate the activities of its foreign subsidiaries to achieve strategic synergies it should expand through foreign direct investment.
117) What are the steps involved in foreign market analysis?
Answer: When assessing foreign markets, firms must first assess alternative markets. This process involves considering market potential, levels of competition, the legal and political environment, and sociocultural influences. Then, the firm should evaluate the respective costs, benefits, and risks of entering each, and finally, select those that hold the most potential for entry or expansion.
116) In a brief essay, discuss how both exporting and FDI enable international businesses to maintain control in a foreign environment.
Answer: With exporting, the firm can control its financial exposure to the host country market as it deems appropriate. Little or no capital investment may be needed. Second, exporting permits a firm to enter a foreign market gradually. A firm can then monitor its success prior to more extensive entry into that market. FDI affords the firm increased control over its international business operations, as well as increased profit potential. Control is particularly important to the firm if it needs to closely coordinate the activities of its foreign subsidiaries to achieve strategic synergies, as IBM has long done, or if it determines that the control is necessary in order to fully exploit the economic potential of proprietary technology, manufacturing expertise, or some other intellectual property right.
12) ________ are those factors that affect the desirability of host country production relative to home country production. A) Ownership advantages B) Location advantages C) National competitive advantages D) Internalization advantages
B
14) Toyota's efficient manufacturing techniques and reputation for producing high-quality automobiles are examples of ________. A) location advantages B) ownership advantages C) internalization advantages D) internationalization advantages
B
18) ________ are those that pull a firm into foreign markets as a result of opportunities available there. A) Reactive motivations B) Proactive motivations C) Opportunity motivations D) Avoidance motivations
B
26) Which term refers to sales made to either distributors or end-users located outside the firm's home country? A) indirect exporting B) direct exporting C) intercorporate transfers D) intracorporate transfers
B
35) Wine consumption in China has been at an annual growth rate of ________. A) 2% B) 20% C) 200% D) 2,000%
B
4) ________ refer to expenses incurred by the firm as it enters a new foreign market. A) Indirect costs B) Direct costs C) Opportunity costs D) Variable costs
B
40) Where are the world's most important international trading companies located? A) Germany B) Japan C) Canada D) China
B
45) ________ can bring together international buyers and sellers of standardized commodities like coffee and grains. A) A manufacturers' agent B) An export and import broker C) A freight forwarder D) A sogo shosha
B
47) The Mitsubishi Corporation is a firm that is directly engaged in importing and exporting a wide variety of goods for its own account and is a part of a keiretsu system. What type of export intermediary is it? A) export management company B) sogo shosha C) freight forwarder D) export and import broker
B
49) The firm that leases the right to use intellectual property is called the ________. A) leasor B) licensor C) licensee D) franchisee
B
55) In comparison to licensing, franchising offers a firm ________. A) less taxation B) more control C) higher profit margins D) fewer financial risks
B
61) Which term refers to a firm building and operating a facility before transferring ownership of the facility to another party? A) FDI B) B-O-T project C) turnkey project D) greenfield strategy
B
64) Which of the following is a method for foreign direct investment? A) participating in business process outsourcing B) buying existing assets in a foreign country C) exporting services and products D) entering licensing agreements
B
68) When two or more firms agree to work together and create a joint owned firm to promote mutual interest, ________ has occurred. A) an acquisition B) a joint venture C) a licensing agreement D) a franchise agreement
B
9) The informational, political, and cultural disadvantages that foreign firms face when trying to compete against local firms in the host country market are referred to as ________. A) opportunity costs B) liability of foreignness C) internalization disadvantages D) the burden of internationalization
B
1) Which of the following is not one of the three steps in increasing market share, revenue, and profits? A) assess alternative markets B) evaluate respective costs, benefits, and risks C) perform a situation analysis D) select market with most potential for entry or expansion
C
28) When British Petroleum ships crude oil from its storage facilities in Kuwait to its Australian subsidiary, ________ has occurred. A) indirect exporting B) direct exporting C) an intracorporate transfer D) an intercorporate transfer
C
33) A(n) ________ is a firm that acts as its client's export department. A) Webb-Pomerene association B) Greenfield organization C) export management company D) international trading company
C
46) BTV Enterprises specializes in the physical transportation of goods for its clients by arranging customs documentation and obtaining transportation services. BTV Enterprises is most likely a(n) ________. A) manufacturers' agent B) export and import broker C) freight forwarder D) manufacturers' export agent
C
48) The Nintendo Company manufactures electronic video consoles and game cartridges. Nintendo provides game design firms with technical specifications for how Nintendo consoles function. The game design firms create the games and then pay Nintendo a fee to manufacture those games. What mode of entry is described in this example? A) exporting B) franchising C) licensing D) joint venture
C
5) Gameware recently entered the German market. Gameware executives also wanted to enter the Canadian market but had to delay the entry because of limited resources. What type of costs will Gameware incur as a result of being unable to enter the Canadian market? A) indirect costs B) direct costs C) opportunity costs D) variable costs
C
50) Research suggests that in ________ of cases, a firm's initial direct exporting to a foreign market is the result of unsolicited orders. A) one-tenth B) one-quarter C) one-third D) one-half
C
7) Which of the following are potential benefits of entering a new market? A) eliminating synergy with other operations B) increasing manufacturing costs C) limiting competitors' profits D) logistical complexities
C
8) Which theory listed below is useful in deciding which mode of entry to use when entering foreign markets? A) ownership advantage theory B) internalization theory C) eclectic theory D) relative factor endowments
C
10) Which of the following is the most intensive mode of entry into foreign markets? A) exporting B) importing C) international licensing D) FDI
D
17) Which of the following is a characteristic of exporting? A) high financial exposure B) rapid market entry C) logistical simplicity D) local market knowledge
D
20) Which of the following is an advantage of exporting? A) vulnerability to tariffs B) logistical complexities C) potential conflicts with distributors D) access to new markets
D
27) Which term refers to the sale of goods by a firm in one country to an affiliated firm in another country? A) indirect exporting B) direct exporting C) intercorporate transfers D) intracorporate transfers
D
29) Which form of exporting is used by firms in order to lower their production costs? A) indirect exporting B) direct exporting C) intercorporate transfers D) intracorporate transfers
D
3) Which of the following is the least effective indicator of a country's potential for economic growth? A) GDP B) per capita income C) energy consumption D) television viewing patterns
D
39) Unlike an export management company, an international trading company ________. A) offers customer financing B) facilitates customs documentation C) manages international transportation logistics D) participates in exporting and importing activities
D
44) The ________ acts as a foreign sales department for domestic producers by selling those firms' goods in foreign markets. A) manufacturers' agent B) export and import broker C) freight forwarder D) manufacturers' export agent
D
52) Which term refers to compensation under a licensing agreement? A) sales commission B) fixed amount C) sales percentage D) royalty
D
60) Which of the following is typically critical to a turnkey project? A) business processes B) low-wage labor force C) environmental regulations D) home government financing
D
65) Comtex, a U.S. clock manufacturer, recently built a new production facility in Bangladesh. Which term best describes the activities of Comtex? A) joint venture strategy B) brownfield strategy C) acquisition strategy D) greenfield strategy
D
66) What is a common disadvantage of using a greenfield strategy? A) paying high tariffs B) using outdated equipment C) taking over existing debts D) complying with local regulations
D
67) The licensees that built Tokyo Disneyland insisted on a ________ licensing agreement with the Walt Disney Company before agreeing to invest the funds necessary to build the park. A) one-year B) ten-year C) twenty-five year D) one-hundred year
D
69) Assessing market potential is the second step in the process of foreign market analysis.
FALSE
70) A firm specializing in low-priced, lower-quality goods will most likely find a high-income market more attractive than a low-income one.
FALSE
72) Trade policies usually have little effect on a firm's choice of entry mode.
FALSE
75) Indirect costs are those the firm incurs in entering a new market and include costs associated with setting up a business operation.
FALSE
78) Ownership advantages are always tangible resources.
FALSE
79) Liability of foreignness refers to the internalization advantages that make it desirable to produce a good or service in-house.
FALSE
82) Exporting is the most complicated mode of internationalizing due to the issue of tariffs and nontariff barriers.
FALSE
85) Reactive motivations for exporting are those that pull a firm into foreign markets as a result of opportunities available there.
FALSE
88) Webb-Pomerene associations play a major role in international business.
FALSE
90) Manufacturers' agents specialize in the physical transportation of goods.
FALSE
98) The number of joint ventures being formed today is on the decline.
FALSE
73) Government stability is an important factor in foreign market assessment.
TRUE
74) Firms can reduce the uncertainty associated with sociocultural influences by focusing their internationalization efforts in countries that are culturally similar to their own.
TRUE
76) Dunning's eclectic theory is useful in understanding which mode of entry to use.
TRUE
77) When deciding which mode of entry to use, a firm must consider things like ownership advantages, location advantages, and internalization advantages.
TRUE
80) Embedded technology is often best transferred through an equity mode.
TRUE
81) Pharmaceutical firms routinely use licensing as their entry mode.
TRUE
83) One disadvantage of exporting is the logistical complexities.
TRUE
84) Foreign direct investment offers both high profit potential and high financial risk.
TRUE
86) Intracorporate transfers are common in the service sector.
TRUE
89) The most important trading companies in the global marketplace are Japan's sogo shosha.
TRUE
91) Royalties are determined most commonly as a percentage of the sales of the licensed products.
TRUE
92) When the licensor fully investigates market opportunities and the abilities of its licensees, licensing has a relatively low financial risk.
TRUE
93) The greater the investment costs incurred by the licensee, the longer is the likely duration of the licensing agreement.
TRUE
94) International franchising is among the fastest growing forms of international business.
TRUE
95) McDonald's, Pizza Hut, and KFC all rely on franchising for their international expansion.
TRUE
96) Management contracts are attractive because they allow firms to earn additional revenues without incurring any investment risks or obligations.
TRUE
97) When there is overcapacity in an industry, acquisition is the best strategy.
TRUE
23) Franklin Carpets engages in indirect exporting, so the firm sells its carpets to a(n) ________. A) domestic customer who then sells the carpets to a foreign customer B) foreign customer who then sells the carpets to a domestic customer C) affiliated company located in a foreign country D) foreign customer through e-commerce
A
24) ________ occur(s) when a firm sells its products to a domestic customer, which in turn exports the product, in either its original form or a modified form. A) Indirect exporting B) Direct exporting C) Intercorporate transfers D) Intracorporate transfers
A
25) When Hewlett-Packard buys microchips from Intel to use in manufacturing computers and then exports the completed computers to Europe, ________ has occurred. A) indirect exporting of Intel's chips B) direct exporting of Intel's chips C) an intercorporate transfer of Intel's chips D) an intracorporate transfer of Intel's chips
A
30) Which of the following would most likely discourage an international firm from relying on exports as an entry mode? A) tariffs B) export promotion policies C) export financing programs D) home country subsidization
A
11) ________ are tangible or intangible resources owned by a firm which grant it a competitive advantage over its industry rivals. A) Ownership advantages B) Location advantages C) Internalization advantages D) Competitive advantages
A
16) ________ is the most common form of international business activity. A) Exporting B) Licensing C) Greenfield strategy D) Management contract
A
19) ________ for exporting are those that push a firm into foreign markets. A) Reactive motivations B) Proactive motivations C) Opportunity motivations D) Avoidance motivations
A
2) What is the first step in selecting a foreign market? A) assessing market potential B) monitoring major markets C) evaluating host country's trade policies D) assessing general legal and political environments
A
21) Which mode of entry has the most potential to create a future competitor? A) licensing B) exporting C) turnkey project D) contract manufacturing
A
87) Export management companies always take title to the goods.
FALSE
