ch14

ch14Student: ___________________________________________________________________________

1. The long-run benefits of doing business in a country are a function of factors such as the size of the market, the present wealth of consumers in that market, and the likely future wealth of customers. True False

2. The costs and risks associated with doing business in a foreign country are typically high in an

economically advanced and politically stable democratic nation. True False

3. First-mover advantages are the advantages associated with entering a market early.

True False

4. Costs that an early entrant has to bear that a later entrant can avoid are known as first-mover costs.

True False

5. Educating customers is a part of pioneering costs.

True False

6. A strategic commitment can be reversed by the top management according to their convenience.

True False

7. Large strategic commitments limit strategic flexibility.

True False

8. A small-scale entrant is more likely than a large-scale entrant to capture first-mover advantages associated

with demand preemption, scale economies, and switching costs. True False

9. Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that

market. True False

10. Exporting is advantageous because it avoids the cost of establishing manufacturing operations in the host

country and because it may help a firm achieve experience curve and location economies. True False

11. Exporting may not be appropriate if lower-cost locations for manufacturing the product can be found

abroad. True False

12. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client. True False

13. An advantage of turnkey projects is that the firm that enters into a turnkey deal will have no long-term

interest in the foreign country. True False

14. Tangible property includes patents, designs, copyrights, and trademarks.

True False

15. Licensing increases a firm's ability to realize experience curve and location economies by producing its

product in a centralized location. True False

16. By its very nature, licensing increases a firm's ability to utilize a coordinated strategy.

True False

17. Franchising enables a firm to quickly build a global presence.

True False

18. The most typical joint venture is a 25/75 venture.

True False

19. An advantage of joint ventures with a local partner is the knowledge of the local environment the local

partner contributes to the venture. True False

20. A wholly owned subsidiary limits a firm's control over operations in different countries.

True False

21. Firms entering a market via a wholly owned subsidiary must bear all the costs and risks associated with the

venture. True False

22. Brand names are generally well-protected by international laws pertaining to trademarks.

True False

23. Firms pursuing global standardization or transnational strategies tend to prefer joint-venture arrangements

over wholly owned subsidiaries. True False

24. Over the decade, between 50 and 90 percent of all FDI inflows have been in the form of mergers and acquisitions. True False

25. A clear advantage of greenfield investments as compared to acquisitions is the short execution time

involved. True False

26. Acquisitions rarely produce disappointing results.

True False

27. Overpayment for assets of an acquired firm is one reason acquisitions fail.

True False

28. Evidence suggests that all acquisitions create rather than destroy value.

True False

29. The main advantage of greenfield investment is that it gives the firm a much greater ability to build the

kind of subsidiary company that it wants. True False

30. Acquisitions are less risky than in greenfield ventures in the sense that there is less potential for unpleasant

surprises. True False

31. If a firm is trying to enter a market where there are already well-established companies, and where global

competitors are also interested in establishing a presence, the firm should choose a greenfield investment. True False

32. Firms may avoid strategic alliances because their complexity usually delays entry into a foreign market.

True False

33. Unlike joint ventures, strategic alliances require the firm to bear all the costs and risks of foreign expansion.

True False

34. The failure rate for international strategic alliances is very low.

True False

35. Cross-licensing agreements can be used to formalize arrangements to swap skills and technology in a

strategic alliance. True False

36. Relational capital refers to the building of interpersonal relationships between the firms' managers in a strategic alliance. True False

37. To maximize the learning benefits of an alliance, partners should try to learn from each other and then

disperse the knowledge within their own organizations. True False

38. Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in:

A. politically unstable developing nations that operate with a mixed or command economy.B. nations where there is a dramatic upsurge in either inflation rates or private-sector debt.C. politically stable developed and developing nations that have free market systems.D. developing nations where speculative financial bubbles have led to excess borrowing.

39. Which of the following is not an advantage associated with entering a foreign market before other

international businesses? A. Ability to preempt rivals and capture demand by establishing a strong brand name.B. Ability to ride down the experience curve ahead of rivals.C. Ability to create switching costs.D. Ability to avoid pioneering costs.

40. Switching costs:

A. drive early entrants out of the market.B. make it easy for later entrants to win business.C. make it difficult for later entrants to win business.D. give later entrants a cost advantage over early entrants.

41. Early entrants to a market that are able to create switching costs that tie the customer to the product are

capitalizing on: A. economies of scale.B. pioneering costs.C. first-mover advantages.D. late-mover advantages.

42. All of the following are examples of pioneering costs except the costs of:

A. business failure.B. educating consumers.C. promoting and establishing a product offering.D. learning from the mistakes of early entrants.

43. The costs of promoting and establishing a product offering when a firm enters a foreign market prior to its

rivals are known as: A. switching costs.B. market development costs.C. pioneering costs.D. promotional development costs.

44. A large-scale entrant is more likely than a small-scale entrant to be able to capture first-mover advantages associated with: A. demand preemption.B. diseconomies of scale.C. pioneering costs.D. diseconomies of scope.

45. Which of the following statements about small-scale entry is true?

A. The commitment associated with a small-scale entry makes it possible for the small-scale entrant to

capture first-mover advantages.B. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter

on a significant scale.C. By giving a firm time to collect information, small-scale entry increases the risks associated with a

subsequent large-scale entry.D. Small-scale entry limits a firms ability to learn about a foreign market thereby also limiting the firm's

exposure to that market. 46. Which of the following is not an advantage of a small-scale entry?

A.

A small-scale entrant is more likely to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs.

B. Small-scale entry is a way to gather information about a foreign market before deciding how best to enter.

C. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry.

D. Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market.

47. If a firm can realize location economies by moving production elsewhere, it should avoid:

A. exporting.B. turnkey contracts.C. licensing.D. wholly owned subsidiaries.

48. Which of the following is a distinct advantage of exporting?

A. It avoids the often substantial costs of establishing manufacturing operations in the host country.B. Benefits from a local partner's knowledge of the host country's competitive conditions.C. Avoids the threat of tariff barriers by the host-country government.D. Appropriate if lower cost locations for manufacturing the product can be found abroad.

49. When a firm faces significant transportation costs, _____ can be uneconomical.

A. joint venturesB. greenfield investmentsC. licensing agreementsD. exporting

50. When an exporting firm finds that its local agent is also carrying competitors' products, the firm may switch to a _____ to handle local marketing, sales, and service. A. wholly owned subsidiaryB. franchising arrangementC. turnkey operationD. licensing agreement

51. When local agents carry the products of competing firms and have divided loyalties, _____ is not

appropriate. A. franchisingB. licensingC. exportingD. greenfield investment

52. The threat of tariff barriers by the host government can make _____ very risky.

A. greenfield investmentB. franchisingC. licensingD. exporting

53. Identify the incorrect statement about turnkey projects.

A. The contractor agrees to handle every detail of the project for a foreign client.B. They are most common in industries which use inexpensive production technologies.C. This is a means of exporting process technology to other countries.D. They create efficient global competitors in the process.

54. In which of the following industries are turnkey projects the most common?

A. Fresh fruit, grain, and meat products.B. Chemical, pharmaceutical, and metal refining.C. Consumer durables, computer peripherals, and automotive parts.D. Apparel, shoes, and leather products.

55. A turnkey strategy:

A. is always riskier than conventional FDI.B. is never used in a country with unstable political and economic environments.C. is useful where FDI is limited by host-government regulations.D. is a strong indicator of a firm's long-term interest in a foreign country.

56. Many Western firms that sold oil-refining technology to firms in Gulf states now find themselves

competing with these firms in the world oil market. This is an example of: A. the firm entering into a turnkey project with a foreign enterprise, inadvertently creating a competitor.B. the firm entering into a turnkey deal having no long-term interest in the foreign country.C. the country subsequently proving to be a major market for the output of the process that has been

exported.D. selling the firm's process technology through a turnkey project which is also selling competitive

advantage to potential competitors.

57. Firms that lack the capital necessary to develop foreign operations may choose _____ as a means of expanding internationally. A. turnkey projectsB. licensingC. greenfield investmentsD. acquisitions

58. An arrangement whereby a firm grants the right of intangible property to another entity for a specified time

period in exchange for royalties is a(n) _____ agreement. A. wholly owned subsidiaryB. turnkeyC. licensingD. exporting

59. Patents, inventions, formulas, processes, designs, copyrights, and trademarks are all forms of

A. licensing agreements.B. franchising agreements.C. intangible property.D. tangible property.

60. What is the primary advantage of licensing?

A. It helps a firm avoid the development costs associated with opening a foreign market.B. It gives a firm the tight control over manufacturing, marketing, and strategy.C. It helps a firm achieve experience curve and location economies.D. It increases a firm's ability to utilize a coordinated strategy.

61. Which of the following is a disadvantage of licensing?

A. It does not help firms that lack capital to develop operations overseas.B. It does not give a firm the tight control over strategy that is required for realizing experience curve and

location economies.C. It cannot be used when a firm possesses some intangible property that might have business applications.D. The firm has to bear the development costs and risks associated with opening a foreign market.

62. When a company has some intangible property that might have business applications, but the firm does not

want to develop those applications itself, _____ makes sense. A. exportingB. a turnkey projectC. licensingD. a wholly owned subsidiary

63. Cross-licensing agreements are increasingly common in the _____ industry.

A. transportationB. high-technologyC. constructionD. consumer durables

64. Which mode of entry is pursued primarily by manufacturing firms? A. FranchisingB. TurnkeyC. LicensingD. Strategic alliance

65. This mode of entry is primarily used by service firms.

A. FranchisingB. LicensingC. A strategic allianceD. A turnkey project

66. If a service firm wants to build a global presence quickly and at a relatively low cost and risk, _____ makes

sense. A. a wholly owned subsidiaryB. exportingC. a turnkey projectD. franchising

67. Which of the following statements about franchising is true?

A. It guarantees consistent product quality.B. It tends to involve more short-term commitments than licensing.C. It is a specialized form of licensing.D. It is employed primarily by manufacturing firms.

68. Which of the following is an advantage of franchising?

A. A firm takes profits out of one country to support competitive attacks in another.B. A firm is relieved of many of the costs and risks of opening a foreign market on its own.C. It guarantees consistent product quality.D. It achieves experience curve and location economies.

69. Firms engaging in _____ with a local company can benefit from a local partner's knowledge of the host

country's competitive conditions, culture, language, political systems, and business systems. A. turnkey projectsB. joint venturesC. greenfield investmentsD. licensing arrangements

70. Identify the advantage of establishing wholly owned subsidiaries.

A. It is the least expensive method of serving a foreign market from a capital investment standpoint.B. Political considerations make it the most feasible entry mode.C. It may be required if a firm is trying to realize location and experience curve economies.D. It is particularly useful where FDI is limited by host-government regulations.

71. A wholly owned subsidiary is appropriate when: A. the firm wants to share the cost and risk of developing a foreign market.B. the firm wants 100 percent of the profits generated in a foreign market.C. the firm wants a plant that is ready to operate.D. the firm wants to test a market.

72. A firm that establishes a _____ must bear the full costs and risks of entering a foreign market.

A. licensing agreementB. wholly owned subsidiaryC. franchiseD. joint venture

73. A _____ is the most costly method of serving a foreign market from a capital investment standpoint.

A. wholly owned subsidiaryB. franchising agreementC. turnkey projectD. joint venture

74. "Protection of technology and The Ability to engage in global strategic coordination" are advantages of

which of the following? A. FranchisingB. Turnkey contractsC. Joint venturesD. Wholly owned subsidiaries

75. If a firm's core competency is based on control over proprietary technological know-how, it should avoid

_____ and _____ arrangements if possible, to minimize the risk of losing control over that technology. A. licensing; joint-ventureB. wholly owned subsidiary; exportingC. turnkey contracts; exportingD. exporting; joint-venture

76. If a high-tech firm sets up operations in a foreign country to profit from a core competency in technological

know-how, which of the following entry strategy is best? A. Joint venturesB. LicensingC. Wholly owned subsidiariesD. Turnkey contacts

77. Most service firms have found that _____ with local partners work best for controlling subsidiaries.

A. joint venturesB. licensing agreementsC. greenfield investmentsD. turnkey projects

78. Firms may prefer acquisitions to greenfield investments for all of the following reasons except: A. they allow companies to completely sidestep government regulations on investment.B. they are quick to execute.C. they enable the firm to preempt competitors.D. managers believe acquisitions are less risky.

79. According to the _____, top managers typically overestimate their ability to create value from an

acquisition. A. misvaluation theoryB. performance extrapolation hypothesisC. market timing theoryD. hubris hypothesis

80. To increase the potential for a successful acquisition, a firm should:

A. always bid low to allow for partial failure.B. try to acquire a firm with a very different corporate culture so there is no forced "overlap".C. seek companies only from similar national cultures.D. screen the foreign enterprise to be acquired.

81. Which of the following is not important in the acquisition process?

A. Firms should strive to limit unwanted management attrition after acquisition.B. An integration plan should quickly be implemented.C. Proper screening of the company to be acquired should take place.D. The hubris hypothesis should be maintained.

82. When a firm wants to enter a market where there are already well-established incumbent companies, and

where global competitors are also interested in establishing a presence, the firm should consider: A. joint ventures.B. turnkey projects.C. acquisitions.D. greenfield investments.

83. Firms entering markets where there are no incumbent competitors to be acquired should choose:

A. greenfield investments.B. joint ventures.C. acquisitions.D. takeovers.

84. Which of the following is not an advantage of strategic alliances?

A. It allows firms to share the fixed costs of developing new products or processes.B. It is a way to bring together complementary skills and assets that neither company could easily develop

on its own.C. It will help the firm establish technological standards for the industry that will benefit the firm.D. It gives a firm tight control over operations in different countries.

85. What are the three basic decisions a firm contemplating foreign expansion must make?

86. What are first-mover advantages? Discuss the advantages associated with them.

87. Explain the relationship between first-mover disadvantages and pioneering costs.

88. Discuss the trade-offs associated with large-scale entry versus small-scale entry.

89. Discuss Bartlett and Ghoshal's perspective on how firms from developing countries should approach

international expansion.

90. Why should a firm choose exporting as a means of foreign market expansion? Discuss the advantages and disadvantages of exporting.

91. Explain the idea of a turnkey project. Why should a firm use this arrangement to expand internationally? In

what industries are turnkey arrangements most common?

92. Define licensing agreements. What are the advantages of this mode of international expansion?

93. Why should a firm be cautious about entering a licensing agreement?

94. What is intangible property? How can intangible property be protected in a licensing agreement?

95. Compare and contrast licensing agreements and franchising agreements.

96. Briefly explain the advantages and disadvantages of franchising agreements.

97. What is a joint venture? What type of joint venture is most common? Provide an example of a joint

venture.

98. Discuss the advantages of using a joint venture to enter foreign markets.

99. Imagine that you are meeting with your superiors to discuss entering a foreign market. Your boss has asked

you to analyze a joint venture prospect. Why might you tell your boss that the joint venture is not a good idea?

100.How can a firm protect its proprietary information in a joint venture arrangement?

101.What are the two methods of entering foreign marketing using a wholly owned subsidiary?

102.Consider why a firm should enter a market via a wholly owned subsidiary. What are the advantages and

disadvantages of this type of strategy?

103.Why do acquisitions fail?

104.Discuss strategic alliances. How successful are they? Why do firms form strategic alliances?

ch14 Key

1.(p. 470)

The long-run benefits of doing business in a country are a function of factors such as the size of the market, the present wealth of consumers in that market, and the likely future wealth of customers. TRUE

AACSB: Reflective Thinking Skills

Bloom's: KnowledgeDifficulty: Medium

Hill - Chapter 14 #1Learning Objective: 14-1

2.(p. 471)

The costs and risks associated with doing business in a foreign country are typically high in an economically advanced and politically stable democratic nation. FALSE


Bloom's: ComprehensionDifficulty: Easy


3.(p. 471)

First-mover advantages are the advantages associated with entering a market early. TRUE

AACSB: Analytic Skills

Bloom's: KnowledgeDifficulty: Easy


4.(p. 471)

Costs that an early entrant has to bear that a later entrant can avoid are known as first-mover costs. FALSE




5.(p. 472)

Educating customers is a part of pioneering costs. TRUE




6.(p. 473)

A strategic commitment can be reversed by the top management according to their convenience. FALSE




7.(p. 474)

Large strategic commitments limit strategic flexibility. TRUE


Bloom's: ComprehensionDifficulty: Medium


8.(p. 474)

A small-scale entrant is more likely than a large-scale entrant to capture first-mover advantages associated with demand preemption, scale economies, and switching costs. FALSE




9.(p. 474)

Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. TRUE




10.(p. 475)

Exporting is advantageous because it avoids the cost of establishing manufacturing operations in the host country and because it may help a firm achieve experience curve and location economies. TRUE




11.(p. 475)

Exporting may not be appropriate if lower-cost locations for manufacturing the product can be found abroad. TRUE




12.(p. 477)

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client. TRUE




13.(p. 478)

An advantage of turnkey projects is that the firm that enters into a turnkey deal will have no long-term interest in the foreign country. FALSE




14.(p. 478)

Tangible property includes patents, designs, copyrights, and trademarks. FALSE




15.(p. 479)

Licensing increases a firm's ability to realize experience curve and location economies by producing its product in a centralized location. FALSE




16.(p. 479)

By its very nature, licensing increases a firm's ability to utilize a coordinated strategy. FALSE




17.(p. 480)

Franchising enables a firm to quickly build a global presence. TRUE




18.(p. 481)

The most typical joint venture is a 25/75 venture. FALSE




19.(p. 481)

An advantage of joint ventures with a local partner is the knowledge of the local environment the local partner contributes to the venture. TRUE




20.(p. 482)

A wholly owned subsidiary limits a firm's control over operations in different countries. FALSE




21.(p. 482-483)

Firms entering a market via a wholly owned subsidiary must bear all the costs and risks associated with the venture. TRUE




22.(p. 484)

Brand names are generally well-protected by international laws pertaining to trademarks. TRUE



Difficulty: MediumHill - Chapter 14 #22

Learning Objective: 14-3

23.(p. 485)

Firms pursuing global standardization or transnational strategies tend to prefer joint-venture arrangements over wholly owned subsidiaries. FALSE




24.(p. 485)

Over the decade, between 50 and 90 percent of all FDI inflows have been in the form of mergers and acquisitions. TRUE




25.(p. 485)

A clear advantage of greenfield investments as compared to acquisitions is the short execution time involved. FALSE




26.(p. 486)

Acquisitions rarely produce disappointing results. FALSE




27.(p. 486)

Overpayment for assets of an acquired firm is one reason acquisitions fail. TRUE




28.(p. 486)

Evidence suggests that all acquisitions create rather than destroy value. FALSE




29.(p. 487)

The main advantage of greenfield investment is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. TRUE




30.(p. 488)

Acquisitions are less risky than in greenfield ventures in the sense that there is less potential for unpleasant surprises. FALSE




31.(p. 488)

If a firm is trying to enter a market where there are already well-established companies, and where global competitors are also interested in establishing a presence, the firm should choose a greenfield investment. FALSE




32.(p. 489)

Firms may avoid strategic alliances because their complexity usually delays entry into a foreign market. FALSE




33.(p. 489)

Unlike joint ventures, strategic alliances require the firm to bear all the costs and risks of foreign expansion. FALSE




34.(p. 490)

The failure rate for international strategic alliances is very low. FALSE




35.(p. 492)

Cross-licensing agreements can be used to formalize arrangements to swap skills and technology in a strategic alliance. TRUE




36.(p. 492)

Relational capital refers to the building of interpersonal relationships between the firms' managers in a strategic alliance. TRUE




37.(p. 493)

To maximize the learning benefits of an alliance, partners should try to learn from each other and then disperse the knowledge within their own organizations. TRUE




38.(p. 471)

Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in: A. politically unstable developing nations that operate with a mixed or command economy.B. nations where there is a dramatic upsurge in either inflation rates or private-sector debt.C. politically stable developed and developing nations that have free market systems.D. developing nations where speculative financial bubbles have led to excess borrowing.

The trade-off is likely to be least favorable in politically unstable developing nations that operate with a mixed or command economy or in developing nations where speculative financial bubbles have led to excess borrowing.

AACSB: Domestic and Global Economic Environments



39.(p. 471)

Which of the following is not an advantage associated with entering a foreign market before other international businesses? A. Ability to preempt rivals and capture demand by establishing a strong brand name.B. Ability to ride down the experience curve ahead of rivals.C. Ability to create switching costs.D. Ability to avoid pioneering costs.

Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid.




40.(p. 471)

Switching costs: A. drive early entrants out of the market.B. make it easy for later entrants to win business.C. make it difficult for later entrants to win business.D. give later entrants a cost advantage over early entrants.

The ability of early entrants to create switching costs that tie customers into their products or services is a first-mover advantage.




41.(p. 471)

Early entrants to a market that are able to create switching costs that tie the customer to the product are capitalizing on: A. economies of scale.B. pioneering costs.C. first-mover advantages.D. late-mover advantages.

Switching costs make it difficult for later entrants to win business.




42.(p. 471-472)

All of the following are examples of pioneering costs except the costs of: A. business failure.B. educating consumers.C. promoting and establishing a product offering.D. learning from the mistakes of early entrants.

Late entrants may be able to ride on an early entrant's investments (pioneering costs) in learning and customer education by watching how the early entrant proceeded in the market, avoiding the early entrant's costly mistakes.




43.(p. 472)

The costs of promoting and establishing a product offering when a firm enters a foreign market prior to its rivals are known as: A. switching costs.B. market development costs.C. pioneering costs.D. promotional development costs.

Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game.




44.(p. 474)

A large-scale entrant is more likely than a small-scale entrant to be able to capture first-mover advantages associated with: A. demand preemption.B. diseconomies of scale.C. pioneering costs.D. diseconomies of scope.

Apart from demand preemption, a large-scale entrant is more likely than a small-scale entrant to be able to capture first-mover advantages associated with scales economies and switching costs.




45.(p. 474)

Which of the following statements about small-scale entry is true? A. The commitment associated with a small-scale entry makes it possible for the small-scale entrant to

capture first-mover advantages.B. Small-scale entry is a way to gather information about a foreign market before deciding whether to

enter on a significant scale.C. By giving a firm time to collect information, small-scale entry increases the risks associated with a

subsequent large-scale entry.D. Small-scale entry limits a firms ability to learn about a foreign market thereby also limiting the firm's

exposure to that market.

Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages.


Bloom's: ComprehensionDifficulty: Hard


46.(p. 474)

Which of the following is not an advantage of a small-scale entry? A.

A small-scale entrant is more likely to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs.

B. Small-scale entry is a way to gather information about a foreign market before deciding how best to enter.

C. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry.

D. Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market.

A 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.




47.(p. 475)

If a firm can realize location economies by moving production elsewhere, it should avoid: A. exporting.B. turnkey contracts.C. licensing.D. wholly owned subsidiaries.

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.




48.(p. 475)

Which of the following is a distinct advantage of exporting? A. It avoids the often substantial costs of establishing manufacturing operations in the host country.B. Benefits from a local partner's knowledge of the host country's competitive conditions.C. Avoids the threat of tariff barriers by the host-country government.D. Appropriate if lower cost locations for manufacturing the product can be found abroad.

Another advantage of exporting is that it helps a firm achieve experience curve and location economies.




49.(p. 476)

When a firm faces significant transportation costs, _____ can be uneconomical. A. joint venturesB. greenfield investmentsC. licensing agreementsD. exporting

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.




50.(p. 476-477)

When an exporting firm finds that its local agent is also carrying competitors' products, the firm may switch to a _____ to handle local marketing, sales, and service. A. wholly owned subsidiaryB. franchising arrangementC. turnkey operationD. licensing agreement

By doing this, the firm can exercise tight control over marketing and sales in the country while reaping the cost advantages of manufacturing the product in a single location, or a few choice locations.




51.(p. 476)

When local agents carry the products of competing firms and have divided loyalties, _____ is not appropriate. A. franchisingB. licensingC. exportingD. greenfield investment

In such cases, the local agent may not do as good a job as the firm would if it managed its marketing itself.




52.(p. 476)

The threat of tariff barriers by the host government can make _____ very risky. A. greenfield investmentB. franchisingC. licensingD. exporting

This is one of the drawbacks of exporting.




53.(p. 477)

Identify the incorrect statement about turnkey projects. A. The contractor agrees to handle every detail of the project for a foreign client.B. They are most common in industries which use inexpensive production technologies.C. This is a means of exporting process technology to other countries.D. They create efficient global competitors in the process.

Turnkey projects are most common in industries that use complex, expensive production technologies.




54.(p. 477)

In which of the following industries are turnkey projects the most common? A. Fresh fruit, grain, and meat products.B. Chemical, pharmaceutical, and metal refining.C. Consumer durables, computer peripherals, and automotive parts.D. Apparel, shoes, and leather products.

Turnkey projects are most common in industries that use complex, expensive production technologies.




55.(p. 478)

A turnkey strategy: A. is always riskier than conventional FDI.B. is never used in a country with unstable political and economic environments.C. is useful where FDI is limited by host-government regulations.D. is a strong indicator of a firm's long-term interest in a foreign country.

The governments of many oil-rich countries have set out to build their own petroleum refining industries, so they restrict FDI in their oil and refining sectors. But because many of these countries lack petroleum-refining technology, they gain it by entering into turnkey projects with foreign firms that have the technology. Such deals are often attractive to the selling firm because without them, they would have no way to earn a return on their valuable know-how in that country.




56.(p. 478)

Many Western firms that sold oil-refining technology to firms in Gulf states now find themselves competing with these firms in the world oil market. This is an example of: A. the firm entering into a turnkey project with a foreign enterprise, inadvertently creating a competitor.B. the firm entering into a turnkey deal having no long-term interest in the foreign country.C. the country subsequently proving to be a major market for the output of the process that has been

exported.D. selling the firm's process technology through a turnkey project which is also selling competitive

advantage to potential competitors.

Another drawback of turnkey strategy is that if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.




57.(p. 478)

Firms that lack the capital necessary to develop foreign operations may choose _____ as a means of expanding internationally. A. turnkey projectsB. licensingC. greenfield investmentsD. acquisitions

A primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market.




58.(p. 478)

An arrangement whereby a firm grants the right of intangible property to another entity for a specified time period in exchange for royalties is a(n) _____ agreement. A. wholly owned subsidiaryB. turnkeyC. licensingD. exporting

Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.




59.(p. 478)

Patents, inventions, formulas, processes, designs, copyrights, and trademarks are all forms of A. licensing agreements.B. franchising agreements.C. intangible property.D. tangible property.

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.




60.(p. 478)

What is the primary advantage of licensing? A. It helps a firm avoid the development costs associated with opening a foreign market.B. It gives a firm the tight control over manufacturing, marketing, and strategy.C. It helps a firm achieve experience curve and location economies.D. It increases a firm's ability to utilize a coordinated strategy.





61.(p. 479)

Which of the following is a disadvantage of licensing? A. It does not help firms that lack capital to develop operations overseas.B. It does not give a firm the tight control over strategy that is required for realizing experience curve

and location economies.C. It cannot be used when a firm possesses some intangible property that might have business

applications.D. The firm has to bear the development costs and risks associated with opening a foreign market.

Licensing typically involves each licensee setting up its own production operations. This severely limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location.




62.(p. 479)

When a company has some intangible property that might have business applications, but the firm does not want to develop those applications itself, _____ makes sense. A. exportingB. a turnkey projectC. licensingD. a wholly owned subsidiary





63.(p. 479)

Cross-licensing agreements are increasingly common in the _____ industry. A. transportationB. high-technologyC. constructionD. consumer durables

Cross-licensing agreements enable firms to hold each other hostage, which reduces the probability that they will behave opportunistically toward each other.




64.(p. 480)

Which mode of entry is pursued primarily by manufacturing firms? A. FranchisingB. TurnkeyC. LicensingD. Strategic alliance





65.(p. 480)

This mode of entry is primarily used by service firms. A. FranchisingB. LicensingC. A strategic allianceD. A turnkey project

Franchising is a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.




66.(p. 480)

If a service firm wants to build a global presence quickly and at a relatively low cost and risk, _____ makes sense. A. a wholly owned subsidiaryB. exportingC. a turnkey projectD. franchising

Franchising is similar to licensing and is employed primarily by service firms.




67.(p. 480)

Which of the following statements about franchising is true? A. It guarantees consistent product quality.B. It tends to involve more short-term commitments than licensing.C. It is a specialized form of licensing.D. It is employed primarily by manufacturing firms.

Franchising is a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.




68.(p. 480)

Which of the following is an advantage of franchising? A. A firm takes profits out of one country to support competitive attacks in another.B. A firm is relieved of many of the costs and risks of opening a foreign market on its own.C. It guarantees consistent product quality.D. It achieves experience curve and location economies.

This creates a good incentive for the franchisee to build a profitable operation as quickly as possible.




69.(p. 481)

Firms engaging in _____ with a local company can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. A. turnkey projectsB. joint venturesC. greenfield investmentsD. licensing arrangements

A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms.




70.(p. 482)

Identify the advantage of establishing wholly owned subsidiaries. A. It is the least expensive method of serving a foreign market from a capital investment standpoint.B. Political considerations make it the most feasible entry mode.C. It may be required if a firm is trying to realize location and experience curve economies.D. It is particularly useful where FDI is limited by host-government regulations.

In a wholly owned subsidiary, the firm owns 100 percent of the stock.




71.(p. 501)

A wholly owned subsidiary is appropriate when: A. the firm wants to share the cost and risk of developing a foreign market.B. the firm wants 100 percent of the profits generated in a foreign market.C. the firm wants a plant that is ready to operate.D. the firm wants to test a market.

Establishing a wholly owned subsidiary in a foreign market can be done in two ways. The firm either can set up a new operation in that country, often referred to as a greenfield venture, or it can acquire an established firm in the host nation and use that firm to promote its products.




72.(p. 482-483)

A firm that establishes a _____ must bear the full costs and risks of entering a foreign market. A. licensing agreementB. wholly owned subsidiaryC. franchiseD. joint venture

Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint.




73.(p. 482)

A _____ is the most costly method of serving a foreign market from a capital investment standpoint. A. wholly owned subsidiaryB. franchising agreementC. turnkey projectD. joint venture

Establishing a wholly owned subsidiary must bear the full capital costs and risks of setting up overseas operations.




74.(p. 483)

"Protection of technology and The Ability to engage in global strategic coordination" are advantages of which of the following? A. FranchisingB. Turnkey contractsC. Joint venturesD. Wholly owned subsidiaries

Table 14.1 "Advantages and Disadvantages of Entry Modes" In a wholly owned subsidiary, the firm owns 100 percent of the stock.




75.(p. 484)

If a firm's core competency is based on control over proprietary technological know-how, it should avoid _____ and _____ arrangements if possible, to minimize the risk of losing control over that technology. A. licensing; joint-ventureB. wholly owned subsidiary; exportingC. turnkey contracts; exportingD. exporting; joint-venture

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.




76.(p. 484)

If a high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how, which of the following entry strategy is best? A. Joint venturesB. LicensingC. Wholly owned subsidiariesD. Turnkey contacts

If a firm's competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint- venture arrangements should be avoided if possible to minimize the risk of losing control over that technology.




77.(p. 484)

Most service firms have found that _____ with local partners work best for controlling subsidiaries. A. joint venturesB. licensing agreementsC. greenfield investmentsD. turnkey projects

A joint venture is often politically more acceptable and brings a degree of local knowledge to the subsidiary.




78.(p. 485)

Firms may prefer acquisitions to greenfield investments for all of the following reasons except: A. they allow companies to completely sidestep government regulations on investment.B. they are quick to execute.C. they enable the firm to preempt competitors.D. managers believe acquisitions are less risky.

Acquisitions do not allow companies to completely sidestep government regulations on investment.




79.(p. 486)

According to the _____, top managers typically overestimate their ability to create value from an acquisition. A. misvaluation theoryB. performance extrapolation hypothesisC. market timing theoryD. hubris hypothesis

The hubris hypothesis attempts to explain why acquisitions fail.




80.(p. 487)

To increase the potential for a successful acquisition, a firm should: A. always bid low to allow for partial failure.B. try to acquire a firm with a very different corporate culture so there is no forced "overlap".C. seek companies only from similar national cultures.D. screen the foreign enterprise to be acquired.

Screening the foreign enterprise to be acquired, including a detailed auditing of operations, financial position, and management culture, can help to make sure the firm does not pay too much for the acquired unit, does not uncover any nasty surprises after the acquisition, and acquires a firm whose organization culture is not antagonistic to that of the acquiring enterprise.




81.(p. 486)

Which of the following is not important in the acquisition process? A. Firms should strive to limit unwanted management attrition after acquisition.B. An integration plan should quickly be implemented.C. Proper screening of the company to be acquired should take place.D. The hubris hypothesis should be maintained.

The hubris hypothesis postulates that top managers typically overestimate their ability to create value from an acquisition, primarily because rising to the top of a corporation has given them an exaggerated sense of their own capabilities.




82.(p. 488)

When a firm wants to enter a market where there are already well-established incumbent companies, and where global competitors are also interested in establishing a presence, the firm should consider: A. joint ventures.B. turnkey projects.C. acquisitions.D. greenfield investments.

In these circumstances, a greenfield venture may be too slow to establish a sizable presence.




83.(p. 488)

Firms entering markets where there are no incumbent competitors to be acquired should choose: A. greenfield investments.B. joint ventures.C. acquisitions.D. takeovers.

In such cases, it may be better to enter by the slower route of a greenfield venture than to make a bad acquisition.




84.(p. 489)

Which of the following is not an advantage of strategic alliances? A. It allows firms to share the fixed costs of developing new products or processes.B. It is a way to bring together complementary skills and assets that neither company could easily

develop on its own.C. It will help the firm establish technological standards for the industry that will benefit the firm.D. It gives a firm tight control over operations in different countries.

A wholly owned subsidiary gives a firm tight control over operations in different countries.




85.(p. 470)

What are the three basic decisions a firm contemplating foreign expansion must make? The three basic decisions a firm that is seeking to expand into foreign markets must make are: which markets to enter, when to enter those markets, and on what scale. The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential.




86.(p. 471)

What are first-mover advantages? Discuss the advantages associated with them. First-mover advantages are the advantages frequently associated with entering a market early. One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business.




87.(p. 471-472)

Explain the relationship between first-mover disadvantages and pioneering costs. When a firm enters a market prior to other international businesses, it can have first-mover disadvantages. These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs also include the costs of promoting and establishing a product offering. Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant's investments.


Bloom's: EvaluationDifficulty: Hard


88.(p. 473-474)

Discuss the trade-offs associated with large-scale entry versus small-scale entry. 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.Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry. Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages. The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages.




89.(p. 474-475)

Discuss Bartlett and Ghoshal's perspective on how firms from developing countries should approach international expansion. Bartlett and Ghoshal suggest that companies based in developing countries should use the entry of foreign multinationals as an opportunity to learn from these competitors by benchmarking their operations and performance against them. They argue that the local company might be able to find ways to differentiate itself from foreign companies by focusing on market niches that the multinational ignores or is unable to serve effectively if it has a standardized global product offering. Then, the firm from the developing nation may then be in a position to pursue its own international expansion strategy.




90.(p. 475-476)

Why should a firm choose exporting as a means of foreign market expansion? Discuss the advantages and disadvantages of exporting. 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.However, there are several disadvantages of exporting. First, exporting may not be appropriate if lower-cost manufacturing locations are available abroad. Second, high transportation costs may make exporting uneconomical. Finally, tariff barriers may make exporting less attractive.




91.(p. 477-478)

Explain the idea of a turnkey project. Why should a firm use this arrangement to expand internationally? In what industries are turnkey arrangements most common? In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation.The know-how required to assemble and run a technologically complex process is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. The strategy is particularly useful where FDI is limited by host-government regulations. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments, a longer-term investment might expose a firm to unacceptable political or economic risks.Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries.


Bloom's: EvaluationDifficulty: Medium


92.(p. 478-479)

Define licensing agreements. What are the advantages of this mode of international expansion? A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties.The primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market. As a result, licensing is a very attractive option for firms that lack the capital to open overseas markets. Licensing is also an attractive option when a firm is interested in pursuing a foreign market but does not want to commit substantial resources to an unfamiliar or potentially volatile foreign market. Licensing is also used when a firm wishes to participate in a foreign market, but is prohibited from doing so by barriers to investment. Finally, licensing is used when a firm possesses some intangible property but does not want to pursue a potential application itself.




93.(p. 479)

Why should a firm be cautious about entering a licensing agreement? In a licensing agreement, the licensor grants the rights to intangible property to the licensee for a specified period in exchange for royalty payments. Firms considering this type of arrangement should be cautious on three fronts. First, if a firm licenses any of its proprietary know-how (such as its production processes) to another company, it risks losing control over this knowledge by permitting access to it by another firm. Second, licensing is not an effective way of realizing experience curve and location economies by manufacturing a product in a centralized location. If these attributes are important to a firm, licensing may be a poor choice. Finally, competing in a global market may require a firm to coordinate strategic moves across countries by using profits from one country to support competitive attacks in another. Licensing severely limits a firm's ability to do this. A licensee is unlikely to allow a multinational firm to use its profits (beyond the royalty payments) to support a different licensee operating in another country.




94.(p. 478-479)

What is intangible property? How can intangible property be protected in a licensing agreement? Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.A licensor can reduce the risk of losing intangible property, or proprietary know-how, to a foreign partner by entering into a cross-licensing agreement. Under a cross-license agreement, a firm licenses some valuable intangible property (such as a production process) to a foreign partner, but in addition to royalty payments, the firm also requires the foreign partner to license some of its valuable know-how to the firm. Cross-licensing agreements enable firms to hold each other "hostage," thereby reducing the risk they will behave in an opportunistic manner toward each other.




95.(p. 478, 480)

Compare and contrast licensing agreements and franchising agreements. A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties. In contrast, franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchising tends to involve longer-term commitments than licensing.


Bloom's: EvaluationDifficulty: Hard


96.(p. 480)

Briefly explain the advantages and disadvantages of franchising agreements. There are several advantages of franchising as an entry mode. In particular, the firm is relieved of many of the costs and risks of opening a foreign market on its own. This creates a good incentive for the franchisee to build a profitable operation as quickly as possible. However, franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. Furthermore, quality control may become an issue if a franchisee does not maintain an appropriate quality level.




97.(p. 481-482)

What is a joint venture? What type of joint venture is most common? Provide an example of a joint venture. A joint venture involves establishing a firm that is jointly owned by two or more otherwise independent firms.The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control.Fuji-Xerox is an example of a joint venture that was established between Fuji Photo and Xerox.




98.(p. 481)

Discuss the advantages of using a joint venture to enter foreign markets. There are several advantages to expanding into foreign markets via a joint venture. First, firms benefit from a local partner's knowledge of the host market. Second, a firm can share the costs and/or risks of operating in a foreign market. Third, in many countries, political considerations make joint ventures the only feasible entry mode.




99.(p. 481-482)

Imagine that you are meeting with your superiors to discuss entering a foreign market. Your boss has asked you to analyze a joint venture prospect. Why might you tell your boss that the joint venture is not a good idea? There are major disadvantages with joint ventures. A firm that enters into a joint venture risks giving control of its technology to its partner. In addition, a joint venture does not give the firm the tight control over subsidiaries that it might need in order to realize experience curve or location economies. Finally, a joint venture might not be a good strategy because the shared ownership structure can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they do not share a common vision for the venture.


Bloom's: ApplicationDifficulty: Hard


100.(p. 481)

How can a firm protect its proprietary information in a joint venture arrangement? There are several things a firm can do to protect proprietary information in a joint venture arrangement. One option is to hold majority ownership in the venture so that the firm has greater control over the technology. A second option is to "wall off" from a partner technology that is central to the core competence of the firm, while sharing other technology.




101.(p. 482)

What are the two methods of entering foreign marketing using a wholly owned subsidiary? Firms entering a foreign market via a wholly owned subsidiary, where the firm owns 100 percent of the stock, can either make the investment in a greenfield operation or in an acquisition. A greenfield operation involves the establishment of a new operation, whereas an acquisition involves buying an established firm in the host country and using that firm to promote the company's products.




102.(p. 482-483)

Consider why a firm should enter a market via a wholly owned subsidiary. What are the advantages and disadvantages of this type of strategy? In a wholly owned subsidiary, the firm owns 100 percent of the stock. Wholly owned subsidiaries can take two forms, a greenfield investment which involves the establishment of a new company, or an acquisition.Establishing a wholly owned subsidiary as an entry strategy into a foreign market is appropriate when a firm's competitive advantage is based on technological competence. By establishing a wholly owned subsidiary, a firm reduces the risk of losing control over that competence. In addition, expanding via a wholly owned subsidiary gives a firm tight control over its operations in various countries. This strategy maximizes a firm's potential to engage in global strategic coordination. Furthermore, a wholly owned subsidiary strategy may be required if a firm is trying to realize location and experience curve economies.However, establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market, and since the firm owns 100 percent of the operation, the risks are also the highest.




103.(p. 486-487)

Why do acquisitions fail? Acquisitions fail for several reasons. First, the acquiring firm often overpays for the assets of the acquired firm. Second, many acquisitions fail because there is a clash between the cultures of the acquired and the acquiring firms. Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. Finally, many acquisitions fail due to inadequate preacquisition screening.




104.(p. 488-489)

Discuss strategic alliances. How successful are they? Why do firms form strategic alliances? The term strategic alliance refers to cooperative agreements between potential or actual competitors. Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual arrangements, in which two companies agree to cooperate on a particular task. Firms enter into strategic alliances for four main reasons. First, strategic alliances may facilitate entry into a foreign market. Second, strategic alliances allow firms to share the fixed costs of developing new products or processes. Third, strategic alliances allow firms to bring together complementary skills and assets that neither company could develop easily on its own. Fourth, strategic alliances can help firms establish technological standards for an industry.




ch14 Summary

Category # of Questions

AACSB: Analytic Skills 45

AACSB: Domestic and Global Economic Environments 1

AACSB: Reflective Thinking Skills 58

Bloom's: Application 1

Bloom's: Comprehension 46

Bloom's: Evaluation 3

Bloom's: Knowledge 54

Difficulty: Easy 40

Difficulty: Hard 11

Difficulty: Medium 54

Hill - Chapter 14 104

Learning Objective: 14-1 23





ch14

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