Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Chapter 13 - QUIZ
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Chapter 13 - QUIZ
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International Business, 8e (Wild/Wild)
Chapter 13 Selecting and Managing Entry Modes
1) Which of the following is the most common method of buying and selling goods internationally?
- A) exporting and importing
- B) countertrade
- C) a turnkey project
- D) A merger or an acquisition
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
2) Which of the following steps of the strategy development process for exports involves performing market research and interpreting results obtained from the research?
- A) identification of a potential market
- B) match needs of the market to the company's abilities
- C) initiation of meetings
- D) commitment of resources
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
3) Which of the following steps of the strategy development process for exports involves establishing relationships with potential local distributors?
- A) identification of a potential market
- B) match market needs to the company's abilities
- C) initiation of meetings
- D) commitment of resources
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
4) Which of the following is the first step in developing a successful export strategy?
- A) identification of a potential market
- B) match market needs to the company's abilities
- C) initiation of meetings
- D) commitment of resources
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
5) Which of the following is true of distributors?
- A) The use of distributors increases the exporter's control over the price buyers are charged.
- B) They are compensated with a fixed salary plus commissions based on the value of their sales.
- C) They are seldom required to take ownership of the merchandise when it enters their country.
- D) They can stunt the growth of the exporter's market share by charging very high prices.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
6) Which of the following occurs when a company sells its products to intermediaries who then resell to buyers in a target market?
- A) indirect exporting
- B) counterpurchase
- C) an acquisition
- D) a joint venture
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
7) Which of the following allows a country to earn back some of the currency it pays out for imports?
- A) switch trading
- B) counterpurchase
- C) buyback
- D) barter
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
8) Which of the following is the oldest known form of countertrade?
- A) counterpurchase
- B) switch trading
- C) offset
- D) barter
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
9) The sale of goods and services to a country by a company that promises to buy a specific product from that country in the future is called a(n) ________.
- A) counterpurchase
- B) offset
- C) joint venture
- D) barter
Answer: A
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
10) A company proposes that in exchange for a hard-currency sale, it will make a hard-currency purchase of an unspecified product from the buyer nation in the future. Which of the following is the company proposing?
- A) a counterpurchase
- B) an offset
- C) a buyback
- D) a barter
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
11) An offset agreement differs from a counterpurchase agreement in that an offset agreement ________.
- A) fails to specify the type of product that must be purchased
- B) fails to specify the amount that will be spent on the purchase
- C) fails to give a business greater freedom in fulfilling its end of a countertrade deal
- D) fails to make a hard-currency purchase of any product from that nation in the future
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
12) ________ is a countertrade whereby one company sells to another its obligation to make a purchase in a given country.
- A) Franchising
- B) Joint venture
- C) Switch trading
- D) Barter
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
13) Buyback is defined as ________.
- A) the export of industrial equipment in return for products produced by that equipment
- B) an agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future
- C) the sale of goods or services to a country by a company that promises to make a future purchase of a specific product from that country
- D) the exchange of goods or services for a certain amount of money
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
14) A form of countertrade that usually typifies long-term relationships between the companies involved is called ________.
- A) barter
- B) franchising
- C) offset
- D) buyback
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
15) Which of the following statements is true of countertrade?
- A) Countertrade is practiced by countries when there is a lack of hard currency.
- B) Countertrade involves products whose prices on world markets tend to remain steady.
- C) Countertrade usually involves industrial products and computer softwares.
- D) Hedging risk in countertrade is prohibited.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
16) Which of the following is a strategic factor that influences a company's international entry mode selection?
- A) market consumption capacity
- B) market receptivity
- C) market size
- D) market intensity
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
17) Which of the following statements is true of the strategic factors that influence a company's international entry mode selection?
- A) Low tariffs and high quota limits encourage market entry by means of investment.
- B) Companies that produce goods with high shipping costs prefer exporting.
- C) Companies set up production units in a host market if the total cost of production is lower in the home market.
- D) Markets that are likely to remain relatively small consider exporting as a viable option.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
Scenario: Owen's HomeCare Products
Owen McCain, owner of Owen's HomeCare Products, is considering going international. He feels that the products he manufactures will be well-received, especially in developing countries. He wants to understand the exporting process and then scale his exporting activities accordingly.
18) Through his research, Owen learns that the first step in developing a successful export strategy is ________.
- A) initiation of meetings with intermediaries
- B) identification of a potential market
- C) commitment of resources
- D) matching of market needs to company abilities
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
19) Which of the following steps would Owen implement toward the end while developing a successful export strategy?
- A) initiation of meetings with intermediaries
- B) identification of a potential market
- C) commitment of resources
- D) matching of market needs to company abilities
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
20) If Owen's HomeCare Products decides to sell their products to intermediaries who then resell them to buyers in target markets, the company would be engaging in ________.
- A) indirect exporting
- B) counterpurchase
- C) an acquisition
- D) a joint venture
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
Scenario: Wang's Techno Toys
Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the domestic market. Continually increasing and stiff competition at home has now forced Wang's Techno Toys to enter international markets through direct exports.
21) Which of the following will most likely help Techno Toys sell its toys directly to buyers in the target market?
- A) agents
- B) sales representatives
- C) export management companies
- D) export trading companies
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
22) The most common method used for buying and selling goods internationally is licensing.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
23) Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
24) Companies can achieve economies of scale by expanding into international markets.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
25) Direct exporters always sell directly to end users.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
26) Typically, indirect exporting relies on local sales representatives or distributors.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
27) Using a distributor increases an exporter's risk.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
28) Agency relationships are popular among exporters because they are easy to terminate should difficulties arise.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
29) Countertrade provides a way for firms to trade either by using a small amount of hard currency or even none at all.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
30) Countertrade is not an option for smaller companies because of the cash outlays involved.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
31) Switch trading is the export of industrial equipment in return for products produced by that equipment.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
32) A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
33) Letters of credit are popular among traders because banks assume most of the risks.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
34) The brand name or trademark of a company is normally the single most important item desired by a franchisee.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
35) Explain why companies consider exporting. Describe the four-step model of developing a successful export strategy.
Answer: Companies generally begin exporting for three main reasons.
- Expand sales-Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated. By going international, they tend to achieve economies of scale.
- Diversify sales-Companies can offset slow sales in one national market with increased sales in another.
- Gain experience-Companies often use exporting as a low-cost, low-risk way of getting started in international business.
Companies are often drawn into exporting when customers in other countries solicit their goods. In this way, companies become aware of their products' international potential and get their first taste of international business. Yet a company should not fall into the habit of simply responding to random international requests for its products. A more logical approach is to research and analyze international opportunities and to develop a coherent export strategy. A business with such a strategy actively pursues export markets rather than sitting back and waiting for international orders to come in.
Step 1: Identify a potential market-To identify whether demand exists in a particular target market, a company should perform market research and interpret the results. Novice exporters should focus on one or only a few markets. For example, a first-time Brazilian exporter might not want to export simultaneously to Argentina, Britain, and Greece. A better strategy would likely be to focus on Argentina because of its cultural similarities with Brazil (despite having a different, though related, language). The company could then expand into more diverse markets after it gains initial international experience in a nearby country. The would-be exporter should also seek expert advice on the regulations and general process of exporting and any special issues related to a selected target market.
Step 2: Match needs to abilities-The next step is to determine whether the company is capable of satisfying the needs of the market.
Step 3: Initiate Meetings-Holding meetings early with potential local distributors, buyers, and others is a must. Initial contact should focus on building trust and developing a cooperative climate among all parties. The cultural differences between the parties will come into play already at this stage. Beyond building trust, successive meetings are designed to estimate the potential success of any agreement if interest is shown on both sides. At the most advanced stage, negotiations take place and details of agreements are finalized.
Step 4: Commit resources-After all the meetings, negotiations, and contract signings, it is time to put the company's human, financial, and physical resources to work. First, the objectives of the export program must be clearly stated and should extend out at least three to five years. For small firms, it may be sufficient to assign one individual the responsibility for drawing up objectives and estimating resources. Yet as companies expand their activities to include more products and/or markets, many firms discover the need for an export department or division. The head of this department usually has the responsibility (and authority) to formulate, implement, and evaluate the company's export strategy.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
36) Why would an exporter use a sales representative or a distributor? Why would the exporter be reluctant to offer an open account payment method?
Answer: Some companies become deeply involved in the export of their products. Direct exporting occurs when a company sells its products directly to buyers in a target market. Direct exporters operate in many industries, including aircraft, industrial equipment, apparel, and bottled beverages. Direct exporters need not sell directly to end users. Rather, they take full responsibility for getting their goods into the target market by selling directly to local buyers and not going through intermediary companies. Typically, they rely on either local sales representatives or distributors.
Sales Representatives-A sales representative (whether an individual or an organization) represents only its own company's products, not those of other companies. Sales representatives promote those products in many ways, such as by attending trade fairs and making personal visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales.
Distributors-Alternatively, a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. As owners of the products, they accept all the risks associated with generating local sales. They sell either to retailers and wholesalers or to end users through their own channels of distribution. Typically, they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an exporter's control over the price buyers are charged. A distributor who charges very high prices can stunt the growth of an exporter's market share. Exporters should choose, if possible, distributors who are willing to invest in the promotion of their products and who do not sell directly competing products.
Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of nonshipment faced by the importer under the advance payment method. By the same token, the open account method increases the risk of nonpayment for the exporter. Thus, open account is the least favorable for exporters but the most favorable for importers.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
37) What is countertrade? Explain the concept of buyback as a type of countertrade, and discuss buyback as a joint venture configuration.
Answer: Companies are sometimes unable to import merchandise in exchange for financial payment. The reason is either that the government of the importer's nation lacks the hard currency to pay for imports or that it intentionally restricts the convertibility of its currency. Fortunately, there is a way for firms to trade by using either a small amount of hard currency or even none at all. Selling goods or services that are paid for, in whole or in part, with other goods or services is called countertrade. Although countertrade often requires an extensive network of international contacts, even smaller companies can take advantage of its benefits.
Nations that have long used countertrade are found mostly in Africa, Asia, Eastern Europe, and the Middle East. A lack of adequate hard currency often forced those nations to use countertrade to exchange oil for passenger aircraft and military equipment. Today, because of insufficient hard currency, developing and emerging markets frequently rely on countertrade to import goods. The greater involvement of firms from industrialized nations in those markets is expanding the use of countertrade.
Buyback is the export of industrial equipment in return for products produced by that equipment. This practice usually typifies long-term relationships between the companies involved.
A buyback joint venture is formed when each partner requires the same component in its production process. It might be formed when a production facility of a certain minimum size is needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant building it. However, by combining resources, the partners can construct a facility that serves their needs while achieving savings from economies of scale production. For instance, this was one reason behind the $500 million joint venture between Chrysler and BMW to build small-car engines in Latin America. Each party benefited from the economies of scale offered by the plant's annual production capacity of 400,000 engines–a volume that neither company could absorb alone.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
38) Which of the following occurs when a company sells its products to buyers in a target market without going through intermediary companies?
- A) export through local distributors
- B) export through agents
- C) sale through export management companies
- D) sale through export trading companies
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
39) ________ take ownership of the merchandise when it enters their country and accept all the risks associated with generating local sales.
- A) Agents
- B) Distributors
- C) Sales representatives
- D) Freight forwarders
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
40) Companies involved in direct exporting typically rely on ________.
- A) distributors
- B) agents
- C) export management companies
- D) export trading companies
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
41) A(n) ________ exports products on behalf of an indirect exporter.
- A) local distributor
- B) subsidiary
- C) sales representative
- D) export management company
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
42) Which of the following is a method of export/import financing?
- A) offset
- B) buyback
- C) switch trading
- D) documentary collection
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
43) Which of the following normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter prior to shipment of merchandise?
- A) documentary collection
- B) letter of credit
- C) advance payment
- D) open account
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
44) Advance payment is commonly used for export/import financing when ________.
- A) two parties are unfamiliar with each other
- B) the buyer has obtained credit for the transaction
- C) the transaction is for a relatively high amount
- D) the buyer has good credit rating at banks
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
45) Export/import financing in which a bank acts as an intermediary without accepting financial risk is called ________.
- A) documentary collection
- B) counterpurchase
- C) buyback
- D) open account
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
46) Which of the following financing methods entails the greatest risk for importers?
- A) documentary collection
- B) advance payment
- C) letter of credit
- D) open account
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
47) Which of the following financing methods entails the greatest risk for exporters?
- A) supersedeas bond
- B) advance payment
- C) letter of credit
- D) open account
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
48) ________ is a payment method commonly used when there is an ongoing relationship between the involved parties.
- A) Advance payment
- B) Documentary collection
- C) Letter of credit
- D) Open account
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
49) A document ordering the importer to pay the exporter a specified sum of money at a specified time is called a ________.
- A) bill of lading
- B) letter of credit
- C) bill of exchange
- D) management contract
Answer: C
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
50) Which of the following requires an importer to pay for the imported goods when they are delivered?
- A) sight draft
- B) inland bill of lading
- C) air way bill of lading
- D) time draft
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
51) A(n) ________ becomes a negotiable instrument that can be traded among financial institutions when inscribed "accepted" by an importer.
- A) sight draft
- B) ocean bill of lading
- C) time draft
- D) inland bill of lading
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
52) Which of the following refers to a contract between the exporter and shipper that specifies merchandise destination and shipping costs?
- A) sight draft
- B) bill of lading
- C) letter of credit
- D) bill of exchange
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
53) Which of the following is a method of export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document?
- A) sight draft
- B) bill of lading
- C) letter of credit
- D) bill of exchange
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
54) A(n) ________ allows the bank to modify the terms of the letter only after obtaining the approval of both exporter and importer.
- A) bill of exchange
- B) bill of lading
- C) confirmed letter of credit
- D) irrevocable letter of credit
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
55) Which of the following letters of credit can be modified without obtaining approval from either the exporter or the importer, by the bank issuing the letter of credit?
- A) revocable letter of credit
- B) confirmed letter of credit
- C) at sight letter of credit
- D) usance letter of credit
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
56) A(n) ________ is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.
- A) confirmed letter of credit
- B) transferrable letter of credit
- C) revocable letter of credit
- D) irrevocable letter of credit
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
57) Letters of credit are popular among traders because most of the risks are assumed by ________.
- A) distributors
- B) importers
- C) exporters
- D) banks
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
58) Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called ________.
- A) advance payment
- B) open account
- C) a letter of credit
- D) documentary collection
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
Scenario: Wang's Techno Toys
Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the domestic market. Continually increasing and stiff competition at home has now forced Wang's Techno Toys to enter international markets through direct exports.
59) In some countries, people exchange electronic goods for Techno Toys instead of paying money for them. This practice is known as ________.
- A) offset
- B) counterpurchase
- C) switch trading
- D) barter
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 13.2: Explain the various methods of export/import financing.
60) Which of the following methods of export/import financing is Techno Toys' bank using if it acts as an intermediary without accepting financial risk?
- A) documentary collection
- B) buyback
- C) letter of credit
- D) advance payment
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 13.2: Explain the various methods of export/import financing.
Scenario: Gro-Tru Grows To Europe
Gro-Tru, a maker of chemical fertilizers and pesticides, sees enormous growth potential in Central Europe. The company has received several inquiries from potential importers in the region, but in most cases, the potential importers have expressed difficulty in obtaining the hard currency to pay for Gro-Tru's products. Alistair Green, vice-president for business development, is exploring how Gro-Tru can meet the needs of the potential market.
61) Alistair has identified an option that might help the firm deal with the importer's inability to pay with hard currency. The option involves selling goods or services that are paid for in whole or part with other goods or services. Which of the following methods is Alistair considering?
- A) auction
- B) bidding
- C) countertrade
- D) tendering
Answer: C
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
62) Which of the following methods would Gro-Tru be implementing if it exchanges its products directly for other goods or services without the use of money?
- A) barter
- B) offset
- C) switch trading
- D) buyback
Answer: A
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
63) Gro-Tru would be engaging in ________, if it decides that in exchange for a hard-currency sale it would make a hard-currency purchase of an unspecified product from the importing nation in the future.
- A) barter
- B) offset
- C) switch trading
- D) buyback
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
64) One option that intrigues Alistair is the process in which one company sells to another its obligation to make a purchase in a given country. This arrangement is known as ________.
- A) barter
- B) offset
- C) switch trading
- D) buyback
Answer: C
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
65) In his research, Alistair discovers a type of arrangement in which industrial equipment is exported in return for products produced by that equipment. This arrangement is known as ________.
- A) barter
- B) offset
- C) switch trading
- D) buyback
Answer: D
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
Scenario: Sports Stuff Inc.
Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.
66) Herb knows that much of the success his company enjoys is due to the patents and copyrights that protect the company's products. If Sports Stuff chooses an entry mode in which it grants another firm the right to use its intangible property for a specified period of time, it would be engaging in ________.
- A) a turnkey project
- B) franchising
- C) licensing
- D) a joint venture
Answer: C
AACSB: Analytical thinking; Written and oral communication
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
67) Herb has been exploring another type of entry mode that requires ongoing assistance on the part of one firm, often in the form of start-up capital, management training, or location advice. Herb is most likely considering ________.
- A) a strategic alliance
- B) franchising
- C) licensing
- D) a joint venture
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
68) Matching market needs to the company's abilities is the first step in developing a successful export strategy.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
69) Advance payment is the least favorable method of payment collection for exporters.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
70) Advance payment made by an importer to an exporter normally takes the form of a sight draft.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.2: Explain the various methods of export/import financing.
71) A sight draft extends the period of time following delivery by which the importer must pay for goods.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
72) The open account method of export/import financing is used when the two parties are unfamiliar with each other.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.2: Explain the various methods of export/import financing.
73) Cross licensing occurs when companies use licensing agreements to swap intangible property with one another.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
74) Discuss the steps companies should take to avoid export and import blunders. How can an advance payment method help exporters reduce financial risk?
Answer: There are several errors common to companies new to exporting. First, many businesses fail to conduct adequate market research before exporting. In fact, many companies begin exporting by responding to unsolicited requests for their products. If a company enters a market in this manner, it should quickly devise an export strategy to manage its export activities effectively and not strain its resources.
Second, many companies fail to obtain adequate export advice. National and regional governments are often willing and able to help managers and small-business owners understand and cope with the vast amounts of paperwork required by each country's export and import laws. Naturally, more experienced exporters can be extremely helpful as well. They can help novice exporters avoid embarrassing mistakes by guiding them through unfamiliar cultural, political, and economic environments.
To better ensure that it will not make embarrassing blunders, an inexperienced exporter might also want to engage the services of a freight forwarder–a specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees. Freight forwarders also can pack shipments for export and take responsibility for getting a shipment from the port of export to the port of import.
The advance payment method can help exporters reduce financial risk. Advance payment refers to export/import financing in which an importer pays an exporter for merchandise before it is shipped. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of nonshipment for importers–importers might pay for goods but never receive them. Thus advance payment is the most favorable method for exporters but the least favorable for importers.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 13.2: Explain the various methods of export/import financing.
75) What are the different financing methods available to exporters and importers?
Answer: Export/import financing methods designed to reduce risks include advance payment, documentary collection, letter of credit, and open account.
Advance Payment-Export/import financing in which an importer pays an exporter for merchandise before it is shipped is called advance payment. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of nonshipment for importers–importers might pay for goods but never receive them. Thus advance payment is the most favorable method for exporters but the least favorable for importers.
Documentary Collection-Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties.
Letter of Credit-Export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document is called letter of credit. A letter of credit is typically used when an importer's credit rating is questionable, when the exporter needs a letter of credit to obtain financing, and when a market's regulations require it.
Open Account-Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of nonshipment faced by the importer under the advance payment method.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.2: Explain the various methods of export/import financing.
76) Describe the process of how the documentary collection procedure works using an example.
Answer: Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties. The documentary collection process can be broken into three main stages and nine smaller steps.
- Before shipping merchandise, the exporter (with its banker's assistance) draws up a draft (bill of exchange)–a document ordering the importer to pay the exporter a specified sum of money at a specified time. A sight draft requires the importer to pay when goods are delivered. A time draft extends the period of time (typically 30, 60, or 90 days) following delivery by which the importer must pay for the goods.
- Following creation of the draft, the exporter delivers the merchandise to a transportation company for shipment to the importer. The exporter then delivers to its banker a set of documents that includes the draft, a packing list of items shipped, and a bill of lading–a contract between the exporter and shipper that specifies merchandise destination and shipping costs. The bill of lading is proof that the exporter has shipped the merchandise. An international ocean shipment requires an inland bill of lading to get the shipment to the exporter's border and an ocean bill of lading for water transport to the importer nation. An international air shipment requires an air way bill that covers the entire international journey.
- After receiving appropriate documents from the exporter, the exporter's bank sends the documents to the importer's bank. After the importer fulfills the terms stated on the draft and pays its own bank, the bank issues the bill of lading (which becomes title to the merchandise) to the importer.
Documentary collection reduces the importer's risk of nonshipment because the packing list details the contents of the shipment and the bill of lading is proof that the merchandise was shipped. The exporter's risk of nonpayment is increased because, although the exporter retains title to the goods until the merchandise is accepted, the importer does not pay until all necessary documents have been received. Although importers have the option of refusing the draft (and, therefore, the merchandise), this action is unlikely. Refusing the draft–despite all terms of the agreement being fulfilled–would make the importer's bank unlikely to do business with the importer in the future.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.2: Explain the various methods of export/import financing.
77) The biggest advantage of an export management company is usually its ________.
- A) knowledge of the target market's cultural, political, legal, and economic conditions
- B) well-developed and extensive distribution channels and storage facilities
- C) well-rounded experience in countertrade-related activities
- D) financial understanding of investment projects and its manufacturing expertise
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.3: Describe the different types of contractual entry modes.
78) Selling goods or services that are paid for, in whole or part, with other goods or services is called ________.
- A) indirect exporting
- B) countertrade
- C) licensing
- D) a joint venture
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
79) Which of the following refers to the exchange of goods or services directly for other goods or services without the use of money?
- A) offset
- B) barter
- C) counterpurchase
- D) switch trading
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
80) Which of the following is a contractual entry mode?
- A) wholly owned subsidies
- B) turnkey projects
- C) joint ventures
- D) strategic alliances
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
81) Which of the following is a contractual entry mode in which a company owning intangible property grants another firm the right to use that property for a specified period of time?
- A) franchising
- B) licensing
- C) management contract
- D) strategic alliance
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
Scenario: Sports Stuff Inc.
Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.
82) Which of the following entry modes would Sports Stuff be implementing if it hires a company to design, construct, and test a production facility on its behalf?
- A) joint venture
- B) turnkey project
- C) wholly owned subsidiary
- D) franchising
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
83) In a backward integration joint venture, the parties choose to invest together in downstream business activities.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 13.3: Describe the different types of contractual entry modes.
84) The most important disadvantage of a strategic alliance is that it can create a future local or even global competitor.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.3: Describe the different types of contractual entry modes.
85) Low tariffs and high quota limits encourage market entry by means of investment.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.3: Describe the different types of contractual entry modes.
86) Explain franchising with examples. Mention the advantages and disadvantages associated with franchising. How is franchising different from licensing?
Answer: Franchising is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period. Franchisers typically receive compensation as flat fees, royalty payments, or both. The most popular franchises are those with widely recognized brand names, such as Mercedes, McDonald's, and Starbucks. In fact, the brand name or trademark of a company is normally the single most important item desired by the franchisee. This is why smaller companies with lesser known brand names and trademarks have greater difficulty locating interested franchisees.
Franchising differs from licensing in several ways. First, franchising gives a company greater control over the sale of its product in a target market. Franchisees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions. Second, although licensing is fairly common in manufacturing industries, franchising is primarily used in service industries such as auto dealerships, entertainment, lodging, restaurants, and business services. Third, although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. In addition to the initial transfer of property, franchisers typically offer startup capital, management training, location advice, and advertising assistance to their franchisees.
Some examples of the kinds of companies involved in international franchising include:
- Ozemail (Australia) awarded Magictel (Hong Kong) a franchise to operate its Internet phone and fax service in Hong Kong.
- Jean-Louis David (France) awarded franchises to more than 200 hairdressing salons in Italy.
- Brooks Brothers (United States) awarded Dickson Concepts (Hong Kong) a franchise to operate Brooks Brothers stores across Southeast Asia.
Advantages of franchising-There are several important advantages of franchising. First, franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Companies following global strategies rely on consistent products and common themes in worldwide markets. Franchising allows them to maintain consistency by replicating the processes for standardized products in each target market. Many franchisers, however, will make small modifications in products and promotional messages when marketing specifically to local buyers.
Second, franchising is an entry mode that allows for rapid geographic expansion. Firms often gain a competitive advantage by being first in seizing a market opportunity. For example, Microtel Inns & Suites of Atlanta, Georgia, is using franchising to fuel its international expansion. Microtel is boldly entering Argentina and Uruguay and eyeing opportunities in Brazil and Western Europe. Rooms cost around $75 per night and target business travelers who cannot afford $200 per night.
Finally, franchisers can benefit from the cultural knowledge and know-how of local managers. This helps lower the risk of business failure in unfamiliar markets and can create a competitive advantage.
Disadvantages of franchising-Franchising can also pose problems for both franchisers and franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. A major concern is that product quality and promotional messages among franchisees will not be consistent from one market to another. One way to ensure greater control is by establishing in each market a so-called master franchisee, which is responsible for monitoring the operations of individual franchisees.
Second, franchisees can experience a loss of organizational flexibility in franchising agreements. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser's other divisions. For years PepsiCo owned the well-known restaurant chains Pizza Hut, Taco Bell, and KFC. As part of their franchise agreements with PepsiCo, restaurant owners were required to sell only PepsiCo beverages to their customers. Many franchisees worldwide were displeased with such restrictions on their product offerings and were relieved when PepsiCo spun off the restaurant chains.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.3: Describe the different types of contractual entry modes.
87) Discuss the advantages of licensing, low-cost production, and low-cost shipping for international companies.
Answer: There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise.
Second, licensing can be a less risky method of international expansion for a licensor than other entry modes. Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately.
Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at all–which is what owners get from bootleg versions of their products.
Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies.
In addition to licensing, low-cost production and shipping can give a company an advantage by helping to control total costs. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.
Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 13.3: Describe the different types of contractual entry modes.
88) Which of the following statements is true of licensing?
- A) Licensing restricts finances needed for international expansion.
- B) Cross licensing grants a company the right to use a property but does not grant it sole access to a market.
- C) A major advantage of licensing is that it is the least risky method of international expansion.
- D) Licensing increases the likelihood that a licensor's product will appear on the black market.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
89) Which of the following is a contractual entry mode in which one company supplies another with intangible property and other assistance over an extended period?
- A) franchising
- B) management contract
- C) licensing
- D) strategic alliance
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
90) When one company is hired to design, construct, and test a production facility for a client, the arrangement is called ________.
- A) a turnkey project
- B) licensing
- C) a joint venture
- D) franchising
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
91) Which of the following is an investment entry mode?
- A) licensing
- B) franchising
- C) joint venture
- D) turnkey project
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
92) Which of the following is an advantage of wholly owned subsidiaries?
- A) The parent company receives all profits generated by the subsidiary.
- B) They are the least expensive investment entry modes.
- C) They help in the sharing of the cost of an international investment project.
- D) They are the least risky when compared to other investment entry modes.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
93) A ________ is a separate company created and owned by two or more independent entities to achieve a common business objective.
- A) wholly owned subsidiary
- B) joint venture
- C) strategic alliance
- D) turnkey project
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
94) Which of the following types of joint ventures involve parties investing together in downstream business activities?
- A) backward integration
- B) forward integration
- C) multistage
- D) buyback
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
95) A ________ joint venture is formed when each partner requires the same component in its production process.
- A) backward
- B) multistage
- C) forward
- D) buyback
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
96) Which of the following is a disadvantage of strategic alliances?
- A) They are the most expensive among the investment entry modes.
- B) They increase the likelihood that one partner will try to take advantage of the other.
- C) They create future competitors.
- D) They fail to tap into their competitors' specific strengths.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
Scenario: Sports Stuff Inc.
Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.
97) The CEO of Sports Stuff has decided that the company needs to retain complete control over its operations in Europe. To achieve this objective, Herb would most likely recommend that the firm establish a ________.
- A) joint venture
- B) cross licensing agreement
- C) wholly owned subsidiary
- D) strategic alliance
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 13.4: Describe the various kinds of investment entry modes.
98) The board of directors of Sports Stuff is concerned with the firm's lack of experience in foreign markets. To minimize this problem, Herb recommends that the firm create a ________ with a local partner.
- A) joint venture
- B) turnkey project
- C) wholly owned subsidiary
- D) franchise
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 13.4: Describe the various kinds of investment entry modes.
99) Franchising is primarily used in the manufacturing industries.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
100) The primary advantage of franchising is that franchisees have a great degree of organizational flexibility.
Answer: FALSE
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
101) Under a turnkey project, one company supplies another with managerial expertise for a specific period of time.
Answer: FALSE
Skill: Concept
Difficulty: Easy
LO: 13.4: Describe the various kinds of investment entry modes.
102) What are the advantages of pursuing a wholly owned subsidiary as an entry strategy?
Answer: A wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. Companies can establish a wholly owned subsidiary either by forming a new company and constructing entirely new facilities (such as factories, offices, and equipment) or by purchasing an existing company and internalizing its facilities. Whether an international subsidiary is purchased or newly created depends to a large extent on its proposed operations.
When a parent company designs a subsidiary to manufacture the latest high-tech products, it typically must build new facilities. The major drawback of creation from the ground up is the time it takes to construct new facilities, hire and train employees, and launch production.
Conversely, finding an existing local company capable of performing marketing and sales will be easier because special technologies are typically not needed. By purchasing the existing marketing and sales operations of an existing firm in the target market, the parent can have the subsidiary operating relatively quickly. Buying an existing company's operations in the target market is a particularly good strategy when the company to be acquired has a valuable trademark, brand name, or process technology.
There are two main advantages to entering a market using a wholly owned subsidiary. First, managers have complete control over day-to-day operations in the target market and access to valuable technologies, processes, and other intangible properties within the subsidiary. Complete control also decreases the chance that competitors will gain access to a company's competitive advantage, which is particularly important if it is technology-based. Managers also retain complete control over the subsidiary's output and prices. Unlike licensors and franchisers, the parent company also receives all profits generated by the subsidiary.
Second, a wholly owned subsidiary is a good mode of entry when a company wants to coordinate the activities of all its national subsidiaries. Companies using global strategies view each of their national markets as one part of an interconnected global market. Thus the ability to exercise complete control over a wholly owned subsidiary makes this entry mode attractive to companies that are pursuing global strategies.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.4: Describe the various kinds of investment entry modes.
103) What are the differences between a turnkey project and a strategic alliance?
Answer: When one company designs, constructs, and tests a production facility for a client, the agreement is called a turnkey (build——operate——transfer) project. The term turnkey project is derived from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply 'turn a key' to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.
Similar to management contracts, turnkey projects tend to be large-scale and often involve government agencies. But unlike management contracts, turnkey projects transfer special process technologies or production-facility designs to the client. They typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that are then turned over to the client. Under a management contract, the supplier of a service retains the asset–the managerial expertise.
With turnkey projects, one company hires another to complete a specified scope of work. Strategic alliances, on the other hand, involve a level of cooperation between companies that choose to partner to achieve joint objectives.
A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures, strategic alliances can be formed for relatively short periods or for many years, depending on the goals of the participants. Strategic alliances can be established between a company and its suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner purchases a portion of the other's stock. In this way, each company has a direct stake in its partner's future performance. This decreases the likelihood that one partner will try to take advantage of the other.
AACSB: Application of knowledge
Skill: Synthesis
Difficulty: Hard
LO: 13.4: Describe the various kinds of investment entry modes.
104) Which of the following statements best differentiates between franchising and licensing?
- A) Licensing gives a company greater control than franchising over the sale of its product in a target market.
- B) Franchising is common in manufacturing industries while licensing is primarily used in service industries.
- C) Franchising requires ongoing assistance from the franchiser while licensing normally involves a one-time transfer of property.
- D) Licensees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions unlike franchisees.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.5: Outline key strategic factors in selecting an entry mode.
105) Products for which there are fewer substitutes can more easily absorb higher shipping and production costs.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.5: Outline key strategic factors in selecting an entry mode.
106) Identify the strategic factors that influence a company's international entry mode selection. Explain any three of them.
Answer: The choice of entry mode has many important strategic implications for a company's future operations. Because enormous investments in time and money can go into determining an entry mode, the choice must be made carefully. Several key factors that influence a company's international entry mode selection are the cultural environment, political and legal environments, market size, production and shipping costs, and international experience.
Cultural Environment-The dimensions of culture–values, beliefs, customs, languages, religions–can differ greatly from one nation to another. In such cases, managers can be less confident in their ability to manage operations in the host country. They can be concerned about the potential not only for communication problems but also for interpersonal difficulties. As a result, managers may avoid investment entry modes in favor of exporting or a contractual mode. On the other hand, cultural similarity encourages confidence and thus the likelihood of investment. Likewise, the importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market.
Political and Legal Environments: Political instability in a target market increases the risk exposure of investments. Significant political differences and levels of instability cause companies to avoid large investments and to favor entry modes that shelter assets.
A target market's legal system also influences the choice of entry mode. Certain import regulations, such as high tariffs or low quota limits, can encourage investment. A company that produces locally avoids tariffs that increase product cost; it also doesn't have to worry about making it into the market below the quota (if there is one). But low tariffs and high quota limits discourage market entry by means of investment. Also, governments may enact laws that ban certain types of investment outright.
Market Size-The size of a potential market also influences the choice of entry mode. For example, rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market. High domestic demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. On the other hand, if investors believe that a market is likely to remain relatively small, better options might include exporting or contractual entry.
Production and Shipping Costs-By helping to control total costs, low-cost production and shipping can give a company an advantage. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.
Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.
International Experience-Most companies enter the international marketplace through exporting. As companies gain international experience, they tend to select entry modes that require deeper involvement. But this means businesses must accept greater risk in return for greater control over operations and strategy. Eventually, they may explore the advantages of licensing, franchising, management contracts, and turnkey projects. After businesses become comfortable in a particular market, joint ventures, strategic alliances, and wholly owned subsidiaries become viable options.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.5: Outline key strategic factors in selecting an entry mode.
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