SOM Final Exam Chapter 13

A firm contemplating expansion should choose a foreign market based on an assessment of the nation’s long-run profit potential.
true
The attractiveness of a country as a potential market for an international business depends solely on the size of its consumer market.
false
Small-scale entrants are more likely to capture first-mover advantages associated with switching costs.
false
If an international business can offer a product that has been widely available in that market, the value of that product to consumers is likely to be much greater than if the international business offers a product that has not been widely available in that market.
false
The probability of survival decreases if an international business enters a national market after several other foreign firms have already done so.
false
In international business, a strategic commitment has a short-term impact and is easily reversible.
false
In international business, an early entrant to a foreign market may be at a disadvantage relative to a later entrant, if regulations change in a way that diminishes the value of an
early entrant’s investments.
true
A risk-averse international firm that enters a foreign market on a small scale will increase its potential losses.
false
A drawback of exporting is that tariff barriers can make it uneconomical as a mode of entry into a foreign market.
true
Exporting, as a mode of entry into foreign markets, does not help a firm achieve experience curve and location economies.
false
An international firm that enters into a turnkey deal has a long-term interest in the foreign country.
false
Licensing, a mode of entry into a foreign market, gives an international firm tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies.
false
Under a cross-licensing agreement, a firm can either request a royalty payment or license some valuable intangible property to a foreign partner.
false
Franchising, a mode of entry into a foreign market, helps firms exert greater quality control over franchises in foreign locations.
false
If an international firm’s core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner.
true
Acquiring firms often overpay for the assets of the acquired firms.
true
An advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants.
true
Which of the following is a reason why a relatively poor country may be an attractive target for inward investment?
A) Rapid economic growth
B) High cost of living
C) Less developed infrastructure
D) Currency depreciation
E) Political instability
A) Rapid economic growth
Which of the following factors determines the value that an international business can create in a foreign market?
A) Type of political system in the foreign market
B) Per capita income in the foreign market
C) Population density in the foreign market
D) Political stability of the foreign market
E) Nature of indigenous competition
E) Nature of indigenous competition
In which of the following situations can an international business command higher prices for a particular product in a foreign market?
A) When the product offers greater value to customers in the foreign market
B) When sales volumes is relatively low in the foreign market
C) When domestic competitors are selling alternatives at reduced prices
D) When the product is widely available in the foreign market
E) When the product is more suitable to other foreign markets
A) When the product offers greater value to customers in the foreign market
Which of the following is an example of a first-mover advantage?
A) The increased probability of surviving in a foreign market
B) The avoidance of pioneering costs that a later entrant into the foreign market has to bear
C) The ability to let later entrants ride ahead on the experience curve
D) The opportunity to observe and learn from the mistakes of other entrants
E) The ability to create switching costs that tie customers into one’s products or services
E) The ability to create switching costs that tie customers into one’s products or services
An early entrant find may find itself at a disadvantage if it:
A) has a core competence based on control over technological know-how.
B) incurs low development costs.
C) faces a subsequent change in business regulations in the host-country.
D) considers a greenfield strategy.
E) is trying to realize location and experience curve economies.
C) faces a subsequent change in business regulations in the host-country.
Which of the following is a risk of entering developing nations like India and China on a large scale?
A) Fear of rapid imitation of technology
B) Lack of control over quality
C) High management turnover
D) Lower potential for long-term rewards
E) Absence of prior foreign entrants
E) Absence of prior foreign entrants
In international business, an advantage of being a late entrant in a foreign market is the ability to:
A) create a cost advantage over first movers.
B) capture demand by establishing a strong brand name.
C) build sales volume and ride down the experience curve before early entrants.
D) create switching costs that tie customers into products or services.
E) ride on an early entrant’s investments in learning and customer education.
E) ride on an early entrant’s investments in learning and customer education.
Which of the following is a disadvantage of large-scale entry into a foreign market?
A) Decrease in a firm’s exposure to the foreign market
B) Availability of fewer resources to support expansion in other desirable markets
C) Inability to build rapid market-share irrespective of the scale of entry
D) Limited product acceptance due to the avoidance of potential losses
E) Difficulty attracting customers and distributors for the product
B) Availability of fewer resources to support expansion in other desirable markets
Small-scale entry into a foreign market makes it difficult to build market share because it:
A) is associated with a lack of commitment demonstrated by the foreign firm.
B) leads to increased exposure to a foreign market.
C) necessitates rapid entry into a foreign market.
D) requires that extra time be spent in analyzing a foreign market.
E) leads to escalating strategic commitments.
A) is associated with a lack of commitment demonstrated by the foreign firm.
Which of the following is an advantage of choosing exporting as a mode of entry into foreign markets?
A) A firm has the ability to engage in global strategic coordination.
B) A firm can earn returns from process technology skills in countries where FDI is restricted.
C) A firm has access to local partner’s knowledge.
D) A firm can avoid the cost of establishing manufacturing operations in the host country.
E) A firm shares the development costs and risks with its host partner.
D) A firm can avoid the cost of establishing manufacturing operations in the host country.
How can firms avoid incurring high transport costs when exporting bulk products?
A) By taking a minority equity interest
B) By setting up subsidiaries irrespective of market reach
C) By entering into a turnkey project with a foreign firm
D) By reducing the quantity of the product offering
E) By manufacturing bulk products regionally
E) By manufacturing bulk products regionally
In exporting, problems with local marketing agents can be overcome by:
A) entering into cross-licensing agreements with foreign firms.
B) changing agents frequently.
C) engaging in turnkey projects and exporting process technology to foreign firms.
D) selling intangible property to a franchisee and insisting on rules to conduct the business.
E) setting up wholly owned subsidiaries in foreign nations to handle local marketing.
E) setting up wholly owned subsidiaries in foreign nations to handle local marketing.
Turnkey projects being short-term propositions can be disadvantageous for a firm if a country subsequently proves to be a major market for the output of the process that has been exported. The firm can get around this problem by:
A) competing with the local firm in the global market.
B) establishing a joint venture with a local firm.
C) withholding vital process technology from the local firm.
D) selling competitive advantage to competitors.
E) taking a minority equity interest in the operation.
E) taking a minority equity interest in the operation.
Licensing is NOT attractive to which of the following firms?
A) Firms lacking the capital to develop operations overseas
B) Firms with intangible properties with business applications that it does not want to develop itself
C) Firms unwilling to commit substantial financial resources to an unfamiliar market
D) Firms wanting to explore markets but prohibited from doing so by investment barriers
E) Firms requiring tight control of operations for realizing experience curve and location economies
E) Firms requiring tight control of operations for realizing experience curve and location economies
Which of the following is an advantage of franchising as a mode of entry into foreign markets?
A) Manufacturing concerns can be effectively coordinated across adjacent processes.
B) The franchiser can support its short-term interests in a country with an unstable economy.
C) The franchiser is relieved of many of the costs and risks of opening a foreign market on its own.
D) The franchiser can easily maintain uniform quality across many geographically dispersed franchisees.
E) The franchiser is allowed to take profits out of one country to support competitive attacks in another.
C) The franchiser is relieved of many of the costs and risks of opening a foreign market on its own.
What triggers the conflict of interest over strategy and goals in joint ventures?
A) Trying to realize location and experience curve economies
B) Risk of being subject to adverse government interference
C) Local partner’s knowledge of host country’s competitive conditions
D) Giving control of core technology to the foreign partner
E) Shifts in relative bargaining power of venture partners
E) Shifts in relative bargaining power of venture partners
Which of the following entry modes into a foreign market best serves a high-tech firm?
A) Turnkey projects
B) Joint ventures
C) Exporting
D) Wholly owned subsidiaries
E) Franchising
D) Wholly owned subsidiaries
The risks associated with learning to do business in a new culture are less if the firm:
A) imposes strict marketing guidelines on how to do business.
B) engages in global strategic coordination.
C) realizes substantial location economies.
D) acquires an established host-country enterprise.
E) enters a greenfield venture in the host country.
D) acquires an established host-country enterprise.
Which of the following is true of international firms considering foreign expansion?
A) If the firm’s core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner.
B) The timing and scale of entry of foreign expansion are minor details in comparison with the choice of foreign market.
C) Politically unstable and less developed nations offer favorable benefit-cost-risk trade-off conditions.
D) The long-run economic benefits of doing business in a country are solely a function of the country’s population size.
E) The costs and risks associated with foreign expansion are higher in economically advanced nations.
A) If the firm’s core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner.
A distinction can be drawn between firms whose core competency is in which of the following?
A) Acquisitions and greenfield ventures
B) Scale of entry and strategic commitments
C) Technological know-how and management know-how
D) Cost reductions and entry mode
E) Location and experience curves
C) Technological know-how and management know-how
Jupiter Systems is a high-tech firm looking to set up operations in a foreign country. The firm’s core competency is in technological know-how. Which of the following modes of entry would be most favorable to the firm if it wants to keep a tight control over its technology?
A) Joint venture
B) Turnkey project
C) Wholly owned subsidiary
D) Licensing
E) Franchising
C) Wholly owned subsidiary
Which of the following modes of entry is suitable for service firms where the risk of losing control over the management skills or technological know-how is not much of a concern, and where the firms’ valuable asset is their brand name?
A) Licensing
B) Turnkey projects
C) Cross-licensing
D) Exporting
E) Franchising
E) Franchising
What gives a firm tight control for coordinating a globally dispersed value chain?
A) Setting up wholly owned marketing subsidiaries
B) Using foreign marketing agents
C) Signing joint-venture agreements
D) Establishing a greenfield venture
E) Installing manufacturing units in locations with optimal factor conditions
A) Setting up wholly owned marketing subsidiaries
Which of the following is an advantage of acquisitions as a means of entering foreign markets?
A) It is much easier to change the culture of an existing organization than build a new organization.
B) They give firms access to valuable intangible assets while minimizing a pileup of tangible assets.
C) They are quick to execute and help firms to rapidly build their presence in the target foreign market.
D) It is easier to convert the operating routines of acquired units than establish routines in new subsidiaries.
E) Acquired firms are often undervalued and hence assets can be purchased at minimal prices.
C) They are quick to execute and help firms to rapidly build their presence in the target foreign market.
Which of the following is a reason why firms often overpay for the assets of an acquired firm?
A) Studies supporting the rise of failed companies post acquisitions
B) Evidence of high management turnover post acquisitions
C) Inevitable clash between cultures of acquiring and acquired firms
D) Interest of more than one party in acquiring a particular firm
E) The success rate of acquisitions exceeding that of failures
D) Interest of more than one party in acquiring a particular firm
Spring, an American firm, recently acquired another company, Tazel Inc., in Indonesia. The high-level managers at Tazel quit because they could not cope with the domineering and straightforward approach of their American counterparts. This illustrates how acquisitions may fail because:
A) an acquiring firm overpays for the assets of an acquired firm.
B) managers overestimate their ability to create value from an acquisition.
C) there is a clash between the cultures of the acquired and the acquiring firm.
D) inadequate pre-acquisition screening has been done.
E) integration of operations between the two firms takes longer than forecasted.
C) there is a clash between the cultures of the acquired and the acquiring firm.
To reduce the risks of failure of an acquisition, managers must:
A) move rapidly after an acquisition to put an integration plan in place.
B) ensure that the work cultures are significantly different from each other.
C) encourage and facilitate management turnover.
D) pay more for the acquired unit to please its existing employees.
E) acquire a firm without wasting time on screening.
A) move rapidly after an acquisition to put an integration plan in place.
Which of the following is a disadvantage of greenfield ventures?
A) It is much more difficult to build an organizational culture from scratch than to
change the culture of an existing unit.
B) They have a higher potential for throwing up unpleasant surprises.
C) A firm does not have the freedom to build the kind of subsidiary that it wants.
D) It is slower to establish than acquisitions.
E) Companies find it difficult to avoid falling into the trap of the hubris hypothesis.
D) It is slower to establish than acquisitions.
48. What are the consequences of an international firm entering a foreign market on a significant scale?
The consequences of entering on a significant scale—entering rapidly—are associated with the value of the resulting strategic commitments. A strategic commitment has a long-term impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a major strategic commitment. Strategic commitments, such as rapid large-scale market entry, can have an important influence on the nature of competition in a market. Significant strategic commitments are neither unambiguously good nor bad. Rather, they tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be. It is important for a firm to think through the implications of large-scale entry into a market and act accordingly. Of particular relevance is trying to identify how actual and potential competitors might react to large-scale entry into a market. Also, the large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs. The value of the commitments that flow from rapid large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments. But strategic inflexibility can also have value.
49. Describe the entry modes that a firm with core competency in technological know-how can choose.
If a firm’s competitive advantage (its core competence) is based on control over proprietary technological knowhow, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of losing control over that technology. Thus, if a high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how, it will probably do so through a wholly owned subsidiary. This rule should not be viewed as hard and fast, however. Sometimes a licensing or joint-venture arrangement can be structured to reduce the risk of licensees or joint-venture partners expropriating technological know-how. Another exception exists when a firm perceives its technological advantage to be only transitory, such as when it expects rapid imitation of its core technology by competitors. In such cases, the firm might want to license its technology as rapidly as possible to foreign firms to gain global acceptance for its technology before the imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. Further, by licensing its technology, the firm may establish its technology as the dominant design in the industry. This may ensure a steady stream of royalty payments. However, the attractions of licensing are frequently outweighed by the risks of losing control over technology, and if this is a risk, licensing should be avoided.
50. What are the advantages and disadvantages of exporting as a mode of entry into foreign markets?
Exporting has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and location economies. Exporting has a number of drawbacks. First, exporting from the firm’s home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad (i.e., if the firm can realize location economies by moving production elsewhere). Thus, particularly for firms pursuing global or transnational strategies, it may be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective and to export to the rest of the world from that location. This is not so much an argument against exporting as an argument against exporting from the firm’s home country. A second drawback to exporting is that high transport costs can make exporting uneconomical, particularly for bulk products. One way of getting around this is to manufacture bulk products regionally. This strategy enables the firm to realize some economies from large-scale production and at the same time to limit its transport costs. Another drawback is that tariff barriers can make exporting uneconomical. Similarly, the threat of tariff barriers by the host-country government can make it very risky. A fourth drawback to exporting arises when a firm delegates its marketing, sales, and service in each country where it does business to another company. This is a common approach for manufacturing firms that are just beginning to expand internationally. The other company may be a local agent, or it may be another multinational with extensive international distribution operations. Local agents often carry the products of competing firms and so have divided loyalties. In such cases, the local agent may not do as good a job as the firm would if it managed its marketing itself. Similar problems can occur when another multinational takes on distribution.
Describe the disadvantages of Licensing as a mode of entry into the foreign markets
the firm doesn’t have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies –the firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised