direct investment and collaborative strategies

Chapter 14Direct Investment and Collaborative Strategies

Multiple Choice Questions

STUDY QUESTION 1: What factors may limit exporting from being a feasible means to sell abroad?

1. Products that have to be altered significantly for a country's market are more likely to be _____.a. imported into that marketb. licensed to a foreign firmc. produced within that country (interpretation, pages 487–488)d. test-marketed in the home country

2. Consumers may prefer domestically made products over imports for all the following reasons except _____.a. a desire not to have part of the price go to government tax collection (interpretation, page

488)b. nationalistic sentimentsc. a negative image associated with products from a certain countryd. fears that parts and service will be difficult to obtain for foreign products

3. In which of the following circumstances would a company be most likely to cease exporting and, instead, serve the foreign market through foreign production?a. There is little need to alter the product for the foreign market.b. The company is nearing capacity utilization in its home country plant. (interpretation,

page 487)c. The foreign country has lowered its import restrictions.d. Transportation costs have become low relative to production costs.

4. Assume a small emerging economy wants to attract foreign direct investment (FDI) by imposing import restrictions. For firms making products with the following characteristics, which would seem most likely to respond to the import restrictions by making the FDI?a. low transport cost relative to production cost, excess domestic capacity, standard product sold

worldwideb. high transport cost relative to production cost, excess domestic capacity, standard product sold

worldwidec. low transport cost relative to production cost, excess domestic capacity, product alterations

needed for local marketsd. high transport cost relative to production cost, no excess domestic capacity, product

alterations needed for local markets (interpretation, page 488)

STUDY QUESTION 2: Explain the primary reasons that spur companies to want a controlling interest in foreign operations.

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5. Appropriability theory _____.a. describes a firm's desire to deny rivals access to competitive resources such as

management know-how (definition, page 489)b. categorizes foreign investments in terms of their levels of achieving host country objectives c. explains the investing firm's acquisition of resources abroadd. predicts the general pattern of direct investment locations

6. The self-handling of business activities abroad, as opposed to contracting the activities for another company to perform, is known as _____.a. comprehensive ownershipb. equity alliancec. independenciad. internalization (definition, page 489)

7. Why can a company more easily pursue a global strategy when it owns 100 percent of foreign operations than when it does not?a. The company does not have to enforce a contract with a partner.b. The company does not have to share profits with a partner.c. The company may be better able to avoid situations of overcapacity.d. The company may be able to suboptimize performance in one country to improve total

worldwide performance. (interpretation, page 490)

8. All of the following are reasons why a company may be able to reduce costs through internalization of its foreign operations except _____.a. the sharing of a common corporate culture reduces communications costsb. using one's own managers reduces the cost of explaining and carrying out objectivesc. greater scale economies reduce unit production costs (interpretation, page 489)d. avoidance of negotiations over such matters as the division of income

STUDY QUESTION 3: Compare the advantages of making a foreign direct investment by buying a facility versus starting up a new facility abroad.

9. Which of the following factors, if present, would encourage a firm to start up a new operation rather than acquire an existing one in a foreign country?a. The local government places restrictions on the transfer of foreign capital.b. Labor relations at existing firms are poor and are likely to be difficult to change.

(interpretation, page 490)c. The country's currency is weak and stock market prices are depressed.d. Existing companies have goodwill and positive brand recognition in their market.

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10. Which of the following factors, if present, would encourage a firm to acquire an existing operation abroad rather than starting up an operation?a. Labor is readily available at a low cost.b. Existing facilities are poorly located in relationship to future potential markets.c. Stock market prices are very high.d. The market is close to saturation and does not justify added capacity. (interpretation,

page 490)

11. A reason for buying an existing facility rather than starting up a new operation abroad is _____.a. that it is easier to work with existing managers than with ones hired from the outsideb. there is excess demand in the market c. avoidance of inefficiencies in the start-up phase (interpretation, page 491)d. high unemployment in the market

12. A reason for entering a market with a start-up operation rather than an acquisition is that _____.a. this is an easier way of getting personnel in a tight labor-market situationb. there may not be an acceptable firm to acquire (interpretation, page 490)c. operations may commence more quicklyd. initial operating costs are usually lower

STUDY QUESTION 4: What are the motives/advantages for companies to enter into collaborative arrangements? Which of these are specific to international operations?

13. We would expect to find another company to handle work for our company more cheaply when _____.a. our firm has excess capacityb. fixed costs for the work are high and there are large volumes of workc. our firm has experience in outsourcing workd. fixed costs for the work are high and there are small volumes of work (interpretation,

page 492)

14. Which of the following is an argument for using a collaborative agreement?a. to prevent problems caused by minority shareholdersb. to preserve a concentration strategyc. to spread faster geographically (interpretation, page 494)d. to maintain better control

15. Which of the following would be a reason for a company to contract another company to handle a function for it abroad?a. Committing its own resources abroad would incur too large a risk. (interpretation, page

494)b. Taxes may be reduced through transfer pricing.c. Control over operations is improved.d. It offers a better protection of technology than by self-handling of the foreign operation.

16. Risk is an important factor for companies engaged in international business. One way a collaborative arrangement helps minimize risk when operating abroad is by _____.

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a. increasing the amount of compensation in case of expropriationb. freeing up resources so a company can diversify into more countries (interpretation, page

494)c. providing more control over competitors' entryd. eliminating losses from exchange rate depreciation abroad

STUDY QUESTION 5: How do companies' international objectives, international experience, and resources affect their choice of operating form abroad?

17. One may generally say that when a company has a desired and unique resource, _____.a. it will be more apt to expand abroad by developing international collaborative arrangementsb. it is in a good position to choose the operating form that it would most like to utilize

(interpretation, page 494)c. the company will do best by collaborating to prevent competitiond. it should expand through a diversification strategy

18. The more a company engages in international collaborative arrangements as opposed to wholly owned foreign operations, the more it is apt to _____.a. decrease its exposure to political risk (interpretation, page 494) b. increase its control over foreign operationsc. learn rapidly about foreign environmentsd. lessen its ability to specialize in its competencies

19. Some of the advantages of contracting another company to handle production and sales abroad are less important when _____.a. the foreign country has high political riskb. the company lacks financial resourcesc. the company already has facilities in place within the foreign country (interpretation,

page 497)d. there are governmental requirements for ownership sharing

20. Information may pass more rapidly to potential competitors abroad in which type of arrangement?a. greenfield operationb. acquisitionc. wholly owned operationd. collaborative arrangement (interpretation, page 495)

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STUDY QUESTION 6: Explain the different types of licensing arrangements. What are the methods of pricing these arrangements?

21. A licensing agreement is a contract for the granting of rights on _____.a. intangible property for a specified period (definition, page 497)b. tangible property for an indefinite periodc. intangible property for an indefinite periodd. tangible property for a specified period

22. Which of the following is an example of an exclusive license agreement?a. Three licensees have worldwide rights to sell the product for three years, during which no

other companies can use the asset.b. The licensee is currently the only company using the intangible property, but the licensor has

rights to add other licensees.c. One licensee gets rights for the north island of New Zealand, a second licensee gets rights

for the south island of New Zealand, and the licensor agrees to add no new licensees to New Zealand for the next five years. (definition, page 497)

d. The licensee and licensor use the property in the same market.

23. Which of the following is an example of a cross-licensing agreement?a. allocation of exclusive rights to a licensee to prevent competitionb. an agreement between two or more companies not to compete in each other's home countryc. an exchange of explicit knowledge for tacit knowledged. the exchange of intangible property rights between two or more companies (definition,

pages 497–498)

24. What is a motive for licensing a technology while it is still in the developmental stage?a. to gain funds to complete the developmentb. to assure that a product launches in various countries at about the same time

(interpretation, page 498)c. to receive some earnings in case the technology never becomes operatived. to reduce transaction costs

STUDY QUESTION 7: Why do companies have licensing agreements with companies they own abroad?

25. Most international licensing agreements are _____.a. between companies based in high-income countries and companies based in low-income

countriesb. for tacit rather than explicit technologyc. between parent companies and companies in which they have an ownership

(interpretation, page 498)d. between governments and private enterprises

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26. Which of the following is a reason why a parent company might license the use of intangible property to a company abroad in which it has ownership?a. to reduce transactions costsb. to hit different markets simultaneouslyc. to diversify geographicallyd. to be compensated for other than a capital contribution (interpretation, page 498)

27. A reason that a parent company would license intangible property to a company abroad in which it has ownership is _____.a. the requirement by governments to report merchandise and service exports separatelyb. that most foreign operations are subsidiaries, which are separate legal entities

(interpretation, page 498)c. to turn potential tacit transfers into explicit transfersd. to reduce the risk of expropriation

28. When a company wants to be compensated in a foreign subsidiary beyond its contribution in capital and managerial resources, it often _____.a. licenses intangible property to its subsidiary (interpretation, page 498)b. negotiates a special agreement with the host government c. establishes a management contractd. sets up an equity alliance

STUDY QUESTION 8: How does franchising differ from licensing? What operational modifications do franchisors make abroad?

29. Which of the following best defines franchising?a. the granting of rights on intangible property in return for royaltiesb. an agreement to manage a business for a feec. the spread of fast-food operations worldwided. an agreement for the use of a trademark and assistance with business operations

(definition, page 498)

30. When one firm grants another the use of a trademark in addition to more than nominally assisting the grantee's business, the arrangement is known as _____.a. a management contractb. franchising (definition, page 498)c. a trademark conventiond. appropriability

31. Franchisees sometimes wish to change the product or service offered by the franchisor to better fit local market needs abroad. Why are these changes a problem for franchisors?a. too many changes eliminate the need for the franshisors (interpretation, page 499)b. the royalties as a percentage of sales decreasesc. governments impose more stringent operating restrictions d. sales decrease because consumers want to get the "real thing"

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32. What is a master franchise?a. the original agreement between the franchisor and franchiseeb. the franchisee with the highest revenue in a regionc. a franchisee with rights to open outlets on its own or develop subfranchises (definition,

page 499)d. the set of standard terms regulating the relationship between franchisor and franchisee

STUDY QUESTION 9: What is a management contract, and what are the possible advantages to both parties in the contracts?

33. What is an international management contract?a. the granting of rights abroad on intangible property in return for royaltiesb. an agreement between the company and the personnel it sends to work in a foreign countryc. an agreement between a company and a foreign government on the number of foreign

personnel it can employd. an agreement to manage a business abroad for a fee (definition, page 500)

34. For the provider, management contracts offer the advantage of _____.a. receiving income without making a capital outlay (interpretation, page 500)b. increasing their merchandise exportsc. reducing their global taxesd. better access to raw materials

35. The advantage to host countries of international management contracts is that they _____.a. receive state-of-the-art facilitiesb. get assistance without foreign control (interpretation, page 500)c. can pay in local currencyd. save on making capital investments

36. Hotel chains are one of the biggest providers of management service under contracts, yet their revenues from these contracts have been falling in recent years. What is the reason for this fall in revenue?a. the deterioration of currency rates where they have contractsb. they've taken ownership abroad rather than depending on management contractsc. development of local expertise (interpretation, page 500)d. tourism is down because of terrorism scares

STUDY QUESTION 10: What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangements?

37. What is a turnkey operation?a. a contract for the construction of an operating facility for a fee (definition, page 500)b. a contract with a government to service one of its key industriesc. the buying of another companyd. the repatriation of equity

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38. Companies performing turnkey operations are most frequently _____.a. airline manufacturersb. construction companies (interpretation, page 500)c. government-owned companiesd. hotels

39. Turnkey projects generally differ from other forms of international business in that _____.a. they tend to be smallerb. customers are more likely private companiesc. they are more often located in remote areas (interpretation, page 501)d. they depend almost entirely on acquisitions rather than greenfield operations

40. Turnkey projects depend more on _____ than other types of international collaboration. a. the sale of intangible assets and use of explicit technologyb. massive advertising and uniformity of productsc. two-way technological flows and exclusive marketing areasd. executives with top-level foreign governmental contacts (interpretation, page 501)

STUDY QUESTION 11: What types of ownership sharing can exist in joint ventures and consortia? What are equity alliances, and why would companies form them?

41. What is an international joint venture?a. an agreement between two or more companies to manage a foreign business for a feeb. the ownership of a company by two or more companies, of which at least one is a foreign

company where the venture is located (definition, page 502)c. an international agreement between two or more firms for the use of a trademark d. an agreement between two or more organizations to manufacture and smuggle marijuana

cigarettes

42. What is an international consortium?a. the ownership of a company by a government and a foreign companyb. an agreement signed by most governments to protect intellectual property rightsc. an international joint venture owned by at least three organizations (definition, page 502)d. an agreement between two or more governments to provide for reciprocal foreign investment

protection

43. All of the following are hypothetical examples of international joint ventures except _____.a. two Japanese companies sharing ownership of a company in Canadab. a Danish company sharing ownership with a South African company in South Africac. a government-owned company from China sharing ownership with an Australian company in

Panamad. two Venezuelan companies sharing ownership of a company in Venezuela (interpretation,

page 502)

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44. What is the purpose of an equity alliance?a. to solidify a collaborating contract (interpretation, page 503)b. to spread the costs in a large projectc. to assure that host countries and foreign investors fairly share in a project's earningsd. an alliance whereby two or more companies handle different parts of the value chain, thus

concentrating on their competencies

STUDY QUESTION 12: What are the major problems that can occur in collaborative arrangements? How might joint ventures dissolve?

45. The dissolution of joint ventures and other types of collaborative arrangements may occur in all the following ways except _____.a. planned or unplannedb. friendly or unfriendlyc. downsized or expanded (interpretation, page 503)d. mutual or nonmutual

46. When a large company and a small company enter a collaborative arrangement, _____.a. the large company is expected to contribute more to the arrangementb. the large company is likely to be more active in the venturec. the small company is more likely to view the collaboration's expansion as competition to itselfd. the small company is likely to be disadvantaged if legal action is necessary to solve a

dispute (interpretation, page 504)

47. When no single company has control over a collaborative arrangement, _____.a. the operation may lack direction (interpretation, page 504)b. none of the partners is responsible for legal violations that occur within the collaborationc. it is probably the result of differences in national cultured. one partner's interests are likely to be put ahead of the other partner's interests

48. When a company's motive for entering a collaborative arrangement is to learn from its partner, it is apt to _____.a. leave control to its partnerb. "go it alone" after it has learned what it needs to know (interpretation, page 505)c. have disagreements with the partner over quality issuesd. prefer the arrangement to be a licensing agreement

STUDY QUESTION 13: Explain why/how companies need to manage the dynamics of collaborative arrangements.

49. The truly experienced international firm will usually make use of _____.a. cross-licensing arrangementsb. various modes of operation simultaneously (interpretation, page 506)c. contracts in lieu of overseeing foreign contractual arrangementsd. wholly owned direct investment as opposed to collaborative arrangements

50. As firms gain more experience internationally, there is usually a tendency for them to _____.

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a. move from wholly owned foreign direct investments to nonequity arrangementsb. locate a larger portion of their resources at homec. handle their foreign operations through fewer types of operating formsd. deepen their mode of commitment to foreign operations (interpretation, page 506)

51. Why might a company have internal tensions as its modes of foreign operations change?a. Individuals may gain or lose responsibilities. (interpretation, page 507)b. People are reluctant to take orders from someone in a foreign country.c. More travel is required.d. Additional geographic diversity brings additional uncertainties.

52. Companies may use various international operating forms simultaneously for all the following reasons except _____.a. they may be at different stages of commitment for different productsb. they may be at different stages of commitment for different countriesc. various divisions of companies need to get their shares of foreign revenues

(interpretation, page 506)d. differences in countries' characteristics may necessitate diverse operational forms

STUDY QUESTION 14: How should companies effectively deal with partners and manage the ongoing activities of collaborative arrangements?

53. A company may increase the pool of companies with which it might form collaborative arrangements by all the following except _____.a. participation in trade showsb. monitoring journalsc. nurturing both professional and social contactsd. constructing turnkey facilities (interpretation, page 507)

54. What problem arises when a company wishes to sell techniques, such as through a license, that it has not yet used commercially?a. A buyer is reluctant to buy what it has not seen, but a seller risks divulging the secrets of

the technique if it divulges too much information. (interpretation, page 508)b. Some governments want to see contract details, which companies feel are proprietary.c. It is difficult to develop rapport between negotiating parties in this type of situation.d. Parties can seldom agree on the desired level of quality control.

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55. In entering a collaborative agreement, a company should _____.a. anticipate all points of disagreement and include them in the contractb. strictly depend on common sense and rapport with its partner for settlement of future

disagreementsc. lay out important control issues in the contract but still depend in part on rapport to

settle unanticipated differences (interpretation, page 508)d. agree with its partner that all differences on adherence to the contract be settled in a court of

law

56. All of the following are important when establishing and managing a collaborative agreement except _____.a. setting up mutual goals and expectationsb. avoidance of interference with how the partner handles its duties in the operation

(interpretation, page 508)c. determining whether the agreement is reaching its goalsd. assessing periodically whether a different operational form would be preferable

STUDY QUESTION 15: Countries often limit foreign control of key industries. What are the arguments for and against this limitation?

57. All of the following are arguments for governments to limit foreign control of key industries except _____. a. host countries don't need foreign resources such as technology and export markets for

these industries (interpretation, pages 495–496) b. history shows that home governments have used powerful foreign companies to influence

policies in the countries where they operatec. important decisions can be made abroad that are contrary to the country's best interestd. foreign companies can find means of profiting in these industries without having to control

them

58. All of the following are arguments for permitting foreign control of key industries except _____.a. managers, whether in a foreign or local company, make decisions based on what they think is

best for the company rather than based on some local socio-economic agendab. MNEs staff their organizations abroad mainly with local nationals and depend in part on their

input for making decisionsc. the United States does very well without setting up restrictions on foreign ownership

(interpretation, page 496)d. the security arguments for restrictions on foreign ownership are really just a sham to protect

politically powerful industries and employment

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59. Dependencia theory holds that _____. a. countries should seek to diversify their economiesb. low-income countries have practically no power in dealings with MNEs (definition, page

496)c. in a globalized world, no nation can be independent economicallyd. there is a natural division of labor whereby low-income countries depend on production using

fairly unskilled labor and high-income countries depend on highly educated workers

60. The bargaining school theory states that _____.a. controversies between partners in international collaborative agreements should be settled on a

personal basis rather than through the courtsb. low-income countries should negotiate to improve their terms of trade with high-income

countriesc. a company from a strong currency country can buy foreign facilities more cheaply than a

company from a weak currency countryd. the terms for a foreign investor's operations depend on how much the investor and the

host country need each other's assets (definition, page 496)

True/False Questions

STUDY QUESTION 1: What factors may limit exporting as a feasible means to sell abroad?

61. Exporting is usually more feasible when transportation costs are large rather than small in relation to production costs. False (interpretation, page 487)

62. Products that have to be altered significantly for a country's market are more apt to be produced within that country than products that don't need alterations. True (interpretation, pages 487–488)

STUDY QUESTION 2: Explain the primary reasons that spur companies to want a controlling interest in foreign operations.

63. Appropriability theory describes a firm's desire to deny rivals access to competitive resources. True (definition, page 489)

64. The self-handling of business activities abroad, as opposed to contracting another company to perform them, is known as independencia. False (definition, page 489)

STUDY QUESTION 3: Compare the advantages of making a foreign direct investment by buying a facility versus starting up a new facility abroad?

65. Foreign acquisitions are more advantageous when existing companies have little excess capacity than when they have a lot of excess capacity. False (interpretation, page 490)

66. A motive for making a foreign acquisition rather than a greenfield investment is to avoid inefficiencies in the start-up phase. True (interpretation, page 490)

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STUDY QUESTION 4: What are the motives/advantages for companies to enter into collaborative arrangements? Which of these are specific to international operations?

67. An advantage of collaborative agreements is to spread faster geographically. True (interpretation, page 494)

68. Collaborative agreements allow companies to serve risky countries while committing fewer of their resources to operations in those countries. True (interpretation, page 494)

STUDY QUESTION 5: How do companies' international objectives, resources, and experience influence their choice of operating form abroad?

69. Collaborative arrangements prevent the possibility of information being passed to potential competitors. False (interpretation, page 495)

70. The advantages of contracting another company to handle production and sales abroad is less important when the company already has production and sales facilities in place within the foreign country. True (interpretation, page 497)

STUDY QUESTION 6: Explain the different types of licensing arrangements. What are the methods of pricing in these arrangements?

71. A licensing agreement is a contract for the granting of rights on tangible property. False (definition, page 497)

72. When a company licenses a technology that is still in the development stage, its motive is usually to gain funds to complete the development. False (interpretation, page 498)

STUDY QUESTION 7: Why do companies have licensing agreements with companies they own abroad?

73. Most international licensing agreements are between companies based in high-income countries and companies based in low-income countries. False (interpretation, page 498)

74. A reason for a license agreement between a parent company and one of its foreign subsidiaries is to gain compensation for other than the contribution of capital. True (interpretation, page 498)

STUDY QUESTION 8: What is franchising, and how does it differ from licensing? What operational modifications do franchisors make abroad?

75. An agreement for the use of a trademark and assistance with business operations is known as a cross-licensing agreement. False (definition, page 498)

76. A master franchise is a franchise with rights to open outlets on its own or rights to develop subfranchises. True (definition, page 499)

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STUDY QUESTION 9: What is a management contract, and what are the possible advantages to both parties in the contracts?

77. An international management contract is an agreement between a company and a foreign government on the number of foreign personnel it can employ. False (definition, page 500)

78. For the provider, management contracts offer the advantage of receiving income without making a capital outlay. True (interpretation, page 500)

STUDY QUESTION 10: What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangements?

79. A turnkey operation is a contract for the construction of an operating facility for a fee. True (definition, page 500)

80. Turnkey projects generally differ from other forms of international business in that they tend to be smaller. False (interpretation, page 501)

STUDY QUESTION 11: What types of ownership sharing can exist in joint ventures and consortia? What are equity alliances, and why would companies form them?

81. An international joint venture is an agreement between two or more companies for the use of a trademark. False (definition, page 502)

82. The purpose of an equity alliance is to solidify a collaborative agreement. True (interpretation, page 503)

STUDY QUESTION 12: What are the major problems that can occur in collaborative arrangements? How might joint ventures dissolve?

83. When a large company and a small company enter a joint venture, the large company is expected to contribute more to the arrangement. False (interpretation, page 504)

84. When a company's motive for entering a collaborative arrangement is to learn from its partner, it is apt to continue the collaborative arrangement after it has learned what it needs to know. False (interpretation, page 505)

STUDY QUESTION 13: Explain why/how companies need to manage the dynamics of collaborative arrangements.

85. The truly experienced international firm will usually make use of various modes of operation simultaneously. True (interpretation, page 506)

86. Differences in countries' characteristics may necessitate diverse operational forms. True (interpretation, page 506)

STUDY QUESTION 14: How should companies effectively deal with partners and manage the ongoing activities of collaborative arrangements?

87. It is important when setting up a collaborative arrangement to agree on mutual goals and expectations. True (interpretation, page 508)

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88. In entering a collaborative agreement, companies must anticipate all points of future disagreement and include them in the contract. False (interpretation, page 508)

STUDY QUESTION 15: Countries often restrict foreign control of key industries. What are the arguments for and against this limitation? 89. The dependencia theory holds that the terms for a foreign investor's operations depend on how

much the investor and the host country need each other's assets. False (definition, page 496)90. An argument for limiting foreign control of key industries is that historically home governments

have used powerful foreign companies to influence policies in the countries where they operate. True (interpretation, page 496)

Essay Questions

91. In a short essay, discuss how transportation, trade restrictions, domestic capacity, and country-of-origin effects affect companies' sales.

Answera. Transportation—When companies add the cost of transportation to product costs, some

products become impractical to ship over great distances. A few of these products are newspapers, margarine, dynamite, and soft drinks. For the companies that make these products, it is necessary to produce abroad if they are to sell abroad.

b. Trade restrictions—Governments restrict imports. Thus, companies may find they must produce in a foreign country if they are to sell there. Governmental trade restrictions often favor big companies that can afford to commit large amounts of resources abroad, making foreign competitiveness more difficult for small companies that can afford only exportation as a means of serving foreign markets.

c. Domestic capacity—As long as companies have sufficient domestic capacity, they are more likely to serve foreign markets through exports. However, if they need to construct additional capacity, they are likely to consider putting that capacity abroad to save on transport costs.

d. Country-of-origin effects—Government-imposed legal measures are not the only trade barriers to otherwise competitive goods. Consumer desires also may dictate limitations. Consumers may prefer to buy goods produced in their own country rather than another. Or, they may believe that goods from a given country are superior, therefore preferring those countries' products. They may also fear that service and replacement parts for imported products will be difficult to obtain.

(interpretation, pages 487–488)

92. In a short essay, define direct investment.

AnswerFor direct investment to take place, control must accompany the investment. Otherwise, it is a portfolio investment. If ownership is widely dispersed, then a small percentage of the holdings may be sufficient to establish control of managerial decision-making. However, even 100 percent share does not guarantee control. If a government dictates who a foreign company can hire, what

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the company must sell at a specified price, and how the company must distribute its earnings, then control belongs to the government. Governments usually report direct investment by using an arbitrary figure of 10 percent or 25 percent ownership. (definition, page 489)

93. According to the appropriability theory and the internalization theory, why would companies want to control their foreign operations?

AnswerControl is important to foreign companies because they may want to do what is best for their global operations rather than what is best for the operations of a specific country. Companies are reluctant to transfer vital resources—capital, patents, trademarks, and management know-how—to another organization that can make all its operating decisions independently. The company receiving these resources can use them to undermine the competitive position of the foreign company transferring them. The idea of denying rivals access to resources is called the appropriability theory. The control through self-handling of operations (internal to the organization) is internalization.(interpretation, page 489)

94. How does the interaction between a country’s market size and its import restrictions affect companies’ decisions to make foreign direct investments there?

AnswerManagers must view import barriers along with other factors, such as the market size of the country imposing the barriers. For example, import trade restrictions have been highly influential in enticing automobile producers to locate in Brazil because of its large market, but not for Central American countries that have small markets.. Removing trade restrictions among a group of countries also may attract direct investment, possibly because the expanded market may justify scale economies and possibly because the output from a new location can be feasibly exported.(interpretation, page 488)

95. In a short essay, discuss the various reasons consumers may prefer to buy goods produced in their own country.

Answera. Nationalism—In many countries, companies have instituted promotional campaigns to

persuade people to buy locally produced goods. A specific example is the campaign by the American fiber, textiles, and apparel coalitions to push "crafted with pride in the U.S.A."

b. Product image—Although products may be identical, consumers often view their quality differently on the basis of the country of origin.

c. Delivery risk—Many consumers fear that service and replacement parts for foreign-made goods may be difficult to obtain from abroad. Industrial consumers often prefer to pay a higher price to a nearby producer in order to minimize the risk of nondelivery due to distance and strikes.

(interpretation, page 488)

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96. There are two ways companies can invest in a foreign country. They can either acquire an interest in an existing operation or construct new facilities. In a short essay, describe the advantages and disadvantages of each alternative.

Answera. Reasons for buying—There are many reasons for seeking acquisitions. One is the difficulty of

transferring some resource to a foreign operation or acquiring that resource locally for a new facility. Personnel are a resource that foreign companies find it difficult to hire, especially if local unemployment is low. Instead of paying higher compensation than competitors do to entice employees away from their old jobs, a company can buy an existing company, which gives the buyer not only labor and management but also an existing organizational structure. Through acquisitions, a company may also gain the goodwill and brand identification important to the marketing of mass consumer products, especially if the cost and risk of breaking in a new brand are high. Further, a company that depends substantially on local financing rather than on the transfer of capital may find it easier to gain access to local capital through an acquisition. Local capital suppliers may be more familiar with an ongoing operation than with the foreign enterprise. In addition, a foreign company may acquire an existing company through an exchange of stock, which circumvents home country exchange controls.

b. Reasons for building—Although acquisitions offer advantages, a potential investor will not necessarily be able to realize them. Companies frequently make foreign investments where there is little or no competition, so finding a company to buy may be difficult. In addition, local governments may prevent acquisitions because they want more competitors in the market and fear market dominance by foreign enterprises. Even if acquisitions are available, they are less likely to succeed than start-up operations. The acquired companies might have substantial problems. Further, the managers in the acquiring and acquired companies may not work well together. Finally, a foreign company may find local financing easier to obtain if it builds facilities, particularly if it plans to tap development banks for part of its financial requirements.(interpretation, pages 490–491)

97. In a short essay, describe the general motives for collaborative arrangements.

AnswerGeneral motives for collaborative arrangements include all of the following:a. Spread and reduce costs—To produce or sell abroad, a company must incur certain fixed costs.

A company may have excess production or sales capacity that it can use to produce or sell for another company. The company handling the production or sales may lower its average costs by covering its fixed costs more fully. Likewise, the company contracting out its production or sales will not have to incur fixed costs that may have to be charged to a small amount of production or sales.

b. Specialize in competencies—A company may seek to improve its performance by concentrating on those activities that best fit its competencies, depending on other firms to supply it with products, services, or support activities for which it has lesser competency. Large, diversified companies are constantly realigning their product lines to focus on their major strengths. This realigning may leave them with products, assets, or technologies that they do not wish to exploit themselves, but that may be profitably transferred to other companies.

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c. Avoid competition—Companies may band together so as not to compete. Companies also may combine certain resources to combat larger and more powerful competitors.

d. Secure vertical and horizontal links—There are potential cost savings and supply assurances from vertical integration. Horizontal links may provide finished products or components. For finished products, there may be economies of scope in distribution, such as by having a full line of products to sell, thereby increasing the sales per fixed cost of a visit to potential customers.

e. Gain knowledge—Many companies pursue collaborative arrangements to learn about a partner's technology, operating methods, or home market so that their own competencies will broaden or deepen, making them more competitive in the future.


98. In a short essay, describe the international motives for collaborative arrangements.

AnswerInternational motives for collaborative arrangements include all of the following:a. Gain location-specific assets—Cultural, political, competitive, and economic differences

among countries create barriers for companies that want to operate abroad. When they feel ill-equipped to handle these differences, they may seek collaboration with local companies who will help local operations. In other countries, foreign companies may team with local companies to gain operational assets.

b. Overcome legal constraints—Collaboration can be a means of protecting an asset. Many countries provide little de facto protection for foreign property rights such as trademarks, patents, and copyrights unless authorities are prodded consistently. To prevent pirating of these proprietary assets, companies have sometimes made collaborative agreements with local companies, which then monitor that no one else uses the asset locally.

c. Diversify geographically—By operating in a variety of countries, a company can smooth its sales and earnings because business cycles occur at different times within the different countries. Collaborative arrangements offer a faster initial means of entering multiple markets. Moreover, if product conditions favor a diversification rather than a concentration strategy, there are more compelling reasons to establish foreign collaborative arrangement.

d. Minimize exposure in risky environments—One way to minimize loss from foreign political occurrences is to minimize the base of assets located abroad—or share them. A government may be less willing to move against a shared operation for fear of encountering opposition from more than one company, especially if they are from different countries and can potentially elicit support from their home governments. Another way to spread risk is to place operations in a number of different countries.


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99. How/why might companies have to accept a trade-off among their objectives when choosing their form of operations abroad?

AnswerA decision to take no ownership in foreign production, such as through licensing it to a foreign company, may reduce exposure to political risk. However, learning about that environment will be slow, delaying reaping the full profits from producing the product abroad. When a company has a desired, unique, difficult-to-duplicate resource, it is in a good position to choose the operating form it would most like to use. The preferred form may be exporting, selling from a wholly owned direct investment, or participating in a collaborative arrangement. However, when it lacks this bargaining strength, it faces the possibility of competition. It may have to settle on a form that is lower on its priority list; otherwise, a competitor may preempt the market.(interpretation, pages 494–495)

100. How do companies' desire for control and their international experience influence their choice of operating from abroad?

AnswerThe more a company depends on collaborative arrangements, the more likely it is to lose control over decisions, including those regarding quality, new product directions, and where to expand output. This is because each collaborative partner has a say in these decisions, and the global performance of each may be improved differently. External arrangements also imply the sharing of revenues, a serious consideration for undertakings with high potential profits because a company may want to keep them all for itself. When a company already has operations in place in a foreign country, some of the advantages of contracting with another company to handle production or sales are no longer as prevalent. The company knows how to operate within the foreign country and may have excess capacity it can use for new production or sales.(interpretation, page 495)

101. In a short essay, discuss the issue of key sector control.

AnswerClosely related to the extraterritoriality issue is the fear that if foreign ownership dominates key industries, then decisions made outside of the country may have extremely adverse effects on the local economy or may exert an influence on politics in the host country. MNEs' home country headquarters often decide on what, where, and how their foreign subsidiaries will produce and sell. These decisions might cause different rates of expansion in different countries and possible plant closings with subsequent employment disruption in some of them. Further, by withholding resources or allowing strikes, the MNE also may affect other local industries adversely. Aside from establishing policies that generally restrict the entry of foreign investment, countries have selectively prevented foreign domination of so-called key industries, which affect a large segment of the economy or population by virtue of their size or influence.(interpretation, pages 495–497)

102. Define licensing, cross-licensing, exclusive licensing, and nonexclusive licensing.

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AnswerUnder a licensing agreement, a company (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period. In exchange, the licensee ordinarily pays a royalty to the licensor. The rights may be exclusive (the licensor can give rights to no other company) or nonexclusive (it can give away rights). For industries in which technological changes are frequent and affect many products, companies in various countries often exchange technology rather than compete with each other on every product in every market. Such an arrangement is known as cross-licensing.(definition, page 497)

103. Why are there international licensing agreements between a parent company and a company abroad in which it owns in whole or in part?

AnswerMany licenses are given to companies owned in whole or part by the licensor. A license may be necessary to transfer technology abroad because operations in a foreign country, even if 100 percent owned by the parent, usually are subsidiaries, which are separate companies from a legal standpoint. When a company owns less than 100 percent, a separate licensing arrangement may be a means of compensating the licensor for contributions beyond the mere investment in capital and managerial resources.(interpretation, page 498)

104. Explain how franchising agreements differ from licensing agreements?

AnswerFranchising is a specialized form of licensing in which the franchisor not only sells an independent franchisee the use of the intangible property (usually a trademark) essential to the franchisee's business, but also operationally assists the business on a continuing basis, such as through sales promotion and training. In a sense, a franchisor and a franchisee act almost like a vertically integrated company because the parties are interdependent and each produces part of the product or service that ultimately reaches the consumer.

(definition, page 498)

105. What is the major dilemma that franchisors face in their international operations?

AnswerA dilemma for successful domestic franchisors is that their success comes from three factors: product and service standardization, high identification through promotion, and effective cost controls. When entering many foreign countries, franchisors may encounter difficulties in transferring these success factors. At the same time, the more adjustments made to the host country's different conditions, the less a franchisor has to offer a potential franchisee.(interpretation, page 499)

106. What is a management contract, and what are the possible advantages to both parties in the contract?

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AnswerOne of the most important assets a company may have at its disposal is management talent, which it can transfer internationally, primarily to its own foreign investments. Management contracts are means by which a company may transfer such talent—by using part of its management personnel to assist a foreign company for a specified period for a fee. The company may gain income with little capital outlay. Contracts usually cover three to five years, and fixed fees or fees based on volume rather than profits are most common. A company usually pursues management contracts when it believes that a foreign company can manage its existing or new operation more efficiently than it can. With management contracts, the host country gets the assistance it wants without needing direct investment. In turn, the management company receives income without having to make a capital outlay. A management contract may also allow the supplier to gain foreign experience, increasing its capacity to internationalize.(definition, page 500)

107. What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangements?

AnswerTurnkey operations are a type of collaborative arrangement in which one company contracts another to build complete, ready-to-operate facilities. Companies building turnkey operations are frequently industrial-equipment manufacturers and construction companies. The customer for a turnkey operation is often a governmental agency. One characteristic that sets the turnkey business apart from most other international business operations is the size of the contracts. Most contracts are for hundreds of millions of dollars, and many are for billions. Smaller firms often serve as subcontractors for primary turnkey suppliers. However, large companies are vulnerable to economic downturns when governments cancel big contracts. Payment for a turnkey operation usually occurs in stages, as a project develops. Because of the long time frame between conception and completion, the company performing turnkey operations can encounter currency fluctuations and should cover itself through escalation clauses or cost-plus contracts. (definition, pages 500–501)

108. What type of ownership sharing can exist in joint ventures?

AnswerA type of ownership sharing popular among international companies is the joint venture, in which more than one organization owns a company. Joint ventures are sometimes thought of as 50/50 companies, but often more than two organizations participate in the ownershipage. Further, one organization frequently controls more than 50 percent of the venture. The type of legal organization may be a partnership, corporation, or some other form permitted in the country of operation. When more than two organizations participate, the joint venture is sometimes called a consortium. The more companies in the joint venture, the more complex the management of the arrangement will be. Certain types of companies favor joint ventures more than others do. (definition, pages 501–502)

109. What are equity alliances, and why would companies form them?

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AnswerAn equity alliance is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position in the other. In some cases, each party takes an ownership, such as buying part of each other's shares or by swapping shares with each other. The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break—particularly if the ownership is large enough to secure a board membership for the investing company. The airline industry epitomizes the use of equity alliances.(definition, page 503)

110. What are the alternative ways that joint ventures dissolve?

AnswerJoint venture divorce and divorce from other collaborative arrangements can be planned or unplanned, friendly or unfriendly, mutual or nonmutual. The major strains on collaborative arrangements are due to five factors: the importance to the partners, differing objectives, control problems, comparative contributions and appropriations, and differences in culture.(interpretation, page 503)

111. In a short essay, discuss the various problems of collaborative arrangements.

AnswerThe major strains on collaborative arrangements are due to five factors:a. Collaboration's importance to partners—One partner may give more management attention to a

collaborative arrangement than the other does. If things go wrong, the active partner blames the less-active partner for its lack of attention, and the less-active partner blames the more active partner for making poor decisions. The difference in attention may be due to the different sizes of partners.

b. Differing objectives—Although companies enter into collaborative arrangements because they have complementary capabilities, their objectives may evolve differently over time. For instance, one partner may want to reinvest earnings for growth and the other may want to receive dividends. One partner may want to expand the product line and sales territory, and the other may see this as competition with its wholly owned operations. A partner may wish to sell or buy from the venture, and the other partner may disagree with the prices.

c. Control problems—By sharing the assets with another company, one company may lose some control of the extent or quality of the assets' use. When no single company has control of a collaborative arrangement, the operation may lack direction. Studies show that when two or more partners attempt to share in an operation's management, failure is much more likely than when one partner dominates. However, the dominating partner must consider the other company's interests. For this reason, studies also show that joint ventures with an even split in ownership are likely to succeed because the financial ownership ensures that management will consider both partners' interests.

d. Partners' contributions and appropriations—One partner's capability of contributing technology, capital, or some other asset may diminish compared to its partner's capability over time. In almost all collaborative arrangements, there is a danger that one partner will use the other partner's contributed assets, enabling it to become a competitor.

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e. Differences in culture—Companies with different cultures differ in how they evaluate the success of their operations. In addition to national culture, differences in corporate cultures may also create problems within joint ventures. For example, one company may be accustomed to promoting managers from within the organization, whereas the other opens its search to outsiders. One may use a participatory management style, and the other an authoritarian style. For this reason, many companies will develop joint ventures only after they have had long-term positive experiences with the other company through distributorship, licensing, or other contractual arrangements.


112. Explain how companies can manage international collaborative arrangements effectively.

AnswerAs companies enter into more collaborative arrangements, they enjoy better performance. In essence, they may choose partners more wisely and learn how better to have synergy between their partners and their own operations. A company can seek out a partner for its foreign operations, or it can react to a proposal from another company to collaborate with it. In either case, it is necessary to evaluate the potential partner not only for the resources it can supply but also for its motivation and willingness to work with the other company. Contracts should be spelled out in detail, but if courts must rule on disagreements both parties may lose something in the settlement. Management also should estimate potential sales, determine whether the arrangement is meeting quality standards, and assess servicing requirements to check whether the other company is doing an adequate job. Mutual goals should be set so that both parties understand what is expected, and the expectations should be spelled out in the contract.(interpretation, pages 505–508)

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direct investment and collaborative strategies

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