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Ch. 12 Entering Foreign markets

The choice of what foreign markets to enter should be driven by an assessment of relative long-run growth and profit potential.
TRUE
Ultimately, the choice for foreign expansion must be based on an assessment of a nation’s short-run profit potential.
FALSE
Although some markets are very large when measured by the number of consumers, businesses must also consider standards of living and economic growth.
TRUE
China and, to a less extent, India, while relatively poor, are growing so rapidly that they are attractive targets for inward investment.
TRUE
Preemptive advantages are the advantages frequently associated with entering a market early.
FALSE
An advantage of being a first-mover is the ability to build sales volume in a country and ride down the experience curve ahead of rivals.
TRUE
Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid.
TRUE
A decision that is short-term in nature and is fairly easy to reverse is referred to as a strategic commitment.
FALSE
Early entrants can find themselves at a disadvantage if a subsequent change in a foreign country’s regulations invalidates prior assumptions about the best business model for operating in that country.
TRUE
Large-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter.
FALSE
The risk-averse firm that enters a foreign market on a small scale may limit its potential loses, but it may also miss the chance to capture first-mover advantages.
TRUE
The liability of being foreign is increased by the absence of prior foreign entrants whose experience can be a useful guide.
TRUE
Entering s large developing nation such as China or India after most other international businesses in the firm’s industry, and entering on a small-scale, will be associated with high levels of risk.
FALSE
One advantage to exporting is that it avoids the costs of establishing manufacturing operations in the host country.
TRUE
One disadvantage of wholly owned subsidiaries is that high transport costs can make it uneconomical, particularly for bulk products.
FALSE
The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel in a turnkey project.
TRUE
A turnkey strategy is usually less risky than conventional FDI.
TRUE
Licensing gives a firm tight control over the manufacturing, marketing, and strategy that is required for realizing experience curve and location economies.
FALSE
In a typical international licensing deal, the licensor puts up most of the capital necessary to get the overseas operation going.
FALSE
A way to reduce the risks involved in licensing is to perform a cross-licensing agreement.
TRUE
Franchising is employed primarily by service firms, whereas licensing is pursued primarily by manufacturing firms.
TRUE
McDonald’s is a good example of a firm that has grown by using a good licensing strategy.
FALSE
Quality control is one of the significant disadvantages of franchising.
TRUE
A franchise entails establishment of a firm that is jointly owned by two or more otherwise independent companies.
FALSE
One advantage of a joint venture is that a firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems.
TRUE
Sharing of development costs and risks is one of the advantages of joint ventures.
TRUE
A firm that enters into a joint venture risks giving control of its technology to its partner.
TRUE
A joint venture gives a firm tight control over subsidiaries that it might need to realize experience curve or location economies.
FALSE
According to the text, Texas Instruments was engaging in global strategic coordination when it entered the Japanese semiconductor market.
TRUE
A disadvantage of joint ventures is that the shared ownership arrangement can lead to conflicts or battles for control between the investing firms if their goals and objectives change.
TRUE
One of the primary advantages of a wholly owned subsidiary is that it gives the firm tight control over operations in different countries that are necessary for engaging in global strategic coordination.
TRUE
When a firm’s competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode because it reduces the risk of losing control over that competence.
TRUE
A joint venture is required if a firm is trying to realize location and experience curve economies.
FALSE
Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint.
TRUE
Licensing has low development costs and risks.
TRUE
Franchising has a lack of long-term market presence.
FALSE
Licensing has an inability to engage in global strategic coordination.
TRUE
If a firm’s competitive advantage is based on control over technological know-how, licensing and joint-ventures should be encouraged.
FALSE
Over the past decade, between 50 and 80 percent of FDI inflows have been in the form of mergers and acquisitions.
TRUE
Overpayment for assets of an acquired firm is one reason acquisitions fail.
TRUE
Which of the following is NOT a basic decision that a firm contemplating foreign expansion must make?
How to withdraw from markets.
The magnitude of the advantages and disadvantages associated with an entry mode is NOT determined by:
the surface area of the country.
Long-run economic benefits of doing business in a country are a function of factors such as:
purchasing power of the consumers.
_____, while relatively poor, is growing so rapidly that it is an attractive target for inward investment.
China
When making basic entry decisions, the benefit-cost-risk trade-off is likely to be most favorable in which type of country?
A country with a free market system
The advantages frequently associated with entering a market early are commonly known as:
first-mover advantages
Which of the following is a first-mover advantage?
Create switching costs that tie customers into their products or services.
What are disadvantages associated with entering a market early commonly known as?
First-mover disadvantages
Which of the following are costs that an early entrant has to bear that a later entrant can avoid?
Pioneering costs
The ability to preempt rivals and capture demand by establishing a strong brand name is an example of:
first-mover advantages.
_____ arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game.
Pioneering costs
The rapid expansion by Tesco into developing nations is an example of:
capturing demand by establishing a strong brand name before the competitors.
Which type of costs involves promoting and establishing a product offering, including the costs of educating customers?
Pioneering costs
A decision that has a long-term impact and is difficult to reverse is a(n):
strategic commitment.
The _____ entrant is more likely than the _____ entrant to be able to capture the first-mover advantages associated with demand preemption, scale economies, and switching costs.
large scale; small scale
Entering a market on a large scale implies:
rapid entry.
What type of entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market?
Small-scale
By giving a firm time to collect information, _____ reduces the risks for that firm.
small-scale entry
_____ firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages.
A risk-averse
Which of the following is NOT a mode of entry that firms can use to enter foreign markets?
Initial public offering
Which of the following is an advantage of exporting?
Allows a firm to achieve experience curve and location economies.
All of the following statements are disadvantages of exporting EXCEPT:
exporting may help a firm achieve experience curve economies.
Tariff barriers can make it uneconomical to use which mode of entry?
Exporting
Turnkey projects are a means of exporting _____ to other countries.
process technology
Turnkey projects are most common in the following industries:
chemical, pharmaceutical, petroleum refining, and metal refining.
In which strategy does a foreign client have the least input in details of a project?
Turnkey strategy
An advantage of _____ is that they are a way of earning great economic returns from technological assets.
turnkey projects
Creating competitors and lack of long-term market presence are disadvantages of:
turnkey projects.
Which of the following is an advantage of turnkey projects?
Earning great returns from the technological know-how of running a complex process.
An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period in exchange for royalties is a(n) _____ agreement.
licensing
Examples of _____ property include patents, inventions, formulas, processes, designs, copyrights, and trademarks.
intangible
A primary advantage of _____ is that the firm does not have to bear the development costs and risks associated with opening a foreign market.
licensing
Which of the following is NOT a drawback of licensing?
Licensing can become unprofitable due to trade barriers and transportation costs.
Under a(n) _____ agreement, a firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm.
cross-licensing
Which type of agreement is believed to reduce the risks associated with licensing technological know-how?
Cross-licensing agreement
Cross-licensing agreements are increasingly common in:
high-technology industries.
Although they are similar, _____ tends to involve longer-term commitments than:
franchising; licensing.
Franchising is employed primarily by:
service firms
Advantages of _____ are low development costs and risks.
franchising and licensing
Because the _____ typically assumes most costs and risks, he or she has the incentive to build a profitable operation as quickly as possible.
franchisee
In franchises, the result of _____ can extend beyond lost sales in a particular foreign market to a decline in the firm’s worldwide reputation.
poor quality
To overcome quality control problems in franchises, a company could set up _____ in each country in which the firm expands.
a subsidiary
A _____ entails establishment of a firm that is jointly owned by two or more otherwise independent firms.
joint venture
The most typical joint venture is:
50/50, in which there are two partners and each partner holds an equal share.
_____ has the following advantages: firms benefit from a local partner’s knowledge of the host country’s competitive conditions, a firm shares development costs with a local partner, and in many countries political considerations necessitate this form of entry.
A. A wholly owned subsidiary
A joint venture
Which of the following is NOT a disadvantage of joint ventures?
A joint venture is the most costly and risky choice
Which of the following is a disadvantage of joint ventures?
The shared ownership arrangement can lead to conflicts and battles for control between the investing firms.
In a _____, the firm owns 100 percent of the stock.
wholly owned subsidiary
Establishing a wholly owned subsidiary in a foreign country can be done:
by setting up a new operation or by acquiring an established firm.
ING’s strategy for entering the U.S. market was to acquire established U.S. enterprises, rather than try to build an operation from the ground floor. ING follows which strategy?
Wholly owned subsidiary strategy
A _____ is the preferred mode of foreign market entry for high-tech firms that want to minimize the risk of losing control over its technological competence; and maintain tight control over its operations.
wholly owned subsidiary
What is the most costly form of foreign market entry?
Wholly owned subsidiary
Protection of technology, the ability to engage in global strategic coordination, and the ability to realize location and experience curve economies are distinct advantages of:
A. franchising.
wholly owned subsidiaries.
Because all entry modes have advantages and disadvantages, _____ is inevitable.
trade-off
The most advantageous entry mode is _____, if a high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how.
wholly owned subsidiary
Which entry mode has low development costs and risks?
Franchising
Which entry mode has the ability to realize location and experience curve economies?
Exporting
Which entry mode has high costs and risks?
Wholly owned subsidiaries
Which entry mode has a lack of control over quality?
Franchising
Many service firms favor a combination of franchising and _____ to control the franchises within a particular country or regions.
subsidiaries
The greater the pressures for cost reductions are, the most likely a firm will want to pursue some combination of:
exporting and wholly owned subsidiaries.
When a firm expects rapid imitation of its core technology by competitors, what should it do?
It should license its technology as rapidly as possible to foreign firms.
The competitive advantage of many _____ firms is based on management know-how.
service
Why are wholly owned subsidiaries preferred by firms pursuing global or transnational strategies?
They allow the use of profits generated in one market and improve the competitive position in another.
The need for _____ is particularly great in markets that are rapidly globalizing.
preemption
Which of the following is an advantage of acquisitions?
They are quick to execute and establish a sizable presence in the target market.
Which of the following is NOT an advantage of acquisitions?
They are the least expensive form of expansion.
Which term refers to the situation when the management of the acquiring firm is too optimistic about the value than can be created via an acquisition and is willing to pay a significant premium over a target firm’s market capitalization?
The hubris hypothesis
Which of the following is an example of an intangible asset?
Brand name
The _____ hypothesis postulates that top managers typically overestimate their ability to create value from an acquisition, primarily because rising to the top of a corporation has given them an exaggerated sense of their own capabilities.
hubris
Differences in _____ can slow the integration of operations in acquisitions.
management philosophy
After the DaimlerChrysler merger, many senior managers left Chrysler because they disliked the dominance in decision making by Daimler’s German managers. This illustrates what type of acquisition disadvantage?
Acquisitions may fail because there is a clash between the cultures of the two firms.
What can be done to reduce the risk of failure of an acquisition?
Ensure that the firm does not pay too much for the acquired unit.
Screening a potential acquisition enterprise can do all of the following EXCEPT:
ensure elimination of competition in the foreign market.
The big advantage of establishing a(n) _____ in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants.
greenfield venture
An advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much _____ to build the kind of subsidiary company that it wants.
greater ability
It is much easier to build an organization culture from _____ than it is to change the culture of an acquired unit.
scratch
If a firm is entering a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via a(n):
acquisition
_____ are less risky than _____ in the sense that there is less potential for unpleasant surprises.
Green-field ventures; acquisitions
Suzi’s Sleds, Inc. is considering establishing a subsidiary in Japan, where there are no other incumbent competitors to acquire. Suzi’s would do best in Japan with a(n):
green-field venture.

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