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International BusinessChapter 14 Direct Investment and Collaborative Strategies

1) Coca-Cola collaborates extensively abroad, but it refuses collaboration that might imperil control of its core competency. As a result, which of the following is NOT one of its international collaborative forms?A) sharing ownership in the production of its secret formula concentrate B) using franchisers to bottle, sell, and deliver Coke beveragesC) licensing Coke's trademark for use on products in which it lacks skillsD) forming joint ventures with companies that provide supplies for Coke products Answer: A

2) All of the following are ways that Coca-Cola has been attempting to increase its global sales EXCEPT ________.A) gaining licenses to use brand names of other companies B) acquiring companies with complementary productsC) adding alcoholic beverages to its product lineD) distributing soft drinks from other companies Answer: C

3) Which of the following is the LEAST likely reason that consumers would prefer domestically made products over imports?A) belief that imports are subsidizedB) feelings of national pride and sentiment C) negative associations with products from certain countriesD) concerns that parts will be difficult to obtain for foreign productsAnswer: A

4) A U.S. firm plans to shift from exporting to production in China to serve the Chinese market. Which of the following statements would best explain this decision?A) China's currency is appreciating relative to the U.S. dollar.B) The firm is nearing capacity utilization in its U.S. plant.C) The company need not alter its products for the Chinese market. D) Transportation costs have become low relative to production costs.Answer: B

Learning Outcome: Explain the implications of foreign direct investment for both host and home country

5) Small economies are sometimes less successful than large countries in attracting FDI by raising import restrictions. What is the most likely reason for this?A) Large economies impose higher trade restrictions.B) Transportation costs are generally higher in small economies.C) People in small economies are more nationalistic in their purchases.D) Small economies frequently lack sufficient markets for large-scale production.Answer: D

AACSB: Dynamics of the global economy

6) A U.S. firm owns 100% of its production facility in Brazil, thus is most likely using a ________ strategy.A) comprehensive ownershipB) vertical integrationC) appropriabilityD) internalizationAnswer: D


7) A U.S. firm with a production facility in Brazil uses its own personnel to handle almost all activities because their outsourcing would be too costly and inefficient. Its internalization will most likely lead to cost savings because the firm can avoid ________.A) costly customs brokers B) high, fixed start-up costsC) the costs of enforcing an agreementD) sharing profitsAnswer: C


8) Appropriability theory refers to ________.A) denying rivals access to competitive resources such as management know-howB) categorizing the appropriateness of a firm's foreign investments in terms of host country objectivesC) explaining an investing firm's choice of partner in a joint ventureD) predicting the general pattern of direct investment locationsAnswer: A

9) Why can a company more easily pursue a global strategy when it owns 100 percent of foreign operations?A) The company is not likely to face overcapacity issues.B) The company limits foreign exchange rates fluctuations.C) The company avoids communication misunderstandings.D) The company can sub-optimize results in one country in order to optimize results globally.Answer: D

10) A U.S. firm is acquiring an existing company in Germany rather than starting up a new foreign operation. Which of the following statements best supports this decision?A) Because the German firm is performing poorly, there is a good turn-around opportunity.B) The U.S. firm's U.S. facility is working at capacity. C) Stock market prices have been very high in Germany.D) The German firm has skilled personnel that the U.S. firm cannot hire at a good price on its own. Answer: D

Learning Outcome: Explain the implications of foreign direct investment for both host and home countrySkill: Critical Thinking

11) A company that makes a foreign investment largely to acquire knowledge is most likely to use ________ as a means of expansion.A) a greenfield investmentB) internalizationC) an acquisitionD) a licensing agreementAnswer: C

12) Executives at a U.S. firm are debating whether to start a new operation in Russia or acquire an existing one. Which of the following factors best supports a decision to start up a new operation in Russia?A) The Russian government places restrictions on the outward transfer of foreign capital.B) Labor relations at existing Russian firms are poor and difficult to change.C) Russia's currency is weak and stock market prices are significantly depressed.D) Existing companies have goodwill and positive brand recognition in Russia. Answer: B


13) A greenfield investment is another name for a company's decision to ________.A) acquire an interest in an existing foreign operationB) implement sustainable marketing practicesC) construct a new facility in a foreign marketD) build a facility for a local companyAnswer: C

14) In which of the following situations would Company X most likely seek a collaborative arrangement with Company Z in which Company Z would handle work for Company X? A) Company X has excess capacity.B) Fixed costs for the work are high, and Company X has large volumes of work.C) Company X is inexperienced in outsourcing work.D) Fixed costs for the work are high, and Company X has small volumes of work.Answer: D

AACSB: Reflective thinking skills

15) 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 secure vertical and horizontal linksD) to maintain better controlAnswer: C

16) Coca-Cola has collaborative arrangements whereby it produces concentrate that it sells to other companies to bottle its drinks. Which of the following terms best describes this type of arrangement?A) vertical allianceB) horizontal allianceC) link allianceD) scale allianceAnswer: A

17) Risk is an important factor for companies engaged in international business. One way a collaborative arrangement helps minimize risk when operating abroad is by ________.A) reducing the possibility of technological appropriationB) freeing up resources so a company can diversify into more countriesC) preventing the entry of new competitorsD) eliminating losses from exchange rate depreciation abroadAnswer: B

18) In which of the following situations is a firm most likely to be able to choose the foreign operating form it would most like to use?A) Its main motive is to gain location-specific assets.B) It has a desired and unique resource.C) Its preference for entering foreign markets is via acquisition of foreign facilities.D) It has little concern about appropriability.Answer: B

19) The more a company engages in international collaborative arrangements as opposed to wholly owned foreign operations, the more it is likely to ________.A) decrease its exposure to political riskB) increase its control over foreign operationsC) learn rapidly about foreign environmentsD) protect its core assetsAnswer: A

20) What is a key industry?A) an industry that is locked up competitively by domestic producersB) a turnkey operator specializing in the construction of infrastructure componentsC) an industry that receives government subsidiesD) an industry that significantly affects the economy by virtue of its size or influence on other sectorsAnswer: D

21) All of the following are arguments for governments to limit foreign control of key industries EXCEPT which one?A) Host countries don't need foreign resources such as technology and export markets for these industries.B) History shows that home governments have used powerful foreign companies to influence policies in the countries where they operate.C) Important decisions can be made abroad that are contrary to the country's best interest.D) Foreign companies can find means of profiting in these industries without having to control them.Answer: A

Learning Outcome: Discuss arguments for and against government intervention in international business

22) All of the following are arguments for permitting foreign control of key industries EXCEPT which one?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 agenda.B) MNEs staff their organizations abroad mainly with local nationals and depend in part on their input for making decisions.C) Foreign governments can no longer use their home-based companies to influence policies abroad.D) The security arguments for restrictions on foreign ownership are really just a sham to protect politically powerful industries and employment.Answer: C

Learning Outcome: Discuss arguments for and against government intervention in international business

23) Dependencia theory holds that ________.A) countries should seek to diversify their economiesB) low-income countries have practically no power in dealings with MNEsC) in a globalized world, no nation can be independent economically or politicallyD) there is a natural division of labor whereby developing countries depend on production using fairly unskilled labor and developed countries depend on highly educated workersAnswer: B

24) Chrysler granted South East Motor (a company in China) rights to produce its Grand Voyager minivan for sale in China in exchange for a fee. This is an example of a(n) ________.A) licensing agreementB) bargaining school arrangementC) technology appropriationD) turnkey operationAnswer: A

Learning Outcome: Summarize the main entry strategies and modes that businesses use to enter into foreign markets

25) Which of the following is an example of an exclusive license agreement?A) Three licensees have worldwide rights to sell the product worldwide for three years, during which time 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.D) The licensee and licensor use the property in the same market.Answer: C


26) Which of the following describes 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 countriesC) an exchange of explicit knowledge for tacit knowledgeD) the exchange of intangible property rights between two or more companiesAnswer: D


27) What is the primary reason for technology licensing to take place while a product is still in the developmental stage?A) to enable the licensor to receive some earnings in case the technology never becomes operativeB) to ensure that a product launches in various countries at about the same timeC) to gain funds to complete the developmentD) to reduce transaction costsAnswer: B

28) Licensing companies commonly negotiate a "front-end" payment from licensees to cover ________ transfer costs.A) employeeB) brand name C) technology D) copyright Answer: C

29) Which of the following is NOT a factor affecting the payment amount of international licensing

contracts?A) geographic scope of the sales territoryB) tax treaties between the parties' home countriesC) length of time the asset will have market valueD) market experience of using the asset elsewhereAnswer: B

30) 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 subsidiaryB) negotiates a special agreement with the host governmentC) establishes a management contractD) sets up an equity allianceAnswer: A

31) Judson Baked Goods, a U.S. firm, grants the use of its trademark to a company in Sweden and provides the Swedish company with operational assistance on a continuing basis. Judson is most likely involved in ________. A) a management contractB) franchisingC) offshoringD) appropriabilityAnswer: B


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 subfranchisesD) the set of standard terms regulating the relationship between franchisor and franchiseeAnswer: C


33) Lesser-known franchisors sometimes enter foreign countries with company-owned outlets. A reason for doing this is to ________.A) guarantee profits B) avoid competitionC) compete with local stores D) attract potential franchiseesAnswer: D

34) 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 franchisors.B) The royalties as a percentage of sales decrease.C) Governments impose more stringent operating restrictions.D) Sales decrease because consumers want to get the "real thing."Answer: A

35) Metro Hotels, a U.S. hotel chain, has transferred several of its employees to Myanmar where they will work for three or four years before returning to the U.S. The employees will be working with a Myanmar hotel to provide it with their extensive knowledge regarding how to run a hotel. Metro is most likely involved in a ________. A) franchise B) turnkey operationC) joint ventureD) management contractAnswer: D


36) For the provider, management contracts offer the advantage of ________.A) receiving income without making a capital outlayB) increasing their merchandise exportsC) reducing their global taxesD) better access to raw materialsAnswer: A


37) The advantage to host countries of international management contracts is that they ________.A) receive state-of-the-art facilitiesB) get assistance without foreign controlC) can pay in local currencyD) save on making capital investmentsAnswer: B


38) Hotel chains are large providers of international management services through collaborative operations. All of the following are reasons for this EXCEPT which one?A) Some governments have restricted foreign ownership in hotels.B) Local hotel owners may be very knowledgeable about real estate, but know little about hotel operations.C) Local companies can forego making a capital investment.D) Hotel chains can offer global brand recognition.Answer: C

39) What is a turnkey operation?A) a contract for the complete construction of an operating facility for a feeB) a contract with a government to service one of its key industriesC) the buying of another companyD) the repatriation of equityAnswer: A


40) Which of the following firms would most likely be involved in a turnkey operation?A) American Airlines B) Bechtel Construction C) Burger King D) MicrosoftAnswer: B


41) 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 areasD) they depend almost entirely on acquisitions rather than greenfield operationsAnswer: C

42) Why do turnkey operators often require a feasibility study as part of the contract?A) By adding to the cost, they earn more money.B) This lessens the risk of contract cancellation when political leadership changes.C) This lowers their risk of foreign exchange losses.D) This helps to define what constitutes "satisfactory completion" of the project.Answer: D

43) What is an international joint venture?A) an international agreement between two or more companies to have access to each other's patentsB) the ownership of a company by two or more companies, of which at least one is a foreign company where the venture is locatedC) an international agreement between two or more firms for the use of a trademarkD) an agreement between two or more organizations to share management expertiseAnswer: B


44) 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 organizationsD) an agreement between two or more governments to provide for reciprocal foreign investment protectionAnswer: C


45) All of the following would be 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 VenezuelaAnswer: D

46) What is an equity alliance?A) a collaborative arrangement in which at least one collaborating company takes an ownership position in the otherB) a collaboration in which each contributor receives an equitable return based on relative contributionC) a collaboration in which partners agree to share technology with each otherD) a wholly owned acquisition to prevent appropriation of intellectual propertyAnswer: A


47) Which of the following is LEAST likely to trigger the breakup of a joint venture?A) The partners place a different degree of importance on the joint venture.B) The partners develop different capabilities to contribute to the joint venture.C) The partners come from different industries.D) Objectives evolve differently over time.Answer: C

48) 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 disputeAnswer: D

49) When no single company has control over a collaborative arrangement, ________.A) the operation may lack directionB) none of the partners is responsible for legal violations C) differences in corporate culture are likely to growD) one partner's interests are likely to be put ahead of the other partner's interestsAnswer: A

50) When a company's primary motive for entering a collaborative arrangement is to learn from its partner, it is likely to ________.A) leave control to its partnerB) "go it alone" after it has learned what it needs to knowC) have disagreements with the partner over quality issuesD) prefer the arrangement to be a licensing agreementAnswer: B

51) Companies typically use various international operating forms simultaneously for all the following reasons EXCEPT which one?A) They may be at different stages of commitment for different products.B) They may be at different stages of commitment for different countries.C) They may need to balance foreign revenues among their operating divisions.D) Differences in countries' characteristics may necessitate diverse operational forms.Answer: C

52) Which of the following would most likely trigger internal tensions as a firm's modes of foreign operations change?A) losing or gaining responsibilitiesB) reluctance to learn about a culture C) traveling for business purposes D) geographic diversity Answer: A

53) Tom, a manager at an MNE, has been given the task of identifying a pool of companies with which the firm might form collaborative arrangements. Which of the following activities would be LEAST useful for Tom? A) attending technical conferences B) monitoring industry journalsC) attending trade fairsD) constructing turnkey facilitiesAnswer: D

54) Without a proven track record in collaborative arrangements, a company will most likely need to ________.A) have its home country government approve licensing contractsB) delegate fewer responsibilities to partners at the companyC) negotiate harder with and make more concessions to a partnerD) depend more on trust as a control mechanismAnswer: C

55) What problem most likely arises when a company wishes to sell techniques/technology that it has either not yet fully developed or used commercially?A) A buyer is reluctant to buy what it has not seen, and a seller risks divulging secretive information. B) Most governments want to see contract details, which companies feel are proprietary.C) It is difficult to develop a rapport between negotiating parties in this type of situation.D) Parties can seldom agree on the desired level of quality control.Answer: A

56) All of the following are important when establishing and managing a collaborative agreement EXCEPT ________.A) setting up mutual goals and expectationsB) avoiding interference about how the partner handles its duties in the operationC) determining whether the agreement is reaching its goalsD) assessing periodically whether a different operational form would be preferableAnswer: B

57) Billions of investment dollars are needed to develop many new products. This trend toward higher development costs is likely to have which of the following effects on future modes of operations?A) Collaborative arrangements are likely to decrease because a company making a breakthrough will be leery of partners' appropriation of knowledge.B) Collaborative arrangements are likely to increase because of the huge investments needed for development.C) Exporting will become more important relative to other operating modes because of the large scale production facilities necessary for economic efficiency.D) Cross-licensing will gain in importance because companies will be forced to specialize more in different technologies.Answer: B



58) Large companies that have resources to go it alone may have advantages in product development over small companies that do not because ________.A) evidence suggests that collaborative arrangements slow the speed of innovationB) large companies can dictate their terms of operations abroadC) small companies are disadvantaged in legal settlements D) large companies need not adapt to national differencesAnswer: A

59) All of the following are differences that need to be overcome for international collaborative arrangements to be effective EXCEPT ________. A) national disparities in governmental policies B) company variances in strategic directions and objectives C) governmental differences in export restrictions D) company diversity in management styles and structuresAnswer: C


60) Exporting is usually more feasible when transportation costs are high rather than low in relation to production costs.Answer: FALSE

61) Appropriability theory describes a firm's desire to deny rivals access to its competitive resources.Answer: TRUE

62) Wholly owned operations abroad inhibit a company's ability to pursue a global strategy.Answer: FALSE

63) Foreign acquisitions are more advantageous than start-ups when the industry has little excess capacity than when it has a lot of excess capacity.Answer: FALSE

64) Governments sometimes prohibit foreign acquisitions because they fear market dominance by foreign enterprises.Answer: TRUE


65) Collaborative agreements allow companies to specialize more in those activities that best fit their competencies.Answer: TRUE

66) An advantage of collaborative agreements is the ability to spread faster geographically.Answer: TRUE

67) Collaborative arrangements prevent the possibility of information being passed to potential competitors.Answer: FALSE

AACSB: Communication abilities

68) The more a company engages in collaborative agreements, the more it loses control over decisions and their implementation.Answer: TRUE

69) An argument for limiting foreign control of key industries is that decisions made abroad can have adverse effects on the local economy.Answer: TRUE

70) 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.Answer: FALSE

71) A licensing agreement is a contract for the granting of rights on tangible property.Answer: FALSE


72) Patents, copyrights, and trademarks are all examples of property rights that may be licensed to one company from another.Answer: TRUE


73) In a licensing arrangement, it is rare for companies to agree to a front-end payment to cover technology transfer costs.Answer: FALSE


74) Licenses are often given to companies owned in whole or in part by the licensor. Answer: TRUE


75) An agreement for the use of a trademark and assistance with business operations is known as a cross-licensing agreement.Answer: FALSE


76) When entering foreign countries, many franchisors encounter difficulty in transferring the domestic success factors of product and service standardization.Answer: TRUE

77) An international management contract is an agreement between a company and a foreign government on the number of foreign personnel it can employ.Answer: FALSE


78) The use of management contracts has been significant in hotel operations.Answer: TRUE


79) A turnkey operation is a contract for the construction of an operating facility for a fee.Answer: TRUE


80) Few turnkey projects to date have been in remote areas of the world.Answer: FALSE


81) An international joint venture is an agreement between two or more companies for the use of a trademark.Answer: FALSE


82) The more partners in a joint venture, the more complex the management of the arrangement will be.Answer: TRUE

83) When a large company and a small company enter a joint venture, the large company is expected to contribute more to the arrangement.Answer: FALSE

84) In collaborative arrangements, when one partner cedes control to another partner, it is no longer responsible for problems.Answer: FALSE

AACSB: Ethical understanding and reasoning abilities

85) The truly experienced international firm will usually make use of various modes of operation simultaneously.Answer: TRUE

86) Internal tension may develop within a company as it changes an international operating mode because some managers gain responsibility and others lose it.Answer: TRUE

87) Although a company may have a good track record with collaborative arrangements, this is of little help when negotiating new collaborative arrangements with different companies.Answer: FALSE

88) It is important when setting up a collaborative arrangement to agree on mutual goals and expectations.Answer: TRUE

89) The sums needed to develop and market many new products are out of reach of most companies acting alone.Answer: TRUE

90) In a short essay, discuss how transportation, trade restrictions, domestic capacity, and country-of-origin affect companies' decisions about modes of operating internationally.Answer: a. Transportation: When companies add the cost of transportation to product costs, some products become impractical to ship over great distances. Companies that make these products, such as soft drinks, must 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.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 transportation 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, and therefore prefer those countries' products. They may also fear that service and replacement parts for imported products will be difficult to obtain.

Skill: Critical Thinking


91) According to the appropriability theory and the internalization theory, why would companies want to control their foreign operations?Answer: Control 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 of 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, which may save transaction costs.


92) 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.Answer: a. 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. Foreign companies may 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. This may also prevent excess capacity within the market.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 may be 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.


93) What motives do businesses have for entering into collaborative arrangements? What are some of the problems associated with collaborative arrangements?Answer: Firms enter into collaborative arrangements for various reasons. Spreading and reducing costs is a common reason. Second, a firm often seeks to improve 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. Companies may band together so as not to compete. Companies also may combine certain resources to combat larger and more powerful competitors. There are potential cost savings and supply assurances from vertical integration. Horizontal links may provide finished products or components. 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. The major strains on collaborative arrangements are due to five factors:collaboration's importance to partners, differing objectives, control problems, partners' contributions and appropriations, and differences in culture.

Skill: Synthesis, 6

94) What is the difference between licensing and cross-licensing? What factors do firms need to

consider before entering into licensing agreements?Answer: Under 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. Firms need to consider payments when involved in licensing. The amount and type of payment for licensing arrangements vary, as each contract is negotiated on its own merits. For instance, the value to the licensee will be greater if potential sales are high. Potential sales depend, in turn, on such factors as the geographic scope of the sales territory, the length of time the asset will have market value, and the market experience of using the asset elsewhere.

Learning Outcome: Summarize the main entry strategies and modes that businesses use to enter into foreign marketsSkill: Synthesis, 5

95) Explain how franchising agreements differ from licensing agreements.Answer: Franchising 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.


96) What is a management contract? What are the potential advantages to both parties in the contract?Answer: One 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 a 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.


97) What is a turnkey operation? What features generally make turnkey operations different from other collaborative arrangements?Answer: Turnkey 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.


98) What is an equity alliance? What motives would a firm have for forming an equity alliance?Answer: An 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.


99) What are the various types of collaborative arrangement options available to international businesses? How can firms most effectively manage international collaborative arrangements?Answer: Licensing, franchising, management contracts, turnkey operations, joint ventures, and equity alliances are collaborative arrangements. Managing collaborative arrangements effectively is key to better performance. In essence, they must choose partners 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. 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.


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