international business quiz

Chapter 14 - Entry Strategy and Strategic Alliances

Chapter 14Entry Strategy and Strategic Alliances

True / False Questions

1. (p. 488) The long-run benefits of doing business in a country are a function of factors such as the size of the market, the present wealth of consumers in that market and the likely future wealth of customers. TRUE

Difficulty: Medium

2. (p. 489) The costs and risks associated with doing business in a foreign country are typically high in an economically advanced and politically stable democratic nation. FALSE

Difficulty: Easy

3. (p. 489) First-mover advantages are the advantages associated with entering a market early. TRUE

Difficulty: Easy

4. (p. 489) Costs that an early entrant has to bear that a later entrant can avoid are known as first-mover costs. FALSE

Difficulty: Medium

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5. (p. 491) Large strategic commitments limit strategic flexibility. TRUE

Difficulty: Medium

6. (p. 492) A small-scale entrant is more likely than a large-scale entrant to capture first-mover advantages associated with demand preemption, scale economies and switching costs. FALSE

Difficulty: Medium

7. (p. 492) Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. TRUE

Difficulty: Medium

8. (p. 493) Exporting is advantageous because it avoids the cost of establishing manufacturing operations in the host country and because it may help a firm achieve experience curve and location economies. TRUE

Difficulty: Medium

9. (p. 493) Exporting may not be appropriate if lower-cost locations for manufacturing the product can be found abroad. TRUE

Difficulty: Easy

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10. (p. 495) In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client. TRUE

Difficulty: Easy

11. (p. 496) An advantage of turnkey projects is that the firm that enters into a turnkey deal will have no long-term interest in the foreign country. FALSE

Difficulty: Medium

12. (p. 496) Tangible property includes patents, designs, copyrights and trademarks. FALSE

Difficulty: Easy

13. (p. 497) Licensing increases a firm's ability to realize experience curve and location economies by producing its product in a centralized location. FALSE

Difficulty: Medium

14. (p. 497) By its very nature, licensing increases a firm's ability to utilize a coordinated strategy. FALSE

Difficulty: Medium

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15. (p. 498) Franchising enables a firm to quickly build a global presence. TRUE

Difficulty: Easy

16. (p. 499) The most typical joint venture is a 25/75 venture. FALSE

Difficulty: Medium

17. (p. 499) An advantage of joint ventures with a local partner is the knowledge of the local environment the local partner contributes to the venture. TRUE

Difficulty: Medium

18. (p. 500) A wholly owned subsidiary limits a firm's control over operations in different countries. FALSE

Difficulty: Medium

19. (p. 501) Firms entering a market via a wholly owned subsidiary must bear all the costs and risks associated with the venture. TRUE

Difficulty: Medium

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20. (p. 502) Brand names are generally well-protected by international laws pertaining to trademarks. TRUE

Difficulty: Medium

21. (p. 503) Firms pursuing global standardization or transnational strategies tend to prefer joint-venture arrangements over wholly owned subsidiaries. FALSE

Difficulty: Medium

22. (p. 503) Over the decade, between 50 and 80 percent of all FDI inflows have been in the form of mergers and acquisitions. TRUE

Difficulty: Medium

23. (p. 503) A clear advantage of greenfield investments as compared to acquisitions is the short execution time involved. FALSE

Difficulty: Medium

24. (p. 504) Acquisitions rarely produce disappointing results. FALSE

Difficulty: Medium

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25. (p. 504) Overpayment for assets of an acquired firm is one reason acquisitions fail. TRUE

Difficulty: Easy

26. (p. 504) Evidence suggests that almost all acquisitions create rather than destroy value. FALSE

Difficulty: Medium

27. (p. 505) The main advantage of greenfield investment is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. TRUE

Difficulty: Medium

28. (p. 506) Acquisitions are less risky than in greenfield ventures the sense that there is less potential for unpleasant surprises. FALSE

Difficulty: Medium

29. (p. 506) If a firm is trying to enter a market where there are already well-established companies and where global competitors are also interested in establishing a presence, the firm should choose a greenfield investment. FALSE

Difficulty: Hard

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30. (p. 506) Firms may avoid strategic alliances because their complexity usually delays entry into a foreign market. FALSE

Difficulty: Medium

31. (p. 507) Unlike joint ventures, strategic alliances require the firm to bear all the costs and risks of foreign expansion. FALSE

Difficulty: Medium

32. (p. 508) The failure rate for international strategic alliances is very low. FALSE

Difficulty: Medium

33. (p. 509) Cross-licensing agreements can be used to formalize arrangements to swap skills and technology in a strategic alliance. TRUE

Difficulty: Hard

34. (p. 510) Relational capital refers to the building of interpersonal relationships between the firms' managers in a strategic alliance. TRUE

Difficulty: Medium

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35. (p. 511) To maximize the learning benefits of an alliance, partners should try to learn from each other and then disperse the knowledge within their own organizations. TRUE

Difficulty: Medium

Multiple Choice Questions

36. (p. 489) Other things being equal, the benefit–cost–risk trade-off is likely to be most favorable in A. Politically unstable developing nations that operate with a mixed or command economyB. Nations where there is a dramatic upsurge in either inflation rates or private-sector debtC. Politically stable developed and developing nations that have free market systemsD. Developing nations where speculative financial bubbles have led to excess borrowing

Difficulty: Easy

37. (p. 489) Which of the following statements about value creation by an international business in a foreign market is false? A. Value depends on the suitability of the product offering to that marketB. Greater value translates into an ability to charge lower pricesC. Value depends on the nature of indigenous competitionD. Greater value translates into an ability to build sales volume more rapidly

Difficulty: Easy

38. (p. 489) The advantages frequently associated with entering a market early are commonly known as A. Primary advantagesB. First-mover advantagesC. Initial-entrant premiumsD. Proactive-mover benefits

Difficulty: Easy

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39. (p. 489) Which of the following is not an advantage associated with entering a foreign market before other international businesses? A. Ability to preempt rivals and capture demand by establishing a strong brand nameB. Ability to ride down the experience curve ahead of rivalsC. Ability to create switching costsD. Ability to avoid pioneering costs

Difficulty: Medium

40. (p. 489) Switching costs A. Drive early entrants out of the marketB. Make it easy for later entrants to win businessC. Make it difficult for later entrants to win businessD. Give later entrants a cost advantage over early entrants

Difficulty: Medium

41. (p. 489) Pioneering costs are A. The costs of establishing manufacturing operations in the host countryB. The fixed costs of developing new products or processesC. Costs that the firm has to bear that a later entrant can avoidD. The switching costs involved in moving from one market to another

Difficulty: Easy

42. (p. 489) Early entrants to a market that are able to create switching costs that tie the customer to the product are capitalizing on A. Economies of scaleB. Pioneering costsC. First-mover advantagesD. Late-mover advantages

Difficulty: Easy

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43. (p. 489) All of the following are examples of pioneering costs except the costs of A. Business failureB. Educating consumersC. Promoting and establishing a product offeringD. Learning from the mistakes of early entrants

Difficulty: Medium

44. (p. 489) The costs of promoting and establishing a product offering when a firm enters a foreign market prior to its rivals are known as A. Switching costsB. Market development costsC. Pioneering costsD. Promotional development costs

Difficulty: Medium

45. (p. 491) A strategic commitment A. Has a short-term impact aloneB. Is difficult to reverseC. Cannot change the competitive playing fieldD. Does not have any influence on the nature of competition in a market

Difficulty: Medium

46. (p. 492) A large-scale entrant is more likely than a small-scale entrant to be able to capture first-mover advantages associated with A. Demand preemptionB. Diseconomies of scaleC. Pioneering costsD. Diseconomies of scope

Difficulty: Medium

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47. (p. 492) 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. A. Small scale; large scaleB. Small scale; moderate scaleC. Large scale; small scaleD. Moderate scale; large scale

Difficulty: Easy

48. (p. 492) Which of the following statements about small-scale entry is true? A. The commitment associated with a small-scale entry makes it possible for the small-scale entrant to capture first-mover advantagesB. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scaleC. By giving a firm time to collect information, small-scale entry increases the risks associated with a subsequent large-scale entryD. Small-scale entry limits a firms ability to learn about a foreign market thereby also limiting the firm's exposure to that market

Difficulty: Hard

49. (p. 493) If a firm can realize location economies by moving production elsewhere, it should avoid A. ExportingB. Turnkey contractsC. LicensingD. Wholly owned subsidiaries

Difficulty: Medium

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50. (p. 493) Which of the following is a distinct advantage of exporting? A. It avoids the often substantial costs of establishing manufacturing operations in the host countryB. Benefits from a local partner's knowledge of the host country's competitive conditionsC. Avoids the threat of tariff barriers by the host-country governmentD. Appropriate if lower cost locations for manufacturing the product can be found abroad

Difficulty: Medium

51. (p. 493) Which of the following is a distinct advantage of exporting? A. Absolute control over operations in the foreign nationB. It may help a firm achieve experience curve and location economiesC. Avoids the threat of tariff barriers by the host-country governmentD. It is useful for bulk products and also in situations where transportation costs are high

Difficulty: Medium

52. (p. 494) When a firm faces significant transportation costs, _____ can be uneconomical. A. Joint venturesB. Greenfield investmentsC. Licensing agreementsD. Exporting

Difficulty: Medium

53. (p. 494) Manufacturing bulk products regionally A. Increases the firm's costs of transportationB. Enables a firm to realize some economies from large-scale productionC. Leads to diseconomies of scaleD. Makes exporting uneconomical for the firm

Difficulty: Hard

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54. (p. 494-495) When an exporting firm finds that its local agent is also carrying competitors' products, the firm may switch to a _____ to handle local marketing, sales and service. A. Wholly owned subsidiaryB. Franchising arrangementC. Turnkey operationD. Licensing agreement

Difficulty: Medium

55. (p. 494) When local agents carry the products of competing firms and have divided loyalties, _____ is not appropriate. A. FranchisingB. LicensingC. ExportingD. Greenfield investment

Difficulty: Medium

56. (p. 494) The threat of tariff barriers by the host government can make _____ very risky. A. Greenfield investmentB. FranchisingC. LicensingD. Exporting

Difficulty: Medium

57. (p. 495) Identify the incorrect statement about turnkey projects. A. The contractor agrees to handle every detail of the project for a foreign clientB. They are most common in industries which use inexpensive production technologiesC. This is a means of exporting process technology to other countriesD. They create efficient global competitors in the process

Difficulty: Hard

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58. (p. 495) In which of the following industries are turnkey projects the most common? A. Fresh fruit, grain and meat productsB. Chemical, pharmaceutical and metal refiningC. Consumer durables, computer peripherals and automotive partsD. Apparel, shoes and leather products

Difficulty: Easy

59. (p. 496) A turnkey strategy A. Is always riskier than conventional FDIB. Is never used in a country with unstable political and economic environmentsC. Is useful where FDI is limited by host-government regulationsD. Is a strong indicator of a firm's long-term interest in a foreign country

Difficulty: Hard

60. (p. 496) Many Western firms that sold oil-refining technology to firms in Gulf states now find themselves competing with these firms in the world oil market. This is an example of A. The firm entering into a turnkey project with a foreign enterprise, inadvertently creating a competitorB. The firm entering into a turnkey deal having no long-term interest in the foreign countryC. The country subsequently proving to be a major market for the output of the process that has been exportedD. Selling the firm's process technology through a turnkey project which is also selling competitive advantage to potential competitors

Difficulty: Hard

61. (p. 496) Which of the following is a drawback associated with a turnkey strategy? A. Creates long-term commitment in the foreign countryB. Possible creation of a competitorC. Not useful if FDI is limited by host-government regulationsD. Riskier than conventional FDI

Difficulty: Hard

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62. (p. 496) Firms that lack the capital necessary to develop foreign operations may choose _____ as a means of expanding internationally. A. Turnkey projectsB. LicensingC. Greenfield investmentsD. Acquisitions

Difficulty: Medium

63. (p. 496) An arrangement whereby a firm grants the rights to intangible property to another entity for a specified time period in exchange for royalties is a(n) _____ agreement. A. Wholly owned subsidiaryB. TurnkeyC. LicensingD. Exporting

Difficulty: Easy

64. (p. 496) Patents, inventions, formulas, processes, designs, copyrights and trademarks are all forms of A. Licensing agreementsB. Franchising agreementsC. Intangible propertyD. Tangible property

Difficulty: Medium

65. (p. 496) What is the primary advantage of licensing? A. It helps a firm avoid the development costs associated with opening a foreign marketB. It gives a firm the tight control over manufacturing, marketing and strategyC. It helps a firm achieve experience curve and location economiesD. It increases a firm's ability to utilize a coordinated strategy

Difficulty: Hard

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66. (p. 497) Which of the following is a disadvantage of licensing? A. It does not help firms that lack capital to develop operations overseasB. It does not give a firm the tight control over strategy that is required for realizing experience curve and location economiesC. It cannot be used when a firm possesses some intangible property that might have business applicationsD. The firm has to bear the development costs and risks associated with opening a foreign market

Difficulty: Hard

67. (p. 497) When a company has some intangible property that might have business applications, but the firm does not want to develop those applications itself, _____ makes sense. A. ExportingB. A turnkey projectC. LicensingD. A wholly owned subsidiary

Difficulty: Medium

68. (p. 497) Cross-licensing agreements are increasingly common in the _____ industry. A. TransportationB. High-technologyC. ConstructionD. Consumer durables

Difficulty: Easy

69. (p. 497) Identify the correct statement concerning cross-licensing agreements. A. They may reduce the risks associated with licensing technological know-howB. They may enable firms to hold each other hostageC. They increase the probability that parties will behave opportunistically toward each otherD. They are increasingly common in high-technology industries

Difficulty: Hard

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70. (p. 498) Which mode of entry is pursued primarily by manufacturing firms? A. FranchisingB. TurnkeyC. LicensingD. Strategic alliance

Difficulty: Medium

71. (p. 498) This mode of entry is primarily used by service firms. A. FranchisingB. LicensingC. A strategic allianceD. A turnkey project

Difficulty: Medium

72. (p. 498) If a service firm wants to build a global presence quickly and at a relatively low cost and risk, _____ makes sense. A. A wholly owned subsidiaryB. ExportingC. A turnkey projectD. Franchising

Difficulty: Medium

73. (p. 498) Which of the following statements about franchising is true? A. It guarantees consistent product qualityB. It tends to involve more short-term commitments than licensingC. It is a specialized form of licensingD. It is employed primarily by manufacturing firms

Difficulty: Hard

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74. (p. 498) Which of the following is an advantage of franchising? A. A firm takes profits out of one country to support competitive attacks in anotherB. A firm is relieved of many of the costs and risks of opening a foreign market on its ownC. It guarantees consistent product qualityD. It achieves experience curve and location economies

Difficulty: Hard

75. (p. 499) Firms engaging in _____ with a local company can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems and business systems. A. Turnkey projectsB. Joint venturesC. Greenfield investmentsD. Licensing arrangements

Difficulty: Medium

76. (p. 500) Identify the advantage of establishing wholly owned subsidiaries. A. It is the least expensive method of serving a foreign market from a capital investment standpointB. Political considerations make it the most feasible entry modeC. It may be required if a firm is trying to realize location and experience curve economiesD. It is particularly useful where FDI is limited by host-government regulations

Difficulty: Hard

77. (p. 501) A wholly owned subsidiary is appropriate when A. The firm wants to share the cost and risk of developing a foreign marketB. The firm wants 100 percent of the profits generated in a foreign marketC. The firm wants a plant that is ready to operateD. The firm wants to test a market

Difficulty: Hard

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78. (p. 501) A firm that establishes a _____ must bear the full costs and risks of entering a foreign market. A. Licensing agreementB. Wholly owned subsidiaryC. FranchiseD. Joint venture

Difficulty: Medium

79. (p. 501) A _____ is the most costly method of serving a foreign market from a capital investment standpoint. A. Wholly owned subsidiaryB. Franchising agreementC. Turnkey projectD. Joint venture

Difficulty: Medium

80. (p. 502) If a firm's core competency is based on control over proprietary technological know-how, it should avoid _____ and _____ arrangements if possible, to minimize the risk of losing control over that technology. A. Licensing; joint-ventureB. Wholly owned subsidiary; exportingC. Turnkey contracts; exportingD. Exporting; joint-venture

Difficulty: Hard

81. (p. 502) Most service firms have found that _____ with local partners work best for controlling subsidiaries. A. Joint venturesB. Licensing agreementsC. Greenfield investmentsD. Turnkey projects

Difficulty: Medium

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82. (p. 503) _____ are the preferred method of market entry for firms pursuing global standardization or transnational strategies. A. Joint venturesB. Licensing agreementsC. Turnkey projectsD. Wholly owned subsidiaries

Difficulty: Medium

83. (p. 503) Firms may prefer acquisitions to greenfield investments for all of the following reasons except A. They allow companies to completely sidestep government regulations on investmentB. They are quick to executeC. They enable the firm to preempt competitorsD. Managers believe acquisitions are less risky

Difficulty: Hard

84. (p. 504) The hubris hypothesis attempts to explain A. The risks involved in franchisingB. The reasons behind the underperformance of an economyC. Why acquisitions failD. How FDI limits affect growth

Difficulty: Medium

85. (p. 504) According to the _____, top managers typically overestimate their ability to create value from an acquisition. A. Misvaluation theoryB. Performance extrapolation hypothesisC. Market timing theoryD. Hubris hypothesis

Difficulty: Medium

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86. (p. 505) To increase the potential for a successful acquisition, a firm should A. Always bid low to allow for partial failureB. Try to acquire a firm with a very different corporate culture so there is no forced "overlap"C. Seek companies only from similar national culturesD. Screen the foreign enterprise to be acquired

Difficulty: Medium

87. (p. 505) Which of the following is not important in the acquisition process? A. Firms should strive to limit unwanted management attrition after acquisitionB. An integration plan should quickly be implementedC. Proper screening of the company to be acquired should take placeD. The hubris hypothesis should be maintained

Difficulty: Medium

88. (p. 506) When a firm wants to enter a market where there are already well-established incumbent companies and where global competitors are also interested in establishing a presence, the firm should consider A. Joint venturesB. Turnkey projectsC. AcquisitionsD. Greenfield investments

Difficulty: Medium

89. (p. 506) Firms entering markets where there are no incumbent competitors to be acquired should choose A. Greenfield investmentsB. Joint venturesC. AcquisitionsD. Takeovers

Difficulty: Medium

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90. (p. 511) High transportation costs, trade barriers and problems with local marketing agents are all disadvantages of A. LicensingB. Turnkey projectsC. ExportingD. Franchising

Difficulty: Medium

Essay Questions

91. (p. 488) What are the three basic decisions a firm contemplating foreign expansion must make?

The three basic decisions a firm that is seeking to expand into foreign markets must make are: which markets to enter, when to enter those markets and on what scale. The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential.

Difficulty: Easy

92. (p. 489) What are first-mover advantages? Discuss the advantages associated with them.

First-mover advantages are the advantages frequently associated with entering a market early. One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business.

Difficulty: Medium

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93. (p. 489-490) Explain the relationship between first-mover disadvantages and pioneering costs.

When a firm enters a market prior to other international businesses, it can have first-mover disadvantages. These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs 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 also include the costs of promoting and establishing a product offering. Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant's investments.

Difficulty: Medium

94. (p. 492) Discuss the trade-offs associated with large-scale entry versus small-scale entry.

The choice between entering a market on a small scale versus a large scale is a decision associated with levels of risk and reward. In general, entering a large developing nation before most other international businesses and entering on a large scale is associated with high levels of risk. The potential long-term rewards associated with this time strategy are very large. In contrast, entering a developed market after other international businesses in the firm's industry and entering on a small scale to first learn more about those markets is associated with much lower levels of risk. However, the potential long-term rewards are also likely to be lower because the firm is essentially forgoing the opportunity to capture first-mover advantages and because the lack of commitment signaled by small-scale entry may limit its future growth potential.

Difficulty: Hard

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95. (p. 493) Discuss Bartlett and Ghoshal's perspective on how firms from developing countries should approach international expansion.

Bartlett and Ghoshal suggest that companies based in developing countries should use the entry of foreign multinationals as an opportunity to learn from these competitors by benchmarking their operations and performance against them. They argue that the local company might be able to find ways to differentiate itself from foreign companies by focusing on market niches that the multinational ignores or is unable to serve effectively if it has a standardized global product offering. Then, the firm from the developing nation may then be in a position to pursue its own international expansion strategy.

Difficulty: Hard

96. (p. 493-494) Why should a firm choose exporting as a means of foreign market expansion? Discuss the advantages and disadvantages of exporting.

Exporting has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and location economies.However, there are several disadvantages of exporting. First, exporting may not be appropriate if lower-cost manufacturing locations are available abroad. Second, high transportation costs may make exporting uneconomical. Finally, tariff barriers may make exporting less attractive.

Difficulty: Medium

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97. (p. 495-496) Explain the idea of a turnkey project. Why should a firm use this arrangement to expand internationally? In what industries are turnkey arrangements most common?

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation.The know-how required to assemble and run a technologically complex process is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. The strategy is particularly useful where FDI is limited by host-government regulations. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments, a longer-term investment might expose a firm to unacceptable political or economic risks.Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining and metal refining industries.

Difficulty: Medium

98. (p. 496-497) Define licensing agreements. What are the advantages of this mode of international expansion?

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties.The primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market. As a result, licensing is a very attractive option for firms that lack the capital to open overseas markets. Licensing is also an attractive option when a firm is interested in pursuing a foreign market but does not want to commit substantial resources to an unfamiliar or potentially volatile foreign market. Licensing is also used when a firm wishes to participate in a foreign market, but is prohibited from doing so by barriers to investment. Finally, licensing is used when a firm possesses some intangible property but does not want to pursue a potential application itself.

Difficulty: Medium

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99. (p. 496-497) Why should a firm be cautious about entering a licensing agreement?

In a licensing agreement, the licensor grants the rights to intangible property to the licensee for a specified period in exchange for royalty payments. Firms considering this type of arrangement should be cautious on three fronts. First, if a firm licenses any of its proprietary know-how (such as its production processes) to another company, it risks losing control over this knowledge by permitting access to it by another firm. Second, licensing is not an effective way of realizing experience curve and location economies by manufacturing a product in a centralized location. If these attributes are important to a firm, licensing may be a poor choice. Finally, competing in a global market may require a firm to coordinate strategic moves across countries by using profits from one country to support competitive attacks in another. Licensing severely limits a firm's ability to do this. A licensee is unlikely to allow a multinational firm to use its profits (beyond the royalty payments) to support a different licensee operating in another country.

Difficulty: Medium

100. (p. 496-497) What is intangible property? How can intangible property be protected in a licensing agreement?

Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks.A licensor can reduce the risk of losing intangible property or proprietary know-how, to a foreign partner by entering into a cross-licensing agreement. Under a cross-license agreement, a firm licenses some valuable intangible property (such as a production process) to a foreign partner, but in addition to royalty payments, the firm also requires the foreign partner to license some of its valuable know-how to the firm. Cross-licensing agreements enable firms to hold each other "hostage," thereby reducing the risk they will behave in an opportunistic manner toward each other.

Difficulty: Medium

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101. (p. 496-498) Compare and contrast licensing agreements and franchising agreements.

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties. In contrast, franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchising tends to involve longer-term commitments than licensing.

Difficulty: Medium

102. (p. 498) Briefly explain the advantages and disadvantages of franchising agreements.

There are several advantages of franchising as an entry mode. In particular, the firm is relieved of many of the costs and risks of opening a foreign market on its own. This creates a good incentive for the franchisee to build a profitable operation as quickly as possible. However, franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. Furthermore, quality control may become an issue if a franchisee does not maintain an appropriate quality level.

Difficulty: Medium

103. (p. 499) What is a joint venture? What type of joint venture is most common? Provide an example of a joint venture.

A joint venture involves establishing a firm that is jointly owned by two or more otherwise independent firms.The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control.Fuji-Xerox is an example of a joint venture that was established between Fuji Photo and Xerox.

Difficulty: Medium

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104. (p. 499) Discuss the advantages of using a joint venture to enter foreign markets.

There are several advantages to expanding into foreign markets via a joint venture. First, firms benefit from a local partner's knowledge of the host market. Second, a firm can share the costs and/or risks of operating in a foreign market. Third, in many countries, political considerations make joint ventures the only feasible entry mode.

Difficulty: Medium

105. (p. 499-500) Imagine that you are meeting with your superiors to discuss entering a foreign market. Your boss has asked you to analyze a joint venture prospect. Why might you tell your boss that the joint venture is not a good idea?

There are major disadvantages with joint ventures. A firm that enters into a joint venture risks giving control of its technology to its partner. In addition, a joint venture does not give the firm the tight control over subsidiaries that it might need in order to realize experience curve or location economies. Finally, a joint venture might not be a good strategy because the shared ownership structure can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they do not share a common vision for the venture.

Difficulty: Medium

106. (p. 499) How can a firm protect its proprietary information in a joint venture arrangement?

There are several things a firm can do to protect proprietary information in a joint venture arrangement. One option is to hold majority ownership in the venture so that the firm has greater control over the technology. A second option is to "wall off" from a partner technology that is central to the core competence of the firm, while sharing other technology.

Difficulty: Medium

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107. (p. 500) What are the two methods of entering foreign marketing using a wholly owned subsidiary?

Firms entering a foreign market via a wholly owned subsidiary, where the firm owns 100 percent of the stock, can either make the investment in a greenfield operation or in an acquisition. A greenfield operation involves the establishment of a new operation, whereas an acquisition involves buying an established firm in the host country and using that firm to promote the company's products.

Difficulty: Easy

108. (p. 500-501) Consider why a firm should enter a market via a wholly owned subsidiary. What are the advantages and disadvantages of this type of strategy?

In a wholly owned subsidiary, the firm owns 100 percent of the stock. Wholly owned subsidiaries can take two forms, a greenfield investment which involves the establishment of a new company or an acquisition.Establishing a wholly owned subsidiary as an entry strategy into a foreign market is appropriate when a firm's competitive advantage is based on technological competence. By establishing a wholly owned subsidiary, a firm reduces the risk of losing control over that competence. In addition, expanding via a wholly owned subsidiary gives a firm tight control over its operations in various countries. This strategy maximizes a firm's potential to engage in global strategic coordination. Furthermore, a wholly owned subsidiary strategy may be required if a firm is trying to realize location and experience curve economies. However, establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market and since the firm owns 100 percent of the operation, the risks are also the highest.

Difficulty: Medium

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109. (p. 504-505) Why do acquisitions fail?

Acquisitions fail for several reasons. First, the acquiring firm often overpays for the assets of the acquired firm. Second, many acquisitions fail because there is a clash between the cultures of the acquired and the acquiring firms. Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. Finally, many acquisitions fail due to inadequate preacquisition screening.

Difficulty: Medium

110. (p. 506-508) Discuss strategic alliances. How successful are they? Why do firms form strategic alliances?

The term strategic alliance refers to cooperative agreements between potential or actual competitors. Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual arrangements, in which two companies agree to cooperate on a particular task. Firms enter into strategic alliances for four main reasons. First, strategic alliances may facilitate entry into a foreign market. Second, strategic alliances allow firms to share the fixed costs of developing new products or processes. Third, strategic alliances allow firms to bring together complementary skills and assets that neither company could develop easily on its own. Fourth, strategic alliances can help firms establish technological standards for an industry.

Difficulty: Medium

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