Entry Strategy and Strategic Alliances

Entry Strategy and Strategic Alliances

1.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.

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

3.First-mover advantages are the advantages associated with entering a market early.

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

5.Large strategic commitments limit strategic flexibility.

6.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.

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

8.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.

9.Exporting may not be appropriate if lower-cost locations for manufacturing the product can be found abroad.

10.In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client.

11.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.

12.Tangible property includes patents, designs, copyrights and trademarks.

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

14.By its very nature, licensing increases a firm's ability to utilize a coordinated strategy.

15.Franchising enables a firm to quickly build a global presence.

16.The most typical joint venture is a 25/75 venture.

17.An advantage of joint ventures with a local partner is the knowledge of the local environment the local partner contributes to the venture.

18.A wholly owned subsidiary limits a firm's control over operations in different countries.

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

20.Brand names are generally well-protected by international laws pertaining to trademarks.

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

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

23.A clear advantage of greenfield investments as compared to acquisitions is the short execution time involved.

24.Acquisitions rarely produce disappointing results.

25.Overpayment for assets of an acquired firm is one reason acquisitions fail.

26.Evidence suggests that almost all acquisitions create rather than destroy value.

27.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.

28.Acquisitions are less risky than in greenfield ventures the sense that there is less potential for unpleasant surprises.

29.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.

30.Firms may avoid strategic alliances because their complexity usually delays entry into a foreign market.

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

32.The failure rate for international strategic alliances is very low.

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

34.Relational capital refers to the building of interpersonal relationships between the firms' managers in a strategic alliance.

35.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.

Multiple Choice Questions

36.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 economy
B.Nations where there is a dramatic upsurge in either inflation rates or private-sector debt
C.Politically stable developed and developing nations that have free market systems
D.Developing nations where speculative financial bubbles have led to excess borrowing

37.Which of the following statements about value creation by an international business in a foreign market is ?
A.Value depends on the suitability of the product offering to that market
B.Greater value translates into an ability to charge lower prices
C.Value depends on the nature of indigenous competition
D.Greater value translates into an ability to build sales volume more rapidly

38.The advantages frequently associated with entering a market early are commonly known as
A.Primary advantages
B.First-mover advantages
C.Initial-entrant premiums
D.Proactive-mover benefits

39.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 name
B.Ability to ride down the experience curve ahead of rivals
C.Ability to create switching costs
D.Ability to avoid pioneering costs

40.Switching costs
A.Drive early entrants out of the market
B.Make it easy for later entrants to win business
C.Make it difficult for later entrants to win business
D.Give later entrants a cost advantage over early entrants

41.Pioneering costs are
A.The costs of establishing manufacturing operations in the host country
B.The fixed costs of developing new products or processes
C.Costs that the firm has to bear that a later entrant can avoid
D.The switching costs involved in moving from one market to another

42.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 scale
B.Pioneering costs
C.First-mover advantages
D.Late-mover advantages

43.All of the following are examples of pioneering costs except the costs of
A.Business failure
B.Educating consumers
C.Promoting and establishing a product offering
D.Learning from the mistakes of early entrants

44.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 costs
B.Market development costs
C.Pioneering costs
D.Promotional development costs

45.A strategic commitment
A.Has a short-term impact alone
B.Is difficult to reverse
C.Cannot change the competitive playing field
D.Does not have any influence on the nature of competition in a market

46.A large-scale entrant is more likely than a small-scale entrant to be able to capture first-mover advantages associated with
A.Demand preemption
B.Diseconomies of scale
C.Pioneering costs
D.Diseconomies of scope

47.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 scale
B.Small scale; moderate scale
C.Large scale; small scale
D.Moderate scale; large scale

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

49.If a firm can realize location economies by moving production elsewhere, it should avoid
A.Exporting
B.Turnkey contracts
C.Licensing
D.Wholly owned subsidiaries

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

51.Which of the following is a distinct advantage of exporting?
A.Absolute control over operations in the foreign nation
B.It may help a firm achieve experience curve and location economies
C.Avoids the threat of tariff barriers by the host-country government
D.It is useful for bulk products and also in situations where transportation costs are high

52.When a firm faces significant transportation costs, _____ can be uneconomical.
A.Joint ventures
B.Greenfield investments
C.Licensing agreements
D.Exporting

53.Manufacturing bulk products regionally
A.Increases the firm's costs of transportation
B.Enables a firm to realize some economies from large-scale production
C.Leads to diseconomies of scale
D.Makes exporting uneconomical for the firm

54.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 subsidiary
B.Franchising arrangement
C.Turnkey operation
D.Licensing agreement

55.When local agents carry the products of competing firms and have divided loyalties, _____ is not appropriate.
A.Franchising
B.Licensing
C.Exporting
D.Greenfield investment

56.The threat of tariff barriers by the host government can make _____ very risky.
A.Greenfield investment
B.Franchising
C.Licensing
D.Exporting

57.Identify the incorrect statement about turnkey projects.
A.The contractor agrees to handle every detail of the project for a foreign client
B.They are most common in industries which use inexpensive production technologies
C.This is a means of exporting process technology to other countries
D.They create efficient global competitors in the process

58.In which of the following industries are turnkey projects the most common?
A.Fresh fruit, grain and meat products
B.Chemical, pharmaceutical and metal refining
C.Consumer durables, computer peripherals and automotive parts
D.Apparel, shoes and leather products

59.A turnkey strategy
A.Is always riskier than conventional FDI
B.Is never used in a country with unstable political and economic environments
C.Is useful where FDI is limited by host-government regulations
D.Is a strong indicator of a firm's long-term interest in a foreign country

60.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 competitor
B.The firm entering into a turnkey deal having no long-term interest in the foreign country
C.The country subsequently proving to be a major market for the output of the process that has been exported
D.Selling the firm's process technology through a turnkey project which is also selling competitive advantage to potential competitors

61.Which of the following is a drawback associated with a turnkey strategy?
A.Creates long-term commitment in the foreign country
B.Possible creation of a competitor
C.Not useful if FDI is limited by host-government regulations
D.Riskier than conventional FDI

62.Firms that lack the capital necessary to develop foreign operations may choose _____ as a means of expanding internationally.
A.Turnkey projects
B.Licensing
C.Greenfield investments
D.Acquisitions

63.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 subsidiary
B.Turnkey
C.Licensing
D.Exporting

64.Patents, inventions, formulas, processes, designs, copyrights and trademarks are all forms of
A.Licensing agreements
B.Franchising agreements
C.Intangible property
D.Tangible property

65.What is the primary advantage of licensing?
A.It helps a firm avoid the development costs associated with opening a foreign market
B.It gives a firm the tight control over manufacturing, marketing and strategy
C.It helps a firm achieve experience curve and location economies
D.It increases a firm's ability to utilize a coordinated strategy

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

67.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.Exporting
B.A turnkey project
C.Licensing
D.A wholly owned subsidiary

68.Cross-licensing agreements are increasingly common in the _____ industry.
A.Transportation
B.High-technology
C.Construction
D.Consumer durables

69.Identify the correct statement concerning cross-licensing agreements.
A.They may reduce the risks associated with licensing technological know-how
B.They may enable firms to hold each other hostage
C.They increase the probability that parties will behave opportunistically toward each other
D.They are increasingly common in high-technology industries

70.Which mode of entry is pursued primarily by manufacturing firms?
A.Franchising
B.Turnkey
C.Licensing
D.Strategic alliance

71.This mode of entry is primarily used by service firms.
A.Franchising
B.Licensing
C.A strategic alliance
D.A turnkey project

72.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 subsidiary
B.Exporting
C.A turnkey project
D.Franchising

73.Which of the following statements about franchising is ?
A.It guarantees consistent product quality
B.It tends to involve more short-term commitments than licensing
C.It is a specialized form of licensing
D.It is employed primarily by manufacturing firms

74.Which of the following is an advantage of franchising?
A.A firm takes profits out of one country to support competitive attacks in another
B.A firm is relieved of many of the costs and risks of opening a foreign market on its own
C.It guarantees consistent product quality
D.It achieves experience curve and location economies

75.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 projects
B.Joint ventures
C.Greenfield investments
D.Licensing arrangements

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

77.A wholly owned subsidiary is appropriate when
A.The firm wants to share the cost and risk of developing a foreign market
B.The firm wants 100 percent of the profits generated in a foreign market
C.The firm wants a plant that is ready to operate
D.The firm wants to test a market

78.A firm that establishes a _____ must bear the full costs and risks of entering a foreign market.
A.Licensing agreement
B.Wholly owned subsidiary
C.Franchise
D.Joint venture

79.A _____ is the most costly method of serving a foreign market from a capital investment standpoint.
A.Wholly owned subsidiary
B.Franchising agreement
C.Turnkey project
D.Joint venture

80.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-venture
B.Wholly owned subsidiary; exporting
C.Turnkey contracts; exporting
D.Exporting; joint-venture

81.Most service firms have found that _____ with local partners work best for controlling subsidiaries.
A.Joint ventures
B.Licensing agreements
C.Greenfield investments
D.Turnkey projects

82._____ are the preferred method of market entry for firms pursuing global standardization or transnational strategies.
A.Joint ventures
B.Licensing agreements
C.Turnkey projects
D.Wholly owned subsidiaries

83.Firms may prefer acquisitions to greenfield investments for all of the following reasons except
A.They allow companies to completely sidestep government regulations on investment
B.They are quick to execute
C.They enable the firm to preempt competitors
D.Managers believe acquisitions are less risky

84.The hubris hypothesis attempts to explain
A.The risks involved in franchising
B.The reasons behind the underperformance of an economy
C.Why acquisitions fail
D.How FDI limits affect growth

85.According to the _____, top managers typically overestimate their ability to create value from an acquisition.
A.Misvaluation theory
B.Performance extrapolation hypothesis
C.Market timing theory
D.Hubris hypothesis

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

87.Which of the following is not important in the acquisition process?
A.Firms should strive to limit unwanted management attrition after acquisition
B.An integration plan should quickly be implemented
C.Proper screening of the company to be acquired should take place
D.The hubris hypothesis should be maintained

88.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 ventures
B.Turnkey projects
C.Acquisitions
D.Greenfield investments

89.Firms entering markets where there are no incumbent competitors to be acquired should choose
A.Greenfield investments
B.Joint ventures
C.Acquisitions
D.Takeovers

90.High transportation costs, trade barriers and problems with local marketing agents are all disadvantages of
A.Licensing
B.Turnkey projects
C.Exporting
D.Franchising

Essay Questions

91.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.