International Business Chapter Quiz

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Questions and Answers

Global sourcing and exporting are most often managed from a firm's home country.

True (A)

International business transactions that involve countertrade are typically handled with cash payments.

False (B)

A long-term commitment, as well as a large amount of financial and human resources, are required of firms that enter foreign markets through licensing agreements.

False (B)

Firms that internationalize their operations in order to reap the profits of a high-growth market are exhibiting a proactive business strategy.

True (A) Signup and view all the answers

The bilateral trade relationship between Canada and the United States is larger than the two-way trade relationship between China and the United States.

True (A) Signup and view all the answers

Large MNEs use exporting as a manner of initial internationalization, but once they build large manufacturing facilities abroad, the firm no longer exports many products due to the high costs involved.

False (B) Signup and view all the answers

Compared to other entry strategies, exporting is less subject to tariff and other trade barriers.

False (B) Signup and view all the answers

The risks and need for financing associated with international sales can be alleviated through the use of distribution channel intermediaries.

True (A) Signup and view all the answers

In international trade transactions, a letter of credit is considered a more secure method of payment than open account.

True (A) Signup and view all the answers

Factoring occurs when an independent company coordinates an export order in the seller's country and makes payment for the goods in the currency of that country.

False (B) Signup and view all the answers

Disputes often arise between exporters and intermediaries regarding pricing, policies, and inventory levels.

True (A) Signup and view all the answers

To ensure creditworthiness, exporters can purchase insurance to cover their inability to pay buyers.

False (B) Signup and view all the answers

Countertrade is an elaborate and international form of the bartering system, and it accounts for one-third of all global trade.

True (A) Signup and view all the answers

Barter, the oldest form of commerce, has been totally replaced by countertrade in modern global markets.

False (B) Signup and view all the answers

When a firm invests capital in a foreign market in order to gain ownership of a facility it is known by which of the following terms?

FDI (D) Signup and view all the answers

Licensing and franchising are both ______ relationships.

contractual (C) Signup and view all the answers

Which of the following foreign market entry strategies offers the focal firm the highest degree of control over foreign operations?

wholly owned subsidiary (FDI) (D) Signup and view all the answers

Which of the following foreign market entry strategies requires the most substantial resource commitment on the part of the focal firm?

majority-owned equity joint venture (D) Signup and view all the answers

A focal firm that maintains a relatively low degree of control over foreign operations is most likely using which of the following foreign market entry strategies?

countertrade (A) Signup and view all the answers

A focal firm that requires a low-risk foreign market entry strategy would most likely choose which of the following approaches?

global sourcing (A) Signup and view all the answers

Which of the following is an example of push factors?

falling profit margins (A) Signup and view all the answers

Favorable foreign market conditions that encourage firms to internationalize are known by which of the following terms?

pull factors (A) Signup and view all the answers

A risk-taking manager at a Canadian firm would most likely pursue initial internationalization in which of the following foreign markets?

Saudi Arabia (C) Signup and view all the answers

Why would a firm with a domestic market focus never go beyond the first step of internationalization?

All of the above (D) Signup and view all the answers

Which of the following most likely occurs in the experimental stage of internationalization?

Managers target low-risk, culturally close markets through exporting or licensing. (C) Signup and view all the answers

Governments use data on exporting and importing activities to calculate which of the following?

trade deficit statistics (A) Signup and view all the answers

All of the following are advantages that firms often experience through exporting except

amplified country and corporate risk (B) Signup and view all the answers

Which of the following is most likely a disadvantage to firms who use exporting as an entry strategy?

lack of detailed knowledge about foreign customers (A) Signup and view all the answers

After managers have chosen an appropriate market to which to export, they next need to make which of the following decisions?

how much resources can be committed (D) Signup and view all the answers

During the global market opportunity assessment phase, managers will most likely do which of the following?

identify qualified distributors and other foreign business partners (A) Signup and view all the answers

Which of the following questions is most likely to be addressed as firms organize for exporting?

How much should the firm depend on intermediaries to carry out exporting? (B) Signup and view all the answers

Which of the following terms refers to purchasing foreign merchandise and bringing it into the home market?

global sourcing (A) Signup and view all the answers

Among the following firms, which one imports the most from China?

Walmart (C) Signup and view all the answers

Which of the following documents is the contract between the shipping company and the exporter?

bill of lading (D) Signup and view all the answers

Incoterms were developed by the International Chamber of Commerce in order to

define how the buyer and seller share freight and insurance costs (A) Signup and view all the answers

Which of the following methods of payment is the least popular among foreign buyers?

cash in advance (C) Signup and view all the answers

Which of the following forms of countertrade involves payments in a combination of cash and goods?

compensation deals (D) Signup and view all the answers

Which of the following is true with regard to global sourcing?

Global sourcing is a low-control strategy in which the focal firm sources from independent suppliers through contractual agreements. (A) Signup and view all the answers

Contract manufacturing can best be defined as

an arrangement in which the focal firm contracts with an independent supplier to manufacture products according to well-defined specifications (C) Signup and view all the answers

The pattern or geographic arrangement of locations where the firm carries out value-chain activities is known as

configuration of value-adding activity (C) Signup and view all the answers

In a short essay, describe at least six of the numerous variables important to managers as they determine the best entry strategy for their firm.

When managers are investigating the best entry strategies for their firms they consider many variables. They evaluate the goals and objectives of the firm, such as desired profitability, market share, or competitive positioning. Managers determine the particular financial, organizational, and technological resources and capabilities available to the firm. They also consider the unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as the nature of business infrastructures, such as distribution and transportation systems. Managers evaluate the risks inherent in each proposed foreign venture in relation to the firm's goals and objectives in pursuing internationalization. Managers review the nature and extent of competition from existing rivals, and from firms that may enter the market later. Finally, managers consider the characteristics of the product or service to be offered to customers in the market. Signup and view all the answers

In a short essay, describe the three categories of internationalization strategies, and explain why it is more difficult and risky to internationalize through FDI than through franchising. Provide examples of firms that have done each, as well as their motivations for internationalizing.

Three categories of internationalization strategies are as follows: 1. Trade of products and services are generally home-based international exchange activities, such as global sourcing, exporting, and countertrade. Global sourcing, also known as importing, global procurement, or global purchasing, is the strategy of buying products and services from foreign sources and bringing them into the home country or a third country. While sourcing and importing represent an inbound flow, exporting represents outbound international business. Thus, exporting refers to the strategy of producing products or services in one country (often the producer's home country) and selling and distributing them to customers located in other countries. In both global sourcing and exporting, the firm manages its international operations largely from the home country. Countertrade refers to an international business transaction in which full or partial payments are made in kind rather than cash. That is, instead of receiving money as payment for exported products, the firm receives other products or commodities. 2. Equity or ownership-based international business activities typically are foreign direct investment (FDI) and equity-based collaborative ventures. In contrast to home-based international operations, here the firm establishes a presence in the foreign market by investing capital in and securing ownership of a factory, subsidiary, or other facility there. Collaborative ventures include joint ventures in which the firm makes similar equity investments abroad, but in partnership with another company. 3. Contractual relationships usually take the form of licensing and franchising, in which the firm allows a foreign partner to use its intellectual property in return for royalties or other compensation. Firms such as McDonald's, Dunkin Donuts, and Century 21 Real Estate use franchising to serve customers abroad. For companies that launch exporting, licensing, or franchising ventures, internationalization motives tend to be relatively straightforward. In most cases, management seeks to maximize returns from investments that the firm has made in products, services, and know-how by seeking a broader customer base located abroad. When companies such as Boston Scientific (medical instruments), Subway, and Starbucks internationalize, they are essentially exploiting their competitive assets in a broader geographic space. In contrast, FDI and collaborative ventures usually involve more complex motivations. They pose greater risks for managers, and require careful consideration of the likely costs and benefits of internationalization. For example, the Swedish appliance maker Electrolux recently built assembly operations in such diverse markets as Hungary, Mexico, and Thailand. Home appliances represent a complex global industry in which profit margins are tight and competition is intense. By undertaking product development, manufacturing, supply chain coordination, and workforce management in relatively risky markets, Electrolux has taken on formidable challenges. Signup and view all the answers

In a short essay, describe, with an example, why exporting is a flexible entry strategy for focal firms.

As an entry strategy, exporting is very flexible. The exporter can enter and withdraw from markets fairly easily, with minimal risk and expense. Experienced international firms usually export in combination with other strategies, such as joint ventures and FDI. Toyota has used FDI to build factories in key locations in Asia, Europe, and North America from which it exports cars to neighboring countries and regions. Signup and view all the answers

In a short essay, describe three disadvantages firms face when internationalizing through exporting.

Management has fewer opportunities to learn about customers, competitors, and other unique aspects of the market because exporting does not require the firm to have a physical presence in the foreign market. A lack of direct contact with foreign customers means that the exporter may fail to perceive opportunities and threats, or may not acquire the knowledge that it needs to succeed in the market in the long term. Exporting usually requires the firm to acquire new capabilities and dedicate organizational resources to properly conduct export transactions. Firms that are serious about exporting must hire personnel with competency in international transactions and foreign languages. Exporting requires management to expend the time and effort to learn about freight forwarders, documentation, foreign currencies, and new financing methods. The acquisition of such capabilities puts a strain on company resources. Exporting is much more sensitive to tariff and other trade barriers, as well as fluctuations in exchange rates. Exporters run the risk of being priced out of foreign markets if shifting exchange rates make the exported product too costly to foreign buyers. Signup and view all the answers

What is the four-step process many managers use to achieve successful exporting? Explain your answer in a short essay.

Management assesses the various global market opportunities available to the firm. It analyzes the readiness of the firm and its products to carry out exporting. Management screens for the most attractive export markets, identifies qualified distributors and other foreign business partners, and estimates industry market potential and company sales potential. Managers determine what types of managerial, financial, and productive resources the firm should commit to exporting. Managers also try to establish a timetable for the firm to follow in order to achieve export goals and objectives. Managers also investigate how to implement exporting, either through indirect exporting, direct exporting, or a company-owned subsidiary. Export transactions require specialized skills and competencies in areas such as product development, distribution, logistics, finance, contract law, and currency management. Managers may need to acquire foreign language skills and the ability to interact with customers from diverse cultures. Management formulates elements of the firm's export strategy. Product adaptation involves modifying a product to make it fit the needs and tastes of the buyers in the target market. Marketing communications adaptation refers to modifying advertising, selling style, public relations, and promotional activities to suit individual markets. Price competitiveness keeps foreign pricing in line with that of competitors. Signup and view all the answers

In a short essay, compare the advantages of using direct exporting and indirect exporting.

Indirect exporting is accomplished by contracting with intermediaries in the firm's home market who assume responsibility for finding foreign buyers, shipping products, and getting paid. The main advantage of indirect exporting for most companies is it provides a relatively inexpensive way to penetrate foreign markets without the complexities and risks of more direct exporting. In contrast, direct exporting is typically achieved by contracting with intermediaries located in the foreign market. The foreign intermediaries serve as an extension of the exporter, negotiating on behalf of the exporter and assuming such responsibilities as local supply-chain management, pricing, and customer service. The exporter retains greater control over the export process but also must dedicate substantial time and resources to developing and managing export operations. Signup and view all the answers

In a short essay, explain why most firms use exporting as part of their internationalization portfolio, and discuss how Incoterms have mitigated problems with logistics.

Beyond initial entry, most firms, large and small, use exporting as part of their internationalization portfolio. Large manufacturing firms typically account for the largest overall value of exports and make up about three-quarters of the total value of exports from the United States. However, the vast majority of exporting firms—more than 90 percent in most countries—are SMEs with fewer than 500 employees. As an entry strategy, exporting is very flexible. The exporter can both enter and withdraw from markets fairly easily, with minimal risk and expense. Experienced international firms usually export in combination with other strategies, such as joint ventures and FDI. Toyota has used FDI to build factories in key locations in Asia, Europe, and North America from which it exports cars to neighboring countries and regions. Incoterms have mitigated problems with logistics for international firms. In the past, disputes sometimes arose over who should pay the cost of freight and insurance in international transactions: the seller (that is, the exporter) or the foreign buyer. To eliminate such disputes, a system of universal, standard terms of sale and delivery, known as Incoterms (short for "International Commerce Terms"), was developed by the International Chamber of Commerce. Commonly used in international sales contracts, Incoterms specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods. Signup and view all the answers

In a short essay, describe three different types of payment methods used in international exporting and importing. What is an advantage or disadvantage to each method?

When the exporter receives cash in advance, payment is collected before the goods are shipped to the customer. The main advantage is that the exporter need not worry about collection problems and can access the funds almost immediately upon concluding the sale. From the buyer's standpoint, however, cash in advance is risky and may cause cash flow problems. The buyer may hesitate to pay cash in advance for fear the exporter will not follow through with shipment, particularly if the buyer does not know the exporter well. Because a letter of credit protects the interests of both the seller and the buyer simultaneously, it has become the most popular method for getting paid in export transactions. Essentially, a letter of credit is a contract between the banks of the buyer and seller that ensures payment from the buyer to the seller upon receiving an export shipment. It amounts to a substitution of each bank's name and credit for the name and credit of the buyer and seller. The system works because virtually all banks have established relationships with correspondent banks around the world. The letter of credit immediately establishes trust between buyer and seller. When the exporter uses an open account, the buyer pays the exporter at some future time following receipt of the goods, in much the same way that a retail customer pays a department store on account for products he or she has purchased. Because of the risk involved, exporters use this approach only with customers of long standing or with excellent credit or a branch office owned by the exporter. With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at some future time. However, in international transactions, open account is risky, and the firm should structure such payment methods with care. Signup and view all the answers

What are the criteria used by exporters to screen prospective foreign intermediaries? What are reasons that a relationship between an exporter and an intermediary might become strained? Provide your answers in a short essay.

In general, foreign intermediaries expect exporters to provide: -Good, reliable products for which there is a ready market -Products that provide significant profits -Opportunities to handle other product lines -Support for marketing communications, advertising, and product warranties -A payment method that does not unduly burden the intermediary -Training for intermediary staff and the opportunity to visit the exporter's facilities (at the exporter's expense) to gain first-hand knowledge of the exporter's operations -Help establishing after-sales service facilities, including training of local technical representatives and the means to replace defective parts, as well as a ready supply of spare parts, to maintain or repair the products Despite good intentions, disputes can arise between the exporter and its intermediaries about such issues as: -Compensation arrangements (for example, the intermediary may want to be compensated even if not directly responsible for a sale in its territory) -Pricing practices -Advertising and promotion practices, and the extent of advertising support -After-sales service -Return policies -Adequate inventory levels -Incentives for promoting new products -Adapting the product for local customers Signup and view all the answers

In a short essay, describe the four types of countertrade.

Barter is exercised even in domestic trade in straightforward, one-shot deals. It requires a single contract, has a short time span, and is less complicated than other forms, requiring little managerial commitment or additional resources. Compensation deals involve payment both in goods and cash. For example, a company may sell its equipment to the government of Brazil, and receive half the payment in a hard currency and the other half in merchandise. Counterpurchase involves two distinct contracts. In the first contract, the seller agrees to sell its product at a set price and receives cash payment from the buyer. However, this first deal is contingent on a second contract wherein the seller also agrees to purchase goods from the buyer for the total monetary amount or a set percentage of same. If the exchange is not of equal value, partial payment may be made in cash. In a product buy-back agreement, the seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility. For example, the seller might design and construct a factory in the buyer's country to manufacture tractors. The seller is compensated by receiving finished tractors from the factory it built, which it then sells in world markets. In essence, the original transaction involves goods and services that produce other goods and services, which are then received in payment. Signup and view all the answers

Flashcards

Exporting

A business strategy that involves producing goods or services in one country and selling them in another.

Global Sourcing

The practice of purchasing products and services from foreign sources.

Countertrade

A form of international trade where payments are made in goods or services instead of cash.

Licensing

An agreement where a company grants another company the right to use its intellectual property (like trademarks or technology) in exchange for a fee.