Chapter 1 Answers PDF

International Business: The New Realities, 4e, GE (Cavusgil) Chapter 1 Introduction: What Is International Business? 1) International business is defined as the performance of ________ activities by firms across national borders. A) marketing and fiduciary B) trade and investment C) finance and ope...

International Business: The New Realities, 4e, GE (Cavusgil) Chapter 1 Introduction: What Is International Business? 1) International business is defined as the performance of ________ activities by firms across national borders. A) marketing and fiduciary B) trade and investment C) finance and operational D) accounting and auditing Answer: B 2) International business is also known as which of the following? A) born global business B) laissez-faire business C) cross-border business D) multi-hub business Answer: C 3) Which of the following best characterizes the development of international business? A) It has existed in some form for centuries. B) It first started in Europe. C) It developed after the year 2000. D) Its development has slowed in recent years. Answer: A 4) A few decades ago, international business was largely the domain of ________. A) service firms B) multinational firms C) smaller firms D) all of the above Answer: B 5) Which of the following is another term for importing? A) capital investment B) supply side development C) global sourcing D) unilateral procurement Answer: C 6) Which of the following is subject to importing and exporting? A) both finished products and intermediate goods B) finished products but not intermediate goods C) intermediate goods but not raw materials D) raw materials and components, but not finished products Answer: A 1 Copyright © 2017 Pearson Education, Ltd. 7) ________ refers to the transfer of assets to another country or the acquisition of assets in that country. A) International investment B) International trade C) Importing D) Exporting Answer: A 8) Each of the following represents a factor of production EXCEPT ________. A) manufacturing infrastructure B) technology C) government regulations D) managerial talent Answer: C 9) Which of the following would NOT be considered an example of foreign direct investment (FDI)? A) cross-border purchase of a textile plant B) cross-border purchase of stocks C) purchase of capital assets of a foreign company D) purchase of foreign land for business operations Answer: B 10) ________ is the total value of products and services produced in a country over the course of a year. A) GDP B) CAD C) FDI D) PPP Answer: A 11) Which of the following best explains why export growth has outpaced the growth of domestic production during the last few decades? A) Both world exports and domestic production have grown significantly over the past 30 years. B) The cost to import products is generally higher than the cost to produce domestic products. C) Growth in gross domestic product in most countries has steadily increased since 1970. D) Advanced economies now source many of their consumable products from low-cost manufacturing nations. Answer: D 2 Copyright © 2017 Pearson Education, Ltd. 12) Each of the following has contributed to the rapid growth of trade among nations EXCEPT ________. A) the growth of emerging market countries B) the increase in trade barriers C) advances in information technology D) the liberalization of markets Answer: B 13) International business is performed not just by individual firms, but also governments and international agencies. Answer: TRUE 14) The globalization of markets refers to the growing independence and self-sufficiency of countries worldwide. Answer: FALSE 15) International business today is predominantly the domain of large, multinational companies. Answer: FALSE 16) Exporting is an entry strategy involving the sale of products or services to customers located abroad. Answer: TRUE 17) A country's economic assets are also known as factors of production. Answer: TRUE 18) The two primary types of international investment are portfolio investment and foreign direct investment. Answer: TRUE 19) Over the last few decades, export activity by nations has grown more quickly than has domestic production. Answer: TRUE 20) In the past, international trade and investment activities were mainly conducted by companies that sold services. Answer: FALSE 21) Although services trade is growing rapidly, the value of merchandise trade is still much larger. Answer: TRUE 22) In a short essay, explain the four trends that provide evidence for the globalization of markets. Provide an example to illustrate one of the trends. Answer: In practical terms, the globalization of markets is evident in several related trends. First 3 Copyright © 2017 Pearson Education, Ltd. is the unprecedented growth of international trade. For example, cross-border trade was modest- about $100 billion per year. Today, it accounts for a substantial proportion of the world economy, with world exports alone amounting to some $18 trillion annually-that is, $18,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge. The third trend is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge. Fourth, globalization has brought about a greater degree of collaboration among nations through such organizations as the World Trade Organization and the International Monetary Fund. 23) In a short essay, explain the main differences between international portfolio investment and foreign direct investment. Answer: a. Types of assets purchased-The first main difference between the two types of investments concerns the types of assets purchased. Portfolio investment involves the purchase of foreign securities, such as stocks and bonds, for the purpose of gaining financial returns. Foreign direct investment involves the purchase of productive assets, such as capital, technology, labor, land, plants, and equipment. b. Types of ownership-The second main difference concerns the level or type of ownership. Portfolio investment refers to passive ownership, with no active management of or control over the assets purchased. Foreign direct investment, on the other hand, gives investors partial or full ownership of a productive enterprise typically dedicated to manufacturing, marketing, or management activities. c. Interest timeline-The third main difference between the two types of strategies involves the length of interest maintained by investors. In international portfolio investment, investors have a relatively short-term interest in the ownership of their assets. In foreign direct investment, firms usually have a long-term investing interest. 24) The level of government intervention in commercial activities is similar across most countries. Answer: FALSE 25) Currency risk refers to the risk posed by adverse fluctuations in exchange rates. Answer: TRUE 26) For internationalizing firms, the consequences of poor business management decisions are usually more costly when mistakes occur abroad than when they occur at home. Answer: TRUE 4 Copyright © 2017 Pearson Education, Ltd. 27) What is meant by the term "entrepôt economies?" In a short essay, explain the concept and provide an example. Answer: Entrepôt is from the French for "intermediate depot." Such countries import a large volume of products, some of which they process into higher value-added products and some they simply re-export to other destinations. For example, Singapore is a major entrepôt for petroleum products received from the Middle East, which it then exports to China and other destinations in Asia. 28) In a short essay, describe the major trends in the growth of foreign direct investment (FDI) since the 1980s. Answer: the dollar volume of FDI has grown immensely since the 1980s, especially in developed (advanced) economies such as Japan, Europe, and North America. FDI inflows to the developing economies began to surpass those to the advanced economies in about 2010. FDI inflows were interrupted in 2001 as investors panicked following the September 11 terrorist attacks in the United States. The inflows were interrupted again in 2008 by the global recession. These dips underscore the importance of maintaining stability in the world economy. Despite these setbacks, the overall trend remains strong and growing over time. Particularly significant is the growth of FDI into developing economies, much of which results from their need for modern industrial infrastructure. It reflects the growing importance of developing economies and emerging markets as target markets and sourcing bases. 29) What are the main differences between products and services? In a short essay, explain the difference between the two and provide three examples of each. Which sector has seen the greatest growth in international trade in recent years? Answer: Products are defined as tangible merchandise, such as clothing, computers, and cars. Services, by contrast, are intangible deeds, performances, or efforts performed directly by people working in firms in the services sector. Some examples of services are creating advertising campaigns, underwriting mortgages, and managing restaurant operations. In recent years, services trade has been growing faster than products trade. International trade in services accounts for about one-quarter of all international trade and is growing rapidly. 5 Copyright © 2017 Pearson Education, Ltd. 30) In a short essay, identify three sectors in the service industry that are internationalizing rapidly. Explain the types of activities conducted within each sector, and provide examples of three companies that operate in each. Answer: a. Architectural, construction, and engineering-Activities within this sector include construction, electric power utilities, design, and engineering services for airports, hospitals, and dams. Companies within this sector include ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, and Skanska AB. b. Banking, finance, and insurance-Activities within this sector include banking services, insurance provision, risk evaluation, and financial management. Companies within this sector include CIGNA, Barclays, HSBC, and Ernst & Young. c. Education, training, and publication-Activities within this sector include management training, technical training, and English language training. Companies within this sector include Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, and Elsevier. 31) In a short essay, explain the meaning of international trade. Describe the two major forms through which international trade takes place. Answer: International trade describes the exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). Exchange can occur through exporting, an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country. Exchange also can take the form of importing or global sourcing-the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. While exporting represents the outbound flow of products and services, importing is an inbound activity. Both finished products and intermediate goods (for example, raw materials and components) can be imported and exported. 32) What is international business, and how has it transformed the world economy? Answer: International business refers to the performance of trade and investment activities by firms across national borders. Because it emphasizes crossing national boundaries, we also refer to international business as cross-border business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners. International business is transforming the world as never before. In the last 50 years, international trade and investment have experienced unprecedented growth. Since the 1980s, emerging markets have provided new impetus to worldwide economic interconnectedness. These fast-growth developing economies-some thirty countries, including Brazil, Russia, India, and China, the so-called BRICs-are experiencing substantial market liberalization, privatization, and industrialization, which are fueling global economic transformation. Along with market globalization, advances in technology is another megatrend helping to transform the global economy. The rise of information and communication technologies, as well as production and process technologies, has dramatically reduced the cost of conducting business with customers located around the world. E-commerce makes international business increasingly imperative for firms of all sizes and resource levels. Technological advances are allowing globalization to progress more rapidly. Globalization, in turn, is accelerating the development of the latest technologies. 6 Copyright © 2017 Pearson Education, Ltd. 33) Which of the following types of risk is also known as political risk? A) currency risk B) cross-cultural risk C) commercial risk D) country risk Answer: D 34) Which of the following is NOT an example of a cross-cultural risk factor? A) negotiation patterns B) decision-making styles C) costs of production D) ethical practices Answer: C 35) Fluctuating exchange rates are an example of which of the following? A) country risk B) political risk C) currency risk D) cross-cultural risk Answer: C 36) LeShaun Golding researched the risks linked to establishing the plant in Country B. He cited government intervention, lack of local managerial talent, and unethical business practices as the most prominent risks for this location. LeShaun noted all of the following types of risks EXCEPT ________. A) currency risk B) political risk C) country risk D) cross-cultural risk Answer: A 37) Rosa Suarez reported on her analysis of cross-cultural risks involved with establishing the plant in Country C. Each of the following was most likely discussed in her report EXCEPT ________. A) language barriers B) lifestyle differences C) religious beliefs D) the level of national debt Answer: D 38) In a short essay, explain the cross-cultural risk faced by internationalizing firms. What causes this type of risk? Why might it pose a problem for internationalizing firms? Answer: Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk arises from differences in language, 7 Copyright © 2017 Pearson Education, Ltd. lifestyles, mind-sets, customs, and religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mind-set and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market. Language is a critical dimension of culture. In addition to facilitating communication, language is a window on people's value systems and living conditions. When translating from one language to another, it is often difficult to find words that convey the same meanings. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers. 39) In a short essay, discuss how international firms manage the four types of international business risk. Provide an example that illustrates the process of risk management. Answer: When they undertake international business, companies are routinely exposed to four major types of risk. These are: cross-cultural risk, country risk, currency risk, and commercial risk: 1. Cross-cultural risk: A situation or event where a cultural misunderstanding puts some human value at stake. 2. Country risk: Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. 3. Currency risk: Risk of adverse fluctuations in exchange rates. 4. Commercial risk: Firm's potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. The four types of international business risks are omnipresent; the firm may encounter them around every corner. Some international risks are extremely challenging. One example is global financial disruptions. The Greek debt crisis has now lingered on for several years and affects not only the European Union but creditors elsewhere. Although risk cannot be avoided, it can be anticipated and managed. Experienced international firms constantly assess their environments and conduct research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects. 8 Copyright © 2017 Pearson Education, Ltd. 40) Businesses that directly initiate international business transactions are known as ________. A) focal firms B) fiscal enterprises C) fiduciary trusts D) business affiliates Answer: A 41) The Coca-Cola Company is an example of ________. A) born global firm B) SME C) multinational enterprise D) NGO Answer: C 42) Which of the following is an example of a new global challenger? A) a firm from Russia that is rapidly growing in the communications industry B) a U.S. non-profit that focuses on fundraising for children's health care C) an MNE from France with large-scale operations across the globe D) an SME from Canada that began international operations early in its development Answer: A 43) China has the second most MNEs. Answer: TRUE 44) SMEs usually choose exporting as their main strategy for entering foreign markets. Answer: TRUE 45) What distinguishes an MNE from an SME? In a short essay, describe the major differences between the two types of firms. Answer: A multinational enterprise (MNE) is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. Leading MNEs are listed in the Fortune Global 500 (www.fortune.com). Examples include well-known companies like Nestlé, Sony, Citibank, Unilever, Nokia, Ford, Barclays, DHL, Four Seasons Hotels, and Shell Oil. In recent years, the largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the automotive industry (General Motors and Honda), as well as retailing (Walmart). Although MNEs employ a range of foreign market entry strategies, they are best known for their foreign direct investment (FDI) activities. They operate in multiple countries, especially in Asia, Europe, and North America, by setting up production plants, marketing subsidiaries, and regional headquarters. MNEs such as Exxon, Honda, and Coca-Cola derive much of their total sales and profits, often more than half, from cross-border operations. In recent years, large MNEs have begun to appear in emerging market countries, such as China, Mexico, and Russia. China currently hosts 95 of the top 500 MNEs, a number that has increased from only 15 countries in the past ten years. Small and medium-sized enterprises (SMEs) are manufacturers or service providers with fewer than 500 employees (in the European Union and numerous other countries, they are defined as 9 Copyright © 2017 Pearson Education, Ltd. having fewer than 250 employees). SMEs now make up the majority of companies active in international business. Nearly all firms, including large MNEs, started out small. Compared to large multinationals, SMEs can be more flexible and quicker to respond to global business opportunities. They are usually less bureaucratic, more adaptable, and more entrepreneurial, and often sustain entrepreneurship and innovation in national economies. 46) In a short essay, explain why non-profit organizations might conduct cross-border activities. Answer: In addition to profit-seeking focal firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). They work on behalf of special causes, such as education, research, health care, human development, and the natural environment, operating internationally either to conduct their activities or to raise funds. Examples of nonprofit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, both of which support health and educational initiatives. CARE is an international nonprofit organization dedicated to reducing poverty. Many MNEs operate charitable foundations that support various initiatives. GlaxoSmithKline (GSK), the giant pharmaceutical firm, operates a number of small country-based foundations in Canada, France, Italy, Romania, Spain, and the United States. 47) What is a born global firm? Explain one strategic or reactive reason why an SME might choose to start as a born global. Answer: A born global firm is a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Despite the scarce resources typical of most small businesses, born globals usually internationalize within three years of their founding and may export to twenty or more countries, generating over 25 percent of their sales from abroad. In countries like Australia, Denmark, Ireland, and the United States, born globals account for a substantial proportion of national exports. In many cases, born globals offer leading-edge products with strong potential to generate international sales. They leverage the Internet and communications technologies to facilitate early and efficient international operations. An SME might start as a born global to lower its production costs by establishing manufacturing bases in foreign countries. Alternatively, the company might benefit from establishing international operations as a way to confront its industry competitors. 48) The process of targeting and serving markets outside the home country is known as ________. A) market diversification B) competition intensity C) reactive internationalization D) trade protectionism Answer: A 10 Copyright © 2017 Pearson Education, Ltd. 49) Which of the following contributes LEAST to increasing a company's profit margins? A) increasing demand B) increasing global competition C) high-growth markets D) underserved economies Answer: B 50) Which of the following best explains why the Japanese firm Canon relocated much of its production to China? A) low-cost financial capital B) low-cost labor C) access to raw materials D) lack of skilled managerial talent in home country Answer: B 51) Which of the following best explains why Taiwanese computer manufacturers established subsidiaries in the United States? A) low-cost financial capital B) low-cost labor C) access to raw materials D) lack of skilled managerial talent in home country Answer: A 52) Why might firms choose to pursue internationalization strategies? In a short essay, identify five major motivations for expanding overseas. Classify these motivations as strategic or reactive and provide an example of each. Answer: Strategic Motivations a. One reason why firms might expand internationally is to seek opportunities for growth through market diversification. Firms expand to tap into the market potential that exists outside the home country. One example is the expansion of automatic teller machines (ATMs) throughout the world. b. Firms expand to earn higher margins and profits. Foreign markets are often underserved or not served at all. Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their respective home markets, bathroom fixtures manufacturers American Standard and Toto (of Japan) have found a more favorable competitive environment in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam. c. Firms internationalize to gain new ideas about products, services, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, just-in-time inventory techniques were refined by Toyota and then adopted by other manufacturers all over the world. d. Firms might internationalize to be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies often establish international operations in countries where needed raw materials are located, or where raw materials and labor can be more flexibly accessed. One example is the aluminum producer Alcoa, which established operations in Brazil, Guinea, Jamaica, and elsewhere to extract 11 Copyright © 2017 Pearson Education, Ltd. aluminum's base mineral bauxite from local mines. e. Firms expand to gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher-quality, or better overall value at locations worldwide. For example, some Taiwanese computer manufacturers have established subsidiaries in the United States to access low-cost capital. f. Firms internationalize to develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale refers to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per-unit cost of making just 100 cameras. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of products that it manufactures. g. Firms might expand to invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or project- based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term profit-making opportunities. For example, Black and Decker entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long-term sales in the huge Indian market. Reactive Motivations Firms expand to better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto-parts suppliers followed, establishing their own operations there. Strategic or Reactive Motivations Firms might also internationalize to confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitor's home markets to destabilize and curb its growth. If the firm acts to confront an existing competitor, it would be responding reactively. If the firm acts to preempt a competitor, it would be responding proactively. One example of a proactive response is Caterpillar's preemptive entry into Japan just as its main rival in the earthmoving equipment industry, Komatsu, was getting started in the early 1970s. Caterpillar's preemptive move hindered Komatsu's international expansion for at least a decade. Had it not moved proactively to stifle Komatsu's growth in Japan, Komatsu's home market, Caterpillar would certainly have to face a more potent rival sooner. 53) All of the following are reasons to study international business EXCEPT ________. A) international business contributes to economic prosperity B) international trade is a critical engine for job creation C) international trade and investment have experienced unprecedented decline D) international business provides an opportunity to support sustainability and corporate citizenship Answer: C 12 Copyright © 2017 Pearson Education, Ltd.