Chapter Questions and Answers: Exporting, Global Sourcing, and Countertrade PDF

Chapter questions and answers Exporting, Global sourcing and Countertrade 1) Global sourcing and exporting are most often managed from a firm's home country. Answer: TRUE 2) International business transactions that involve countertrade are typically handled with cash payments. Answer: FALSE 3) A...

Chapter questions and answers Exporting, Global sourcing and Countertrade 1) Global sourcing and exporting are most often managed from a firm's home country. Answer: TRUE 2) International business transactions that involve countertrade are typically handled with cash payments. Answer: FALSE 3) 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. Answer: FALSE 4) Firms that internationalize their operations in order to reap the profits of a high-growth market are exhibiting a proactive business strategy. Answer: TRUE 5) The bilateral trade relationship between Canada and the United States is larger than the two-way trade relationship between China and the United States. Answer: TRUE 6) 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. Answer: FALSE 7) Compared to other entry strategies, exporting is less subject to tariff and other trade barriers. Answer: FALSE 8) The risks and need for financing associated with international sales can be alleviated through the use of distribution channel intermediaries. Answer: TRUE 9) In international trade transactions, a letter of credit is considered a more secure method of payment than open account. Answer: TRUE 10) 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. Answer: FALSE 11) Disputes often arise between exporters and intermediaries regarding pricing, policies, and inventory levels. Answer: TRUE 12) To ensure creditworthiness, exporters can purchase insurance to cover their inability to pay buyers. Answer: FALSE 13) Countertrade is an elaborate and international form of the bartering system, and it accounts for one-third of all global trade. Answer: TRUE 14) Barter, the oldest form of commerce, has been totally replaced by countertrade in modern global markets. Answer: FALSE 15) 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? A) FDI B) global procurement C) exporting D) outsourcing Answer: A 16) Licensing and franchising are both ________ relationships. A) joint venture B) intermediary C) contractual D) competitive Answer: C 17) Which of the following foreign market entry strategies offers the focal firm the highest degree of control over foreign operations? A) exporting B) global sourcing C) wholly owned subsidiary (FDI) D) countertrade Answer: C 18) Which of the following foreign market entry strategies requires the most substantial resource commitment on the part of the focal firm? A) majority-owned equity joint venture B) licensing C) franchising D) global sourcing Answer: A 19) 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? A) countertrade B) minority-owned equity joint venture C) wholly owned subsidiary (FDI) D) majority-owned equity joint venture Answer: A 20) A focal firm that requires a low-risk foreign market entry strategy would most likely choose which of the following approaches? A) minority-owned equity joint venture B) project-based (nonequity) collaborative venture C) global sourcing D) wholly owned subsidiary (FDI) Answer: C 21) Which of the following is an example of push factors? A) government incentives B) falling profit margins C) business plans D) increasing demand Answer: B 22) Favorable foreign market conditions that encourage firms to internationalize are known by which of the following terms? A) proactive factors B) reactive factors C) push factors D) pull factors Answer: D 23) A risk-taking manager at a Canadian firm would most likely pursue initial internationalization in which of the following foreign markets? A) Saudi Arabia B) Great Britain C) Australia D) United States Answer: A 24) Why would a firm with a domestic market focus never go beyond the first step of internationalization? A) Too much time is needed for employee training and business plan development. B) Managers have to become familiar with the local regulations and procedures for doing business in an overseas market. C) Tax liabilities assume new complexities. D) all of the above Answer: D AACSB: Dynamics of the global economy 25) Which of the following most likely occurs in the experimental stage of internationalization? A) Managers open franchises within an economic bloc to gain valuable experience. B) Management aggressively targets the domestic market to take control over competitors. C) Managers target low-risk, culturally close markets through exporting or licensing. D) Management targets psychically close markets through collaborative ventures or FDI. Answer: C 26) Governments use data on exporting and importing activities to calculate which of the following? A) import taxes and duties B) trade deficit statistics C) cost-of-living index D) inflation predictions Answer: B 27) All of the following are advantages that firms often experience through exporting except ________. A) increased economies of scale B) stabilized sales fluctuations C) reduced dependence on domestic sales D) amplified country and corporate risk Answer: D 28) Which of the following is most likely a disadvantage to firms who use exporting as an entry strategy? A) unqualified foreign market managers B) difficulties withdrawing from foreign markets C) lack of detailed knowledge about foreign customers D) high levels of political risk Answer: C 29) After managers have chosen an appropriate market to which to export, they next need to make which of the following decisions? A) how much resources can be committed B) how to deal with domestic competitors C) which country has the fewest barriers D) which freight forwarder to use Answer: A 30) During the global market opportunity assessment phase, managers will most likely do which of the following? A) identify qualified distributors and other foreign business partners B) perform a test-run by exporting a small amount of products to potential markets C) send out a survey to foreign suppliers and distributors to learn about the culture D) collaborate with another trading company for a short period of time Answer: A 31) Which of the following questions is most likely to be addressed as firms organize for exporting? A) Which market offers the firm the most opportunities for profit and expansion? B) Which domestic and foreign retailers will probably purchase our products? C) How much should the firm depend on intermediaries to carry out exporting? D) How many managers with global experience are employed by the firm? Answer: C 32) Which of the following terms refers to purchasing foreign merchandise and bringing it into the home market? A) exporting B) global sourcing C) global bartering D) offshoring 33) Among the following firms, which one imports the most from China? A) Dow Chemical B) Rolls Royce C) Walmart D) Zara Answer: C 34) Which of the following documents is the contract between the shipping company and the exporter? A) pro forma invoice B) bill of lading C) export declaration D) commercial invoice Answer: B 35) Incoterms were developed by the International Chamber of Commerce in order to ________. A) provide a mediator to settle disputes between buyers and sellers B) standardize the cost of shipping and insuring exported items C) define how the buyer and seller share freight and insurance costs D) reduce the costs of shipping and insuring exported products Answer: C 36) Which of the following methods of payment is the least popular among foreign buyers? A) cash in advance B) sight draft C) consignment sales D) countertrade Answer: A 37) Which of the following forms of countertrade involves payments in a combination of cash and goods? A) barter B) counterpurchase C) compensation deals D) buy-back agreements Answer: C 38) Which of the following is true with regard to global sourcing? A) Global sourcing has declined significantly in the current phase of globalization. B) Global sourcing is a low-control strategy in which the focal firm sources from independent suppliers through contractual agreements. C) Global sourcing refers to the relocation of a business process or entire manufacturing facility to a foreign country. D) Global sourcing does not represent the firm's initial involvement in international business. Answer: B 39) Contract manufacturing can best be defined as ________. A) the outsourcing to independent suppliers of business service functions such as accounting, payroll, human resource functions, travel services, IT services, customer service, or technical support B) the relocation of a business process or entire manufacturing facility to a foreign country C) sourcing from the firm's own production facilities D) an arrangement in which the focal firm contracts with an independent supplier to manufacture products according to well-defined specifications Answer: D 40) The pattern or geographic arrangement of locations where the firm carries out value-chain activities is known as ________. A) configuration of value-adding activity B) internalization C) visual merchandising D) disintermediation Answer: A 41 ) 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. Possible Answer: 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. 42) 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. Possible Answer: 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. 43) In a short essay, describe, with an example, why exporting is a flexible entry strategy for focal firms. Answer: 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. 44) In a short essay, describe three disadvantages firms face when internationalizing through exporting. Answer: a. 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. b. 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. c. 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. 45) What is the four-step process many managers use to achieve successful exporting? Explain your answer in a short essay. Answer: a. Assess Global Market Opportunity—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. b. Organize for Exporting—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. c. Acquire Needed Skills and Competencies—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. d. Export Management—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. 46) In a short essay, compare the advantages of using direct exporting and indirect exporting. Answer: 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. 47) 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. Answer: 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. 48) 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? Answer: a. Cash in Advance—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. b. Letter of Credit—a letter of credit resolves some of the problems associated with cash in advance. 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. c. Open Account—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. 49) 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. Answer: 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 50) In a short essay, describe the four types of countertrade. Answer: a. 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. b. 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. c. 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. d. 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.