Chapter 14 Entry Strategy and Strategic Alliances
Chapter 14 - Entry Strategy and Strategic AlliancesChapter
14Entry Strategy and Strategic Alliances
True / False Questions1.(p.488)The long-run benefits of doing
business in a country are a function of factors such as the size of
the market, the present wealth of consumers in that market and the
likely future wealth of customers.TRUE
Difficulty: Medium2.(p.489)The costs and risks associated with
doing business in a foreign country are typically high in an
economically advanced and politically stable democratic
nation.FALSE
Difficulty: Easy3.(p.489)First-mover advantages are the
advantages associated with entering a market early.TRUE
Difficulty: Easy4.(p.489)Costs that an early entrant has to bear
that a later entrant can avoid are known as first-mover
costs.FALSE
Difficulty: Medium
5.(p.491)Large strategic commitments limit strategic
flexibility.TRUE
Difficulty: Medium6.(p.492)A small-scale entrant is more likely
than a large-scale entrant to capture first-mover advantages
associated with demand preemption, scale economies and switching
costs.FALSE
Difficulty: Medium7.(p.492)Small-scale entry allows a firm to
learn about a foreign market while limiting the firm's exposure to
that market.TRUE
Difficulty: Medium8.(p.493)Exporting is advantageous because it
avoids the cost of establishing manufacturing operations in the
host country and because it may help a firm achieve experience
curve and location economies.TRUE
Difficulty: Medium9.(p.493)Exporting may not be appropriate if
lower-cost locations for manufacturing the product can be found
abroad.TRUE
Difficulty: Easy
10.(p.495)In a turnkey project, the contractor agrees to handle
every detail of the project for a foreign client.TRUE
Difficulty: Easy11.(p.496)An advantage of turnkey projects is
that the firm that enters into a turnkey deal will have no
long-term interest in the foreign country.FALSE
Difficulty: Medium12.(p.496)Tangible property includes patents,
designs, copyrights and trademarks.FALSE
Difficulty: Easy13.(p.497)Licensing increases a firm's ability
to realize experience curve and location economies by producing its
product in a centralized location.FALSE
Difficulty: Medium14.(p.497)By its very nature, licensing
increases a firm's ability to utilize a coordinated
strategy.FALSE
Difficulty: Medium
15.(p.498)Franchising enables a firm to quickly build a global
presence.TRUE
Difficulty: Easy16.(p.499)The most typical joint venture is a
25/75 venture.FALSE
Difficulty: Medium17.(p.499)An advantage of joint ventures with
a local partner is the knowledge of the local environment the local
partner contributes to the venture.TRUE
Difficulty: Medium18.(p.500)A wholly owned subsidiary limits a
firm's control over operations in different countries.FALSE
Difficulty: Medium19.(p.501)Firms entering a market via a wholly
owned subsidiary must bear all the costs and risks associated with
the venture.TRUE
Difficulty: Medium
20.(p.502)Brand names are generally well-protected by
international laws pertaining to trademarks.TRUE
Difficulty: Medium21.(p.503)Firms pursuing global
standardization or transnational strategies tend to prefer
joint-venture arrangements over wholly owned subsidiaries.FALSE
Difficulty: Medium22.(p.503)Over the decade, between 50 and 80
percent of all FDI inflows have been in the form of mergers and
acquisitions.TRUE
Difficulty: Medium23.(p.503)A clear advantage of greenfield
investments as compared to acquisitions is the short execution time
involved.FALSE
Difficulty: Medium24.(p.504)Acquisitions rarely produce
disappointing results.FALSE
Difficulty: Medium
25.(p.504)Overpayment for assets of an acquired firm is one
reason acquisitions fail.TRUE
Difficulty: Easy26.(p.504)Evidence suggests that almost all
acquisitions create rather than destroy value.FALSE
Difficulty: Medium27.(p.505)The main advantage of greenfield
investment is that it gives the firm a much greater ability to
build the kind of subsidiary company that it wants.TRUE
Difficulty: Medium28.(p.506)Acquisitions are less risky than in
greenfield ventures the sense that there is less potential for
unpleasant surprises.FALSE
Difficulty: Medium29.(p.506)If a firm is trying to enter a
market where there are already well-established companies and where
global competitors are also interested in establishing a presence,
the firm should choose a greenfield investment.FALSE
Difficulty: Hard
30.(p.506)Firms may avoid strategic alliances because their
complexity usually delays entry into a foreign market.FALSE
Difficulty: Medium31.(p.507)Unlike joint ventures, strategic
alliances require the firm to bear all the costs and risks of
foreign expansion.FALSE
Difficulty: Medium32.(p.508)The failure rate for international
strategic alliances is very low.FALSE
Difficulty: Medium33.(p.509)Cross-licensing agreements can be
used to formalize arrangements to swap skills and technology in a
strategic alliance.TRUE
Difficulty: Hard34.(p.510)Relational capital refers to the
building of interpersonal relationships between the firms' managers
in a strategic alliance.TRUE
Difficulty: Medium
35.(p.511)To maximize the learning benefits of an alliance,
partners should try to learn from each other and then disperse the
knowledge within their own organizations.TRUE
Difficulty: Medium
Multiple Choice Questions36.(p.489)Other things being equal, the
benefitcostrisk trade-off is likely to be most favorable
inA.Politically unstable developing nations that operate with a
mixed or command economyB.Nations where there is a dramatic upsurge
in either inflation rates or private-sector debtC.Politically
stable developed and developing nations that have free market
systemsD.Developing nations where speculative financial bubbles
have led to excess borrowing
Difficulty: Easy37.(p.489)Which of the following statements
about value creation by an international business in a foreign
market is false?A.Value depends on the suitability of the product
offering to that marketB.Greater value translates into an ability
to charge lower pricesC.Value depends on the nature of indigenous
competitionD.Greater value translates into an ability to build
sales volume more rapidly
Difficulty: Easy38.(p.489)The advantages frequently associated
with entering a market early are commonly known asA.Primary
advantagesB.First-mover advantagesC.Initial-entrant
premiumsD.Proactive-mover benefits
Difficulty: Easy
39.(p.489)Which of the following is not an advantage associated
with entering a foreign market before other international
businesses?A.Ability to preempt rivals and capture demand by
establishing a strong brand nameB.Ability to ride down the
experience curve ahead of rivalsC.Ability to create switching
costsD.Ability to avoid pioneering costs
Difficulty: Medium40.(p.489)Switching costsA.Drive early
entrants out of the marketB.Make it easy for later entrants to win
businessC.Make it difficult for later entrants to win
businessD.Give later entrants a cost advantage over early
entrants
Difficulty: Medium41.(p.489)Pioneering costs areA.The costs of
establishing manufacturing operations in the host countryB.The
fixed costs of developing new products or processesC.Costs that the
firm has to bear that a later entrant can avoidD.The switching
costs involved in moving from one market to another
Difficulty: Easy42.(p.489)Early entrants to a market that are
able to create switching costs that tie the customer to the product
are capitalizing onA.Economies of scaleB.Pioneering
costsC.First-mover advantagesD.Late-mover advantages
Difficulty: Easy
43.(p.489)All of the following are examples of pioneering costs
except the costs ofA.Business failureB.Educating
consumersC.Promoting and establishing a product offeringD.Learning
from the mistakes of early entrants
Difficulty: Medium44.(p.489)The costs of promoting and
establishing a product offering when a firm enters a foreign market
prior to its rivals are known asA.Switching costsB.Market
development costsC.Pioneering costsD.Promotional development
costs
Difficulty: Medium45.(p.491)A strategic commitmentA.Has a
short-term impact aloneB.Is difficult to reverseC.Cannot change the
competitive playing fieldD.Does not have any influence on the
nature of competition in a market
Difficulty: Medium46.(p.492)A large-scale entrant is more likely
than a small-scale entrant to be able to capture first-mover
advantages associated withA.Demand preemptionB.Diseconomies of
scaleC.Pioneering costsD.Diseconomies of scope
Difficulty: Medium
47.(p.492)The _____ entrant is more likely than the _____
entrant to be able to capture the first-mover advantages associated
with demand preemption, scale economies and switching costs.A.Small
scale; large scaleB.Small scale; moderate scaleC.Large scale; small
scaleD.Moderate scale; large scale
Difficulty: Easy48.(p.492)Which of the following statements
about small-scale entry is true?A.The commitment associated with a
small-scale entry makes it possible for the small-scale entrant to
capture first-mover advantagesB.Small-scale entry is a way to
gather information about a foreign market before deciding whether
to enter on a significant scaleC.By giving a firm time to collect
information, small-scale entry increases the risks associated with
a subsequent large-scale entryD.Small-scale entry limits a firms
ability to learn about a foreign market thereby also limiting the
firm's exposure to that market
Difficulty: Hard49.(p.493)If a firm can realize location
economies by moving production elsewhere, it should
avoidA.ExportingB.Turnkey contractsC.LicensingD.Wholly owned
subsidiaries
Difficulty: Medium
50.(p.493)Which of the following is a distinct advantage of
exporting?A.It avoids the often substantial costs of establishing
manufacturing operations in the host countryB.Benefits from a local
partner's knowledge of the host country's competitive
conditionsC.Avoids the threat of tariff barriers by the
host-country governmentD.Appropriate if lower cost locations for
manufacturing the product can be found abroad
Difficulty: Medium51.(p.493)Which of the following is a distinct
advantage of exporting?A.Absolute control over operations in the
foreign nationB.It may help a firm achieve experience curve and
location economiesC.Avoids the threat of tariff barriers by the
host-country governmentD.It is useful for bulk products and also in
situations where transportation costs are high
Difficulty: Medium52.(p.494)When a firm faces significant
transportation costs, _____ can be uneconomical.A.Joint
venturesB.Greenfield investmentsC.Licensing
agreementsD.Exporting
Difficulty: Medium53.(p.494)Manufacturing bulk products
regionallyA.Increases the firm's costs of transportationB.Enables a
firm to realize some economies from large-scale productionC.Leads
to diseconomies of scaleD.Makes exporting uneconomical for the
firm
Difficulty: Hard
54.(p.494-495)When an exporting firm finds that its local agent
is also carrying competitors' products, the firm may switch to a
_____ to handle local marketing, sales and service.A.Wholly owned
subsidiaryB.Franchising arrangementC.Turnkey operationD.Licensing
agreement
Difficulty: Medium55.(p.494)When local agents carry the products
of competing firms and have divided loyalties, _____ is not
appropriate.A.FranchisingB.LicensingC.ExportingD.Greenfield
investment
Difficulty: Medium56.(p.494)The threat of tariff barriers by the
host government can make _____ very risky.A.Greenfield
investmentB.FranchisingC.LicensingD.Exporting
Difficulty: Medium57.(p.495)Identify the incorrect statement
about turnkey projects.A.The contractor agrees to handle every
detail of the project for a foreign clientB.They are most common in
industries which use inexpensive production technologiesC.This is a
means of exporting process technology to other countriesD.They
create efficient global competitors in the process
Difficulty: Hard
58.(p.495)In which of the following industries are turnkey
projects the most common?A.Fresh fruit, grain and meat
productsB.Chemical, pharmaceutical and metal refiningC.Consumer
durables, computer peripherals and automotive partsD.Apparel, shoes
and leather products
Difficulty: Easy59.(p.496)A turnkey strategyA.Is always riskier
than conventional FDIB.Is never used in a country with unstable
political and economic environmentsC.Is useful where FDI is limited
by host-government regulationsD.Is a strong indicator of a firm's
long-term interest in a foreign country
Difficulty: Hard60.(p.496)Many Western firms that sold
oil-refining technology to firms in Gulf states now find themselves
competing with these firms in the world oil market. This is an
example ofA.The firm entering into a turnkey project with a foreign
enterprise, inadvertently creating a competitorB.The firm entering
into a turnkey deal having no long-term interest in the foreign
countryC.The country subsequently proving to be a major market for
the output of the process that has been exportedD.Selling the
firm's process technology through a turnkey project which is also
selling competitive advantage to potential competitors
Difficulty: Hard61.(p.496)Which of the following is a drawback
associated with a turnkey strategy?A.Creates long-term commitment
in the foreign countryB.Possible creation of a competitorC.Not
useful if FDI is limited by host-government regulationsD.Riskier
than conventional FDI
Difficulty: Hard
62.(p.496)Firms that lack the capital necessary to develop
foreign operations may choose _____ as a means of expanding
internationally.A.Turnkey projectsB.LicensingC.Greenfield
investmentsD.Acquisitions
Difficulty: Medium63.(p.496)An arrangement whereby a firm grants
the rights to intangible property to another entity for a specified
time period in exchange for royalties is a(n) _____
agreement.A.Wholly owned
subsidiaryB.TurnkeyC.LicensingD.Exporting
Difficulty: Easy64.(p.496)Patents, inventions, formulas,
processes, designs, copyrights and trademarks are all forms
ofA.Licensing agreementsB.Franchising agreementsC.Intangible
propertyD.Tangible property
Difficulty: Medium65.(p.496)What is the primary advantage of
licensing?A.It helps a firm avoid the development costs associated
with opening a foreign marketB.It gives a firm the tight control
over manufacturing, marketing and strategyC.It helps a firm achieve
experience curve and location economiesD.It increases a firm's
ability to utilize a coordinated strategy
Difficulty: Hard
66.(p.497)Which of the following is a disadvantage of
licensing?A.It does not help firms that lack capital to develop
operations overseasB.It does not give a firm the tight control over
strategy that is required for realizing experience curve and
location economiesC.It cannot be used when a firm possesses some
intangible property that might have business applicationsD.The firm
has to bear the development costs and risks associated with opening
a foreign market
Difficulty: Hard67.(p.497)When a company has some intangible
property that might have business applications, but the firm does
not want to develop those applications itself, _____ makes
sense.A.ExportingB.A turnkey projectC.LicensingD.A wholly owned
subsidiary
Difficulty: Medium68.(p.497)Cross-licensing agreements are
increasingly common in the _____
industry.A.TransportationB.High-technologyC.ConstructionD.Consumer
durables
Difficulty: Easy69.(p.497)Identify the correct statement
concerning cross-licensing agreements.A.They may reduce the risks
associated with licensing technological know-howB.They may enable
firms to hold each other hostageC.They increase the probability
that parties will behave opportunistically toward each otherD.They
are increasingly common in high-technology industries
Difficulty: Hard
70.(p.498)Which mode of entry is pursued primarily by
manufacturing firms?A.FranchisingB.TurnkeyC.LicensingD.Strategic
alliance
Difficulty: Medium71.(p.498)This mode of entry is primarily used
by service firms.A.FranchisingB.LicensingC.A strategic allianceD.A
turnkey project
Difficulty: Medium72.(p.498)If a service firm wants to build a
global presence quickly and at a relatively low cost and risk,
_____ makes sense.A.A wholly owned subsidiaryB.ExportingC.A turnkey
projectD.Franchising
Difficulty: Medium73.(p.498)Which of the following statements
about franchising is true?A.It guarantees consistent product
qualityB.It tends to involve more short-term commitments than
licensingC.It is a specialized form of licensingD.It is employed
primarily by manufacturing firms
Difficulty: Hard
74.(p.498)Which of the following is an advantage of
franchising?A.A firm takes profits out of one country to support
competitive attacks in anotherB.A firm is relieved of many of the
costs and risks of opening a foreign market on its ownC.It
guarantees consistent product qualityD.It achieves experience curve
and location economies
Difficulty: Hard75.(p.499)Firms engaging in _____ with a local
company can benefit from a local partner's knowledge of the host
country's competitive conditions, culture, language, political
systems and business systems.A.Turnkey projectsB.Joint
venturesC.Greenfield investmentsD.Licensing arrangements
Difficulty: Medium76.(p.500)Identify the advantage of
establishing wholly owned subsidiaries.A.It is the least expensive
method of serving a foreign market from a capital investment
standpointB.Political considerations make it the most feasible
entry modeC.It may be required if a firm is trying to realize
location and experience curve economiesD.It is particularly useful
where FDI is limited by host-government regulations
Difficulty: Hard77.(p.501)A wholly owned subsidiary is
appropriate whenA.The firm wants to share the cost and risk of
developing a foreign marketB.The firm wants 100 percent of the
profits generated in a foreign marketC.The firm wants a plant that
is ready to operateD.The firm wants to test a market
Difficulty: Hard
78.(p.501)A firm that establishes a _____ must bear the full
costs and risks of entering a foreign market.A.Licensing
agreementB.Wholly owned subsidiaryC.FranchiseD.Joint venture
Difficulty: Medium79.(p.501)A _____ is the most costly method of
serving a foreign market from a capital investment
standpoint.A.Wholly owned subsidiaryB.Franchising
agreementC.Turnkey projectD.Joint venture
Difficulty: Medium80.(p.502)If a firm's core competency is based
on control over proprietary technological know-how, it should avoid
_____ and _____ arrangements if possible, to minimize the risk of
losing control over that technology.A.Licensing;
joint-ventureB.Wholly owned subsidiary; exportingC.Turnkey
contracts; exportingD.Exporting; joint-venture
Difficulty: Hard81.(p.502)Most service firms have found that
_____ with local partners work best for controlling
subsidiaries.A.Joint venturesB.Licensing agreementsC.Greenfield
investmentsD.Turnkey projects
Difficulty: Medium
82.(p.503)_____ are the preferred method of market entry for
firms pursuing global standardization or transnational
strategies.A.Joint venturesB.Licensing agreementsC.Turnkey
projectsD.Wholly owned subsidiaries
Difficulty: Medium83.(p.503)Firms may prefer acquisitions to
greenfield investments for all of the following reasons
exceptA.They allow companies to completely sidestep government
regulations on investmentB.They are quick to executeC.They enable
the firm to preempt competitorsD.Managers believe acquisitions are
less risky
Difficulty: Hard84.(p.504)The hubris hypothesis attempts to
explainA.The risks involved in franchisingB.The reasons behind the
underperformance of an economyC.Why acquisitions failD.How FDI
limits affect growth
Difficulty: Medium85.(p.504)According to the _____, top managers
typically overestimate their ability to create value from an
acquisition.A.Misvaluation theoryB.Performance extrapolation
hypothesisC.Market timing theoryD.Hubris hypothesis
Difficulty: Medium
86.(p.505)To increase the potential for a successful
acquisition, a firm shouldA.Always bid low to allow for partial
failureB.Try to acquire a firm with a very different corporate
culture so there is no forced "overlap"C.Seek companies only from
similar national culturesD.Screen the foreign enterprise to be
acquired
Difficulty: Medium87.(p.505)Which of the following is not
important in the acquisition process?A.Firms should strive to limit
unwanted management attrition after acquisitionB.An integration
plan should quickly be implementedC.Proper screening of the company
to be acquired should take placeD.The hubris hypothesis should be
maintained
Difficulty: Medium88.(p.506)When a firm wants to enter a market
where there are already well-established incumbent companies and
where global competitors are also interested in establishing a
presence, the firm should considerA.Joint venturesB.Turnkey
projectsC.AcquisitionsD.Greenfield investments
Difficulty: Medium89.(p.506)Firms entering markets where there
are no incumbent competitors to be acquired should
chooseA.Greenfield investmentsB.Joint
venturesC.AcquisitionsD.Takeovers
Difficulty: Medium
90.(p.511)High transportation costs, trade barriers and problems
with local marketing agents are all disadvantages
ofA.LicensingB.Turnkey projectsC.ExportingD.Franchising
Difficulty: Medium
Essay Questions91.(p.488)What are the three basic decisions a
firm contemplating foreign expansion must make?The three basic
decisions a firm that is seeking to expand into foreign markets
must make are: which markets to enter, when to enter those markets
and on what scale. The choice of which markets to enter should be
driven by an assessment of relative long-run growth and profit
potential.
Difficulty: Easy92.(p.489)What are first-mover advantages?
Discuss the advantages associated with them.First-mover advantages
are the advantages frequently associated with entering a market
early. One first-mover advantage is the ability to preempt rivals
and capture demand by establishing a strong brand name. A second
advantage is the ability to build sales volume in that country and
ride down the experience curve ahead of rivals, giving the early
entrant a cost advantage over later entrants. A third advantage is
the ability of early entrants to create switching costs that tie
customers into their products or services. Such switching costs
make it difficult for later entrants to win business.
Difficulty: Medium
93.(p.489-490)Explain the relationship between first-mover
disadvantages and pioneering costs.When a firm enters a market
prior to other international businesses, it can have first-mover
disadvantages. These disadvantages may give rise to pioneering
costs, costs that an early entrant has to bear that a later entrant
can avoid. Pioneering costs arise when the business system in a
foreign country is so different from that in a firm's home market
that the enterprise has to devote considerable effort, time and
expense to learning the rules of the game. Pioneering costs also
include the costs of promoting and establishing a product offering.
Finally, an early entrant may be put at a disadvantage, relative to
a later entrant, if regulations change in a way that diminishes the
value of the early entrant's investments.
Difficulty: Medium94.(p.492)Discuss the trade-offs associated
with large-scale entry versus small-scale entry.The choice between
entering a market on a small scale versus a large scale is a
decision associated with levels of risk and reward. In general,
entering a large developing nation before most other international
businesses and entering on a large scale is associated with high
levels of risk. The potential long-term rewards associated with
this time strategy are very large. In contrast, entering a
developed market after other international businesses in the firm's
industry and entering on a small scale to first learn more about
those markets is associated with much lower levels of risk.
However, the potential long-term rewards are also likely to be
lower because the firm is essentially forgoing the opportunity to
capture first-mover advantages and because the lack of commitment
signaled by small-scale entry may limit its future growth
potential.
Difficulty: Hard
95.(p.493)Discuss Bartlett and Ghoshal's perspective on how
firms from developing countries should approach international
expansion.Bartlett and Ghoshal suggest that companies based in
developing countries should use the entry of foreign multinationals
as an opportunity to learn from these competitors by benchmarking
their operations and performance against them. They argue that the
local company might be able to find ways to differentiate itself
from foreign companies by focusing on market niches that the
multinational ignores or is unable to serve effectively if it has a
standardized global product offering. Then, the firm from the
developing nation may then be in a position to pursue its own
international expansion strategy.
Difficulty: Hard96.(p.493-494)Why should a firm choose exporting
as a means of foreign market expansion? Discuss the advantages and
disadvantages of exporting.Exporting has two distinct advantages.
First, it avoids the often substantial costs of establishing
manufacturing operations in the host country. Second, exporting may
help a firm achieve experience curve and location
economies.However, there are several disadvantages of exporting.
First, exporting may not be appropriate if lower-cost manufacturing
locations are available abroad. Second, high transportation costs
may make exporting uneconomical. Finally, tariff barriers may make
exporting less attractive.
Difficulty: Medium
97.(p.495-496)Explain the idea of a turnkey project. Why should
a firm use this arrangement to expand internationally? In what
industries are turnkey arrangements most common?In a turnkey
project, the contractor agrees to handle every detail of the
project for a foreign client, including the training of operating
personnel. At completion of the contract, the foreign client is
handed the "key" to a plant that is ready for full operation.The
know-how required to assemble and run a technologically complex
process is a valuable asset. Turnkey projects are a way of earning
great economic returns from that asset. The strategy is
particularly useful where FDI is limited by host-government
regulations. A turnkey strategy can also be less risky than
conventional FDI. In a country with unstable political and economic
environments, a longer-term investment might expose a firm to
unacceptable political or economic risks.Turnkey projects are most
common in the chemical, pharmaceutical, petroleum refining and
metal refining industries.
Difficulty: Medium98.(p.496-497)Define licensing agreements.
What are the advantages of this mode of international expansion?A
licensing agreement is an arrangement whereby a licensor grants the
rights to intangible property to another entity for a specified
period in exchange for royalties.The primary advantage of licensing
is that the firm does not have to bear the development costs and
risks associated with opening a foreign market. As a result,
licensing is a very attractive option for firms that lack the
capital to open overseas markets. Licensing is also an attractive
option when a firm is interested in pursuing a foreign market but
does not want to commit substantial resources to an unfamiliar or
potentially volatile foreign market. Licensing is also used when a
firm wishes to participate in a foreign market, but is prohibited
from doing so by barriers to investment. Finally, licensing is used
when a firm possesses some intangible property but does not want to
pursue a potential application itself.
Difficulty: Medium
99.(p.496-497)Why should a firm be cautious about entering a
licensing agreement?In a licensing agreement, the licensor grants
the rights to intangible property to the licensee for a specified
period in exchange for royalty payments. Firms considering this
type of arrangement should be cautious on three fronts. First, if a
firm licenses any of its proprietary know-how (such as its
production processes) to another company, it risks losing control
over this knowledge by permitting access to it by another firm.
Second, licensing is not an effective way of realizing experience
curve and location economies by manufacturing a product in a
centralized location. If these attributes are important to a firm,
licensing may be a poor choice. Finally, competing in a global
market may require a firm to coordinate strategic moves across
countries by using profits from one country to support competitive
attacks in another. Licensing severely limits a firm's ability to
do this. A licensee is unlikely to allow a multinational firm to
use its profits (beyond the royalty payments) to support a
different licensee operating in another country.
Difficulty: Medium100.(p.496-497)What is intangible property?
How can intangible property be protected in a licensing
agreement?Intangible property includes patents, inventions,
formulas, processes, designs, copyrights and trademarks.A licensor
can reduce the risk of losing intangible property or proprietary
know-how, to a foreign partner by entering into a cross-licensing
agreement. Under a cross-license agreement, a firm licenses some
valuable intangible property (such as a production process) to a
foreign partner, but in addition to royalty payments, the firm also
requires the foreign partner to license some of its valuable
know-how to the firm. Cross-licensing agreements enable firms to
hold each other "hostage," thereby reducing the risk they will
behave in an opportunistic manner toward each other.
Difficulty: Medium
101.(p.496-498)Compare and contrast licensing agreements and
franchising agreements.A licensing agreement is an arrangement
whereby a licensor grants the rights to intangible property to
another entity for a specified period in exchange for royalties. In
contrast, franchising is basically a specialized form of licensing
in which the franchiser not only sells intangible property to the
franchisee, but also insists that the franchisee agree to abide by
strict rules as to how it does business. Franchising tends to
involve longer-term commitments than licensing.
Difficulty: Medium102.(p.498)Briefly explain the advantages and
disadvantages of franchising agreements.There are several
advantages of franchising as an entry mode. In particular, the firm
is relieved of many of the costs and risks of opening a foreign
market on its own. This creates a good incentive for the franchisee
to build a profitable operation as quickly as possible. However,
franchising may inhibit the firm's ability to take profits out of
one country to support competitive attacks in another. Furthermore,
quality control may become an issue if a franchisee does not
maintain an appropriate quality level.
Difficulty: Medium103.(p.499)What is a joint venture? What type
of joint venture is most common? Provide an example of a joint
venture.A joint venture involves establishing a firm that is
jointly owned by two or more otherwise independent firms.The most
typical joint venture is a 50/50 venture, in which there are two
parties, each of which holds a 50 percent ownership stake and
contributes a team of managers to share operating
control.Fuji-Xerox is an example of a joint venture that was
established between Fuji Photo and Xerox.
Difficulty: Medium
104.(p.499)Discuss the advantages of using a joint venture to
enter foreign markets.There are several advantages to expanding
into foreign markets via a joint venture. First, firms benefit from
a local partner's knowledge of the host market. Second, a firm can
share the costs and/or risks of operating in a foreign market.
Third, in many countries, political considerations make joint
ventures the only feasible entry mode.
Difficulty: Medium105.(p.499-500)Imagine that you are meeting
with your superiors to discuss entering a foreign market. Your boss
has asked you to analyze a joint venture prospect. Why might you
tell your boss that the joint venture is not a good idea?There are
major disadvantages with joint ventures. A firm that enters into a
joint venture risks giving control of its technology to its
partner. In addition, a joint venture does not give the firm the
tight control over subsidiaries that it might need in order to
realize experience curve or location economies. Finally, a joint
venture might not be a good strategy because the shared ownership
structure can lead to conflicts and battles for control between the
investing firms if their goals and objectives change or if they do
not share a common vision for the venture.
Difficulty: Medium106.(p.499)How can a firm protect its
proprietary information in a joint venture arrangement?There are
several things a firm can do to protect proprietary information in
a joint venture arrangement. One option is to hold majority
ownership in the venture so that the firm has greater control over
the technology. A second option is to "wall off" from a partner
technology that is central to the core competence of the firm,
while sharing other technology.
Difficulty: Medium
107.(p.500)What are the two methods of entering foreign
marketing using a wholly owned subsidiary?Firms entering a foreign
market via a wholly owned subsidiary, where the firm owns 100
percent of the stock, can either make the investment in a
greenfield operation or in an acquisition. A greenfield operation
involves the establishment of a new operation, whereas an
acquisition involves buying an established firm in the host country
and using that firm to promote the company's products.
Difficulty: Easy108.(p.500-501)Consider why a firm should enter
a market via a wholly owned subsidiary. What are the advantages and
disadvantages of this type of strategy?In a wholly owned
subsidiary, the firm owns 100 percent of the stock. Wholly owned
subsidiaries can take two forms, a greenfield investment which
involves the establishment of a new company or an
acquisition.Establishing a wholly owned subsidiary as an entry
strategy into a foreign market is appropriate when a firm's
competitive advantage is based on technological competence. By
establishing a wholly owned subsidiary, a firm reduces the risk of
losing control over that competence. In addition, expanding via a
wholly owned subsidiary gives a firm tight control over its
operations in various countries. This strategy maximizes a firm's
potential to engage in global strategic coordination. Furthermore,
a wholly owned subsidiary strategy may be required if a firm is
trying to realize location and experience curve economies. However,
establishing a wholly owned subsidiary is generally the most costly
method of serving a foreign market and since the firm owns 100
percent of the operation, the risks are also the highest.
Difficulty: Medium
109.(p.504-505)Why do acquisitions fail?Acquisitions fail for
several reasons. First, the acquiring firm often overpays for the
assets of the acquired firm. Second, many acquisitions fail because
there is a clash between the cultures of the acquired and the
acquiring firms. Third, many acquisitions fail because attempts to
realize synergies by integrating the operations of the acquired and
acquiring entities often run into roadblocks and take much longer
than forecast. Finally, many acquisitions fail due to inadequate
preacquisition screening.
Difficulty: Medium110.(p.506-508)Discuss strategic alliances.
How successful are they? Why do firms form strategic alliances?The
term strategic alliance refers to cooperative agreements between
potential or actual competitors. Strategic alliances run the range
from formal joint ventures, in which two or more firms have equity
stakes, to short-term contractual arrangements, in which two
companies agree to cooperate on a particular task. Firms enter into
strategic alliances for four main reasons. First, strategic
alliances may facilitate entry into a foreign market. Second,
strategic alliances allow firms to share the fixed costs of
developing new products or processes. Third, strategic alliances
allow firms to bring together complementary skills and assets that
neither company could develop easily on its own. Fourth, strategic
alliances can help firms establish technological standards for an
industry.
Difficulty: Medium
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