TEST BANK for International Business: The Challanges of Globalization. 1st Edition CANADIAN EDITION

Contents

Chapter 1 Globalization True/False Multiple Choice Fill-In-The-Blank Essay

1 5 19 22

Chapter 2 Cross-Cultural Business True/False Multiple Choice Fill-In-The-Blank Essay

32 37 57 61

Chapter 3 Politics and Law True/False Multiple Choice Fill-In-The-Blank Essay

72 76 90 93

Chapter 4 International Ethics True/False Multiple Choice Fill-In-The-Blank Essay

102 106 114 118

Chapter 5 Economics and Emerging Markets True/False 123 Multiple Choice 127 Fill-In-The-Blank 141 Essay 144 Chapter 6 International Trade True/False Multiple Choice Fill-In-The-Blank Essay

151 157 174 177

Chapter 7 Foreign Direct Investment True/False Multiple Choice Fill-In-The-Blank Essay

190 194 208 211

Chapter 8 Regional Economic Integration True/False 221 Multiple Choice 225 Fill-In-The-Blank 241 Essay 244 Chapter 9 International Financial Markets and Foreign Exchange True/False 255 Multiple Choice 260 Fill-In-The-Blank 275 Essay 278 Chapter 10 International Strategy and Organization True/False Multiple Choice Fill-In-The-Blank Essay

288 292 306 309

Chapter 11 Selecting and Managing Entry Modes True/False 320 Multiple Choice 324 Fill-In-The-Blank 338 Essay 341 Chapter 12 Developing and Marketing Products True/False 359 Multiple Choice 363 Fill-In-The-Blank 378 Essay 381

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International Business, 1ce (Wild/Wild/Valladares Montemayor)

Chapter 1 Globalization

Chapter 1 Globalization True/False Question ID: 1-1 Question: International business is any commercial transaction that crosses the borders of two or more nations.

Answer: TRUE Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-2 Question: Imports are goods and services purchased abroad and brought into a country.

Answer: TRUE Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-3 Question: Products marketed in all countries essentially without any changes are known as sourced products.

Answer: FALSE Diff: 3 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-4 Question: The term globalization of production refers to convergence in buyer preferences in markets around the world.

Answer: FALSE Diff: 2 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-5 Question: The General Agreement on Tariffs and Trade (GATT) was designed to promote free trade by reducing both tariffs and nontariff barriers to international trade.

Answer: TRUE Diff: 1 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-6 Question: Today, NAFTA is the international organization that enforces the rules of international trade worldwide.

Answer: FALSE Diff: 1 Page Ref: 9, 10 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-7 Question: The power of the General Agreement on Tariffs and Trade (GATT) to settle trade disputes is what sets it apart from its predecessor, the World Trade Organization (WTO).

Answer: FALSE Diff: 1 Page Ref: 10 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-8 Question: In the World Trade Organization (WTO) dispute settlement system, the WTO has the ability to penalize offending nations.

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Chapter 1 Globalization

Answer: TRUE Diff: 1 Page Ref: 10 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-9 Question: Resistance to worldwide trade agreements is causing some nations to place greater emphasis on regional pacts.

Answer: TRUE Diff: 1 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-10 Question: Gross national product (GNP) is the value of all goods and services produced by a domestic economy over a one-year period.

Answer: FALSE Diff: 2 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-11 Question: A country’s GDP per capita is its GDP divided by its population.

Answer: TRUE Diff: 2 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-12 Question: Extranets give distributors and suppliers access to a company’s online database to place orders electronically.

Answer: TRUE Diff: 2 Page Ref: 14 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-13 Question: One commonality among the world’s least-global nations is low levels of corruption.

Answer: FALSE Diff: 2 Page Ref: 16 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-14 Question: The role of the World Bank is to provide financing for national economic development efforts.

Answer: TRUE Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-15 Question: The rules of the international monetary system are enforced by the World Bank.

Answer: FALSE Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-16 Question: Critics of globalization argue that it eliminates jobs in developing nations.

Answer: FALSE

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Chapter 1 Globalization

Diff: 2 Page Ref: 18 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-17 Question: Pro-globalization economists believe globalization increases wealth in both developed and developing nations.

Answer: TRUE Diff: 2 Page Ref: 19 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-18 Question: Flexible labour markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued.

Answer: TRUE Diff: 2 Page Ref: 20 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-19 Question: Supporters and critics of globalization appear to agree that globalization causes dislocation in labour markets.

Answer: TRUE Diff: 2 Page Ref: 20 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-20 Question: Critics of globalization believe the overall gains that accrue to national economies are worth the lost livelihoods of some workers.

Answer: FALSE Diff: 2 Page Ref: 20 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-21 Question: Opponents of globalization argue that it causes a “race to the bottom” in environmental conditions.

Answer: TRUE Diff: 2 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-22 Question: Research shows that pollution-intensive US companies tend to invest in nations with stricter environmental standards.

Answer: TRUE Diff: 2 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-23 Question: International firms tend to support reasonable labour and environmental laws to expand future local markets for their businesses.

Answer: TRUE Diff: 2 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-24

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Chapter 1 Globalization

Question: Multinational corporations (MNCs) have direct investments abroad in multiple countries.

Answer: TRUE Diff: 1 Page Ref: 26 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-25 Question: The revenues of the world’s largest businesses are lower in value than the gross domestic products of the smallest nations.

Answer: FALSE Diff: 2 Page Ref: 26 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-26 Question: A born global firm is a company that engages in international business from or near its inception.

Answer: TRUE Diff: 1 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-27 Question: Research shows that only large companies can export successfully.

Answer: FALSE Diff: 1 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-28 Question: Some businesses can become completely immune to events in the international business environment.

Answer: FALSE Diff: 2 Page Ref: 29 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-29 Question: The world today is experiencing a trend toward more porous national boundaries.

Answer: TRUE Diff: 1 Page Ref: 29 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-30 Question: It is rare for a business to search for production bases and markets at the same time.

Answer: FALSE Diff: 2 Page Ref: 29 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

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Chapter 1 Globalization

Multiple Choice Question ID: 1-31 Question: All goods and services purchased abroad and brought into a country are called ________.

A) domestic products B) exports C) national products D) imports Answer: D Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-32 Question: Any commercial transaction that crosses the borders of two or more nations is known as ________.

A) an export B) e-business C) international business D) an import Answer: C Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-33 Question: ________ are all goods and services sold abroad and sent out of a country.

A) Global products B) Exports C) Global licences D) Imports Answer: B Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-34 Question: Olive oil made in Italy and sold in Canada is an example of which of the following?

A) Global brand B) Canadian export C) Canadian import D) Standardized product Answer: C Diff: 2 Page Ref: 4 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-35 Question: Robeeze baby shoes, made in Canada and sold in Russia, are an example of which of the following?

A) Canadian export B) outsourced product C) globally licensed product D) Canadian import Answer: A Diff: 2 Page Ref: 4 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-36 Question: The most remarkable facilitator of societal and commercial changes today is prompted by _______________.

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Chapter 1 Globalization

A) increasing imports B) international business networks C) improvements in telecommunications D) use of computer networks and e-commerce Answer: D Diff: 2 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-37 Question: Which of the following is defined as the use of computer networks to purchase, sell, or exchange products; service customers; and collaborate with partners?

A) E-commerce B) Intranet C) International business D) Extranet Answer: A Diff: 2 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-38 Question: ________ is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies.

A) International business B) Denationalization C) Globalization D) E-business Answer: C Diff: 1 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-39 Question: Which of the following refers to convergence in buyer preferences in markets around the world?

A) Homogenization of markets B) Globalization of markets C) Internationalization of markets D) Denationalization of markets Answer: B Diff: 2 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-40 Question: Which of the following is most likely not an effect of globalization?

A) Increases in the variety of capital flows across national borders B) Increases in the economic isolation of developing countries C) Increases in the rate at which products are diffused worldwide D) Increases in the volume of cross-border transactions Answer: B Diff: 3 Page Ref: 4 Skill: Critical thinking Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-41 Question: Denationalization refers to ________.

A) a loss of sovereignty among nations B) national boundaries becoming less relevant C) cooperation between nations to reduce trade barriers

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Chapter 1 Globalization

D) attempts by international organizations to resolve trade conflicts Answer: B Diff: 2 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-42 Question: Which of the following are products marketed in all countries essentially without any changes?

A) National products B) Adapted products C) Global products D) Locally responsive products Answer: C Diff: 1 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-43 Question: ________ is defined as the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or service.

A) Importing B) Globalization of production C) Global strategy development D) Globalization of markets Answer: B Diff: 2 Page Ref: 7 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-44 Question: Which of the following is an example of the globalization of production?

A) Canadian consumers buy foods imported from Australia.

B) A Chinese company sells textiles to European car makers.

C) A US company builds a manufacturing facility in India.

D) A Swiss watch manufacturer builds a manufacturing facility in Switzerland.

Answer: C Diff: 2 Page Ref: 7 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-45 Question: Whereas relocating production to low-cost locales traditionally meant production of ________ almost exclusively, it increasingly applies to the production of ________.

A) services; goods B) imports; exports C) goods; services D) domestic products; global brands Answer: C Diff: 2 Page Ref: 8 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-46 Question: Which of the following is an example of a service that a company might produce in a foreign country to benefit from low-cost labour?

A) House cleaning B) Dental care C) Appliance repair D) Research & development Answer: D

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International Business, 1ce (Wild/Wild/Valladares Montemayor)

Chapter 1 Globalization

Diff: 1 Page Ref: 8 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-47 Question: Two major forces that underlie the expansion of globalization are ________ and ________.

A) deregulation of tourism; the rise of nationalism B) economic interdependence; the decline of international organizations C) increasing trade barriers; political unrest D) falling barriers to trade and investment; technological innovation Answer: D Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-48 Question: The purpose of the General Agreement on Tariffs and Trade (GATT) was to ________.

A) create an international currency B) regulate exchange rates C) create regional trade organizations D) promote free trade Answer: D Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-49 Question: Taxes levied on traded goods are known as which of the following?

A) Quotas B) Import barriers C) Tariffs D) Export levies Answer: C Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-50 Question: A limit placed on the quantity of an imported product is known as which of the following?

A) Import sanction B) Tariff C) Embargo D) Nontariff barrier Answer: D Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-51 Question: A major flaw of the original General Agreement on Tariffs and Trade (GATT) was that it lacked the power to ________.

A) erect barriers to trade B) dismantle bilateral trade agreements C) govern exchange rates D) enforce world trade rules Answer: D Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

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International Business, 1ce (Wild/Wild/Valladares Montemayor)

Chapter 1 Globalization

Question ID: 1-52 Question: Which of the following most likely represents the greatest accomplishment of the 1994 revision of the GATT? A) Creation of the World Trade Organization B) Creation of regional trade agreements C) Creation of the World Bank D) Creation of the International Monetary Fund Answer: A Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-53 Question: The three main goals of the ________ are to help the free flow of trade, help negotiate the further opening of markets, and settle trade disputes between its members.

A) General Agreement on Tariffs and Trade (GATT) B) World Trade Organization (WTO) C) World Bank D) International Monetary Fund (IMF) Answer: B Diff: 2 Page Ref: 10 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-54 Question: All of the following represent examples of regional trade agreements EXCEPT ________.

A) WTO B) EU C) APEC D) NAFTA Answer: A Diff: 2 Page Ref: 11 Skill: Application Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-55 Question: The value of all goods and services produced by a country’s domestic and international activities over a one-year period is the country’s ________.

A) gross domestic product (GDP) B) trade balance C) gross national product (GNP) D) production quotient Answer: C Diff: 2 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-56 Question: ________ helps nations to produce a greater amount of output.

A) Increasing tariffs B) Improvements in technology C) Openness to trade D) E-commerce Answer: C Diff: 2 Page Ref: 11 Skill: Application Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-57 Question: Innovations in ______________________ are helping globalize markets and production.

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Chapter 1 Globalization

A) production materials B) packaging C) tariff collection D) the shipping industry Answer: D Diff: 2 Page Ref: 14 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-58 Question: An anthropologist may want to examine the influence of globalization on ____________.

A) the living standards B) the culture of people C) education levels D) trade relationships Answer: B Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-59 Question: In the KOF Index of Globalization, Canada ranks number 7 in terms of _________.

A) overall globalization B) economic globalization C) political globalization D) social globalization Answer: D Diff: 2 Page Ref: 16 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-60 Question: The KOF Index of Globalization considers a factor that measures the flow of ideas and information in a country. This is _______________ globalization.

A) technological B) social C) economic D) political Answer: B Diff: 2 Page Ref: 15 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-61 Question: According to the KOF Index of Globalization, _____________ is the overall most globalized country.

A) Switzerland B) Singapore C) United States D) Belgium Answer: D Diff: 1 Page Ref: 16 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-62 Question: The world’s least global nations have one commonality, which is ________________.

A) high import tariffs B) growing services sectors C) low levels of technological connectivity D) inept political leadership

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Chapter 1 Globalization

Answer: C Diff: 2 Page Ref: 16 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-63 Question: The first age of globalization extended from ________.

A) the mid-1700s to the 1850s B) the mid-1800s to the 1920s C) 1920 to 1950 D) 1960 to 2000 Answer: B Diff: 1 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-64 Question: The first age of globalization was halted by all of the following EXCEPT ________.

A) the Great Depression B) the Russian Revolution C) the First World War D) the Cold War Answer: D Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-65 Question: For 75 years, from the start of the First World War to the end of the Cold War, there was a geographic divide between ________, and an ideological divide between ________.

A) North and South; protectionism and socialism B) North and South; regionalism and globalization C) East and West; regionalism and globalization D) East and West; communism and capitalism Answer: D Diff: 2 Page Ref: 15 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-66 Question: Which of the following helped launch the second age of globalization?

A) The end of the Cold War B) The end of the Korean War C) The collapse of the Berlin Wall D) The end of the Second World War Answer: C Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-67 Question: The ________ is an agency created to provide financing for national economic development efforts.

A) International Monetary Fund B) World Trade Organization C) European Union D) World Bank Answer: D Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

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International Business, 1ce (Wild/Wild/Valladares Montemayor)

Chapter 1 Globalization

Question ID: 1-68 Question: Which of the following was created to regulate fixed exchange rates and enforce the rules of the dealing with international monies?

A) International Monetary Fund B) World Trade Organization C) United Nations D) World Bank Answer: A Diff: 1 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-69 Question: The International Monetary Fund serves each of the following purposes EXCEPT ________.

A) promoting international monetary cooperation B) facilitating balanced growth of international trade C) encouraging competitive exchange devaluation D) making financial resources temporarily available to members Answer: C Diff: 2 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-70 Question: According to the opponents of globalization, which of the following occurs as a result of worker dislocation brought about by globalization?

A) Increased labour costs for companies.

B) Gradual lowering of workers’ wages.

C) Sudden widespread wage decreases.

D) Increased investment in individual education.

Answer: B Diff: 2 Page Ref: 19 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-71 Question: Supporters of globalization argue that openness to international trade in a developing nation will ______________________ .

A) bring in workers from developed countries B) raise per capita income in that country C) increase emigration to developed countries D) inspire local workers to work harder Answer: B Diff: 2 Page Ref: 19 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-72 Question: Trade unions claim that globalization ________________________ .

A) strengthens global labour standards B) slows down production C) lowers global labour standards D) increases worker discontent Answer: C Diff: 3 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-73

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International Business, 1ce (Wild/Wild/Valladares Montemayor)

Chapter 1 Globalization

Question: A special region in which companies can engage in tariff-free importing and exporting is called a(n) ________.

A) regional economic integration zone (REIZ) B) international customs zone (ICZ) C) export-processing zone (EPZ) D) free trade development zone (FTDZ) Answer: C Diff: 3 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-74 Question: Opponents of globalization argue that globalization causes environmental conditions to ________.

A) increase gradually B) remain at status quo levels C) decline slightly, then level off D) decline significantly Answer: D Diff: 2 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-75 Question: The three main branches of the debate over income inequality include each of the following EXCEPT ________.

A) inequality within nations B) inequality in nongovernmental organizations C) inequality between nations D) global inequality Answer: B Diff: 2 Page Ref: 21–23 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-76 Question: A business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in multiple countries is called a ________.

A) born global firm B) multinational corporation C) multiregional company D) international corporation Answer: B Diff: 1 Page Ref: 26 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-77 Question: Which of the following makes the world market more accessible for companies that sell traditional products by lessening the cost and difficulties associated with global communication?

A) Technology B) Franchising opportunities C) Licensing D) Financial capital Answer: A Diff: 2 Page Ref: 25 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-78 Question: Key characteristics of born global firms are an ________ and knowledge-based organizational capabilities.

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Chapter 1 Globalization

A) inventive R&D centre B) insular management style C) integrated global network D) innovative culture Answer: D Diff: 2 Page Ref: 25 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-79 Question: The “global business environment” consists of four distinct elements: globalization, national business environments, the international business environment, and ________.

A) falling trade and investment barriers B) international firm management C) technological innovation D) multinational corporations Answer: B Diff: 2 Page Ref: 26 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

Scenario: Tacky Toys and Mushi Toys Tacky Toys, a Canada-based toy retailer, buys all its merchandise from Mushi Toys, a Japan-based toy manufacturer with production facilities in 12 nations. Mushi Toys markets its toys globally without modification.

Question ID: 1-80 Question: Tacky Toys buying its merchandise from Mushi Toys is an example of ________.

A) importing B) bartering C) exporting D) globalization Answer: A Diff: 1 Page Ref: 4 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-81 Question: Mushi Toys selling its products to Tacky Toys is an example of ________.

A) importing B) bartering C) exporting D) globalization Answer: C Diff: 1 Page Ref: 4 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-82 Question: The products that Mushi Toys manufactures are examples of ________.

A) global products B) Internet products C) value-added exports D) industrial products Answer: A Diff: 1 Page Ref: 6 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-83 Question: Mushi Toys is an example of a(n) ________.

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Chapter 1 Globalization

A) domestic company B) multinational company C) direct exporter D) Internet-based company Answer: B Diff: 1 Page Ref: 26 Skill: Application Objective: 1-4 Identify the types of companies that participate in international business.

Scenario: Ciao Manufacturing The Italian car company, Ciao, has made plans to expand its operations by building a manufacturing facility in a foreign market. Ciao has been very successful selling its small, economical, and stylish cars in Italy and Spain, and firm managers believe that the Ciao cars will be equally profitable in other markets.

Question ID: 1-84 Question: Ciao plans to build a model of car that can be marketed in Italy, Spain, and another new foreign market essentially without any changes. The car would be an example of which of the following?

A) Global product B) Source product C) Offshore product D) Market leader product Answer: A Diff: 2 Page Ref: 6 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-85 Question: In marketing a single car to customers in Italy, Spain, and the new foreign market, which of the following is most likely to help Ciao reduce its marketing costs?

A) Seeking sales growth in a fourth market B) Creating TV ads in a single language C) Standardizing marketing activities D) Decentralizing control over its marketing Answer: C Diff: 2 Page Ref: 6 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-86 Question: The decision by Ciao to build a manufacturing facility in a foreign market is an example of which of the following?

A) Globalization of markets B) Globalization of production C) Denationalization D) Standardization Answer: B Diff: 2 Page Ref: 6 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Scenario: Acme Software Acme Software is a Canadian company that makes software for the health-care industry. Recently Acme has been investigating whether it would be beneficial to sell global products or move some of its production overseas. Acme hires a consulting group to help determine which, if any, globalization activities could promote business growth.

Question ID: 1-87 Question: The consulting group identifies two software development companies in India that could provide programming services at a lower cost than Acme’s current cost for programming. Which of the following, if true, would most strongly suggest that outsourcing to these software companies would NOT promote Acme’s business growth?

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A) Indian software developers could provide a high degree of technical expertise for Acme.

B) Software development in the health care industry tends to be more costly than in other industries.

C) Though both companies experience significant employee turnover, product quality does not appear to suffer.

D) Cultural differences in working with the Indian companies would cost more to resolve than any savings gained.

Answer: D Diff: 3 Page Ref: 8 Skill: Critical Thinking Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-88 Question: Which of the following would be most important for the Acme staff to consider when deciding whether to outsource its software development to India in order to lower production costs?

A) Will Acme save money on advertising by targeting Indian Internet users?

B) How intense is the competition from foreign companies in other markets in India?

C) What type of training is received by programmers in the software firms Acme is considering?

D) How successful have Indian companies been at marketing to global customers?

Answer: C Diff: 3 Page Ref: 8–9 Skill: Critical Thinking Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Scenario: Jeans Unlimited Jeans Unlimited produces clothing for young adults. It designs the clothes at its Montreal headquarters and produces them at facilities in two Southeast Asian countries. The company recently received negative press after one of its facilities was found using questionable, albeit legal, labour practices—including employing child labour and operating in a manner that damages the environment.

Question ID: 1-89 Question: The facilities that Jeans Unlimited operates in Southeast Asia are examples of ________.

A) global products B) international business C) globalization of markets D) globalization of production Answer: D Diff: 2 Page Ref: 7–8 Skill: Application Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-90 Question: Which of the following arguments against globalization could most likely be made using Jeans Unlimited as an example?

A) Globalization is responsible for laying off public sector workers in developed countries.

B) Globalization empowers supranational institutions at the expense of national governments.

C) Globalization causes companies to produce goods in nations with the most lenient labour regulations.

D) Globalization is widening the gap in average incomes between rich and poor nations.

Answer: C Diff: 3 Page Ref: 19 Reflective thinking skills Skill: Critical Thinking Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-91 Question: Jeans Unlimited has designed a new line of accessories and must build a new facility to produce them. To avoid paying tariffs when importing raw materials for processing and when exporting finished goods, the company should consider locating its assembly plant in a(n) ________.

A) developing country B) export processing zone C) tariff-free environment D) import processing zone Answer: B

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Diff: 2 Page Ref: 21 Skill: Application Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Scenario: Donna Bader, Global Executive Donna Bader is a successful global business executive with 15 years of marketing experience throughout Europe.

Donna is participating in a forum designed to prepare young executives for their initial forays into international business.

Question ID: 1-92 Question: According to Donna, a key to success in global markets is having detailed knowledge of what international customers want, and ensuring that the company is flexible enough to customize products to meet those needs.

Donna is referring to the notion of ________.

A) improving logistics B) knowing how to analyze a problem C) emphasizing global awareness D) knowing the customer Answer: D Diff: 2 Page Ref: 22 Skill: Application Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-93 Question: Donna believes that to be successful globally a company must design and build products and services for export from the beginning, not as an afterthought following the conquest of domestic markets. Donna is referring to the principle that businesses should ________.

A) know their customers B) emphasize global awareness C) monitor global markets D) market effectively Answer: B Diff: 3 Page Ref: 22 Skill: Application Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Scenario: Globalization Debate In his international business class, Professor Jang organizes a debate on the societal effects of globalization. Juan Prince takes a position against globalization. He emphasizes how supranational institutions can threaten national sovereignty. He also notes the prevalence of low wages and sweatshop conditions as firms utilize low-cost labour abroad. Juan then describes the detrimental effects of corporate pollution on the environment, and he ends his argument by explaining how market globalization helps homogenize national cultures. Rina Taylor is assigned to counter Juan’s position.

Question ID: 1-94 Question: Which of the following does Juan most likely cite to support his argument regarding the influence of supranational institutions on national sovereignty?

A) Examples of the International Monetary Fund (IMF) imposing its will on nations.

B) The fact that the World Trade Organization is led by elected representatives.

C) The political influence of large firms such as Walmart.

D) The effect of globalization on the spread of democracy worldwide.

Answer: A Diff: 3 Page Ref: 24 Skill: Critical Thinking Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-95 Question: Which of the following most likely supports Rina’s argument over Juan’s concerning wages and working conditions in developing countries?

A) Some developing countries today still suffer from low economic growth.

B) Some developing countries have experienced significant increases in wages as a result of globalization.

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C) The move of one international company to Mexico resulted in 2,700 lost jobs for Canadians.

D) Minimum wages should be established at set levels, regardless of the impact on the number of jobs.

Answer: B Diff: 3 Page Ref: 19–20 Skill: Critical Thinking Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-96 Question: Rina most likely counters Juan’s claim regarding the environmental effects of globalization by pointing out which of the following?

A) Land preservation is more important than pollution reduction for preserving the environment.

B) China’s landscape was permanently altered by the construction of the Three Gorges Dam. C) Pollution-intensive Canadian firms tend to invest in countries with stricter environmental standards.

D) Attempts at foreign cultural imperialism are often blocked by national governments.

Answer: C Diff: 3 Page Ref: 21 Skill: Critical Thinking Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-97 Question: Which of the following most likely supports Rina’s argument over Juan’s concerning the homogenization of national cultures?

A) Many countries specialize in producing the goods and services they can produce most efficiently.

B) Globalization tends to shift not just superficial aspects of culture, but deeply held beliefs as well.

C) Material goods such as cell phones and computers are found in most homes throughout the world.

D) In most industries, domestic operation alone cannot sustain competitive business growth.

Answer: A Diff: 3 Page Ref: 25 Skill: Critical Thinking Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Scenario: Sabrina’s Spices & Sauces Last year, Sabrina Shin started a business selling all types of spices and hot sauces. The business is small but this entrepreneur’s dreams are big. Given limited demand and sales fluctuations in the domestic market, Sabrina has been considering going international. Yet she has little information, many doubts, and no guidance.

Question ID: 1-98 Question: Which of the following can help Sabrina reach consumers in different corners of the world quickly and inexpensively?

A) Intranet B) Extranet C) GPS D) Internet Answer: D Diff: 1 Page Ref: 14 Skill: Application Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-99 Question: If you were to advise Sabrina on the myths versus facts of exporting, which of the following would you say is a fact?

A) Only large companies can export successfully.

B) Sabrina’s products do not need export licensing.

C) Small businesses have no place to turn for export advice.

D) There is no export financing available for Sabrina’s business.

Answer: B Diff: 3 Page Ref: 27 Skill: Application Objective: 1-4 Identify the types of companies that participate in international business.

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Question ID: 1-100 Question: If Sabrina needs $500 000 to expand her business internationally, which of the following organizations might be her best bet?

A) Any commercial bank in Canada B) World Trade Organization C) Business Development Bank of Canada D) International Monetary Fund Answer: C Diff: 3 Page Ref: 25 Skill: Application Objective: 1-4 Identify the types of companies that participate in international business.

Fill-In-The-Blank Question ID: 1-101 Question: Goods and services sold abroad and sent out of a country are called ________.

Answer: exports Diff: 1 Page Ref: 4 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-102 Question: The term ________ refers to national boundaries becoming less relevant.

Answer: denationalization Diff: 2 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-103 Question: The term ________ refers to entities cooperating across national boundaries.

Answer: internationalization Diff: 3 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-104 Question: Companies that sell global products can reduce costs by ________ certain marketing activities.

Answer: standardizing Diff: 3 Page Ref: 6 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-105 Question: Makers of global seasonal products may supplement domestic sales with ________ to level their income streams.

Answer: international sales Diff: 3 Page Ref: 7 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-106 Question: ________ refers to the dispersal of production activities to locations that help a company achieve its costminimization or quality-maximization objectives for a good or service.

Answer: Globalization of production Diff: 2 Page Ref: 7 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-107

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Question: The quest for ________ draws many companies into international markets.

Answer: natural resources Diff: 2 Page Ref: 8 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-108 Question: The two main forces that underlie the globalization of markets and production are ________ and technological innovation.

Answer: falling barriers to trade and investment Diff: 2 Page Ref: 9 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-109 Question: ________ is the sum of all individual nations’ gross domestic product (GDP) figures.

Answer: World GDP Diff: 3 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-110 Question: ________ is the value of all goods and services produced by a country’s domestic and international activities over a one-year period.

Answer: Gross national product (GNP) Diff: 2 Page Ref: 11 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-111 Question: The KOF Index of Globalization comprises a compilation of over a dozen variables within three categories: economic globalization, _____________, and political globalization.

Answer: social globalization Diff: 3 Page Ref: 14 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-112 Question: Drivers of the first age of globalization (from the mid-1800s to the 1920s) included the steamship, telegraph, railroad, and later, the ________ and airplane.

Answer: telephone Diff: 3 Page Ref: 17 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-113 Question: ________ are special areas in which companies engage in tariff-free importing and exporting.

Answer: Export-processing zones (EPZs) Diff: 2 Page Ref: 21 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-114 Question: The three main branches of the debate over income inequality are inequality within nations, inequality between nations, and ________.

Answer: global inequality Diff: 2 Page Ref: 21–23 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

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Question ID: 1-115 Question: ________ involves the idea that a nation-state (1) is autonomous; (2) can freely select its government; (3) cannot intervene in the affairs of other nations; (4) can control movements across its borders; and (5) can enter into binding international agreements.

Answer: National sovereignty Diff: 2 Page Ref: 24 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-116 Question: National ________ is a strong shaper of a people’s values, attitudes, customs, beliefs, and communication styles.

Answer: culture Diff: 1 Page Ref: 24 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-117 Question: ________ allows countries to specialize in producing goods and services in which they are most efficient.

Answer: Trade Diff: 1 Page Ref: 25 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-118 Question: Largely because of advances in ________, small and medium-sized companies are accounting for a greater portion of international business.

Answer: technology Diff: 1 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-119 Question: The rise of a new international entity called the ________ suggests that any firm, regardless of age, experience, and resources, can engage in international business.

Answer: born global firm Diff: 1 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-120 Question: The four elements comprising the “global business environment” include ________, national business environments, the international business environment, and international firm management.

Answer: globalization Diff: 1 Page Ref: 28–29 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

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Essay Question ID: 1-121 Question: Explain what we mean by “international business,” why is it special; and describe in detail how it affects each of us in our daily activities.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

International business is any commercial transaction that crosses the borders of two or more nations. In our daily activities, we encounter terms such as outsourcing, emerging markets, competitive advantage, sustainability, and

social responsibility.

Each of us experiences the result of dozens of international transactions every day. A quick glance at the “Made in” tags on our jacket, backpack, watch, wallet, or other items will demonstrate the pervasiveness of international business transactions.

Part of international business is imports and exports. Imports are goods and services purchased abroad and brought into a country. Exports are goods and services sold abroad and sent out of a country.

International business differs from business in a purely domestic content in that nations create entirely different commercial environments in which to conduct global business.

Diff: 1 Page Ref: 4, 28–29 Skill: Synthesis Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-122 Question: Explain in detail e-business (e-commerce) and describe how it helps companies conduct international business.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

E-business (e-commerce) is the use of computer networks to purchase, sell, or exchange products; service customers; and collaborate with partners. E-business is making it easier for companies to make their products abroad, not simply import and export finished goods.

Technology is one of the two main drivers of globalization and has had a huge impact on expanding global business.

Born global firms often rely completely on technology and e-commerce to make their mark on the international business world.

Diff: 2 Page Ref: 4–5, 14, 27 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-123 Question: Explain in detail what constitutes globalization and describe its main characteristics; include the factors that influence countries to be more or less global.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Globalization is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. Globalization is a trend characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries).

The greater interdependence that globalization is causing means an increasingly freer flow of goods, services, money, people, and ideas across national borders.

The KOF Index of Globalizations measures countries’ extent of globalization based on economic globalization, social globalization and political globalization.

Diff: 2 Page Ref: 6, 9, 14, 15–16 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-124 Question: Describe in detail what benefits (or drawbacks) a company might experience from the globalization of markets.

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Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The globalization of markets refers to convergence in buyer preferences in markets around the world.

The benefits of the globalization of markets for companies include: 1. Reduces marketing costs. Companies that sell global products can reduce costs by standardizing certain marketing activities. A company selling a global consumer good can make an identical product for the global market and then simply design different packaging to account for the language spoken in each market. Companies can achieve further cost savings by keeping an ad’s visual component the same for all markets but dubbing TV ads and translating print ads into local languages.

2. Creates new market opportunities. A company that sells a global product can explore opportunities abroad if the home market is small or becomes saturated. Seeking sales growth abroad can be absolutely essential for an entrepreneur or small company that sells a global product but has a limited home market.

3. Levels uneven income streams. A company that sells a product with universal, but seasonal, appeal can use international sales to level its income stream. By supplementing domestic sales with international sales, the company can reduce or eliminate wide variations in sales between seasons and steady its cash flow.

Diff: 2 Page Ref: 6–7, 21 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-125 Question: Describe in detail how a company might benefit from the globalization of production. Give specific examples of how companies have expanded their production and the benefits and problems that might have resulted.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or service. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services.

The globalization of production can benefit companies through the following ways: 1. Access to lower cost workers. Global production activities allow companies to reduce overall production costs through access to low-cost labour. For decades, companies located their factories in low-wage nations to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally applied to production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Many European and US businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent.

2. Access technical expertise. Companies also produce goods and services abroad to benefit from technical knowhow.

3. Access production inputs. Globalization of production allows companies to access resources that are unavailable or more costly at home. The quest for natural resources draws many companies into international markets.

Diff: 2 Page Ref: 6, 7–9, 20 Skill: Synthesis Objective: 1-1 Describe the process of globalization and how it affects markets and production.

Question ID: 1-126 Question: Describe the process of globalization and explain the two main forces driving globalization.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Globalization is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. Globalization is a trend characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries).

The greater interdependence that globalization is causing means an increasingly freer flow of goods, services, money, people, and ideas across national borders.

Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation.

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1. Falling barriers to trade and investment. In 1947, political leaders of 23 nations (12 developed and 11 developing economies) made history when they created the General Agreement on Tariffs and Trade (GATT)—a treaty designed to promote free trade by reducing both tariffs and nontariff barriers to international trade. Tariffs are essentially taxes levied on traded goods, and nontariff barriers are limits on the quantity of an imported product. The treaty was successful in its early years. After four decades, world merchandise trade had grown 20 times larger, and average tariffs had fallen from 40 percent to 5 percent. Significant progress occurred again with a 1994 revision of the GATT treaty. Nations that had signed on to the treaty further reduced average tariffs on merchandise trade and lowered subsidies (government financial support) for agricultural products. The treaty’s revision also clearly defined intellectual property rights—giving protection to copyrights (including computer programs, databases, sound recordings, and films), trademarks and service marks, and patents (including trade secrets and know-how). A major flaw of the original GATT was that it lacked the power to enforce world trade rules. Likely the greatest accomplishment of the 1994 revision was the creation of the World Trade Organization.

2. Technological innovation. Although falling barriers to trade and investment encourage globalization, technological innovation is accelerating its pace. Significant advancements in information technology and transportation methods are making it easier, faster, and less costly to move data, goods, and equipment around the world. Important technological innovations include e-mail, videoconferencing, the Internet, the World Wide Web, corporate intranets and extranets, and advancements in transportation technologies (including GPS and RFID).

Diff: 3 Page Ref: 6, 9–14 Skill: Concept Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-127 Question: Describe the two major forces that drive globalization and how they work together to expand globalization.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation. These two features are increasing competition among nations by leveling the global business playing field. Greater competition is simultaneously driving companies worldwide into more direct confrontation and cooperation. Local industries once isolated by time and distance are increasingly accessible to large international companies based many thousands of miles away. Some small and medium-sized local firms are compelled to cooperate with one another or with larger international firms to remain competitive. Other local businesses revitalize themselves in a bold attempt to survive the competitive onslaught. And on a global scale, consolidation is occurring in many industries as former competitors link up to challenge others on a worldwide basis.

Diff: 3 Page Ref: 4–5, 9–14 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-128 Question: Identify the World Trade Organization’s (WTO) three main goals and explain how the WTO differs from the General Agreement on Tariffs and Trade (GATT). Give examples of countries that have been affected by WTO rules.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The World Trade Organization (WTO) is the international organization that enforces the rules of international trade.

The three main goals of the WTO are to help the free flow of trade, help negotiate the further opening of markets, and settle trade disputes among its members. It is the power of the WTO to settle trade disputes that really sets it apart from its predecessor, the GATT. The various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. Offenders must realign their trade policies according to WTO guidelines or face fines and, perhaps, trade sanctions (penalties). Because of its ability to penalize offending nations, the WTO’s dispute settlement system truly is the spine of the global trading system. The WTO replaced the institution of GATT but absorbed all of the former GATT agreements. Thus, the GATT institution no longer officially exists.

Diff: 3 Page Ref: 9–11, 24 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

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Question ID: 1-129 Question: Explain how technological innovation impacts globalization and how it is accelerating the process.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Significant advancements in information technology and transportation methods are making it easier, faster, and less costly to move data, goods, and equipment around the world.

1. E-mail and videoconferencing. Operating across borders and time zones complicates the job of coordinating and controlling business activities. But technology can speed the flow of information and ease the tasks of coordination and control. Electronic mail (e-mail) is an indispensable tool that managers use to stay in contact with international operations and to respond quickly to important matters. Videoconferencing allows managers in different locations to meet in virtual face-to-face meetings. Primary reasons for 25 to 30 percent annual growth in videoconferencing include lower-cost bandwidth (communication channels) used to transmit information, lower-cost equipment, and the rising cost of travel for businesses. Videoconferencing equipment can cost as little as $5000 and as much as $340 000. A company that does not require ongoing videoconferencing can pay even less by renting the facilities and equipment of a local conference centre.

2. Internet and World Wide Web. Companies use the Internet to quickly and cheaply contact managers in distant locations—for example, to inquire about production runs, revise sales strategies, and check on distribution bottlenecks. They also use the Internet to achieve longer-term goals, such as sharpen their forecasting, lower their inventories, and improve communication with suppliers. The lower cost of reaching an international customer base especially benefits small firms, which were among the first to use the Web as a global marketing tool. Further gains arise from the ability of the Internet to cut postproduction costs by decreasing the number of intermediaries a product passes through on its way to the customer. Eliminating intermediaries greatly benefits online sellers of books, music, and travel services, among others.

3. Company intranets and extranets: Internal company Web sites and information networks (intranets) give employees access to company data using personal computers. Extranets give distributors and suppliers access to a company’s database to place orders or restock inventories electronically and automatically. These networks permit international companies (along with their suppliers and buyers) to respond to internal and external conditions more quickly and more appropriately.

4. Advancements in transportation technologies. Retailers worldwide rely on imports to stock their storerooms with finished goods and to supply factories with raw materials and intermediate products. Innovation in the shipping industry is helping globalize markets and production by making shipping more efficient and dependable. In the past, a cargo ship would sit in port up to 10 days while it was unloaded one pallet at a time. But because cargo today is loaded onto a ship in 20- and 40-foot containers that are quickly unloaded onto railcars or truck chassis at the final destination, a 700-foot cargo ship is routinely unloaded in just 15 hours. Operation of cargo ships is now simpler and safer due to computerized charts that pinpoint a ship’s movements on the high seas using Global Positioning System (GPS) satellites. Combining GPS with radio frequency identification (RFID) technology allows continuous monitoring of individual containers from port of departure to destination. RFID can tell whether a container’s doors are opened and closed on its journey and can monitor the temperature inside refrigerated containers.

Diff: 2 Page Ref: 14 Skill: Synthesis Objective: 1-2 Identify the two forces causing globalization to increase.

Question ID: 1-130 Question: Explain in detail the factors that help make some countries more global than others. Identify several highly global nations based on the KOF Index of Globalization.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Several factors help to make some countries more global than others.

1. Economic globalization: trade and investment flows, and trade barriers 2. Social globalization: flow of ideas and information 3. Political globalization: degree of political cooperation between countries The top ten highly global nations are Belgium, Ireland, Netherlands, Austria, Singapore, Sweden, Denmark, Hungary, Portugal, and Switzerland.

Diff: 2 Page Ref: 15–16 Skill: Concept Objective: 1-2 Identify the two forces causing globalization to increase.

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Question ID: 1-131 Question: One argument in the debate surrounding globalization is about the inequality between nations. Discuss the major points of the inequality between nations argument and describe how falling barriers to trade and investment might help reduce the inequality between nations.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The inequality between nations debate questions the widening gap in average incomes between rich and poor nations. If we compare average incomes in high-income countries with average incomes in middle- and low-income nations, we do find a widening gap. But averages conceal differences between nations. On closer inspection, it appears the gap between rich and poor nations is not occurring everywhere: one group of poor nations is closing the gap with rich economies, while a second group of poor countries is falling further behind. For example, China is narrowing the income gap between itself and the United States as measured by GDP per capita, but the gap between Africa and the United States is widening. China’s progress is no doubt a result of its integration with the world economy and annual economic growth rates of around 9 percent. Another emerging market, India, is also narrowing its income gap with the United States by embracing globalization. Developing countries that embrace globalization are increasing personal incomes, extending life expectancies, and improving education systems. In addition, postcommunist countries that welcomed world trade and investment experienced high growth rates in GDP per capita.

But nations that remain closed off from the world economy have performed far worse.

Falling barriers to trade and investment may help reduce the inequality between nations by leveling the global business playing field. Specifically, the WTO launched a new round of negotiations in Doha, Qatar, in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations in particular.

Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day—more than six times the value of their combined aid budgets to poor nations. Because 70 percent of poor nations’ exports are agricultural products and textiles, wealthy nations had intended to further open these and other labour-intensive industries. Poor nations were encouraged to reduce tariffs among themselves and were to receive help in integrating themselves into the global trading system. Although the Doha round was to conclude by the end of 2004, negotiations are proceeding more slowly than was anticipated.

Diff: 3 Page Ref: 9–11, 15–16, 21–23 Skill: Synthesis Objective: 1-2 Identify the two forces causing globalization to increase; 1-3 Summarize the evidence for each main argument in the globalization debate Question ID: 1-132 Question: Explain in detail how this current period of globalization compares with the first age of globalization.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The first age of globalization extended from the mid-1800s to the 1920s. In those days, labour was highly mobile, with 300,000 people leaving Europe each year in the 1800s and 1 million people leaving each year after 1900. Other than in wartime, nations did not even require passports for international travel before 1914. And like today, workers in wealthy nations back then feared competition for jobs from high- and low-wage countries.

Trade and capital flowed more freely than ever during that first age of globalization. Huge companies from wealthy nations built facilities in distant lands to extract raw materials and produce all sorts of goods. Large cargo ships plied the seas to deliver their manufactures to distant markets. The transatlantic cable (completed in 1866) allowed news between Europe and the United States to travel faster than ever before. The drivers of that first age of globalization included the steamship, telegraph, railroad, and, later, the telephone and airplane.

Although it took until the 1990s for international capital flows, in absolute terms, to recover to levels seen prior to the First World War, the global economy had finally been reborn. Lowering the cost of telecommunications and binding our world more tightly together are the drivers of this second age of globalization—communication satellites, fiber optics, microchips, and the Internet.

Diff: 2 Page Ref: 9–14, 17 Skill: Synthesis Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-133 Question: Compare and contrast the purposes of the World Bank and the International Monetary Fund. Give specific examples of how the actions of these two bodies have impacted selected countries.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the

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textbook, class discussions, Internet, and/or newspapers and other publications.

The World Bank is an agency created to provide financing for national economic development efforts. The initial purpose of the World Bank was to finance European reconstruction following the Second World War. It later shifted its focus to the general financial needs of developing countries, and today it finances many economic development projects in Africa, South America, and Southeast Asia.

The International Monetary Fund (IMF) is an agency created to regulate fixed exchange rates and enforce the rules of the international monetary system. Today, the IMF has 185 member countries. Some of the purposes of the IMF include promoting international monetary cooperation; facilitating expansion and balanced growth of international trade; avoiding competitive exchange devaluation; and making financial resources temporarily available to members.

Diff: 3 Page Ref: 17–18, 23–24 Skill: Concept Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

Question ID: 1-134 Question: Globalization’s impact on jobs and wages is an important topic for debate. Discuss the major points in support of globalization in the jobs and wages debate, and describe how the actions of large multinational corporations affect the issues in the jobs and wages debate.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Supporters of globalization credit it with improving standards of living and making possible new ways of life. They argue that globalization increases wealth and efficiency in all nations, generates labour market flexibility in developed nations, and advances the economies of developing nations.

1. Increases wealth and efficiency in all nations. Some economists believe globalization increases wealth and efficiency in both developed and developing nations. Globalization supporters argue that openness to international trade (the ratio of trade to national output) increases national production (by increasing efficiency) and raises per capita income (by passing savings on to consumers). For instance, by squeezing inefficiencies out of the retail supply chain, powerful global retailers help restrain inflation and boost productivity. Some economists predict that removing all remaining barriers to free trade would significantly boost worldwide income and greatly benefit developing nations.

2. Generates labour market flexibility in developed nations. Globalization supporters believe globalization creates positive benefits by generating labour market flexibility in developed nations. It is claimed that benefits derive from worker dislocation, or “churning” as it is called when there is widespread job turnover throughout an economy.

Flexible labour markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued and in demand. This also allows employees, particularly young workers, to change jobs easily with few negative effects. For instance, a young person can gain experience and skills with an initial employer and then move to a different job that provides a better match between employee and employer.

3. Advances economies of developing nations. Those in favour of globalization argue that globalization and international outsourcing help to advance developing nations’ economies.

A multinational corporation (MNC) is a business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in multiple countries. The actions of multinationals affect the issues in the jobs and wages debate because these companies generate significant jobs, investment, and tax revenue for the regions and nations they enter. Likewise, they can leave thousands of people out of work when they close or scale back operations. Mergers and acquisitions between multinationals are commonly worth billions of dollars and increasingly involve companies based in emerging markets. Some companies have more employees than many of the smallest countries and island nations have citizens. Walmart has 2 055 000 employees—the most of any company. We see the enormous economic clout of multinational corporations when we compare the revenues of the Global 500 ranking of companies to the value of goods and services that countries generate. If Walmart were a country, it would weigh in as a rich nation and rank just below Switzerland.

Diff: 3 Page Ref: 17, 19–20, 26–27 Skill: Synthesis Objective: 1-3 Summarize the evidence for each main argument in the globalization debate; 1-4 Identify the types of companies that participate in international business.

Question ID: 1-135 Question: Explain how technological innovation has benefitted entrepreneurs in their search for opportunities for globalization.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Technological innovation is accelerating the pace of globalization. Significant advancements in information technology and transportation methods are making it easier, faster, and less costly to move data, goods, and equipment around the world. Important technological advances include e-mail, videoconferencing, the Internet and the World Wide Web, company intranets and extranets, and advancements in transportation technologies (including GPS and RFID).

Entrepreneurs and small businesses have benefitted from these technological innovations because in this age of globalization, small companies are increasingly active in international trade and investment. Companies are exporting earlier and growing faster, often with help from technology. Whereas traditional distribution channels often gave only large companies access to distant markets, electronic distribution is a cheap and effective alternative for small businesses that sell digitized products. Small companies that sell traditional products also benefit from technology that lowers the cost and difficulties of global communication.

Diff: 3 Page Ref: 14, 27 Skill: Synthesis Objective: 1-2 Identify the two forces causing globalization to increase; 1-4 Identify the types of companies that participate in international business.

Question ID: 1-136 Question: Explain with examples why entrepreneurs and small businesses are increasingly active in international trade and investment.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In this age of globalization, small companies are increasingly active in international trade and investment. Companies are exporting earlier and growing faster, often with help from technology. Whereas traditional distribution channels often gave only large companies access to distant markets, electronic distribution is a cheap and effective alternative for small businesses that sell digitized products. Small companies that sell traditional products also benefit from technology that lowers the cost and difficulties of global communication.

Diff: 2 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-137 Question: What are several myths that keep small companies from engaging in exporting and the facts that dispel these myths?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Myth 1: Only large companies can export successfully.

Fact: Most exporters are small and medium-sized enterprises with fewer than 50 employees. Exporting can reduce the dependency of small firms on domestic markets and can help them avoid seasonal sales fluctuations. A product popular domestically, or perhaps even unsuccessful at home, may be wanted elsewhere in the global market.

Myth 2: Small businesses can find little export advice.

Fact: Novice and experienced exporters alike can receive comprehensive export assistance from federal agencies (www.export.gov). International trade specialists can help small businesses locate and use federal, state, local, and private-sector programs. They are also an excellent source of market research, trade leads, financing, and trade events.

Myth 3: Licensing requirements needed to export are too complicated.

Fact: Most products do not need export licenses. Exporters need only to write “NLR” for “no license required” on their Shipper’s Export Declaration. A license is generally needed only for high-tech or defense-related goods or when the receiving country is under a US embargo or other restriction.

Myth 4: Small businesses cannot obtain export financing.

Fact: The Small Business Administration and the Export-Import Bank work together in lending money to small businesses. Whereas the SBA is responsible for loan requests below $750 000, the Ex-Im Bank handles transactions over $750 000. The Trade and Development Agency also helps small and medium-sized firms obtain financing for international projects.

Diff: 2 Page Ref: 27 Skill: Concept Objective: 1-4 Identify the types of companies that participate in international business.

Question ID: 1-138 Question: Describe key characteristics of a born global firm, and explain why a born global firm would be attuned to

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international firm management.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Globalization has given rise to a new international entity, the born global firm—a company that adopts a global perspective and engages in international business from or near its inception. Key characteristics of born global firms are an innovative culture and knowledge-based organizational capabilities. Although these firms first appeared in nations having small domestic markets, today they arise from all major trading nations. Remarkably, many of these companies rise to the status of international competitor in less than three years. Perhaps the extreme example of a born global firm is one that reaches out to customers around the world solely through the Internet.

A born global firm would be attuned to international firm management because managing a global company is vastly different from managing a purely domestic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the characteristics of national business environments. Because of widely dispersed production and marketing activities today, firms commonly interact with people in distant locations within the international business environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their operations by closely monitoring globalization, national business environments, and the international business environment.

Diff: 3 Page Ref: 27–29 Skill: Synthesis Objective: 1-4 Identify the types of companies that participate in international business; 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-139 Question: Explain globalization of production and include its benefits. Why should a company study international firm management if its leadership commits to globalization of production?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or service. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services.

Benefits to companies for the globalization of production include: 1. Access to lower-cost workers. Global production activities allow companies to reduce overall production costs through access to low-cost labour. For decades, companies located their factories in low-wage nations to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Although most services must be produced where they are consumed, some services can be performed at remote locations where labour costs are lower. Many European and US businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent.

2. Access to technical expertise. Companies also produce goods and services abroad to benefit from technical knowhow.

3. Access to production inputs. Globalization of production allows companies to access resources that are unavailable or more costly at home. The quest for natural resources draws many companies into international markets.

If a company commits to the globalization of production, its leadership should study international firm management because this management arena is vastly different from managing a purely domestic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the characteristics of national business environments. Because of widely dispersed production and marketing activities today, firms commonly interact with people in distant locations within the international business environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their operations by closely monitoring globalization, national business environments, and the international business environment.

Diff: 3 Page Ref: 7–9, 28–29 Skill: Synthesis Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-5 Describe the global business environment and identify its four main elements.

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Question ID: 1-140 Question: Explain the globalization of markets, and describe how a company might work within an international business environment to take advantage of the globalization of markets.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Globalization of markets refers to convergence in buyer preferences in markets around the world. This trend is occurring in many product categories, including consumer goods, industrial products, and business services. Global products are products marketed in all countries essentially without any changes. The globalization of markets is important to international business because of the benefits it offers companies.

To take advantage of the globalization of markets, a company must operate within an international business environment. The international business environment influences how firms conduct their operations in both subtle and not-so-subtle ways. No business is entirely immune to events in the international business environment, as evidenced by the long-term trend toward more porous national borders. The drivers of globalization are causing the flows of trade, investment, and capital to grow and become more entwined—often causing firms to search simultaneously for production bases and new markets. Companies today must keep their finger on the pulse of the international business environment to see how it may affect their business activities.

Important factors are the four main elements in the global business environment: globalization, the international business environment, the national business environment and international firm management.

Diff: 3 Page Ref: 6, 28–29 Skill: Synthesis Objective: 1-1 Describe the process of globalization and how it affects markets and production; 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-141 Question: Describe in detail the “global business environment” model and each of its four elements.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

International business is special because it occurs within a dynamic, integrated system that weaves together four distinct elements: 1. The forces of globalization. Globalization is a potent force transforming our societies and commercial activities in countless ways. In this way, the drivers of globalization (technological innovation and falling trade and investment barriers) influence every aspect of the global business environment. The dynamic nature of globalization also creates increasing competition for all firms everywhere, as managers begin to see the entire world as an opportunity. At home and abroad, firms must remain vigilant to the fundamental societal and commercial changes that globalization is causing.

2. The international business environment. The international business environment influences how firms conduct their operations in both subtle and not-so-subtle ways. No business is entirely immune to events in the international business environment, as evidenced by the long-term trend toward more porous national borders. The drivers of globalization are causing the flows of trade, investment, and capital to grow and become more entwined—often causing firms to search simultaneously for production bases and new markets. Companies today must keep their finger on the pulse of the international business environment to see how it may affect their business activities.

3. Many national business environments. Each national business environment is composed of unique cultural, political, legal, and economic characteristics that define business activity within that nation’s borders. This set of national characteristics can differ greatly from country to country. But, as nations open up and embrace globalization, their business environments are being transformed. Globalization can cause powerful synergies and enormous tensions to arise within and across various elements of a society. Company managers must be attentive to such nuances, adapting their products and practices as needed.

4. International firm management. International firm management is vastly different from managing a purely domestic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the characteristics of national business environments. Because of widely dispersed production and marketing activities today, firms commonly interact with people in distant locations within the international business environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their operations by closely monitoring globalization, national business environments, and the international business environment.

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Diff: 3 Page Ref: 28–29 Skill: Concept Objective: 1-5 Describe the global business environment and identify its four main elements.

Question ID: 1-142 Question: Globalization has both supporters and opponents. Discuss in detail how both of these groups view globalization’s impact on the environment, national sovereignty, and culture.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Environment: opponents say that globalization causes a “race to the bottom” in environmental conditions, meaning that companies from developed countries do not care about the environment in the country of production.

Supporters say that companies are now looking at relocating the countries with new and stricter environmental laws and therefore developing countries are paying more attention to environmental protection because they want foreign investors. So environmental policies are improving overall.

Opponents of globalization protest that strong developed nations as well as supranational organizations such as IMF exert too much influence on weaker governments. Big multinational firms also have much financial power to influence local governments who want to appear competent by bringing in foreign investment. Supporters on the other hand point to the spread of democracy as a proof that globalization is focused on giving peoples of poor nations more freedom and increased level of economic well-being.

Opponents argue that globalization eradicates cultural differences and influences valuable local cultural norms to disappear. Supporters argue that in many countries the local culture is stronger because nations want to fight the intrusion of foreign cultural imports.

Diff: 3 Page Ref: 21, 24–25, 22, 24–25 Skill: Synthesis Objective: 1-3 Summarize the evidence for each main argument in the globalization debate.

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Chapter 2 Cross-Cultural Business

Chapter 2 Cross-Cultural Business True/False Question ID: 2-1 Question: The first step in analyzing a nation’s potential for international business activity is to examine its customs.

Answer: FALSE Diff: 1 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-2 Question: Ethnocentricity improves the ability to manage new business practices abroad.

Answer: FALSE Diff: 2 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-3 Question: Democratic nations that value freedom of speech do not regulate economic sectors such as broadcasting.

Answer: FALSE Diff: 2 Page Ref: 48 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-4 Question: Subcultures share the same language, lifestyle, values, and attitudes as the dominant culture.

Answer: FALSE Diff: 2 Page Ref: 48 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-5 Question: A nation’s cultural boundaries do not always correspond to its political boundaries.

Answer: TRUE Diff: 2 Page Ref: 49 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-6 Question: Some subcultures exist across national borders.

Answer: TRUE Diff: 2 Page Ref: 49 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-7 Question: The cultural component of aesthetics deals with elements such as imagery, symbolism, and the arts.

Answer: TRUE Diff: 1 Page Ref: 49 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-8 Question: Black is the universal colour that symbolizes death and mourning.

Answer: FALSE Diff: 2 Page Ref: 50 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

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Question ID: 2-9 Question: In today’s global business world, the use of a 12-hour clock (as opposed to the 24-hour clock) is universally appropriate.

Answer: FALSE Diff: 2 Page Ref: 50 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-10 Question: When going global with an Internet presence, it is highly beneficial for a business to localize its Web site.

Answer: TRUE Diff: 2 Page Ref: 50 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-11 Question: Japanese employees place value on group consensus.

Answer: TRUE Diff: 2 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-12 Question: A culture’s values tend to be rigid over time.

Answer: TRUE Diff: 2 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-13 Question: Status refers to the way a culture divides its population according to positions within its social structure.

Answer: TRUE Diff: 1 Page Ref: 56 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-14 Question: Religion strongly affects the kinds of goods and services acceptable to Muslim consumers.

Answer: TRUE Diff: 2 Page Ref: 60 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-15 Question: French is the most widely used “lingua franca” in international business.

Answer: FALSE Diff: 2 Page Ref: 64 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-16 Question: Literacy tests offer a reliable basis on which to compare one nation’s education level to another’s.

Answer: FALSE Diff: 3 Page Ref: 66 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-17 Question: Nations that invest in worker training are usually rewarded with productivity increases and rising incomes.

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Answer: TRUE Diff: 1 Page Ref: 67 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-18 Question: Hong Kong, South Korea, Singapore, and Taiwan have experienced rapid economic development despite their poor education systems.

Answer: FALSE Diff: 2 Page Ref: 67 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-19 Question: Material culture often displays uneven development across a nation’s industries.

Answer: TRUE Diff: 2 Page Ref: 68 Skill: Concept Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-20 Question: Group-oriented cultures are typically found in Europe and North America.

Answer: FALSE Diff: 2 Page Ref: 70 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-21 Question: In cultures with large power distance, prestige and rewards tend to be equally shared between superiors and rank-and-file employees.

Answer: FALSE Diff: 3 Page Ref: 70 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-22 Question: Cultures that score low on uncertainty avoidance tend to be more open to change and new ideas.

Answer: TRUE Diff: 3 Page Ref: 71 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-23 Question: Three main approaches to the staffing of international business operations are ethnocentric, polycentric, and geocentric.

Answer: TRUE Diff: 1 Page Ref: 73–74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-24 Question: Companies use polycentric staffing to re-create local operations in the image of home-country operations.

Answer: FALSE Diff: 3 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-25 Question: An ethnocentric staffing strategy can facilitate the transfer of special know-how to branch operations.

Answer: TRUE

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Diff: 2 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-26 Question: In ethnocentric staffing, operations outside the home country are managed by individuals from the host country.

Answer: FALSE Diff: 2 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-27 Question: Polycentric staffing places managerial responsibility in the hands of people intimately familiar with the local business environment.

Answer: TRUE Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-28 Question: The major drawback to polycentric staffing is the potential for losing control of the host-country operation.

Answer: TRUE Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-29 Question: In geocentric staffing, operations outside the home country are managed by the best-qualified individuals, regardless of nationality.

Answer: TRUE Diff: 1 Page Ref: 74–75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-30 Question: A geocentric policy towards staffing is typically reserved for mid-level managers.

Answer: FALSE Diff: 2 Page Ref: 75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-31 Question: A major drawback of geocentric staffing is that it is expensive.

Answer: TRUE Diff: 1 Page Ref: 75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-32 Question: The first phase of human resource planning involves taking an inventory of a company’s current human resources.

Answer: TRUE Diff: 1 Page Ref: 75 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-33 Question: When cultural understanding is a key job requirement, firms commonly hire local managers.

Answer: TRUE

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Diff: 2 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-34 Question: Companies typically recruit locally for non-managerial positions.

Answer: TRUE Diff: 1 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-35 Question: Culture shock is a psychological process characterized by homesickness, irritability, confusion, aggravation, and depression.

Answer: TRUE Diff: 1 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-36 Question: The psychological process of readapting to one’s home culture is called expatriation.

Answer: FALSE Diff: 2 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-37 Question: The extent of a company’s involvement in international business dealings helps determine the level of cultural knowledge required for its employees.

Answer: TRUE Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-38 Question: Sensitivity training constitutes the most basic level of cultural training for managers on international assignments.

Answer: FALSE Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-39 Question: In managerial cultural training programs, field experience involves visiting the culture, walking the streets of its cities and villages, and becoming absorbed by the culture for a short time.

Answer: TRUE Diff: 2 Page Ref: 79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

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Chapter 2 Cross-Cultural Business

Multiple Choice Question ID: 2-40 Question: Typically, the first step in the process of analyzing a nation’s potential as a host for international business activity is to ________.

A) assess its overall business climate B) analyze its religious environment C) investigate its history of corruption D) evaluate its legal system Answer: A Diff: 2 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-41 Question: Which of the following terms is defined as the set of values, beliefs, rules, and institutions held by a specific group of people?

A) Customs B) Rituals C) Culture D) Aesthetics Answer: C Diff: 1 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-42 Question: The belief that one’s own ethnic group or culture is superior to that of others is referred to as ________.

A) cultural inheritance B) cultural diffusion C) cultural literacy D) ethnocentricity Answer: D Diff: 1 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-43 Question: Which of the following is the best example of a case in which ethnocentricity undermines an international business project?

A) International investors avoid investing in an Indian company because they are unsure of India’s commitment to free markets.

B) Production falls at a Canadian owned factory in Vietnam because workers react negatively to Canadian management techniques.

C) China relies on its natural resources and inexpensive factory labour to promote its country’s economic development.

D) Korean managers of a manufacturing company are sent to East European plants to learn the work habits of local workers.

Answer: B Diff: 3 Page Ref: 46 Skill: Application Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-44 Question: Detailed knowledge about a culture that enables people to live and work within that culture is called ________.

A) cultural literacy B) social mobility C) cultural diffusion D) cultural assimilation

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Answer: A Diff: 1 Page Ref: 47 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-45 Question: Which one of the following best supports the argument that ethnocentricity should be avoided in business relationships with other countries?

A) Managers often need time to learn the traits and work habits of other cultures.

B) Cultural literacy can only be gained through fluency in another country’s language.

C) Managers from other cultures understand best how to motivate their own employees.

D) Western management principles have been proven to enhance business productivity.

Answer: C Diff: 3 Page Ref: 47 Skill: Critical Thinking Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-46 Question: A critic argues that the French government is too restrictive regarding its limitations on English language usage in product packaging. Which of the following would most likely reflect the French government’s response to the critic?

A) The limitations are designed to stop the diffusion of French traits across European borders.

B) The limitations will diminish over time as France earns more income through international trade.

C) The limitations are necessary to preserve unique elements of French national culture.

D) The limitations are focused primarily on British imports and do not affect US-made products.

Answer: C Diff: 2 Page Ref: 47–48 Skill: Critical Thinking Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-47 Question: Which of the following is best defined as a group of people who share a unique way of life within a larger dominant culture?

A) Caste system B) Subculture C) Collective culture D) Material culture Answer: B Diff: 1 Page Ref: 48 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-48 Question: Which of the following terms is used to refer to that which a culture considers to be in “good taste” in the arts?

A) Customs B) Social structure C) Manners D) Aesthetics Answer: D Diff: 1 Page Ref: 49 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-49 Question: An electronics manufacturer is designing a product to be marketed to consumers in Islamic countries.

Which of the following colours should the company use most prominently in its packaging to make a favourable impression on buyers?

A) Green B) White

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C) Black D) Orange Answer: A Diff: 2 Page Ref: 50 Skill: Application Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-50 Question: Which colour is primarily associated with funerals in Japan?

A) Black B) White C) Jade D) Tan Answer: B Diff: 2 Page Ref: 50 Skill: Application Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-51 Question: Which of the following terms is used to refer to the ideas, beliefs, and customs to which people are emotionally attached?

A) Aesthetics B) Social structure C) Manners D) Values Answer: D Diff: 2 Page Ref: 50 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-52 Question: The United Kingdom and the United States value ________, whereas Japan and South Korea value ________.

A) the class system; the caste system B) aesthetics; ethnocentricity C) individual freedom; group consensus D) hard work; leisure Answer: C Diff: 3 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-53 Question: Which of the following terms is used to refer to the positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts?

A) Customs B) Attitudes C) Manners D) Values Answer: B Diff: 1 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-54 Question: Which of the following statements is true regarding attitudes?

A) They are quite rigid over time compared to values.

B) They are learned from role models.

C) They are similar from one country to the next because they form within a cultural context.

D) They are developed only toward the most important aspects of life.

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Answer: B Diff: 3 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-55 Question: Which of the following statements regarding cultural change is NOT true?

A) Cultural change occurs as new traits are accepted and absorbed into a culture.

B) Cultural diffusion occurs quickly in almost every culture.

C) Globalization is increasing the pace of cultural diffusion.

D) Technological advances are increasing the pace of cultural diffusion.

Answer: B Diff: 3 Page Ref: 52 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-56 Question: Which of the following refers to the process whereby cultural traits spread from one culture to another?

A) Cultural imperialism B) Social mobility C) Cultural diffusion D) Cultural literacy Answer: C Diff: 2 Page Ref: 52 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-57 Question: ________ refers to the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

A) Cultural imperialism B) Acculturation C) Cultural attrition D) Cultural immersion Answer: A Diff: 1 Page Ref: 52 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-58 Question: Companies that wish to avoid the charge of cultural imperialism should do which of the following?

A) Be sensitive to how their activities and products affect people’s traditional ways and habits.

B) Quickly launch new management practices to avoid prolonged resistance to change.

C) Implement new investment projects and management practices only during volatile times.

D) Maintain a standardized approach to strategy with policy decisions made at headquarters.

Answer: A Diff: 2 Page Ref: 52 Skill: Application Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-59 Question: A group of senior managers decides to require members of their new Mexican office to take a course in business etiquette. Several employees speak out against the idea, arguing that the course is a waste of time. Which of the following would be the most effective response to the employees?

A) Businesspeople are likely to be understanding if a mistake is made by someone outside the culture.

B) Most business meetings are held on company property during work time, not during lunch.

C) It is important for business success to display culturally appropriate behaviour in social settings.

D) Non-native speakers may have difficulty understanding the nuances of negotiations in Spanish.

Answer: C Diff: 3 Page Ref: 55

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Skill: Critical Thinking Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-60 Question: Which of the following terms is used to refer to habits or ways of behaving in specific circumstances that are passed down through generations?

A) Customs B) Attitudes C) Values D) Manners Answer: A Diff: 2 Page Ref: 54 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-61 Question: The wearing of turbans by Muslims in Asia is an example of which of the following?

A) Folk custom B) Popular custom C) Symbolic act D) Ritual Answer: A Diff: 2 Page Ref: 54 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-62 Question: Which of the following terms is used to refer to a collection of two or more people who identify and interact with each another?

A) Class system B) Social tier C) Caste system D) Social group Answer: D Diff: 1 Page Ref: 55 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-63 Question: Which of the following terms is used to refer to the process of ranking people into social layers or classes?

A) Social status B) Social stratification C) Social group D) Social mobility Answer: B Diff: 2 Page Ref: 56 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-64 Question: A ________ is a system of social stratification in which people are born into a social ranking, with no opportunity for social mobility.

A) moksha system B) class system C) caste system D) genealogy system Answer: C Diff: 1 Page Ref: 56 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

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Question ID: 2-65 Question: A ________ is a system of social stratification in which personal ability and actions determine an individual’s social status and mobility.

A) genealogy system B) moksha system C) caste system D) class system Answer: D Diff: 1 Page Ref: 57 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-66 Question: Which of the following is the world’s single largest religion?

A) Jewish B) Christianity C) Islamic D) Confucianism Answer: B Diff: 2 Page Ref: 57 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-67 Question: A publisher based in Kazakhstan specializes in books for Islamic readers. The publisher is considering opening sales offices in Saudi Arabia and Ethiopia. Which country would be the better choice?

A) Saudi Arabia, because its population is predominantly Islamic.

B) Ethiopia, because its population is predominantly Islamic.

C) Saudi Arabia, because its population does not favour one religion.

D) Ethiopia, because it contains a mix of Islamic and Christian citizens.

Answer: A Diff: 2 Page Ref: 60 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-68 Question: The world’s second largest religion is ________.

A) Judaism B) Hinduism C) Islam D) Confucianism Answer: C Diff: 3 Page Ref: 60 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-69 Question: Nations governed by which religion segregate the sexes at certain activities and locations such as in school?

A) Confucianism B) Hinduism C) Buddhism D) Islam Answer: D Diff: 2 Page Ref: 60 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-70

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Question: A company that sells products designed for Buddhist and Confucian temples would be most likely to find customers in which of the following countries?

A) Philippines and Singapore B) India and Indonesia C) Thailand and Mongolia D) Madagascar and Nepal Answer: C Diff: 2 Page Ref: 61 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-71 Question: A Chinese business establishes an office in Hong Kong. It conducts business locally with vendors and customers who live in Hong Kong. Which of the following would be most effective as the company’s main business dialect?

A) Taiwanese B) Guanxi C) Mandarin D) Cantonese Answer: D Diff: 2 Page Ref: 64 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-72 Question: Which of the following terms is used to refer to the departure of highly educated people from one profession, geographic region, or nation to another?

A) Social mobility B) Elite flight C) Power vacuum D) Brain drain Answer: D Diff: 2 Page Ref: 67 Skill: Concept Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-73 Question: Which of the following represent aspects of the physical environment that heavily influence a people’s culture?

A) Topography and climate B) Topography and communication C) Climate and customs D) Lifestyle and customs Answer: A Diff: 3 Page Ref: 67 Skill: Concept Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-74 Question: Which of the following would likely experience the LEAST amount of cultural diffusion?

A) Two subcultures located on a coast with navigable waterways.

B) Two subcultures separated by an impassable mountain range.

C) Neighboring cultures located adjacent to each other on a land mass.

D) Neighboring cultures located next to each other in a desert climate.

Answer: B Diff: 3 Page Ref: 67 Skill: Application Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-75

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Question: Which of the following terms is used to refer to all the technology used in a culture to manufacture goods and provide services?

A) Intellectual culture B) Popular culture C) Hofstede culture D) Material culture Answer: D Diff: 2 Page Ref: 68 Skill: Concept Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-76 Question: The Kluckhohn-Strodtbeck framework compares cultures along all of the following dimensions EXCEPT ________.

A) Do people believe that their environment controls them, that they control their environment, or that they are part of nature?

B) Do people focus on past events, on the present, or on the future implications of their actions?

C) Do people embrace or avoid uncertainty and ambiguity?

D) Do people believe individuals or groups are responsible for each person’s welfare?

Answer: C Diff: 2 Page Ref: 69 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-77 Question: According to Hofstede’s framework, which of the following describes the degree of inequality between people in different occupations?

A) Power distance B) Uncertainty avoidance C) Individualism D) Collectivism Answer: A Diff: 2 Page Ref: 70 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-78 Question: According to Hofstede’s framework, which of the following is LEAST likely to be valued in a group-oriented culture?

A) Entrepreneurial risk taking B) Shared responsibility C) Collective goals D) Maintaining harmony Answer: A Diff: 3 Page Ref: 70 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-79 Question: All of the following are dimensions developed by Hofstede for examining cultures EXCEPT ________.

A) individualism versus collectivism B) power distance C) uncertainty avoidance D) caste system versus class system Answer: D Diff: 2 Page Ref: 70–72 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-80

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Question: Which of the following countries would most likely be the slowest to implement cultural change, based on Hofstede’s framework?

A) South Africa B) Norway C) Japan D) Denmark Answer: C Diff: 3 Page Ref: 70–72 Skill: Critical thinking Objective: 2-3 Describe cultural change and explain how companies and culture affect each other; 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Scenario: CelinePurses.com Celine Franklin, a young entrepreneur from Montreal, started her hand-crocheted purse business seven years ago.

Celine’s business has since thrived and employs 150 people. Most of Celine’s business is within Canada with an occasional international order. But Celine now wants to make a concerted effort to grow international sales and is designing her Web site to attract more customers located abroad. Celine is meeting with Jason Rufus, a Web site designer, for help with the project.

Question ID: 2-81 Question: In choosing colours that comprise the background of the Web site, Celine should ________.

A) go for simplicity by using a black-and-white site throughout Asia B) pick a pastel colour scheme for Japan C) avoid pastel colours in Europe and choose primary colours instead D) use the same colour scheme globally so as to not confuse customers Answer: B Diff: 3 Page Ref: 50 Skill: Application Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-82 Question: Celine believes her success rests on her careful listening and responding to customers' needs. To ensure that her customers abroad can provide feedback easily, Celine should ________.

A) set a fixed time for customers to call, such as from 3 to 5 p.m., Eastern Standard Time B) switch to the 12-hour clock commonly used outside North America C) learn what prospective customers seek to accomplish on her Web site D) ignore issues related to time since her customers will be familiar with the North American system Answer: C Diff: 2 Page Ref: 50 Skill: Application Objective: 2-2 Identify the components of culture and describe their impact on international business.

Scenario: HR Experts, Inc. You were just hired at HR Experts, Inc., a global human resources consulting company. On your first day at work, you are assigned to a trouble-shooting group comprised of individuals from different cultures. Your team members are Tom, Ketan, Yoshi, Hung Shin, and Nazam. During the course of the day working in the group, you try to put people’s names and faces with their cultures and beliefs.

Question ID: 2-83 Question: You overheard Ketan making a remark, “I do not want to come back in the next life as an insect. I want to do right and achieve moksha.” Based on this comment, which religion does Ketan most likely practise?

A) Buddhism B) Hinduism C) Islam D) Confucianism Answer: B Diff: 2 Page Ref: 60

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Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-84 Question: Hearing Ketan’s comment, Tom responded, “I believe that salvation comes from faith in God and that hard work gives glory to God. So my friend, work hard and have faith in God.” Based on this comment, which religion does Tom most likely practise?

A) Protestantism B) Buddhism C) Islam D) Confucianism Answer: A Diff: 2 Page Ref: 59 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-85 Question: To celebrate you joining the group, everyone goes to a local restaurant for dinner after work. When ordering drinks, Nazam says he cannot drink alcoholic beverages because his religion forbids it, and that he must eat quickly so he can attend evening prayers. Based on these statements, which religion is Nazam most likely practising?

A) Shinto B) Hinduism C) Islam D) Confucianism Answer: C Diff: 2 Page Ref: 60 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Scenario: Ian Richards, International Executive Ian Richards is vice president of new business development for a British-based Internet company. He will soon attend an international symposium on global Internet marketing in Brazil where he will meet people from around the world.

Question ID: 2-86 Question: When Ian attends a luncheon with several Arab delegates he does not know, he should ________.

A) not use his left hand to pour drinks for his Arab associates B) maintain personal space of about 36 inches C) avoid steady eye contact D) bow about 30 degrees to each delegate Answer: A Diff: 2 Page Ref: 60 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-87 Question: After the symposium, Ian meets several company vice-presidents from the Japan office. When meeting with the Japanese associates, Ian should ________.

A) bow around 15 degrees B) bow around 30 degrees C) bow around 45 degrees D) simply shake hands but do not bow Answer: A Diff: 3 Page Ref: 65 Skill: Application Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-88 Question: In attendance with the Japanese vice presidents is a regional manager, Hideki Yoshimura, who recently made some business errors that were costly for the company. If Mr. Yoshimura bows at 45 degrees, Ian should

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interpret this to mean that ________.

A) Mr. Yoshimura has insulted him B) Mr. Yoshimura expects an apology C) Mr. Yoshimura has apologized D) Mr. Yoshimura perceives himself as Ian’s elder Answer: C Diff: 1 Page Ref: 65 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-89 Question: Ian ends most of his meetings with the thumbs up signal indicating that all is good. When meeting symposium representatives from Italy, he should ________.

A) avoid making the gesture B) tap his nose instead C) make the gesture as usual D) make the gesture and then shake all hands Answer: A Diff: 2 Page Ref: 65 Skill: Application Objective: 2-3 Describe cultural change and explain how companies and culture affect each other.

Scenario: Global Trading, Inc. Global Trading, Inc. (GTI) is a company that manufactures and markets in over 40 countries and has 75 000 employees. GTI is concerned about understanding and managing not only its employees abroad, but also its suppliers and customers. Jamie, a consultant with Diversity Training International, is supervising a cross-cultural project for GTI and proposes using the Hofstede framework for analyzing cultures. Executives with GTI are interested in the framework, but they have many questions.

Question ID: 2-90 Question: Jamie presents GTI managers with the following list of Hofstede dimensions to test their understanding of the framework. Which dimension would the managers most likely identify as the one that does not belong?

A) Achievement versus nurturing B) Individualism versus collectivism C) Public versus private orientation D) Power distance Answer: C Diff: 1 Page Ref: 70–72 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-91 Question: Which of the following dimensions would most likely help executives understand the degree to which employees accept social inequality in different countries?

A) Uncertainty avoidance B) Individualism versus collectivism C) Caste system versus class system D) Power distance Answer: D Diff: 1 Page Ref: 70 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-92 Question: One manager indicates that her subsidiary experiences high turnover, that there are few formal rules for regulating individual behaviour, and that these qualities seems to be characteristic of the national culture. Which one of Hofstede’s dimensions would most likely measure these qualities?

A) Quantity versus quality of life B) Uncertainty avoidance

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C) Individualism versus collectivism D) Power distance Answer: B Diff: 2 Page Ref: 71 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-93 Question: Which of the following dimensions would most likely help a manager understand whether the lifestyle in her host country is more oriented toward accumulating wealth or maintaining a balanced life?

A) Achievement versus nurturing B) Uncertainty avoidance C) Individualism versus collectivism D) Power distance Answer: A Diff: 1 Page Ref: 71–72 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-94 Question: Which of the following is defined as the process of staffing a company and ensuring that employees are as productive as possible?

A) Staffing policy B) Human resource management C) Recruitment D) Human resource planning Answer: B Diff: 1 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-95 Question: A French citizen living and working in the United States on a one-year work assignment is an example of which of the following?

A) Contract worker B) Expatriate C) Host-country national D) Immigrant Answer: B Diff: 2 Page Ref: 73 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-96 Question: Individuals from the home country manage operations outside the home country in which of the following staffing policies?

A) Ethnocentric B) Polycentric C) Multicentric D) Geocentric Answer: A Diff: 1 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-97 Question: Which of the following statements regarding ethnocentric staffing is NOT true?

A) Ethnocentric staffing appeals to companies that want to maintain tight control over decision making in branch offices abroad.

B) Companies that use ethnocentric staffing formulate policies designed to work in every county in which they

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operate.

C) Ethnocentric staffing is generally used to fill positions at all levels of an organization.

D) When a company uses ethnocentric staffing, individuals from the home country manage operations abroad.

Answer: C Diff: 2 Page Ref: 73 Skill: Critical thinking Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-98 Question: An ethnocentric staffing policy is generally pursued to fill which of the following?

A) Top-level management positions B) Mid-level management positions C) Lower-level management positions D) Management positions at all levels Answer: A Diff: 2 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-99 Question: Which of the following statements regarding ethnocentric staffing is true?

A) It can facilitate the transfer of special knowledge.

B) It is a relatively inexpensive policy to implement.

C) It allows a company to “blend in” with the local market.

D) It is a poor choice for highly nationalistic markets.

Answer: A Diff: 2 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-100 Question: Which of the following is most likely a drawback of ethnocentric staffing?

A) Potentially losing control of host-country operations B) Potentially losing control of home-country operations C) High costs of relocating managers D) Re-creating local operations in the image of home-country operations Answer: C Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-101 Question: In ________ staffing, operations outside the home country are managed by individuals from the host country.

A) geocentric B) regiocentric C) ethnocentric D) polycentric Answer: D Diff: 1 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-102 Question: To give foreign units a degree of autonomy in decision making, a company would most likely choose a(n)________ staffing policy.

A) geocentric B) regiocentric C) ethnocentric D) polycentric

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Answer: D Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-103 Question: An important advantage of polycentric staffing is that it ________.

A) re-creates local operations in the image of home-country operations B) eliminates the high cost of relocating expatriate managers and their families C) helps a company develop global managers who can adjust easily to any business environment D) employs managers from home who will look out for the company’s interests Answer: B Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-104 Question: The major drawback of polycentric staffing is the potential to ________.

A) experience a high incidence of expatriate failure B) lose control of host-country operations C) create barriers for the host-country office D) create legal problems for the home-country office Answer: B Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-105 Question: A company that hires the best-qualified individuals, regardless of nationality, to manage foreign operations is utilizing which of the following staffing approaches?

A) Globecentric B) Geocentric C) Ethnocentric D) Polycentric Answer: B Diff: 1 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-106 Question: Which of the following is an advantage of geocentric staffing?

A) It reduces the high cost of relocating expatriate managers and their families.

B) It employs managers from home who will look out for the company’s interests.

C) It helps a company develop global managers who can adjust easily to any business environment.

D) It re-creates local operations in the image of home-country operations.

Answer: C Diff: 3 Page Ref: 75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-107 Question: A geocentric staffing policy is generally reserved for ________.

A) top-level management B) mid-level management C) lower-level management D) management positions at all levels Answer: A Diff: 2 Page Ref: 75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

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Question ID: 2-108 Question: The major disadvantage of a geocentric staffing policy is its potential for ________.

A) creating barriers for the host-country office B) being costly due to high salaries and moving costs C) creating legal problems for the home-country office D) losing control of host-country operations Answer: B Diff: 3 Page Ref: 75 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-109 Question: Which of the following is the first phase of human resource planning?

A) Develop an approach to recruit and select people to fill vacant and anticipated positions B) Estimate the company’s future human resource needs C) Take an inventory of the company’s current human resources D) Promote employees to positions of greater responsibility Answer: C Diff: 2 Page Ref: 75 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-110 Question: The process of reducing a firm’s workforce is called ________.

A) selection B) decruitment C) staffing D) layoffs Answer: B Diff: 1 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-111 Question: Planning for decruitment normally occurs when a company ________.

A) discontinues manufacturing or selling in a market B) moves its production operations overseas C) maintains multiple foreign subsidiaries D) hires new executive leadership Answer: A Diff: 2 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-112 Question: To help speed up the process of getting approvals for foreign operations, a firm would most likely benefit from hiring which of the following?

A) Home-country managers from the company’s headquarters.

B) Local managerial talent with strong government contacts.

C) Recent college graduates trained in the home country.

D) Third-country expatriates with extensive experience in the field.

Answer: B Diff: 2 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-113 Question: Which of the following would most likely be recruited for non-managerial positions at foreign subsidiaries that do not require specialized skills?

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A) Recent graduates from colleges in the host country B) Home-country specialists C) Workers from the local host-country market D) Current employees from company headquarters Answer: C Diff: 2 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-114 Question: Companies typically recruit ________ to train individuals placed in demanding non-managerial positions at foreign branches.

A) workers from the local market B) recent college graduates from the host country C) qualified third-party nationals D) specialists from the home country Answer: D Diff: 1 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-115 Question: Which of the following is a psychological process affecting employees living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression?

A) Reverse culture shock B) Decruitment C) Culture shock D) Cultural assimilation Answer: C Diff: 1 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-116 Question: The psychological process of readapting to one’s home culture is called ________.

A) culture shock B) cultural assimilation C) reverse culture shock D) expatriate failure Answer: C Diff: 1 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-117 Question: An expatriate manager who returns from an overseas assignment to find that there is no position for him in his home country office would most likely experience which of the following?

A) Reverse culture shock B) Decruitment C) Expatriate failure D) Culture shock Answer: A Diff: 1 Page Ref: 77 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-118 Question: Which of the following constitutes the most basic level of training to prepare managers for international assignments?

A) Environmental briefings

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B) Language training C) Cultural assimilation D) Field experience Answer: A Diff: 1 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-119 Question: An expatriate employee could most likely gain information on a local area’s housing, health care, transportation, schools, and climate by participating in which of the following?

A) Language training B) Environmental briefings C) Field experience D) Sensitivity training Answer: B Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-120 Question: Which of the following offers insight into a host country’s political, legal, economic, and social institutions as a way of enhancing environmental briefings?

A) Language training B) Field experience C) Sensitivity training D) Cultural orientation Answer: D Diff: 2 Page Ref: 78–79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-121 Question: Which of the following trains managers to be considerate and understanding of other people’s feelings and emotions?

A) Cultural orientation B) Sensitivity training C) Environmental briefings D) Guerilla linguistics Answer: B Diff: 1 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-122 Question: Which of the following approaches to cultural training gets a trainee "under the skin" of the local people?

A) Language training B) Environmental briefings C) Sensitivity training D) Cultural orientation Answer: C Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-123 Question: Which of the following approaches to cultural training gets a trainee "into the mind" of the local people?

A) Sensitivity training B) Cultural assimilation C) Language training

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D) Environmental briefings Answer: C Diff: 2 Page Ref: 79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-124 Question: The most common inducement that companies offer managers to accept international postings is ________.

A) a promotion B) a financial bonus C) a vacation D) free housing Answer: B Diff: 2 Page Ref: 79 Skill: Concept Objective: 2-8 Explain how companies compensate managers and workers in international markets.

Scenario: Swingset International Jonathan Johnston, human resource manager at a Canadian Swingset International, is developing an international staffing policy for the company. Jonathan personally believes Swingset should send managers from Canada to manage each subsidiary. But the CEO of the company, Valerie Hudson, believes subsidiary operations ought to be managed by individuals from the host country.

Question ID: 2-125 Question: Jonathan’s recommended approach is an example of which of the following?

A) Polycentric staffing B) Ethnocentric staffing C) Regioncentric staffing D) Geocentric staffing Answer: B Diff: 2 Page Ref: 73 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-126 Question: Which of the following is a drawback of Jonathan’s staffing approach?

A) Expense to relocate managers B) Potential for losing control of the host-country operations C) Potential for losing control of the home-country operations D) Re-creation of local operations in the image of home-country operations Answer: A Diff: 2 Page Ref: 73 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-127 Question: Valerie’s recommended approach represents which type of staffing policy?

A) Ethnocentric B) Regiocentric C) Polycentric D) Geocentric Answer: C Diff: 2 Page Ref: 74 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-128 Question: An important advantage of Valerie’s recommended staffing policy is ________.

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A) re-creating local operations in the image of home-country operations B) eliminating the high cost of relocating expatriate managers and families C) helping the company develop global managers who can adjust easily to any business environment D) sending managers from home to look out for the company’s interests Answer: B Diff: 2 Page Ref: 74 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-129 Question: The major drawback of Valerie’s recommended staffing policy is ________.

A) the necessity of depending on managers who don't know the local culture B) the potential for creating legal barriers to host-country operations C) the high cost of training managers in the language of the host country D) the potential for losing control of the host-country operations Answer: D Diff: 2 Page Ref: 74 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-130 Question: If Swingset values having its foreign operations managed by the best-qualified individuals regardless of nationality, which staffing policy should it consider using?

A) Polycentric B) Ethnocentric C) Geocentric D) Regioncentric Answer: C Diff: 2 Page Ref: 74–75 Skill: Application Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Scenario: GemStone Jewels GemStone Jewels recently established subsidiary operations in six foreign countries. In four of these countries, the company is expecting a high level of international business involvement, whereas in the other two, activity is expected to be very low. What type of cultural training should the company offer home-country managers assigned to work in each of the six host countries?

Question ID: 2-131 Question: The most basic level of training for managers in the two countries with low expected international involvement should be ________.

A) language training B) field experience C) sensitivity training D) environmental briefings Answer: D Diff: 2 Page Ref: 78 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-132 Question: In the countries with high expected involvement, if GemStone Jewels wants its employees to get "under the skin" of the local people, it should provide which of the following types of training?

A) Language training B) Sensitivity training C) Cultural assimilation D) Field experience Answer: B Diff: 2 Page Ref: 78

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Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-133 Question: In the countries with high expected involvement, if GemStone Jewels truly wants its employees to get "into the minds" of the local people, it should provide which of the following types of training?

A) Language training B) Sensitivity training C) Cultural orientations D) Environmental briefings Answer: A Diff: 2 Page Ref: 79 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-134 Question: To teach its employees the values, attitudes, manners, and customs of the host-country culture, GemStone Jewels should offer which of the following types of training?

A) Language training B) Sensitivity training C) Cultural assimilation D) Field experience Answer: C Diff: 2 Page Ref: 79 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Scenario: You're Hired!

Erica Els has just been promoted to vice president of human resources for her company, Hudson Foods, a Canadianbased international frozen and snack food corporation. Erica’s first task is to staff the company’s new European subsidiary.

Question ID: 2-135 Question: One lower-level position Erica must fill requires the employee to be familiar with the new market and cognizant of its customs, traditions, and language. Also, because the subsidiary is new, the new hire must be comfortable with Hudson Food’s organizational culture and business traditions. Which of the following will Erica most likely recruit for this position?

A) A local candidate with experience in an unrelated field and strong government contacts B) An existing Hudson Foods employee from Canada C) A native of the target market who has graduated from a Canadian university and who has completed a one-year internship at Hudson Foods D) An individual from the United States who has extensive experience in the industry in North America Answer: C Diff: 2 Page Ref: 76, 78 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-136 Question: One challenge facing Hudson Foods as it expands into Europe is getting through all the certification requirements surrounding the food industry. Erica plans to hire a manager to ensure that this challenge is met.

Which of the following will Erica most likely recruit for this position?

A) A local manager with strong government contacts.

B) An experienced manager from the Hudson Foods Canadian headquarters.

C) A native of the target market who is a recent Canadian college grad.

D) A candidate from South Korea with extensive management experience in the food industry.

Answer: A Diff: 2 Page Ref: 74 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

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Question ID: 2-137 Question: The new subsidiary’s production facilities will employ approximately 100 full-time non-managerial workers.

Which of the following will Erica most likely recruit to fill these positions?

A) Highly productive workers transferred from operations in Mexico B) Bilingual Canadian workers who speak the language of the host country C) Qualified and experienced workers from the local market D) Workers from the Canadian headquarters who are interested in gaining international experience Answer: C Diff: 2 Page Ref: 74 Skill: Application Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Fill-In-The-Blank Question ID: 2-138 Question: ________ is the set of values, beliefs, rules and institutions held by a specific group of people.

Answer: Culture Diff: 1 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-139 Question: The belief that a person’s ethnic group or culture is superior to that of others is called ________.

Answer: ethnocentricity Diff: 1 Page Ref: 46 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-140 Question: ________ refers to detailed knowledge about a culture that enables a person to function effectively within it.

Answer: Cultural literacy Diff: 2 Page Ref: 47 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-141 Question: ________ are ideas, beliefs, and customs to which people are emotionally attached.

Answer: Values Diff: 2 Page Ref: 50 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-142 Question: ________ are positive or negative evaluations, feelings, or tendencies that individuals harbor toward objects or concepts.

Answer: Attitudes Diff: 1 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-143 Question: While ________ are quite rigid over time, ________ are more flexible.

Answer: values, attitudes Diff: 2 Page Ref: 51 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

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Question ID: 2-144 Question: The process whereby cultural traits spread from one culture to another is called ________.

Answer: cultural diffusion Diff: 2 Page Ref: 52 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-145 Question: Appropriate ways of behaving, speaking, and dressing in a culture are called ________.

Answer: manners Diff: 1 Page Ref: 54 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-146 Question: ________ define appropriate habits or behaviours in specific situations.

Answer: Customs Diff: 2 Page Ref: 54 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-147 Question: Wearing blue jeans and playing golf are both examples of ________.

Answer: popular customs Diff: 1 Page Ref: 54 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-148 Question: A(n) ________ is behaviour, often dating back several generations, that is practised by a homogeneous group of people.

Answer: folk custom Diff: 1 Page Ref: 54 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-149 Question: Collections of two or more people who identify and interact with one another are known as ________.

Answer: social groups Diff: 2 Page Ref: 56 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-150 Question: The process of ranking people into social layers or classes is called ________.

Answer: social stratification Diff: 2 Page Ref: 56 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-151 Question: ________ is the ease with which individuals can move up or down a culture’s social ladder.

Answer: Social mobility Diff: 1 Page Ref: 56 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-152 Question: A(n) ________ is a system of social stratification in which people are born into a social ranking with no opportunity for social mobility.

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Answer: caste system Diff: 1 Page Ref: 56 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-153 Question: A(n) ________ is a third or "link" language that is understood by two parties who speak different languages.

Answer: lingua franca Diff: 2 Page Ref: 64 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-154 Question: The departure of highly educated people from one profession, geographic region, or nation to another is known as ________.

Answer: brain drain Diff: 2 Page Ref: 67 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-155 Question: ________ refers to all the physical features that characterize the surface of a geographic region.

Answer: Topography Diff: 1 Page Ref: 67 Skill: Concept Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-156 Question: Citizens of one country who are living and working in another are called ________.

Answer: expatriates Diff: 2 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-157 Question: In ________ staffing, operations outside the home country are managed by individuals from the home country.

Answer: ethnocentric Diff: 1 Page Ref: 73 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-158 Question: In ________ staffing, operations outside the home country are managed by individuals from the host country.

Answer: polycentric Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-159 Question: In ________ staffing, operations outside the home country are managed by the best-qualified individuals regardless of nationality.

Answer: geocentric Diff: 2 Page Ref: 74 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-160

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Question: A company that is reducing its workforce is undergoing ________.

Answer: decruitment Diff: 2 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-161 Question: The process of identifying and attracting a qualified pool of applicants for vacant positions is called ________.

Answer: recruitment Diff: 1 Page Ref: 76 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-162 Question: ________ is a psychological process affecting employees living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression.

Answer: Culture shock Diff: 1 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-163 Question: The psychological process of readapting to one’s home culture after returning from a foreign work assignment is called ________.

Answer: reverse culture shock Diff: 1 Page Ref: 77 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-164 Question: ________ constitute the most basic level of cultural training for managers.

Answer: Environmental briefings Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-165 Question: The purpose of ________ is to add depth and substance to environmental briefings.

Answer: cultural orientations Diff: 3 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-166 Question: The training approach of ________ teaches the culture’s values, attitudes, manners, and customs.

Answer: cultural assimilation Diff: 3 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-167 Question: Teaching people to be considerate and understanding of other people’s feelings and emotions is known as ________.

Answer: sensitivity training Diff: 2 Page Ref: 78 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-168

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Question: Employees who are visiting another culture, walking the streets of its cities and villages, and becoming absorbed by the culture for a short time are participating in ________ training.

Answer: field experience Diff: 1 Page Ref: 79 Skill: Concepts Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Essay Question ID: 2-169 Question: Explain the concept of culture. Why is it important for business people to avoid ethnocentricity and gain cultural literacy?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Culture is the set of values, beliefs, rules, and institutions held by a specific group of people. Individuals who are ethnocentric believe their culture is superior to other cultures. It is important to avoid ethnocentricity because it can seriously undermine international business projects. It causes people to view other cultures in terms of their own and, therefore, disregard the beneficial characteristics of other cultures.

Cultural literacy, on the other hand, involves acquiring detailed knowledge about a culture to function effectively within it. Cultural literacy improves a person’s ability to manage employees, market products, and conduct negotiations in other countries. The culturally literate manager who compensates for local needs and desires brings his or her company closer to customers and improves the firm’s competitiveness.

Brief mention here should be made of the impact of issues such as religion, values, customs and social structure and their impact on global business.

Diff: 2 Page Ref: 46–47, 76–77 Skill: Synthesis Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-170 Question: Describe in detail what is culture and the ways in which nation-states support and promote national culture, giving examples.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Culture is the set of values, beliefs, rules, and institutions held by a specific group of people. Individuals who are ethnocentric believe their culture is superior to other cultures. It is important to avoid ethnocentricity because it can seriously undermine international business projects. It causes people to view other cultures in terms of their own and, therefore, disregard the beneficial characteristics of other cultures.

Nation-states support and promote the concept of national culture by building museums and monuments to preserve the legacies of important events and people. The Guggenheim Museum in Bilbao, Spain, for instance, revived that old Basque industrial city. Nation-states also intervene in business to preserve national culture. Most nations, for example, regulate culturally sensitive sectors of the economy, such as filmmaking and broadcasting.

Diff: 2 Page Ref: 48–49 Skill: Concept Objective: 2-1 Describe culture and explain the significance of both national culture and subcultures.

Question ID: 2-171 Question: Global business is influenced in large part by cultures of individual countries. Explain in detail how

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aesthetics, values and attitudes (especially attitudes toward cultural change), education and religion can influence how a company does business globally.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Aesthetics are those components of culture that determine what is in good taste in the arts of a country. Paying attention to aesthetics is important in such things are colours and cultural symbols. Values are deeply held beliefs of a culture and can influence how foreign businesses are viewed. Attitudes differ from one country to another because they are formed within a cultural context. Attitudes toward time and toward work can hinder or help a global business. Cultural diffusion and imperialism are topics that can be viewed with suspicion in certain cultures which fear the loss of their own culture in face of a global culture. Religion can affect what products can be sold in certain cultures and how foreign products are advertised. Education levels will have bearing on business operations such as hiring of local people. It is important for a global business to pay attention to influences that may infringe on the local culture, and businesses often have to make changes to adapt to the local cultures.

Diff: 3 Page Ref: 49–53, 57–62, 66–67 Skill: Synthesis Objective: 2-2 Identify the components of culture and describe their impact on international business; 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-172 Question: Describe in detail values and attitudes and their role in global business. How do attitudes differ from values? How do cultures differ in their attitudes toward cultural change?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Attitudes are positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts. Attitudes reflect underlying values. But unlike with values (which generally concern only important matters), people hold attitudes toward both important and unimportant aspects of life. And whereas values remain quite rigid over time, attitudes are more flexible.

Cultures can have varying responses to cultural change. Some countries feel threatened by the diffusion of traits from certain cultures, particularly if there appears to be a risk of cultural imperialism. One example involves French resistance to the influx of American cultural icons such as Mickey Mouse. In other cases, countries may welcome cultural change or at least see its benefits. US audiences have embraced the diffusion of British-style competitive TV shows, such as the type of show that spawned American Idol.

Diff: 3 Page Ref: 51–53 Skill: Synthesis Objective: 2-2 Identify the components of culture and describe their impact on international business; 2-3 Describe cultural change and explain how companies and culture affect each other.

Question ID: 2-173 Question: Explain in detail how customs differ from manners and give specific examples of types of customs.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Manners are appropriate ways of behaving, speaking, and dressing in a culture. When habits or ways of behaving in specific circumstances are passed down through generations, they become customs. Customs differ from manners in that they define appropriate habits or behaviours in specific situations.

Two types of customs are folk customs and popular customs. A folk custom is behaviour, often dating back several generations, that is practised by a homogeneous group of people. The wearing of turbans by Muslims in southern Asia and the art of belly dancing in Turkey are both folk customs. A popular custom is behaviour shared by a heterogeneous group or by several groups. Popular customs can exist in just one culture or in two or more cultures at once. Wearing blue jeans and playing golf are both popular customs across the globe. Folk customs that spread by cultural diffusion to other regions develop into popular customs.

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Diff: 2 Page Ref: 54–55 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-174 Question: Describe the concept of social structure and its relevance for companies doing business abroad.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Social structure embodies a culture’s fundamental organization, including its groups and institutions, its system of social positions and their relationships, and the process by which its resources are distributed. Social structure plays a role in many business decisions, including production-site selection, advertising methods, and the costs of doing business in a country.

Diff: 2 Page Ref: 55–57 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-175 Question: Describe three different religions and provide examples of how they affect business practices.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Three of the world’s major religions are Christianity, Islam, and Hinduism. Christianity was born in Palestine around 2,000 years ago among Jews who believed that God sent Jesus of Nazareth to be their savior. The Roman Catholic faith asks its followers to refrain from placing material possessions above God and others. Protestants believe that salvation comes from faith in God and that hard work gives glory to God—a tenet known widely as the "Protestant work ethic." Many historians believe this conviction to be a main factor in the development of capitalism and free enterprise in nineteenth-century Europe.

Christian organizations sometimes get involved in social causes that affect business policy. For example, some conservative Christian groups have boycotted the Walt Disney Company, charging that in portraying young people as rejecting parental guidance, Disney films impede the moral development of young viewers worldwide.

With 1.3 billion adherents, Islam is the world’s second-largest religion. The prophet Muhammad founded Islam around A.D. 600 in Mecca, the holy city of Islam located in Saudi Arabia. Islam revolves around the "five pillars": (1) reciting the Shahada (profession of faith), (2) giving to the poor, (3) praying five times daily, (4) fasting during the holy month of Ramadan, and (5) making the Hajj (pilgrimage) to the Saudi Arabian city of Mecca at least once in one’s lifetime.

Religion strongly affects the kinds of goods and services acceptable to Muslim consumers. Islam, for example, prohibits the consumption of alcohol and pork. Popular alcohol substitutes are soda pop, coffee, and tea. Substitutes for pork include lamb, beef, and poultry (all of which must be slaughtered in a prescribed way so as to meet halal requirements). Because hot coffee and tea often play ceremonial roles in Muslim nations, the markets for them are quite large. And because usury (charging interest for money lent) violates the laws of Islam, credit card companies collect management fees rather than interest, and each cardholder’s credit line is limited to an amount held on deposit.

Hinduism formed around 4,000 years ago in present-day India, where over 90 percent of its 900 million adherents live. Considered by some to be a way of life rather than a religion, Hinduism recalls no founder and recognizes no central authority or spiritual leader. Hindus believe in reincarnation—the rebirth of the human soul at the time of death. Hindus tend to disdain materialism. Strict Hindus do not eat or willfully harm any living creature because it may be a reincarnated human soul.

Because Hindus consider cows sacred animals, they do not eat beef; consuming milk is considered a means of religious purification. Firms such as McDonald’s must work closely with government and religious officials in India to respect Hindu beliefs. In many regions, McDonald’s has removed all beef products from its menu and prepares vegetable and fish products in separate kitchen areas. And for those Indians who do eat red meat (but not cows because of their sacred status), the company sells the Maharaja Mac, made of lamb, in place of the Big Mac.

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Diff: 3 Page Ref: 57–62 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-176 Question: Discuss in detail how personal communication affects business operations and the concept of lingua franca and how it affects communication in international business.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Personal communication systems are used to convey thoughts, feelings, knowledge and information specific to individual cultures. These give us insight into how and why people think and act the way they do. Spoken and written language is the most obvious issue that global companies must understand to achieve success in international business. Understanding language is the key to understanding culture.

A lingua franca is a third or "link" language understood by two parties who speak different native languages. The original lingua franca arose to support ancient trading activities and contained a mixture of Italian and French, along with Arabic, Greek, and Turkish.

Multinational corporations sometimes choose a lingua franca for official internal communications because they operate in many nations, each with its own language. Although only 5 percent of the world’s population speaks English as a first language, it is the most common lingua franca in international business, followed closely by French and Spanish.

Diff: 2 Page Ref: 64 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-177 Question: Explain in detail how education levels and the concept of brain drain affect global business expanding to the developing world.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Education is crucial for passing on traditions, customs, and values. In addition, education levels are a good indication of the human resources available for global business when expanding operations to other countries.

Brain drain is the departure of highly educated people from one profession, geographic region, or nation to another.

Brain drain can negatively affect an economy if individuals needed for economic development, such as science and technology professionals, move elsewhere. However, brain drain can have a positive effect on an economy when it occurs in reverse. Under these circumstances, the educated elite are given incentives to return to the country.

Diff: 2 Page Ref: 66–67 Skill: Concept Objective: 2-2 Identify the components of culture and describe their impact on international business.

Question ID: 2-178 Question: Describe the relation between culture and the physical environment, explaining the roles of topography and climate. Furthermore, explain what role these factors have in business decision-making.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Although physical environment affects a people’s culture, it does not directly determine it. Two aspects of the physical environment that heavily influence a people’s culture are topography and climate.

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All the physical features that characterize the surface of a geographic region constitute its topography. Some surface features such as navigable rivers and flat plains facilitate travel and contact with others. By contrast, treacherous mountain ranges and large bodies of water can discourage contact. Cultures isolated by topographical features can find themselves less exposed to the cultural traits of other peoples, which can mean slower cultural change.

Topography can impact consumers' product needs and can also have a profound impact on personal communication in a culture.

Climate affects where people settle and helps direct systems of distribution. It plays a large role in lifestyle and work habits, to which companies must adapt, and it also impacts customs such as the type of clothing people wear.

Diff: 2 Page Ref: 67–68 Skill: Concept Objective: 2-4 Explain how the physical environment and technology influence culture.

Question ID: 2-179 Question: Explain the Hofstede framework providing specific cultural examples for each dimension.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The Hofstede framework compares cultures along five dimensions: (1) individualism vs. collectivism; (2) power distance; (3) uncertainty avoidance; (4) achievement vs. nurturing; and (5) long-term orientation.

The individualism vs. collectivism dimension identifies the extent to which a culture emphasizes the individual versus the group. Asian cultures tend to be very collectivist, for example, while American culture stresses individualism.

Power distance conveys the degree to which a culture accepts social inequality among its people. Countries in African and Asia tend to have large power distance, with much inequality between superiors and subordinates. Countries in North American and Western Europe have lower power distance scores.

Uncertainty avoidance identifies the extent to which a culture avoids uncertainty and ambiguity. Asian countries have large uncertainty avoidance indexes, while the United States and Canada are characterized by small uncertainty avoidance.

Achievement vs. nurturing captures the extent to which a culture emphasizes personal achievement and materialism versus relationships and quality of life. Nations in Western Europe tend to have more relaxed lifestyles than do highly driven Americans, for example.

The dimension of long-term orientation indicates a society’s time perspective and an attitude of overcoming obstacles with time, if not with will and strength. A high-scoring culture, such as Japan, values respect for tradition, thrift, perseverance, and a sense of personal shame. A low-scoring culture such as the United States is characterized by individual stability and reputation, fulfilling social obligations, and reciprocation of greetings and gifts. These cultures can change more rapidly because tradition and commitment are not impediments to change.

Diff: 3 Page Ref: 67–69 Skill: Concept Objective: 2-5 Describe the two main frameworks used to classify cultures and explain their practical use.

Question ID: 2-180 Question: Explain in detail the three approaches to the staffing of international business operations. What are the advantages and disadvantages of each?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer:

Ethnocentric Staffing. In ethnocentric staffing, individuals from the home country manage operations abroad. This

policy tends to appeal to companies that want to maintain tight control over decision making in branch offices abroad. Accordingly, those companies work to formulate policies designed to work in every country in which they operate. But note that firms generally pursue this policy in their international operations for top managerial posts— implementing it at lower levels is often impractical.

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Firms pursue this policy for several reasons. First, locally qualified people are not always available. In developing and newly industrialized countries, there is often a shortage of qualified personnel that creates a highly competitive local labour market. Second, companies use ethnocentric staffing to re-create local operations in the image of homecountry operations. Especially if they have climbed the corporate ladder in the home office, expatriate managers tend to infuse branch offices with the corporate culture. This policy is important for companies that need a strong set of shared values among the people in each international office—such as firms implementing global strategies.

By the same token, a system of shared values is important when a company’s international units are highly interdependent. Finally, some companies feel that managers sent from the home country will look out for the company’s interests more earnestly than will host-country natives.

Polycentric Staffing. In polycentric staffing, individuals from the host country manage operations abroad. Companies

can implement a polycentric approach for top and mid-level managers, for lower level staff, or for non-managerial workers. It is well suited to companies who want to give national units a degree of autonomy in decision making.

This policy does not mean that host country managers are left to run operations in any way they see fit. Large international companies usually conduct extensive training programs in which host-country managers visit home offices for extended periods. This exposes them to the company’s culture and specific business practices. Small and medium-sized companies can find this policy expensive, but being able to depend on local managers who fully understand what is expected of them can far outweigh any costs.

Polycentric staffing places managerial responsibility in the hands of people intimately familiar with the local business environment. Managers with deep cultural understanding of the local market can be an enormous advantage. They are familiar with local business practices and can read the subtle cues of both verbal and nonverbal language. They need not overcome any cultural barriers created by an image of being an outsider, and they tend to have a better feel for the needs of employees, customers, and suppliers.

Another important advantage of polycentric staffing is elimination of the high cost of relocating expatriate managers and families. This benefit can be extremely helpful for small and medium-sized businesses that cannot afford the expenses associated with expatriate employees.

Geocentric Staffing. In geocentric staffing, the best-qualified individuals, regardless of nationality, manage operations abroad. The local operation may choose managers from the host country, from the home country, or from a third country. The choice depends on the operation’s specific needs. This policy is typically reserved for top-level managers.

Geocentric staffing helps a company develop global managers who can adjust easily to any business environment— particularly to cultural differences. This advantage is especially useful for global companies trying to break down nationalistic barriers, whether between managers in a single office or between different offices. One hope of companies using this policy is that a global perspective among its managers will help them seize opportunities that may otherwise be overlooked.

Diff: 3 Page Ref: 408–410 Skill: Concept Objective: 2-6 Explain the three different types of staffing policies used by international companies.

Question ID: 2-181 Question: Describe in detail the process of HR recruitment and selection of employees for global companies. Give specific examples of the process and explain the advantages and disadvantages of the various methods.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Human resource management (HRM) is the process of staffing a company and ensuring that employees are as productive as possible. It requires managers to be effective in recruiting and selecting employees and in forming good relationships with them.

There are concerns over the employment of expatriates—citizens of one country who are living and working in another.

Finding well-qualified non-managerial workers in those markets is relatively easy. Recruitment and selection practices must be adapted to the host nation’s hiring laws. Hiring practices regarding nondiscrimination among job candidates

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must be carefully monitored so that the company does not violate such laws.

Recruiting and selecting managers and workers requires human resource planning—the process of forecasting a company’s human resource needs and its supply. The first phase of HR planning involves taking an inventory of a company’s current human resources—that is, collecting data on every employee, including educational background, special job skills, previous jobs, language skills, and experience living abroad.

Companies must develop a plan for recruiting and selecting people to fill vacant and anticipated new positions, both managerial and non-managerial. Sometimes, a firm must also make plans for reducing its workforce—a process called decruitment—when current HR levels are greater than anticipated needs.

Recruitment process can focus on current company employees, recent college graduates, particularly those who have come from the target country/culture to study in the company’s home country. Companies can also recruit local managerial talent, especially when cultural understanding is a key job requirement. In hiring non-managerial workers, there is often little need for highly specialized skills and local host country can provide required workers.

Diff: 2 Page Ref: 75–77 Skill: Synthesis Objective: 2-6 Explain the three different types of staffing policies used by international companies; 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-182 Question: Describe the policy of polycentric staffing, and explain why some companies might recruit local managerial talent.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: In polycentric staffing, individuals from the host country manage operations abroad. Companies can implement a polycentric approach for top and mid-level managers, for lower level staff, or for non-managerial workers. It is well suited to companies who want to give national units a degree of autonomy in decision making.

This policy does not mean that host country managers are left to run operations in any way they see fit. Large international companies usually conduct extensive training programs in which host-country managers visit home offices for extended periods. This exposes them to the company’s culture and specific business practices. Small and medium-sized companies can find this policy expensive, but being able to depend on local managers who fully understand what is expected of them can far outweigh any costs.

Hiring local managers is common when cultural understanding is a key job requirement. Hiring local managers with government contacts can speed the process of getting approvals for local operations. In some cases, governments force companies to recruit local managers so that they can develop their own internal pools of managerial talent.

Governments sometimes also restrict the number of international managers that can work in the host country.

Diff: 2 Page Ref: 74, 76 Skill: Synthesis Objective: 2-6 Explain the three different types of staffing policies used by international companies; 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-183 Question: Explain what is meant by the term expatriate failure and discuss how it can be avoided.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Living in another culture can be a stressful experience. Selecting managers comfortable traveling to and living in unfamiliar cultures, therefore, is an extremely important factor when recruiting for international posts. Set down in the midst of new cultures, many expatriates experience culture shock—a psychological process affecting people living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression. In other words, they have trouble adjusting to the new environment in which they find themselves. Expatriate failure— the early return by an employee from an international assignment because of inadequate job performance—often results from cultural stress. The higher cost of expatriate failure is convincing many companies to invest in cultural-

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training programs for employees sent abroad.

The effects of reverse culture shock can be reduced. Home-culture reorientation programs and career-counselling sessions for returning managers and their families can be highly effective. For example, the employer might bring the entire family home for a short stay several weeks before the official return. This kind of trip allows returnees to prepare for at least some of the reverse culture shock that may await them.

Good career development programs can help companies retain valuable managers. Ideally, the career development plan was worked out before the employee went abroad and revised before his or her return. Some companies work with employees before they go abroad to plan career paths of up to 20 years within the company. Mentors who have previously gone abroad and had to adjust on returning home can also be assigned to returning managers. The mentor becomes a confidant with whom the expatriate manager can discuss particular problems related to work, family, and readjusting to the home culture.

Diff: 2 Page Ref: 77–79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-184 Question: Describe in detail the differences between culture shock and reverse culture shock. How can companies help employees deal with such issues?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Successful international managers typically do not mind, and often enjoy, living and working outside their native lands. In extreme cases, they might even be required to relocate every year or so. These individuals are capable of adapting quickly to local conditions and business practices. Such managers are becoming increasingly valuable with the emergence of markets in Asia, Central and Eastern Europe, and Latin America. They are also helping to create a global pool of managers who are ready and willing to go practically anywhere on short notice.

The size of this pool, however, remains limited because of the difficulties that many people experience in relocating to unfamiliar cultures.

Living in another culture can be a stressful experience. Selecting managers comfortable traveling to and living in unfamiliar cultures, therefore, is an extremely important factor when recruiting for international posts. Set down in the midst of new cultures, many expatriates experience culture shock—a psychological process affecting people living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression. In other words, they have trouble adjusting to the new environment in which they find themselves. Expatriate failure—the early return by an employee from an international assignment because of inadequate job performance—often results from cultural stress. The higher cost of expatriate failure is convincing many companies to invest in cultural-training programs for employees sent abroad.

Ironically, expatriates who successfully adapt to new cultures often undergo an experience called reverse culture shock—the psychological process of readapting to one’s home culture. Because values and behaviour that once

seemed so natural now seem so strange, reverse culture shock may be even more disturbing than culture shock.

Returning managers often find that either no position or merely a "standby" position awaits them in the home office.

Companies often do not know how to take full advantage of the cross-cultural abilities developed by managers who have spent several potentially valuable years abroad. It is not uncommon for expatriates to leave their companies within a year of returning home because of difficulties blending back into the company culture.

Moreover, spouses and children often have difficulty leaving the adopted culture and returning home. For many Japanese employees and their families, reentry into Japanese culture after a work assignment in the United States can be particularly difficult. The fast pace of business and social life in the United States, plus the relatively high degree of freedom and independence for women, contrasts with life in Japan. Returning Japanese expatriates can find it difficult to adjust back to life in Japan after years of living in the United States.

The effects of reverse culture shock can be reduced. Home-culture reorientation programs and career-counseling sessions for returning managers and their families can be highly effective. For example, the employer might bring the entire family home for a short stay several weeks before the official return. This kind of trip allows returnees to prepare for at least some of the reverse culture shock that may await them.

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Good career development programs can help companies retain valuable managers. Ideally, the career development plan was worked out before the employee went abroad and revised before his or her return. Some companies work with employees before they go abroad to plan career paths of up to 20 years within the company. Mentors who have previously gone abroad and had to adjust on returning home can also be assigned to returning managers. The mentor becomes a confidant with whom the expatriate manager can discuss particular problems related to work, family, and readjusting to the home culture.

Diff: 2 Page Ref: 77–79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-185 Question: Compare and contrast the methods of cultural training. Is any single method better than all the others?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer:

Environmental Briefings and Cultural Orientations. Environmental (area) briefings constitute the most basic level of training—often the starting point for studying other cultures. Briefings include information on local housing, health care, transportation, schools, and climate. Such knowledge is normally obtained from books, films, and lectures.

Cultural orientations offer insight into social, political, legal, and economic institutions. Their purpose is to add depth and substance to environmental briefings.

Cultural Assimilation and Sensitivity Training. Cultural assimilation teaches the culture’s values, attitudes, manners,

and customs. So-called guerrilla linguistics, which involves learning some phrases in the local language, is often used at this stage. It also typically includes role-play exercises: the trainee responds to a specific situation to be evaluated by a team of judges. This method is often used when someone is given little notice of a short stay abroad and wishes to take a crash course in social and business etiquette and communication. Sensitivity training teaches people to be considerate and understanding of other people’s feelings and emotions. It gets the trainee "under the skin" of the local people.

Language Training. The need for more thorough cultural preparedness brings us to intensive language training. This

level of training entails more than memorizing phrases for ordering dinner or asking directions. It gets a trainee "into the mind" of local people. The trainee learns more about why local people behave as they do. This is perhaps the most critical part of cultural training for long-term assignments.

Field Experience. Field experience means visiting the culture, walking the streets of its cities and villages, and

becoming absorbed by it for a short time. The trainee gets to enjoy some of the unique cultural traits and feel some of the stresses inherent in living in the culture.

Finally, remember that spouses and children also need cultural training. Training for them is a good investment because the alternatives—an international "commuter marriage" or expatriate failure—are both psychologically and financially expensive options.

Diff: 3 Page Ref: 78–79 Skill: Concept Objective: 2-7 Describe the recruitment, selection, and cultural training issues facing international companies.

Question ID: 2-186 Question: Briefly explain how companies compensate managers in international markets.

Answer: Naturally, compensation packages for managers differ from company to company and from country to country. Good packages are fairly complicated to design, for several reasons. Consider the effect of cost of living, which includes factors such as the cost of groceries, dining out, clothing, housing, schooling, health care, transportation, and utilities. Quite simply, it costs more to live in some countries than in others. Moreover, within a given country, the cost of living typically varies from large cities to rural towns and villages. Most companies add a certain amount to an expatriate manager’s pay to cover greater cost-of-living expenses. On the other hand, managers who are relocating to lower cost-of-living countries are typically paid the same amount that they were

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receiving at the home office—otherwise, they would be financially penalized for accepting an international job assignment.

Companies must cover other costs incurred by expatriate managers even when the cost of living abroad is lower than at home. One important concern for relocating managers is the quality of local education. In many cases, children cannot immediately enter local classes because they do not speak the local language. In such instances, most companies pay for private-school education.

Bonus and Tax Incentives. Companies commonly offer managers inducements to accept international postings. The most common is a financial bonus. This bonus can be in the form of a one-time payment or an add-on to regular pay—generally 15 to 20 percent. Bonuses for managers who are asked to go into a particularly unstable country or one with a very low standard of living often receive hardship pay.

Managers can also be attracted by another income-related factor. For example, the US government permits citizens working abroad to exclude $82 000 of "foreign-earned income" from their taxable income in the United States—even if it was earned in a country with no income tax. But earnings over that amount are subject to income tax, as are employee benefits such as free housing.

Cultural and Social Contributors to Cost. Culture also plays an important role in the compensation of expatriate managers. Some nations offer more paid holidays than others. Many offer free medical care to everyone living and working there. Granted, the quality of locally available medical care is not always good. Many companies, therefore, have plans to take seriously ill expatriates and family members home or to nearby countries where medical care is equal to that available in the home country.

Companies that hire managers in the local market might encounter additional costs engendered by social attitudes.

For instance, in some countries employers are expected to provide free or subsidized housing. In others the government obliges employers to provide paid maternity leaves of up to one and a half years. Government-mandated maternity leaves vary significantly across European countries. Although not all such costs need to be absorbed by companies, they do tend to raise a country’s cost of doing business.

Managers recruited from within the host country generally receive the same pay as managers who work for local companies. Yet they often receive perks not offered by local firms. And some managers are required to visit the home office at least several times per year. If time allows, many managers will make these into short vacations by taking along their families and adding a few extra days onto the length of the trip.

Diff: 2 Page Ref: 79–80 Skill: Concept Objective: 2-8 Explain how companies compensate managers and workers in international markets.

Question ID: 2-187 Question: Discuss the disadvantages of an ethnocentric staffing policy, and explain how bonuses, tax incentives, and cultural and social expectations can contribute to high personnel costs.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Despite its advantages, ethnocentric staffing has its negative aspects. First, relocating managers from the home country is expensive. The bonuses that managers often receive for relocating plus relocation expenses for entire families can increase the cost of a manager several times over. Likewise, the pressure of cultural differences and long periods away from relatives and friends can contribute to the failure of managers on international assignments.

Second, an ethnocentric policy can create barriers for the host-country office. The presence of home-country managers in the host country might encourage a "foreign" image of the business. Lower-level employees might feel that managers do not really understand their needs because they come from another culture. Occasionally they are right: Expatriate managers sometimes fail to integrate themselves into the local culture. And if they fail to overcome cultural barriers, they typically fail to understand the needs of their local employees and those of their local customers.

Bonuses, tax incentives, and cultural and social expectations can contribute to high personnel costs. Companies

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commonly offer managers inducements to accept international postings. The most common is a financial bonus. This bonus can be in the form of a one-time payment or an add-on to regular pay—generally 15 to 20 percent. Bonuses for managers who are asked to go into a particularly unstable country or one with a very low standard of living often receive hardship pay.

Managers can also be attracted by another income-related factor. For example, the US government permits citizens working abroad to exclude $82 000 of "foreign-earned income" from their taxable income in the United States—even if it was earned in a country with no income tax. But earnings over that amount are subject to income tax, as are employee benefits such as free housing.

Culture also plays an important role in the compensation of expatriate managers. Some nations offer more paid holidays than others. Many offer free medical care to everyone living and working there. Granted, the quality of locally available medical care is not always good. Many companies, therefore, have plans to take seriously ill expatriates and family members home or to nearby countries where medical care is equal to that available in the home country.

Companies that hire managers in the local market might encounter additional costs engendered by social attitudes.

For instance, in some countries employers are expected to provide free or subsidized housing. In others the government obliges employers to provide paid maternity leaves of up to one and a half years. Government-mandated maternity leaves vary significantly across European countries. Although not all such costs need to be absorbed by companies, they do tend to raise a country’s cost of doing business.

Diff: 2 Page Ref: 73, 79–80 Skill: Synthesis Objective: 2-6 Explain the three different types of staffing policies used by international companies; 2-8 Explain how companies compensate managers and workers in international markets.

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Chapter 3 Politics and Law

Chapter 3 Politics and Law True/False Question ID: 3-1 Question: Anarchism is the belief that every aspect of people's lives must be controlled in order for a nation's political system to be effective.

Answer: FALSE Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-2 Question: Pluralism is the belief that only individuals and private groups should control a nation's political activities.

Answer: FALSE Diff: 2 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-3 Question: Totalitarian political systems include authoritarian regimes such as communism and fascism.

Answer: TRUE Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-4 Question: In a totalitarian system, rulers tightly control people's lives and do not tolerate opposing viewpoints.

Answer: TRUE Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-5 Question: When a country's religious leaders are also its political leaders, its political system is called a theocracy.

Answer: TRUE Diff: 1 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-6 Question: A political system that is under the control of totalitarian religious leaders is called secular totalitarianism.

Answer: FALSE Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-7 Question: A democracy is a political system in which government leaders are elected directly by the wide participation of the people or their representatives.

Answer: TRUE Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-8 Question: In a "pure" democracy, citizens elect individuals from their groups to represent their political needs and views.

Answer: FALSE

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Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-9 Question: Civil rights include freedom of speech, freedom to organize political parties, and the right to a fair trial.

Answer: TRUE Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-10 Question: Bureaucracy is the part of the government that implements the rules and laws passed by elected representatives.

Answer: TRUE Diff: 1 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-11 Question: In politicized bureaucracies, bureaucrats tend to implement decisions according to their own political views rather than those of the people's representatives.

Answer: TRUE Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-12 Question: A participative democracy combined with free markets and property rights guarantees strong economic growth.

Answer: FALSE Diff: 2 Page Ref: 93 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-13 Question: In every country, the rate of economic growth is primarily determined by its degree of political and civil liberties.

Answer: FALSE Diff: 2 Page Ref: 93 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-14 Question: The "four tigers" of Asia—Hong Kong, Singapore, South Korea, and Taiwan—built strong market economies in the absence of truly democratic practices.

Answer: TRUE Diff: 2 Page Ref: 93 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-15 Question: Local content requirements are one form of political risk.

Answer: TRUE Diff: 1 Page Ref: 97 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-16 Question: Expropriation involves the forced transfer of assets from a company to the government without

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compensation.

Answer: FALSE Diff: 2 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-17 Question: Among asset seizure approaches, nationalization is more common than confiscation and expropriation.

Answer: TRUE Diff: 2 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-18 Question: Lobbying is the policy of hiring people to represent a company's views on political matters.

Answer: TRUE Diff: 1 Page Ref: 101 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-19 Question: Bribery is an expected way of doing business in certain countries.

Answer: TRUE Diff: 2 Page Ref: 101 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-20 Question: Totalitarian governments tend to favour public ownership of economic resources.

Answer: TRUE Diff: 2 Page Ref: 102 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-21 Question: Civil law can be more adversarial than common law because civil law relies more on the need to interpret laws according to tradition, precedent, and usage.

Answer: FALSE Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-22 Question: A theocratic legal system is based on a detailed set of written rules and statutes that constitute a legal code.

Answer: FALSE Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-23 Question: Hindu law is the most widely practised theocratic legal system today.

Answer: FALSE Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-24 Question: The 20-year term granted for patents by the World Trade Organization begins when a patent is finally granted.

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Answer: FALSE Diff: 2 Page Ref: 105 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-25 Question: Trademark protection typically lasts indefinitely provided the word or symbol continues to be distinctive.

Answer: TRUE Diff: 2 Page Ref: 106 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-26 Question: Product liability laws hold only manufacturers responsible for damage, injury, or death caused by defective products.

Answer: FALSE Diff: 1 Page Ref: 106 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-27 Question: A value-added tax is a tax levied on each party that adds value to a product throughout its production and distribution.

Answer: TRUE Diff: 2 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-28 Question: Antitrust laws are designed to prevent companies from gaining unfair monopoly advantages.

Answer: TRUE Diff: 2 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-29 Question: Treaties concluded among several nations are called multilateral agreements.

Answer: TRUE Diff: 1 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-30 Question: Political relations between a company’s home country and the host nation do not affects its international business activities.

Answer: FALSE Diff: 2 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-31 Question: The way a country is perceived has a strong effect on the country’s ability to compete for investment and to export its goods and services, and can make a significant difference in the success of its businesses.

Answer: TRUE Diff: 1 Page Ref: 109 Skill: Critical thinking Objective: 3-4 Explain how international relations affect international business activities.

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Multiple Choice Question ID: 3-32 Question: Pure Internet companies ________.

A) can avoid local laws and politics since they do not have a physical presence in other countries B) must adapt to local politics and law, just like brick-and-mortar companies must do C) are exempt from most local regulations because of their unique intangible nature D) should act according to their own corporate culture, not the local environment Answer: B Diff: 2 Page Ref: 88 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-33 Question: In which of the following countries do citizens vote directly on many national issues?

A) Switzerland B) Canada C) Austria D) Norway Answer: A Diff: 1 Page Ref: 88 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-34 Question: Which of the following terms refers to the structures, processes, and activities by which a nation governs itself?

A) Political system B) Legal system C) Cultural system D) Judicial system Answer: A Diff: 1 Page Ref: 88 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-35 Question: When people who are capable of influencing the political system make an effort to do so, which of the following occurs?

A) Wide political participation B) Secular totalitarianism C) Tribal totalitarianism D) Narrow political participation Answer: A Diff: 1 Page Ref: 88 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-36 Question: Totalitarian political systems include authoritarian regimes such as ________.

A) democracy and theocracy B) anarchism and pluralism C) communism and fascism D) capitalism and secularism Answer: C Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-37

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Question: The belief that only individuals and private groups should control a nation's political activities is called ________.

A) pluralism B) anarchism C) theocracy D) totalitarianism Answer: B Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-38 Question: Which of the following refers to the belief that every aspect of people's lives must be controlled for a nation's political system to be effective?

A) Totalitarianism B) Capitalism C) Anarchism D) Pluralism Answer: A Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-39 Question: The belief that both private and public groups play important roles in a nation's political activities is called ________.

A) totalitarianism B) capitalism C) anarchism D) pluralism Answer: D Diff: 1 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-40 Question: Which of the following types of political systems includes democracies, constitutional monarchies, and some aristocracies?

A) Totalitarianism B) Anarchism C) Fascism D) Pluralism Answer: D Diff: 2 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-41 Question: Which of the following features are totalitarian governments LEAST likely to demonstrate?

A) Imposed authority B) Lack of constitutional guarantees C) Preservation of minority rights D) Restricted participation Answer: C Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-42 Question: A totalitarian political system is marked by which of the following?

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A) Narrow participation B) Total participation C) Wide participation D) Public referendums Answer: A Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-43 Question: North Korea is an example of which of the following types of government?

A) Totalitarian B) Democratic C) Theocratic D) Anarchistic Answer: A Diff: 2 Page Ref: 90 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-44 Question: When a country's religious leaders are also its political leaders, its political system is called a ________.

A) democracy B) theocracy C) plutocracy D) bureaucracy Answer: B Diff: 1 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-45 Question: Which of the following terms refers to a political system under the control of totalitarian religious leaders?

A) Communist totalitarianism B) Tribal totalitarianism C) Right-wing totalitarianism D) Theocratic totalitarianism Answer: D Diff: 1 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-46 Question: A political system in which political leaders rely on military and bureaucratic power is referred to as which of the following?

A) Secular anarchism B) Theocratic totalitarianism C) Secular totalitarianism D) Theocratic pluralism Answer: C Diff: 3 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-47 Question: Secular totalitarianism can take on all the following forms EXCEPT ________.

A) communist totalitarianism B) tribal totalitarianism C) right-wing totalitarianism D) theocratic totalitarianism

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Answer: D Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-48 Question: Which of the following terms refers to an economic system in which the government owns and controls all types of economic activity?

A) Socialism B) Sovereign nationalism C) Political bureaucracy D) Pluralism Answer: A Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-49 Question: In which of the following political systems does the government endorse private ownership of property and a market-based economy but grant few (if any) political freedoms?

A) Left-wing totalitarianism B) Theocratic totalitarianism C) Tribal totalitarianism D) Right-wing totalitarianism Answer: D Diff: 1 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-50 Question: Which of the following terms is also used to refer to communism?

A) Tribal totalitarianism B) Right-wing totalitarianism C) Left-wing totalitarianism D) Civil totalitarianism Answer: C Diff: 3 Page Ref: 91 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-51 Question: The government of which of the following countries is currently a mix of communism and right-wing totalitarianism?

A) India B) Iran C) Kenya D) China Answer: D Diff: 3 Page Ref: 91 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-52 Question: Under which of the following political systems are government leaders elected directly by the wide participation of the people or by their representatives?

A) Theocracy B) Democracy C) Communism D) Totalitarianism Answer: B

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Diff: 1 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-53 Question: Most democratic nations practise ________, in which citizens elect individuals from their groups to help govern the people and pass laws.

A) public referendums B) secular totalitarianism C) representative democracy D) socialist pluralism Answer: C Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-54 Question: Representative democracies strive to provide all of the following EXCEPT ________.

A) periodic elections B) politicized bureaucracies C) freedom of expression D) full civil and property rights Answer: B Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-55 Question: In which of the following do bureaucrats implement decisions according to their own political views rather than those of the people's representatives?

A) Public referendums B) Parliamentary democracies C) Politicized bureaucracies D) Pure democracies Answer: C Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-56 Question: The segment of the economic environment comprising independently owned firms that seek to earn profits is called the ________.

A) tribal sector B) private sector C) democratic sector D) public sector Answer: B Diff: 1 Page Ref: 93 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-57 Question: Which of the following philosophies asserts that ownership of the means of production belongs in the hands of individuals and private businesses?

A) Communism B) Pluralism C) Capitalism D) Socialism Answer: C Diff: 1 Page Ref: 93

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Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-58 Question: Venezuelan political system can be viewed as ______________.

A) Communist and totalitarian B) Democratic C) Neither democratic not communist D) Socialist Answer: C Diff: 1 Page Ref: 94 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-59 Question: Political change in China is caused by all of the following EXCEPT _________.

A) collapse of state-owned industry B) influx of foreign companies C) unjust legal system D) restless rural population Answer: B Diff: 1 Page Ref: 94 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-60 Question: The likelihood that a society will undergo political change that negatively affects local business activity is called ________.

A) political risk B) investment risk C) economic risk D) cultural risk Answer: A Diff: 1 Page Ref: 94 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-61 Question: ________ risk threatens companies within a particular industry.

A) Local content B) Macro C) Property D) Micro Answer: D Diff: 2 Page Ref: 94 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-62 Question: Which of the following is NOT a method of asset seizure?

A) Confiscation B) Localization C) Expropriation D) Nationalization Answer: B Diff: 2 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-63

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Question: Which of the following terms refers to the forced transfer of assets from a company to the government without compensation?

A) Expropriation B) Nationalism C) Nationalization D) Confiscation Answer: D Diff: 3 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-64 Question: ________ is the forced transfer of assets from a company to the government with compensation.

A) Expropriation B) Nationalization C) Confiscation D) Localization Answer: A Diff: 3 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-65 Question: All of the following are methods used by companies to manage political risk EXCEPT ________.

A) political influence B) information gathering C) adaptation D) expropriation Answer: D Diff: 2 Page Ref: 100 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-66 Question: Which of the following is NOT a method of employing the risk management strategy of adaptation?

A) Partnerships B) Localization C) Development assistance D) Lobbying Answer: D Diff: 2 Page Ref: 97, 100 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-67 Question: In Canada, Bill S-21, forbids Canadians (individuals or companies) from ________ foreign governments and public officials.

A) lobbying B) influencing C) bribing D) contacting Answer: C Diff: 2 Page Ref: 101 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-68 Question: Which of the following terms refers to the devotion of a people to their nation's interest and advancement?

A) Pluralism B) Nationalism

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C) Capitalism D) Egalitarianism Answer: B Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-69 Question: The Canadian legal system is based largely on which of the following?

A) Common law B) Democratic law C) Civil law D) Representative law Answer: A Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-70 Question: A common law legal system is based on three factors: tradition, precedent, and ________.

A) culture B) values C) usage D) religion Answer: C Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-71 Question: Which of the following legal systems is based on a detailed set of written rules and statutes that constitute a legal code?

A) International law B) Civil law C) Tribal law D) Common law Answer: B Diff: 1 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-72 Question: Which of the following was initially a code governing moral and ethical behaviour that was later extended to govern commercial transactions?

A) Civil law B) Hindu law C) Common law D) Islamic law Answer: D Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-73 Question: A ________ is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.

A) patent B) trademark C) civil right D) copyright

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Answer: A Diff: 2 Page Ref: 105 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-74 Question: The Nike "swoosh" is an example of a ________.

A) patent B) fad C) copyright D) trademark Answer: D Diff: 2 Page Ref: 106 Skill: Application Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-75 Question: A counterfeit Prada backpack that costs $500 in New York but sells for $100 in Rome is an example of which of the following?

A) Patent infringement B) Pirated product C) Copyright violation D) Standardized product Answer: B Diff: 2 Page Ref: 106 Skill: Application Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-76 Question: Governments impose which of the following to help pay for the consequences of using a particular product?

A) Income taxes B) Consumption taxes C) Property taxes D) Value-added taxes Answer: B Diff: 2 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-77 Question: Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages are called ________.

A) antitrust laws B) international laws C) political laws D) bilateral laws Answer: A Diff: 1 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Scenario: Susan Goes Global with R&R Susan Smith works in marketing at Reconditioned Refrigerators (R&R), a global manufacturing company. Susan knows that to advance into upper management she must gain broader experience and was recently told that she can choose from several locations in which R&R is active for her first international assignment. Susan knows little about other nations, their cultures, and their political systems, so she has embarked on an ambitious research project to make an informed decision.

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Question ID: 3-78 Question: Susan has learned that R&R does business with countries having religious political systems where religious leaders are the political leaders. Such countries are examples of which of the following?

A) Democracies B) Bureaucracies C) Theocracies D) Communist countries Answer: C Diff: 2 Page Ref: 90 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-79 Question: Susan's personal political beliefs are congruent with those of a democracy. Susan's beliefs are most likely reflected in which of the following political ideologies?

A) Anarchism B) Pluralism C) Totalitarianism D) Socialism Answer: B Diff: 2 Page Ref: 89 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-80 Question: If Susan chooses a nation in which representative democracy prevails, she can expect that the country will strive to guarantee all of the following EXCEPT ________.

A) full civil and property rights B) periodic elections C) politicized bureaucracy D) freedom of expression Answer: C Diff: 2 Page Ref: 92 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-81 Question: If Susan decides to take her assignment in China, which of the following political systems will she encounter?

A) A mix of theocracy and communism B) A mix of parliamentary democracy and tribal totalitarianism C) A mix of communism and right-wing totalitarianism D) A system based on public referendums Answer: C Diff: 2 Page Ref: 91 Skill: Application Objective: 3-1 Describe each main type of political system.

Question ID: 3-82 Question: Researching Britain, Susan learns that Britain is an example of which of the following forms of government?

A) Theocracy B) Politicized bureaucracy C) Socialism D) Parliamentary democracy Answer: D Diff: 2 Page Ref: 92 Skill: Application Objective: 3-1 Describe each main type of political system.

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Scenario: Risky Business Global Trading, LLC, is a distributor of computer software and hardware, steel and copper scrap, and telephone and electric utility equipment. Involved in three very different types of industries, the company faces many types of risks in its global business.

Question ID: 3-83 Question: Global Trading just learned that the government in one country in which it does business has taken over the entire electric utility industry. The government's actions are an example of ________.

A) confiscation B) globalization C) expropriation D) nationalization Answer: D Diff: 2 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-84 Question: Had the government taken over (with compensation) the assets of Global Trading but not those of any other company, the government's actions would be an example of ________.

A) expropriation B) nationalization C) confiscation D) communism Answer: A Diff: 2 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-85 Question: Had the government taken over the assets of Global Trading without compensation, and not taken over the assets of any other company, the government's actions would be an example of ________.

A) expropriation B) nationalization C) confiscation D) communism Answer: C Diff: 2 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Scenario: Carolyn Martin Goes to Colombia Carolyn Martin, vice president of marketing for a large consumer products company, will soon travel to Colombia to spearhead an effort to increase her company's presence there. Carolyn is concerned about her safety and has contacted a risk-assessment service for advice.

Question ID: 3-86 Question: Would Carolyn most likely increase her safety by establishing a daily routine travelling between the hotel and office?

A) Yes, because this will help her feel more comfortable in an unfamiliar environment.

B) No, because kidnappers are likely to watch for daily routines.

C) Yes, because this will enable her to develop relationships with neighbours on the same routines.

D) No, because a regular routine would inhibit her from blending in with the locals.

Answer: B Diff: 3 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

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Question ID: 3-87 Question: Which of the following is most likely to assist Carolyn in keeping a low profile?

A) Dressing like the locals whenever possible and avoiding expensive jewellery.

B) Participating in public demonstrations attended by large local crowds.

C) Streamlining financial transactions by paying for expenses with large denominations.

D) Maintaining the ability to cover unexpected expenses by carrying a large amount of cash.

Answer: A Diff: 3 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-88 Question: If Carolyn is asked for personal information, she should ________.

A) respond quickly and give detailed information B) be vague but friendly with her response C) give out her work or mobile phone number, but never her home phone number D) demand to know why she is being asked for personal information Answer: B Diff: 3 Page Ref: 96 Skill: Application Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Scenario: Common and Civil Law Delta Computer Corporation is considering the possibility of building a new manufacturing facility in a foreign country in order to lower labour and production costs. The legal department of Delta has raised some issues regarding the two countries which are the top contenders for the new facility. The legal system of Country A is based on civil law, while the legal system of Country B is based on common law. Other than the legal systems of the two countries, all other aspects are virtually identical. Delta’s legal experts must determine which system would be the most beneficial to Delta in the long term.

Question ID: 3-89 Question: Which of the following questions would be most important for Delta legal experts to consider when making the decision to choose the civil law system of Country A or the common law system of Country B? A) Have other corporations based in these two countries been profitable?

B) What is the prevalence of industrial crime in these two countries?

C) How would a contractual dispute with a local vendor be resolved?

D) Would local environmental organizations target Delta for its manufacturing practices?

Answer: C Diff: 3 Page Ref: 103 Skill: Critical Thinking Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-90 Question: Which of the following statements is most likely true for Country B and not Country A? A) Individual rights are less important than states' rights.

B) Ethics and morality are the underlying tenets of the country's legal system.

C) Rules and principles are the basis of judicial decisions.

D) Detailed contracts clearly state all potential contingencies.

Answer: D Diff: 3 Page Ref: 103 Skill: Critical Thinking Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-91 Question: Which of the following most likely supports a decision by Delta to choose Country B over Country A? A) Most countries in the world follow civil law principles.

B) The flexibility of a common law system allows for judicial interpretation in unique cases.

C) Civil law nations administer justice based on a structured set of rules.

D) Common law contracts tend to be lengthy and time consuming to develop.

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Answer: B Diff: 3 Page Ref: 103 Skill: Critical Thinking Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-92 Question: Which of the following, if true, would most likely support a decision by Delta to choose Country A over Country B? A) Under civil law, contractual noncompliance provisions are fairly broad in scope.

B) Common law contracts are so detailed that they are expensive to draft.

C) Intellectual property rights in both countries are loosely upheld and enforced.

D) Judges in Country A confer with legislators on international business issues.

Answer: A Diff: 3 Page Ref: 103 Skill: Critical Thinking Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Scenario: James Maxwell James Maxwell is head of legal affairs for Hudson Inc., a producer of animal figurines that include an embedded software program that makes animal sounds. Hudson is expanding its market to include parts of Asia and Maxwell is concerned about reports of software piracy in the region.

Question ID: 3-93 Question: The software program embedded in Hudson's figurines is an example of ________.

A) a copyright B) intellectual property C) a trademark D) local content Answer: B Diff: 1 Page Ref: 104 Skill: Application Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-94 Question: To protect itself against imitators and ensure that customers can easily identify its product, Hudson could register a ________.

A) patent B) copyright C) trademark D) users licence Answer: C Diff: 1 Page Ref: 106 Skill: Application Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-95 Question: Which of the following could Hudson obtain to protect its rights to the proprietary software embedded in the figurines?

A) Trademark B) Patent C) Copyright D) Users licence Answer: C Diff: 2 Page Ref: 106 Skill: Application Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-96 Question: James Maxwell is aware that all of the following statements are true EXCEPT ________.

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A) trademark protection typically last indefinitely B) consumers benefit from trademarks because they know what to expect from a particular brand C) pirated versions of trademarked products are always cheap and flawed imitations D) trademarks are words or symbols that distinguish a product and its manufacturer Answer: C Diff: 3 Page Ref: 106 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-97 Question: Increased business opportunities in global context are helped by ____________.

A) providing gifts to politicians of the host country B) visible participation in the political systems of the host country C) fostering favourable political relations with target countries D) ignoring the political climate and focusing on business only Answer: C Diff: 2 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-99 Question: Canada has a high brand image globally due to all of the following EXCEPT ____ .

A) strong governance reputation B) membership in the Security Council of the UN C) liberal immigration policy D) rich cultural heritage Answer: B Diff: 1 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-99 Question: In order to generate a stable international business environment, some countries have turned to _________ .

A) strong laws against foreign investment B) restrictions in immigration C) open trade with all countries D) multilateral trade agreements Answer: D Diff: 1 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

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Fill-In-The-Blank Question ID: 3-100 Question: A(n) ________ system includes the structures, processes, and activities by which a nation governs itself.

Answer: political Diff: 1 Page Ref: 88 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-101 Question: ________ political participation occurs when few people participate in the political process.

Answer: Narrow Diff: 2 Page Ref: 89 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-102 Question: Totalitarian governments tend to share three features: ________, ________, and ________.

Answer: imposed authority, lack of constitutional guarantees, restricted participation Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-103 Question: Under a(n) ________ political system, religious leaders enforce laws and regulations based on religious beliefs.

Answer: theocratic Diff: 1 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-104 Question: A political system in which political leaders rely on military and bureaucratic power is called ________.

Answer: secular totalitarianism Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-105 Question: A(n) ________ economic system is one in which the government owns and controls all types of economic activity.

Answer: socialist Diff: 2 Page Ref: 90 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-106 Question: A(n) ________ democracy is one in which all citizens participate freely and actively in the political process.

Answer: pure Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-107 Question: For practical reasons, most nations have resorted to ________ democracy in which citizens nominate individuals from their groups to represent their political needs and views.

Answer: representative Diff: 2 Page Ref: 92 Skill: Concept Objective: 3-1 Describe each main type of political system.

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Question ID: 3-108 Question: The likelihood that a society will undergo political changes that negatively affect local business activity is called ________.

Answer: political risk Diff: 2 Page Ref: 94 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-109 Question: ________ risk threatens all companies, domestic and international, regardless of industry.

Answer: Macro Diff: 2 Page Ref: 94 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-119 Question: ________ risk threatens companies within a particular industry or even smaller groups.

Answer: Micro Diff: 2 Page Ref: 94–95 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-111 Question: The forced transfer of assets from a company to the government without compensation is called ________.

Answer: confiscation Diff: 2 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-112 Question: ________ of an industry means government takeover of the entire industry.

Answer: Nationalization Diff: 2 Page Ref: 96 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-113 Question: ________ law is based on a detailed set of written rules and statutes.

Answer: Civil Diff: 2 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-114 Question: Uniformity in interpreting and applying laws in more than one country is known as ________.

Answer: standardization Diff: 2 Page Ref: 104 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-115 Question: ________ includes patents and trademarks, which are often considered a firm's most valuable asset.

Answer: Industrial property Diff: 2 Page Ref: 105 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-116

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Question: Laws designed to prevent companies from fixing prices and gaining unfair monopoly advantages are called _____________.

Answer: antitrust (antimonopoly) laws Diff: 1 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-117 Question: A country’s _____________ has a strong effect on the country’s ability to compete for investment.

Answer: brand image Diff: 2 Page Ref 109 Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-118 Question: The United Nations ________ is responsible for ensuring international peace and security.

Answer: Security Council Diff: 1 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-119 Question: The United Nations body most directly involved with international business issues is the ________.

Answer: United Nations Conference on Trade and Development Diff: 1 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-120 Question: Headed by the ______________, the ______________ administers the operations of the UN. Answer: secretary general; the Secretariat Diff: 1 Page Ref: 110 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

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Essay Question ID: 3-121 Question: Explain what political systems are, and how politics, culture and political participation are related.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Political systems include the structures, processes, and activities by which a nation governs itself. Politics and culture are closely related. A country’s political system is rooted in the history and culture of its people. Political participation occurs when people voice their opinions, vote, and show general approval or disapproval of the system.

Participation can be wide or narrow. Wide participation occurs when people who are capable of influencing the political system make an effort to do so. For example, most adults living in the United States have the right to participate in the political process by voting in elections. Narrow participation occurs when few people participate. In Kuwait, for example, only citizens who can prove Kuwaiti ancestry participate in the political process.

Diff: 2 Page Ref: 88 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-122 Question: Compare and contrast the world's three main political ideologies: anarchism, totalitarianism, and pluralism.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Totalitarianism is the belief that every aspect of people's lives must be controlled for a nation's political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labour. Totalitarian political systems include authoritarian regimes such as communism and fascism.

Anarchism is the belief that only individuals and private groups should control a nation's political activities. An anarchist views public government as unnecessary and unwanted because it tramples personal liberties.

Pluralism is the belief that both private and public groups play important roles in a nation's political activities. Each group (consisting of people with different ethnic, racial, class, and lifestyle backgrounds) serves to balance the power that can be gained by the other. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies.

Diff: 2 Page Ref: 79 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-123 Question: Describe the various types of political risk. Provide an example of each form.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Conflict and Violence. Local conflict can strongly discourage international companies from investing in a nation.

Violent disturbances impair a company's ability to manufacture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict also threatens a company's physical assets (such as offices and factories) and the lives of its employees. Conflict arises from several sources. First, it may arise from people's resentment toward their own government. When peaceful resolution of disputes between people (or factions) and the government fails, violent attempts to change political leadership can ensue. ExxonMobil suspended production of liquid natural gas at its facility in Indonesia's Aceh province when separatist rebels targeted the complex with their violence. Second, conflict can arise over territorial disputes between countries.

Terrorism and Kidnapping. Terrorist activities are means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics to force change through fear and destruction.

Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group's activities. Executives of

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large international companies are often prime targets for kidnappers because their employers have "deep pockets" to pay large ransoms. Latin American countries have some of the world's highest kidnapping rates, and Mexico City is at or near the top of the list of cities with the highest kidnapping rates.

Property Seizure. Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization. In recent years, Venezuela's President Hugo Chavez nationalized that country's telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela.

Policy Changes. Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. One common policy tool restricts ownership to domestic companies or limits ownership by nondomestic firms to a minority stake. This type of policy restricted PepsiCo's ownership of local companies to 49 percent when it first entered India.

Local Content Requirements. Laws stipulating that a specified amount of a good or service be supplied by producers

in the domestic market are called local content requirements. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers. They ensure that international companies foster local business activity and help ease regional or national unemployment.

They also help governments maintain some degree of control over international companies without resorting to extreme measures such as confiscation and expropriation.

Diff: 2 Page Ref: 94–97 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-124 Question: Describe in detail each of the three main methods companies use to manage political risk.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

International companies benefit from monitoring and attempting to predict political changes that can negatively affect their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attractive, international companies find other ways to manage political risks, including: 1. Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: • Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets.

• Localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture.

• Development assistance lets an international business assist the host country or region in improving the quality of life for locals.

• Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures US companies that invest abroad against loss and can provide project financing.

2. Information Gathering. International firms attempt to gather information that will help them predict and manage political risk. Two sources that companies use to conduct accurate political risk forecasting are Current Employees with Relevant Information and Agencies Specializing in Political-Risk Services.

3. Political Influence. Managers must work within the established rules and regulations of each national business environment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politicians directly or through lobbyists. Lobbying is the policy of hiring people to represent a company's views on political matters. Bribes often represent attempts to gain political influence.

Diff: 3

Page Ref: 97, 100–101

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Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-125 Question: Describe the various types of political risk, and explain why a company might experience violent political risk in a nation with a tribal totalitarian political system.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The broadest categories of political risk reflect the range of companies affected. Macro risk threatens the activities of all domestic and international companies in every industry. Examples include an ongoing threat of violence against corporate assets in a nation and a rising level of government corruption. Micro risk threatens companies only within a particular industry (or more narrowly defined group). For example, an international trade war in steel affects the operations of steel producers and companies that require steel as an input to their business activities. In addition to these two broad categories, we can classify political risk according to the actions or events that cause it to arise, including: 1. Conflict and Violence. Local conflict can strongly discourage international companies from investing in a nation.

Violent disturbances impair a company's ability to manufacture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict also threatens a company's physical assets (such as offices and factories) and the lives of its employees. Conflict arises from several sources. First, it may arise from people's resentment toward their own government. Second, conflict can arise over territorial disputes between countries.

Third, disputes among ethnic, racial, and religious groups may erupt in violent conflict.

2. Terrorism and Kidnapping. Terrorist activities are means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics to force change through fear and destruction.

3. Property Seizure. Governments sometimes seize the assets of companies doing business within their borders.

Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization.

4. Policy Changes. Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. One common policy tool restricts ownership to domestic companies or limits ownership by nondomestic firms to a minority stake.

5. Local Content Requirements. Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market are called local content requirements. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers.

A country with a tribal totalitarian government would present political risk because disputes among ethnic, racial, and religious groups may erupt in violent conflict. Under tribal totalitarianism, one tribe (or ethnic group) imposes its will on others with whom it shares a national identity. Tribal totalitarianism characterizes the governments of several African nations, including Burundi and Rwanda. When the European colonial powers departed Africa, many national boundaries were created with little regard to ethnic differences among the people. People of different ethnicities found themselves living in the same nation, whereas members of the same ethnicity found themselves living in different nations. In time, certain ethnic groups gained political and military power over other groups. Animosity among them often erupted in bloody conflict.

Diff: 2 Page Ref: 90, 94–97 Skill: Synthesis Objective: 3-1 Describe each main type of political system; 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-126 Question: Explain the three types of property seizure. Why might property seizure be a risk for a business operating in a totalitarian nation?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization.

The forced transfer of assets from a company to the government without compensation is called confiscation. Usually the former owners have no legal basis for requesting compensation or the return of assets.

The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensation. There is no framework for legal appeal, and compensation is typically far below market value. Today, governments rarely resort to confiscation or expropriation because these acts can force companies to leave the nation and can jeopardize future investment in the country.

Whereas expropriation involves one or several companies in an industry, nationalization means government takeover of an entire industry. Nationalization is more common than confiscation and expropriation. Likely candidates for nationalization include industries important to a nation's security and those that generate large revenues. In recent years, Venezuela's President Hugo Chavez nationalized that country's telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela.

In general, a government may nationalize an industry to: 1. Use subsidies to protect an industry for ideological reasons.

2. Save local jobs in an ailing industry to gain political clout.

3. Control industry profits so they cannot be transferred to low tax-rate countries.

4. Invest in sectors, such as public utilities, that private companies cannot afford.

The extent of nationalization varies widely from country to country. Whereas the governments of Cuba, North Korea, and Vietnam control practically every industry, those of the United States and Canada own very few. Many countries, including France, Mexico, Poland, and India, try to strike a balance between government and private ownership.

Property seizure is a risk in a totalitarian nation because totalitarianism is the belief that every aspect of people's lives must be controlled for a nation's political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labour. Totalitarian political systems include authoritarian regimes such as communism and fascism.

Totalitarian systems deny citizens the constitutional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject concepts such as freedom of expression, periodically held elections, and guaranteed civil and property rights.

Diff: 3 Page Ref: 90–91, 96–97 Skill: Synthesis Objective: 3-1 Describe each main type of political system; 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-127 Question: Explain in detail each of the four means of incorporating risk into business strategies when companies employ an adaptation strategy.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: 1. Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint

ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

2. Localization entails modifying operations, the product mix, or some other business element—even the company

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name—to suit local tastes and culture.

3. Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.

4. Insurance against political risk can be essential to companies entering risky business environments. Export Development Canada (EDC) is the largest political risk insurance provider in Canada. EDC can insure a company for up to 90 percent of its losses resulting from breach of contract, expropriation, political violence, currency conversion or transfer, repossession, and non-payment by a government.

Diff: 3 Page Ref: 100 Skill: Concept Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects.

Question ID: 3-128 Question: Compare and contrast two prevalent political systems, totalitarianism and democracy, and explain how a country's political system influences its legal system.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In a totalitarian system, individuals govern without the support of the people, tightly control people's lives, and do not tolerate opposing viewpoints. Nazi Germany under Adolf Hitler and the former Soviet Union under Joseph Stalin are historical examples of totalitarian governments. Today, Myanmar and North Korea are prominent examples of totalitarian governments. Totalitarian leaders attempt to silence those with opposing political views and, therefore, require the near-total centralization of political power. But a "pure" form of totalitarianism is not possible because no totalitarian government is capable of entirely silencing all its critics.

A democracy is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives. Democracy differs from totalitarianism in nearly every respect. The foundations of modern democracy go back at least as far as the ancient Greeks. The Greeks tried to practise a pure democracy, one in which all citizens participate freely and actively in the political process. But a pure democracy is more an ideal than a workable system for several reasons. Some people have neither the time nor the desire to get involved in the political process. Also, citizens are less able to participate completely and actively as a population grows and as the barriers of distance and time increase. Finally, leaders in a pure democracy may find it difficult or impossible to form cohesive policies because direct voting can lead to conflicting popular opinion.

A country's political system also influences its legal system. Totalitarian governments tend to favour public ownership of economic resources and enact laws limiting entrepreneurial behaviour. By contrast, democracies tend to encourage entrepreneurial activity and protect business with strong property-rights laws. The rights and responsibilities of parties to business transactions also differ from nation to nation. Political systems and legal systems, therefore, are naturally interlocked. A country's political system inspires and endorses its legal system, and its legal system legitimizes and supports its political system.

Diff: 2 Page Ref: 89–93, 102–103 Skill: Synthesis Objective: 3-1 Describe each main type of political system; 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-129 Question: Describe the importance of a nation's legal system, and identify the main differences between the three main types of legal systems.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A country's legal system is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Many cultural factors—including ideas on social mobility, religion, and individualism—influence a nation's legal system. Likewise, many laws and

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regulations are enacted to safeguard cultural values and beliefs.

Key characteristics of each type of legal system in use around the world (common law, civil law, and theocratic law), include: 1. Common law: A common law legal system reflects three elements: Tradition. A country's legal history Precedent. Past cases that have come before the courts Usage. How laws are applied in specific situations Under common law, the justice system decides cases by interpreting the law on the basis of tradition, precedent, and usage. Yet each law may be interpreted somewhat differently in each case to which it is applied. In turn, each new interpretation sets a precedent that may be followed in later cases. As new precedents arise, laws are altered to clarify vague wording or to accommodate situations not previously considered.

2. Civil law: A civil law system is based on a detailed set of written rules and statutes that constitute a legal code.

Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code.

Less time and money are typically spent, therefore, on legal matters.

3. Theocratic law: A legal tradition based on religious teachings is called theocratic law. Three prominent theocratic legal systems are Islamic, Hindu, and Jewish law. Islamic law is the most widely practised theocratic legal system today. Islamic law was initially a code governing moral and ethical behaviour and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions.

Diff: 3 Page Ref: 103 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-130 Question: Describe in detail the risk-management method of "adaptation." Why would it most likely be less costly and time-consuming to pursue this method in a nation that practises civil law rather than in a nation that practises common law?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: 1. Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint

ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they lend cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

2. Localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture.

3. Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.

4. Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures US companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism.

The Foreign Credit Insurance Association also insures US exporters against loss due to a variety of causes.

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Pursuing adaptation in a nation that practises civil law would most likely be less costly and time-consuming because of the lack of room for arbitrary interpretation of the law. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters.

Diff: 3 Page Ref: 100, 104 Skill: Synthesis Objective: 3-2 Identify the origins of political risk and how managers can reduce its effects; 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-131 Question: Define intellectual property and explain in detail the importance of property rights in international business.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Property that results from people's intellectual talent and abilities is called intellectual property. Most national legal systems protect property rights—the legal rights to resources and any income they generate. Similar to other types of property, intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments.

Intellectual property laws are designed to compensate people whose property rights are violated.

Diff: 2 Page Ref: 93 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-132 Question: Explain in detail each of the following terms, giving examples of each: patent, trademark, and copyright.

Why are these issues important in international business?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Patents can be sought for any invention that is new, useful, and not obvious to any individual of ordinary skill in the relevant technical field. Patents motivate companies to pursue inventions and make them available to consumers because they protect investments companies make in research and development.

Trademarks are words or symbols that distinguish a product and its manufacturer. The Nike "swoosh" is a trademark, as is the name "Lexus." Trademark law creates incentives for manufacturers to invest in developing new products. It also benefits consumers because they know what to expect when they buy a particular brand. In other words, you would not expect a canned soft drink labelled "Coca-Cola" to taste like one labeled "Sprite."

Copyrights give creators of original works the freedom to publish or dispose of them as they choose. A copyright is

typically denoted by the well-known symbol ©, a date, and the copyright holder's name. A copyright holder has the legal rights to: Reproduce the copyrighted work Derive new works from the copyrighted work Sell or distribute copies of the copyrighted work Perform the copyrighted work Display the copyrighted work publicly

Copyright holders include artists, photographers, painters, literary authors, publishers, musical composers, and software developers. Works created after January 1, 1978, are automatically copyrighted for the creator's lifetime plus 50 years. Publishing houses receive copyrights for either 75 years from the date of publication or 100 years after creation, whichever comes first.

Diff: 3

Page Ref: 105–106

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Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-133 Question: Explain in detail the benefits and drawbacks of a value-added tax.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Many countries impose a value-added tax (VAT)—a tax levied on each party that adds value to a product throughout its production and distribution. In Canada, the value added tax is known as the Goods and Services Tax (GST).

Supporters of the VAT system contend that it distributes taxes on retail sales more evenly between producers and consumers. Consumers pay no additional tax at the point of sale because the government has already collected taxes from each party in the value chain. Still, consumers end up paying the tax because producers and distributors must increase prices to compensate for their tax burdens. So the poor are not overly burdened, many countries exclude the VAT on certain items such as children's clothing.

Diff: 2 Page Ref: 107 Skill: Concept Objective: 3-3 Describe each main type of legal system and the important global legal issues.

Question ID: 3-134 Question: Describe in detail, giving examples, the characteristics, advantages and disadvantages of doing business in a democracy as compared to doing business in a totalitarian country.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Doing business in a totalitarian country can be a risky proposition. In a totalitarian country companies can be less concerned with local political opposition. On the negative side, they might need to pay bribes and kickbacks to government official. Laws of these countries can be either vague or nonexistent, and laws can be interpreted by powerful people as they please.

Democracies maintain stable business environments through laws that protect individual property rights. Capitalism ensures that ownership of the means of production belongs to private businesses. Democracy does not ensure successful business; neither does absence of democratic practices hinder economic success.

Diff: 2 Page Ref: 91, 93, 110 Skill: Concept Objective: 3-1 Describe each main type of political system.

Question ID: 3-135 Question: Describe in detail the main issues concerning businesses and international relations. The answer should include explanations of political relations, country branding and how countries can develop stable business environments.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Favourable political relationships foster stable business environments and increase international cooperation. Such issues require strong legal systems that can resolve disputes quickly and fairly. The way a country is perceived has a strong effect on the country’s ability to compete for investment and to export its goods and services. The Anholt-GfK Roper National Brands Index measures the power and quality of each country’s brand image by combining six dimensions: exports, governance, culture and heritage, people, tourism, and investment and immigration. Canada has a high brand image around the world.

To generate stable business environments, some countries have turned to multilateral agreements —treaties concluded among several nations, each of whom agrees to abide by treaty terms even if tensions develop. European Union is a good example of such an agreement.

Diff: 2

Page Ref: 109

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Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

Question ID: 3-136 Question: Explain in detail the role of the United Nations and its various agencies. How can the UN exert influence in international business and trade?

Answer: The US was formed to provide leadership in fostering peace and stability around the world. The UN and its agencies provide food and medical supplies, educational supplies and training, and financial resources to poorer member nations.

The UN is headed by a secretary general who is elected for a five-year term by all members. The main bodies of the UN system are: The General Assembly The Security Council The Economic and Social Council The Trusteeship Council The International Court of Justice The Secretariat The UN Conference on Trade and Development (UNCTAD) has a broad mandate in the areas of international trade and economic development. It hosts conference on pressing development issues including entrepreneurship and national debt. Certain conferences are designed to develop the business management skills of individuals in developing nations.

Diff: 2 Page Ref: 109 Skill: Concept Objective: 3-4 Explain how international relations affect international business activities.

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Chapter 4 International Ethics True/False Question ID: 4-1 Question: Different cultures have different acceptable ethical behaviours.

Answer: TRUE Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-2 Question: There is insignificant variation in the political systems, laws, and cultures of differing nation and therefore ethical dilemmas are rare in international business dealings.

Answer: FALSE Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-3 Question: A situation where moral imperatives are in conflict and there is no right or wrong decision is an ethical dilemma.

Answer: TRUE Diff: 1 Page Ref: 119 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-4 Question: Ethics is a completely separate issue from human morality.

Answer: FALSE Diff: 2 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-5 Question: Ethical conduct is a guaranteed formula for profits and sustainability.

Answer: FALSE Diff: 2 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-6 Question: Ethical dilemmas are not legal questions.

Answer: TRUE Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-7 Question: Corporate codes of ethics are completely voluntary.

Answer: TRUE Diff: 1 Page Ref: 120 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-8 Question: Code of ethics are regulations established by governments to ensure ethical behaviour of companies.

Answer: FALSE

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Diff: 2 Page Ref: 120 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-9 Question: It is important to understand the context when resolving ethical dilemmas.

Answer: TRUE Diff: 1 Page Ref: 119 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-10 Question: The Friedman view of ethics proposes that “When in Rome do as the Romans do.”

Answer: FALSE Diff: 2 Page Ref: 123 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-11 Question: The righteous moralist view says that a company should maintain its home country ethics where it operates.

Answer: TRUE Diff: 1 Page Ref: 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-12 Question: The cultural relativist view says that a company should adopt local ethics wherever it operates.

Answer: TRUE Diff: 1 Page Ref: 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-13 Question: corruption has been a problem in almost every society in history, with the exception of Western nations.

Answer: FALSE Diff: 3 Page Ref: 125 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-14 Question: Some economists have argued that corruption reduces the returns on business investments and leads to low economic growth.

Answer: TRUE Diff: 1 Page Ref: 125 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-15 Question: The concept of social responsibility refers to the idea that businesspeople should consider the social consequences of economic actions when making business decisions.

Answer: TRUE Diff: 2 Page Ref: 125 Skill: Critical thinking

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Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-16 Question: Similar to other cultural and political elements, the prevalence of corruption varies from nation to nation.

Answer: TRUE Diff: 1 Page Ref: 125 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-17 Question: Corruption often interferes with a company’s entry into a new market.

Answer: TRUE Diff: 2 Page Ref: 128 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-18 Question: Singapore is considered one of the most corrupt countries for business.

Answer: FALSE Diff: 1 Page Ref: 125 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-19 Question: The least corrupt countries tend to be developed nations or advanced economies.

Answer: TRUE Diff: 1 Page Ref: 125 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-20 Question: Although Canada is perceived as a highly ethical country, managers of some Canadian businesses have tried to eliminate political risk by using bribery.

Answer: TRUE Diff: 3 Page Ref: 128 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-21 Question: International law says that both nations and businesses can be held liable for human rights abuses.

Answer: FALSE Diff: 2 Page Ref: 129 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-22 Question: Social sustainability encompasses the humanitarian side of societies including medical and educational access.

Answer: TRUE Diff: 1 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable

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practices, and provide examples international businesses that apply these concepts.

Question ID: 4-23 Question: Fair trade refers to the fair profits that companies earn from their international operations.

Answer: FALSE Diff: 1 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-24 Question: Fair trade is a trading partnership that seeks greater equity in international trade.

Answer: TRUE Diff: 2 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-25 Question: Carbon footprint is the environmental impact of greenhouses gases that results from human activity.

Answer: TRUE Diff: 1 Page Ref: 131 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-26 Question: It is commonly believed that globalization and economic development has minimal or no impact on the environment.

Answer: FALSE Diff: 2 Page Ref: 132 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-27 Question: The Principles of Responsible Investment (PRI) is a code of conduct developed to encourage companies to behave ethically.

Answer: TRUE Diff: 1 Page Ref: 133 Objective: 4-4 Understand the principles of responsible investment.

Question ID: 4-28 Question: The Principles of Responsible Investment (PRI) was developed by the European Union for their member countries.

Answer: FALSE Diff: 2 Page Ref: 134 Objective: 4-4 Understand the principles of responsible investment.

Question ID: 4-29 Question: Canadian companies needs to be cautious about applying cultural relativism.

Answer: TRUE Diff: 2 Page Ref: 135 Skill: Critical thinking Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

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Multiple Choice Question ID: 4-30 Question: Which of the following terms is used to refer to personal behaviour in accordance with guidelines for good conduct or morality?

A) Culturally accepted behaviour B) Adaptive behaviour C) Values based behaviour D) Ethical behaviour Answer: D Diff: 2 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-31 Question: ____________ are the moral obligation to separate right from wrong.

A) Values B) Beliefs C) Customs D) Ethics Answer: D Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-32 Question: Many international business ethical issues arise as a result of all the following EXCEPT _______.

A) differences in economic development B) differences in legal systems C) differences in currency markets D) differences in cultures Answer: C Diff: 2 Page Ref: 118 Skill: Critical thinking Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-33 Question: When trying to solve ethical dilemmas, it is important to understand _____________.

A) political systems B) the local culture C) the context D) the moral situation Answer: C Diff: 2 Page Ref: 118 Skill: Critical thinking Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-34 Question: ______________ are situations in which none of the available alternatives seem ethically acceptable A) Ethical behaviours B) Ethical dilemmas C) Moral obligations D) Social responsibilities Answer: B Diff: 3 Page Ref: 119 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-35

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 4 International Ethics

Question: All of the following, EXCEPT __________, are things an international business and its managers can do to make sure ethical issues are considered in business decisions.

A) hiring and promoting people with a well-grounded sense of personal ethics B) developing a Code of Ethics for the company C) building an organizational culture that places a high value on ethical behaviour D) distancing the leadership of the company from ethical issues Answer: D Diff: 3 Page Ref: 120 Skill: Critical thinking Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-36 Question: _____________ is a formal statement of the ethical priorities a business adheres to.

A) Cultural relativism B) A business policy C) A code of ethics D) A strategic plan Answer: C Diff: 2 Page Ref: 120 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-37 Question: Businesses can make sure they are hiring individuals who match with the company’s ethical guidelines by doing all of the following EXCEPT ____________.

A) administering psychological tests B) checking former employer and personal references C) hiring only employees with a strong sense of personal ethics D) hiring only relatives of current employees Answer: D Diff: 2 Page Ref: 120 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-38 Question: Having articulated values in a code of ethics or some other document, leaders in the business must give meaning to those words by ______________.

A) terminating those who deviate from the code B) acting as role models C) challenging those who present opposition D) holding regular seminars about ethics Answer: B Diff: 3 Page Ref: 120 Skill: Application Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-39 Question: An individual with a strong sense of personal ethics is _______ to behave unethically in a business situation.

A) likely B) less likely C) more likely D) more unlikely Answer: B Diff: 3 Page Ref: 119 Skill: Application Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

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Question ID: 4-40 Question: Of the following, which basic position is that the only social responsibility of business is to increase profits so long as the company stays within the rules of law?

A) The cultural relativist view B) The utilitarian view C) The Friedman view D) The righteous morality view Answer: C Diff: 2 Page Ref: 123–124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-41 Question: _____________ is the belief that ethics are nothing more than the reflection of a culture and are culturally determined.

A) A rights theory B) The utilitarian view C) Cultural relativism D) The Friedman view Answer: C Diff: 1 Page Ref: 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-42 Question: Who is noted for saying that a company’s sole responsibility is to maximize profits?

A) Bill Gates B) Michael Porter C) Milton Friedman D) Warren Buffett Answer: C Diff: 3 Page Ref: 123 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-43 Question: A ______________ claims that a multinational company’s home-country standards of ethics are the appropriate ones for companies to follow in foreign countries.

A) righteous moralist B) utilitarian approach C) righteous immoralist D) cultural relativist Answer: A Diff: 1 Page Ref 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-44 Question: In its extreme viewpoint, _________ suggests that if a culture supports child labour, it is all right to use child workers in the country.

A) the righteous moralist B) cultural relativist C) utilitarian approach D) rights approach Answer: B

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Diff: 1 Page Ref: 124 Skill: Application Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-45 Question: Which ethics approach is typically associated with managers from developed countries?

A) The Buffet principle.

B) The Friedman doctrine.

C) The righteous moralist.

D) The utilitarian supporter.

Answer: C Diff: 2 Page Ref: 124 Skill: Application Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-46 Question: Specific tools such as cost benefit analysis and risk assessment are firmly rooted in __________.

A) the Friedman doctrine B) the Buffet principle C) the utilitarian approach D) cultural relativism Answer: C Diff: 3 Page Ref: 124 Skill: Application Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-47 Question: Which approach to business ethics is best summarized by the saying “When in Rome, do as the Romans do”?

A) The Friedman doctrine B) Cultural relativism C) Righteous moralist D) Code of Ethics Answer: B Diff: 2 Page Ref: 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-48 Question: The most commonly cited philosophies of business ethics include all of the following EXCEPT ____________.

A) the cultural relativist view B) the moral imperatives view C) the righteous moralist view D) the utilitarian view Answer: B Diff: 1 Page Ref: 124 Skill: Concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-49 Question: In international business setting, the most common ethical issues involve all of the following EXCEPT _________.

A) employment practices

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B) human rights C) corrupt business practices D) immigration control Answer: D Diff: 1 Page Ref: 125, 129 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-50 Question: ____________ is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade.

A) A code of ethics B) Principles of responsible investment C) Fair trade D) Free trade Answer: C Diff: 2 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-51 Question: Some economists have argued that ________ reduces the returns on business investment and leads to low economic growth.

A) human rights focus B) corruption C) the culture of a country D) environmental pollution Answer: B Diff: 3 Page Ref: 125 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-52 Question: The concept of _________ refers to the idea that businesspeople should consider the social consequences of economic actions when making business decisions.

A) environmental responsibility B) human rights C) just distribution D) social responsibility Answer: D Diff: 3 Page Ref: 125 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-53 Question: Corporate social responsibility consists of all the following layers of activity EXCEPT _____________.

A) code of ethics B) traditional philanthropy C) risk management D) strategic CSR Answer: A Diff: 2 Page Ref: 125 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

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Question ID: 4-54 Question: _____________ is the practice of companies going beyond legal obligations to actively balance commitments to investors, customers and communities.

A) PRI (principles of responsible investment) B) Ethical behaviour C) Corporate social responsibility D) Fair trade Answer: C Diff: 2 Page Ref: 125 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-55 Question: ____________ are some of the countries perceived as having less corruption.

A) Denmark, South Africa, and Argentina B) Denmark, Finland, and New Zealand C) Singapore, Italy, and Chile D) Canada, France, and Japan Answer: B Diff: 2 Page Ref: 125 Skill: Application Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-56 Question: _______________ are some of the countries perceived as having more corruption.

A) Great Britain, Russia, and Argentina B) Russia, Venezuela, and Haiti C) Iran, Italy, and Singapore D) Japan, Singapore, and Chile Answer: B Diff: 2 Page Ref: 125 Skill: Application Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-57 Question: An oil company is considering establishing operations in a foreign country that represses human rights.

Which of the following would best support the position of a human rights activist would take regarding the company’s entry into that market?

A) The firm should establish operations in the country because it would help create jobs.

B) The firm should avoid operating in that country because too many oil firms are already there.

C) The firm should avoid operating in that country because the government is repressive.

D) The firm should establish operations in the country because it would reduce despotism.

Answer: C Diff: 3 Page Ref: 129–130 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-58 Question: Fair trade is a trading partnership based on _________________.

A) dialogue, transparency, and respect B) fair profits and financial returns C) specific rules for trading partners D) securing the rights of global companies Answer: A

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Diff: 2 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-59 Question: The three main pillars of sustainability (sustainable development) include all of the following EXCEPT ____________.

A) economic development B) bilateral trade C) social equity D) environmental protection Answer: B Diff: 2 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-60 Question: In cases of human rights abuses, international law states that _________.

A) global companies can be held liable B) executives of global companies can be held liable C) only nations can be held liable D) anyone who works for the company can be held liable Answer: C Diff: 2 Page Ref: 129 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-61 Question: One important reason why companies pursue “green” initiatives is _____________.

A) to adhere to international laws B) to appease human rights activists C) to reduce operating costs D) to increase bi-lateral trade Answer: C Diff: 2 Page Ref: 130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-62 Question: Multinational organizations have ethical obligations toward all of the following EXCEPT _________.

A) human rights B) social structure of a culture C) environmental pollution D) social sustainability Answer: B Diff: 3 Page Ref: 125–130 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-63 Question: Which country is the global leader in “going green”?

A) United States B) Australia C) Sweden

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D) Germany Answer: D Diff: 2 Page Ref: 133 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-64 Question: Which of the following is one of the most important activities to offset carbon dioxide emissions?

A) Planting trees B) Using recycled paper C) Higher taxes on cars D) Encouraging people to quit smoking Answer: A Diff: 3 Page Ref: 132 Skill: Application Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-65 Question: The environmental impact of greenhouse gases is measured by __________.

A) the number of global companies engaged in sustainable initiatives B) the carbon footprint of human activity C) the number of green products in the marketplace D) world population numbers Answer: B Diff: 3 Page Ref: 131 Skill: Critical thinking Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-66 Question: The main objectives of the principles of responsible investment include all of the following EXCEPT ____________.

A) to apply social responsibility to investments B) to assist investors to achieve better long-term investments C) to create sustainable markets D) to invest in developing countries only Answer: D Diff: 3 Page Ref: 133 Skill: Concept Objective: 4-4 Understand the principles of responsible investment.

Question ID: 4-67 Question: All of the following are the benefits for the principles of responsible investment signatory countries, EXCEPT ________.

A) increased returns B) lower risks C) being part of a global network D) lower corruption Answer: D Diff: 3 Page Ref: 134 Skill: Concept Objective: 4-4 Understand the principles of responsible investment.

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Fill-In-The-Blank Question ID: 4-68 Question: Ethics seeks to resolve question dealing with _____________.

Answer: morality Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-69 Question: _______ often establishes the limits on what are considered acceptable and unacceptable behaviours.

Answer: Culture Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-70 Question: Resolving ethical dilemmas involves understanding the __________ in which the dilemma occurred.

Answer: context Diff: 1 Page Ref: 119 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-71 Question: ____________ is a set of moral principles that defines right or wrong for a person or a group.

Answer: Ethics Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-72 Question: Culture often establishes the ____________ on what is considered acceptable and unacceptable behaviours.

Answer: limits Diff: 1 Page Ref: 118 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-73 Question: A code of ethics is a set of __________ established by an organization to help its employees of members behave in accordance with the organization’s values and ethical standards.

Answer: guidelines Diff: 1 Page Ref: 120 Skill: concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-74 Question: ____________ is a set of guidelines established to help employees behave in accordance with the organization’s values.

Answer: A code of ethics Diff: 1 Page Ref: 120 Skill: concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-75 Question: Corporate codes of ethics are _________.

Answer: voluntary Diff: 1 Page Ref: 120 Skill: concept

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 4 International Ethics

Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-76 Question: Global companies wanting to enter the Japanese market should be aware of the _____________.

Answer: yakuza Diff: 1 Page Ref: 121 Skill: concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-77 Question: Milton Friedman says that a company’s sole responsibility is to _______________.

Answer: maximize profits Diff: 1 Page Ref: 123 Skill: concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-78 Question: ____________ argues that a company should act in accordance with local standards of conduct.

Answer: Cultural relativism Diff: 2 Page Ref: 124 Skill: concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-79 Question: The view that home-country ethics are superior to other views is ____________.

Answer: the righteous moralist view Diff: 2 Page Ref: 124 Skill: concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-80 Question: The utilitarian view says that the right behaviour is that which produces __________ .

Answer: the greatest good for the greatest number Diff: 2 Page Ref: 124 Skill: concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-81 Question: The practice of companies going beyond legal obligations to balance commitments to investors, customers and communities is called _______________.

Answer: corporate social responsibility Diff: 1 Page Ref: 125 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-82 Question: In certain countries, ______________ are part of routine business practices.

Answer: bribes Diff: 1 Page Ref: 125 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-83

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 4 International Ethics

Question: Pressure from __________ has driven conscientious companies to introduce codes of conduct.

Answer: human rights activists Diff: 2 Page Ref: 129 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-84 Question: _______________ states that only nations can be held liable for human rights abuses.

Answer: International law Diff: 1 Page Ref: 129 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-85 Question: International law states that _____________ can be held liable for human rights abuses.

Answer: only nations Diff: 1 Page Ref: 129 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-86 Question: A trading partnership that seeks greater equity in international trade is called _____.

Answer: fair trade Diff: 1 Page Ref: 129 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-87 Question: ______________ encompasses the humanitarian side of societies, including medical and educational access.

Answer: Social sustainability Diff: 2 Page Ref: 130 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-88 Question: _______ focuses on the impact of organizations on the quality and quantity of natural resources.

Answer: Environmental sustainability Diff: 2 Page Ref: 130 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-89 Question: Direct carbon dioxide emissions from the burning of fossil fuels are called the _____.

Answer: primary footprint Diff: 1 Page Ref: 131 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-90 Question: Indirect carbon dioxide emissions from the life-cycle of products are considered to be the __________.

Answer: secondary footprint

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Diff: 1 Page Ref: 131 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-91 Question: __________ is the environmental impact of greenhouse gases that result from human activity.

Answer: Carbon footprint Diff: 1 Page Ref: 131 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-92 Question: Companies are working to create so called ____________ products to reduce the impact of modern economies on our ecosystem.

Answer: green Diff: 2 Page Ref: 132 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-93 Question: Companies are working to create green products to reduce the impact of modern economies on our _____________.

Answer: ecosystem Diff: 2 Page Ref: 132 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-94 Question: Energy law is making _______________ a global leader in renewable energy.

Answer: Germany Diff: 1 Page Ref: 133 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-95 Question: Germany’s energy law is making the country a global leader in _____________.

Answer: renewable energy.

Diff: 1 Page Ref: 133 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-96 Question: Many companies that establish CSR programs do so ________.

Answer: voluntarily Diff: 1 Page Ref: 133 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-97 Question: According to the ____________________, Canada is perceived as one of the least corrupt countries in the world.

Answer: Corruption Perceptions Index.

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Diff: 2 Page Ref: 135 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-98 Question: Bribery is a _______________ in Canada and global Canadian companies and employees are subject to Canadian law.

Answer: criminal offence Diff: 2 Page 135 Skill: concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Essay Question ID: 4-99 Question: Explain in detail the concepts of ethics, ethical behaviour and ethical dilemmas. Why should companies care about these concepts in their global business operations?

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Ethics is the moral obligation to separate right from wrong. There are clear examples of unethical behaviour in companies, yet many of the issues they face in the global marketplace do not have a clear answer of right or wrong behaviour. Ethics is a dynamic and individual concept influenced by societal governance, laws, regulations, and codes of conduct. Ethical conduct is not a guaranteed formula for profits or sustainability but lack of ethical behaviour is a recipe for failure.

Ethical behaviour is personal behaviour with guidelines for good conduct or morality. Culture often establishes the limits on what are considered acceptable and unacceptable behaviours. Since ethical behaviours vary, it is not uncommon for ethical dilemmas to occur. When there are laws to guide actions, that path must be followed. In an ethical dilemma there is no right or wrong decision. There are just alternatives.

Competition pressure, survival in the marketplace, business goals and pressure to meet deadlines influence the ethical behaviour often. The process of resolving ethical dilemmas involves understanding the context in which the dilemma occurs. There is no clear formula or model to resolve an ethical dilemma. A set of questions can provide guidelines before making a decision.

Diff: 2 Page Ref: 118–119, 135 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-100 Question: Explain in detail what an ethical dilemma is, and what questions that may provide guidelines in making a decision. Give specific examples of ethical dilemmas that companies have faced.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

An ethical dilemma is a situation where moral imperatives are in conflict. There is no right or wrong decision to resolve the conflict in a reasonable way. The process involves understanding the context in which the dilemma occurs. It is important to understand the facts, values, principles and moral obligations with regard to the case.

There is no clear formula or model, but the following questions may provide guidelines for resolving the issue: • Is the proposed action legal?

• Is the decision a fair and balanced one for all stakeholders in both short and long term?

• Does the situation justify the action?

• How will this decision make me feel about myself?

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•

How would I feel if my decisions were to be published or if my family found out about it?

Examples of dilemmas and companies may be from the textbook or from other sources.

Diff: 2 Page Ref: 119–120 Skill: Concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-101 Question: Explain in detail what a code of ethics is, and how and why organizations should develop such a code.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A code of ethics is a set of guidelines established by an organization to help their employees or members behave in accordance with the organization’s values and ethical standards. For the most part, codes of ethics are voluntary and their establishment, implementation, and enforcement depend completely on the company.

Code of ethics may include statements related to expected conduct and values that are considered acceptable, such as integrity and professionalism. They may also include statements prohibiting certain behaviours.

Most large international companies have codes of ethics in place. However, a code of ethics is no guarantee that a corporation or its employees and stakeholders will behave ethically.

Diff: 2 Page Ref: 122–123 Skill: concept Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics.

Question ID: 4-102 Question: Describe in detail the four commonly cited philosophies of business ethics, giving detailed examples of each.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The Friedman view states that a company’s sole responsibility is to maximize profits for its owners while operating within the law.

The cultural relativist view states that a company should adopt local ethics where it operates because all belief systems are determined within a cultural context. This view argues that right and wrong are determined within a specific situation and may accept such unethical behaviours are bribery or child labour.

The righteous moralist view states that a company should maintain its home-country ethics where it operates because the home-country’s view is superior to other views.

The utilitarian view states that a company should behave in a way that maximizes good outcomes and minimizes bad outcomes. The right behaviour is that which produces the greatest good for the greatest number.

Diff: 2 Page Ref: 123–124 Skill: concept Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes.

Question ID: 4-103 Question: Explain in detail the issues related with corporate social responsibility specifically related to labour conditions and human rights.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Corporate social responsibility (CSR) is a practice of companies going beyond legal obligations to actively balance commitments to investors, customers other companies, and communities. CSR consists of three layers of activity: the traditional philanthropy, risk management issues and strategic CSR. Companies should only produce public relations campaigns that represent a business as socially responsible if it actually conscientiously and actively pursues causes that are clearly supporting these claims.

To fulfill their responsibilities to society, companies are monitoring the actions of their employees. Pressure from human rights activities are driving companies to meet socially and ethically acceptable behaviours. Examples of companies are Nike and Levi-Strauss.

International law says that only nations can be held liable for human rights abuses, however, activist groups can file lawsuits against businesses for alleged human rights violations.

Diff: 2 Page Ref: 125, 129–130 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-104 Question: Explain in detail how bribery and corruption impact international business.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Prevalence of corruption varies from nation to nation. In certain countries bribes are an accepted way of doing business. Corruption is detrimental to society and business. The Corruption Perceptions Index analyzes which countries are more or less corrupt. The least developed nations tend to be perceived as being most corrupt and the developed nations or advanced economies as less corrupt.

Financial considerations often cause companies to extend operation into the grey area between ethics and corruption.

Canada is considered to be highly ethical, but companies have tried to eliminate political risk by using bribery. A UK study of companies operating in Brazil found that corruption interfered with a company’s entry into a new market more than any other factors. Bribery is difficult to eradicate, but all countries are companies should work toward that goal.

Diff: 2 Page Ref: 125–126 Skill: Concept Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-105 Question: Describe in detail the concept of fair trade and explain how it relates to sustainable business practices.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Fair trade is a trading partnership based on dialogue, transparency, and respect, which seeks greater equity in international trade. If contributes to sustainable development by offering better trading condition to, and securing the rights of, marginalized producers and workers.

Sustainability is comprised of three main pillars: economic development, social equity, and environmental protection.

Social sustainability encompasses the humanitarian side of societies, including medical and educational access and poverty. Environmental sustainability focuses on the impact of organizations on the quality and quantity of natural resources.

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Sustainable development includes consideration of carbon footprint, which is the environmental impact of greenhouse gases that result from human activity. Many companies are now working to create many kinds of green products to reduce the impact of modern economies on our ecosystem.

Diff: 3 Page Ref: 130–133 Skill: Synthesis Objective: 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-106 Question: Explain in detail the six principles of responsible investment (PRI).

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The principles of responsible investment were created in 2006 through a UN-instigated process that encourages companies to behave ethically. The main objectives of the PRI are to protect the world’s assets by applying social responsibility to investments and to assist investors to achieve better long-term investments and create sustainable markets.

The six principles are: 1. We will incorporate environmental, social, and governance (ESG) issues into investment analysis and decision-making processes.

2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4. We will promote acceptance and implementation of the Principles within the investment industry 5. We will work together to enhance our effectiveness in implementing the Principles 6. We will each report on our activities and progress towards implementing the Principles.

The benefits for the signatories are: • Increased returns and lower risk.

• Being part of a global network, with opportunities to pool resources and influence to engage with companies on ESG issues.

• Potential improvement of their reputation or public image as they will be seen as socially responsible companies.

Diff: 2 Page Ref: 133–134 Skill: Concept Objective: 4-4 Understand the principles of responsible investment.

Question ID: 4-107 Question: Explain in detail the relationship between ethical philosophy and the implications of ethical issues for companies Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Ethical behaviour varies among cultures and there are different philosophies of ethics that can be adopted to implement business objectives. Ethical issues are becoming increasingly important for any company wanting to operate or invest internationally.

A company should not blindly follow the behaviour of other companies is a country where they wish to conduct business but carefully consider which philosophy applies in each context.

Most international companies have a policy for ethics and social responsibility. Today companies search for ways to use both to create value and build competitive advantage. Key CSR issues include labour conditions, human rights, bribery, corruption, fair trade practices, and the environment.

Diff: 3

Page Ref: 123–125, 129–130, 135

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Skill: Synthesis Objective: 4-2 Understand the different philosophies of ethics and how international business managers apply them to their decision-making processes; 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

Question ID: 4-108 Question: Describe in detail the relationship between ethics, ethical behaviour and why and how companies are developing green products.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Ethics seeks to resolve questions dealing with human morality and acceptable values. It is a dynamic concept strongly influenced by society, laws, regulations and codes of conduct. Ethical behaviour leads companies to conduct business in a way that benefits society as well as the company itself. One of the most visible initiatives currently is focused on carbon dioxide emissions which are linked to many environmental problems. Many people believe that globalization and economic development are directly responsible for the increasing deterioration in environments everywhere. Companies that focus on products or services that are seen to minimize carbon emissions are viewed positively by consumers and society as a whole.

Green companies are doing things such as planting trees, using recycled raw materials, and encouraging employees to become green ambassadors. On a national level, the German government has gone greener than most others.

Germany has passed an energy law that guarantees operators of windmills and solar generators prices that are above the market rate. Today Germany is a global leader in renewable energy.

In the long run, both ethical behaviour and a focus on “going green” benefit the bottom line.

Diff: 3 Page Ref: 118, 131–133 Skill: synthesis Objective: 4-1 Explain ethics, ethical behaviour, ethical dilemmas, and codes of ethics; 4-3 Explain corporate social responsibility, understand the concept of sustainability and sustainable practices, and provide examples international businesses that apply these concepts.

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Chapter 5 Economics and Emerging Markets True/False Question ID: 5-1 Question: Development of a country’s economy can influence aspects of its culture.

Answer: TRUE Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-2 Question: Incentives and rewards for individual business initiatives are an important component of collectivist cultures.

Answer: FALSE Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-3 Question: Collectivist cultures tend to offer fewer incentives and rewards than individualist cultures.

Answer: TRUE Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-4 Question: Entrepreneurs are businesspeople who accept the risks and opportunities involved in creating and operating new business ventures.

Answer: TRUE Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-5 Question: No economic system reflects a completely individual or group cultural orientation.

Answer: TRUE Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-6 Question: Central planning is rooted in the ideology that the welfare of the group is more important than individual well-being.

Answer: TRUE Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-7 Question: German philosopher Helmut Newton popularized the idea of central planning in the nineteenth century.

Answer: FALSE Diff: 1 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-8 Question: The ultimate goal of a market economy is to achieve a wide range of political, social, and economic objectives by taking complete control over production and distribution of the nation's resources.

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Answer: FALSE Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-9 Question: China's leaders describe its economic philosophy as "socialism with Chinese characteristics."

Answer: TRUE Diff: 2 Page Ref: 144 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-10 Question: The Chinese term guanxi means government ownership.

Answer: FALSE Diff: 2 Page Ref: 144 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-11 Question: In China, family relationships rarely enter the business environment.

Answer: FALSE Diff: 2 Page Ref: 145 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-12 Question: The biggest contributor to China's unemployment rate is its reunification with Hong Kong.

Answer: FALSE Diff: 2 Page Ref: 146 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-13 Question: When China regained control of Hong Kong, it promised to implement a "one country, two systems" scenario to support economic and political freedom in Hong Kong.

Answer: TRUE Diff: 2 Page Ref: 146 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-14 Question: China and Taiwan have both gained entry into the World Trade Organization in recent years.

Answer: TRUE Diff: 3 Page Ref: 146 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-15 Question: In a mixed economy, extensive government ownership on a national level tends to result in a lack of accountability.

Answer: FALSE Diff: 2 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-16 Question: Canada and the United States are examples of contemporary market economies.

Answer: TRUE Diff: 1 Page Ref: 151

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Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-17 Question: Free choice in a market economy gives individuals access to alternative purchase options.

Answer: TRUE Diff: 2 Page Ref: 150 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-18 Question: As supply and demand change for a good or service, so does its selling price.

Answer: TRUE Diff: 2 Page Ref: 150 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-19 Question: Interfering with the price mechanism violates a fundamental principle of the market economy.

Answer: TRUE Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-20 Question: Economic development is a measure for gauging the economic well-being of one nation's people as compared with that of another nation's people.

Answer: TRUE Diff: 2 Page Ref: 153 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-21 Question: Both GDP per capita and GNP per capita measure a nation's income per person.

Answer: TRUE Diff: 1 Page Ref: 156 AACSB: Dynamics of the global economy Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-22 Question: Volunteer work and unpaid household work are both counted in GNP and GDP. Answer: FALSE Diff: 2 Page Ref: 157 AACSB: Dynamics of the global economy Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-23 Question: Barter is a popular alternative for buyers lacking the hard currency needed to pay for imports.

Answer: TRUE Diff: 2 Page Ref: 157 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-24 Question: The concept of purchasing power parity (PPP) must be applied to understand the true value of a currency in its home country.

Answer: FALSE Diff: 2 Page Ref: 160

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Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-25 Question: The United Nations' human development index (HDI) measures the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living.

Answer: TRUE Diff: 2 Page Ref: 161 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-26 Question: The human development index (HDI) demonstrates that high national income alone does not guarantee human progress.

Answer: TRUE Diff: 3 Page Ref: 161 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-27 Question: Nations are commonly classified as being either developed, newly industrialized, or developing.

Answer: TRUE Diff: 1 Page Ref: 162–163 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-28 Question: Nations with the poorest infrastructures and lowest personal incomes are called developing countries.

Answer: TRUE Diff: 1 Page Ref: 163 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-29 Question: One of the key obstacles faced by countries in economic transition is the lack of managerial expertise.

Answer: TRUE Diff: 2 Page Ref: 164 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-30 Question: Political instability in the form of intensified nationalism potentially threatens Russia's progress toward economic transition.

Answer: TRUE Diff: 2 Page Ref: 165 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

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Multiple Choice Question ID: 5-31 Question: Businesspeople who accept the risks and opportunities involved in creating and operating new business ventures are called ________.

A) managers B) supervisors C) entrepreneurs D) central planners Answer: C Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-32 Question: A country's ________ system consists of the structure and processes it uses to allocate its resources and conduct its commercial activities.

A) political B) economic C) social D) cultural Answer: B Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-33 Question: A ________ is a system in which the government owns a nation's land, factories, and other economic resources.

A) mixed economy B) market economy C) centrally planned economy D) laissez-faire economy Answer: C Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-34 Question: Central planning is rooted in the ideology that ________.

A) the welfare of the group is more important than individual well-being B) individual concerns should be placed above group consensus C) individual and group concerns are just as important as government concerns D) privatization will enhance a country's economic well-being Answer: A Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-35 Question: All the following are true of centrally planned economies EXCEPT ________.

A) government determines who produces what products B) government determines the prices of products and labour C) factories are privately owned D) government sets production goals Answer: C Diff: 1 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

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Question ID: 5-36 Question: In most failed centrally planned economies, ________.

A) market conditions helped determine who produced various goods B) prices of products were a function of supply and demand C) central planning agencies specified production goals and decided prices D) central planners paid attention to efficiency improvement Answer: C Diff: 2 Page Ref: 143 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-37 Question: Which of the following people popularized the idea of central economic planning?

A) Mao Zhe Dong B) Karl Marx C) Mikhail Gorbachev D) Henry Fayol Answer: B Diff: 1 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-38 Question: North Korea practises a policy of self-reliance known as ________.

A) guanxi B) laissez-faire C) juche D) karoshi Answer: C Diff: 2 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-39 Question: Which of the following was NOT true of centrally planned economies?

A) At the time of their collapse, standards of living in most centrally planned economies were at or above those of market economies.

B) Basic necessities were often not provided to citizens in centrally planned economies.

C) Underground economies for goods and services thrived in most centrally planned economies.

D) Prices on the black market were much higher than the official prices set by governments.

Answer: A Diff: 2 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-40 Question: A by-product of the centrally planned economy was the emergence of which of the following?

A) Black markets B) Public markets C) Free enterprise system D) Market economy Answer: A Diff: 1 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-41 Question: In China, businesspeople do which of the following?

A) Follow a strategy for forming business relationships that is similar to their Western counterparts.

B) Focus on establishing tight formal contracts.

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C) Place greater importance on written contracts than on personal relationships.

D) Establish a trusting relationship before proceeding with business.

Answer: D Diff: 2 Page Ref: 145 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-42 Question: One of the most important factors in forming a successful venture in China is guanxi, which means ________.

A) bribing government officials B) manufacturing inexpensive products C) personal relationships D) adhering to Confucianism Answer: C Diff: 1 Page Ref: 144–145 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-43 Question: Which of the following is NOT true of good guanxi in China?

A) Business before pleasure.

B) Business partners are sometimes invited to family functions.

C) Contacts are more important than contracts.

D) Cultural sensitivity is critical to success.

Answer: A Diff: 2 Page Ref: 144–145 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-44 Question: Which of the following is NOT an example of a mixed economy?

A) France B) Sweden C) India D) United States Answer: D Diff: 2 Page Ref: 147 Skill: Application Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-45 Question: Land, factories, and other economic resources are more equally split between private and government ownership in which of the following systems?

A) Market economy B) Black market economy C) Mixed economy D) Centrally planned economy Answer: C Diff: 1 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-46 Question: In Country A, the government maintains control over the banking industry. If Country A is a mixed economy, which of the following is most likely true?

A) Businesses in most economic sectors of Country A are privately owned.

B) The government of Country A views the banking sector as important to national security.

C) Country A has never experienced threats to its long-term stability.

D) The government of Country A views banking as more important than manufacturing.

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Answer: B Diff: 3 Page Ref: 147 Skill: Application Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-47 Question: France, Germany, and Sweden are examples of which of the following?

A) Centrally planned economies B) Market economies C) Global economies D) Mixed economies Answer: D Diff: 2 Page Ref: 147 Skill: Application Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-48 Question: All of the following comprise the ultimate goals of a mixed economy EXCEPT ________.

A) low unemployment B) high government ownership of industry C) steady economic growth D) an equitable distribution of wealth Answer: B Diff: 2 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-49 Question: In a mixed economy, governments influence economic activity through ________.

A) laws restricting foreign businesses B) special incentive through subsidies C) participation in WTO D) policy of no involvement in the economy Answer: B Diff: 3 Page Ref: 147 Skill: Application Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-50 Question: The sale of government-owned economic resources to private operators is called ________.

A) nationalization B) laissez-faire economics C) privatization D) guanxi Answer: C Diff: 1 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-51 Question: Which of the following is the main goal of privatization?

A) Reduce responsibility and accountability B) Increase economic efficiency C) Increase subsidies to companies D) Slow economic growth Answer: B Diff: 2 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

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Question ID: 5-52 Question: In a market economy, nearly all economy-related decisions are determined by the interplay of ________.

A) government and individuals B) supply and demand C) customers and employees D) large and small businesses Answer: B Diff: 1 Page Ref: 150 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-53 Question: Supply and demand in a market economy are dictated by which of the following?

A) Privatization B) Production quotas C) The price mechanism D) Government intervention Answer: C Diff: 2 Page Ref: 150 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-54 Question: Market economics is rooted in which of the following beliefs?

A) Group concerns should be placed above individual concerns.

B) Individual concerns should be placed above group concerns.

C) Individual and group concerns are of equal importance.

D) Totalitarianism enhances a country's economic well-being.

Answer: B Diff: 2 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-55 Question: If insects were to destroy coffee crops in key producer countries worldwide, which of the following would most likely occur within the coffee market?

A) Coffee prices would increase.

B) Demand for coffee would be reduced.

C) Demand for coffee would increase.

D) Governments would buy up excess coffee crops.

Answer: A Diff: 3 Page Ref: 150 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-56 Question: Several research studies are published that document the health benefits of a certain grain. What is the most likely economic result of these findings?

A) Demand for the grain increases.

B) Demand for the grain decreases.

C) The price of the grain decreases.

D) Reserves of the grain increase worldwide.

Answer: A Diff: 3 Page Ref: 150 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-57 Question: Laissez-faire economics refers to which of the following?

A) A centrally planned economic system

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B) Government-controlled commerce and individual control effort C) Less government interference in commerce and greater individual economic freedom D) Creating monopolies through government partnership Answer: C Diff: 2 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-58 Question: To function smoothly and properly, a market economy requires all of the following EXCEPT ________.

A) free enterprise B) free monopoly C) price flexibility D) free choice Answer: B Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-59 Question: In a market economy, access to alternative purchase options is known as ________.

A) free choice B) free enterprise C) purchase flexibility D) laissez-faire Answer: A Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-60 Question: Comparing market economies with centrally planned economies, which of the following statements is most accurate regarding the element of free choice?

A) Consumers have free choice in both types of economies.

B) Free choice exists in market economies, but choices are restricted in planned economies.

C) Consumers do not have free choice in either of these economies.

D) Planned economies allow for greater free choice than do market economies.

Answer: B Diff: 2 Page Ref: 142–143, 150–151 Skill: Synthesis Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining; 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-61 Question: In a market economy, ________ allows most prices to rise and fall to reflect the forces of supply and demand.

A) free choice B) free enterprise C) price flexibility D) laissez-faire Answer: C Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-62 Question: When one company is able to control a product's supply—and therefore its price—it is considered a(n) ________.

A) state-owned company B) supply-driven company

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C) underground company D) monopoly Answer: D Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-63 Question: Which of the following are used to control taxation and government spending?

A) Fiscal policies B) Monetary policies C) Bureaucratic policies D) Development policies Answer: A Diff: 2 Page Ref: 152 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-64 Question: Which of the following would most likely characterize a nation with a high degree of economic freedom?

A) Low tariffs B) Wage controls C) Price controls D) Flourishing black markets Answer: A Diff: 3 Page Ref: 152 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-65 Question: Which of the following would most likely characterize a nation with a low degree of economic freedom?

A) Low government intervention B) Protected property rights C) Price controls D) Low tariffs Answer: C Diff: 3 Page Ref: 152 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-66 Question: A country's level of economic development reflects all of the following EXCEPT its ________.

A) economic output B) currency value relative to that of other countries C) infrastructure D) citizen's physical health and level of education Answer: B Diff: 2 Page Ref: 153 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-67 Question: Which of the following is the broadest measure of economic development?

A) Gross domestic product (GDP) B) Purchasing power parity (PPP) C) Gross national product (GNP) D) Human development index (HDI) Answer: C Diff: 2 Page Ref: 156 Skill: Concept

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Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-68 Question: The value of all goods and services produced by the domestic economy over a one-year period is called ________.

A) gross domestic product (GDP) B) human development index (HDI) C) gross national product (GNP) D) purchasing power parity (PPP) Answer: A Diff: 1 Page Ref: 156 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-69 Question: An investor wishes to invest in a business in a country with a relatively high gross national income (GNI).

Which of the following countries would most likely qualify as a prospect?

A) Nepal B) India C) Japan D) Vietnam Answer: C Diff: 2 Page Ref: 158–159 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-70 Question: An investor is looking for three countries with similar GNI levels. Which of the following would most likely make up such a group?

A) Russia, Romania, Bulgaria B) Angola, Sudan, Chad C) Cambodia, Thailand, South Korea D) Turkey, Morocco, Greece Answer: A Diff: 2 Page Ref: 158–159 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-71 Question: A philanthropical organization wishes to bring an assistance initiative to a country with a low GNI. Which of the following would the organization most likely choose?

A) Angola B) Syria C) Eygpt D) Madagascar Answer: D Diff: 2 Page Ref: 158–159 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-72 Question: After a natural disaster, an organization ranks the affected countries in terms of their gross national income and provides assistance to the lowest-ranking countries first. Which of the following countries would most likely receive aid first?

A) Japan B) Cambodia C) Thailand D) Indonesia Answer: B Diff: 2 Page Ref: 158–159

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Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-73 Question: Which of the following terms is used to refer to the exchange of goods and services for other goods and services instead of money?

A) Volunteerism B) Underground transaction C) Barter D) Guanxi Answer: C Diff: 1 Page Ref: 157 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-74 Question: An American-owned business based in Russia is having trouble meeting its payroll. Which of the following would be most effective for the business to use for bartering purposes?

A) Cleaning products B) Paper goods C) Vodka D) Fabric Answer: C Diff: 2 Page Ref: 157 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-75 Question: ________ is the value of goods and services that can be purchased with one unit of a country's currency.

A) Economic development B) Gross national product C) Purchasing power D) Gross domestic product Answer: C Diff: 1 Page Ref: 160 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-76 Question: The GDP per capita of Country A is lower than that of France. If the GDP per capita of Country A is adjusted for PPP, the country's revised GDP is higher than that of France. Which of the following is most likely true about Country A? A) The cost of living in Country A is lower than that of France.

B) The cost of living in Country A is higher than that of France.

C) The cost of living in Country A is approximately equal to that of France.

D) The cost of living in Country A has decreased over the past decade.

Answer: A Diff: 3 Page Ref: 160 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-77 Question: The GDP per capita of Country X is higher than that of Thailand. If the GDP per capita of Country X is adjusted for PPP, the country's revised GDP is lower than that of Thailand. Which of the following is most likely true about Country X? A) There are fewer types of everyday goods available for purchase in Country X than in Thailand.

B) The cost to buy everyday goods in Country X is approximately the same as the cost in Thailand.

C) It costs less to buy everyday goods in Country X than it does to buy similar goods in Thailand.

D) It costs more to buy everyday goods in Country X than it does to buy similar goods in Thailand.

Answer: D

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Diff: 3 Page Ref: 160 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-78 Question: Which of the following measures the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living?

A) Economic development index B) Gross national product index C) Human development index D) Purchasing power index Answer: C Diff: 1 Page Ref: 161 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-79 Question: A company is researching new markets by comparing potential countries in terms of their human development index (HDI) scores. The company wishes to expand into a market where individuals experience a very high level of total well-being. Which of the following countries would the company most likely choose?

A) Russia B) Mexico C) China D) Japan Answer: D Diff: 2 Page Ref: 162 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-80 Question: If HDI (human development index) is a measure of the government's ability to provide its citizens with a high quality of life, which of the following governments could best be described as closely matched in that ability?

A) China and Hong Kong B) Czech Republic and Russia C) United Kingdom and Germany D) Japan and Hong Kong Answer: C Diff: 2 Page Ref: 162 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-81 Question: The life expectancy of China is greater than that of Russia, but China ranks lower than Russia in terms of HDI. Which of the following is the best explanation for this discrepancy?

A) HDI and life expectancy are not necessarily correlated.

B) HDI is a strong predictor of life expectancy.

C) Life expectancy is a strong predictor of HDI. D) HDI is more closely correlated with life expectancy than with GDP rank.

Answer: A Diff: 3 Page Ref: 161 Skill: Critical Thinking Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-82 Question: Which of the following can be inferred regarding the relationship between a country's HDI value and its GDP per capita rank?

A) High HDI values tend to be associated with high GDP per capita ranks, but there are exceptions to this pattern.

B) If one country has a higher HDI value than another, the first country will also have a higher GDP per capita than the other.

C) Countries with the highest GDP per capita rank also maintain the highest HDI values.

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D) Countries with the lowest GDP per capita rank also maintain the lowest HDI values.

Answer: A Diff: 3 Page Ref: 161 Skill: Critical Thinking Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-83 Question: Nations having the poorest infrastructures and lowest personal incomes are called ________.

A) developed countries B) newly industrialized countries C) emerging markets D) developing countries Answer: D Diff: 1 Page Ref: 163 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-84 Question: Economic transition refers to the process of moving from ________.

A) developing to developed economies B) centrally planned to free-market economies C) newly industrialized to developed economies D) free-market to centrally planned economies Answer: B Diff: 2 Page Ref: 164 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Scenario: Cleanshot Canada in Russia When Cleanshot Canada, a photography products company, decided to enter the international arena, it chose Russia as its main market. Although Russia has been in transition for years, Cleanshot managers believe their company has tremendous opportunities there.

Question ID: 5-85 Question: Russia is an economy in transition from ________.

A) capitalist economics to mixed economics B) centrally planned economics to free-market economics C) market economics to centrally planned economics D) mixed economics to centrally planned economics Answer: B Diff: 2 Page Ref: 165 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-86 Question: Cleanshot will most likely face which of the following challenges in Russia?

A) Organized crime B) Too many competitors C) Low demand for the products of non-Russian companies D) No underground economy Answer: A Diff: 3 Page Ref: 165 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-87 Question: Given the lack of available hard currency, Russian businesses often use goods and services as payment for other products they buy from abroad. This practice is referred to as ________.

A) liquid payment

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B) underground commerce C) barter D) centrally planned commerce Answer: C Diff: 1 Page Ref: 157 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Scenario: Globetrotter Alex Johnson Alex Johnson is an individual who accepts risks and opportunities involved in creating and operating new business ventures worldwide. He has been considering several countries for his next venture.

Question ID: 5-88 Question: Alex wishes to start his business in a country with high life expectancy. Which of the following would be the LEAST likely candidate for Alex’s venture?

A) South Africa B) Norway C) Japan D) Mexico Answer: A Diff: 2 Page Ref: 162 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-89 Question: In addition to high life expectancy, a high HDI value is important for the country that Alex chooses. Which of the following best satisfies both of these criteria?

A) United States B) Germany C) United Kingdom D) Japan Answer: D Diff: 2 Page Ref: 162 Skill: Application Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-90 Question: Alex decides to limit his choice to locations with an HDI value over 0.959 and a life expectancy of more than 80 years. Among the candidates that fit these criteria, he selects the one with the highest GDP per capita.

Which location does Alex choose?

A) Canada B) Norway C) Switzerland D) Hong Kong Answer: B Diff: 2 Page Ref: 162 Skill: Application Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Scenario: Stephanie Wong Chinese-Canadian Stephanie Wong owns a consulting business that advises clients as they expand into China. Wong is preparing to lead a symposium on entering China for small and mid-sized exporters and is preparing by answering the following questions that symposium participants might ask.

Question ID: 5-91 Question: The first question that Stephanie addresses concerns the relative importance of contacts versus contracts in China. She expects participants to ask: "Which is more important, contacts or contracts?" Which of the following is the most effective response Stephanie could give to this question?

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A) Contracts are critical because of their extreme importance in Chinese business.

B) Face-to-face communications and personal relationships take priority over written contracts.

C) Non-Chinese businesspeople should take time to agree on a legal contract before developing personal relationships.

D) Business relationships come with time and are established only after successful legal dealings are concluded.

Answer: B Diff: 2 Page Ref: 144–145 Skill: Critical Thinking Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-92 Question: Stephanie also expects participants to ask, "When should we expect to actually conduct business with our Chinese counterparts?" Stephanie would most likely respond to this question with which of the following?

A) The Chinese operate in a way very much like Canadians; business before pleasure.

B) The Chinese dislike guessing games; give them your sales pitch right away and let the meeting develop.

C) Don't overlook the importance of personal relationships; friendship comes before business.

D) The Chinese are very flexible and will easily adapt to your culture's way of doing business.

Answer: C Diff: 2 Page Ref: 145 Skill: Critical Thinking Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-93 Question: A final question that Stephanie anticipates concerns the acceptability of certain topics of discussion.

Participants might ask, "Should we avoid discussing our families and spouses?" Which of the following represents the most effective response to this question?

A) Absolutely. Family is kept completely separate from business in China.

B) Yes, because it is considered very rude for businesspeople to discuss family.

C) No, Chinese businesspeople may invite business partners to family functions.

D) It's fine to discuss family, but never agree to go to a business partner's house.

Answer: C Diff: 2 Page Ref: 145 Skill: Critical Thinking Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Scenario: Learning the American Way Sergei Chernovl is a Russian exchange student. To learn more about how a market economy functions, Sergei is writing a research paper comparing business in Russia with business in the North America.

Question ID: 5-94 Question: Sergei believes it is important to recognize the origin of the economic system in each country. He knows that the idea of central economic planning was popularized by ________.

A) Mikhael Gorbachev B) Joseph Stalin C) Karl Marx D) Deng Xiao Ping Answer: C Diff: 1 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-95 Question: Sergei recognizes that all of the following were reasons why central planning failed EXCEPT the failure to ________.

A) create economic value B) provide incentives C) control rampant economic growth D) satisfy consumer needs Answer: C

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Diff: 2 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-96 Question: Sergei knows that an important factor in a market-based economy is privately operated companies. As Russia goes through the privatization process, the overall aim of this process is to ________.

A) increase tax revenues B) improve military defense C) increase social welfare D) increase economic efficiency Answer: D Diff: 2 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-97 Question: Sergei knows that prices in a market economy are determined by the interplay of ________.

A) government and labour B) labour and management C) government and management D) supply and demand Answer: D Diff: 2 Page Ref: 140 AACSB: Dynamics of the global economy Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Scenario: Economic Freedom Workshop Members of 50 different countries attend a workshop on economic freedom hosted by an international organization based in Geneva, Switzerland. Attendees of the workshop learn about techniques designed to assist countries in expanding their degree of economic freedom.

Question ID: 5-98 Question: Six attendees at the workshop represent three countries with the highest degree of economic freedom.

These attendees are from which of the following countries?

A) Japan, Brazil, and France B) Canada, the United States, and Denmark C) Australia, Britain, and the United States D) The Netherlands, Sweden, and Britain Answer: C Diff: 2 Page Ref: 154–155 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-99 Question: Two attendees represent a country with relatively little economic freedom, compared to the other nations present. These individuals are most likely from ________.

A) Argentina B) Venezuela C) Turkey D) Poland Answer: B Diff: 2 Page Ref: 154–155 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-100 Question: Workshop participants are divided into groups of three. For learning purposes, groups must be made up of

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individuals from countries with similar degrees of economic freedom. Which of the following might be grouped together?

A) Representatives from Mongolia, France, and Peru B) Representatives from Germany, Japan, and Syria C) Representatives from the United States, China, and Belarus D) Representatives from Portugal, Spain, and Cuba Answer: A Diff: 3 Page Ref: 154–155 Skill: Application Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Fill-In-The-Blank Question ID: 5-101 Question: Economic systems in ________ cultures tend to provide incentives and rewards for individual initiative.

Answer: individualist Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-102 Question: ________ cultures tend to offer few incentives and rewards for individual initiatives.

Answer: Collectivist Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-103 Question: ________ is rooted in the ideology that the welfare of the group is more important than individual wellbeing.

Answer: Central planning Diff: 2 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-104 Question: The notion of central economic planning was popularized by ________.

Answer: Karl Marx Diff: 1 Page Ref: 142 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-105 Question: North Korea follows an economic policy of ________.

Answer: juche (self-reliance) Diff: 3 Page Ref: 143 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-106 Question: Learning the secrets of good ________ is extremely important for success in China.

Answer: guanxi Diff: 2 Page Ref: 144 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-107 Question: ________ refers to the sale of government-owned economic resources to private operators.

Answer: Privatization

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Diff: 1 Page Ref: 147 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

Question ID: 5-108 Question: Supply and demand are dictated by the ________.

Answer: price mechanism Diff: 2 Page Ref: 150 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-109 Question: The ________ approach to national economics calls for less government interference in commerce and greater individual economic freedom.

Answer: laissez-faire Diff: 2 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-110 Question: To function smoothly and properly, a market economy requires three elements: free choice, ________, and price flexibility.

Answer: free enterprise Diff: 2 Page Ref: 119 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-111 Question: A company that is able to control a product's supply and, therefore, its price is considered a(n) ________.

Answer: monopoly Diff: 1 Page Ref: 151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-112 Question: Policies that control the money supply and interest rates are known as ________ policies.

Answer: monetary Diff: 3 Page Ref: 152 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-113 Question: The broadest measure of economic development is ________.

Answer: gross national product (GNP) Diff: 2 Page Ref: 156 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-114 Question: ________ is the value of all goods and services produced by a domestic economy over a one-year period.

Answer: Gross domestic product (GDP) Diff: 1 Page Ref: 156 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-115 Question: A country's ________ is simply its gross national product divided by its population.

Answer: GNP per capita Diff: 1 Page Ref: 156 Skill: Concept

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Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-116 Question: The relative ability of two countries' currencies to buy the same basket of goods in those two countries is called ________.

Answer: purchasing power parity (PPP) Diff: 2 Page Ref: 160 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-117 Question: The ________ measures the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living.

Answer: human development index (HDI) Diff: 2 Page Ref: 161 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-118 Question: A country that has recently increased the portion of its national production and exports derived from industrial operations is called a(n) ________.

Answer: newly industrialized country (NIC) Diff: 2 Page Ref: 163 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-119 Question: Nations that have the poorest infrastructures and lowest personal incomes are called ________ countries.

Answer: developing or less-developed Diff: 1 Page Ref: 163 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-120 Question: ________ is the process by which a nation changes its fundamental economic organization and creates new free-market institutions.

Answer: Economic transition Diff: 2 Page Ref: 164 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

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Essay Question ID: 5-121 Question: Describe in detail each of the three main types of economic systems and give examples of countries that fall into each category.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A country's economic system consists of the structure and processes that it uses to allocate its resources and conduct its commercial activities. Every economy displays a tendency toward individualist or collectivist economic values. We can arrange national economies on a horizontal scale that is anchored by two extremes. At one end of the scale is a theoretical pure centrally planned economy, at the other end is a theoretical pure market economy, and in between is a mixed economy.

A centrally planned economy is a system in which a nation's land, factories, and other economic resources are owned by the government. The government makes nearly all economy-related decisions—including who produces what and the prices of products, labour, and capital. Central planning agencies specify production goals for factories and other production units, and they even decide prices. The ultimate goal of central planning is to achieve a wide range of political, social, and economic objectives by taking complete control over the production and distribution of a nation's resources.

A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership. In a mixed economy, the government owns fewer economic resources than does the government in a centrally planned economy. Yet in a mixed economy, the government tends to control the economic sectors that it considers important to national security and long-term stability. Many mixed economies also maintain generous welfare systems to support the unemployed and provide health care for the general population.

In a market economy, the majority of a nation's land, factories, and other economic resources are privately owned, either by individuals or businesses. This means that who produces what and the prices of products, labour, and capital in a market economy are determined by the interplay of two forces: supply and demand. Supply represents the quantity of a good or service that producers are willing to provide at a specific selling price; demand is the quantity of a good or service that buyers are willing to purchase at a specific selling price.

Diff: 2 Page Ref: 142–151 Skill: Synthesis Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining; 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization; 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-122 Question: Discuss in detail the four factors that contributed to the collapse of centrally planned economies.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Central economies collapsed due to four failures. First, they failed to create economic value. They failed to see that commercial activities succeed when they create economic value for customers. Along the way, scarce resources were wasted in the pursuit of commercial activities that were not self-sustaining.

Second, they failed to provide incentives for economic success. Government ownership of economic resources drastically reduced incentives for businesses to maximize the output obtained from those resources. Except for aerospace, nuclear power, and other sciences (in which government scientists excelled), there were few incentives to create new technologies, new products, and new production methods. The result was little or no economic growth and consistently low standards of living.

Third, they failed to achieve rapid growth. Leaders in communist nations took note of the high rates of economic growth in countries such as Hong Kong, Singapore, South Korea, and Taiwan—called Asia's four tigers. That a oncepoor region of the world had so rapidly achieved such astounding growth awakened central planners to the possibilities. They realized that an economic system based on private ownership fosters growth much better than one hampered by central planning.

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Finally, central economies failed to satisfy consumer needs. People in centrally planned economies were tired of a standard of living that had slipped far below that found in market economies. Ironically, although central planning was conceived as a means to create a more equitable system of distributing wealth, too many central planners failed to provide even basic necessities such as adequate food, housing, and medical care.

Diff: 2 Page Ref: 113 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-123 Question: Discuss in detail the challenges China faces as it continues its experiment in "socialism with Chinese characteristics."

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Three factors have posed challenges for China in its transition to a market economy. First, political and social problems pose threats to China's future economic performance. For the most part, political leaders restrict advanced democratic reforms. Protests sporadically arise whenever ordinary Chinese citizens grow impatient with political progress.

Another potential problem is unemployment. Intensified competition and the entry of international companies into China are placing greater emphasis on efficiency and the cutting of payrolls in some industries. But the biggest contributor to the unemployed sector seems to be migrant workers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better-paying factory work or construction jobs.

Another key issue is reunification of "greater China." China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of "one country, two systems." Although the economic (and to a lesser extent political) freedoms of people in Hong Kong have remained largely intact, the rest of China has continued along lines drawn by the communist leadership.

Diff: 2 Page Ref: 144–145 Skill: Concept Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining.

Question ID: 5-124 Question: Explain in detail what a market economy is and what it requires to function smoothly. Include examples of countries that practise market economy in your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A market economy operates according to the principles of supply and demand. Instead of being set by the government, prices are determined based on the amount of supply and demand for that item or service. To function smoothly and properly, a market economy requires three things: free choice, free enterprise, and price flexibility.

Free choice gives individuals access to alternative purchase options. In a market economy, few restrictions are placed on consumers' ability to make their own decisions and exercise free choice. For example, a consumer shopping for a new car is guaranteed a variety from which to choose. The consumer can choose among dealers, models, sizes, styles, colours, and mechanical specifications such as engine size and transmission type.

Free enterprise gives companies the ability to decide which goods and services to produce and the markets in which to compete. Companies are free to enter new and different lines of business, select geographic markets and customer segments to pursue, hire workers, and advertise their products. They are, therefore, guaranteed the right to pursue interests profitable to them.

Price flexibility allows most prices to rise and fall to reflect the forces of supply and demand. By contrast, nonmarket economies often set and maintain prices at stipulated levels. Interfering with the price mechanism violates a fundamental principle of the market economy.

Diff: 2 Page Ref: 150–151 Skill: Concept Objective: 5-3 Explain how a market economy functions and identify its distinguishing features.

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Question ID: 5-125 Question: Explain in detail why many mixed economies are converting to market-based systems. How does the role of government change when a mixed economy transitions to a market economy?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Many mixed economies are remaking themselves to more closely resemble free markets. When assets are owned by the government there seems to be less incentive to eliminate waste or to practise innovation. Extensive government ownership on a national level tends to result in a lack of accountability, rising costs, defective products, and slow economic growth. Many government-owned businesses in mixed economies need large infusions of taxpayer money to survive as world-class competitors, which raises taxes and prices for goods and services. Underpinning the move toward market-based systems is the sale of government-owned businesses.

In a market economy, the government has relatively little direct involvement in business activities. Even so, it usually plays four important roles: enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment, and preserving political stability.

Diff: 3 Page Ref: 147 Skill: Synthesis Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization; 5-3 Explain how a market economy functions and identify its distinguishing features.

Question ID: 5-126 Question: Discuss in detail the importance of economic development for international business.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Economic development is an increasingly important topic for international businesspeople as companies pursue business opportunities in emerging markets. Productivity is a key factor that drives economic growth and rising living standards. For a company to boost its productivity it must increase the value of its outputs using the same amount of inputs, create the same value of outputs with fewer inputs, or do both at the same time.

Raising living standards in an economy depends in large part on unlocking the gains that productivity offers. Mixed economies in Western Europe continue to privatize state-owned companies to boost productivity and competitiveness. Former centrally planned economies in Eastern Europe implemented free market reforms to raise living standards. Even North Korea (with one of the lowest standards of living outside Africa) is being compelled to consider economic reform.

As the poorest nations invest in the fundamental drivers of productivity growth (such as basic infrastructure), the richest nations exploit the latest technological advancements. Information technology is driving productivity gains in online customer service, online purchasing of materials and parts, outsourcing operations, and other areas of business.

Diff: 2 Page Ref: 153–156 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-127 Question: Differentiate between GDP and GNP. Discuss the drawbacks of using GDP and GNP as indicators of economic development.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Gross national product (GNP) is the value of all goods and services produced by a country's domestic and international activities over a one-year period. Gross domestic product (GDP) is the value of all goods and services

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produced by a domestic economy over a one-year period. GDP is a narrower figure that excludes a nation's income generated from exports, imports, and the international operations of its companies.

Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks. First, for a variety of reasons, many of a nation's transactions do not get counted in either GDP or GNP. Second, gross product figures do not tell us whether a nation's economy is growing or shrinking—they are simply a snapshot of one year's economic output. Third, per capita numbers provide an average figure for an entire country, which does not give us a very detailed picture of development. Finally, country comparisons using gross product figures can be misleading.

Diff: 2 Page Ref: 156–157 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-128 Question: Describe in detail the main points of difference between purchasing power parity and the human development index.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Purchasing power parity (PPP) is the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries. This basket of goods is representative of ordinary, daily-use items such as apples, rice, soap, toothpaste, and so forth. Estimates of gross product per capita at PPP allow us to see what a currency can actually buy in real terms. The human development index (HDI) is the measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living.

One main difference between the two indexes is that PPP is a poor indicator of a people's well-being, while HDI gives a more accurate measure of well-being. Also, PPP focuses specifically on financial wealth, whereas the HDI looks beyond financial wealth. By stressing the human aspects of economic development, HDI demonstrates that high national income alone does not guarantee human progress.

Diff: 2 Page Ref: 160–162 Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-129 Question: Discuss in detail the three overall classifications of countries. Provide examples of countries for each classification.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Nations are commonly classified as being developed, newly industrialized, or developing. Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life are developed countries. People in developed countries usually receive the finest health care and benefit from the best educational systems in the world.

Countries in this category include Australia, Canada, Japan, New Zealand, and the United States.

Countries that recently increased the portion of their national production and exports derived from industrial operations are newly industrialized countries (NICs). The NICs are located primarily in Asia and Latin America. Most listings of NICs include Asia's "four tigers" (Hong Kong, South Korea, Singapore, and Taiwan), Brazil, China, India, Malaysia, Mexico, South Africa, and Thailand.

Nations with the poorest infrastructures and lowest personal incomes are called developing countries (also called less-developed countries). These countries often rely heavily on one or a few sectors of production, such as

agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but typically lack the necessary resources and skills to do so. Most lists of developing countries include many nations in Africa, the Middle East, and the poorest formerly communist nations in Eastern Europe and Asia.

Diff: 2

Page Ref: 162–163

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Skill: Concept Objective: 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-130 Question: Does greater economic freedom guarantee a higher standard of living? Provide examples of specific countries to support your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Countries with the greatest economic freedom tend to have the highest standards of living, whereas those with the lowest freedom tend to have the lowest standards of living. The United States and Zimbabwe are two examples: the United States has high economic freedom and a high GNI, while Zimbabwe has low freedom and a low GNI. Greater economic freedom does not guarantee a high per capita income, however. A country can rank very low on economic freedom yet have a higher per capita income than a country with far greater freedom. Saudi Arabia, for instance, has relatively low economic freedom with a relatively high GNI. Diff: 3 Page Ref: 150–151, 153, 162 Skill: Critical thinking Objective: 5-3 Explain how a market economy functions and identify its distinguishing features; 5-4 Describe the different ways to measure a nation’s level of development.

Question ID: 5-131 Question: What is economic transition? Describe the obstacles that countries face in their economic transition giving specific examples of countries to support your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Economic transition is the process through which countries move from centrally planned economies to stronger market economies. This process involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. It typically involves four reform measures: (1) stabilizing the economy; (2) allowing prices to reflect supply and demand; (3) legalizing private business; and (4) reducing barriers to trade.

Countries in transition face four key obstacles. These are: lack of managerial expertise, lack of investment capital, cultural differences, and environmental degradation.

Diff: 2 Page Ref: 164–166 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-132 Question: Explain in detail how a lack of managerial expertise has affected former centrally planned countries as they transition to market economies.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Problems associated with the lack of managerial expertise arise from the fact that such expertise was not necessary in central economies. In central planning, there was little need for production, distribution, and marketing strategies or for trained individuals to devise them. Central planners decided all aspects of the nation's commercial activities.

There was no need to investigate consumer wants and no need for market research. And little thought was given to product pricing or to the need for experts in operations, inventory, distribution, or logistics. Factory managers at government-owned firms had only to meet production requirements set by central planners.

Diff: 3 Page Ref: 142–143, 164–166 Skill: Synthesis Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining; 5-5 Discuss the process of economic transition and identify the obstacles for business.

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Question ID: 5-133 Question: What is privatization, and what role does it play in economic transition?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The selling of government-owned economic resources to private operators is called privatization. Privatization helps eliminate subsidized materials, labour, and capital formerly provided to government-owned companies. It also curtails the practice of appointing managers for political reasons rather than for their professional expertise. To survive, newly privatized companies must produce competitive products at fair prices because they are subject to forces of the free market. The overall aim of privatization is to increase economic efficiency, boost productivity, and raise living standards.

During economic transition, privatization occurs as part of establishing a free market system. To solidify the new economy, governments must legalize private business, sell state-owned companies, and support property rights.

Diff: 2 Page Ref: 147, 164–165 Skill: Synthesis Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization; 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-134 Question: Discuss in detail the challenges facing Russia as the country moves forward with its transition from a centrally planned economy to a market economy.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Russia faces four main challenges during its transition. First, as in so many other transitional economies, Russia needs to foster managerial talent. Years of central planning delayed the development of managerial skills needed in a market-based economy. Russian managers must improve their skills in every facet of management practice, including financial control, research and development, human resource management, and marketing strategy.

Second, political instability, especially in the form of intensified nationalist sentiment, is another potential threat to progress. Russia and Georgia had a military confrontation in the summer of 2008 over two of Georgia's restive republics that wanted to align themselves closer to Russia. Strong ethnic and nationalist sentiments in the region can cause misunderstandings to quickly spiral out of control. The lack of security for Russia's nuclear weapons stockpile is also a potential cause of instability. These weapons in the hands of terrorists would threaten global security.

An unstable investment climate is a third concern within the international business community. Tense uneasiness characterizes relations between Russia's government and its business community. The uneasiness stems from the Russian government's attacks on business owners that disagree with official policy or on businesses it wants to control.

Finally, the root of many of Russia's problems appears to be corrupt law enforcement. Officials of the government, such as the Russian Interior Ministry, are accused of raiding the offices of companies for documents and computers.

Records are then falsified and signatures forged to make it appear that another company—one controlled by government officials—has massively overpaid taxes and is due a government refund. Meanwhile, the owners and managers of the raided businesses often find themselves behind Russian prison bars. If Russia truly wishes to become a location of choice for international companies, the government will need to meddle less in business and begin to safeguard property rights.

Diff: 2 Page Ref: 165–166 Skill: Concept Objective: 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-135 Question: Compare and contrast the business environments of China and Russia.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the

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textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Doing Business. China and Russia share certain similarities in terms of what it takes to do business in those countries. In both cultures, patience is required to develop business arrangements. The quality of personal interactions also appears to be very important. In Russia, individual personalities have a significant impact on business dealings. In China, personal relationships are highly valued and must be established first before business agreements.

Economic Obstacles. Similar obstacles that both countries face are political and social problems that can lead to social

unrest and a lack of managerial expertise stemming from the fact that such expertise was not required of managers in both countries' centrally planned economies. The countries differ with respect to certain other key obstacles, however. China's progress is hindered by issues concerning unification, which is not a challenge faced by Russia. In addition, Russia maintains an unstable investment climate, while China has attracted huge sums of investment due to its immense population, rising incomes, and expanding opportunities.

Diff: 3 Page Ref: 144–146, 165–166 Skill: Synthesis Objective: 5-1 Describe what is meant by a centrally planned economy and explain why its use is declining; 5-5 Discuss the process of economic transition and identify the obstacles for business.

Question ID: 5-136 Question: Compare and contrast the economies and business environments in India and Brazil.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

India began its transition to a mixed economy in 1947, adopting a democratic government after gaining independence. At first the country operation a centrally planned type of economy with state-owned enterprises which made it difficult to set up and run a business. Despite some small reforms in the 1980s India’s economy stagnated and low annual growth rates prevailed. In 1991 a trade liberalization process was initiated and an ambitious economic reform program was implemented. Trade reforms and foreign directed investment regulations opened the economy to foreign investors. Today India is one of the fastest developing economies in the world. However, India does not yet have a well-functioning legal and regulatory framework. Judicial procedures are subject to political pressure. The government continues to control prices on a number of products. The labour market is underdeveloped. India still has many challenges to overcome.

Brazil began its transition to a democracy in 1985. From 1995-2003 Brazil went through a major economic transformation that saw a reduction of trade barriers and an increase in international cooperation. From 2003 to 2011 Brazilian foreign trade increased dramatically. Financial, economic, and risk indicators improved and the annual growth rates made Brazil the largest economy in Latin America. The country still faced problems with high interest rates, high unemployment, poverty, social inequality, poor infrastructure, and rampant corruption. Brazil has not yet established a full market economy and needs to overcome some issues such as high inflation and unemployment.

Starting up a business is still a long process, labour regulations are rigorous, and corruption remains a problem.

Despite its challenges, Brazil’s economy is one of the fastest growing in the world and is forecast to become one of the five largest economies in the coming decades.

Diff: 2 Page Ref: 147–150 Skill: Concept Objective: 5-2 Identify the main characteristics of a mixed economy and explain the emphasis on privatization; 5-5 Discuss the process of economic transition and identify the obstacles for business.

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Chapter 6 International Trade True/False Question ID: 6-1 Question: The purchase, sale, or exchange of goods and services across national borders is called international trade.

Answer: TRUE Diff: 1 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-2 Question: In Canada, about 20 percent of all jobs are directly or indirectly derived from exports.

Answer: TRUE Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-3 Question: China ranks first in merchandise imports globally.

Answer: FALSE Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-4 Question: Most of world merchandise trade consists of trade in manufactured goods.

Answer: TRUE Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-5 Question: Trade in services tends to be relatively more important for the world's richest countries as compared to other nations.

Answer: TRUE Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-6 Question: China dominates the world in export of services.

Answer: FALSE Diff: 2 Page Ref: 175 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-7 Question: Canada is the world's largest exporter of merchandise.

Answer: FALSE Diff: 3 Page Ref: 175 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade

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patterns.

Question ID: 6-8 Question: When a country's currency is weak relative to other nations, imports are more expensive relative to domestic products.

Answer: TRUE Diff: 2 Page Ref: 175 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-9 Question: Trade among the world's high-income economies accounts for around 60 percent of total world merchandise trade.

Answer: TRUE Diff: 3 Page Ref: 178 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-10 Question: About half of all exports in Asia are intra-regional.

Answer: TRUE Diff: 3 Page Ref: 178 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-11 Question: In the context of international trade, complete independence is preferred by most countries.

Answer: FALSE Diff: 2 Page Ref: 179 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-12 Question: It is not necessary to have bilingual business cards when doing business in the Pacific Rim because most Asians speak English.

Answer: FALSE Diff: 2 Page Ref: 179 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-13 Question: The highly competitive nature of Asian business means that the use of cold calling to make direct contact with other companies is a common and successful business practice.

Answer: FALSE Diff: 2 Page Ref: 179 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-14 Question: Industries considered essential to national security often receive government-sponsored protection.

Answer: TRUE Diff: 1 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

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Question ID: 6-15 Question: Governments may intervene in markets to protect both imports and exports in industries deemed essential to national security.

Answer: TRUE Diff: 2 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-16 Question: The main disadvantage of protection from import competition is the added cost of continuing to produce a good or service that could be supplied more efficiently by an international supplier.

Answer: TRUE Diff: 1 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-17 Question: Agriculture is typically protected for national security reasons.

Answer: TRUE Diff: 1 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-18 Question: A primary reason why the United States maintains its embargo on Cuba is the potential to influence internal politics.

Answer: TRUE Diff: 1 Page Ref: 181 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-19 Question: The most common economic reason for nations' attempts to influence international trade is preserving national security.

Answer: FALSE Diff: 2 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-20 Question: Protecting infant industries can cause domestic companies to become complacent toward innovation.

Answer: TRUE Diff: 1 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-21 Question: Nations often restrict trade in goods and services to achieve cultural objectives, the most common being protection of national identity.

Answer: TRUE Diff: 2 Page Ref: 183 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-22 Question: The main cultural motives behind government intervention in trade include protecting jobs and preserving national security.

Answer: FALSE Diff: 2 Page Ref: 182

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Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-23 Question: Unwanted cultural influence in a nation can cause governments to block imports that it believes are harmful.

Answer: TRUE Diff: 1 Page Ref: 183 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-24 Question: Receiving financing from government agencies is often crucial to the success of small businesses just beginning to export.

Answer: TRUE Diff: 2 Page Ref: 183 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-25 Question: A common purpose of many companies' facilities in foreign trade zones is final product assembly.

Answer: TRUE Diff: 2 Page Ref: 184 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-26 Question: Creation of foreign trade zones caused development of companies called maquiladoras along the border inside Mexico.

Answer: TRUE Diff: 1 Page Ref: 185 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-27 Question: The purpose of tariffs is to protect domestic producers.

Answer: TRUE Diff: 2 Page Ref: 186 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-28 Question: The main purpose of quotas is to allow unlimited levels of imports and exports.

Answer: FALSE Diff: 2 Page Ref: 186 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-29 Question: The purpose of mercantilism theory is that nations should accumulate financial wealth by encouraging exports and discouraging imports.

Answer: TRUE Diff: 1 Page Ref: 189 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-30 Question: According to Adam Smith, international trade should be restricted by tariffs and quotas to give a country an absolute advantage.

Answer: FALSE

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Diff: 2 Page Ref: 191–192 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-31 Question: Comparative advantage forces a country to import goods from countries that are more efficient because they cannot be produced in the home country.

Answer: FALSE Diff: 1 Page Ref: 193 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-32 Question: The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game.

Answer: TRUE Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-33 Question: The ability of a nation to produce a good more efficiently than any other nation is called a comparative advantage.

Answer: FALSE Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-34 Question: The theories of comparative and absolute advantage assume that countries are driven only by the maximization of production and consumption.

Answer: TRUE Diff: 2 Page Ref: 194 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-35 Question: The theories of comparative and absolute advantage assume that specialization in the production of one particular good results in efficiency gains.

Answer: FALSE Diff: 2 Page Ref: 194 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-36 Question: Factor proportions theory states that factors in great supply relative to demand will be more costly than factors in short supply relative to demand.

Answer: FALSE Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-37 Question: Factor proportions theory states that a country will produce and export goods that require resources (factors) that are abundant.

Answer: TRUE Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

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Question ID: 6-38 Question: Factor proportions theory considers a country’s production factors within a country to be widely varied.

Answer: FALSE Diff: 1 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-39 Question: The apparent paradox between the predictions made using factor proportions theory and the actual trade flows of nations is called the Leontief paradox.

Answer: TRUE Diff: 2 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-40 Question: The international product life cycle theory states that companies undertake foreign direct investment as the first stage of going global.

Answer: FALSE Diff: 1 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-41 Question: According to new trade theory, as a company increases the extent to which it specializes in the production of a particular good, output rises because of gains in efficiency.

Answer: TRUE Diff: 2 Page Ref: 198 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-42 Question: National competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

Answer: TRUE Diff: 1 Page Ref: 199 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

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Multiple Choice Question ID: 6-43 Question: Which of the following refers to the purchase, sale, or exchange of goods and services across national borders?

A) Domestic trade B) Foreign direct investment C) International trade D) Mercantilism Answer: C Diff: 1 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-44 Question: One way to measure the importance of trade to a nation is to examine ________.

A) its human development index relative to its CPI B) the availability of natural resources and ease of extracting them C) its comparative advantage relative to those of its neighbours D) the volume of an economy's trade relative to its total output Answer: D Diff: 3 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-45 Question: Which of the following statements is NOT true about the services trade today?

A) Trade in services makes up about 20 percent of total world trade.

B) Trade in services tends to be more important for emerging markets.

C) The United States is a top exporter of services in the world.

D) Trade in services is growing for many nations.

Answer: B Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-46 Question: The Department of Foreign Affairs and International Trade Canada estimates that 20 percent of all jobs in Canada are directly or indirectly derived from ____________ .

A) imports B) regional trade C) global trade D) exports Answer: D Diff: 3 Page Ref: 174 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-47 Question: Most of the world merchandise trade is comprised of trade in ________.

A) natural resources B) services C) manufactured goods D) knowledge-based goods Answer: C Diff: 2 Page Ref: 174

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Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-48 Question: When a country has a weak currency relative to other nations, imports are ________ relative to domestic products.

A) more expensive B) equal in price C) more attractive D) less expensive Answer: A Diff: 2 Page Ref: 174–175 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-49 Question: The majority of total world merchandise trade occurs among ________.

A) high-income countries and low- and middle-income nations B) high-income economies C) low- and middle-income nations D) emerging markets Answer: B Diff: 2 Page Ref: 178 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-50 Question: The smallest portion of total world trade takes place between ________.

A) high-income countries and low- and middle-income nations B) high-income economies C) low- and middle-income nations D) emerging markets Answer: C Diff: 2 Page Ref: 178 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-51 Question: Which of the following countries is the most important trading partner of the Central and Eastern European nations that recently joined the European Union?

A) Germany B) Hungary C) Japan D) United States Answer: A Diff: 3 Page Ref: 179 Skill: Application Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-52 Question: When doing business in the Pacific Rim, ________.

A) carry business cards printed only in the home country language B) be persistent and aggressive, because Asians often take a while before they agree to a meeting C) don't accept invitations to dine at someone's house; go for a neutral location D) tone down the use of legal language

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Answer: D Diff: 3 Page Ref: 179 Skill: Application Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-53 Question: Companies are leaving Mexico for Asia and Europe because of differences in all of the following EXCEPT ________.

A) drug violence B) unemployment C) red tape D) corruption Answer: B Diff: 2 Page Ref: 180 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-54 Question: Governments impose trade barriers for all of the following reasons EXCEPT ________.

A) to protect national security B) to gain influence over other nations C) to respond to other nation's fair trade practices D) to protect jobs Answer: C Diff: 2 Page Ref: 180–181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-55 Question: The pattern of imports and exports that occurs in the absence of trade barriers is called ________.

A) an embargo B) protectionism C) infant industry D) free trade Answer: D Diff: 1 Page Ref: 180 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-56 Question: Which of the following is an example of a political motive behind government intervention in trade?

A) Promote a strategic trade policy.

B) Gain influence over other nations.

C) Protect against unwanted cultural influence.

D) Protect young industries from competition.

Answer: B Diff: 3 Page Ref: 181 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-57 Question: Which of the following is NOT an example of a political motive behind government intervention in trade?

A) Respond to other nation's unfair trade practices B) Preserve national security C) Protect jobs D) Protect young industries from competition Answer: D Diff: 3 Page Ref: 180–181

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Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-58 Question: Which of the following is NOT true?

A) Governments intervene in markets to ensure access to a domestic supply of certain items in the event that war could restrict their availability.

B) Industries considered essential to national security often receive government-sponsored protection.

C) Governments may intervene to protect both imports and exports.

D) It is difficult to make the case to protect industries for the purpose of preserving national security.

Answer: D Diff: 2 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-59 Question: Which of the following industries is typically protected for national security reasons?

A) Agriculture B) Textile C) Cosmetics D) Housing Answer: A Diff: 2 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-60 Question: Products designated as dual use require ________ before export can take place.

A) multi-language translation documents B) better consumer-use instructions C) special government approval D) World Trade Organization clearance Answer: C Diff: 2 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-61 Question: When a product has both industrial and military applications, they are said to have ________.

A) multiple uses B) a free trade designation C) an unfair trade advantage D) dual uses Answer: D Diff: 1 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-62 Question: Which of the following is an example of an economic motive for nations' attempts to influence international trade?

A) Pursue strategic trade policy B) Protect jobs C) Respond to "unfair" trade D) Preserve national security Answer: A Diff: 1 Page Ref: 182 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

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Question ID: 6-63 Question: The ________ argument says that a country's emerging industries need protection from international competition during their development.

A) national security B) infant industry C) strategic trade policy D) WTO rules Answer: B Diff: 1 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-64 Question: The notion that as an industry grows and matures it gains the knowledge it needs to become more innovative, efficient, and competitive is known as the ________.

A) maturing industry argument B) infant industry argument C) entrant industry argument D) state-owned industry argument Answer: B Diff: 1 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-65 Question: Which of the following is NOT a problem associated with the infant industry argument?

A) Once protection of an industry is given, it can be politically difficult to eliminate.

B) Protection can do more economic harm than good.

C) It can cause domestic companies to become overly innovative.

D) Governments might have difficulty identifying the industries worth protecting.

Answer: C Diff: 2 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-66 Question: Each of the following can be the result of protection from international competition EXCEPT ________.

A) consumers often end up paying more for products B) there are fewer incentives to cut production costs or improve quality C) companies become more reliant on protection D) strategic trade policy dictates trading patterns Answer: D Diff: 2 Page Ref: 182 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-67 Question: ________ believe that government intervention can help companies take advantage of economies of scale and be the first movers in their industries.

A) Opponents of globalization B) New trade theorists C) Critics of strategic trade policy D) Cultural imperialists Answer: B Diff: 2 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-68 Question: The term chaebol refers to ________.

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A) Japanese multinational powerhouses B) South Korean global conglomerates C) Vietnamese free trade policies D) Chinese personal relationships Answer: B Diff: 2 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-69 Question: Which of these is the main cultural motive behind government intervention in trade?

A) Promote a strategic trade policy B) Protect jobs C) Protect national identity D) Protect young industries from competition Answer: C Diff: 2 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-70 Question: Unwanted cultural influence in a nation is referred to as ________.

A) cultural protectionism B) cultural imperialism C) cultural capitalism D) cultural dumping Answer: B Diff: 2 Page Ref: 183 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-71 Question: Canada tries to mitigate the cultural influence from the United States by _________ .

A) a law that reduces the number of American TV channels from Canadian airwaves B) paying subsidies to Canadian artists and performers C) limiting the importation of American music and movies using quotas D) requiring that a certain percentage of music played by radio stations is by Canadian performers Answer: D Diff: 2 Page Ref: 183 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-72 Question: Which of the following is NOT an example of an instrument that government uses to promote trade?

A) Tariffs B) Subsidies C) Export financing D) Foreign trade zones Answer: A Diff: 1 Page Ref: 183 Skill: Application Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Scenario: Not-So-Free Freeland Freeland is a semi-closed economy whose government believes in protecting national identity and becoming a selfsustaining country. The government's priority is to protect local jobs and provide opportunities to Freeland's emerging industries to flourish without the threat of external competition.

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Question ID: 6-73 Question: Freeland's restriction of free trade could be attributed to each of the following EXCEPT ________.

A) political motives B) economic motives C) cultural motives D) protectionist motives Answer: D Diff: 2 Page Ref: 180 Skill: Application Objective: 6-2 Describe the political, economic and cultural motives behind governmental intervention in trade.

Question ID: 6-74 Question: Freeland's protection of its national identity is an example of which of the following?

A) Political motive B) Economic motive C) Cultural motive D) Systematic motive Answer: C Diff: 1 Page Ref: 183 Skill: Application Objective: 6-2 Describe the political, economic and cultural motives behind governmental intervention in trade.

Question ID: 6-75 Question: The Freeland government's effort to protect local jobs is an example of which of the following motives?

A) Political B) Economic C) Cultural D) Systematic Answer: A Diff: 2 Page Ref: 180 Skill: Application Objective: 6-2 Describe the political, economic and cultural motives behind governmental intervention in trade.

Question ID: 6-76 Question: Freeland's effort to provide opportunities to its emerging industries is an example of which of the following motives?

A) Political B) Economic C) Cultural D) Systematic Answer: B Diff: 2 Page Ref: 182 Skill: Application Objective: 6-2 Describe the political, economic and cultural motives behind governmental intervention in trade.

Question ID: 6-77 Question: The belief that Freeland's emerging industries need protection from international competition during their development phase is an example of which of the following?

A) The national security argument B) The emerging embargo argument C) The infant industry argument D) The import subsidy argument Answer: C Diff: 2 Page Ref: 182 Skill: Application Objective: 6-2 Describe the political, economic and cultural motives behind governmental intervention in trade.

Question ID: 6-78 Question: Which of the following is an example of a common instrument used by government to promote trade?

A) Tariffs

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B) Subsidies C) Quotas D) Local content requirements Answer: B Diff: 2 Page Ref: 183 Skill: Application Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-79 Question: Financial assistance to domestic producers in the form of cash payments is an example of a(n) ________.

A) ad valorem tariff B) embargo C) subsidy D) export tariff Answer: C Diff: 1 Page Ref: 183 Skill: Application Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-80 Question: When a government guarantees it will repay the loan of a company if the company should default on repayment, this is an example of a(n) ________.

A) subsidy B) loan guarantee C) infant industry protection D) loan repayment clause Answer: B Diff: 1 Page Ref: 184 Skill: Application Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-81 Question: Which of the following government agencies in Canada provides financial and consulting services to exporters and other companies investing abroad?

A) Overseas Private Investment Corporation B) Business Development Bank C) Asian Development Bank D) International Monetary Fund Answer: B Diff: 2 Page Ref: 184 Skill: Application Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-82 Question: Critics of subsidies argue that subsidies __________________ .

A) create trade barriers B) hinder market economy C) encourage inefficiency D) produce lower growth Answer: C Diff: 2 Page Ref: 184 Skill: Application Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-83 Question: What effect do non-tariff barriers have on trade?

A) They lower the prices of a product to consumers.

B) They limit the availability of an imported product.

C) They increase the volume of imports.

D) They are not imposed by a government but by business.

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Answer: B Diff: 3 Page Ref: 185 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-84 Question: A designated geographic region in which merchandise is allowed to pass through with lower custom duties and/or fewer customs procedures is called a(n) ________.

A) chaebol zone B) special subsidy zone C) international customs zone D) foreign trade zone Answer: D Diff: 1 Page Ref: 184 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-85 Question: The purpose of quotas is to ______________ .

A) subsidize companies in global expansion B) improve the efficiencies of companies importing or exporting C) restrict the number of foreign workers allowed in a country D) limit the amount of good allowed to enter of leave a country Answer: A Diff: 3 Page Ref: 186 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-86 Question: Many companies' facilities in foreign trade zones are used ________.

A) for final product assembly B) for acquisition of raw materials C) for product design D) to increase the total amount of a good's production cost Answer: A Diff: 2 Page Ref: 184 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-87 Question: Which of the following is NOT true about maquiladoras?

A) They employ hundreds of thousands of people.

B) They are foreign trade zones along Mexico's northern border.

C) They import materials or parts from the United States without duties, perform some processing on them, and export them back to the United States.

D) They have shown little success because of the immense amount of paperwork involved.

Answer: D Diff: 2 Page Ref: 185 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-88 Question: According to ________, measures, such as living standards and human development, are irrelevant in measures of a nation’s well-being.

A) mercantilism B) absolute advantage theory C) factor proportions theory D) new trade theory Answer: A Diff: 2 Page Ref: 189

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Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-89 Question: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called ________.

A) absolute advantage B) mercantilism C) comparative advantage D) factor proportions theory Answer: B Diff: 1 Page Ref: 189 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-90 Question: According to mercantilism, accumulation of national wealth depended on ________.

A) increasing a nation's trade surplus B) expanding a nation's total value of trade C) expanding a nation's total volume of trade D) increasing a nation's trade deficit Answer: A Diff: 2 Page Ref: 190 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-91 Question: Nations following the theory of ________ believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbours.

A) absolute advantage B) comparative advantage C) mercantilism D) factor proportions Answer: C Diff: 2 Page Ref: 190 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-92 Question: Which of the following refers to the ability of a nation to produce a good more efficiently than any other nation?

A) Mercantilism B) Comparative advantage C) Absolute advantage D) Zero-sum game Answer: C Diff: 1 Page Ref: 192 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-93 Question: Adam Smith believed which of the following?

A) International trade should be restricted by tariffs and quotas.

B) Governments should intervene to maintain a balance of exports and imports.

C) Market forces should determine trade flows.

D) Countries should produce most goods themselves and trade as little as possible.

Answer: C Diff: 2 Page Ref: 192 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

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Question ID: 6-94 Question: The theory of absolute advantage measures a nation's wealth by determining the ________.

A) gold it has on reserve B) silver it has on reserve C) cash it has on reserve D) living standards of its people Answer: D Diff: 3 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-95 Question: The theory of absolute advantage destroys the mercantilist idea that international trade is a ________.

A) positive-sum game B) zero-sum game C) negative-sum game D) no-win game Answer: B Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-96 Question: The theory of ________ measures a nation's wealth by the living standards of its people.

A) mercantilism B) factor proportions C) absolute advantage D) advanced factors Answer: C Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-97 Question: When there are gains to be had by both countries that are party to an exchange, international trade is considered a(n) ________.

A) positive-sum game B) zero-sum game C) negative-sum game D) equal-sum game Answer: A Diff: 1 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-98 Question: When a country is not able to produce a good more efficiently than other nations, but produces the good more efficiently than it does any other good, it is said to have a(n) ________.

A) absolute advantage B) resource advantage C) first-mover advantage D) comparative advantage Answer: D Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-99 Question: To complete his business bookkeeping each month, a small business owner spends about 20 hours and

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gives up $2000 in income. If he hired a bookkeeper to do the work, the job would be completed in 15 hours and would cost $600. Should the owner hire the bookkeeper or continue to do the work himself?

A) He should hire the bookkeeper because the bookkeeper has an absolute advantage in completing the books.

B) He should do the bookkeeping himself because he has an absolute advantage in completing the books.

C) He should hire the bookkeeper only if the bookkeeper agrees to give him a discount on the service price.

D) He should hire the bookkeeper only if the bookkeeper is willing to complete the books more quickly.

Answer: A Diff: 3 Page Ref: 193 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-100 Question: Country A produces one ton of coffee using one unit of resources. Country B produces two tons of coffee using one unit of resources. Which of the following is true regarding Country A and Country B? A) Country A has an absolute advantage in producing coffee.

B) Neither Country A nor Country B has an absolute advantage in producing coffee.

C) Country B has an absolute advantage in producing coffee.

D) Both Country A and Country B have an absolute advantage in producing coffee.

Answer: C Diff: 3 Page Ref: 193 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-101 Question: According to the theory of ________, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

A) absolute advantage B) mercantilism C) comparative advantage D) factor proportions Answer: C Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-102 Question: Which of the following is NOT a limitation of the absolute and comparative advantage theories?

A) The theories assume that there are only two countries engaged in the production and consumption of just two goods.

B) The theories assume that there are no costs for transporting traded goods from one country to another.

C) The theories consider labour the only resource used in the production process.

D) The theories assume that specialization in the production of one particular good results in gains in efficiency.

Answer: D Diff: 3 Page Ref: 194 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-103 Question: Absolute and comparative advantage theories assume that countries focus on which of the following?

A) Maximization of production and consumption B) Logistics planning C) Resource assessment D) Creation of trade surpluses Answer: A Diff: 2 Page Ref: 194 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-104 Question: Both absolute and comparative advantage theories assume that ________ is the only resource used in the

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production process.

A) land B) labour C) capital D) information Answer: B Diff: 2 Page Ref: 194 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-105 Question: The ________ theory states that countries produce and export goods that require resources that are abundant and import goods that require resources in short supply.

A) new trade B) absolute advantage C) international product life cycle D) factor proportions Answer: D Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-106 Question: Under factor proportions theory, a nation's resources include all of the following EXCEPT ________.

A) labour B) land C) information D) capital equipment Answer: C Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-107 Question: Factor proportions theory argues that a country should produce and export goods ________.

A) that require factors of production that are most abundant B) where it is most productive to do so C) where it is most efficient to do so D) that require factors of production that are most advanced Answer: A Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-108 Question: Country X is a small country with a large population. Most of its land is devoted to housing and commercial developments; agricultural land is in short supply. According to the factor proportions theory, which of the following would Country X most likely import?

A) Computers B) Crops such as wheat and corn C) Building materials D) Consulting services Answer: B Diff: 2 Page Ref: 195 Skill: Application Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-109 Question: The international product life cycle theory was put forth for which type of goods?

A) Service goods

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B) Knowledge-based goods C) Manufactured goods D) Natural resources Answer: C Diff: 2 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-110 Question: During which stage of the international product life cycle theory does high purchasing power and buyer demand in an industrialized nation encourage a company to design and introduce a product concept?

A) Growth stage B) New product stage C) Maturing product stage D) Standardized product stage Answer: B Diff: 2 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-111 Question: During which stage of the international product life cycle theory does demand rise and remain sustained over a fairly lengthy period of time?

A) Growth stage B) New product stage C) Maturing product stage D) Standardized product stage Answer: C Diff: 2 Page Ref: 197 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-112 Question: During which stage of the product life cycle are companies looking for low-cost production bases in developing nations to supply a growing worldwide market?

A) Growth stage B) New product stage C) Maturing product stage D) Standardized product stage Answer: D Diff: 2 Page Ref: 197 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-113 Question: Which of the following is NOT an argument offered by the new trade theory?

A) Gains can arise from diversification and managed growth.

B) Gains can arise from specialization and increasing economies of scale.

C) Companies first to enter a market can create barriers to entry.

D) Government may play a role in assisting its home companies.

Answer: A Diff: 2 Page Ref: 198 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-114 Question: The new trade theory states that a country dominates the export of a product because it has a company that has acquired ______________________.

A) an absolute advantage B) a patent and a trademark

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C) a first-mover advantage D) a subsidy for exporting Answer: C Diff: 1 Page Ref: 198 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-115 Question: National competitive advantage theory states that a nation's competitiveness in an industry depends on ________.

A) the level of government subsidy available B) the capacity of the industry to innovate and upgrade C) obtaining first-mover status D) absolute advantage Answer: B Diff: 1 Page Ref: 199 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-116 Question: The Porter national competitive advantage theory (diamond) consists of all the following EXCEPT ________.

A) factor conditions B) demand conditions C) supply conditions D) firm strategy, structure, and rivalry Answer: C Diff: 2 Page Ref: 200 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-117 Question: Which element of national competitive advantage theory divides resources into two groups: basic and advanced?

A) Demand conditions B) Factor conditions C) Related and supporting industries D) Firm, strategy, structure, and rivalry Answer: B Diff: 2 Page Ref: 199 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Scenario: Steven Praeger, Global Entrepreneur Steven Praeger has made a name for himself by being able to sell golf equipment to anyone, anywhere, anytime.

Steven would like to expand his business into Pacific Rim countries and has begun making inquiries into potential distributors.

Question ID: 6-118 Question: Steven is convinced that his golf equipment will sell itself. But Steven is preparing his special "hard-sell" presentation for Asia because he wants to make a good first impression. As a Pacific Rim expert, what do you tell Steven?

A) Be sure to have a tight legal contract ready to avoid product piracy problems.

B) Aggressive salesmanship is unlikely to work in Pacific Rim countries.

C) Have plenty of English-language business cards to pass around because Asians are impressed with all things about the United States.

D) Avoid the confusion introduced by third-party contacts.

Answer: B Diff: 1 Page Ref: 179

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Skill: Application Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-119 Question: Steven is a hands-on individual who believes his business has grown because of his personal involvement every step of the way. What advice do you offer Steven as he continues to expand his business in new Asian markets?

A) Contact distributors directly to avoid misunderstandings that can arise when using third-party contacts.

B) Always stick to corporate settings when doing business to avoid misunderstandings that can arise in less formal environments.

C) Protect his interests by insisting on detailed contracts from the start.

D) Use proper intermediaries as required in Pacific Rim nations.

Answer: D Diff: 1 Page Ref: 179 Skill: Application Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Scenario: Foodland and Drinkland Two countries, Foodland and Drinkland, produce food and drinks. In Foodland, one resource unit produces 20 tons of food and one resource unit produces 10 tons of drinks. In Drinkland, one resource unit produces 12 tons of food and one resource unit produces 24 tons of drinks.

Food Drinks Foodland 20 10 Drinkland 12 24 Question ID: 6-120 Question: This scenario provides an example of ________.

A) mercantilism B) comparative advantage C) a zero-sum game D) absolute advantage Answer: D Diff: 2 Page Ref: 191–192 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-121 Question: Based on the above scenario, which of the following is a true statement?

A) Foodland has an absolute advantage in producing food.

B) Foodland has an absolute advantage in producing drinks.

C) Drinkland has an absolute advantage in producing both food and drinks.

D) Drinkland has an absolute advantage in producing food.

Answer: A Diff: 3 Page Ref: 191–192 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-122 Question: Which of the following is a true statement about the above scenario?

A) Foodland has a comparative advantage in producing drinks.

B) Drinkland cannot trade with Foodland because trade is too expensive.

C) Drinkland has an absolute advantage in producing drinks.

D) Foodland should stop producing food and just produce drinks.

Answer: C Diff: 3 Page Ref: 191–192 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

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Question ID: 6-123 Question: If these two countries were to gain from trading with each other, this would support the notion that trade is a ________.

A) zero-sum game B) negative experience C) positive-sum game D) form of economic nationalism Answer: C Diff: 1 Page Ref: 193 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-124 Question: A third country, Funland, also produces food and drinks. In Funland, one resource unit produces 8 tons of food and 6 tons of drinks. Which of the following is true about Funland, Foodland, and Drinkland?

A) Funland has a comparative advantage in producing food.

B) Funland has a comparative advantage in producing drinks.

C) Funland has an absolute advantage in producing food.

D) Funland has an absolute advantage in producing drinks.

Answer: A Diff: 3 Page Ref: 193 Skill: Application Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Scenario: A Better Mousetrap, Inc. A Better Mousetrap, Inc. is a manufacturing company that sells pest control systems. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the US market. Senior vice president Marc Wallace recommends expanding sales overseas as a way to increase company revenues.

Question ID: 6-125 Question: Wallace's executive team reviews the stages of the international product life cycle to better understand what to expect when the product is sold overseas. Since there is virtually no export market for the product at present, it is most likely in which of the following stages of the life cycle?

A) Maturing product stage B) New product stage C) Growth product stage D) Standardized product stage Answer: B Diff: 2 Page Ref: 196–197 Skill: Application Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-126 Question: Wallace expects that markets abroad will soon become fully aware of the existence of the product and its benefits. At that point, the mousetrap will be in which of the following life cycle stages?

A) Maturing product stage B) Growth product stage C) Standardized product stage D) New product stage Answer: A Diff: 2 Page Ref: 196–197 Skill: Application Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-127 Question: Eventually, Wallace expects that domestic production of the mousetrap will cease altogether. This would happen in the ________ life cycle stage.

A) new product

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B) maturing product C) growth product D) standardized product Answer: D Diff: 2 Page Ref: 196–197 Skill: Application Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Fill-In-The-Blank Question ID: 6-128 Question: The purchase, sale, or exchange of goods and services across national borders is called ________.

Answer: international trade Diff: 1 Page Ref: 140 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-129 Question: Trade in ________ makes up roughly 20 percent of total world trade.

Answer: services Diff: 2 Page Ref: 140 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-130 Question: A nation’s attempts to protect local jobs and avoid high unemployment is a __________ motive in government intervention in trade.

Answer: political Diff: 1 Page Ref: 180 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID:6-131 Question: Some countries claim national security is the reason for fierce protection of their ___________________.

Answer: agricultural sector Diff: 1 Page Ref: 181 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-132 Question: Industries that are just emerging and may require protection from international competition during their development phase are called _________________.

Answer: infant industries Diff: 1 Page Ref: 182 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-133 Question: Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or some other form is called a(n)________.

Answer: subsidy Diff: 2 Page Ref: 168 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-134 Question: The ________ finances the export activities of companies in Canada and offers them reasonably priced

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insurance.

Answer: Export Development Bank of Canada Diff: 3 Page Ref: 169 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-135 Question: A designated geographic region in which merchandise is allowed to pass through with lower customs duties and/or fewer custom procedures is called a(n) ________.

Answer: foreign trade zone Diff: 2 Page Ref: 169 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-136 Question: Foreign trade zones are often intended to increase ________ in a nation.

Answer: employment Diff: 2 Page Ref: 169 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-137 Question: ____________ is a restriction on the amount of a good that can enter or leave a country during a certain period of time.

Answer: Quota Diff: 1 Page Ref: 186 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-138 Question: A complete ban on trade in one or more products with a particular country is called _______________.

Answer: an embargo Diff: 1 Page Ref: 188 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-139 Question: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called ________.

Answer: mercantilism Diff: 1 Page Ref: 189 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-140 Question: ________ is the condition that results when the value of a nation's exports is greater than the value of its imports.

Answer: Trade surplus Diff: 1 Page Ref: 190 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-141 Question: Mercantilist nations believed that a nation could increase its share of the world's wealth only at the expense of its neighbours, a perspective called a(n) ________.

Answer: zero-sum game Diff: 2 Page Ref: 191 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

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Question ID: 6-142 Question: ________ is the ability of a nation to produce a good more efficiently than any other nation.

Answer: Absolute advantage Diff: 1 Page Ref: 192 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-143 Question: According to the theory of absolute advantage, because there are gains to be had by both countries involved in an exchange, international trade is a(n) ________.

Answer: positive-sum game Diff: 2 Page Ref: 193 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-144 Question: A country has a(n) ________ when it is unable to produce a good more efficiently than other nations, but it produces the good more efficiently than it does any other good.

Answer: comparative advantage Diff: 1 Page Ref: 183 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-145 Question: ________ states that countries produce and export goods that require resources that are abundant and import goods that require resources in short supply.

Answer: Factor proportions theory Diff: 2 Page Ref: 195 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-146 Question: The ________ theory states that a country's export eventually becomes its import.

Answer: international product life cycle Diff: 3 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-147 Question: In the ________ stage of the international product life cycle, the high purchasing power and demand of buyers in an industrialized country spur a company to design and introduce a new product concept.

Answer: new product Diff: 3 Page Ref: 196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-148 Question: In the ________ stage of the international product life cycle, the domestic market and markets abroad become fully aware of the existence of a new product and its benefits.

Answer: maturing product Diff: 3 Page Ref: 197 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-149 Question: In the ________ of the international product life cycle, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels.

Answer: standardized product stage Diff: 2 Page Ref: 197 Skill: Concept

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Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-150 Question: The economic and strategic advantage gained by being the first company to enter an industry is called a(n) ________.

Answer: first-mover advantage Diff: 1 Page Ref: 198 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-151 Question: The ________ theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

Answer: national competitive advantage Diff: 2 Page Ref: 199 Skill: Concept Objective: 6-7 Explain the new trade and national competitive advantage theories.

Essay Question ID: 6-152 Question: Describe in detail international trade, its potential benefits, the volume and overall patterns of international trade.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The purchase, sale, or exchange of goods and services across national borders is called international trade. This is in contrast to domestic trade, which occurs between different states, regions, or cities within a country. In recent years, nations that embrace globalization are seeing trade grow in importance for their economies. One way to measure the importance of trade to a nation is to examine the volume of an economy's trade relative to its total output.

International trade is opening doors to new entrepreneurial opportunity across the globe. It also provides a country's people with a greater choice of goods and services. International trade is an important engine for job creation in many countries.

The value and volume of international trade continues to increase. Today world merchandise exports are valued at more than $16 trillion, and service exports are nearly $3.8 trillion. Perhaps not surprisingly, the United States ranks first in commercial services exports and ranks third in merchandise exports (behind Germany and China). Most of world merchandise trade is composed of trade in manufactured goods. The dominance of manufactured goods in the trade of merchandise has persisted over time and will likely continue to do so. The reason is its growth is much faster than trade in the two other classifications of merchandise—mining and agricultural products. Although the importance of trade in services is growing for many nations, it tends to be relatively more important for the world's richest countries. Trade in services accounts for around 20 percent of total world trade.

Customs agencies in most countries record the destination of exports, the source of imports, and the physical quantities and values of goods crossing their borders. Although this type of data is sometimes misleading, customs data does reflect overall trade patterns among nations. For example, governments sometimes deliberately distort the reporting of trade in military equipment or other sensitive goods. In other cases, extensive trade in unofficial (underground) economies can distort the real picture of trade between nations.

Large ocean-going cargo vessels are needed to support these patterns in international trade and deliver merchandise from one shore to another. In fact, Greek and Japanese merchant ships own more than 30 percent of the world's total capacity (measured in tons shipped, or tonnage) of merchant ships. As a whole, the developing countries' share of global shipping is rising and today stands at nearly 20 percent. Yet global merchant shipping companies are feeling the pinch of higher oil prices. And as importers must absorb a portion of higher shipping costs, they may begin producing goods closer to home and reduce the need for additional merchant ship capacity.

Diff: 3 Page Ref: 174–178 Skill: Concept

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Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-153 Question: Discuss in detail the issues of trade dependence and independence.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Countries differ in their trade interdependencies. Some nations depend almost entirely on trade with one other country, whereas others depend on no single trade partner. Developing and transition nations are often dependent on their wealthier neighbours.

The dangers of trade dependency become apparent when a nation experiences economic recession or political turmoil, which then also harms dependent nations. Trade dependency is a concern in Mexico, which for 30 years was a favourite destination for the investments of US companies. Mexican factories assemble all sorts of products headed for the US market, including refrigerators, mobile phones, and many types of garments. But a weak education system, corruption, relatively high taxes, and an outdated infrastructure are forcing some companies to abandon Mexico for locations in Asia and Europe, which is leaving many unemployed people in their wake. Although trade dependency was a blessing for Mexico for years, it is now feeling the pain as some companies shift jobs out of the country. Likely the best way for Mexico to cope with its dependency on the United States is to improve its competitiveness and make it the preferred destination among emerging markets for US companies.

Diff: 2 Page Ref: 179–180 Skill: Concept Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns.

Question ID: 6-154 Question: Describe in detail mercantilism, what its philosophy was, how it worked and what its flaws were.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain.

How Mercantilism Worked. When navigation was a fairly new science, Europeans explored the world by sea and claimed the lands they encountered in the name of the European monarchy that financed their voyage. Early explorers landed in Africa; Asia; and North, South, and Central America, where they established colonies. Colonial trade was conducted for the benefit of mother countries, and colonies were generally treated as exploitable resources.

In recent times, former colonies have struggled to diminish their reliance on the former colonial powers. For example, in an effort to decrease their dependence on their former colonial powers, African nations are welcoming trade relationships with partners from Asia and North America. But because of geographic proximity, the European Union is still often preferred as a trading partner.

Flaws of Mercantilism. Despite its seemingly positive benefits for any nation implementing it, mercantilism is inherently flawed. Mercantilist nations believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbours—called a zero-sum game. The main problem with mercantilism is that, if all nations were to barricade their markets from imports and push their exports onto others, international trade would be severely restricted. In fact, trade in all nonessential goods would likely cease altogether.

In addition, paying colonies little for their exports but charging them high prices for their imports impaired their economic development. Thus, their appeal as markets for goods was less than it would have been if they were allowed to accumulate greater wealth.

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Diff: 3 Page Ref: 189–191 Skill: Concept Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies.

Question ID: 6-155 Question: Discuss the three essential pillars of the theory of mercantilism, and explain how the theory of absolute advantage conflicts with the theory of mercantilism.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain.

The practice of mercantilism rested upon three essential pillars: trade surpluses, government intervention, and colonialism.

Trade Surpluses. Nations believed they could increase their wealth by maintaining a trade surplus—the condition that results when the value of a nation's exports is greater than the value of its imports. In mercantilism, a trade surplus meant that a country was taking in more gold on the sale of its exports than it was paying out for its imports. A trade deficit is the opposite condition—one that results when the value of a country's imports is greater than the value of its exports. In mercantilism, trade deficits were to be avoided at all costs.

Government Intervention. Governments actively intervened in international trade to maintain a trade surplus.

According to mercantilism, the accumulation of wealth depended on increasing a nation's trade surplus, not necessarily expanding its total value or volume of trade. The governments of mercantilist nations did this by either banning certain imports or imposing various restrictions on them, such as tariffs or quotas. At the same time, they subsidized industries based in the home country to expand exports. Governments also typically outlawed the removal of their gold and silver to other nations.

Colonialism. Mercantilist nations acquired territories (colonies) around the world to serve as sources of inexpensive

raw materials and as markets for higher-priced finished goods. These colonies were the source of essential raw materials, including tea, sugar, tobacco, rubber, and cotton. These resources would be shipped to the mercantilist nation, where they were incorporated into finished goods such as clothing, cigars, and other products. These finished goods would then be sold to the colonies. Trade between mercantilist countries and their colonies were a huge source of profits for the mercantilist powers. The colonies received low prices for basic raw materials but paid high prices for finished goods.

Mercantilist nations believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbours—called a zero-sum game.

The theory of mercantilism conflicts with another trade theory, the theory of absolute advantage. Scottish economist Adam Smith first put forth the trade theory of absolute advantage in 1776. The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. In other words, a nation with an absolute advantage can produce a greater output of a good or service than other nations using the same amount of, or fewer, resources.

The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Instead, because there are gains to be had by both countries party to an exchange, international trade is a positive-sum game. The theory also calls into question the objective of national governments to acquire wealth through restrictive trade policies. It argues that nations should instead open their doors to trade so their people can obtain a greater quantity of goods more cheaply. The theory does not measure a nation's wealth by how much gold and silver it has on reserve but by the living standards of its people.

Diff: 3 Page Ref: 180–191, 192–193 Skill: Synthesis Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies; 6-5 Explain the

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theories of absolute advantage and comparative advantage.

Question ID: 6-156 Question: Compare and contrast the theories of absolute and comparative advantage.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Scottish economist Adam Smith first put forth the trade theory of absolute advantage in 1776. The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. In other words, a nation with an absolute advantage can produce a greater output of a good or service than other nations using the same amount of, or fewer, resources. Among other things, Smith reasoned that international trade should not be banned or restricted by tariffs and quotas but allowed to flow as dictated by market forces. If people in different countries were able to trade as they saw fit, no country would need to produce all the goods it consumed. Instead, a country could concentrate on producing the goods in which it holds an absolute advantage. It could then trade with other nations to obtain the goods it needed but did not produce.

An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still

beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

Diff: 3 Page Ref: 191–195 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-157 Question: Explain in detail the theory of comparative advantage using an example, and describe its assumptions and limitations.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still

beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

For example, suppose that Kevin O’Leary has previously installed many hot tubs and can do the job in one week— twice as fast as the hot tub installer. Thus, O’Leary now holds absolute advantages in both investing and hot tub installation. Although the professional installer is at an absolute disadvantage in both hot tub installation and investing, he is less inefficient in hot tub installation. Despite his absolute advantage in both areas, however, O’Leary would still have to give up $200 000 (one week's pay) to take time off from investing to complete the work. Is this a wise decision? No. O’Leary should hire the professional installer to do the work for $10 000. The installer earns money he would not earn if O’Leary did the job himself. And Kevin O’Leary earns more money by focusing on his investing than he would save by installing the hot tub himself.

The theory of comparative advantage makes several important assumptions that limit real-world application of the theories. First, we assumed that countries are driven only by the maximization of production and consumption. This is often not the case. Governments often get involved in international trade out of a concern for workers or consumers.

Second, the theories assume that there are only two countries engaged in the production and consumption of just two goods. This is obviously not the situation that exists in the real world. There currently are more than 180 countries and a countless number of products being produced, traded, and consumed worldwide.

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Third, it is assumed that there are no costs for transporting traded goods from one country to another. In reality, transportation costs are a major expense of international trade for some products. If transportation costs for a good are higher than the savings generated through specialization, trade will not occur.

Fourth, the theories consider labour the only resource used in the production process because labour accounted for a large portion of the total production cost of goods at the time the theories were developed. Moreover, it is assumed that resources are mobile within each nation but cannot be transferred between nations. But labour, and especially natural resources, can be difficult and costly to transfer between nations.

Finally, it is assumed that specialization in the production of one particular good does not result in gains in efficiency.

But we know that specialization results in increased knowledge of a task and perhaps even future improvements in how that task is performed. Thus, the amount of resources needed to produce a specific amount of a good should decrease over time.

Diff: 3 Page Ref: 193–195 Skill: Concept Objective: 6-5 Explain the theories of absolute advantage and comparative advantage.

Question ID: 6-158 Question: Discuss in detail the factor proportions theory and describe the evidence on this theory.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.

Factor proportions theory breaks a nation's resources into two categories: labour on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labour if the cost of labour is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labour.

Evidence on factor proportions theory: the Leontief paradox. Despite its conceptual appeal, factor proportions theory

is not supported by studies that examine the trade flows of nations. The first large-scale study to document such evidence was performed by a researcher named Wassily Leontief in the early 1950s. Leontief tested whether the United States, which uses an abundance of capital equipment, exports goods requiring capital-intensive production and imports goods requiring labour-intensive production. Contrary to the predictions of the factor proportions theory, his research found that US exports require more labour-intensive production than its imports. This apparent paradox between the predictions using the theory and the actual trade flows is called the Leontief paradox. Leontief's findings are supported by more recent research on the trade data of a large number of countries.

Diff: 3 Page Ref: 195–196 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-159 Question: Explain in detail the international product life cycle theory including its several stages.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Raymond Vernon put forth an international trade theory for manufactured goods in the mid-1960s. His international product life cycle theory says that a company will begin by exporting its product and later undertake foreign direct

investment as the product moves through its life cycle. The theory also says that, for a number of reasons, a country's export eventually becomes its import. Although Vernon developed his model around the United States, we can generalize it to apply to any developed and innovative market such as Australia, the European Union, and Japan.

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Stages of the Product Life Cycle. The international product life cycle theory follows the path of a good through its life cycle (from new to maturing to standardized product) to determine where it will be produced. In stage 1, the new product stage, the high purchasing power and demand of buyers in an industrialized country drive a company to design and introduce a new product concept. Because the exact level of demand in the domestic market is highly uncertain at this point, the company keeps its production volume low and based in the home country. Keeping production where initial research and development occurred and staying in contact with customers allows the company to monitor buyer preferences and to modify the product as needed. Although initially there is virtually no export market, exports do begin to pick up late in the new product stage.

In stage 2, the maturing product stage, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. As exports begin to account for an increasingly greater share of total product sales, the innovating company introduces production facilities in the countries with the highest demand. Near the end of the maturity stage, the product begins generating sales in developing nations, and perhaps some manufacturing presence is established there.

In stage 3, the standardized product stage, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. As the market becomes more price-sensitive, the company begins searching aggressively for low-cost production bases in developing nations to supply a growing worldwide market. Furthermore, as most production now takes place outside the innovating country, demand in the innovating country is supplied with imports from developing countries and other industrialized nations. Late in this stage, domestic production might even cease altogether.

Diff: 3 Page Ref: 196–198 Skill: Concept Objective: 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-160 Question: Discuss the limitations of the international product life cycle theory. How well does the theory explain current trade patterns?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Vernon developed his theory at a time when most new products were being developed and sold first in the United States. One reason US companies were strong globally in the 1960s was that their domestic production bases were not destroyed during the Second World War, as was the case in Europe (and to some extent Japan). In addition, during the war, the production of many durable goods in the United States, including automobiles, was shifted to the production of military transportation and weaponry. This laid the foundation for enormous post-war demand for new capital-intensive consumer goods, such as autos and home appliances. Furthermore, advances in technology that were originally developed with military purposes in mind were integrated into consumer goods. A wide range of new and innovative products like televisions, photocopiers, and computers met the seemingly insatiable appetite of consumers in the United States.

The theory seemed to explain world trade patterns quite well when the United States dominated world trade. But today the theory's ability to accurately depict the trade flows of nations is weak. The United States is no longer the sole innovator of products in the world. New products spring up everywhere as companies continue to globalize their research and development activities. Furthermore, companies today design new products and make product modifications at a very quick pace. The result is quicker product obsolescence and a situation in which companies replace their existing products with new product introductions. This is forcing companies to introduce products in many markets simultaneously to recoup a product's research and development costs before sales decline and the product is dropped. The theory has a difficult time explaining the resulting trade patterns.

In fact, older theories might better explain today's global trade patterns. Much production in the world today more closely resembles what is predicted by the theory of comparative advantage. Boeing's assembly plant in Everett, Washington, constructs its 747, 767, and 777 wide-body aircraft. The shop floor has wooden crates marked "Belfast, Ireland" containing nose landing-gear doors. On a metal rack, there is a stack of outboard wing flaps from Italy. The entire fuselage of the 777 has traveled in quarter sections from Japan. Its wing tip assembly comes from Korea, its rudders from Australia, and so on. This pattern resembles the theory of comparative advantage in that a product's components are made in the country that can produce them at a high level of productivity. Components are later assembled in a chosen location. Finally, the theory is challenged by the fact that more companies are operating in

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international markets from their inception. Many small companies are teaming up with companies in other markets to develop new products or production technologies. This strategy is particularly effective for small companies that would otherwise be unable to participate in international production or sales.

Diff: 3 Page Ref: 197–198 Skill: Synthesis Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns; 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-161 Question: Explain the theory of comparative advantage, and discuss how it differs from the factor proportions theory.

Include a description of the factor proportions theory in your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words,

trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. The theory resulted from the research of two economists, Eli Heckscher and Bertil Ohlin, and is therefore sometimes called the Heckscher-Ohlin theory.

Factor proportions theory differs considerably from the theory of comparative advantage. The theory of comparative advantage states that a country specializes in producing the good that it can produce more efficiently than any other good. Thus, the focus of the theory (and absolute advantage as well) is on the productivity of the production process for a particular good. By contrast, factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest—not the goods in which it is most productive.

Diff: 2 Page Ref: 193–196 Skill: Synthesis Objective: 6-4 Describe mercantilism and explain its impact on world powers and their colonies; 6-6 Explain the factor proportions and international product life cycle theories.

Question ID: 6-162 Question: Explain the factor proportions theory, and discuss why it is at odds with the new trade theory.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. Factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest—not the goods in which it is most productive.

In contrast, the new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies. Because the theory emphasizes productivity rather than a nation's resources, it is in line with the theory of comparative advantage but at odds with factor proportions theory.

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Diff: 3 Page Ref: 195–196, 198 Skill: Synthesis Objective: 6-6 Explain the factor proportions and international product life cycle theories; 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-163 Question: Explain how the national competitive advantage theory supports and builds upon the factor proportions theory. Include a brief description of the national competitive advantage theory and the factor proportions theory in your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The factor proportions theory is an international trade theory that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.

Factor proportions theory breaks a nation's resources into two categories: labour on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labour if the cost of labour is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labour.

The national competitive advantage theory supports and builds on the factor proportions theory, with "advanced factors." Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the production of certain products. The national competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. This theory identifies four elements present to varying degrees in every nation that form the basis of national competitiveness. The Porter diamond consists of (1) factor conditions; (2) demand conditions; (3) related and supporting industries; and (4) firm strategy, structure, and rivalry.

In terms of the first element, factor conditions, factor proportions theory considers a nation's resources, such as a large labour force, natural resources, climate, or surface features, as paramount factors in what products a country will produce and export. Porter acknowledges the value of such resources, which he terms basic factors, but he also discusses the significance of what he calls advanced factors.

Advanced factors include the skill levels of different segments of the workforce and the quality of the technological infrastructure in a nation. Advanced factors are the result of investments in education and innovation, including worker training and technological research and development. Whereas basic factors can be the initial spark for why an economy begins producing a certain product, advanced factors account for the sustained competitive advantage a country enjoys in that product.

Diff: 3 Page Ref: 195–196, 199–200 Skill: Synthesis Objective: 6-6 Explain the factor proportions and international product life cycle theories; 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-164 Question: Discuss the volume and patterns of international trade, and explain the role government and chance play in the growth of international trade.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The value and volume of international trade continues to increase. Today world merchandise exports are valued at more than $16 trillion, and service exports are nearly $3.8 trillion. Perhaps not surprisingly, the United States ranks first in commercial services exports and ranks third in merchandise exports (behind Germany and China). Most of world merchandise trade is composed of trade in manufactured goods. The dominance of manufactured goods in the

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trade of merchandise has persisted over time and will likely continue to do so. The reason is its growth is much faster than trade in the two other classifications of merchandise—mining and agricultural products. Although the importance of trade in services is growing for many nations, it tends to be relatively more important for the world's richest countries. Trade in services accounts for around 20 percent of total world trade.

Government and chance play a role in fostering the national competitiveness of industries in international trade. First, governments, by their actions, can often increase the competitiveness of firms and perhaps even entire industries.

Governments of emerging markets could increase economic growth by increasing the pace of privatization of stateowned companies, for example. Privatization forces those companies to grow more competitive in world markets if they are to survive. Second, although chance events can help the competitiveness of a firm or an industry, it can also threaten it.

Diff: 3 Page Ref: 174–175, 200 Skill: Synthesis Objective: 6-1 Describe the relation between international trade volume and world output and identify overall trade patterns; 6-7 Explain the new trade and national competitive advantage theories.

Question ID: 6-165 Question: Explain in detail, with examples, the three categories of reasons why governments intervene in trade.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In general, they do so for reasons that are political, economic, or cultural—or some combination of the three.

Countries often intervene in trade by strongly supporting their domestic companies' exporting activities. But the more emotionally charged intervention occurs when a nation's economy is underperforming. In tough economic times, businesses and workers often lobby their governments for protection from imports that are eliminating jobs in the domestic market.

Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. Yet a trade policy based purely on political motives is seldom wise in the long run. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.

Economic motives focus on protecting domestic infant industries so that these have time to develop fully and become competitive in the global markets. Another reason is to pursue strategic trade policies with other countries, and in some cases, exert influence on trading partners for the benefit of home country companies.

Cultural motives are focused on protecting national identity in face of exposure to foreign ideas, goods, services and cultural influences. Unwanted cultural influence in a nation can cause great harm and cause governments to block imports that may be harmful.

Diff: 3 Page Ref: 180–183 Skill: Concept Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade.

Question ID: 6-166 Question: Describe in detail each instrument governments use to promote trade Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

1. Subsidy. Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports.

2. Export financing. Governments often promote exports by helping companies finance their export activities. They can offer loans that a company could otherwise not obtain or charge them an interest rate that is lower than the market rate. Another option is for a government to guarantee that it will repay the loan of a company if the company

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should default on repayment; this is called a loan guarantee.

3. Foreign trade zones. Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

4. Special government agencies. The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries. These offices are designed to promote the home country's exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation's exports.

Diff: 3 Page Ref: 183–185 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-167 Question: Explain the concept of subsidies and how they are used, including their disadvantages. In what ways does the protection of infant industries produce similar drawbacks?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports. It is nearly impossible to calculate the amount of subsidies a country offers its producers because of their many forms. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.

In a similar way, the protection of intact industries can produce complacency and prevent an industry from being fully competitive. According to the infant industry argument, a country's emerging industries need protection from international competition during their development phase until they become sufficiently competitive internationally.

This argument is based on the idea that infant industries need protection because of a steep learning curve. In other words, only as an industry grows and matures does it gain the knowledge it needs to become more innovative, efficient, and competitive.

Protection from international competition can cause domestic companies to become complacent toward innovation.

This can limit a company's incentives to obtain the knowledge it needs to become more competitive. The most extreme examples of complacency are industries within formerly communist nations. When their communist protections collapsed, nearly all companies that were run by the state were decades behind their competitors from capitalist nations. To survive, many government-owned businesses required financial assistance in the form of infusions of capital or outright purchase.

Diff: 3 Page Ref: 182, 183–184 Skill: Synthesis Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade; 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-168 Question: Describe the purpose of a foreign trade zone including how they are used to promote trade.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The US Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the US market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.

Diff: 2 Page Ref: 184–185 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-169 Question: Discuss the benefits and drawbacks of strategic trade policy. How are the drawbacks of subsidies as a method of promoting trade similar to the drawbacks of strategic trade policy?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Benefits of Strategic Trade Policy. Supporters of strategic trade policy argue that it results in increased national income. Companies should earn a good profit if they obtain first-mover advantages and solidify positions in their markets around the world. Advocates claim that strategic trade policies helped South Korea build global conglomerates (called chaebol) that dwarf competitors. For years, South Korean shipbuilders received a variety of government subsidies, including low-cost financing. The chaebol helped South Korea to emerge strongly from the global economic crisis because of their market power and the wide range of industries in which they compete. Such policies had spin-off effects on related industries, and local suppliers to the chaebol are now thriving.

Drawbacks of Strategic Trade Policy. Although it sounds as if strategic trade policy has only benefits, there can be drawbacks as well. Lavish government assistance to domestic companies in the past caused inefficiency and high costs for both South Korean and Japanese companies. Large government concessions to local labour unions hiked wages and forced Korea's chaebol to accept low profit margins.

In addition, when governments decide to support specific industries, their choice is often subject to political lobbying by the groups seeking government assistance. It is possible that special interest groups could capture all the gains from assistance with no benefit for consumers. If this were to occur, consumers could end up paying more for lowerquality goods than they could otherwise obtain.

Like strategic trade policy, government subsidies can also encourage complacency in an industry and prevent it from becoming competitive internationally. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.

Diff: 3 Page Ref: 182, 183–184 Skill: Synthesis Objective: 6-2 Describe the political, economic, and cultural motives behind governmental intervention in trade; 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-170 Question: Describe in detail each instrument governments use to restrict trade Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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There are two general categories of trade restriction methods: tariff and nontariff barriers. Tariffs are government taxes levied on imports and exports. A tariff increases the price of imported product directly and thus protects domestic producers. There are three categories of tariff: import tariffs, transit tariffs, and export tariffs. Tariffs are a source of government revenue mostly in developing nations.

Nontariff barriers limit the availability of an imported product, which increases its price indirectly and reduces its appeal to buyers. Quotas are a restriction on the amount of a good that can enter or leave a country during a certain period of time. For import quotas this is a tool to protect domestic producers. Export quotas are levied to maintain adequate supplies of product that are essential to domestic consumers. In addition, export quotas can increase the international price of the good and increase domestic revenues.

Embargoes are a complete ban on trade in one or more products. It is the most restrictive nontariff trade barrier and is typically applied to accomplish political goals.

Local content requirements are laws stipulating that producers in the domestic market must supply a specified amount of a good or service. The purpose is to force companies from other nations to use local resources in their production processes—labour. Such requirements help protect domestic producers.

Administrative delays include a wide range of government actions such as excessive product inspections, inconvenient transport hubs, delays in customs and licencing. The objective is protectionism.

Currency controls place restrictions on the convertibility of a currency into international acceptable currencies.

Unfavourable exchange rates can also force the cost of imported goods to an impractical level and thus discourage importers.

Diff: 2 Page Ref: 185–189 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-171 Question: Explain how tariffs protect domestic producers, and describe how a foreign trade zone might offset the effects of tariffs.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers. Nations can use tariffs to protect domestic producers. For example, an import tariff raises the cost of an imported good and increases the appeal of domestically produced goods. In this way, domestic producers gain a protective barrier against imports.

While tariffs are designed to restrict trade, most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The US Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the US market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.

Diff: 2 Page Ref: 184–185, 186 Skill: Synthesis Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

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Question ID: 6-172 Question: What are voluntary export restraints and how are they used?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A unique version of the export quota is called a voluntary export restraint (VER)—a quota that a nation imposes on its own exports, usually at the request of another nation. Countries normally self-impose a voluntary export restraint in response to the threat of an import quota or total ban on the product by an importing nation. The classic example of the use of a voluntary export restraint is from the 1980s when Japanese carmakers were making significant market share gains in the United States. The closing of US carmakers' production facilities in the United States was creating a volatile anti-Japan sentiment among the population and the US Congress. Fearing punitive legislation if Japan did not limit its automobile exports to the United States, the Japanese government and its carmakers self imposed a voluntary export restraint on cars headed for the United States.

Consumers in the country that imposes an export quota benefit from lower-priced products (due to their greater supply) as long as domestic producers do not curtail production. Producers in an importing country benefit because the goods of producers from the exporting country are restrained, which may allow them to increase prices. Export quotas hurt consumers in the importing nation because of reduced selection and perhaps higher prices. Yet export quotas might allow these same consumers to retain their jobs if imports were threatening to put domestic producers out of business. Again, detailed economic studies are needed to determine the winners and losers in any particular export quota case.

Diff: 2 Page Ref: 174 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

Question ID: 6-173 Question: Describe how embargoes work and why they are seldom used today.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A complete ban on trade (imports and exports) in one or more products with a particular country is called an

embargo. An embargo may be placed on one or a few goods, or it may completely ban trade in all goods. It is the

most restrictive nontariff trade barrier available, and it is typically applied to accomplish political goals. Embargoes can be decreed by individual nations or by supranational organizations such as the United Nations. Because they can be very difficult to enforce, embargoes are used less today than they have been in the past.

Diff: 2 Page Ref: 188 Skill: Concept Objective: 6-3 List and explain the methods governments use to promote and restrict international trade.

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Chapter 7 Foreign Direct Investment

Chapter 7 Foreign Direct Investment True/False Question ID: 7-1 Question: Many early trade theories were created at a time when most factors of production either could not be moved or could not be moved easily across national borders.

Answer: TRUE Diff: 2 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-2 Question: Factors of production include things such as labour, financial capital, capital equipment, and land or natural resources.

Answer: TRUE Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-3 Question: Today, all factors of production are internationally mobile.

Answer: FALSE Diff: 1 Page Ref: 210 Skill: Critical Thinking Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-4 Question: Portfolio investment is the purchase of physical assets or a significant amount of ownership of a company in another country to gain a degree of management control.

Answer: FALSE Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-5 Question: Foreign direct investment is the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control.

Answer: TRUE Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-6 Question: At the core of foreign direct investment are international flows of capital.

Answer: TRUE Diff: 2 Page Ref: 210 Skill: Critical Thinking Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-7 Question: Two main reasons for foreign direct investment flows are globalization and diversity.

Answer: FALSE Diff: 1 Page Ref: 211 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-8

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Question: Developed countries are the prime destination for foreign direct investment because cross-border mergers and acquisitions are concentrated in developed countries.

Answer: TRUE Diff: 2 Page Ref: 212 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-9 Question: European Union nations, the United States, and Japan account for the vast majority of world foreign direct investment inflows.

Answer: TRUE Diff: 3 Page Ref: 212 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-10 Question: Canada is considered to be one of the most restrictive countries for foreign direct investment (FDI).

Answer: TRUE Diff: 2 Page Ref: 212 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-11 Question: Trade barriers and specialized knowledge are both examples of market imperfections.

Answer: TRUE Diff: 1 Page Ref: 214 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-12 Question: A market imperfection that can encourage foreign direct investment is the possibility that a company will create a future competitor by charging another company for access to its knowledge.

Answer: TRUE Diff: 3 Page Ref: 214–215 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-13 Question: The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Answer: TRUE Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-14 Question: According to the eclectic theory, an internalization advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Answer: TRUE Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-15 Question: According to the eclectic theory, an ownership advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

Answer: FALSE Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

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Question ID: 7-16 Question: In foreign direct investment, 100 percent ownership of a company does not guarantee its complete control.

Answer: TRUE Diff: 2 Page Ref: 216 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-17 Question: Building a subsidiary abroad from the ground up is called a greenfield investment.

Answer: TRUE Diff: 1 Page Ref: 217 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-18 Question: Rationalized production is a system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest.

Answer: TRUE Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-19 Question: A potential problem with a rationalized production model is that a work stoppage in one country can bring the entire production process to a standstill.

Answer: TRUE Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-20 Question: The Mexican maquiladora project was built upon the success of the border project between Germany and Poland.

Answer: FALSE Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-21 Question: The soaring cost of developing subsequent stages of technology has led multinationals to engage in crossborder alliances and acquisitions.

Answer: TRUE Diff: 1 Page Ref: 218 Skill: Critical Thinking Objective: Chapter 7-LO3 Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-22 Question: The practice of "following clients" can be expected in industries where many component parts are obtained from suppliers with whom a manufacturer has a close working relationship.

Answer: TRUE Diff: 1 Page Ref: 219 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-23 Question: In industries with a limited number of large firms, foreign direct investment decisions frequently resemble a "follow the leader" scenario.

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Answer: TRUE Diff: 2 Page Ref: 219 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-24 Question: A country's balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation.

Answer: TRUE Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-25 Question: The goods account records export of services.

Answer: FALSE Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-26 Question: The current account includes income earned on Canadian assets held abroad Answer: FALSE Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-27 Question: A current account deficit occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad.

Answer: FALSE Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-28 Question: The two main reasons countries intervene in foreign direct investment flows are to control the balance of payments and to obtain resources and benefits.

Answer: TRUE Diff: 2 Page Ref: 222–223 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-29 Question: One reason a home country may discourage foreign direct investment outflows is to protect its "sunset" industries.

Answer: FALSE Diff: 3 Page Ref: 224 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-30 Question: One method used by host countries to restrict incoming foreign direct investment is ownership restrictions.

Answer: TRUE Diff: 2 Page Ref: 226

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Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Multiple Choice Question ID: 7-31 Question: All of the following factors of production are internationally mobile EXCEPT ________.

A) labour B) financial capital C) capital equipment D) land Answer: D Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-32 Question: The purchase of physical assets or a significant amount of ownership (stock) of a company in another country to gain a measure of management control is called ________.

A) foreign direct investment B) portfolio investment C) ownership control D) vertical integration Answer: A Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-33 Question: Which of the following refers to investments that do NOT involve obtaining a measure of control in a company?

A) Foreign direct investment B) Portfolio investment C) Mergers D) Acquisitions Answer: B Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-34 Question: Canada’s share of global inward FDI has _______________ .

A) increased considerably in recent years B) improved because of mergers and acquisitions C) fallen because of restrictive policies D) fallen because of labour market conflicts Answer: C Diff: 3 Page Ref: 212 Skill: Critical Thinking Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-35 Question: Which of the following are main drivers of foreign direct investment?

A) Diversity and telecommunications B) Telecommunications and transportation C) Globalization and mergers and acquisitions (M&A) D) Diversity and globalization Answer: C Diff: 1 Page Ref: 211

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Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-36 Question: Which of the following created renewed determination to further reduce barriers to trade?

A) Consumer demand B) Advancements in telecommunications C) Portfolio investment trends D) Uruguay Round of trade negotiations Answer: D Diff: 2 Page Ref: 211 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-37 Question: When companies realized they could produce in the most efficient and productive locations in the world and simply export to markets worldwide, a new surge of foreign direct investment flowed into ________.

A) newly industrialized nations and emerging markets B) highly developed economies C) home country markets D) totalitarian and theocratic nations only Answer: A Diff: 2 Page Ref: 211 Skill: Application Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-38 Question: Companies seek cross-border mergers and acquisitions for each of the following reasons EXCEPT to ________.

A) get a foothold in new geographic markets B) increase a firm's global competitiveness C) fill in gaps in companies' product lines in a global industry D) free up company budgets for increased R & D Answer: D Diff: 2 Page Ref: 211 Skill: Critical Thinking Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-39 Question: Which of the following statements is NOT true?

A) Entrepreneurs and small businesses play a minimal role in expanding foreign direct investment flows.

B) Increasing globalization is causing a growing number of international companies from emerging markets to undertake foreign direct investment.

C) The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.

D) Companies may pursue mergers and acquisitions to fill gaps in their product lines.

Answer: A Diff: 2 Page Ref: 212 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-40 Question: Which of the following is NOT one of the four main theories that attempts to explain why companies engage in foreign direct investment?

A) International product life cycle theory B) Market imperfections theory C) Eclectic theory D) Mercantilism Answer: D Diff: 2 Page Ref: 213–215 Skill: Concept

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Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-41 Question: The theory that a company will begin by exporting its products and later undertake foreign direct investment is referred to as the _______________ theory.

A) eclectic life cycle B) market improvements life cycle C) international product life cycle D) market power life cycle Answer: C Diff: 1 Page Ref: 213–214 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-42 Question: According to the international product life cycle theory, in which of the following stages is a good produced in the home country because of uncertain domestic demand and to keep production close to the research department?

A) Standardized product stage B) Maturing product stage C) Declining product stage D) New product stage Answer: D Diff: 2 Page Ref: 213–214 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-43 Question: According to the international product life cycle theory, in which stage of a product's life cycle does a company directly invest in production facilities in countries where demand is great enough to warrant such facilities?

A) New product stage B) Maturing product stage C) Standardized product stage D) Declining product stage Answer: B Diff: 2 Page Ref: 213–214 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-44 Question: In the ________ product stage of the international product life cycle theory, increased competition pressures a company to produce in low-cost developing nations.

A) new B) maturing C) standardized D) declining Answer: C Diff: 2 Page Ref: 213 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-45 Question: A market that is said to operate at peak efficiency and where goods are readily and easily available is said to be a(n) ________.

A) perfect market B) eclectic market C) imperfect market D) greenfield market Answer: A Diff: 1 Page Ref: 214

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Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-46 Question: The ________ theory states that when an aspect of the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the efficiency reducing aspect.

A) market power B) perfect market C) international product life cycle D) market imperfections Answer: D Diff: 2 Page Ref: 214 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-47 Question: The requirement that a sufficient portion of a product's content must originate within a certain market to escape tariff charges is an example of a ________.

A) trade marker B) market imperfection C) tariff quota D) maturing product Answer: B Diff: 2 Page Ref: 214 Skill: Application Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-48 Question: The ________ theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for an investment.

A) rational production B) international product life cycle C) market imperfections D) eclectic Answer: D Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-49 Question: A(n) ________ is the advantage of conducting a particular economic activity in a specific area because of the characteristics of that place.

A) industry advantage B) production advantage C) comparative advantage D) location advantage Answer: D Diff: 2 Page Ref: 215 Skill: Application Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-50 Question: A(n) ________ is the advantage that arises when a company exhibits superior technical knowledge.

A) ownership advantage B) internalization advantage C) location advantage D) market power advantage Answer: A

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Diff: 2 Page Ref: 215 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-51 Question: According to the eclectic theory, each of the following advantages must be present for a company to undertake foreign direct investment EXCEPT ________.

A) location B) ownership C) internationalization D) localization Answer: D Diff: 2 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-52 Question: The ________ theory states that a firm tries to establish a dominant presence in an industry by undertaking foreign direct investment.

A) market power B) eclectic C) market imperfections D) trade barriers Answer: A Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-53 Question: One way a company can achieve market power is through ________.

A) ownership advantages B) horizontal integration C) vertical integration D) balancing payments Answer: C Diff: 2 Page Ref: 215 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-54 Question: Which of the following is the extension of company activities into stages of production that provide a firm's inputs or absorb its outputs?

A) Horizontal integration B) Vertical integration C) Market penetration D) Collaborative diversification Answer: B Diff: 2 Page Ref: 215 Skill: Application Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-55 Question: A company that integrates backward or forward can achieve market power through ________.

A) ownership advantages B) horizontal integration C) vertical integration D) internalization Answer: C Diff: 2 Page Ref: 215 Skill: Critical Thinking

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Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-56 Question: Which of the following statements is true regarding complete ownership of a business in another country?

A) It guarantees profits.

B) It does not guarantee decision-making responsibility.

C) It does not guarantee control.

D) It guarantees government support.

Answer: C Diff: 2 Page Ref: 216 Skill: Critical Thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-57 Question: Canadian government exercises a high degree of control over the broadcasting sector because it ___________________.

A) wants to control the technology in broadcasting B) is considered critical to national security C) wants to control the type of programming offered D) wants to provide better working conditions to Canadians Answer: C Diff: 3 Page Ref: 216 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-58 Question: A subsidiary built abroad from the ground up is called a(n) ________.

A) portfolio investment B) distributive channel C) acquisition D) greenfield investment Answer: D Diff: 1 Page Ref: 217 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-59 Question: Which of the following is an example of a greenfield investment?

A) A business acquisition in Southeast Asia's former agricultural region B) The construction of an entirely new manufacturing subsidiary overseas C) A merger between a US and non-US company D) The purchase of an existing business that is still in its infancy Answer: B Diff: 2 Page Ref: 217 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-60 Question: The appeal of purchasing existing facilities is reduced by the potential for each of the following EXCEPT ________.

A) obsolete equipment B) unsuitable location C) poor relations with workers D) low wages for local workers Answer: D Diff: 1 Page Ref: 217 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-61

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Question: All of the following are benefits of acquisitions EXCEPT the ________.

A) acquisition of goodwill the company has built up over the years B) acquisition of the brand recognition of the existing company C) ability to use alternate methods to finance the purchase of the company D) acquisition of a plant or physical facility with obsolete equipment Answer: D Diff: 2 Page Ref: 217 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-62 Question: A system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest is called ________ production.

A) rationalized B) greenfield C) centralized D) maquiladora Answer: A Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-63 Question: A potential problem with rationalized production is that ________.

A) it is highly inefficient B) a work stoppage in one country can bring the entire production process to a standstill C) unionization in one country affects operations in other countries D) parts come in from multiple countries for assembly Answer: B Diff: 3 Page Ref: 218 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-64 Question: The automobile industry uses a ________ method of production.

A) fractional B) rationalized C) single-country D) component Answer: B Diff: 2 Page Ref: 218 Skill: Critical Thinking Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-65 Question: Which of the following is LEAST likely to motivate foreign direct investment?

A) Customer knowledge B) Following clients C) Following rivals D) Minimizing competition Answer: D Diff: 2 Page Ref: 219 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-66 Question: To capitalize on buyer perceptions of high quality, a watchmaker might produce in which of the following countries?

A) Argentina B) Thailand

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C) South Africa D) Switzerland Answer: D Diff: 1 Page Ref: 219 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-67 Question: The practice of "following clients" can be expected in industries having ________.

A) few suppliers B) many suppliers C) supply clusters D) suppliers and manufacturers with close working relationships Answer: D Diff: 2 Page Ref: 219 Skill: Critical Thinking Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-68 Question: The ________ represents a country's national accounting system that records all payments to entities in other countries and all receipts coming into the nation.

A) balance of payments B) credit account C) capital account D) current account Answer: A Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-69 Question: A nation's balance of payments consists of two components: the ________ account and the ________ account.

A) current; past-due B) capital; fixed C) current; capital D) merchandise; services Answer: C Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-70 Question: If a Canadian company receives payment for consulting services provided to a company in another country, the receipt is recorded in the _____________.

A) capital account B) current account C) income account D) balance of payments account Answer: B Diff: 2 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-71 Question: Which of the following records transactions involving the export of services?

A) Income receipts account B) Capital account C) Income payments account

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D) Current account Answer: D Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-72 Question: Governments intervene to keep their balance of payments under control for all of the following reasons EXCEPT ____________.

A) to impose local content requirements.

B) to create exports generated by the new production operation.

C) to boost the balance to payments from an initial FDI D) to transfer assets back to the home country Answer: D Diff: 3 Page Ref: 222 Skill: Critical Thinking Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-73 Question: Exports and imports of tourism and business consulting are included in which of the following?

A) Services within the current account B) Capital account C) Merchandise within the current account D) Corporate account Answer: A Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-74 Question: Exports and imports of tangible goods are included in the ________ account within the current account.

A) exports B) capital C) merchandise D) corporate Answer: C Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-75 Question: Exports and imports of computer software, electronic components, and apparel would be reflected in the ________ account within the current account.

A) services B) capital C) merchandise D) corporate Answer: C Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-76 Question: Which of the following occurs when a country exports more goods and services and receives more income from abroad than it imports?

A) Current account deficit B) Capital account surplus C) Current account surplus D) Capital account deficit Answer: C

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Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-77 Question: Which of the following is a national account that records transactions involving the purchase or sale of assets?

A) Current account B) Merchandise account C) Service account D) Capital account Answer: D Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-78 Question: When a Canadian company buys 40 percent of the publicly traded stock of a French company on France's stock market, Canada’s balance of payments records the transaction as an ________.

A) inflow of capital recorded with a plus sign B) inflow of capital recorded with a minus sign C) outflow of capital recorded with a plus sign D) outflow of capital recorded with a minus sign Answer: D Diff: 3 Page Ref: 222 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-79 Question: If a Japanese citizen invests in the Australian stock market, the transaction would show up on the capital account of ________.

A) Japan B) Australia C) neither Japan nor Australia D) both Japan and Australia Answer: D Diff: 3 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-80 Question: When a Canadian subsidiary in another country remits profits back to its parent in Canada, the receipt of profits is recorded in the ________.

A) income receipts account and given a plus sign B) income receipts account and given a minus sign C) income payments account and given a plus sign D) income payments account and given a minus sign Answer: A Diff: 3 Page Ref: 222 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-81 Question: Which of the following is a reason for host country intervention in foreign direct investment (FDI) flows?

A) FDI sends resources out of the host country B) To keep competitive local firms in business C) To improve the nation's balance of payments D) To prevent loss of technology to other countries Answer: C Diff: 2 Page Ref: 222–223

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Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-82 Question: Reasons for home nations to discourage foreign direct investment outflows include all of the following EXCEPT that it may ________.

A) send resources out of the home country B) cause loss of jobs at home C) relocate "sunset" industry jobs abroad D) damage a nation's balance of payments Answer: C Diff: 2 Page Ref: 224 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-83 Question: A home country may encourage outflows of foreign direct investment because it ________.

A) may serve to replace jobs at home B) can increase long-run competitiveness C) sends resources out of the home country D) may take the place of exports Answer: B Diff: 2 Page Ref: 224 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-84 Question: When a country provides tax breaks and low-interest loans to companies, it is using which of these to encourage inflows of foreign direct investment?

A) Financial incentives B) Technology transfer C) Infrastructure improvements D) Performance demands Answer: A Diff: 1 Page Ref: 225 Skill: Application Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Question ID: 7-85 Question: Which of the following would most likely be used by a host country to restrict incoming foreign direct investment?

A) Differential tax rates for earnings abroad B) Insurance to cover the risk of overseas investments C) Low-interest loans to investors D) Performance demands Answer: D Diff: 2 Page Ref: 225 Skill: Critical Thinking Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Question ID: 7-86 Question: Which of the following is LEAST likely to be used by home-country governments to promote outbound foreign direct investment?

A) Offering tax breaks on profits earned abroad.

B) Granting loans to firms wishing to increase their investments abroad.

C) Eliminating ownership restrictions on nondomestic investors.

D) Offering insurance to cover the risks of investments abroad.

Answer: C

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Diff: 2 Page Ref: 226 Skill: Critical Thinking Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Question ID: 7-87 Question: Home governments may use which of the following to limit the effects of outbound foreign direct investment?

A) Insurance B) Differential tax rates C) Low-interest loans D) Infrastructure improvements Answer: B Diff: 2 Page Ref: 226 Skill: Concept Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Scenario: Global Manufacturing, Inc. (GMI) GMI is a fast-growing Canadian company that wants a production system that makes each of its product's two components in the location where the cost of production is lowest. The components will then be taken to maquiladoras for final assembly. GMI purchased an existing company in Brazil to produce component A and built a subsidiary in Thailand to produce component B. Question ID: 7-88 Question: GMI's investments are examples of ________.

A) foreign direct investment B) portfolio investment C) merger D) horizontal integration Answer: A Diff: 1 Page Ref: 210 Skill: Application Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-89 Question: GMI's production system can best be described as ________.

A) following clients B) mandated benefits C) rationalized production D) market power production Answer: C Diff: 2 Page Ref: 218 Skill: Application Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-90 Question: GMI's purchase of the Brazilian company can be best classified as a(n) ________.

A) greenfield investment B) acquisition C) portfolio investment D) merger Answer: B Diff: 1 Page Ref: 211 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-91 Question: GMI's subsidiary for component B in Thailand can be best described as a(n) ________.

A) greenfield investment

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B) acquisition C) portfolio investment D) merger Answer: A Diff: 1 Page Ref: 217 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-92 Question: GMI's company purchase in Brazil and subsidiary construction in Thailand would appear in which of the following?

A) Current account of Canada B) Capital account of the World Trade Organization C) Capital accounts of Brazil, Thailand, and Canada D) Current accounts of Brazil and Thailand Answer: C Diff: 3 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Scenario: Happyland Happyland, a country of about 48 million people with beautiful beaches, vast natural resources, and a highly skilled labour force, is encouraging foreign direct investment inflows. The country has been exporting textiles, computer hardware, and software. The net result of trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.

Question ID: 7-93 Question: Looking at Happyland's international trade situation, the country is experiencing a ________.

A) current account deficit B) natural resources account surplus C) current account surplus D) capital account surplus Answer: C Diff: 1 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-94 Question: Transactions involving the export of Happyland's textile and computer products are included in its ________.

A) capital account B) merchandise account C) services account D) corporate account Answer: B Diff: 1 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-95 Question: If Happyland markets its beaches and attracts tourists, the tourism-related income would be recorded in its ________.

A) capital account B) service account C) income payments account D) merchandise account Answer: B Diff: 1 Page Ref: 221 Skill: Application

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Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-96 Question: If Happyland is successful at attracting foreign investment, transactions involving those investments would appear in the country's ________.

A) capital account B) service account C) income payments account D) merchandise account Answer: A Diff: 1 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-97 Question: Which of the following is Happyland LEAST likely to use to encourage foreign direct investment inflows?

A) Tax incentives B) Low-interest loans C) Infrastructure improvements D) Performance demands Answer: D Diff: 2 Page Ref: 226 Skill: Application Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Scenario: Blickinstock at the Crossroads Auto parts supplier, Blickinstock Ltd., would like to expand its presence in Latin America. To that end, Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary.

Keith Moon, Blickinstock's vice president of global business development, will be making a presentation to the board outlining the company's options.

Question ID: 7-98 Question: Blickinstock has identified a company that would be open to merger or acquisition. Which of the following is NOT a reason to go ahead with the merger?

A) The merger could help increase Blickinstock's global competitiveness.

B) The merger could allow the company to get a foothold in the Latin American market.

C) The merger could help to fill the gaps in Blickinstock's product line.

D) The merger would allow Blickinstock to remain focused on the home market.

Answer: D Diff: 2 Page Ref: 211 Skill: Application Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-99 Question: Which of the following is the LEAST likely reason why Blickinstock should consider building its own subsidiary?

A) The company may inherit obsolete equipment if it goes ahead with the purchase.

B) Blickinstock may find relations are poor with workers at the proposed acquisition.

C) The proposed acquisition is located in a somewhat unsuitable location because of its remoteness.

D) Workers at the existing facility are qualified to undertake Blickinstock's production tasks.

Answer: D Diff: 2 Page Ref: 217 Skill: Application Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-100 Question: If Blickinstock's home government tries to stop the company from investing in Latin America, the government may be trying to ________.

A) protect its balance of payments

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B) prevent a monopoly situation from occurring C) instill an invest-at-home focus among its home companies D) determine whether Blickinstock is a "sunset industry" company Answer: A Diff: 3 Page Ref: 221 Skill: Application Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-101 One board member has asked about the maquiladora phenomenon, which refers to ________.

A) Mexico's low-cost labour unions B) the drug cartel problems that threatens to limit legitimate production in Mexico C) the low-wage manufacturing zone in the US-Mexican border region.

D) Latin America's new model for business that allows foreign investors to take advantage of government incentives designed to attract foreign direct investment Answer: C Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Fill-In-The-Blank Question ID: 7-102 Question: ________ is an investment that does not involve obtaining a degree of control in a company.

Answer: Portfolio investment Diff: 1 Page Ref: 210 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-103 Question: The destination of most foreign direct investment inflows is ________ countries.

Answer: developed Diff: 1 Page Ref: 212 Skill: Concept Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-104 Question: The ________ theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves from development to maturity.

Answer: international product life cycle Diff: 1 Page Ref: 213–214 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-105 Question: In the ________ stage of the international product life cycle, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product.

Answer: new product Diff: 2 Page Ref: 213 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-106 Question: In the ________ stage of the international product life cycle, a company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities.

Answer: maturing product Diff: 2 Page Ref: 213 Skill: Concept

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Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-107 Question: A market that operates at peak efficiency and where goods are readily and easily available is said to be a(n) ________.

Answer: perfect market Diff: 2 Page Ref: 214 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-108 Question: The ________ theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Answer: eclectic Diff: 2 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-109 Question: The advantage of locating a particular economic activity in a specific location because of the characteristics of that location is called a(n) ________.

Answer: location advantage Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-110 Question: A(n) ________ is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Answer: internalization advantage Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-111 Question: The ________ theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment.

Answer: market power Diff: 1 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-112 Question: The extension of company activities into stages of production that provide a firm's inputs or absorb its output is called ________.

Answer: vertical integration Diff: 2 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-113 Question: Building a subsidiary abroad from the ground up is called a(n) ________.

Answer: greenfield investment Diff: 1 Page Ref: 217 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-114 Question: A system of production in which each of a product's components is produced in the location where the cost

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of producing the component is lowest is called ________.

Answer: rationalized production Diff: 2 Page Ref: 218 Skill: Concept Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-115 Question: A country's ________ is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation.

Answer: balance of payments Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-116 Question: The ________ is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country.

Answer: current account Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-117 Question: The ________ account within the current account includes exports and imports of tangible goods.

Answer: merchandise Diff: 1 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-118 Question: The ________ account within the current account includes income earned on Canadian assets held abroad.

Answer: income receipts Diff: 3 Page Ref: 221 Skill: Critical Thinking Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-119 Question: The ________ account includes income paid to entities in other nations that is earned on assets they hold in Canada.

Answer: primary income payments Diff: 3 Page Ref: 221 Skill: Critical Thinking Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-120 Question: The ________ is a national account that records transactions involving the purchase or sale of assets.

Answer: capital account Diff: 2 Page Ref: 221 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-121 Question: ________ prohibit nondomestic companies from investing in certain industries or owning certain types of businesses.

Answer: Ownership restrictions Diff: 2 Page Ref: 225 Skill: Critical Thinking Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

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Essay Question ID: 7-122 Question: What two factors propel growth in foreign direct investment?

Answer: Specific examples can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The two main drivers of FDI flows are globalization and international mergers and acquisitions.

Globalization. Years ago, barriers to trade were not being reduced, and new, creative barriers seemed to be popping

up in many nations. This presented a problem for companies that were trying to export their products to markets around the world. This resulted in a wave of FDI as many companies entered promising markets to get around growing trade barriers. But then the Uruguay Round of GATT negotiations created renewed determination to further reduce barriers to trade. As countries lowered their trade barriers, companies realized that they could now produce in the most efficient and productive locations and simply export to their markets worldwide. This set off another wave of FDI flows into low-cost, newly industrialized nations and emerging markets. Forces causing globalization to occur are, therefore, part of the reason for long-term growth in foreign direct investment. Increasing globalization is also causing a growing number of international companies from emerging markets to undertake FDI.

Mergers and Acquisitions. The number of mergers and acquisitions (M&As) and their exploding values also underlie long-term growth in foreign direct investment. In fact, cross-border M&As are the main vehicle through which companies undertake foreign direct investment. Companies based in developed nations have historically been the main participants behind cross-border M&As, but firms from developing nations are accounting for an ever greater share of global M&A activity.

Diff: 2 Page Ref: 210–212 Skill: Concept Learning Objective: 7-1: Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-123 Question: Using any two of the four theories that appear in your text, explain why companies engage in foreign direct investment.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications. a. International Product Life Cycle. The international product life cycle is used to explain foreign direct investment.

The international product life cycle theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world.

Despite its conceptual appeal, the international product life cycle theory is limited in its power to explain why companies choose FDI over other forms of market entry. A local firm in the target market could pay for (license) the right to use the special assets needed to manufacture a particular product. In this way, a company could avoid the additional risks associated with direct investments in the market. The theory also fails to explain why firms choose FDI over exporting activities. It might be less expensive to serve a market abroad by increasing output at the home country factory rather than by building additional capacity within the target market.

The theory explains why the FDI of some firms follows the international product life cycle of their products. But it does not explain why other market entry modes are inferior or less advantageous options. b. Market Imperfections (internalization). A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry—called market imperfections. Market imperfections theory states that when an imperfection in the

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market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two market imperfections that are relevant to this discussion—trade barriers and specialized knowledge. c. Eclectic Theory. The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that when all of these advantages are present, a company will undertake FDI. d. Market Power. Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking

foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

Diff: 3 Page Ref: 213–215 Skill: Synthesis Learning Objective: 7-1: Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns.

Question ID: 7-124 Question: Explain the theory of market imperfections and describe the two market imperfections.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry—called market imperfections.

Market imperfections theory states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two market imperfections that are relevant to this discussion—trade barriers and specialized knowledge.

Trade Barriers. One common market imperfection in international business is trade barriers, such as tariffs. For

example, the North American Free Trade Agreement stipulates that a sufficient portion of a product's content must originate within Canada, Mexico, or the United States for the product to avoid tariff charges when it is imported to any of these three markets.

Specialized Knowledge. The unique competitive advantage of a company sometimes consists of specialized

knowledge. This knowledge could be the technical expertise of engineers or the special marketing abilities of managers. When the knowledge is technical expertise, companies can charge a fee to companies in other countries for use of the knowledge in producing the same or a similar product. But when a company's specialized knowledge is embodied in its employees, the only way to exploit a market opportunity in another nation may be to undertake FDI. The possibility that a company will create a future competitor by charging another company for access to its knowledge is another market imperfection that can encourage FDI. Rather than trade a short-term gain (the fee charged another company) for a long-term loss (lost competitiveness), a company will prefer to undertake investment.

Diff: 2 Page Ref: 214–215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-125 Question: Distinguish between the different advantages identified by the eclectic theory.

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Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI. Diff: 2 Page Ref: 215 Skill: Critical thinking Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-126 Question: Discuss the market power theory and explain how a company can achieve market power.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

One way a company can achieve market power (or dominance) is through vertical integration—the extension of company activities into stages of production that provide a firm's inputs (backward integration) or absorb its output (forward integration). Sometimes a company can effectively control the world supply of an input needed by its industry if it has the resources or ability to integrate backward into supplying that input. Companies may also be able to achieve a great deal of market power if they can integrate forward to increase control over output. For example, they could perhaps make investments in distribution to leapfrog channels of distribution that are tightly controlled by competitors.

Diff: 2 Page Ref: 215 Skill: Concept Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs.

Question ID: 7-127 Question: Describe in detail any three management issues involved in foreign direct investment decisions.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications. a. Control. Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Perhaps the company wants to be certain that its product is being marketed in the same way in the local market as it is at home. Or maybe it wants to ensure that the selling price remains the same in both markets.

Some companies try to maintain ownership of a large portion of the local operation, say, even up to 100 percent, in the belief that greater ownership gives them greater control. Yet for a variety of reasons, even complete ownership does not guarantee control. For example, the local government might intervene and require a company to hire some local managers rather than bring them all in from the home office. Companies may need to prove a scarcity of skilled local managerial talent before the government will let them bring managers in from the home country. Governments might also require that all goods produced in the local facility be exported so they do not compete with products of the country's domestic firms. b. Purchase-or-Build Decision. Another important matter for managers is whether to purchase an existing business or to build a subsidiary abroad from the ground up—called a greenfield investment. An acquisition generally provides the investor with an existing plant, equipment, and personnel. The acquiring firm may also benefit from the goodwill

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the existing company has built up over the years and, perhaps, brand recognition of the existing firm. The purchase of an existing business may also allow for alternative methods of financing the purchase, such as an exchange of stock ownership between the companies. Factors that can reduce the appeal of purchasing existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location. c. Production Costs. Many factors contribute to production costs in every national market. Labour regulations can add significantly to the overall cost of production. Companies may be required to provide benefits packages for their employees that are over and above hourly wages. More time than was planned for might be required to train workers adequately to bring productivity up to an acceptable standard. Although the cost of land and the tax rate on profits can be lower in the local market (or purposely lowered to attract multinationals), it cannot be assumed that they will remain constant. Companies from around the world using China as a production base have witnessed rising wages erode their profits as the economy continues to industrialize. Some companies are therefore finding that Vietnam is their low-cost location of choice. d. Customer Knowledge. The behaviour of buyers is frequently an important issue in the decision of whether to undertake foreign direct investment. A local presence can help companies gain valuable knowledge about customers that could not be obtained from the home market. For example, when customer preferences for a product differ a great deal from country to country, a local presence might help companies to better understand such preferences and tailor their products accordingly. e. Following Clients. Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs. f. Following Rivals. FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market.

Diff: 2 Page Ref: 215–219 Skill: Synthesis Objective: 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-128 Question: Discuss in detail the role entrepreneurs and small businesses play in the expansion of FDI. What are some of the surprises that may face managers as they invest in new markets abroad?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Entrepreneurs and small businesses also play a role in the expansion of FDI inflows. There is no data on the portion of FDI contributed by small businesses, but we know from anecdotal evidence that these companies are engaged in FDI. Unhindered by many of the constraints of a large company, entrepreneurs investing in other markets often demonstrate an inspiring can-do spirit mixed with ingenuity and bravado.

Building facilities in a market abroad can be difficult. Managers can minimize risk by preparing their companies for a number of surprises they might face.

Human Resource Policies. Companies cannot always import home country policies without violating local laws or offending local customs. Countries have differing requirements for plant operations and their own regulations regarding business operations.

Labour Costs. France has a minimum wage of about $12 an hour, whereas Mexico has a minimum wage of nearly $5 a day. But Mexico's real minimum wage is nearly double that due to government-mandated benefits and employment practices. Such differences are not always obvious.

Mandated Benefits. These include company-supplied clothing and meals, required profit sharing, guaranteed employment contracts, and generous dismissal policies. These costs can exceed an employee's wages and are typically not negotiable.

Labour Unions. In some countries, organized labour is found in nearly every industry and at almost every company.

Rather than dealing with a single union, managers may need to negotiate with five or six different unions, each of

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which represents a distinct skill or profession.

Information. Sometimes there simply is no reliable data on factors such as labour availability, cost of energy, and national inflation rates. These data are generally high quality in developed countries and suspect in emerging and developing ones.

Personal and Political Contacts. These contacts can be extremely important in developing and emerging markets and can be the only way to establish operations. But complying with locally accepted practices can cause ethical dilemmas for managers.

Diff: 2 Page Ref: 212–213, 220 Skill: Synthesis Objective: 7-1 Describe worldwide patterns of foreign direct investment (FDI) and reasons for these patterns; 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-129 Question: Explain the market power theory of FDI, and discuss why the decision whether or not to follow rivals into a new international market is important.

Answer: Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

One way a company can achieve market power (or dominance) is through vertical integration—the extension of company activities into stages of production that provide a firm's inputs (backward integration) or absorb its output (forward integration). Sometimes a company can effectively control the world supply of an input needed by its industry if it has the resources or ability to integrate backward into supplying that input. Companies may also be able to achieve a great deal of market power if they can integrate forward to increase control over output. For example, they could perhaps make investments in distribution to leapfrog channels of distribution that are tightly controlled by competitors.

Whether or not to follow rivals into a new international market is an important managerial decision. FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market. When firms based in industrial countries moved back into South Africa after the end of apartheid, their competitors followed. Of course, each market can sustain only a certain number of rivals. Firms that cannot compete choose the "least damaging option."

Diff: 2 Page Ref: 215,219 Skill: Synthesis Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs; 7-3 Discuss the important management issues in the foreign direct investment decision.

Question ID: 7-130 Question: Explain the concept of balance of payments and describe its two major components.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A country's balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation. International transactions that result in payments (outflows) to entities in other nations are reductions in the balance of payments accounts and are therefore recorded with a minus sign. International transactions that result in receipts (inflows) from other nations are additions to the balance of payments accounts and thus are recorded with a plus sign.

Any nation's balance of payments consists of two major components—the current account and capital account. The

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current account is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. The merchandise account includes exports and imports of tangible goods such as computer software, electronic components, and apparel. The services account includes exports and imports of services such as tourism, business consulting, and banking services. Suppose a company in the United States receives payment for consulting services provided to a company in another country. The receipt is recorded as an "export of services" and assigned a plus sign in the services account in the balance of payments.

The capital account is a national account that records transactions involving the purchase or sale of assets. Suppose a US citizen buys shares of stock in a Mexican company on Mexico's stock market. The transaction would show up on the capital accounts of both the United States and Mexico—as an outflow of assets from the United States and an inflow of assets to Mexico. Conversely, suppose a Mexican investor buys real estate in the United States. That transaction also shows up on the capital accounts of both nations—as an inflow of assets to the United States and as an outflow of assets from Mexico.

Diff: 2 Page Ref: 221–222 Skill: Synthesis Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-131 Question: Explain how the decision whether or not to "follow clients" can lead to FDI. Discuss why a host country might promote or restrict foreign direct investment.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs.

Nations often intervene in the flow of FDI to protect their cultural heritages, domestic companies, and jobs. They can enact laws, create regulations, or construct administrative hurdles that companies from other nations must overcome if they want to invest in the nation. Yet rising competitive pressure is forcing nations to compete against each other to attract multinational companies. The increased national competition for investment is causing governments to enact regulatory changes that encourage investment. The vast majority of regulatory changes that governments introduced in recent years are more favourable to FDI. In a general sense, a bias toward protectionism or openness is rooted in a nation's culture, history, and politics.

Values, attitudes, and beliefs form the basis for much of a government's position regarding foreign direct investment.

For example, South American nations with strong cultural ties to a European heritage (such as Argentina) are generally enthusiastic about investment received from European nations. South American nations with stronger indigenous influences (such as Ecuador) are generally less enthusiastic.

Opinions vary widely on the appropriate amount of foreign direct investment a country should encourage. At one extreme are those who favour complete economic self-sufficiency and oppose any form of FDI. At the other extreme are those who favour no governmental intervention and booming FDI inflows. Between these two extremes lie most countries, which believe a certain amount of FDI is desirable to raise national output and enhance the standard of living for their people.

Diff: 3 Page Ref: 219, 221–224 Skill: Synthesis Objective: 7-3 Discuss the important management issues in the foreign direct investment decision; 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-132 Question: Why are R&D costs important to assess when considering FDI? Even given its costs, how can FDI benefit the host country with access to technology, management skills, and employment?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the

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textbook, class discussions, Internet, and/or newspapers and other publications.

R&D costs are important production costs for companies considering FDI, and they have increased in recent years.

As technology becomes an increasingly powerful competitive factor, the soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions. For instance, huge multinational pharmaceutical companies are intensely interested in the pioneering biotechnology work done by smaller, entrepreneurial startups.

One indicator of technology's significance in foreign direct investment is the amount of R&D conducted by companies' affiliates in other countries. The globalization of innovation and the phenomenon of foreign direct investment in R&D are not necessarily motivated by demand factors such as the size of local markets. They instead appear to be encouraged by supply factors, including gaining access to high-quality scientific and technical human capital.

Even given its costs, FDI can benefit a host country by providing new technology and labour skills to its citizens.

Investment in technology, whether in products or processes, tends to increase the productivity and the competitiveness of a nation. That is why host nations have a strong incentive to encourage the importation of technology. For years, developing countries in Asia were introduced to expertise in industrial processes as multinationals set up factories within their borders.

Many formerly communist nations suffer from a lack of management skills needed to succeed in the global economy.

By encouraging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of their domestic companies. Furthermore, locals who are trained in modern management techniques may eventually start their own local businesses—further expanding employment opportunities. Yet detractors argue that, although FDI may create jobs, it may also destroy jobs because less competitive local firms may be forced out of business.

Diff: 3 Page Ref: 218–219, 223–224 Skill: Synthesis Objective: 7-3 Discuss the important management issues in the foreign direct investment decision; 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-133 Question: Identify why a home country might support or discourage outgoing foreign direct investment.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Home nations (those from which international companies launch their investments) may also seek to encourage or discourage outflows of FDI for a variety of reasons. But home nations tend to have fewer concerns because they are often prosperous, industrialized nations. For these countries, an outward investment seldom has a national impact— unlike the impact on developing or emerging nations that receive the FDI. Nevertheless, among the most common reasons for discouraging outward FDI are the following:

Investing in other nations sends resources out of the home country. As a result, fewer resources are used for

development and economic growth at home. On the other hand, profits on assets abroad that are returned home increase both a home country's balance of payments and its available resources.

Outgoing FDI may ultimately damage a nation's balance of payments by taking the place of its exports. This can

occur when a company creates a production facility in a market abroad, the output of which replaces exports that used to be sent there from the home country.

Jobs resulting from outgoing investments may replace jobs at home. This is often the most contentious issue for

home countries. The relocation of production to a low-wage nation can have a strong impact on a locale or region.

However, the impact is rarely national, and its effects are often muted by other job opportunities in the economy. In addition, there may be an offsetting improvement in home country employment if additional exports are needed to support the activity represented by the outgoing FDI. But foreign direct investment is not always a negative influence on home nations. In fact, under certain circumstances, governments might encourage it. Countries promote outgoing FDI for the following reasons:

Outward FDI can increase long-term competitiveness. Businesses today frequently compete on a global scale. The

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most competitive firms tend to be those that conduct business in the most favourable location anywhere in the world, continuously improve their performance relative to competitors, and derive technological advantages from alliances formed with other companies. Japanese companies have become masterful at benefiting from FDI and cooperative arrangements with companies from other nations. The key to their success is that Japanese companies see every cooperative venture as a learning opportunity.

Nations may encourage FDI in industries identified as "sunset" industries. Sunset industries are those that use outdated and obsolete technologies or employ low-wage workers with few skills. These jobs are not greatly appealing to countries having industries that pay skilled workers high wages. By allowing some of these jobs to go abroad and retraining workers in higher-paying skilled work, they can upgrade their economies toward "sunrise" industries. This represents a trade-off for governments between a short-term loss of jobs and the long-term benefit of developing workers' skills.

Diff: 3 Page Ref: 224 Skill: Concept Objective: 7-4 Explain why governments intervene in the free flow of foreign direct investment.

Question ID: 7-134 Question: Explain the methods of restricting and promoting foreign direct investment that home and host countries can use.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Host Countries: Promotion Financial Incentives. Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time—extending as far out as five years or more. A country may also offer low-interest loans to investors.

The downside of these types of incentives is they can allow multinationals to create bidding wars between locations that are vying for the investment. In such cases, the company typically invests in the most appealing region after the locations endure rounds of escalating incentives. Companies have even been accused of engaging other governments in negotiations to force concessions from locations already selected for investment. The cost to taxpayers of attracting FDI can be several times what the actual jobs themselves pay—especially when nations try to one-up each other to win investment.

Infrastructure Improvements. Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements—better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.

Host Countries: Restriction Host countries also have a variety of methods to restrict incoming FDI. Again, these take two general forms— ownership restrictions and performance demands.

Ownership Restrictions. Governments can impose ownership restrictions that prohibit nondomestic companies from

investing in certain industries or from owning certain types of businesses. Such prohibitions typically apply to businesses in cultural industries and companies vital to national security. Also, most nations do not allow FDI in their domestic weapons or national defense firms. Another ownership restriction is a requirement that nondomestic investors hold less than a 50 percent stake in local firms when they undertake foreign direct investment.

But nations are eliminating such restrictions because companies today often can choose another location that has no such restriction in place.

Performance Demands. More common than ownership requirements are performance demands that influence how

international companies operate in the host nation. Although typically viewed as intrusive, most international companies allow for them in the same way they allow for home country regulations. Performance demands include ensuring that a portion of the product’s content originates locally, stipulating the portion of output that must be exported, or requiring that certain technologies be transferred to local businesses.

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Home Countries: Promotion To encourage outbound FDI, home country governments can do any of the following: Offer insurance to cover the risks of investments abroad, including, among others, insurance against expropriation of assets and losses from armed conflict, kidnappings, and terrorist attacks.

Grant loans to firms wishing to increase their investments abroad. A home country government may also guarantee the loans that a company takes from financial institutions.

Offer tax breaks on profits earned abroad or negotiate special tax treaties. For example, several multinational agreements reduce or eliminate the practice of double taxation—profits earned abroad being taxed both in the home and host countries.

Apply political pressure on other nations to get them to relax their restrictions on inbound investments. NonJapanese companies often find it very difficult to invest inside Japan. The United States, for one, repeatedly pressures the Japanese government to open its market further to FDI. But because such pressure has achieved little success, many US companies cooperate with local Japanese businesses.

Home Countries: Restriction On the other hand, to limit the effects of outbound FDI on the national economy, home governments may exercise either of the following two options: Impose differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings.

Impose outright sanctions that prohibit domestic firms from making investments in certain nations.

Diff: 3 Page Ref: 225–226 Skill: Synthesis Objective: 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

Question ID: 7-135 Question: Explain the view of the "eclectic theory" of FDI regarding when FDI will be undertaken. How might a host country offer incentives to attract FDI? Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI. Host countries offer a variety of incentives to encourage FDI inflows. These take two general forms—financial incentives and infrastructure improvements.

Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time— extending as far out as five years or more. A country may also offer low-interest loans to investors.

Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements—better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.

Diff: 2 Page Ref: 215, 225 Skill: Synthesis

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Chapter 7 Foreign Direct Investment

Objective: 7-2 Describe each of the theories that attempt to explain why foreign direct investment occurs; 7-5 Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Chapter 8 Regional Economic Integration True/False Question ID: 8-1 Question: Trade agreements are lowering trade barriers and opening new markets for goods and services.

Answer: TRUE Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-2 Question: A group of nations in a geographic region undergoing economic integration is called a regional trading bloc.

Answer: TRUE Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-3 Question: A common market area is the greatest extent of national integration.

Answer: FALSE Diff: 1 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-4 Question: In a free trade area, each country is able to maintain whatever policy it sees fit against non-member countries.

Answer: TRUE Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-5 Question: A common market requires that member nations harmonize their tax, monetary, and fiscal policies, and that they create a common currency.

Answer: FALSE Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-6 Question: Countries belonging to the free trade area must concede a certain amount of their national autonomy (or sovereignty) to the supranational union of which they are a part.

Answer: FALSE Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-7 Question: Canada and the United States are examples of early formations of political unions.

Answer: TRUE Diff: 1 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-8 Question: A political union requires nations to accept a common stance on all economic and political policies within

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their territories.

Answer: FALSE Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-9 Question: The increase in the level of trade between nations that results from regional economic integration is called trade creation.

Answer: TRUE Diff: 2 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-10 Question: One result of trade creation is that buyers pay higher prices for imported goods and services after trade barriers are removed.

Answer: FALSE Diff: 2 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-11 Question: The greatest benefit of regional integration is trade diversion.

Answer: FALSE Diff: 2 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-12 Question: Economic integration can unintentionally reward a less efficient producer within a trading bloc.

Answer: TRUE Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-13 Question: When trade diversion occurs, buyers will likely pay less for products.

Answer: FALSE Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-14 Question: In regional economic integration, industries requiring mostly unskilled labour will tend to shift production to low-wage nations within a trading bloc.

Answer: TRUE Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-15 Question: A benefit of regional economic integration is that it always expands employment opportunities in all nations.

Answer: FALSE Diff: 1 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-16

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Question: The least amount of sovereignty that must be surrendered to the trading bloc occurs in a political union.

Answer: FALSE Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-17 Question: The goal of the Single European Act was to reduce the ability of European companies to compete against companies from Japan and North America.

Answer: FALSE Diff: 3 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-18 Question: The Maastricht Treaty called for eventual political union of the member nations.

Answer: TRUE Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-19 Question: The European Parliament fulfills its role of adopting European Union law by debating and amending legislation.

Answer: TRUE Diff: 2 Page Ref: 243–244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-20 Question: The Council of the European Union (EU) is the legislative body of the EU. Answer: TRUE Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-21 Question: The Court of Justice is the court of appeals of the European Union.

Answer: TRUE Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-22 Question: Like the European Union (EU) commissioners, EU justices are required to act in the interest of their native countries.

Answer: FALSE Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 9-23 Question: The European Union (EU) and European Free Trade Association (EFTA) created the European Economic Area to cooperate on matters such as the free movement of goods, persons, services, and capital.

Answer: TRUE Diff: 2 Page Ref: 245 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-24

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Question: Canada and the European Union successfully concluded a free trade agreement in 2013.

Answer: TRUE Diff: 1 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-25 Question: European Free Trade Association (EFTA) consists of four countries that were reluctant to join the EU. Answer: TRUE Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-26 Question: The North American Free Trade Agreement membership includes Canada, Mexico, and the United States.

Answer: TRUE Diff: 1 Page Ref: 246 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-27 Question: The Southern Common Market is also referred to as MERCOSUR. Answer: TRUE Diff: 1 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-28 Question: Today, the Southern Common Market (MERCOSUR) acts as a political union.

Answer: FALSE Diff: 3 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-29 Question: The Caribbean Community and Common Market (CARICOM) was formed in 1961 as a common market between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

Answer: FALSE Diff: 3 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-30 Question: Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the Association of Southeast Asian Nations (ASEAN) in 1967.

Answer: TRUE Diff: 2 Page Ref: 252 Skill: Concept Objective: 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Question ID: 8-31 Question: The primary purpose of the Gulf Cooperation Council (GCC) at its formation was to create a political union between Iraq and Iran.

Answer: FALSE Diff: 2 Page Ref: 253 Skill: Concept

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Objective: 8-6 Describe integration in Middle East and Africa, and explain the slow progress.

Question ID: 8-32 Question: NAFTA is a good example of trade diversion.

Answer: TRUE Diff: 2 Page Ref: 247 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-33 Question: NAFTA does not include provisions for environmental protection.

Answer: FALSE Diff: 1 Page Ref: 247 Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-34 Question: Under NAFTA terms, Canada must make majority of its natural gas supplies available for export to the United States.

Answer: TRUE Diff: 1 Page Ref: 247 Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Multiple Choice Question ID: 8-35 Question: The process whereby countries in a geographic region cooperate with one another to reduce or eliminate barriers to the flow of products, people, or capital is called ________.

A) regional economic integration B) region-first policy C) intra-nation pact D) trade union Answer: A Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-36 Question: A group of nations in a geographic region undergoing economic integration is called a ________.

A) regional trade area B) regional market C) regional trading bloc D) foreign direct investment bloc Answer: C Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-37 Question: Nations undergoing economic integration desire to accomplish each of the following EXCEPT ________.

A) increase cross-border investment B) raise living standards for their people C) increase cross-border trade D) establish unified government Answer: D Diff: 2 Page Ref: 234 Skill: Concept

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-38 Question: Which of the following is NOT a potential goal of regional economic integration?

A) Protection of intellectual property rights B) Reduced environment degradation C) Creation of a political union D) Reduced cross-border investment Answer: D Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-39 Question: Which of the following is the lowest level of regional integration?

A) Free trade area B) Political union C) Common market D) Customs union Answer: A Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-40 Question: Economic integration whereby countries remove all barriers to trade among themselves, but each country determines its own barriers against non-members, is called a(n) ________.

A) economic union B) customs union C) common market D) free trade area Answer: D Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-41 Question: Economic integration whereby countries remove all barriers to trade among themselves, but erect a common trade policy against non-members is called a(n) ________.

A) economic union B) customs union C) common market D) free trade area Answer: B Diff: 2 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-42 Question: The main difference between a free trade area and a customs union is that the members of a customs union ________.

A) agree to the free movement of all factors of production B) harmonize their tax, monetary, and fiscal policies and create a common currency C) agree to treat trade with all non-member nations in a similar manner D) accept a common stance on economic and political policies regarding non-member nations Answer: C Diff: 3 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

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Question ID: 8-43 Question: Economic integration whereby countries remove all barriers to trade and the movement of labour and capital between themselves and erect a common trade policy against non-members is called a(n) ________.

A) economic union B) customs union C) common market D) political union Answer: C Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-44 Question: A(n) ________ represents the greatest degree of regional integration.

A) economic union B) political union C) common market D) customs union Answer: B Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-45 Question: Economic integration whereby countries remove barriers to trade and the movement of labour and capital, erect a common trade policy against non-members, and coordinate their economic policies is called a(n) ________.

A) customs union B) common market C) economic union D) free trade area Answer: C Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-46 Question: Which of the following is best classified as an economic union?

A) Southern Common Market (MERCOSUR) B) European Union (EU) C) North American Free Trade Agreement (NAFTA) D) Andean Community Answer: B Diff: 3 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-47 Question: A(n) ________ requires member nations to harmonize their tax, monetary, and fiscal policies and create a common currency.

A) customs union B) economic union C) free trade area D) common market Answer: B Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-48 Question: Integration whereby countries coordinate aspects of their economic and political systems is called a(n)

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

________.

A) free trade area B) common market C) political union D) economic union Answer: C Diff: 1 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-49 Question: Canada and the United States are early examples of ________.

A) customs unions B) free trade areas C) economic unions D) political unions Answer: D Diff: 3 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-50 Question: A group of nations currently taking steps toward political union is ________.

A) European Union (EU) B) Southern Common Market (MERCOSUR) C) Andean Community D) North American Free Trade Agreement (NAFTA) Answer: A Diff: 1 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-51 Question: Higher levels of trade between nations result in all of the following EXCEPT ________.

A) greater standardization B) increased efficiency C) greater consumption D) higher standards of living Answer: A Diff: 2 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-52 Question: The increase in the level of trade among nations that results from regional economic integration is called ________.

A) trade diversion B) trade restriction C) trade creation D) trade embargo Answer: C Diff: 1 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-53 Question: Which of the following is NOT a result of trade creation?

A) Lower costs tend to lead to higher demand for goods.

B) Buyers can acquire goods and services at lower cost.

C) Consumers are faced with a wider selection of goods.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

D) Imported goods are available at higher prices.

Answer: D Diff: 2 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 9-54 Question: All of the following are potential drawbacks of regional integration EXCEPT ________.

A) loss of national sovereignty B) shifts in employment C) trade diversion D) greater consensus Answer: D Diff: 2 Page Ref: 237–238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-55 Question: All of the following are true of trade diversion EXCEPT that it ________.

A) is the opposite of trade creation B) can unintentionally reward a less-efficient producer within the trading bloc C) can increase prices of products D) guarantees consumers a wider selection of goods Answer: D Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-56 Question: Studies of the Southern Common Market (MERCOSUR) found that the net effect of the agreement was ________.

A) trade diversion B) trade creation C) slower trade D) regional inflation Answer: B Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-57 Question: Which of the following requires nations to give up the least amount of sovereignty?

A) Economic union B) Common market C) Free trade area D) Political union Answer: C Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-58 Question: The most sophisticated and advanced example of regional integration today is occurring in which of the following?

A) Asia B) Europe C) North America D) Africa Answer: B Diff: 2 Page Ref: 239

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Skill: Application Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-59 Question: In 1951, Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands created the ________.

A) European Union B) European Economic Community C) European Coal and Steel Community D) European Free Trade Area Answer: C Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-60 Question: Which of the following created the European Economic Community?

A) The Treaty of Rome B) The Maastricht Treaty C) The Single European Act D) The Paris Treaty Answer: A Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-61 Question: The Treaty of Rome aimed at establishing common policies among member nations for ________.

A) textiles and retail goods B) transportation and agriculture C) metal and cyclical products D) meat products and telecommunications Answer: B Diff: 3 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 9-62 Question: Today, the number of European Union (EU) members stands at ________.

A) 8 B) 13 C) 27 D) 18 Answer: C Diff: 3 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 9-63 Question: The EU's goals of removing trade barriers, increasing harmonization, and enhancing the competitiveness of European companies were put forward in which of the following?

A) Maastricht Treaty B) European Monetary Union C) Single European Act D) Copenhagen Criteria Answer: C Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-64

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Question: The ________ called for banking in a single common currency, setting up monetary and fiscal targets for countries taking part in monetary union, and political union of member nations.

A) Maastricht Treaty B) European Monetary Union C) Single European Act D) Copenhagen Criteria Answer: A Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-65 Question: The Maastricht Treaty did all of the following EXCEPT ________.

A) call for a common currency B) establish targets for monetary union C) call for political union of member nations D) call for a customs union of member nations Answer: D Diff: 2 Page Ref: 238 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-66 Question: The European Union plan that established its own central bank and currency in January 1999 is known as the ________.

A) Single European Act B) European Monetary Union C) Copenhagen Criteria D) European currency exchange Answer: B Diff: 1 Page Ref: 239, 242 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-67 Question: The common currency of the European Union is known as the ________.

A) eurofranc B) eurodollar C) euro D) euromark Answer: C Diff: 1 Page Ref: 242 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-68 Question: Which of the following European Union countries opted out of transition to the euro?

A) Norway B) Sweden C) Switzerland D) Finland Answer: B Diff: 3 Page Ref: 242 Skill: Application Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-69 Question: All of the following are true of the euro EXCEPT that it ________.

A) eliminates exchange rate risk for business deals between members B) reduces transaction costs by eliminating the cost of converting currencies

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C) makes prices between markets more transparent D) is not accepted among merchants in France, Germany, and Italy Answer: D Diff: 2 Page Ref: 243 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-70 Question: Which of the following countries is expected to have difficult negotiations regarding its application for European Union membership?

A) Bulgaria B) Czech Republic C) Romania D) Turkey Answer: D Diff: 3 Page Ref: 243 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-71 Question: All of the following institutions play important roles in monitoring and enforcing economic and political integration in the European Union EXCEPT the ________.

A) European Parliament B) Council of the European Union C) European Supreme Court D) European Commission Answer: C Diff: 2 Page Ref: 243–244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-72 Question: The Court of Justice is the ________ of the European Union.

A) Supreme Court B) court of appeals C) small-claims court D) capital crimes court Answer: B Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-73 Question: The Council of the European Union is the ________ body of the European Union.

A) legislative B) executive C) financial D) monitoring Answer: A Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-74 Question: The European Commission is the ________ body of the European Union.

A) legislative B) executive C) financial D) monitoring Answer: B

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Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-75 Question: Which of the following is NOT a member of European Free Trade Association today?

A) Sweden B) Liechtenstein C) Norway D) Switzerland Answer: A Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-76 Question: Which of the following countries is NOT a member of the North American Free Trade Agreement (NAFTA)?

A) Mexico B) United States C) Chile D) Canada Answer: C Diff: 1 Page Ref: 246 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-77 Question: The North American Free Trade Agreement comprises a market of ________ consumers.

A) 120 million B) 220 million C) 320 million D) 450 million Answer: D Diff: 3 Page Ref: 246 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-78 Question: The largest market for US exports today is _____________.

A) China B) Canada C) Mexico D) South Korea Answer: B Diff: 3 Page Ref: 247 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-79 Question: What does the “proportional sharing provision” of NAFTA mean to Canada?

A) United States and Mexico will share their natural resources with Canada.

B) Mexican natural resources will be processes in part by Canadian manufacturers.

C) Two-thirds of Canadian oil needs to be available for export to the United States.

D) Half of Canada’s lumber exports will go to forest poor Mexico.

Answer: C Diff: 3 Page Ref: 247 Skill: Application

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Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-80 Question: NAFTA has not expanded beyond the original three countries due to _____.

A) lack of interest from other countries B) difficulties between the original three members C) differences in cultures from interested countries D) opposition groups and political obstacles Answer: C Diff: 3 Page Ref: 248 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-81 Question: Conducting successful business in Mexico requires all of the following EXCEPT __________.

A) building personal relationships B) behaving in a casual manner in all situations C) finding a local partner D) hiring a local lawyer Answer: B Diff: 2 Page Ref: 249 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-82 Question: Main objectives of the Andean Community include all of the following EXCEPT ________.

A) tariff reduction B) a common external tariff C) common policies in transportation D) a common currency Answer: D Diff: 3 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-83 Question: Today, the Andean Community is best described as a somewhat incomplete ________.

A) free trade area B) customs union C) common market D) political union Answer: B Diff: 2 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-84 Question: ALADI refers to the ________.

A) Latin American Integration Association B) Southern Common Market Association C) Central American Common Market D) Latin American Free Trade Area Answer: A Diff: 2 Page Ref: 250 Skill: Concept

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Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-85 Question: Today, the Southern Common Market (MERCOSUR) is best described as a(n) ________.

A) economic union B) political union C) customs union D) European Union Answer: C Diff: 2 Page Ref: 150 Skill: Application Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-86 Question: The main challenge facing the Caribbean Community and Common Market (CARICOM) is ________.

A) that the bloc has not yet signed an agreement calling for a single market B) that military conflicts continue to hamper efforts to move toward political union C) that most members trade more with non-members than they do with each other D) the difficulty in persuading Chile to become a member Answer: C Diff: 2 Page Ref: 250–251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-87 Question: A common market between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua is referred to as the ________.

A) Latin American Common Market (LACM) B) Central American Common Market (CACM) C) North American Common Market (NACM) D) Southern Common Market (MERCOSUR) Answer: B Diff: 2 Page Ref: 251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-88 Question: Which of the following has adopted the US dollar as its official currency?

A) El Salvador B) Honduras C) Nicaragua D) Costa Rica Answer: A Diff: 2 Page Ref: 251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-89 Question: The Free Trade Area of the Americas (FTAA) is a trade agreement ________.

A) between Mexico, Canada, and the United States B) among the South American nations C) that has been proposed to include all of North and South America D) that includes Brazil, Canada, the United States, and Mexico Answer: C Diff: 2 Page Ref: 251

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Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-90 Question: The only Western Hemisphere nation that would be excluded from participating in the Free Trade Area of the Americas (FTAA) is ________.

A) Colombia B) Mexico C) the United States D) Cuba Answer: D Diff: 1 Page Ref: 251 Skill: Application Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-91 Question: Each of the following is an objective of the Association of Southeast Asian Nations (ASEAN) EXCEPT ________.

A) promote economic, social, and cultural development in the region B) safeguard the region's economic and political stability C) serve as a forum in which differences can be resolved fairly and peacefully D) halving members' tariff rates from an average of 15 percent to 7.5 percent Answer: D Diff: 2 Page Ref: 252 Skill: Concept Objective: 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Question ID: 8-92 Question: The stated aim of the organization for Asia Pacific Economic Cooperation (APEC) is to ________.

A) build another trading bloc B) create a political union C) strengthen the multilateral trading system D) create a single unified economic union Answer: C Diff: 2 Page Ref: 252–253 Skill: Concept Objective: 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Scenario: Moonland Union Twenty-six nations, A through Z countries of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create Moonland Union. They are not sure, however, to what extent they want to cooperate.

Question ID: 8-93 Question: The process undertaken by these 26 countries is an example of ________.

A) foreign direct investment B) regional common marketing C) economic domestication D) regional economic integration Answer: D Diff: 1 Page Ref: 234 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-94 Question: As a first stage of cooperation, the countries agree to remove all barriers to trade among themselves. Each country determines its own barriers against non-members. At this stage, Moonland Union can be described as a

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________.

A) free trade area B) political union C) common market D) customs union Answer: A Diff: 2 Page Ref: 234 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-95 Question: If these 26 nations continue to eliminate all barriers to trade among themselves and erect a common trade policy against non-members, they would create a(n) ________.

A) free trade area B) economic union C) customs union D) common market Answer: C Diff: 2 Page Ref: 234–235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-96 Question: Some countries in Moonland Union are interested not just in free trade among themselves and a common trade policy against non-members, but also in removing all barriers to the movement of labour and capital among themselves. This type of integration is best described as a(n) ________.

A) free trade area B) economic union C) customs union D) common market Answer: D Diff: 2 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-97 Question: Country M wants member nations to harmonize their tax, monetary, and fiscal policies and to create a common currency. Country M is requesting a(n) ________.

A) free trade area B) economic union C) customs union D) common market Answer: B Diff: 2 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-98 Question: Country X advocates for the member nations to achieve the greatest level of integration, even beyond that which would accompany harmonized economic policies and a common currency. Country X most likely supports which of the following?

A) Political union B) Free trade area C) Customs union D) Economic union Answer: A Diff: 2 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

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Scenario: Zucoland Zucoland, a small-sized country just south of the Andes mountain range, was invited to join a regional trading bloc.

The government of Zucoland is considering the benefits and costs of joining such a bloc. The government is attracted by the fact that this trading bloc requires Zucoland to give up the least amount of sovereignty compared to other types of blocs.

Question ID: 8-99 Question: The regional trading bloc that Zucoland will be joining is most likely a(n) ________.

A) economic union B) free trade area C) customs union D) political union Answer: B Diff: 2 Page Ref: 234 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-100 Question: If all countries in the bloc are asked to give up the greatest amount of sovereignty, they would most likely be joining a(n) ________.

A) economic union B) free trade area C) customs union D) political union Answer: D Diff: 2 Page Ref: 235 Skill: Application Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-101 Question: Which of the following would the government of Zucoland most likely experience as a benefit of joining the trading bloc?

A) Trade diversion B) Increased national sovereignty C) Greater consensus D) Production shifts to low-wage nations Answer: C Diff: 2 Page Ref: 237 Skill: Application Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-102 Question: Joining a trading block has some drawbacks also. Zuocoland would likely experience all of the following drawbacks EXCEPT ________.

A) loss of national sovereignty B) loss of military power C) trade diversion D) shifts in employment Answer: C Diff: 1 Page Ref: 237–238 Skill: Application Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Scenario: EU Primer The tiny but important country of Alpenzell has been invited to join the European Union (EU). However, there is a lot of confusion among the country's population as to exactly how the EU operates. Alpenzell’s Office of Public Affairs is putting together a flyer outlining some of the EU's basic operating components and needs help answering the following questions.

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Question ID: 8-103 Question: The ________ fulfills its role of adopting EU law by debating and amending legislation proposed by the European Commission.

A) Council of the European Union B) European Parliament C) Court of Justice D) Court of Auditors Answer: B Diff: 3 Page Ref: 243 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-104 Question: The ________ is the court of appeals of the EU. A) Council of the EU B) European Parliament C) Court of Justice D) Court of Auditors Answer: C Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-105 Question: The ________ brings together representatives of member states at the ministerial level to vote on proposed legislation.

A) European Parliament B) European Commission C) Council of the European Union D) Court of Justice Answer: C Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-106 Question: The ________ drafts legislation, is responsible for managing and implementing policy, and monitors nations' implementation of, and compliance with, EU law.

A) European Parliament B) European Commission C) Council of the European Union D) Court of Justice Answer: B Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Scenario: Learning from the Americas The newly-formed countries that emerged after the breakup of the United Frontier States (UFS) are interested in learning more about integration in the Americas. Because the former UFS nations have many similarities with the countries of North and South America, they believe they can learn from the integration experience in the Americas.

To that end, they pose the following questions.

Question ID: 8-107 Question: The regional trade agreement between Canada, Mexico, and the United States to eliminate tariffs and nontariff barriers between themselves is known as the ________.

A) Latin Free Trade Association B) Andean Community

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C) Caribbean Community and Common Market D) North American Free Trade Agreement Answer: D Diff: 1 Page Ref: 246 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-108 Question: The North American Free Trade Agreement is best considered a ________.

A) free trade area B) customs union C) common market D) political union Answer: A Diff: 1 Page Ref: 246 Skill: Application Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-109 Question: Bolivia, Colombia, Ecuador, and Peru belong to the ________.

A) Latin Free Trade Association (LAFTA) B) North American Free Trade Agreement (NAFTA) C) Andean Community D) Latin American Integration Association (ALADI) Answer: C Diff: 2 Page Ref: 249 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-110 Question: The Andean Community most closely resembles a ________.

A) free trade area B) customs union C) common market D) political union Answer: B Diff: 2 Page Ref: 250 Skill: Application Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-111 Question: Another name for MERCOSUR is the ________.

A) Andean Community B) Southern Common Market C) Latin American Integration Association D) North American Free Trade Agreement Answer: B Diff: 1 Page Ref: 250 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

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Fill-In-The-Blank Question ID: 8-112 Question: Another term for regional economic integration is ________.

Answer: regionalism Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-113 Question: A group of nations in a geographic region undergoing economic integration is called a(n) ________.

Answer: regional trading bloc Diff: 1 Page Ref: 234 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-114 Question: The greatest extent of national integration occurs in a(n) ________.

Answer: political union Diff: 2 Page Ref: 235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-115 Question: The increase in the level of trade among nations that results from regional economic integration is called ________.

Answer: trade creation Diff: 1 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-116 Question: One result of trade creation is that buyers can acquire goods and services at ________ cost after trade barriers are lowered.

Answer: lower Diff: 1 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-117 Question: The opposite of trade creation is ________.

Answer: trade diversion Diff: 1 Page Ref: 237 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-118 Question: The first organization created as a forerunner to the EU was the 1951 creation of ____________.

Answer: The European Coal and Steel Community Diff: 3 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-119 Question: In 1991 at a summit meeting the EU member nations set as their goal to bank in a single common currency. This is the ________________.

Answer: Maastricht Treaty Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

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Question ID: 8-120 Question: The ________ is the European Union (EU) plan that established its own central bank and currency in January 1999.

Answer: European monetary union Diff: 2 Page Ref: 239, 242 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-121 Question: The main purpose of the ________ is to debate and amend legislation proposed by the European Commission.

Answer: European Parliament Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-122 Question: The ________ is the executive body of the European Union.

Answer: European Commission Diff: 2 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-123 Question: The ________ is the court of appeals of the European Union.

Answer: Court of Justice Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-124 Question: The ________ is the legislative body of the European Union.

Answer: Council of the European Union Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-125 Question: The ________ is assigned the duty of auditing the European Union accounts and implementing its budget.

Answer: Court of Auditors Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-126 Question: The European Free Trade Association (EFTA) was originally designed to focus on ________ goods.

Answer: industrial Diff: 3 Page Ref: 244 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-127 Question: The ________ was formed in 1991 and today consists of Canada, Mexico, and United States.

Answer: North American Free Trade Agreement (NAFTA) Diff: 1 Page Ref: 246 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

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Question ID: 8-128 Question: The __________________ provision of NAFTA grants the countries rights in perpetuity to share natural resources.

Answer: proportional sharing Diff: 3 Page Ref: 247 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-129 Question: Formed in 1961, the ________ creates a common market among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

Answer: Central American Common Market Diff: 3 Page Ref: 252 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-130 Question: The proposed free trade area running from Alaska to the southern tip of South America is referred to as the ________.

Answer: Free Trade Area of the Americas Diff: 2 Page Ref: 251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-131 Question: All Western Hemisphere nations EXCEPT ________ are expected to be a part of the FTAA. Answer: Cuba Diff: 1 Page Ref: 251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-132 Question: In 1967, Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the ________.

Answer: Association of Southeast Asian Nations (ASEAN) Diff: 2 Page Ref: 252 Skill: Concept Objective: 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Question ID: 8-133 Question: The 1999 Sirte Declaration created the _________________ .

Answer: African Union (AU) Diff: 2 Page Ref: 253–254 Skill: Concept Objective: 8-6 Describe integration in the Middle East and Africa, and explain the slow progress.

Question ID: 8-134 Question: The Gulf Cooperation Council has evolved to become as much a ______________ entity as an economic one.

Answer: political Diff: 3 Page Ref: 253 Skill: Concept Objective: 8-6 Describe integration in the Middle East and Africa, and explain the slow progress.

Question ID: 8-135 Question: The trading block that comprises a large portion of the economic activity in the Sub-Saharan Africa is called the __________________.

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Answer: Economic Community of West African States (ECOWAS) Diff: 2 Page Ref: 253 Skill: Concept Objective: 8-6 Describe integration in the Middle East and Africa, and explain the slow progress.

Essay Question ID: 8-136 Question: Explain in detail the five levels of economic and political integration and give examples of specific countries/regions that might fit these levels.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Free Trade Area. Economic integration whereby countries seek to remove all barriers to trade among themselves, but each country determines its own barriers against non-members, is called a free trade area. A free trade area is the

lowest level of economic integration that is possible between two or more countries. Countries belonging to the free trade area strive to remove all tariffs and nontariff barriers, such as quotas and subsidies, on international trade in goods and services. However, each country is able to maintain whatever policy it sees fit against non-member countries. These policies can differ widely from country to country. Countries belonging to a free trade area also typically establish a process by which trade disputes can be resolved.

Customs Union. Economic integration whereby countries remove all barriers to trade among themselves, but erect a common trade policy against non-members, is called a customs union. Thus, the main difference between a free

trade area and a customs union is that the members of a customs union agree to treat trade with all non-member nations in a similar manner. Countries belonging to a customs union might also negotiate as a single entity with other supranational organizations, such as the World Trade Organization.

Common Market. Economic integration whereby countries remove all barriers to trade and the movement of labour and capital among themselves, but erect a common trade policy against non-members, is called a common market.

Thus, a common market integrates the elements of free trade areas and customs unions and adds the free movement of important factors of production—people and cross-border investment. This level of integration is very difficult to attain because it requires members to cooperate to at least some extent on economic and labour policies.

Furthermore, the benefits to individual countries can be uneven because skilled labour may move to countries where wages are higher, and investment capital may flow to areas where returns are greater.

Economic Union. Economic integration whereby countries remove barriers to trade and the movement of labour and capital among members, erect a common trade policy against non-members, and coordinate their economic policies is called an economic union. An economic union goes beyond the demands of a common market by requiring member nations to harmonize their tax, monetary, and fiscal policies and to create a common currency. Economic unions require that member countries concede a certain amount of their national autonomy (or sovereignty) to the supranational union of which they are a part.

Political Union. Economic and political integration whereby countries coordinate aspects of their economic and political systems is called a political union. A political union requires member nations to accept a common stance on

economic and political matters regarding non-member nations. However, nations are allowed a degree of freedom in setting certain political and economic policies within their territories. Individually, Canada and the United States provide early examples of political unions. In both these nations, smaller states and provinces combined to form larger entities.

Diff: 2 Page Ref: 234–235 Skill: Concept Objective: 8-1 Define regional economic integration and identify its five levels.

Question ID: 8-137 Question: Discuss in detail the benefits and drawbacks of regional integration.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Benefits of regional integration: nations engage in specialization and trade because of the potential for gains in output and consumption. Higher levels of trade between nations should result in greater specialization, increased efficiency, greater consumption, and higher standards of living.

Trade Creation. Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available.

Another result of trade creation is that buyers can acquire goods and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-priced products tend to drive higher demand for goods and services because they increase purchasing power.

Greater Consensus. The World Trade Organization (WTO) works to lower barriers on a global scale. Efforts at regional economic integration differ in that they comprise smaller groups of nations—ranging from several countries to as many as 30 or more. The benefit of trying to eliminate trade barriers in smaller groups of countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 153 countries that comprise the WTO. Political Cooperation. There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

Employment Opportunities. Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage.

Drawbacks of regional integration:

Trade Diversion. The flip side of trade creation is trade diversion—the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can actually result in increased trade with a lessefficient producer within the trading bloc and reduced trade with a more efficient, non-member producer. In this sense, economic integration can unintentionally reward a less efficient producer within the trading bloc. Unless there is other internal competition for the producer’s good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer.

Shifts in Employment. Perhaps the most controversial aspect of regional economic integration is its effect on people's jobs. The formation of a trading bloc promotes efficiency by significantly reducing or eliminating barriers to trade among its members. The surviving producer of a particular good or service, then, is likely to be the bloc's most efficient producer. Industries requiring mostly unskilled labour, for example, tend to respond to the formation of a trading bloc by shifting production to a low-wage nation within the bloc.

Loss of National Sovereignty. Successive levels of integration require that nations surrender more of their national sovereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in a free trade area. By contrast, a political union requires nations to give up a high degree of sovereignty in foreign policy. This is why a political union is so hard to achieve. Long histories of cooperation or animosity between nations do not become irrelevant when a group of countries forms a union. Because one member nation may have very delicate ties with a non-member nation with which another member may have very strong ties, the setting of a common foreign policy can be extremely tricky.

Diff: 2 Page Ref: 237–238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-138 Question: Discuss in detail "free trade areas" as a level of regional economic integration. How can regional

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integration enable employment opportunities?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Economic integration whereby countries seek to remove all barriers to trade among themselves, but each country determines its own barriers against non-members, is called a free trade area. A free trade area is the lowest level of economic integration that is possible between two or more countries. Countries belonging to the free trade area strive to remove all tariffs and nontariff barriers, such as quotas and subsidies, on international trade in goods and services. However, each country is able to maintain whatever policy it sees fit against non-member countries. These policies can differ widely from country to country. Countries belonging to a free trade area also typically establish a process by which trade disputes can be resolved.

Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage. Regional integration has opened doors for young people in Europe.

Forward-looking young people have abandoned extreme nationalism and have taken on what can only be described as a "European" attitude that embraces a shared history. Those with language skills and a willingness to pick up and move to another EU country get to explore a new culture's way of life while earning a living. As companies seek their future leaders in Europe, they will hire people who can think across borders and across cultures.

Diff: 2 Page Ref: 234, 237 Skill: Synthesis Objective: 8-1 Define regional economic integration and identify its five levels; 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-139 Question: Discuss in detail "political union" as a level of economic integration; and "political cooperation" and loss of sovereignty in context of economic integration.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Economic and political integration whereby countries coordinate aspects of their economic and political systems is called a political union. A political union requires member nations to accept a common stance on economic and political matters regarding non-member nations. However, nations are allowed a degree of freedom in setting certain political and economic policies within their territories. Individually, Canada and the United States provide early examples of political unions. In both these nations, smaller states and provinces combined to form larger entities. A group of nations currently taking steps in this direction is the European Union.

There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

Successive levels of integration may require nations to surrender more of their national sovereignty. Political union is difficult to achieve because it requires nations to give up a high degree of independence in foreign policy.

Diff: 3 Page Ref: 235, 237, 238 Skill: Synthesis Objective: 8-1 Define regional economic integration and identify its five levels; 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-140 Question: Explain the concepts of trade creation and trade diversion. Who are the winners and losers in each scenario?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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Trade Creation. Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available.

Another result of trade creation is that buyers can acquire goods and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-priced products tend to drive higher demand for goods and services because they increase purchasing power.

Trade Diversion. The flip side of trade creation is trade diversion—the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can actually result in increased trade with a lessefficient producer within the trading bloc and reduced trade with a more efficient, non-member producer. In this sense, economic integration can unintentionally reward a less efficient producer within the trading bloc. Unless there is other internal competition for the producer's good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer.

Diff: 2 Page Ref: 237–238 Skill: Concept Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration.

Question ID: 8-141 Question: Describe the evolution of the European Union.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A war-torn Europe emerged from the Second World War in 1945 facing two challenges: (1) it needed to rebuild itself and avoid further armed conflict, and (2) it needed to increase its industrial strength to stay competitive with an increasingly powerful United States. Cooperation seemed to be the only way of facing these challenges. Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris in 1951, creating the European Coal and Steel Community. These nations were determined to remove barriers to trade in coal, iron, steel, and scrap metal so as to coordinate coal and steel production among themselves, thereby controlling the post-war arms industry.

The members of the European Coal and Steel Community signed the Treaty of Rome in 1957, creating the European Economic Community. The Treaty of Rome outlined a future common market for these nations. It also aimed at

establishing common transportation and agricultural policies among members. In 1967 the community's scope was broadened to include additional industries, notably atomic energy, and changed its name to the European Community. As the goals of integration continued to expand, so too did the bloc's membership. Waves of enlargement occurred in 1973, 1981, 1986, 1995, 2004, and 2007. In 1994 the bloc once again changed its name to the European Union (EU). Today the 27-member European Union has a population of about 500 million people and a GDP of around $15 trillion.

Finally the Maastricht Treaty in 1993 called for banking in a single, common currency, and a political union of the member nations including development of a common foreign and defence policy and common citizenship. Member countries agreed to hold off on the political integration until they could evaluate the success of the economic and monetary union.

Diff: 2 Page Ref: 239 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-142 Question: Discuss the European Union's efforts at a monetary union. What are the reasons behind the decision to focus one a single currency? Some countries have chosen not to participate in adopting the euro. Why do you think this is?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

EU leaders were determined to create a single, common currency. The European monetary union is the European Union plan that established its own central bank and currency in January 1999. The Maastricht Treaty stated the economic criteria with which member nations must comply to partake in the single currency, the euro. First, consumer price inflation must be below 3.2 percent and must not exceed that of the three best-performing countries by more than 1.5 percent. Second, the debt of government must be 60 percent of GDP or lower. An exception is made if the ratio is diminishing and approaching the 60 percent mark. Third, the general government deficit must be at or below 3.0 percent of GDP. An exception is made if the deficit is close to 3.0 percent or if the deviation is temporary and unusual. Fourth, interest rates on long-term government securities must not exceed, by more than 2.0 percent, those of the three countries with the lowest inflation rates. Meeting these criteria better aligned countries' economies and paved the way for smoother policy making under a single European Central Bank. The 16 EU member nations that have adopted the single currency are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The euro is seen to remove financial obstacles created by the use of multiple currencies, and eliminates exchangerate risk for business deals. The euro also reduces transaction costs by eliminating the cost of converting from one currency to another. The financial gains are tremendous. The euro makes prices between markets more transparent, making it difficult to charge different prices in adjoining markets. Shoppers feel less need to travel to other countries to save money.

Diff: 3 Page Ref: 239, 242–243 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-143 Question: Consider the effect of further expanding the European Union. What is the relevance of the Copenhagen Criteria?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

One of the most historic events across Europe in recent memory was EU enlargement from 15 to 27 members.

Croatia, Turkey, and the former Yugoslav Republic of Macedonia remain candidates for EU membership and are to become members after they meet certain demands laid down by the EU. These so-called Copenhagen Criteria require each country to demonstrate that it •

has stable institutions, which guarantee democracy, the rule of law, human rights, and respect for and protection of minorities;

•

has a functioning market economy, capable of coping with competitive pressures and market forces within the European Union;

•

is able to assume the obligations of membership, including adherence to the aims of economic, monetary, and political union; and

•

has the ability to adopt the rules and regulations of the community, the rulings of the European Court of Justice, and the treaties.

Diff: 2 Page Ref: 243 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-144 Question: Describe the structure of the European Union. How does it differ from a typical national structure of government?

Five EU institutions play particularly important roles in monitoring and enforcing economic and political integration.

European Parliament. The European Parliament consists of 736 members elected by popular vote within each

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member nation every five years. As such, they are expected to voice their particular political views on EU matters.

The European Parliament fulfills its role of adopting EU law by debating and amending legislation proposed by the European Commission. It exercises political supervision over all EU institutions—giving it the power to supervise commissioner appointments and to censure the commission. It also has veto power over some laws (including the annual budget of the EU). There is a call for increased democratization within the EU, and some believe this could be achieved by strengthening the powers of the Parliament. The Parliament conducts its activities in Belgium (in the city of Brussels), France (in the city of Strasbourg), and Luxembourg.

Council of the European Union. The council is the legislative body of the EU. When it meets, it brings together

representatives of member states at the ministerial level. The makeup of the council changes depending on the topic under discussion. For example, when the topic is agriculture, the council is composed of the ministers of agriculture from each member nation. No proposed legislation becomes EU law unless the council votes it into law. Although passage into law for sensitive issues such as immigration and taxation still requires a unanimous vote, some legislation today requires only a simple majority to win approval. The council also concludes, on behalf of the EU, international agreements with other nations or international organizations. The council is headquartered in Brussels, Belgium.

European Commission. The commission is the executive body of the EU. It comprises commissioners appointed by each member country—larger nations get two commissioners, smaller countries get one. Member nations appoint the president and commissioners after being approved by the European Parliament. It has the right to draft legislation, is responsible for managing and implementing policy, and monitors member nations' implementation of, and compliance with, EU law. Each commissioner is assigned a specific policy area, such as competitive policy or agricultural policy. Although commissioners are appointed by their national governments, they are expected to behave in the best interest of the EU as a whole, not in the interest of their own country. The European Commission is headquartered in Brussels, Belgium.

Court of Justice. The Court of Justice is the court of appeals of the EU and is composed of 27 judges (one from each

member nation) and eight advocates general who hold renewable six-year terms. One type of case that the Court of Justice hears is one in which a member nation is accused of not meeting its treaty obligations. Another type is one in which the commission or council is charged with failing to live up to its responsibilities under the terms of a treaty.

Like the commissioners, justices are required to act in the interest of the EU as a whole, not in the interest of their own countries. The Court of Justice is located in Luxembourg.

Court of Auditors. The Court of Auditors comprises 27 members (one from each member nation) appointed for

renewable six-year terms. The court is assigned the duty of auditing the EU accounts and implementing its budget. It also aims to improve financial management in the EU and report to member nations' citizens on the use of public funds. As such, it issues annual reports and statements on implementation of the EU budget. The court employs roughly 800 auditors and staff to assist it in carrying out its functions. The Court of Auditors is based in Luxembourg.

Diff: 3 Page Ref: 243–245 Skill: Concept Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-145 Question: Discuss in detail the loss of national sovereignty as a drawback for economic integration. What is the European Free Trade Association and how did the fear of loss of national sovereignty play a role in its creation?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Successive levels of integration require that nations surrender more of their national sovereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in a free trade area. By contrast, a political union requires nations to give up a high degree of sovereignty in foreign policy. This is why a political union is so hard to achieve. Long histories of cooperation or animosity between nations do not become irrelevant when a group of countries forms a union. Because one member nation may have very delicate ties with a non-member nation with which another member may have very strong ties, the setting of a common foreign policy can be extremely tricky.

Certain nations in Europe were reluctant to join in the ambitious goals of the EU, fearing destructive rivalries and a loss of national sovereignty. Some of these nations did not want to be part of a common market but instead wanted the benefits of a free trade area. So in 1960 several countries banded together and formed the European Free Trade

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Association (EFTA) to focus on trade in industrial, not consumer, goods. Because some of the original members

joined the EU and some new members joined EFTA, today the group consists of only Iceland, Liechtenstein, Norway, and Switzerland.

The population of EFTA is around 12.5 million, and it has a combined GDP of around $707 billion. Despite its relatively small size, members remain committed to free trade principles and raising standards of living for their people. The EFTA and EU created the European Economic Area (EEA) to cooperate on matters such as the free movement of goods, persons, services, and capital among member nations. The two groups also cooperate in other areas, including the environment, social policy, and education.

Diff: 3 Page Ref: 238, 244 Skill: Synthesis Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration; 8-3 Describe regional integration in Europe and its pattern of enlargement.

Question ID: 8-146 Question: Discuss in detail the effect of the formation of the North American Free Trade Agreement on member and non-member countries.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Since NAFTA came into effect, trade among the three nations has increased markedly, with the greatest gains occurring between Mexico and the United States. Today the United States exports more to Mexico than it does to Britain, France, Germany, and Italy combined. In fact, Mexico is the third largest source of US imports (behind China and Canada) and is the second largest market for U.S exports (behind Canada).

Overall, NAFTA helped trade among the three countries to grow from $297 billion in 1993 to around $1 trillion. Since the start of NAFTA, Mexico's exports to the United States jumped to around $211 billion, and US exports to Mexico grew to more than $136 billion. As these numbers suggest, the United States has developed a trade deficit with Mexico. Over the same period, Canada's exports to the United States more than doubled to nearly $300 billion, while US exports to Canada grew to $176 billion. Canada exported very little to Mexico before NAFTA, but afterward exports grew more than threefold, to nearly $2.7 billion.

NAFTA is a good example of trade diversion. Prior to NAFTA, Canadian and US companies had been establishing manufacturing facilities in Asia; however, after NAFTA came into effect, Mexico became a better option for the location of manufacturing. Transportation costs are also lower from Mexico than from South America or Asia.

Diff: 2 Page Ref: 246-247 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-147 Question: Explain the Single Europe Act and how it helped to integrate Europe. How did the Single Europe Act help prompt the creation of NAFTA? Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

By the mid-1980s, EU member nations were frustrated by remaining trade barriers and a lack of harmony on several important matters, including taxation, law, and regulations. The important objective of harmonizing laws and policies was beginning to appear unachievable. A commission that was formed to analyze the potential for a common market by the end of 1992 put forth several proposals. The goal was to remove remaining barriers, increase harmonization, and thereby enhance the competitiveness of European companies. The proposals became the Single European Act (SEA) and went into effect in 1987.

As companies positioned themselves to take advantage of the opportunities that the SEA offered, a wave of mergers and acquisitions swept across Europe. Large firms combined their special understanding of European needs, capabilities, and cultures with their advantage of economies of scale. Small and medium-sized companies were

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

encouraged through EU institutions to network with one another to offset any negative consequences resulting from, for example, changing product standards.

Accelerating integration in Europe caused new urgency in the task of creating a North American trading bloc that included Mexico. Mexico joined what is now the World Trade Organization in 1987 and began privatizing state-owned enterprises in 1988. Talks among Canada, Mexico, and the United States in 1991 eventually resulted in the formation of the North American Free Trade Agreement (NAFTA). NAFTA became effective in January 1994 and superseded the US-Canada Free Trade Agreement. Today NAFTA comprises a market with 445 million consumers and a GDP of around $16 trillion.

Diff: 2 Page Ref: 239, 246–247 Skill: Synthesis Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement; 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-148 Question: Briefly describe regional integration efforts in Central America and the Caribbean.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Attempts at economic integration in Central American countries and throughout the Caribbean basin have been much more modest than efforts elsewhere in the Americas.

The Caribbean Community and Common Market (CARICOM) trading bloc was formed in 1973. There are 15 full members, 5 associate members, and 7 observers active in CARICOM. Although the Bahamas is a member of the community, it does not belong to the common market. As a whole, CARICOM has a combined GDP of nearly $30 billion and a market of almost 6 million people.

A key CARICOM agreement calls for establishment of a CARICOM Single Market, which would establish the free movement of factors of production including goods, services, capital, and labour. The main difficulty CARICOM will continue to face is that most members trade more with non-members than they do with one another simply because members do not have the imports each other needs.

The Central American Common Market (CACM) was formed in 1961 to create a common market among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Together, the members of CACM comprise a market of 33 million consumers and have a combined GDP of about $120 billion. The common market was never realized, however, because of a long war between El Salvador and Honduras and guerrilla conflicts in several countries. Yet renewed peace is creating more business confidence and optimism, which is driving double-digit growth in trade between members.

Furthermore, the group has not yet created a customs union. External tariffs among members range between 4 and 12 percent. The tentative nature of cooperation was obvious when Honduras and Nicaragua slapped punitive tariffs on each other's goods during a recent dispute. But officials remain positive, saying that their ultimate goal is European-style integration, closer political ties, and adoption of a single currency—probably the dollar. In fact, El Salvador has adopted the US dollar as its official currency, and Guatemala already uses the dollar alongside its own currency, the quetzal.

Diff: 2 Page Ref: 249–251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-149 Question: Describe the development of the Free Trade Area of the Americas (FTAA).

Answer: A truly daunting trading bloc would be the creation of a Free Trade Area of the Americas (FTAA). The objective of the FTAA is to create the largest free trade area on the planet, stretching from the northern tip of Alaska to the southern tip of Tierra del Fuego, in South America. The FTAA would comprise 34 nations and 830 million consumers, with Cuba being the only Western Hemisphere nation excluded from participating. The FTAA would work

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

alongside existing trading blocs throughout the region.

The first official meeting, the 1994 Summit of the Americas, created the broad blueprint for the agreement. Nations reaffirmed their commitment to the FTAA at the Second Summit of the Americas four years later when negotiations began. The Third Summit of the Americas in 2001 met with fierce protests. The ambitious plan of the FTAA means that it will likely be many years before such an agreement would be realized.

Diff: 2 Page Ref: 251 Skill: Concept Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements.

Question ID: 8-150 Question: Describe the Association of Southeast Asian Nations (ASEAN).

Answer: Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the Association of Southeast Asian Nations (ASEAN) in 1967. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1998. Together, the 10 ASEAN countries comprise a market of about 560 million consumers and a GDP of nearly $1.1 trillion. The three main objectives of the alliance are to (1) promote economic, cultural, and social development in the region; (2) safeguard the region's economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully.

The decision to admit Cambodia, Laos, and Myanmar was criticized by some Western nations. The concern regarding Laos and Cambodia being admitted stems from their roles in supporting the communists during the Vietnam War. The quarrel with Myanmar centers on evidence cited by the West of its continued human rights violations.

Nevertheless, ASEAN felt that, by adding these countries to the coalition, it could counter China's rising strength and its resources of cheap labour and abundant raw materials.

Companies involved in Asia's developing economies are likely to be doing business with an ASEAN member. This is even a more likely prospect as China, Japan, and South Korea accelerate their efforts to join ASEAN. China's admission would allow the club to bridge the gap between less advanced and more advanced economies.

Diff: 2 Page Ref: 252 Skill: Concept Objective: 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Question ID: 8-151 Question: Describe some of the challenges of doing business in Mexico. How do these challenges compare with doing business with ASEAN countries?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Mexico seems like a land of untapped opportunity for Canadian business. As with any other country, opportunity needs to be balanced against the challenges of a particular location and culture, such as the following.

Formalities. Mexican society is rather formal, and it is best to tend toward the more formal unless you know your

colleague well. This includes using titles like "doctor" and "mister." It's rarely appropriate to use first names unless you're close friends.

Business Relationships. Making money is obviously important and the ultimate goal for any business. Still, building personal relationships, establishing good references, and doing favours for others can smooth the way for newcomers.

Local Partners. The Mexican culture in unique, influenced by its history as a Spanish colony. Language can be a barrier. Finding a local partner who can handle the inevitable cultural difficulties that arise is crucial.

Local Professionals. It is a good idea to hire a Mexican accountant or someone familiar with Mexican laws, taxes, and red tape. An attorney who is bilingual can also interpret differences between country laws.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

Collectivist Society. In collectivistic societies, family is very important and people are concerned about the common well-being.

Businesses unfamiliar with operating in ASEAN countries should exercise caution in their dealings. Some inescapable facts about ASEAN that warrant consideration are the following.

Diverse Cultures and Politics. The Philippines is a representative democracy, Brunei is an oil-rich sultanate, and Vietnam is a state-controlled communist country. Business policies and protocol must be adapted to each country.

Economic Competition. Many ASEAN nations are feeling the effects of China's power to attract investment from

multinationals worldwide. Whereas ASEAN members used to attract around 30 percent of foreign direct investment into Asia's developing economies, it now attracts about half that amount.

Corruption and Shadow Markets. Bribery and shadow (unofficial) markets are common in many ASEAN countries, including Indonesia, Myanmar, the Philippines, and Vietnam. Corruption studies typically place these countries at or very near the bottom of nations surveyed.

Political Change and Turmoil. Several nations in the region recently elected new leaders. Indonesia in particular has gone through presidents at a fast clip recently. Companies must remain alert to shifting political winds and laws regarding trade and investment.

Border Disputes. Parts of Thailand's borders with Cambodia and Laos are tested frequently. Hostilities break out sporadically between Thailand and Myanmar over border alignment and ethnic Shan rebels operating along the border.

Lack of Common Tariffs and Standards. Doing business in ASEAN nations can be costly. Harmonized tariffs, quality and safety standards, customs regulations, and investment rules would cut transaction costs significantly.

Diff: 2 Page Ref: 249, 252 Skill: Synthesis Objective: 8-3 Describe regional integration in Europe and its pattern of enlargement; 8-5 Characterize regional integration in Asia and how it differs from integration elsewhere.

Question ID: 8-152 Question: Compare and contrast the slow progress of the Andean Community and the Economic Community of West African States (ECOWAS). Why have these trade blocs not been more successful?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Formed in 1969, the Andean Community (in Spanish Comunidad Andina de Naciones, or CAN) includes four South American countries located in the Andes mountain range—Bolivia, Colombia, Ecuador, and Peru. Today the Andean Community comprises a market of around 97 million consumers and a combined GDP of about $220 billion. The main objectives of the group include tariff reduction for trade among member nations, a common external tariff, and common policies in both transportation and certain industries. The Andean Community had the ambitious goal of establishing a common market by 1995, but delays mean that it remains a somewhat incomplete customs union.

Several factors hamper progress. Political ideology among member nations is somewhat hostile to the concept of free markets and favours a good deal of government involvement in business affairs. Also, inherent distrust among members makes lower tariffs and more open trade hard to achieve. The common market will be difficult to implement within the framework of the Andean Community. One reason is that each country has been given significant exceptions in the tariff structure that they have in place for trade with non-member nations. Another reason is that countries continue to sign agreements with just one or two countries outside the Andean Community framework. Independent actions impair progress internally and hurt the credibility of the Andean Community with the rest of the world.

The Economic Community of West African States (ECOWAS) was formed in 1975 but restarted efforts at economic integration in 1992 because of a lack of early progress. One of the most important goals of ECOWAS is the formation of a customs union, an eventual common market, and a monetary union. Together, the ECOWAS nations comprise a

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 8 Regional Economic Integration

large portion of the economic activity in sub-Saharan Africa.

Progress on market integration is almost nonexistent. In fact, the value of trade occurring among ECOWAS nations is just 11 percent of the value that the trade members undertake with third parties. But ECOWAS has made progress in the free movement of people, construction of international roads, and development of international telecommunication links. Some of its main problems are due to political instability, poor governance, weak national economies, poor infrastructure, and poor economic policies.

Diff: 2 Page Ref: 249–250, 253 Skill: Synthesis Objective: 8-4 Discuss and analyze regional integration in the Americas, particularly regarding NAFTA and Canada’s bilateral agreements; 8-6 Describe integration in Middle East and Africa, and explain the slow progress.

Question ID: 8-153 Question: Explain how political cooperation is a benefit of regional integration. How has the Gulf Cooperation Council (GCC) evolved towards political cooperation?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

Several Middle Eastern nations formed the Gulf Cooperation Council (GCC) in 1980. Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The primary purpose of the GCC at its formation was to cooperate with the increasingly powerful trading blocs in Europe at the time—the EU and EFTA. The GCC has evolved, however, to become as much a political entity as an economic one. Its cooperative thrust allows citizens of member countries to travel freely in the GCC without visas. It also permits citizens of one member nation to own land, property, and businesses in any other member nation without the need for local sponsors or partners.

Diff: 2 Page Ref: 237, 253 Skill: Synthesis Objective: 8-2 Discuss the benefits and drawbacks of regional economic integration; 8-6 Describe integration in Middle East and Africa, and explain the slow progress.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange

Chapter 9 International Financial Markets and Foreign Exchange True/False Question ID: 9-1 Question: Changes in currency values, and thus in exchange rates, affect the profitability of a company’s international business activities.

Answer: TRUE Diff: 1 Page Ref: 262 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-2 Question: A capital market is a system that allocates financial resources in the form of cash and shares.

Answer: FALSE Diff: 1 Page Ref: 262 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-3 Question: A bond is a debt instrument that specifies the timing of principal and interest payments.

Answer: TRUE Diff: 1 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-4 Question: Equity normally takes the form of stock, shares of ownership in a company.

Answer: TRUE Diff: 2 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-5 Question: Investors increase risk by holding international securities whose prices move independently.

Answer: FALSE Diff: 2 Page Ref: 263–264 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-6 Question: When obtaining microcredit, small groups of low-income entrepreneurs can borrow money at competitive rates without having to put up collateral.

Answer: TRUE Diff: 2 Page Ref: 264 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-7 Question: Deregulation of national capital markets has been instrumental in the expansion of the international capital market.

Answer: TRUE Diff: 1 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-8

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Question: Increased regulation of national capital markets has been instrumental in the expansion of the international capital market.

Answer: FALSE Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-9 Question: Securitization is the unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments.

Answer: TRUE Diff: 1 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-10 Question: An offshore financial centre is a country or territory whose financial sector features very few regulations and few, if any, taxes.

Answer: TRUE Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-11 Question: Booking centres are usually located on small island nations and territories with favourable tax and/or secrecy laws.

Answer: TRUE Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-12 Question: A rise in a country's currency forces borrowers to shell out more local currency to pay off the interest owed on bonds denominated in an unaffected currency.

Answer: FALSE Diff: 3 Page Ref: 267 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-13 Question: The international bond market consists of all stocks bought and sold outside the issuer's home country.

Answer: FALSE Diff: 2 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-14 Question: The spread of privatization is encouraging the growth of the international equity market.

Answer: TRUE Diff: 3 Page Ref: 267 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-15 Question: All of Europe's currencies combined are referred to as Eurocurrency.

Answer: FALSE Diff: 2 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Question ID: 9-16 Question: Eurocurrency transactions are risky because the banks involved are not dealing globally.

Answer: FALSE Diff: 3 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-17 Question: The rate at which one currency is exchanged for another depends on the size of the transaction, the trader conducting it, and general economic conditions.

Answer: TRUE Diff: 2 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-18 Question: The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency arbitrage.

Answer: FALSE Diff: 1 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-19 Question: Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

Answer: TRUE Diff: 1 Page Ref: 270 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-20 Question: There are two components of every quoted exchange rate: the debt and the equity rates.

Answer: FALSE Diff: 2 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-21 Question: In any exchange rate, the quoted currency is always the numerator and the base currency is always the denominator.

Answer: TRUE Diff: 2 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-22 Question: If you are travelling to another country and want to exchange currencies at your bank before departing, you will be quoted the spot rate since you are exchanging on the spot.

Answer: FALSE Diff: 2 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-23 Question: Forward exchange rates represent the expectations of currency traders and bankers regarding a currency's future spot rate.

Answer: TRUE

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Diff: 1 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-24 Question: Forward contracts belong to a family of financial instruments called arbitrage.

Answer: FALSE Diff: 1 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-25 Question: If a currency's forward rate is higher than its spot rate, the currency is trading at a discount.

Answer: FALSE Diff: 2 Page Ref: 272 Skill: Application Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-26 Question: A company selling in a country with a strong currency while sourcing from a country with a weak currency improves its profits.

Answer: TRUE Diff: 2 Page Ref: 273 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-27 Question: Exchange rates affect the translation of earnings into the home country currencies.

Answer: TRUE Diff: 1 Page Ref: 273 Skill: Application Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-28 Question: The intentional raising of the value of a currency by a nation's government is called devaluation.

Answer: FALSE Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-29 Question: Devaluation lowers the price of a country's exports on world markets and increases the price of imports.

Answer: TRUE Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-30 Question: Currency devaluation increases consumers' buying power.

Answer: FALSE Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-31 Question: Currency revaluation increases the prices of exports and reduces the prices of imports.

Answer: TRUE Diff: 2 Page Ref: 274 Skill: Concept

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-32 Question: In order to capture the gains from currency translation, managers prefer that exchange rates be volatile and unpredictable.

Answer: FALSE Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-33 Question: Stable exchange rates improve the accuracy of financial planning.

Answer: TRUE Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-34 Question: As the unpredictability of exchange rates increases, so too does the cost of insuring against the accompanying risk.

Answer: TRUE Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-35 Question: Predictable exchange rates increase the need for currency hedging.

Answer: FALSE Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-36 Question: A market is efficient if prices of financial instruments quickly reflect new public information made available to traders.

Answer: TRUE Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-37 Question: Forward exchange rates are perfect predictors of future exchange rates.

Answer: FALSE Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-38 Question: Proponents of the efficient market view of exchange rates believe that companies can search for new pieces of information to improve forecasting.

Answer: FALSE Diff: 2 Page Ref: 274–275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-39 Question: A convertible currency (or soft currency) is traded freely in the foreign exchange market with its price determined by the London banks.

Answer: FALSE

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Diff: 1 Page Ref: 277 Skill: Concept Objective: 9-8 Explain why and how governments restrict currency convertibility.

Question ID: 9-40 Question: One goal of currency restriction is to preserve hard currencies to pay for imports and to finance trade deficits.

Answer: TRUE Diff: 2 Page Ref: 277 Skill: Concept Objective: 9-8 Explain why and how governments restrict currency convertibility.

Multiple Choice Question ID: 9-41 Question: The international financial market is composed of two interrelated systems called the ________ and the ________.

A) international capital market; foreign exchange market B) international capital market; foreign goods market C) foreign goods market; international services market D) foreign goods market; foreign exchange market Answer: A Diff: 2 Page Ref: 262 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-42 Question: Which of the following is a system that allocates financial resources in the form of debt and equity according to their most efficient uses?

A) International equity market B) Foreign currency market C) Capital market D) Eurocurrency market Answer: C Diff: 1 Page Ref: 262 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-43 Question: Company debt normally takes the form of ________.

A) bonds B) equity C) stocks D) bank loans Answer: A Diff: 2 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-44 Question: A loan in which the borrower promises to repay the borrowed amount plus a predetermined rate of interest is called ________.

A) equity B) exchange rate C) stock D) debt Answer: D

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Diff: 1 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-45 Question: Which of these is a debt instrument specifying the timing of principal and interest payments?

A) Stock B) Bond C) Eurocurrency D) Equity Answer: B Diff: 1 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-46 Question: Shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows are called ________.

A) stocks B) bonds C) debt D) Eurocurrencies Answer: A Diff: 1 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-47 Question: The ease with which bondholders and shareholders may convert their investments into cash is called ________.

A) barter B) hedging C) arbitrage D) liquidity Answer: D Diff: 2 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-48 Question: An expanded money supply ________.

A) reduces the cost of borrowing B) makes it difficult for financial institutions to lend money C) increases the cost of borrowing D) diminishes the entrepreneurial initiatives of a country Answer: A Diff: 2 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-49 Question: Which of the following is NOT a purpose of the international capital market?

A) Reduces risk for lenders.

B) Expands the money supply for borrowers.

C) Reduces the cost of money to borrowers.

D) Preserves hard currencies to finance trade deficits.

Answer: D Diff: 2 Page Ref: 263 Skill: Concept

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-50 Question: Microcredit loans in developing countries typically average ________.

A) more than $100 B) about $350 C) more than $500 D) less than $500 Answer: B Diff: 2 Page Ref: 264 Skill: Application Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-51 Question: The international capital market's rapid growth rate is traced to all these EXCEPT ________.

A) innovative financial instruments B) information technology C) foreign exchange rates D) deregulation Answer: C Diff: 2 Page Ref: 264–265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-52 Question: The unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments is called ________.

A) market liquidity B) securitization C) bartering D) arbitrage Answer: B Diff: 1 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-53 Question: The world's three most important financial centres are ________.

A) Bonn, Zurich, and New York B) London, Amsterdam, and Sydney C) New York, Tokyo, and Bombay D) Tokyo, London, and New York Answer: D Diff: 2 Page Ref: 265 Skill: Application Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-54 Question: Which of these is a country or territory whose financial sector features very few regulations and few, if any, taxes?

A) Offshore financial centre B) Currency market centre C) Capital market centre D) World trade centre Answer: A Diff: 1 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Question ID: 9-55 Question: An offshore financial centre is usually characterized by each of the following EXCEPT ________.

A) very few regulations B) economic and political stability C) excellent telecommunications D) high taxes Answer: D Diff: 1 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-56 Question: ________ is a prominent operational centre.

A) Singapore B) London C) Beijing D) Frankfurt Answer: B Diff: 3 Page Ref: 265 Skill: Application Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-57 Question: Which of these is a prominent operational centre?

A) The Cayman Islands B) Gibraltar C) Switzerland D) Singapore Answer: C Diff: 2 Page Ref: 265 Skill: Application Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-58 Question: ________ centres are usually located on small island nations or territories with favourable tax and/or secrecy laws.

A) Liquidity B) Booking C) Capital D) Operational Answer: B Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-59 Question: Each of the following is an important booking centre EXCEPT ________.

A) Bahrain B) Singapore C) Monaco D) Iceland Answer: D Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-60 Question: Which of these is NOT a component of the international capital market?

A) Foreign exchange market

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange B) International equity market C) Eurocurrency market D) International bond market Answer: A Diff: 1 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-61 Question: The international bond market consists of all bonds sold by issuing companies, governments, or other organizations ________.

A) within their own countries B) to London banks C) outside their own countries D) to developing nations only Answer: C Diff: 1 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-62 Question: Typical buyers of bonds include all of the following EXCEPT ________.

A) medium-sized to large banks B) pension funds C) mutual funds D) governments in need of funds Answer: D Diff: 2 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-63 Question: Eurobonds account for ________ percent of all international bonds.

A) 20 to 25 B) 30 to 40 C) 50 to 65 D) 75 to 80 Answer: D Diff: 3 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-64 Question: A bond issued by a Venezuelan company, denominated in US dollars, and sold in Britain, France, and Germany is an example of a(n) ________.

A) Ameribond B) Bulldog bond C) Eurobond D) Latinobond Answer: C Diff: 2 Page Ref: 266 Skill: Application Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-65 Question: Eurobonds are popular because ________.

A) they are less risky than traditional bonds B) they are always denominated in euros C) of the absence of government regulation

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange D) European companies are considered very stable Answer: C Diff: 2 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-66 Question: The absence of government regulation in the Eurobond market ________.

A) substantially reduces the cost of issuing a bond B) lowers the risk level of the bond C) makes Eurobonds less popular than foreign bonds D) exists because of the difficulty of regulating a multi-country market Answer: A Diff: 2 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-67 Question: Bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold are called ________.

A) international bonds B) foreign bonds C) Eurobonds D) dragon bonds Answer: B Diff: 1 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-68 Question: Foreign bonds account for ________ percent of all international bonds.

A) about 20 to 25 B) about 25 to 40 C) about 50 to 70 D) more than 90 Answer: A Diff: 3 Page Ref: 266 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-69 Question: Which of the following denotes a stock market with no central geographic location?

A) Cybermarket B) Foreign exchange market C) Capital market D) Bond market Answer: A Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-70 Question: Deposits to the Eurocurrency market originate from all of these EXCEPT ________.

A) governments with excess funds generated by a prolonged trade surplus B) commercial banks with large deposits of excess currency C) international companies with large amounts of excess cash D) nongovernmental organizations seeking to avoid taxes Answer: D Diff: 2 Page Ref: 268

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-71 Question: The market consisting of all the world's currencies that are banked outside their countries of origin is called the ________.

A) foreign exchange market B) interbank trading market C) Eurocurrency market D) offshore financial centre Answer: C Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-72 Question: The British pounds of a British trading company that are deposited in a Japanese bank are called ________.

A) Poundyens B) Euroyen C) Europounds D) Yen-pounds Answer: C Diff: 3 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-73 Question: The most commonly quoted rate in the Eurocurrency market is the ________.

A) London Interbank Offer Rate (LIBOR) B) London Interbank Bid Rate (LIBID) C) spot rate D) interbank rate Answer: A Diff: 2 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-74 Question: Rates that the world's largest banks charge one another for loans are called ________.

A) interbank interest rates B) standardized interest rates C) exchange rates D) inflation hedge rates Answer: A Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-75 Question: The market in which currencies are bought and sold and their prices determined is called the ________.

A) Eurocurrency market B) international capital market C) international bond market D) foreign exchange market Answer: D Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Question ID: 9-76 Question: The bid-ask spread in the foreign exchange market is the ________.

A) price at which a bank will buy a currency B) price of currency in the foreign exchange market C) difference between the bid and ask quotes for a currency D) price a bank will pay for a currency Answer: C Diff: 2 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-77 Question: Investors use the foreign exchange market for each of the following EXCEPT ________.

A) currency hedging B) currency speculation C) currency arbitrage D) currency prospecting Answer: D Diff: 2 Page Ref: 269–270 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-78 Question: Which of the following is LEAST likely to affect the exchange rate between two currencies?

A) The size of the transaction B) The trader conducting the transaction C) General economic conditions D) The recipient of the converted currency Answer: D Diff: 2 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-79 Question: The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency ________.

A) hedging B) arbitrage C) speculation D) conversion Answer: A Diff: 1 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-80 Question: ________ is the instantaneous purchase and sale of a currency in different markets for profit.

A) Currency hedging B) Currency arbitrage C) Currency speculation D) Currency conversion Answer: B Diff: 1 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-81 Question: The purchase or sale of a currency with the expectation that its value will change and generate a profit is

267 Copyright © 2015 Pearson Canada Inc.

International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange called ________.

A) currency hedging B) currency arbitrage C) currency speculation D) currency conversion Answer: C Diff: 2 Page Ref: 270 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-82 Question: Currency arbitrage is ________.

A) the practice of insuring against potential losses that result from adverse changes in exchange rates B) the profit-motivated purchase and sale of interest-paying securities denominated in different currencies C) the purchase or sale of a currency with the expectation that its value will change and generate a profit D) the instantaneous purchase and sale of a currency in different markets for profit Answer: D Diff: 1 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-83 Question: Which of the following is an exchange rate that requires delivery of the traded currency within two business days?

A) Derivative rate B) Spot rate C) Discount rate D) Forward rate Answer: B Diff: 1 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-84 Question: The exchange rate at which two parties agree to exchange currencies on a specified future date is called a(n) ________.

A) forward exchange rate B) bid-ask rate C) spot rate D) arbitrage rate Answer: A Diff: 1 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-85 Question: If a currency's forward exchange rate is higher than its spot rate, the currency is trading at a ________.

A) discount B) swap rate C) derivative rate D) premium Answer: D Diff: 3 Page Ref: 271–272 Skill: Application Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-86 Question: If the spot rate for the British pound (GBP) is $1.6950/GBP and the 30-day forward rate is $1.6921/GBP, then the pound is trading at a ________ in the 30-day market.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange A) premium B) discount C) swap D) spot Answer: B Diff: 3 Page Ref: 271–272 Skill: Application Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-87 Question: Which of these is the simultaneous purchase and sale of foreign exchange for two different dates?

A) Forward swap B) Bid-ask swap C) Currency swap D) Security swap Answer: C Diff: 2 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-88 Question: When a country's currency is weak, the price of its ________.

A) exports and imports declines B) exports on world markets declines and the price of imports increases C) exports and imports increases D) exports on world markets increases and the price of imports declines Answer: B Diff: 3 Page Ref: 273 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-89 Question: A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

A) suggests unethical conduct B) generally faces government penalties C) ends up going bankrupt D) improves its profits Answer: D Diff: 2 Page Ref: 273 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-90 Question: Which of these is the intentional lowering of a currency's value by the nation's government?

A) Revaluation B) Forward swap C) Devaluation D) Currency swap Answer: C Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-91 Question: Devaluation of a currency results in all of the following EXCEPT ________.

A) lowering profit margins for domestic companies B) lowering the price of a country's exports C) increasing the price of a country's imports

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange D) reducing consumers' buying power Answer: A Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-92 Question: A nation's government intentionally raising its currency's value is called ________.

A) revaluation B) forward swap C) devaluation D) convertibility Answer: A Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-93 Question: Which of the following lowers the price of a country's exports on world markets and increases the price of imports?

A) Revaluation B) Devaluation C) Liquidity D) Strong currency Answer: B Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-94 Question: Managers prefer that exchange rates be ________.

A) stable B) freely floating C) volatile D) unpredictable Answer: A Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-95 Question: Predictable exchange rates reduce the need for ________.

A) currency conversion B) devaluation C) financial planning D) currency hedging Answer: D Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-96 Question: According to the efficient market view, the most accurate predictor of exchange rates is ________.

A) forward exchange rates B) fundamental analysis C) technical analysis D) statistical modelling Answer: A Diff: 1 Page Ref: 274

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-97 Question: The efficient market view holds that prices of financial instruments ________.

A) do not reflect all publicly available information B) are dependent on economic efficiency C) are not dependent on economic efficiency D) reflect all publicly available information at any given time Answer: D Diff: 2 Page Ref: 274 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-98 Question: The inefficient market view holds that prices of financial instruments ________.

A) do not reflect all publicly available information B) are dependent on economic efficiency C) are not dependent on economic efficiency D) reflect all publicly available information at any given time Answer: A Diff: 2 Page Ref: 275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-99 Question: Which of these employs statistical models based on fundamental economic indicators to forecast exchange rates?

A) Efficient market view B) Fundamental analysis C) Fisher effect D) Technical analysis Answer: B Diff: 1 Page Ref: 275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-100 Question: Which of these employs charts of past trends in currency prices and other factors to forecast exchange rates?

A) Efficient market view B) Fundamental analysis C) Fisher effect D) Technical analysis Answer: D Diff: 2 Page Ref: 270–275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Scenario: Just-for-Kids, Inc. Just-for-Kids, Inc., is a toys and clothes manufacturer based in Vancouver, BC. The company has received an inquiry from an overseas company to do business. Tom Dodd is the owner of the company researching the opportunity and how exchange rates will affect its international business activities.

Question ID: 9-101 Question: If Just-for-Kids is selling in a country with a strong currency while sourcing from a country with a weak currency, it will most likely ________.

A) improve its profits

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange B) face US government penalties C) generate losses D) engage in unethical conduct Answer: A Diff: 2 Page Ref: 273 Skill: Application Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-102 Question: The government of the country that Just-for-Kids is considering doing business in just lowered the value of its currency, which is referred to as ________.

A) liquidity B) devaluation C) forward swap D) revaluation Answer: B Diff: 1 Page Ref: 274 Skill: Application Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-103 Question: If the nation had raised and not lowered its currency's value, its actions would be called ________.

A) valuation B) devaluation C) forward swap D) revaluation Answer: D Diff: 1 Page Ref: 274 Skill: Application Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-104 Question: Which of the following would best explain to Tom what devaluation in a target market means?

A) Devaluation increases the price of a country's exports on world markets.

B) Devaluation reduces the price of imports like those of Just-For-Kids.

C) Devaluation increases the price of imports like those of Just-For-Kids.

D) Devaluation prohibits foreign companies from investing in the country.

Answer: C Diff: 2 Page Ref: 274 Skill: Application Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-105 Question: A currency used as an intermediary to convert funds between two other currencies is called a(n) ________.

A) spot currency B) vehicle currency C) forward currency D) interbank currency Answer: B Diff: 1 Page Ref: 277 Skill: Concept Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Question ID: 9-106 Question: A ________ currency is traded freely in the foreign exchange market.

A) barter B) convertible C) vehicular

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange D) soft Answer: B Diff: 2 Page Ref: 277 Skill: Concept Objective: 9-8 Explain why and how governments restrict currency convertibility.

Scenario: Trader's Paradise Trader's Paradise is a global merchant that sells a variety of products. The company operates in 48 different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given differing conditions in foreign exchange markets.

Question ID: 9-107 Question: To insure against potential losses that result from adverse changes in exchange rates, Trader's Paradise should use currency ________.

A) conversion B) speculation C) hedging D) arbitrage Answer: C Diff: 1 Page Ref: 269 Skill: Application Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-108 Question: If Trader's Paradise purchases and sells the European Union euro simultaneously in different markets for profit, it would be engaging in currency ________.

A) conversion B) speculation C) hedging D) arbitrage Answer: D Diff: 2 Page Ref: 269 Skill: Application Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-109 Question: If Trader's Paradise instead purchases euros expecting the value to rise and generate a profit for the company, it is engaging in currency ________.

A) conversion B) speculation C) hedging D) arbitrage Answer: B Diff: 2 Page Ref: 270 Skill: Application Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-110 Question: When doing business with former communist countries, Trader's Paradise insists on getting paid in hard currency. This means they are paid in which of the following?

A) Gold bullion B) Coins but not bills C) Bartered goods D) A convertible currency Answer: D Diff: 2 Page Ref: 277 Skill: Application Objective: 9-8 Explain why and how governments restrict currency convertibility.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange

Scenario: ABC Software ABC Software is a producer of educational software for small children. The company has operations in Switzerland and would like to expand its foreign production with a new facility in China.

Question ID: 9-111 Question: ABC Software has had difficulty obtaining funds to expand. A friend of the CEO recommends the company explore an offshore financial centre, which ________.

A) is a country or territory whose financial sector features very few regulations and few, if any, taxes B) tends to be characterized by political and economic instability making, it an inexpensive but risky source of funds C) typically lends money to companies that have had difficulty getting financing elsewhere because of poor credit records D) is a financial centre located in a resort community that is popular among financiers, and therefore allows companies seeking financing to make lucrative contacts Answer: A Diff: 2 Page Ref: 265 Skill: Application Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-112 Question: If ABC Software simultaneously purchases and sells foreign exchange for two different dates, it is doing which of the following?

A) Increasing its foreign exchange rate risk B) Conducting a currency swap C) Entering an arbitrage situation D) Buying and selling at the spot rate Answer: B Diff: 2 Page Ref: 272 Skill: Application Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-113 Question: If ABC Software holds a currency option to purchase Swiss francs at SF1.67/$ in 30 days, and at the end of the 30 days the exchange rate is SF1.70/$, ABC Software ________.

A) is required to follow through with a currency exchange B) would exercise its currency option C) has failed to hedge against exchange rate risk D) would not exercise its currency option Answer: D Diff: 3 Page Ref: 273 Skill: Application Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-114 Question: The company's financial advisors recommend that ABC Software conduct most of its business in a vehicle currency which ________.

A) is a currency used as an intermediary to convert funds between two other currencies B) is a currency that is used in the most bond markets globally C) is another name for Eurocurrency D) offers the best spot rate at any time for exchange purposes Answer: A Diff: 2 Page Ref: 277 Skill: Application Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

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Fill-In-The-Blank Question ID: 9-115 Question: ________ is the ease with which bondholders and shareholders may convert their investments into cash.

Answer: Liquidity Diff: 1 Page Ref: 263 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-116 Question: When small groups of low-income entrepreneurs borrow money at competitive rates without having to put up collateral, the process is known as obtaining ________.

Answer: microfinance Diff: 2 Page Ref: 264 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-117 Question: A(n) ________ is a country or territory whose financial sector features very few regulations and few, if any, taxes.

Answer: offshore financial centre Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-118 Question: ________ are usually located on small island nations or territories with favourable tax and/or secrecy laws.

Answer: Booking centres Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-119 Question: The term ________ denotes a stock market that has no central geographic location.

Answer: cybermarket Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-120 Question: Interest rates that the world's largest banks charge one another for loans are called ________.

Answer: interbank interest rates Diff: 1 Page Ref: 268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-121 Question: The practice of insuring against potential losses that result from adverse changes in exchange rates is called ________.

Answer: currency hedging Diff: 2 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-122 Question: ________ is the simultaneous purchase and sale of a currency in different markets for profit.

Answer: Currency arbitrage Diff: 2 Page Ref: 269

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-123 Question: ________ is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

Answer: Interest arbitrage Diff: 2 Page Ref: 269 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-124 Question: ________ is the purchase or sale of a currency with the expectation that its value will change and generate a profit.

Answer: Currency speculation Diff: 2 Page Ref: 270 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-125 Question: In a quoted exchange rate, the currency that is to be purchased with another currency is called the ________.

Answer: base currency Diff: 3 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-126 Question: The exchange rate calculated using two other exchange rates is called the ________.

Answer: cross rate Diff: 1 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-127 Question: The exchange rate requiring delivery of the traded currency within two business days is called the ________.

Answer: spot rate Diff: 1 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-128 Question: The exchange rate at which two parties agree to exchange currencies on a specified future date is called the ________.

Answer: forward rate Diff: 2 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-129 Question: The currency exchange rate that is available for casual or business travellers is called the ____________.

Answer: buy and sell rate Diff: 2 Page Ref: 271 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-130 Question: _____________ is a financial instrument whose value is calculated from other commodities or financial

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange instruments.

Answer: Derivative Diff: 2 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-131 Question: A(n) ________ is the simultaneous purchase and sale of foreign exchange for two different dates.

Answer: currency swap Diff: 1 Page Ref: 272 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-132 Question: A(n) ________ is a right to exchange a specific amount of a currency on a specific date at a specific rate.

Answer: currency option Diff: 1 Page Ref: 273 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-133 Question: The ________ holds that prices of financial instruments reflect all publicly available information at any given time.

Answer: efficient market view Diff: 1 Page Ref: 274 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-134 Question: The ________ holds that prices of financial instruments do not reflect all publicly available information.

Answer: inefficient market view Diff: 1 Page Ref: 275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-135 Question: ________ employs statistical models based on fundamental economic indicators to forecast exchange rates.

Answer: Fundamental analysis Diff: 2 Page Ref: 275–276 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-136 Question: ________ employs charts of past trends in currency prices and other factors to forecast exchange rates.

Answer: Technical analysis Diff: 2 Page Ref: 275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-137 Question: A(n) ________ is a currency used as an intermediary to convert funds between two other currencies.

Answer: vehicle currency Diff: 1 Page Ref: 277 Skill: Concept Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Question ID: 9-138 Question: The practice of selling goods or services that are paid for with other goods or services is called

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange ____________________.

Answer: countertrade Diff: 1 Page Ref: 278 Skill: Concept Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Question ID: 9-139 Question: A (an) __________ is traded freely in the foreign exchange market with its price determined by the forces of supply and demand.

Answer: convertible (hard) currency Diff: 1 Page Ref: 277 Skill: Concept Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Question ID: 9-140 Question: Some governments implement systems of _______________ specifying a higher exchange rate on the importation of certain goods or imports from certain countries.

Answer: multiple exchange rates Diff: 2 Page Ref: 278 Skill: Concept Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Essay Question ID: 9-141 Question: Describe the purposes of the international capital market and the factors accounting for its rapid growth.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The international capital market is a network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. It consists of both formal exchanges (in which buyers and sellers meet to trade financial instruments) and electronic networks (in which trading occurs anonymously). This market makes use of unique and innovative financial instruments specially designed to fit the needs of investors and borrowers located in different countries that are doing business with one another. Large international banks play a central role in the international capital market. They gather the excess cash of investors and savers around the world and then channel this cash to borrowers across the globe.

Expands the Money Supply for Borrowers. The international capital market is a conduit for joining borrowers and lenders in different national capital markets. A company that is unable to obtain funds from investors in its own nation can seek financing from investors elsewhere, making it possible for the company to undertake an otherwise impossible project.

Reduces the Cost of Money for Borrowers. An expanded money supply reduces the cost of borrowing.

Reduces Risk for Lenders. The international capital market expands the available set of lending opportunities.

Around 40 years ago, national capital markets functioned largely as independent markets. But since that time, the amount of debt, equity, and currencies traded internationally has increased dramatically. This rapid growth can be traced to three main factors:

Information Technology. Information is the lifeblood of every nation's capital market because investors need

information about investment opportunities and their corresponding risk levels. Large investments in information technology over the past two decades have drastically reduced the costs, in both time and money, of communicating around the globe. Investors and borrowers can now respond in record time to events in the international capital market. The introduction of electronic trading after the daily close of formal exchanges also facilitates faster response times.

Deregulation. Deregulation of national capital markets has been instrumental in the expansion of the international capital market. The need for deregulation became apparent in the early 1970s, when heavily regulated markets in

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange the largest countries were facing fierce competition from less regulated markets in smaller nations.

Financial Instruments. Greater competition in the financial industry is creating the need to develop innovative

financial instruments.

Diff: 3 Page Ref: 262–264 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-142 Question: What is an offshore financial centre? Differentiate between an operational and a booking centre, providing country examples of each.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

An offshore financial centre is a country or territory whose financial sector features very few regulations and few, if any, taxes. These centres tend to be economically and politically stable and provide access to the international capital market through an excellent telecommunications infrastructure. Most governments protect their own currencies by restricting the amount of activity that domestic companies can conduct in foreign currencies. So companies can find it hard to borrow funds in foreign currencies and thus turn to offshore centres, which offer large amounts of funding in many currencies. In short, offshore centres are sources of (usually cheaper) funding for companies with multinational operations.

Offshore financial centres fall into two categories:

Operational centres see a great deal of financial activity. Prominent operational centres include London (which does a good deal of currency trading) and Switzerland (which supplies a great deal of investment capital to other nations).

Booking centres are usually located on small island nations or territories with favourable tax and/or secrecy laws.

Little financial activity takes place here. Rather, funds simply pass through on their way to large operational centres.

Booking centres are typically home to offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information. Some important booking centres are the Cayman Islands and the Bahamas in the Caribbean; Gibraltar, Monaco, and the Channel Islands in Europe; Bahrain and Dubai in the Middle East; and Singapore in Southeast Asia.

Diff: 2 Page Ref: 265 Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-143 Question: Briefly describe the three main components of the international capital market.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The international bond market consists of all bonds sold by issuing companies, governments, or other organizations outside their own countries. Issuing bonds internationally is an increasingly popular way to obtain needed funding.

Typical buyers include medium-sized to large banks, pension funds, mutual funds, and governments with excess financial reserves. Large international banks typically manage the sales of new international bond issues for corporate and government clients.

The international equity market consists of all stocks bought and sold outside the issuer's home country. Companies and governments frequently sell shares in the international equity market. Buyers include other companies, banks, mutual funds, pension funds, and individual investors. The stock exchanges that list the greatest number of companies from outside their own borders are Frankfurt, London, and New York. Large international companies frequently list their stocks on several national exchanges simultaneously and sometimes offer new stock issues only outside their country's borders.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange All the world's currencies that are banked outside their countries of origin are referred to as Eurocurrency and trade on the Eurocurrency market. Thus US dollars deposited in a bank in Tokyo are called Eurodollars, and British pounds deposited in New York are called Europounds. Japanese yen deposited in Frankfurt are called Euroyen, and so forth.

Because the Eurocurrency market is characterized by very large transactions, only the very largest companies, banks, and governments are typically involved. Deposits originate primarily from four sources:

• • • •

Governments with excess funds generated by a prolonged trade surplus Commercial banks with large deposits of excess currency International companies with large amounts of excess cash Extremely wealthy individuals

Eurocurrency originated in Europe during the 1950s—hence the "Euro" prefix. Governments across Eastern Europe feared they might forfeit dollar deposits made in US banks if US citizens were to file claims against them. To protect their dollar reserves, they deposited them in banks across Europe. Banks in the United Kingdom began lending these dollars to finance international trade deals, and banks in other countries (including Canada and Japan) followed suit.

The Eurocurrency market is valued at around $6 trillion, with London accounting for about 20 percent of all deposits.

Other important markets include Canada, the Caribbean, Hong Kong, and Singapore.

Diff: 2 Page Ref: 266–268 Skill: Concept Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-144 Question: Explain the role of equity in a national capital market, and identify and explain factors responsible for the growth of the international equity market.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Equity is part ownership of a company in which the equity holder participates with other part owners in the company's financial gains and losses. Equity normally takes the form of stock—shares of ownership in a company's assets that give shareholders (stockholders) a claim on the company's future cash flows. Shareholders may be rewarded with dividends—payments made out of surplus funds—or by increases in the value of their shares. Of course, they may also suffer losses due to poor company performance—and thus decreases in the value of their shares. Dividend payments are not guaranteed but are determined by the company's board of directors and based on financial performance. In capital markets, shareholders can sell one company's stock for that of another or liquidate them—exchange them for cash. Liquidity, which is a feature of both debt and equity markets, refers to the ease with which bondholders and shareholders may convert their investments into cash.

Four factors are responsible for much of the past growth in the international equity market.

Spread of Privatization. As many countries abandoned central planning and socialist-style economics, the pace of privatization accelerated worldwide. A single privatization often places billions of dollars of new equity on stock markets.

Economic Growth in Emerging Markets. Continued economic growth in emerging markets is contributing to growth in

the international equity market. Companies based in these economies require greater investment as they succeed and grow. The international equity market becomes a major source of funding because only a limited supply of funds is available in these nations.

Activity of Investment Banks. Global banks facilitate the sale of a company's stock worldwide by bringing together

sellers and large potential buyers. Increasingly, investment banks are searching for investors outside the national market in which a company is headquartered. In fact, this method of raising funds is becoming more common than listing a company's shares on another country's stock exchange.

Advent of Cybermarkets. The automation of stock exchanges is encouraging growth in the international equity market. The term cybermarkets denotes stock markets that have no central geographic locations. Rather, they consist of global trading activities conducted on the Internet. Cybermarkets (consisting of supercomputers, high-

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange speed data lines, satellite uplinks, and individual personal computers) match buyers and sellers in nanoseconds. They allow companies to list their stocks worldwide through an electronic medium in which trading takes place 24 hours a day.

Diff: 2 Page Ref: 263, 266–268 Skill: Synthesis Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market; 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-145 Question: What is the role of debt in national capital markets, and what form does company debt normally take?

Describe several types of international bonds.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Debt consists of loans, for which the borrower promises to repay the borrowed amount (the principal) plus a predetermined rate of interest. Company debt normally takes the form of bonds—instruments that specify the timing of principal and interest payments. The holder of a bond (the lender) can force the borrower into bankruptcy if the borrower fails to pay on a timely basis. Bonds issued for the purpose of funding investments are commonly issued by private-sector companies and by municipal, regional, and national governments.

One instrument used by companies to access the international bond market is called a Eurobond—a bond issued outside the country in whose currency it is denominated. In other words, a bond issued by a Venezuelan company, denominated in US dollars, and sold in Britain, France, Germany, and the Netherlands (but not available in the United States or to its residents) is a Eurobond. Because this Eurobond is denominated in US dollars, the Venezuelan borrower both receives the loan and makes its interest payments in dollars.

Eurobonds are popular (accounting for 75 to 80 percent of all international bonds) because the governments of countries in which they are sold do not regulate them. The absence of regulation substantially reduces the cost of issuing a bond. Unfortunately, it increases its risk level—a fact that may discourage some potential investors. The traditional markets for Eurobonds are Europe and North America.

Companies also obtain financial resources by issuing so-called foreign bonds—bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold. For example, a yen-denominated bond issued by the German carmaker BMW in Japan's domestic bond market is a foreign bond. Foreign bonds account for about 20 to 25 percent of all international bonds.

Foreign bonds are subject to the same rules and regulations as the domestic bonds of the country in which they are issued. Countries typically require issuers to meet certain regulatory requirements and to disclose details about company activities, owners, and upper management. Thus BMW's samurai bonds (the name for foreign bonds issued in Japan) would need to meet the same disclosure and other regulatory requirements that Toyota's bonds in Japan must meet. Foreign bonds in the United States are called yankee bonds, and those in the United Kingdom are called bulldog bonds. Foreign bonds issued and traded in Asia outside Japan (and normally denominated in dollars) are called dragon bonds.

Diff: 2 Page Ref: 263, 266 Skill: Synthesis Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market; 9-2 Describe the international bond, international equity, and Eurocurrency markets.

Question ID: 9-146 Question: What is the foreign exchange market? Explain why investors use this market.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Unlike domestic transactions, international transactions involve the currencies of two or more nations. To exchange one currency for another in international transactions, companies rely on a mechanism called the foreign exchange

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange market—a market in which currencies are bought and sold and their prices are determined. Financial institutions convert one currency into another at a specific exchange rate—the rate at which one currency is exchanged for

another. Rates depend on the size of the transaction, the trader conducting it, general economic conditions, and sometimes government mandate.

The foreign exchange market is not really a source of corporate finance. Rather, it facilitates corporate financial activities and international transactions. Investors use the foreign exchange market for four main reasons.

Currency Conversion. Companies use the foreign exchange market to convert one currency into another.

Currency Hedging. The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency hedging. International companies commonly use hedging for one of two purposes: 1. To lessen the risk associated with international transfers of funds.

2. To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment.

Currency Arbitrage. Currency arbitrage is the instantaneous purchase and sale of a currency in different markets for

profit.

Currency Speculation. Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period.

The foreign exchange trader may bet that a currency's price will go either up or down in the future.

Diff: 2 Page Ref: 269–270 Skill: Concept Objective: 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-147 Question: Describe interbank interest rates, and differentiate between currency speculation and currency arbitrage.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Interbank interest rates are rates that the world's largest banks charge one another for loans and are determined in the free market. The most commonly quoted rate of this type in the Eurocurrency market is the London Interbank Offer Rate (LIBOR)—the interest rate that London banks charge other large banks that borrow Eurocurrency. The London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits.

Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency's price will go either up or down in the future. Suppose a trader in London believes that the value of the Japanese yen will increase over the next three months. She buys yen with pounds at today's current price, intending to sell them in 90 days. If the price of yen rises in that time, she earns a profit; if it falls, she takes a loss. Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors. Similar to arbitrage, currency speculation is commonly the realm of foreign exchange specialists rather than the managers of firms engaged in other endeavors.

Currency arbitrage is the instantaneous purchase and sale of a currency in different markets for profit. Suppose a currency trader in New York notices that the value of the European Union euro is lower in Tokyo than it is in New York. The trader can buy euros in Tokyo, sell them in New York, and earn a profit on the difference. High-tech communication and trading systems allow the entire transaction to occur within seconds. But note that, if the difference between the value of the euro in Tokyo and the value of the euro in New York is not greater than the cost of conducting the transaction, the trade is not worth making.

Currency arbitrage is a common activity among experienced traders of foreign exchange, very large investors, and companies in the arbitrage business. Firms whose profits are generated primarily by another economic activity, such as retailing or manufacturing, take part in currency arbitrage only if they have very large sums of cash on hand.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Diff: 3 Page Ref: 268–270 Skill: Synthesis Objective: 9-2 Describe the international bond, international equity, and Eurocurrency markets; 9-3 Discuss the four primary functions of the foreign exchange market.

Question ID: 9-148 Question: Identify and explain the types of currency instruments used in the forward market.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

When a company knows that it will need a certain amount of foreign currency on a certain future date, it can exchange currencies using a forward rate—an exchange rate at which two parties agree to exchange currencies on a specified future date. Forward rates represent the expectations of currency traders and bankers regarding a currency's future spot rate. Reflected in these expectations are a country's present and future economic conditions (including inflation rate, national debt, taxes, trade balance, and economic growth rate) as well as its social and political situation. The forward market is the market for currency transactions at forward rates.

To insure themselves against unfavourable exchange-rate changes, companies commonly turn to the forward market. It can be used for all types of transactions that require future payment in other currencies, including credit sales or purchases, interest receipts or payments on investments or loans, and dividend payments to stockholders in other countries. But not all nations' currencies trade in the forward market, such as countries experiencing high inflation or currencies not in demand on international financial markets.

A forward contract is a contract that requires the exchange of an agreed-upon amount of a currency on an agreedupon date at a specific exchange rate. Forward contracts are commonly signed for 30, 90, and 180 days into the future, but customized contracts (say, for 76 days) are possible. Note that a forward contract requires exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. Forward contracts belong to a family of financial instruments called derivatives—instruments whose values derive from other commodities or financial instruments. These include not only forward contracts but also currency swaps, options, and futures.

A currency swap is the simultaneous purchase and sale of foreign exchange for two different dates. Currency swaps are an increasingly important component of the foreign exchange market.

Recall that a forward contract requires exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. In contrast, a currency option is a right, or option, to exchange a specific amount of a currency on a specific date at a specific rate. In other words, whereas forward contracts require parties to follow through on currency exchanges, currency options do not.

Similar to a currency forward contract is a currency futures contract—a contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.

Diff: 2 Page Ref: 272–273 Skill: Concept Objective: 9-4 Understand how currencies are quoted and the different rates given.

Question ID: 9-149 Question: How does the international capital market reduce the cost of money for borrowers? What are the two components for every quoted exchange rate?

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

An expanded money supply reduces the cost of borrowing. Similar to the prices of potatoes, wheat, and other commodities, the "price" of money is determined by supply and demand. If its supply increases, its price—in the form of interest rates—falls. That is why excess supply creates a borrower's market, forcing down interest rates and the cost of borrowing. Projects regarded as infeasible because of low expected returns might be viable at a lower cost of financing.

Diff: 2 Page Ref: 263–264

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Skill: Concept Objective: 9-1 Discuss the purposes, development, and financial centres of the international capital market.

Question ID: 9-150 Question: Describe in detail how exchange rates influence business activities.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison.

Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company's long-term competitiveness.

Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company's financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency.

Diff: 2 Page Ref: 273–274 Skill: Concept Objective: 9-5 Explain how exchange rates influence the activities of domestic and international companies.

Question ID: 9-151 Question: Differentiate the efficient and inefficient market views and discuss the implications of the two schools of thought for companies.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A great deal of debate revolves around the issue of whether markets themselves are efficient or inefficient in forecasting exchange rates. A market is efficient if prices of financial instruments quickly reflect new public information made available to traders. The efficient market view thus holds that prices of financial instruments reflect all publicly available information at any given time. As applied to exchange rates, this means that forward exchange rates are accurate forecasts of future exchange rates.

A forward exchange rate reflects a market's expectations about the future values of two currencies. In an efficient currency market, forward exchange rates reflect all relevant publicly available information at any given time; they are considered the best possible predictors of exchange rates. Proponents of this view hold that there is no other publicly available information that could improve the forecast of exchange rates over that provided by forward rates. To accept this view is to accept that companies do waste time and money collecting and examining information believed to affect future exchange rates. But there is always a certain amount of deviation between forward and actual exchange rates. The fact that forward exchange rates are less than perfect inspires companies to search for more accurate forecasting techniques.

The inefficient market view holds that prices of financial instruments do not reflect all publicly available information.

Proponents of this view believe companies can search for new pieces of information to improve forecasting. But the cost of searching for further information must not outweigh the benefits of its discovery.

Naturally, the inefficient market view is more compelling when the existence of private information is considered.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Suppose a single currency trader holds privileged information regarding a future change in a nation's economic policy—information that she believes will affect its exchange rate. Because the market is unaware of this information, it is not reflected in forward exchange rates. Our trader will no doubt earn a profit by acting on her store of private information.

Diff: 3 Page Ref: 274–275 Skill: Synthesis Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-152 Question: Discuss in detail the challenges involved in the business of forecasting exchange rates.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The business of forecasting exchange rates is a rapidly growing industry. This trend seems to provide evidence that a growing number of people believe it is possible to improve on the forecasts of exchange rates embodied in forward rates. Difficulties of forecasting remain, however. Despite highly sophisticated statistical techniques in the hands of well-trained analysts, forecasting is not a pure science. Few, if any, forecasts are ever completely accurate because of unexpected events that occur throughout the forecast period.

Beyond the problems associated with the data used by these techniques, failings can be traced to the human element involved in forecasting. For example, people might miscalculate the importance of economic news becoming available to the market, placing too much emphasis on some elements and ignoring others.

Diff: 2 Page Ref: 274–275 Skill: Concept Objective: 9-6 Describe the primary methods of forecasting exchange rates.

Question ID: 9-153 Question: Explain the function of spot rates and forward exchange rates. How do they compare in their impact on a business organization.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Spot rates are exchange rates that require delivery of the traded currency within two business days. Exchange of the two currencies is said to occur "on the spot," and the spot market is the market for currency transactions at spot

rates.

The spot market assists companies in performing any one of three functions: 1. Converting income generated from sales abroad into their home-country currency 2. Converting funds into the currency of an international supplier 3. Converting funds into the currency of a country in which they wish to invest The spot rate is available only for trades worth millions of dollars. That is why it is available only to banks and foreign exchange brokers. If you are traveling to another country and want to exchange currencies at your bank before departing, you will not be quoted the spot rate. Rather, banks and other institutions will give you a buy rate (the exchange rate at which the bank will buy a currency) and an ask rate (the rate at which it will sell a currency). In other words, you will receive what we described when introducing the foreign exchange market as bid and ask quotes. These rates reflect the amounts that large currency traders are charging, plus a markup.

Forward exchange rate is where two parties agree to exchange currencies on a specified future date. Forward rates represent the expectations of currency traders and bankers regarding currency’s future spot rate.

To insure themselves against unfavourable exchange-rate changes, companies commonly turn to forward market to decrease its exchange rate risk. Forward contracts are commonly signed for 30, 90, and 180 days into the future. A forward contract requires exchange of an agree-upon amount of a currency on an agreed-upon date at a specific exchange rate.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange Diff: 3 Page Ref: 271, 272 Skill: Synthesis Objective: 9-7 Identify the main instruments and institutions of the foreign exchange market.

Question ID: 9-154 Question: Explain why governments impose currency restrictions and describe how companies can get around such restrictions.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Certain government policies are frequently used to restrict currency convertibility. Governments can require that all foreign exchange transactions be performed at or approved by the country's central bank. They can also require import licenses for some or all import transactions. These licenses help the government control the amount of foreign currency leaving the country. Some governments implement systems of multiple exchange rates, specifying a higher exchange rate on the importation of certain goods or on imports from certain countries. The government can thus reduce importation while ensuring that important goods still enter the country. It also can use such a policy to target the goods of countries with which it is running a trade deficit.

Other governments issue import deposit requirements that require businesses to deposit certain percentages of their foreign exchange funds in special accounts before being granted import licenses. In addition, quantity restrictions limit the amount of foreign currency that residents can take out of the home country when traveling to other countries as tourists, students, or medical patients.

Finally, one way to get around national restrictions on currency convertibility is countertrade—the practice of selling goods or services that are paid for, in whole or in part, with other goods or services. One simple form of countertrade is a barter transaction, in which goods are exchanged for others of equal value. Parties exchange goods and then sell them in world markets for hard currency.

Diff: 2 Page Ref: 277–278 Skill: Concept Objective: 9-8 Explain why and how governments restrict currency convertibility.

Question ID: 9-155 Question: What is currency speculation? Explain what happened in Southeast Asia in 1997, and describe why some countries restrict currency.

Answer: Specific examples of countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency's price will go either up or down in the future. Suppose a trader in London believes that the value of the Japanese yen will increase over the next three months. She buys yen with pounds at today's current price, intending to sell them in 90 days. If the price of yen rises in that time, she earns a profit; if it falls, she takes a loss. Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors. Similar to arbitrage, currency speculation is commonly the realm of foreign exchange specialists rather than the managers of firms engaged in other endeavours.

A classic example of currency speculation unfolded in Southeast Asia in 1997. After news emerged in May about Thailand's slowing economy and political instability, currency traders sprang into action. They responded to poor economic growth prospects and an overvalued currency, the Thai baht, by dumping the baht on the foreign exchange market. When the supply glutted the market, the value of the baht plunged. Meanwhile, traders began speculating that other Asian economies were also vulnerable. From the time the crisis first hit until the end of 1997, the value of the Indonesian rupiah fell by 87 percent, the South Korean won by 85 percent, the Thai baht by 63 percent, the Philippine peso by 34 percent, and the Malaysian ringgit by 32 percent. Although many currency speculators made a great deal of money, the resulting hardship experienced by these nations' citizens caused some to question the ethics of currency speculation on such a scale.

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International Business, 1ce (Wild/Wild/Valladares Montemayor) Chapter 9 International Financial Markets and Foreign Exchange One goal of currency restriction is to protect a currency from speculators. For example, in the wake of the Asian financial crisis years ago, some Southeast Asian nations considered controlling their currencies to limit the damage done by economic downturns. Malaysia stemmed the outflow of foreign money by preventing local investors from converting their Malaysian holdings into other currencies. Although the move also curtailed currency speculation, it effectively cut off Malaysia from investors elsewhere in the world.

Diff: 2 Page Ref: 270, 277–278 Skill: Synthesis Objective: 9-3 Discuss the four primary functions of the foreign exchange market; 9-8 Explain why and how governments restrict currency convertibility.

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Chapter 10 International Strategy and Organization True/False Question ID: 10-1 Question: Strategy is the set of planned actions managers take to help a company meet its objectives.

Answer: TRUE Diff: 1 Page Ref: 286 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-2 Question: A written statement of why a company exists and what it plans to accomplish is referred to as its core competencies.

Answer: FALSE Diff: 2 Page Ref: 286 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-3 Question: A company's mission statement often guides decisions such as which industries to enter.

Answer: TRUE Diff: 2 Page Ref: 286 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-4 Question: A market segment is a clearly identifiable group of potential buyers.

Answer: TRUE Diff: 1 Page Ref: 286 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-5 Question: All parties ranging from suppliers and employers to consumers who are affected by a company's activities are called its stockholders.

Answer: FALSE Diff: 2 Page Ref: 286 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-6 Question: To mass-produce a zero-pollution emissions automobile by 2012 is an example of a business-unit objective.

Answer: TRUE Diff: 2 Page Ref: 287 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-7 Question: To increase market share by 5 percent in the next three years is an example of an objective at the highest level of the firm.

Answer: FALSE Diff: 1 Page Ref: 287 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-8 Question: A core competency is a company skill that competitors can easily imitate.

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Answer: FALSE Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-9 Question: A core competency refers to multiple skills that are coordinated to form a single technological outcome.

Answer: TRUE Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-10 Question: Production is an example of a primary activity.

Answer: TRUE Diff: 2 Page Ref: 288 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-11 Question: Human resource management is an example of a support activity.

Answer: TRUE Diff: 1 Page Ref: 289 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-12 Question: When analyzing primary activities, managers often look for areas in which the company can increase the value provided to customers.

Answer: TRUE Diff: 2 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-13 Question: The external business environment consists of all the elements outside a company that can affect its performance.

Answer: TRUE Diff: 1 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-14 Question: A multinational strategy is most appropriate for companies that do not have foreign direct investments but rather export their products to foreign markets.

Answer: FALSE Diff: 1 Page Ref: 291 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-15 Question: A multinational strategy entails having a separate strategy for each nation in which a company markets its products.

Answer: TRUE Diff: 2 Page Ref: 291 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-16 Question: A multinational strategy is best suited to industries in which price competitiveness is a key success factor.

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Answer: FALSE Diff: 3 Page Ref: 291 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-17 Question: A global strategy does not allow a company to modify its products except for the most superficial features.

Answer: TRUE Diff: 2 Page Ref: 291 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-18 Question: The four key approaches to corporate strategy are growth, retrenchment, stability, and combination.

Answer: TRUE Diff: 1 Page Ref: 292–293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-19 Question: A growth strategy is designed to increase the scale or scope of a corporation's activities.

Answer: TRUE Diff: 2 Page Ref: 292 Skill: Concept Objective: Chapter 11-LO2 Question ID: 10-20 Question: Scale refers to the kinds of activities a firm performs and scope to the size of activities.

Answer: FALSE Diff: 1 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-21 Question: Weaker competitors often resort to retrenchment when national business environments grow more competitive.

Answer: TRUE Diff: 2 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-22 Question: The purpose of a combination strategy is to mix growth, retrenchment, and stability strategies across a corporation's business units.

Answer: TRUE Diff: 1 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-23 Question: The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace.

Answer: TRUE Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-24 Question: A negative aspect of the low-cost leadership strategy is low customer loyalty.

Answer: TRUE

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Diff: 3 Page Ref: 293 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-25 Question: A differentiation strategy works best with mass-marketed products aimed at price-sensitive buyers.

Answer: FALSE Diff: 3 Page Ref: 293–294 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-26 Question: Centralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness.

Answer: FALSE Diff: 3 Page Ref: 296 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-27 Question: Decentralization can help foster participative management practices.

Answer: TRUE Diff: 2 Page Ref: 297 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-28 Question: A global matrix structure is an organizational structure that divides worldwide operations according to a company's product areas.

Answer: FALSE Diff: 3 Page Ref: 300 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-29 Question: A main goal of the matrix structure is to bring together geographic and product area managers in joint decision making.

Answer: TRUE Diff: 2 Page Ref: 300 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-30 Question: The most common self-managed teams in many manufacturing companies are downsizing teams.

Answer: FALSE Diff: 3 Page Ref: 301 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

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Multiple Choice Question ID: 10-31 Question: Which of these is the process of identifying and selecting an organization's objectives and deciding how the organization will achieve those objectives?

A) Mission formulation B) Planning C) Value chain analysis D) Strategy development Answer: B Diff: 3 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-32 Question: ________ is the set of planned actions taken by managers to help a company meet its objectives.

A) Mission formulation B) Planning C) Value chain analysis D) Strategy Answer: D Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-33 Question: The strategy formulation process involves both ________.

A) planning and strategy B) strategy and structure C) planning and marketing D) strategy and production Answer: A Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-34 Question: Which of these refers to a written statement of why a company exists and what it plans to accomplish?

A) Strategy statement B) Mission statement C) Value chain statement D) Core competency statement Answer: B Diff: 1 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-35 Question: All parties affected by a company's activities are called ________.

A) stakeholders B) suppliers C) stockholders D) employees Answer: A Diff: 1 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-36 Question: A company's stakeholders include all of the following EXCEPT ________.

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A) suppliers B) employees C) consumers D) competitors Answer: D Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-37 Question: Which of these is the first stage of the strategy formulation process?

A) Formulate strategies B) Implement strategies C) Identify company mission and goals D) Identify core competency and value creating activities Answer: C Diff: 2 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-38 Question: During the second stage of the strategy formulation process, a company does all of the following EXCEPT analyze ________.

A) the firm's primary activities B) competitors' unique abilities C) national and international business environments D) the firm's support activities Answer: B Diff: 3 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-39 Question: All of the following are part of stage three of the strategy formulation process EXCEPT ________.

A) selecting multinational or global strategy B) formulating departmental-level strategy C) analyzing business-level environment D) formulating corporate-level strategy Answer: C Diff: 2 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-40 Question: The objective to mass-produce a zero-pollution emissions automobile by 2020 would most likely belong to a(n) ________.

A) individual business unit B) individual department C) regional headquarters D) global headquarters Answer: A Diff: 1 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-41 Question: To be the largest global company in each industry in which we compete is an example of an objective at the ________.

A) individual department level B) business-unit level

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C) consumer level D) corporate level Answer: D Diff: 2 Page Ref: 289 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-42 Question: At which level in a company do objectives usually become more precise and almost always contain numerical targets of performance?

A) Individual department level B) Business-unit level C) Consumer level D) Corporate level Answer: A Diff: 2 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-43 Question: Which of these is a special company ability that competitors find extremely difficult to equal?

A) Value chain B) Core competency C) Growth strategy D) Location economics Answer: B Diff: 1 Page Ref: 289 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-44 Question: An architect's ability to design an office building in the Victorian style is an example of a(n) ________.

A) core competency B) skill C) ability D) capability Answer: B Diff: 1 Page Ref: 289 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-45 Question: Which of these divides a company's activities into primary and support activities central to creating customer value?

A) Mission statement analysis B) Location analysis C) Multinational analysis D) Value chain analysis Answer: D Diff: 1 Page Ref: 290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-46 Question: Which of these is a primary activity in a company's value chain?

A) Infrastructure B) Marketing and sales C) Procurement D) Human resource management Answer: B

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Diff: 2 Page Ref: 290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-47 Question: Inbound and outbound logistics are considered ________.

A) capabilities B) primary activities C) support activities D) core competencies Answer: B Diff: 2 Page Ref: 290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-48 Question: Human resource management is an example of a ________.

A) capability B) primary activity C) support activity D) core competency Answer: C Diff: 1 Page Ref: 291 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-49 Question: Which of these is NOT a support activity in a company's value chain?

A) Infrastructure B) Marketing and sales C) Procurement D) Human resource management Answer: B Diff: 2 Page Ref: 291 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-50 Question: All of these are primary activities in a firm's value chain EXCEPT ________.

A) operations B) inbound and outbound logistics C) customer service D) human resource management Answer: D Diff: 3 Page Ref: 290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-51 Question: Which of these is a support activity in a firm's value chain?

A) Operations B) Inbound and outbound logistics C) Customer service D) Human resource management Answer: D Diff: 2 Page Ref: 291 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-52

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Chapter 10 International Strategy and Organization

Question: A strategy of adapting products and their marketing strategies in each national market to suit local preferences is called a ________.

A) multinational strategy B) stability strategy C) global strategy D) retrenchment strategy Answer: A Diff: 2 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-53 Question: Companies often establish largely independent, self-contained units in each national market under which of these strategies?

A) Retrenchment B) Global C) Multinational D) Stability Answer: C Diff: 2 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-54 Question: Which of these strategies are appropriate for companies in industries where buyer preferences do not converge across national borders?

A) Retrenchment B) Global C) Multinational D) Stability Answer: C Diff: 3 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-55 Question: A strategy that establishes research and development (R&D), production, and marketing at the subsidiary level is called a ________ strategy.

A) retrenchment B) global C) multinational D) stability Answer: C Diff: 2 Page Ref: 292–293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-56 Question: The main drawback of a multinational strategy is that it does not allow a company to ________.

A) exploit scale economies in product development and marketing B) closely monitor buyer preferences in each local market C) modify its products except for the most superficial features D) respond quickly and effectively to emerging buyer preferences Answer: A Diff: 3 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-57 Question: In an industry where price competitiveness is a key success factor, a firm should NOT use a ________

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strategy.

A) retrenchment B) global C) multinational D) stability Answer: C Diff: 3 Page Ref: 292–293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-58 Question: Offering the same products using the same marketing strategy in all national markets is referred to as a ________ strategy.

A) global B) multinational C) retrenchment D) multidomestic Answer: A Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-59 Question: Companies producing entire inventories of products or components in one or very few optimal locations are likely following a ________ strategy.

A) retrenchment B) global C) multidomestic D) multinational Answer: B Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-60 Question: Companies performing product R&D in one or very few locations are likely following a ________ strategy.

A) retrenchment B) global C) multidomestic D) multinational Answer: B Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-61 Question: Companies designing promotional campaigns and advertising strategies at headquarters are likely following a ________ strategy.

A) retrenchment B) global C) multinational D) multidomestic Answer: B Diff: 1 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-62 Question: Global products are most common in industries where there is ________.

A) little buyer convergence

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B) low pressure to contain costs C) significant price competition D) high pressure for localization Answer: C Diff: 3 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-63 Question: A ________ strategy can create cost savings due to product and marketing standardization.

A) retrenchment B) multidomestic C) multinational D) global Answer: D Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-64 Question: A ________ strategy can cause a company to overlook important differences in buyer preferences from one market to another.

A) global B) retrenchment C) multidomestic D) multinational Answer: A Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-65 Question: The main benefit of a global strategy is that it allows a company to ________.

A) closely monitor buyer preferences in each local market B) save costs due to product and marketing standardization C) avoid either growth or retrenchment D) respond effectively to emerging buyer preferences Answer: B Diff: 3 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-66 Question: Companies involved in more than one line of business must first formulate a ________.

A) business-level strategy B) department-level strategy C) corporate-level strategy D) global-level strategy Answer: C Diff: 3 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-67 Question: All of these are key approaches to corporate-level strategy EXCEPT ________.

A) differentiation B) growth C) stability D) retrenchment Answer: A

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Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-68 Question: A growth strategy is designed to ________.

A) guard against change B) reduce the scale or scope of a corporation's operations C) increase the scale or scope of a corporation's operations D) mix growth, retrenchment, and stability strategies Answer: C Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-69 Question: Yardsticks most commonly used to measure growth include all of the following EXCEPT ________.

A) geographic coverage B) number of business units C) market share D) average age of facilities Answer: D Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-70 Question: Which of these strategies is designed to increase the scale or scope of a corporation's operations?

A) Differentiation B) Growth C) Stability D) Retrenchment Answer: B Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-71 Question: Organic growth refers to corporate strategy relying on ________.

A) mergers and acquisitions B) joint venture growth C) internally generated growth D) strategic alliance growth Answer: C Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-72 Question: Methods of growth include all of the following EXCEPT ________.

A) acquisitions B) joint ventures C) strategic alliances D) inorganic growth Answer: D Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-73

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Question: A strategy designed to reduce the scale or scope of a corporation's business is called a ________ strategy.

A) growth B) differentiation C) retrenchment D) stability Answer: C Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-74 Question: A retrenchment strategy is designed to ________.

A) guard against change B) reduce the scale or scope of a corporation's operations C) increase the scale or scope of a corporation's operations D) mix growth, retrenchment, and stability strategies Answer: B Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-75 Question: A company that is closing factories with unused capacity and laying off workers is likely following a ________ strategy.

A) growth B) retrenchment C) stability D) combination Answer: B Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-76 Question: A company that is reducing the scope of its activities by selling unprofitable business units or those no longer directly related to its overall aims is likely following a ________ strategy.

A) growth B) retrenchment C) stability D) combination Answer: B Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-77 Question: Which of these strategies is designed to guard against change?

A) Stability B) Growth C) Retrenchment D) Differentiation Answer: A Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-78 Question: Companies that see the business environment as posing neither profitable opportunities nor threats will likely follow a ________ strategy.

A) growth

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B) retrenchment C) stability D) combination Answer: C Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-79 Question: Which strategy works best with mass-marketed products aimed at price-sensitive buyers?

A) Differentiation B) Stability C) Low-cost leadership D) Retrenchment Answer: C Diff: 2 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-80 Question: A strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry is called ________.

A) differentiation B) stability C) low-cost leadership D) retrenchment Answer: C Diff: 1 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-81 Question: Which of these strategies is one in which a company designs its products to be perceived by buyers as unique throughout its industry?

A) Differentiation B) Stability C) Low-cost leadership D) Retrenchment Answer: A Diff: 1 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-82 Question: Companies that follow a ________ strategy can charge a higher price and enjoy greater customer loyalty than the low-cost leader.

A) differentiation B) stability C) low-cost leadership D) retrenchment Answer: A Diff: 1 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-83 Question: Which of the following is NOT a way that products can be differentiated?

A) Quality B) Design C) Accounting methods

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D) Brand image Answer: C Diff: 2 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-84 Question: Which of the following is NOT a characteristic upon which products are typically differentiated?

A) Brand image B) Product design C) Quality reputation D) Low cost Answer: D Diff: 2 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-85 Question: The way in which a company divides its activities among separate units and coordinates activities among those units is referred to as ________.

A) process planning B) organizational structure C) capacity planning D) mission and objectives Answer: B Diff: 1 Page Ref: 296 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-86 Question: An organizational structure that organizes a company's entire global operations into countries or geographic regions is referred to as a(n) ________ structure.

A) international area B) international division C) global matrix D) global product Answer: A Diff: 1 Page Ref: 300 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-87 Question: An organizational structure that splits the chain of command between product and area divisions is referred to as a(n) ________ structure.

A) international area B) international division C) global matrix D) global product Answer: C Diff: 1 Page Ref: 301 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-88 Question: A team in which employees from a single department take on responsibilities of their former supervisors is called a ________ team.

A) cross-functional B) self-managed

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C) global D) domineering Answer: B Diff: 2 Page Ref: 302 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-89 Question: A team of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems is referred to as a ________ team.

A) culture B) cross-functional C) global D) self-managed Answer: C Diff: 2 Page Ref: 302 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Scenario: Beanstalk International Beanstalk International is rapidly growing. The company wants to follow a strategy of adapting its products and marketing in each national market to suit local preferences. Beanstalk is intent on creating value for its customers.

Question ID: 10-90 Question: Beanstalk managers should conduct which of the following to identify company activities that create value for its customers?

A) Mission statement analysis B) Competitive analysis C) Value chain analysis D) Process and capacity planning Answer: C Diff: 1 Page Ref: 290 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-91 Question: Which of the following would be considered a primary activity in creating value for customers, as opposed to a support activity?

A) Firm infrastructure B) Procurement C) Human resource management D) Logistics Answer: D Diff: 2 Page Ref: 290 Skill: Application Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-92 Question: Which of these would be considered a support activity in creating value for Beanstalk's customers, as opposed to a primary activity?

A) Production B) Marketing and sales C) Customer service D) Technology development Answer: D Diff: 2 Page Ref: 290 Skill: Application

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Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-93 Question: The strategy that Beanstalk would most likely want to follow is called a ________ strategy.

A) multinational B) retrenchment C) global D) stability Answer: A Diff: 2 Page Ref: 292 Skill: Application Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-94 Question: Beanstalk managers know that the drawback of such an adaptive strategy is that ________.

A) it does not allow companies to exploit scale economies in product development, manufacturing, and marketing B) it can cause a company to overlook important differences in buyer preferences from one market to another C) it is applicable to industries in which price-competitiveness is a key success factor D) it does not allow a company to modify its products except for the most superficial features Answer: A Diff: 3 Page Ref: 293 Skill: Application Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Scenario: TeleToys International TeleToys International, a US-based company, recently opened 18 toy stores in Brazil, acquired a women's clothing store company in Canada, and closed its men's clothing store chain in Australia. The company has a structure that organizes its global operations into geographic regions.

Question ID: 10-95 Question: TeleToys' opening of 18 stores in Brazil can best be described as a(n) ________ strategy.

A) organic growth B) stability C) retrenchment D) acquisition Answer: A Diff: 2 Page Ref: 294 Skill: Application Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-96 Question: The closing of TeleToys' Australian men's clothing store chain can best be described as a(n) ________ strategy.

A) organic growth B) stability C) retrenchment D) acquisition Answer: C Diff: 1 Page Ref: 294 Skill: Application Objective: Chapter 11-LO2 Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-97 Question: If TeleToys wants buyers to perceive its products as unique, it should follow which type of strategy?

A) Retrenchment B) Global C) Differentiation D) Low-cost leadership

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Answer: C Diff: 2 Page Ref: 295 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-98 Question: Which of the following features would TeleToys be LEAST likely to use to create the perception of unique products?

A) Brand image B) Quality reputation C) Product design D) Low cost Answer: D Diff: 1 Page Ref: 295 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-99 Question: The company's organizational structure can best be referred to as a(n) ________ structure.

A) international division B) global product C) global matrix D) international area Answer: D Diff: 3 Page Ref: 300 Skill: Application Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Scenario: Redding Club Redding Club is a recording and music distribution company with a significant market presence in its native India—an emerging market. Redding's CEO, Bill Woods, an immigrant from England, is concerned whether the company will be able to compete against a large, multinational music corporation that is targeting India as part of its growth strategy.

Question ID: 10-100 Question: Bill knows that if globalization pressures in the industry are weak, and a company's own assets are not transferable, the company should concentrate on its home turf using a(n) ________ strategy.

A) defender B) extender C) dodger D) contender Answer: A Diff: 2 Page Ref: 311 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-101 Question: If globalization pressures are weak in the music industry, and Redding Club's assets can be transferred abroad, the company may be able to extend its success to a limited number of other markets using a(n) ________ strategy.

A) defender B) extender C) dodger D) contender Answer: B Diff: 2 Page Ref: 311 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

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Question ID: 10-102 Question: If globalization pressures are strong, but Redding Club's assets cannot be easily transferred to new markets, the company may want to restructure itself around activities that buyers value by using a(n) ________ strategy.

A) defender B) extender C) dodger D) contender Answer: C Diff: 2 Page Ref: 311 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-103 Question: If Bill decides that Redding Club's best chance for success is to simply face the large multinational headon, the company would pursue a(n) ________ strategy.

A) defender B) extender C) dodger D) contender Answer: D Diff: 2 Page Ref: 311 Skill: Application Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Fill-In-The-Blank Question ID: 10-104 Question: ________ are all parties who are affected by a company's activities.

Answer: Stakeholders Diff: 1 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-105 Question: A clearly identifiable group of potential buyers is known as a(n) ________.

Answer: market segment Diff: 2 Page Ref: 288 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-106 Question: A(n) ________ is a special ability of a company that competitors find extremely difficult or impossible to equal.

Answer: core competency Diff: 2 Page Ref: 289 AACSB: Dynamics of the global economy Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-107 Question: The process of dividing a company's activities into primary and support activities and identifying those that create value for customers is referred to as ________.

Answer: value chain analysis Diff: 2 Page Ref: 290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

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Question ID: 10-108 Question: Adapting products and their marketing strategies in each national market to suit local preferences refers to a(n) ________ strategy.

Answer: multinational (multidomestic) Diff: 1 Page Ref: 292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-109 Question: The main benefit of a(n) ________ strategy is its cost savings due to product and marketing standardization.

Answer: global Diff: 2 Page Ref: 293 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-110 Question: Companies involved in more than one line of business must first formulate a(n) ________ strategy.

Answer: corporate-level Diff: 3 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-111 Question: ________ refers to a corporate strategy relying on internally generated growth.

Answer: Organic growth Diff: 3 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-112 Question: A strategy designed to reduce the scale or scope of a corporation's business is referred to as a(n) ________ strategy.

Answer: retrenchment Diff: 1 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-113 Question: A strategy designed to guard against change and used by corporations to avoid either growth or retrenchment is called a(n) ________ strategy.

Answer: stability Diff: 2 Page Ref: 294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-114 Question: A strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry is called a(n) ________ strategy.

Answer: low-cost leadership Diff: 1 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-115 Question: A(n) ________ strategy is one in which a company designs its products to be perceived as unique by buyers throughout its industry.

Answer: differentiation Diff: 2 Page Ref: 295 Skill: Concept

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Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-116 Question: A(n) ________ is one in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, differentiating its product, or both.

Answer: focus strategy Diff: 2 Page Ref: 295 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-117 Question: ________ decision making occurs at a high level in one location, such as headquarters.

Answer: Centralized Diff: 2 Page Ref: 297 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-118 Question: The lines of authority that run from top management to individual employees and specify internal reporting relationships refers to ________.

Answer: chains of command Diff: 2 Page Ref: 298 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-119 Question: A(n) ________ is an organizational structure that divides worldwide operations according to a company's product areas.

Answer: global product structure Diff: 2 Page Ref: 300–301 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-120 Question: A(n) ________ is an organizational structure that splits the chain of command between product and area divisions.

Answer: global matrix structure Diff: 2 Page Ref: 301 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-121 Question: A(n) ________ is one in which employees from a single department take on responsibilities of their former supervisors.

Answer: self-managed team Diff: 2 Page Ref: 302 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-122 Question: ________ teams help reduce waste in the production process.

Answer: Quality improvement Diff: 3 Page Ref: 302 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

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Question ID: 10-123 Question: A(n) ________ is one composed of employees who work at similar levels in different functional departments.

Answer: cross-functional team Diff: 1 Page Ref: 302 Skill: Concept Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Essay Question ID: 10-124 Question: Differentiate between the primary and support activities that create value for a company's customers. How can managers determine whether an activity enhances customer value?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Value-chain analysis divides a company's activities into primary activities and support activities that are central to creating customer value. Primary activities include inbound and outbound logistics, production (goods and services), marketing and sales, and customer service. Primary activities involve the creation of the product, its marketing and delivery to buyers, and its after-sales support and service. Support activities include business infrastructure, human resource management, technology development, and procurement (sourcing). Each of these activities provides the inputs and infrastructure required by the primary activities.

Each primary and support activity is a source of strength or weakness for a company. Managers determine whether each activity enhances or detracts from customer value, and they incorporate this knowledge into the strategyformulation process. Analysis of primary and support activities often involves finding activities in which improvements can be made with large benefits.

Primary Activities. When analyzing primary activities, managers often look for areas in which the company can increase the value provided to its customers. For example, managers might examine production processes and discover new, more efficient manufacturing methods to reduce production costs and improve quality. Customer satisfaction might be increased by improving logistics management that shortens the time it takes to get a product to the buyer or by providing better customer service.

Support Activities. These assist companies in performing their primary activities. For example, the actions of any company's employees are crucial to its success. Production, logistics, marketing, sales, and customer service all benefit when employees are qualified and well trained. International companies can often improve the quality of their products by investing in worker training and management development. In turn, ensuring quality can increase the efficiency of a firm's manufacturing, marketing and sales, and customer service activities. Effective procurement (or sourcing) can locate low-cost, high-quality raw materials or intermediate products and ensure on-time delivery to production facilities. Finally, a sophisticated infrastructure not only improves internal communication but also supports organizational culture and each primary activity.

Diff: 3 Page Ref: 288–289, 395 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection.

Question ID: 10-125 Question: Describe in detail the strategy formulation process. Identify the activities under each stage.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The strategy-formulation process involves both planning and strategy. Strategy formulation permits managers to step back from day-to-day activities and get a fresh perspective on the current and future direction of the company and its industry.

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Identify Company Mission and Goals. Most companies have a general purpose for why they exist that they express in a mission statement—a written statement of why a company exists and what it plans to accomplish. For example, one company might set out to supply the highest level of service in a market segment—a clearly identifiable group of potential buyers. Another might strive to be the lowest-cost supplier in its segment worldwide. The mission statement often guides decisions such as which industries to enter or exit and how to compete in chosen segments.

Identify Core Competency and Value-Creating Activities. Before managers formulate effective strategies, they must

analyze the company, its industry (or industries), and the national business environments in which it is involved.

They should also examine industries and countries being targeted for potential future entry. We address the company and its industries in this section and examine the business environment in the next section.

Formulate Strategies. The strengths and special capabilities of an international company, along with the environmental forces it faces, strongly influence its strategy.

Diff: 2 Page Ref: 286–290 Skill: Concept Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection; Question ID: 10-126 Question: Describe in detail the two international strategies that companies may use. Identify the differences between the two, and the main benefits and drawbacks of each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Some international companies choose to follow a multinational (multidomestic) strategy—a strategy of adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is just what its name implies—a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market. Each subsidiary typically undertakes its own product research and development, production, and marketing. In many ways, each unit functions largely as an independent company. Multinational strategies are often appropriate for companies in industries in which buyer preferences do not converge across national borders, such as certain food products and some print media.

The main benefit of a multinational strategy is that it allows companies to monitor buyer preferences closely in each local market and to respond quickly and effectively to emerging buyer preferences. Companies hope that customers will perceive a tailored product as delivering greater value than do competitors' products. A multinational strategy, then, should allow a company to charge higher prices and/or gain market share.

The main drawback of a multinational strategy is that companies cannot exploit scale economies in product development, manufacturing, or marketing. The multinational strategy typically increases the cost structure for international companies and forces them to charge higher prices to recover such costs. As such, a multinational strategy is usually poorly suited to industries in which price competitiveness is a key success factor. The high degree of independence with which each unit operates also may reduce opportunities to share knowledge among units within a company.

Other companies decide that what suits their operations is a global strategy—a strategy of offering the same products using the same marketing strategy in all national markets. Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations. They also tend to perform product research and development in one or a few locations and typically design promotional campaigns and advertising strategies at headquarters. So-called global products are most common in industries characterized by price competition and, therefore, pressure to contain costs. They include certain electronic components, a wide variety of industrial goods such as steel, and some consumer goods such as paper and writing instruments.

The main benefit of a global strategy is cost savings due to product and marketing standardization. These cost savings can then be passed on to consumers to help the company gain market share in its market segment. A global strategy also allows managers to share lessons learned in one market with managers at other locations.

The main problem with a global strategy is it can cause a company to overlook important differences in buyer

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preferences from one market to another. A global strategy does not allow a company to modify its products except for the most superficial features, such as the colour of paint applied to a finished product or a small add-on feature.

This can present a competitor with an opportunity to step in and satisfy unmet needs of local buyers, thereby creating a niche market.

Diff: 3 Page Ref: 290–292 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-127 Question: Describe in detail the four key approaches to corporate strategy, providing an example of each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies involved in more than one line of business must first formulate a corporate-level strategy. This means, in part, identifying the national markets and industries in which the company will operate. It also involves developing overall objectives for the company's different business units and specifying the role that each unit will play in reaching those objectives. The four key approaches to corporate strategy are growth, retrenchment, stability, and

combination.

A growth strategy is designed to increase the scale or scope of a corporation's operations. Scale refers to the size of a corporation's activities, scope to the kinds of activities it performs. Yardsticks commonly used to measure growth include geographic coverage, number of business units, market share, sales revenue, and number of employees.

Organic growth refers to a corporate strategy of relying on internally generated growth. For example, management at 3M strongly encourages entrepreneurial activity, often spinning off business units to nurture the best ideas and carry them to completion.

Other methods of growth include mergers and acquisitions, joint ventures, and strategic alliances. These tactics are used when companies do not wish to invest in developing certain skills internally or when other companies already do what managers are trying to achieve. Common partners in implementing these strategies include competitors, suppliers, and buyers. Corporations typically join forces with competitors to reduce competition, expand product lines, or expand geographically. A common motivation for joining forces with suppliers is to increase control over the quality, cost, and timing of inputs.

The exact opposite of a growth strategy is a retrenchment strategy—a strategy designed to reduce the scale or scope of a corporation's businesses. Corporations often cut back the scale of their operations when economic conditions worsen or competition increases. They may do so by closing factories with unused capacity and laying off workers.

Corporations can also reduce the scale of their operations by laying off managers and salespeople in national markets that are not generating adequate sales revenue. Corporations reduce the scope of their activities by selling unprofitable business units or those no longer directly related to their overall aims. Weaker competitors often resort to retrenchment when national business environments grow more competitive.

A stability strategy is designed to guard against change. Corporations often use a stability strategy when trying to avoid either growth or retrenchment. Such corporations have typically met their stated objectives or are satisfied with what they have already accomplished. They believe that their strengths are being fully exploited and their weaknesses fully protected against. They also see the business environment as posing neither profitable opportunities nor threats. They have no interest in expanding sales, increasing profits, increasing market share, or expanding the customer base; at present, they want simply to maintain their present positions.

The purpose of a combination strategy is to mix growth, retrenchment, and stability strategies across a corporation's business units. For example, a corporation can invest in units that show promise, retrench in those for which less exposure is desired, and stabilize others. In fact, corporate combination strategies are quite common because international corporations rarely follow identical strategies in each of their business units.

Diff: 3 Page Ref: 292–294 Skill: Concept Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

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Question ID: 10-128 Question: How do national and international business environments influence multinational strategy formulation?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

National differences in language, religious beliefs, customs, traditions, and climate complicate strategy formulation.

Language differences can increase the cost of operations and administration. Manufacturing processes must sometimes be adapted to the supply of local workers and to local customs, traditions, and practices. Marketing activities can sometimes result in costly mistakes if they do not incorporate cultural differences.

Differences in political and legal systems also complicate international strategies. Legal and political processes often differ in target countries to such an extent that firms must hire outside consultants to teach them about the local system. Such knowledge is important to international companies because the approval of the host government is almost always necessary for making direct investments. Companies need to know which ministry or department has the authority to grant approval for a big business deal—a process that can become extremely cumbersome.

Different national economic systems further complicate strategy formulation. Negative attitudes of local people toward the impact of direct investment can generate political unrest. Economic philosophy affects the tax rates that governments impose. Whereas socialist economic systems normally levy high taxes on business profits, free-market economies tend to levy lighter taxes. The need to work in more than one currency also complicates international strategy. To minimize losses from currency fluctuations, companies must develop strategies to deal with exchangerate risk.

Finally, apart from complicating strategy, the national business environment can affect the location in which a company chooses to perform an activity. For example, a nation that spends a high portion of its GDP on research and development attracts high-tech industries and high-wage jobs and, as a result, prospers. By contrast, countries that spend relatively little in the way of R&D tend to have lower levels of prosperity.

Some international companies choose to follow a multinational (multidomestic) strategy—a strategy of adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is just what its name implies—a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market. Each subsidiary typically undertakes its own product research and development, production, and marketing. In many ways, each unit functions largely as an independent company. Multinational strategies are often appropriate for companies in industries in which buyer preferences do not converge across national borders, such as certain food products and some print media.

Diff: 2 Page Ref: 286, 290–291 Skill: Synthesis Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection; 10-2 Identify the two international strategies and the corporate-level strategies that companies use.

Question ID: 10-129 Question: Explain in detail the relationship between a mission statement and a business-level strategy.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Mission statements often spell out how a company's operations affect its stakeholders—all parties, ranging from suppliers and employees to stockholders and consumers, who are affected by a company's activities. Some companies place corporate brands centre stage and take on the mission of creating well-liked brands above all else.

The mission statements of other businesses focus on other issues, including superior shareholder returns, profitability, market share, and corporate social responsibility. Still other companies make their mission to be the interests of consumers.

Managers must also formulate separate business-level strategies for each business unit. For some companies, this means creating just one strategy. This is the case when the business-level strategy and the corporate-level strategy are one and the same because the corporation is involved in just one line of business. For other companies, this can mean creating dozens of strategies.

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The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace. Each business unit must decide whether to sell the lowest priced product in an industry or to integrate

special attributes into its products. A business unit can use one of three generic business-level strategies for competing in its industry—low-cost leadership, differentiation, or focus. These strategies can be applied to practically all firms in all markets worldwide.

Diff: 3 Page Ref: 286–287, 293–294 Skill: Synthesis Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection; 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-130 Question: Describe the three generic business-level strategies, providing an example of each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

In addition to stipulating the overall corporate strategy, managers must also formulate separate business-level strategies for each business unit. For some companies, this means creating just one strategy. This is the case when the business level strategy and the corporate-level strategy are one and the same because the corporation is involved in just one line of business. For other companies, this can mean creating dozens of strategies.

The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace. Each business unit must decide whether to sell the lowest priced product in an industry or to integrate

special attributes into its products. A business unit can use one of three generic business-level strategies for competing in its industry—low-cost leadership, differentiation, or focus. These strategies can be applied to practically all firms in all markets worldwide.

A strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry is called a low-cost leadership strategy. Companies that pursue the low-cost leadership position also try to contain administrative costs and the costs of their various primary activities, including marketing, advertising, and distribution. Although cutting costs is the mantra for firms that pursue a low-cost leadership position, other important competitive factors such as product quality and customer service cannot be ignored. Factors underlying the low-cost leadership position (efficient production in large quantities) help guard against attack by competitors because of the large upfront cost of getting started. The strategy typically requires a company to have a large market share because achieving low-cost leadership tends to rely on large-scale production to contain costs. One negative aspect of the low-cost leadership strategy is low customer loyalty—all else being equal, buyers will purchase from any low-cost leader.

A differentiation strategy is one in which a company designs its products to be perceived as unique by buyers throughout its industry. The perception of uniqueness can allow a company to charge a higher price and enjoy greater customer loyalty than it could as a low-cost leader. But a perception of exclusivity, or meeting the needs of a small group of buyers, tends to force a company into a lower market-share position. A company using this strategy must develop a loyal customer base to offset its smaller market share and higher costs of producing and marketing a unique product.

A focus strategy is one in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. Increasing competition often means more products distinguished by price or differentiated by quality, design, and so forth. In turn, a greater product range leads to the continuous refinement of market segments. Today many industries consist of large numbers of market segments and even smaller sub-segments. For example, some firms try to serve the needs of one ethnic or racial group, whereas others, often entrepreneurs and small businesses, focus on a single geographic area.

Diff: 2 Page Ref: 293–294 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-131 Question: Explain in detail how a global strategy complements a corporate growth strategy.

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Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Some companies decide that what suits their operations is a global strategy—a strategy of offering the same products using the same marketing strategy in all national markets. Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations. They also tend to perform product research and development in one or a few locations and typically design promotional campaigns and advertising strategies at headquarters. So-called global products are most common in industries characterized by price competition and, therefore, pressure to contain costs. They include certain electronic components, a wide variety of industrial goods such as steel, and some consumer goods such as paper and writing instruments.

The main benefit of a global strategy is cost savings due to product and marketing standardization. These cost savings can then be passed on to consumers to help the company gain market share in its market segment. A global strategy also allows managers to share lessons learned in one market with managers at other locations.

The main problem with a global strategy is it can cause a company to overlook important differences in buyer preferences from one market to another. A global strategy does not allow a company to modify its products except for the most superficial features, such as the colour of paint applied to a finished product or a small add-on feature.

This can present a competitor with an opportunity to step in and satisfy unmet needs of local buyers, thereby creating a niche market.

A growth strategy is designed to increase the scale or scope of a corporation's operations. Scale refers to the size of a corporation's activities, scope to the kinds of activities it performs. Yardsticks commonly used to measure growth include geographic coverage, number of business units, market share, sales revenue, and number of employees.

Organic growth refers to a corporate strategy of relying on internally generated growth. For example, management at 3M strongly encourages entrepreneurial activity, often spinning off business units to nurture the best ideas and carry them to completion.

Other methods of growth include mergers and acquisitions, joint ventures, and strategic alliances. These tactics are used when companies do not wish to invest in developing certain skills internally or when other companies already do what managers are trying to achieve. Common partners in implementing these strategies include competitors, suppliers, and buyers. Corporations typically join forces with competitors to reduce competition, expand product lines, or expand geographically. A common motivation for joining forces with suppliers is to increase control over the quality, cost, and timing of inputs.

Diff: 3 Page Ref: 291–292 Skill: Synthesis Objective: 10-2 Identify the two international strategies and the corporate-level strategies that companies use; 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-132 Question: Explain the different ways products can be differentiated, providing an example of each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A differentiation strategy is one in which a company designs its products to be perceived as unique by buyers throughout its industry. The perception of uniqueness can allow a company to charge a higher price and enjoy greater customer loyalty than it could as a low-cost leader. But a perception of exclusivity, or meeting the needs of a small group of buyers, tends to force a company into a lower market-share position. A company using this strategy must develop a loyal customer base to offset its smaller market share and higher costs of producing and marketing a unique product.

One way products can be differentiated is by improving their reputation for quality. Ceramic tableware for everyday use is found at department stores in almost every country. But the ceramic tableware made by Japanese producer Noritake differentiates itself from common tableware by emphasizing its superior quality. The perception of higher quality allows manufacturers to charge higher prices for their products worldwide.

Other products are differentiated by distinctive brand images. Armani and DKNY, for example, are relatively pricey

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global clothiers appealing to a young, fashionable clientele. Each is continually introducing new textures and colours that are at once stylish and functional. Another example is Italian carmaker Alfa Romeo, which does not compete in the fiercely competitive mass-consumer segment of the global automobile industry. If it were to do so, it would have to be price-competitive and offer a wider selection of cars. Instead, Alfa Romeo offers a high-quality product with a brand image that rewards the Alfa Romeo owner with status and prestige.

Another differentiating factor is product design—the sum of the features by which a product looks and functions according to customer requirements. Special features differentiate both goods and services in the minds of consumers who value those features. Manufacturers can also combine several differentiation factors in formulating their strategies.

Diff: 1 Page Ref: 293–294 Skill: Concept Objective: 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-133 Question: Discuss four questions small businesses ask before going global, and explain a generic focus strategy.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Every company must have a solid grasp of its capabilities and its product if it's going to be successful in global markets.

Are you ready? Do you or your key personnel speak other languages? Have you or they lived in other cultures for extended periods? How long has your company been in business? What markets might need what your company sells? Can your business withstand the rough seas of global trade? What specific sales numbers are forecasted? Can you map your global business journey?

Is your product ready? Can your business capitalize on its strengths? Will you need to modify your product or your marketing approach? Will modifying the product or its marketing weaken your offering? Does your product satisfy all local safety standards and other regulations? Can your product stand up to the competition and to the scrutiny of customers?

Is each department ready? Is your company's infrastructure capable of going global? Does each department (logistics, operations, marketing, sales, service, human resources, collections, etc.) have the resources to handle its international responsibilities? What is your company's financial strategy for international expansion? Can domestic sales support an initial period of money-losing international operations? Is everyone in the company committed to the international effort?

Is your strategy ready? Will your company's international effort conflict with or complement your overall business strategy? Will your company's foreignness be a hindrance, or can it be exploited profitably? Is your business capable of sustaining a lengthy international endeavour? How will your company break into long-established family networks and business relationships?

A focus strategy is one in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. Increasing competition often means more products distinguished by price or differentiated by quality, design, and so forth. In turn, a greater product range leads to the continuous refinement of market segments. Today many industries consist of large numbers of market segments and even smaller sub-segments. For example, some firms try to serve the needs of one ethnic or racial group, whereas others, often entrepreneurs and small businesses, focus on a single geographic area.

Diff: 1 Page Ref: 290, 294 Skill: Synthesis Objective: 10-1 Explain the stages of identification and analysis that precede strategy selection; 10-3 Identify the business-level strategies of companies and the role of department-level strategies.

Question ID: 10-134 Question: When should managers consider decentralized decision making? What benefits might emerge?

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Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Decentralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness. Decentralized decisions can result in products that are better suited to the needs and preferences of local buyers because subsidiary managers are in closer contact with the local business environment.

Local managers are more likely to perceive environmental changes that managers at headquarters might not notice.

By contrast, central managers may not perceive such changes or would likely get a secondhand account of local events. Delayed response and misinterpreted events could then result in lost orders, stalled production, and weakened competitiveness.

Decentralization can also help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies. Decentralization also can increase personal accountability for business decisions.

When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

Diff: 2 Page Ref: 296 Skill: Concept Objective: 10-4 Discuss the important issues that influence the choice of organizational structure.

Question ID: 10-135 Question: Discuss the major points of centralization versus decentralization, and explain the differences between an international area structure and a global product structure.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A vital issue for top managers is determining the degree to which decision making in the organization will be centralized or decentralized. Centralized decision making concentrates decision making at a high organizational level in one location, such as at headquarters. Decentralized decision making disperses decisions to lower organizational levels, such as to international subsidiaries.

Should managers at the parent company be actively involved in the decisions made by international subsidiaries? Or should they intervene relatively little, perhaps only in the most crucial decisions? Some decisions, of course, must be decentralized. If top managers involve themselves in the day-to-day decisions of every subsidiary, they are likely to be overwhelmed. For example, managers cannot get directly involved in every hiring decision or assignment of people to specific tasks at each facility. On the other hand, overall corporate strategy cannot be delegated to subsidiary managers because only top management is likely to have the appropriate perspective to formulate corporate strategy.

In a discussion of centralization versus decentralization of decision making, it is important to remember two points: 1. Companies rarely centralize or decentralize all decision making. Rather, they seek an approach that will result in the greatest efficiency and effectiveness.

2. International companies may centralize decision making in certain geographic markets while decentralizing it in others. Numerous factors influence this decision, including the need for product modification and the abilities of managers at each location.

An international area structure organizes a company's entire global operations into countries or geographic regions.

The greater the number of countries in which a company operates, the greater the likelihood it will organize into regions—say, Asia, Europe, and the Americas—instead of countries. Typically, a general manager is assigned to each country or region. Under this structure, each geographic division operates as a self-contained unit, with most decision making decentralized in the hands of the country or regional managers. Each unit has its own set of departments— purchasing, production, marketing and sales, R&D, and accounting. Each also tends to handle much of its own strategic planning. Management at the parent-company headquarters makes decisions regarding overall corporate

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strategy and coordinates the activities of various units.

The international area structure is best suited to companies that treat each national or regional market as unique. It is particularly useful when there are vast cultural, political, or economic differences between nations or regions.

When they enjoy a great deal of control over activities in their own environments, general managers become experts on the unique needs of their buyers. On the other hand, because units act independently, allocated resources may overlap and cross-fertilization of knowledge from one unit to another may be less than desirable.

A global product structure divides worldwide operations according to a company's product areas. Each product division is then divided into domestic and international units. Each function—R&D, marketing, and so forth—is thus duplicated in both the domestic and international units of each product division.

The global product structure is suitable for companies that offer diverse sets of products or services because it overcomes some coordination problems of the international division structure. Because the primary focus is on the product, activities must be coordinated among a product division's domestic and international managers so they do not conflict.

Diff: 3 Page Ref: 296–297, 299–300 Skill: Synthesis Objective: 10-4 Discuss the important issues that influence the choice of organizational structure; 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-136 Question: Describe any three organizational structures common for the vast majority of the international companies.

Provide an example organizational chart for each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

An international division structure separates domestic from international business activities by creating a separate international division with its own manager. In turn, the international division is typically divided into units corresponding to the countries in which a company is active—say, China, Indonesia, and Thailand. Within each country, a general manager controls the manufacture and marketing of the firm's products. Each country unit typically carries out all of its own activities with its own departments such as marketing and sales, finance, and production.

Because the international division structure concentrates international expertise in one division, divisional managers become specialists in a wide variety of activities such as foreign exchange, export documentation, and host government relations. By consigning international activities to a single division, a firm can reduce costs, increase efficiency, and prevent international activities from disrupting domestic operations. These are important criteria for firms new to international business and whose international operations account for a small percentage of their total business.

An international area structure organizes a company's entire global operations into countries or geographic regions.

The greater the number of countries in which a company operates, the greater the likelihood it will organize into regions—say, Asia, Europe, and the Americas—instead of countries. Typically, a general manager is assigned to each country or region. Under this structure, each geographic division operates as a self-contained unit, with most decision making decentralized in the hands of the country or regional managers. Each unit has its own set of departments— purchasing, production, marketing and sales, R&D, and accounting. Each also tends to handle much of its own strategic planning. Management at the parent-company headquarters makes decisions regarding overall corporate strategy and coordinates the activities of various units.

The international area structure is best suited to companies that treat each national or regional market as unique. It is particularly useful when there are vast cultural, political, or economic differences between nations or regions.

When they enjoy a great deal of control over activities in their own environments, general managers become experts on the unique needs of their buyers. On the other hand, because units act independently, allocated resources may overlap and cross-fertilization of knowledge from one unit to another may be less than desirable.

Diff: 3 Page Ref: 298–301 Skill: Concept

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Objective: 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-137 Question: Explain participative management and accountability in a decentralized organization. Describe how these two concepts apply in a global matrix structure. Include a description of a global matrix structure in your answer.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Decentralization can also help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies. Decentralization also can increase personal accountability for business decisions.

When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

A global matrix structure splits the chain of command between product and area divisions. Each manager reports to two bosses—the president of the product division and the president of the geographic area. A main goal of the matrix structure is to bring together geographic area managers and product area managers in joint decision making.

In fact, bringing together specialists from different parts of the organization creates a sort of team organization. The popularity of the matrix structure has grown among companies trying to increase local responsiveness, reduce costs, and coordinate worldwide operations.

The matrix structure resolves some of the shortcomings of other organizational structures, especially by improving communication among divisions and increasing the efficiency of highly specialized employees. At its best, the matrix structure can increase coordination while simultaneously improving agility and local responsiveness.

However, the global matrix structure suffers from two major shortcomings. First, the matrix form can be quite cumbersome. Numerous meetings are required simply to coordinate the actions of the various division heads, let alone the activities within divisions. In turn, the need for complex coordination tends to make decision making time consuming and slows the reaction time of the organization. Second, individual responsibility and accountability can become foggy in the matrix organization structure. Because responsibility is shared, managers can attribute poor performance to the actions of the other manager. Moreover, the source of problems in the matrix structure can be hard to detect and corrective action difficult to take.

Diff: 3 Page Ref: 297, 300 Skill: Synthesis Objective: 10-4 Discuss the important issues that influence the choice of organizational structure; 10-5 Describe each type of international organizational structure and explain the importance of work teams.

Question ID: 10-138 Question: When should managers consider decentralized decision making? What benefits might emerge? Explain the benefits of a self-managed work team.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Decentralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness. Decentralized decisions can result in products that are better suited to the needs and preferences of local buyers because subsidiary managers are in closer contact with the local business environment.

Local managers are more likely to perceive environmental changes that managers at headquarters might not notice.

By contrast, central managers may not perceive such changes or would likely get a secondhand account of local events. Delayed response and misinterpreted events could then result in lost orders, stalled production, and weakened competitiveness.

Decentralization can also help foster participative management practices. The morale of employees is likely to be

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higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies. Decentralization also can increase personal accountability for business decisions.

When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

Globalization is forcing companies to respond more quickly to changes in the business environment. The formation of teams can be highly useful in improving responsiveness by cutting across functional boundaries, such as that between production and marketing, that slow decision making in an organization. Although a matrix organization accomplishes this by establishing cross-functional cooperation, companies do not always want to change their entire organizational structure to reap the benefits that cross-functional cooperation provides. In such cases, companies can implement several different types of teams without changing the overall company structure.

A self-managed team is one in which the employees from a single department take on the responsibilities of their former supervisors. When used in production, such teams often reorganize the methods and flow of production processes. Because they are "self-managed," they reduce the need for managers to watch over their every activity.

The benefits of self-managed teams typically include increased productivity, product quality, customer satisfaction, employee morale, and company loyalty. In fact, the most common self-managed teams in many manufacturing companies are quality-improvement teams, which help reduce waste in the production process and, therefore, lower costs.

A cross-functional team is one composed of employees who work at similar levels in different functional departments.

These teams work to develop changes in operations and are well suited to projects that require coordination across functions, such as reducing the time needed to get a product from the idea stage to the marketplace. International companies also use cross-functional teams to improve quality by having employees from purchasing, manufacturing, and distribution (among other functions) work together to address specific quality issues. For the same reason, cross-functional teams can help break down barriers between departments and reorganize operations around processes rather than by functional departments.

Finally, large international corporations are creating so-called global teams—groups of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems. For example, Nortel Networks of Canada created a global team of top executives from Britain, Canada, France, and the United States that traveled to Asia, Europe, and North America looking for ways to improve product development practices.

Diff: 2 Page Ref: 296–297, 301 Skill: Synthesis Objective: 10-4 Discuss the important issues that influence the choice of organizational structure; 10-5 Describe each type of international organizational structure and explain the importance of work teams.

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Chapter 11 Selecting and Managing Entry Modes

Chapter 11 Selecting and Managing Entry Modes True/False Question ID: 11-1 Question: An entry mode is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market.

Answer: TRUE Diff: 1 Page Ref: 308 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-2 Question: The most common methods of buying and selling goods internationally are joint ventures and strategic alliances.

Answer: FALSE Diff: 2 Page Ref: 308 Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-3 Question: Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated.

Answer: TRUE Diff: 2 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-4 Question: A way a company can achieve economies of scale is to expand into international markets.

Answer: TRUE Diff: 2 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-5 Question: Exporting permits companies to diversify their sales.

Answer: TRUE Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-6 Question: Companies are often drawn into exporting when customers in other countries solicit their goods.

Answer: TRUE Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-7 Question: Matching needs to abilities is the first step in developing a successful export strategy.

Answer: FALSE Diff: 2 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-8 Question: By definition, direct exporters always sell directly to end users.

Answer: FALSE Diff: 2 Page Ref: 310

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Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-9 Question: Typically, indirect exporting relies on local sales representatives or distributors.

Answer: FALSE Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-10 Question: Using a distributor reduces an exporter's risk.

Answer: TRUE Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-11 Question: Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market.

Answer: TRUE Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-12 Question: Agency relationships are popular among exporters because they are easy to terminate should difficulties arise.

Answer: FALSE Diff: 2 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-13 Question: Countertrade can provide access to markets that are otherwise closed because of a lack of hard currency.

Answer: TRUE Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-14 Question: Because of the cash outlays involved, countertrade is not an option for smaller companies.

Answer: FALSE Diff: 1 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-15 Question: Offset differs from a counterpurchase in that it does not specify the type of product that must be purchased, just the amount that will be spent.

Answer: TRUE Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-16 Question: Switch trading is the export of industrial equipment in return for products produced by that equipment.

Answer: FALSE Diff: 2 Page Ref: 313 Skill: Concept

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Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-17 Question: Advance payment is the least favourable method for exporters.

Answer: FALSE Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-18 Question: Advance payment normally takes the form of a sight draft.

Answer: FALSE Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-19 Question: A sight draft extends the period of time following delivery by which the importer must pay for goods.

Answer: FALSE Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-20 Question: A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

Answer: TRUE Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-21 Question: Letters of credit are popular among traders because banks assume most of the risks.

Answer: TRUE Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-22 Question: The advance payment method reduces the risk of non-shipment the importer faces under the open account method.

Answer: FALSE Diff: 1 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-23 Question: Cross licensing occurs when companies employ licensing agreements to swap intangible property with one another.

Answer: TRUE Diff: 1 Page Ref: 318 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-24 Question: The brand name or trademark of a company is normally the single most important item desired by a franchisee.

Answer: TRUE Diff: 2 Page Ref: 319 Skill: Concept

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Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-25 Question: Licensing is primarily used in the service industries.

Answer: FALSE Diff: 2 Page Ref: 319 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-26 Question: The primary advantage of franchising is that franchisees have a great degree of organizational flexibility.

Answer: FALSE Diff: 2 Page Ref: 347–320 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-27 Question: Under a turnkey project, one company supplies another with managerial expertise for a specific period of time.

Answer: FALSE Diff: 2 Page Ref: 321–322 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-28 Question: A wholly owned subsidiary is a facility owned and controlled by a single parent company.

Answer: TRUE Diff: 1 Page Ref: 323 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-29 Question: In a backward integration joint venture, the parties choose to invest together in downstream business activities.

Answer: FALSE Diff: 1 Page Ref: 324 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-30 Question: The most important disadvantage of a strategic alliance is that it can create a future local or even global competitor.

Answer: TRUE Diff: 1 Page Ref: 326 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

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Multiple Choice Question ID: 11-31 Question: A(n) ________ is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market.

A) investment process B) export C) entry mode D) market transfer Answer: C Diff: 1 Page Ref: 308 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-32 Question: Types of entry modes available to companies include all of the following EXCEPT ________.

A) exporting, importing, and countertrade B) contractual entry C) investment entry D) value entry Answer: D Diff: 2 Page Ref: 308 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-33 Question: Which of the following is the most common method of buying and selling goods internationally?

A) Exporting and importing B) Contractual entry C) Countertrade D) Investment entry Answer: A Diff: 2 Page Ref: 308 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-34 Question: A company performing market research and interpreting results is at which step in the export strategy process?

A) Identify a potential market B) Match needs to abilities C) Initiate meetings D) Commit resources Answer: A Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-35 Question: Which of the following is the first step in developing a successful export strategy?

A) Initiate meetings B) Commit resources C) Identify a potential market D) Match needs to abilities Answer: C Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-36

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Question: A company establishing relationships with potential local distributors, buyers, and others is at which step in the export process?

A) Commit resources B) Match needs to abilities C) Initiate meetings D) Identify a potential market Answer: C Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-37 Question: In developing a successful export strategy, once a potential market has been identified, the next step is to ________.

A) match needs to abilities B) initiate meetings C) commit resources D) investigate demand in a target market Answer: A Diff: 1 Page Ref: 309 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-38 Question: Which of the following occurs when a company sells its products to buyers in a target market without going through intermediary companies?

A) Direct exporting B) Countertrade C) Licensing D) Franchising Answer: A Diff: 1 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-39 Question: Because ________ take ownership of the merchandise when it enters their country, they accept all the risks associated with generating local sales.

A) distributors B) sales representatives C) indirect distributors D) agents Answer: A Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-40 Question: All of the following are true of distributors EXCEPT ________.

A) they sell either to retailers and wholesalers or to end users through their own channels of distribution B) they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods C) they do not take ownership of the merchandise when it enters their country D) they can stunt the growth of the exporter's market share by charging very high prices Answer: C Diff: 3 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-41

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Chapter 11 Selecting and Managing Entry Modes

Question: Which of the following occurs when a company sells its products to intermediaries who then resell to buyers in a target market?

A) Indirect exporting B) Investment entry C) Strategic alliance D) Direct exporting Answer: A Diff: 1 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-42 Question: The different types of intermediaries involved in indirect exporting include all of the following EXCEPT ________.

A) export management companies B) sales representatives C) agents D) export trading companies Answer: B Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-43 Question: A company that exports products on behalf of an indirect exporter is called a(n) ________.

A) distributor B) export trading company C) agent D) export management company Answer: D Diff: 1 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-44 Question: The biggest advantage of an export management company is usually its ________.

A) knowledge of the target market's cultural, political, legal, and economic conditions B) well-developed and extensive distribution channels C) well-rounded experience in countertrade-related activities D) financial understanding of investment projects and its manufacturing expertise Answer: A Diff: 3 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-45 Question: Selling goods or services that are paid for, in whole or part, with other goods or services is called ________.

A) indirect exporting B) countertrade C) licensing D) franchising Answer: B Diff: 1 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-46 Question: Which of the following is NOT a type of countertrade?

A) Offset

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B) Buyback C) Switch trading D) Open account Answer: D Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-47 Question: Which of the following is the exchange of goods and services directly for other goods and services without the use of money?

A) Offset B) Counterpurchase C) Barter D) Switch trading Answer: C Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-48 Question: Which of the following types of agreements allows a country to earn back some of the currency it pays out for imports?

A) Switch trading B) Counterpurchase C) Buyback D) Barter Answer: B Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-49 Question: Which of the following is the oldest known form of countertrade?

A) Offset B) Counterpurchase C) Barter D) Switch trading Answer: C Diff: 1 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-50 Question: The sale of goods and services to a country by a company that promises to make a future purchase of a specific product from that country is called a(n) ________.

A) counterpurchase B) offset C) switch trade D) barter Answer: A Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-51 Question: A company proposes that in exchange for a hard-currency sale, it will make a hard-currency purchase of an unspecified product from the buyer nation in the future. The company is proposing which of the following?

A) Counterpurchase B) Offset

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C) Switch trading D) Barter Answer: B Diff: 1 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-52 Question: An offset agreement differs from a counterpurchase agreement in which of the following respects?

A) Offset does not specify the type of product that must be purchased.

B) Counterpurchase does not specify the type of product that must be purchased.

C) Offset does not involve a currency sale.

D) Offset does not specify the amount that will be spent.

Answer: A Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-53 Question: When one company sells to another its obligation to make a purchase in a given country, this is called ________.

A) counterpurchase B) offset C) switch trading D) barter Answer: C Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-54 Question: Buyback is defined as which of the following?

A) The export of industrial equipment in return for products produced by that equipment B) An agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future C) The sale of goods or services to a country by a company that promises to make a future purchase of a specific product from that country D) The exchange of goods or services directly for other goods or services without the use of money Answer: A Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-55 Question: A form of countertrade that usually typifies long-term relationships between the companies involved is called ________.

A) switch trading B) counterpurchase C) offset D) buyback Answer: D Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-56 Question: Which of the following is NOT true of countertrade?

A) It can provide access to markets that are otherwise off-limits because of a lack of hard currency.

B) It involves commodities and agricultural products.

C) It involves a risk similar to that encountered in currency markets.

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D) There is no means of hedging the type of risk encountered in countertrade.

Answer: D Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-57 Question: Which of the following is NOT a method of export/import financing?

A) Documentary collection B) Letter of credit C) Buyback D) Open account Answer: C Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-58 Question: Which of the following normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter prior to shipment of merchandise?

A) Documentary collection B) Letter of credit C) Advance payment D) Open account Answer: C Diff: 1 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-59 Question: Advance payment is common in each of the following situations EXCEPT when ________.

A) two parties are unfamiliar with each other B) two parties are very familiar with each other C) the transaction is for a relatively small amount D) the buyer is unable to obtain credit Answer: B Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-60 Question: Export/import financing in which a bank acts as an intermediary without accepting financial risk is called ________.

A) documentary collection B) letter of credit C) buyback D) open account Answer: A Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-61 Question: Which of the following financing methods entails the greatest risk for importers?

A) Documentary collection B) Advance payment C) Letter of credit D) Open account Answer: B Diff: 1 Page Ref: 314

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Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-62 Question: Which of the following financing methods entails the greatest risk for exporters?

A) Documentary collection B) Advance payment C) Letter of credit D) Open account Answer: D Diff: 2 Page Ref: 316 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-63 Question: The ________ payment method is commonly used when there is an ongoing relationship between the two parties.

A) advance payment B) documentary collection C) letter of credit D) open account Answer: B Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-64 Question: A document ordering the importer to pay the exporter a specified sum of money at a specified time is called a(n) ________.

A) bill of lading B) letter of credit C) bill of exchange D) airway bill Answer: C Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-65 Question: Which of the following requires the importer to pay when goods are delivered?

A) Sight draft B) Bill of lading C) Time draft D) Airway bill Answer: A Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-66 Question: When inscribed "accepted" by an importer, a(n) ________ becomes a negotiable instrument that can be traded among financial institutions.

A) sight draft B) bill of lading C) time draft D) airway bill Answer: C Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

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Question ID: 11-67 Question: Which of the following is a contract between the exporter and shipper that specifies merchandise destination and shipping costs?

A) Draft B) Bill of lading C) Letter of credit D) Bill of exchange Answer: B Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-68 Question: Which of the following is a method of export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document?

A) Draft B) Bill of lading C) Letter of credit D) Bill of exchange Answer: C Diff: 1 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-69 Question: Which of the following allows the bank issuing a letter of credit to modify the terms of the letter only after obtaining the approval of both exporter and importer?

A) Revocable letter of credit B) Confirmed letter of credit C) Bill of lading D) Irrevocable letter of credit Answer: D Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-70 Question: Which of the following can be modified by the issuing bank without obtaining approval from either the exporter or the importer?

A) Revocable letter of credit B) Confirmed letter of credit C) Bill of lading D) Irrevocable letter of credit Answer: A Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID:11-71 Question: A(n) ________ is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

A) revocable letter of credit B) confirmed letter of credit C) bill of lading D) irrevocable letter of credit Answer: B Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

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Question ID: 11-72 Question: Letters of credit are popular among traders because most of the risks are assumed by ________.

A) countertraders B) importers C) exporters D) banks Answer: D Diff: 2 Page Ref: 315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-73 Question: When an exporter ships merchandise and later bills the importer for its value, it is using a(n) ________ type of export/import financing.

A) advance payment B) open account C) letter of credit D) documentary collection Answer: B Diff: 1 Page Ref: 316 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-74 Question: Contractual entry modes include all of the following EXCEPT ________.

A) franchising B) management contracts C) licensing D) strategic alliances Answer: D Diff: 2 Page Ref: 317 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-75 Question: Which of the following is a contractual entry mode in which a company owning intangible property grants another firm the right to use that property for a specified period of time?

A) Franchising B) Management contract C) Licensing D) Strategic alliance Answer: C Diff: 2 Page Ref: 317 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-76 Question: Which of the following is a contractual entry mode in which one company supplies another with intangible property and other assistance over an extended period?

A) Franchising B) Management contract C) Licensing D) Strategic alliance Answer: A Diff: 2 Page Ref: 319 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-77

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Question: When one company is hired to design, construct, and test a production facility for a client, the arrangement is called a ________.

A) turnkey project B) licensing agreement C) joint venture D) franchising agreement Answer: A Diff: 2 Page Ref: 321 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-78 Question: Which of the following is NOT a form of investment entry?

A) Strategic alliance B) Wholly owned subsidiary C) Joint venture D) Turnkey project Answer: D Diff: 1 Page Ref: 323 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-79 Question: A ________ is a separate company created and jointly owned by two or more independent entities to achieve a common business objective.

A) wholly owned subsidiary B) joint venture C) strategic alliance D) turnkey project Answer: B Diff: 1 Page Ref: 323 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-80 Question: In which type of joint venture do the parties choose to invest together in downstream business activities?

A) Backward integration B) Multistage C) Forward integration D) Buyback Answer: C Diff: 2 Page Ref: 324 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-81 Question: A ________ joint venture is formed when each partner requires the same component in its production process.

A) backward B) multistage C) forward D) buyback Answer: D Diff: 2 Page Ref: 325 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Scenario: Sanjeer's HomeCare Products Sanjeer Sengupta, owner of Sanjeer's HomeCare Products, is considering going international. He feels that the

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Chapter 11 Selecting and Managing Entry Modes

products he manufactures will be well received, especially in developing countries. He wants to understand the exporting process and then consider the degree to which he wants to be involved.

Question ID: 11-82 Question: Through his research, Sanjeer learned that the first step in developing a successful export strategy is to ________.

A) initiate meetings B) identify a potential market C) commit resources D) match needs to abilities Answer: B Diff: 2 Page Ref: 309 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-83 Question: Which of these should be the final step for Sanjeer in developing a successful export strategy?

A) Initiate meetings B) Identify a potential market C) Commit resources D) Match needs to abilities Answer: C Diff: 2 Page Ref: 310 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-84 Question: If Sanjeer's HomeCare Products decides to sell to intermediaries who then resell to buyers in target markets, the company would be engaged in which of the following?

A) Indirect exporting B) Strategic alliance C) Direct exporting D) Investment entry Answer: A Diff: 2 Page Ref: 310 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-85 Question: Sanjeer is looking for a company to provide services in addition to activities directly related to HomeCare's exporting activities. These activities include developing the distribution channel, providing storage facilities, and even financing trading. Which of these would best fit HomeCare's needs?

A) Distributor B) Export trading company C) Agent D) Export management company Answer: B Diff: 2 Page Ref: 311 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Scenario: Wang's Techno Toys Ann Wang has been successful in the domestic market selling high-tech toy products. But facing stiff competition at home, Ann has entered international markets by direct exporting.

Question ID: 11-86 Question: Techno Toys most likely uses which of the following to assist with its direct exporting?

A) Agent B) Sales representative

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C) Export management company D) Export trading company Answer: B Diff: 2 Page Ref: 310 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-87 Question: In some countries, it is better to exchange goods and services directly for Techno Toys, without the use of money. This practice is known as ________.

A) offset B) counterpurchase C) switch trading D) barter Answer: D Diff: 2 Page Ref: 312 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-88 Question: Which of the following is NOT an export/import financing method that Techno Toys might utilize?

A) Buyback B) Letter of credit C) Advance payment D) Documentary collection Answer: A Diff: 2 Page Ref: 313 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-89 Question: If Techno Toy's bank acts as an intermediary without accepting financial risk, it is demonstrating which of the following methods of export/import financing?

A) Documentary collection B) Buyback C) Letter of credit D) Advance payment Answer: A Diff: 2 Page Ref: 314 Skill: Application Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-90 Question: From a risk perspective, which financing method is the LEAST favourable for Techno Toys' export business?

A) Documentary collection B) Advance payment C) Letter of credit D) Open account Answer: D Diff: 2 Page Ref: 316 Skill: Application Objective: 11-2 Explain the various means of financing export and import activities.

Scenario: Gro-Tru Grows To Europe Gro-Tru, a maker of chemical fertilizers and pesticides, sees enormous growth potential in Central Europe. The company has received several unsolicited inquiries from potential importers in the region, but in most cases, the potential importers have expressed difficulty in obtaining the hard currency to pay for Gro-Tru's products. Alistair Green, vice president for new business development, is exploring how Gro-Tru might meet the needs of the potential

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market.

Question ID: 11-91 Question: Alistair has identified one option that might help the firm: selling goods or services that are paid for in whole or in part with other goods or services. Alistair is considering which of the following?

A) Open trade B) Pre-purchase C) Countertrade D) Counterselling Answer: C Diff: 1 Page Ref: 312 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-92 Question: If Gro-Tru exchanges its products directly for other goods or services without the use of money, it would be conducting which of the following?

A) Barter B) Offset C) Switch trading D) Buyback Answer: A Diff: 1 Page Ref: 312 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-93 Question: If, in exchange for a hard-currency sale, Gro-Tru agrees to make a hard-currency purchase of an unspecified product from the importing nation in the future, it would be engaging in which of the following?

A) Barter B) Offset C) Switch trading D) Buyback Answer: B Diff: 2 Page Ref: 313 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-94 Question: One option that intrigues Alistair is the process in which one company sells to another its obligation to make a purchase in a given country. This arrangement is known as ________.

A) barter B) offset C) switch trading D) buyback Answer: C Diff: 2 Page Ref: 313 Skill: Application Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-95 Question: In his research, Alistair discovers a type of arrangement in which industrial equipment is exported in return for products produced by that equipment. This arrangement is known as ________.

A) barter B) offset C) switch trading D) buyback Answer: D Diff: 2 Page Ref: 313 Skill: Application

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Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Scenario: Sports Stuff, Inc. Herb Graham is vice president of Sports Stuff, a business that develops, manufactures, and markets sports memorabilia. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.

Question ID: 11-96 Question: Herb knows that much of the success his company enjoys is due to the patents and copyrights that protect the company's products. If Sports Stuff chooses an entry mode in which it grants another firm the right to use its intangible property for a specified period of time, it would be engaging in which of the following?

A) Strategic alliance B) Franchising C) Licensing D) Management contract Answer: C Diff: 1 Page Ref: 317 Skill: Application Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-97 Question: Herb has been exploring another type of entry mode that requires ongoing assistance on the part of one firm, often in the form of start-up capital, management training, or location advice. Herb is most likely considering a ________.

A) strategic alliance B) franchise C) licensing agreement D) management contract Answer: B Diff: 2 Page Ref: 319 Skill: Application Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-98 Question: If Sports Stuff hires a company to design, construct, and test a production facility on its behalf, the company would be participating in which of the following?

A) Joint venture B) Turnkey project C) Wholly owned subsidiary D) Franchise Answer: B Diff: 2 Page Ref: 321 Skill: Application Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-99 Question: The CEO has just determined that Sports Stuff plans to retain complete control over its operations in Europe. To achieve that objective, Herb would most likely recommend that the firm establish a ________.

A) joint venture B) turnkey project C) wholly owned subsidiary D) franchise Answer: C Diff: 1 Page Ref: 323 Skill: Application Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-100

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Question: Herb's boss is concerned with the firm's lack of experience in foreign markets. To minimize this problem, Herb most likely recommends that the firm create a ________ with a local partner.

A) joint venture B) turnkey project C) wholly owned subsidiary D) franchise Answer: A Diff: 2 Page Ref: 323 Skill: Application Objective: 11-4 Explain the various types of investment entry modes.

Fill-In-The-Blank Question ID: 11-101 Question: ________ occurs when a company sells its products directly to buyers in a target market.

Answer: Direct exporting Diff: 1 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-102 Question: A(n) ________ organization represents only its own company's products, not those of other companies.

Answer: sales representative Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-103 Question: ________ take ownership of merchandise when it enters their country.

Answer: Distributors Diff: 2 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-104 Question: ________ occurs when a company sells its products to intermediaries who then resell to buyers in a target market.

Answer: Indirect exporting Diff: 1 Page Ref: 310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-105 Question: Individuals or organizations that represent one or more indirect exporters in a target market are called ________.

Answer: agents Diff: 2 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-106 Question: A company that exports products on behalf of an indirect exporter is called a(n) ________.

Answer: export management company (EMC) Diff: 2 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-107

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Question: A(n) ________ is a company that provides services to indirect exporters in addition to those activities directly related to clients' exporting activities.

Answer: export trading company (ETC) Diff: 2 Page Ref: 311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-108 Question: A(n) ________ is a specialist in such export-related activities as customs clearing, tariff schedules, and shipping and insurance fees.

Answer: freight forwarder Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-109 Question: ________ is the exchange of goods or services directly for other goods or services without the use of money.

Answer: Barter Diff: 1 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-110 Question: ________ is the sale of goods and services to a country by a company that promises to make a future purchase of a specific product from that country.

Answer: Counterpurchase Diff: 2 Page Ref: 312 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-111 Question: ________ is the export of industrial equipment in return for products produced by that equipment.

Answer: Buyback Diff: 2 Page Ref: 313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-112 Question: Export/import financing in which a bank acts as an intermediary without accepting financial risk is called ________.

Answer: documentary collection Diff: 2 Page Ref: 342 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-113 Question: A(n) ________ requires the importer to pay when goods are delivered.

Answer: sight draft Diff: 1 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-114 Question: A(n) ________ is a contract between an exporter and a shipper that specifies merchandise destination and shipping costs.

Answer: bill of lading Diff: 2 Page Ref: 314 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

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Question ID: 11-115 Question: Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called ________.

Answer: open account Diff: 2 Page Ref: 316 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-116 Question: ________ is a contractual entry mode in which a company owning intangible property grants another firm the right to use that property for a specified period of time.

Answer: Licensing Diff: 2 Page Ref: 317 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-117 Question: ________ occurs when companies employ licensing agreements to swap intangible property with one another.

Answer: Cross licensing Diff: 2 Page Ref: 318 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-118 Question: Under the stipulations of a(n) ________, one company supplies another with managerial expertise for a specific period of time.

Answer: management contract Diff: 2 Page Ref: 320 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-119 Question: A(n) ________ is a separate company created and jointly owned by two or more independent entities to achieve a common business objective.

Answer: joint venture Diff: 2 Page Ref: 323 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-120 Question: A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a(n) ________.

Answer: strategic alliance Diff: 2 Page Ref: 326 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

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Essay Question ID: 11-121 Question: Explain in detail why companies should consider exporting. Describe the four-step model of developing a successful export strategy.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies are often drawn into exporting when customers in other countries solicit their goods. In this way, companies become aware of their products' international potential and get their first taste of international business.

Yet a company should not fall into the habit of simply responding to random international requests for its products. A more logical approach is to research and analyze international opportunities and to develop a coherent export strategy. A business with such a strategy actively pursues export markets rather than sitting back and waiting for international orders to come in.

Step 1: Identify a Potential Market. To identify whether demand exists in a particular target market, a company

should perform market research and interpret the results. Novice exporters should focus on one or only a few markets. For example, a first-time Brazilian exporter might not want to export simultaneously to Argentina, Britain, and Greece. A better strategy would likely be to focus on Argentina because of its cultural similarities with Brazil (despite having a different, though related, language). The company could then expand into more diverse markets after it gains initial international experience in a nearby country. The would-be exporter should also seek expert advice on the regulations and general process of exporting and any special issues related to a selected target market.

Step 2: Match Needs to Abilities. The next step is to determine whether the company is capable of satisfying the

needs of the market.

Step 3: Initiate Meetings. Holding meetings early with potential local distributors, buyers, and others is a must. Initial contact should focus on building trust and developing a cooperative climate among all parties. The cultural differences between the parties will come into play already at this stage. Beyond building trust, successive meetings are designed to estimate the potential success of any agreement if interest is shown on both sides. At the most advanced stage, negotiations take place and details of agreements are finalized.

Step 4: Commit Resources. After all the meetings, negotiations, and contract signings, it is time to put the company's human, financial, and physical resources to work. First, the objectives of the export program must be clearly stated and should extend out at least three to five years. For small firms, it may be sufficient to assign one individual the responsibility for drawing up objectives and estimating resources. Yet as companies expand their activities to include more products and/or markets, many firms discover the need for an export department or division. The head of this department usually has the responsibility (and authority) to formulate, implement, and evaluate the company's export strategy.

Diff: 2 Page Ref: 309–310 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-122 Question: Differentiate between direct and indirect exporting. What types of intermediaries can exporters rely on in each case? Explain the roles of these intermediaries.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Direct Exporting. Some companies become deeply involved in the export of their products. Direct exporting occurs when a company sells its products directly to buyers in a target market. Direct exporters operate in many industries, including aircraft (Boeing), industrial equipment (John Deere), apparel (Lands' End), and bottled beverages (Evian).

Bear in mind that "direct exporters" need not sell directly to end users. Rather, they take full responsibility for getting their goods into the target market by selling directly to local buyers and not going through intermediary companies.

Typically, they rely on either local sales representatives or distributors.

Sales Representatives. A sales representative (whether an individual or an organization) represents only its own

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company's products, not those of other companies. Sales representatives promote those products in many ways, such as by attending trade fairs and making personal visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales.

Distributors. Alternatively, a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. As owners of the products, they accept all the risks associated with generating local sales. They sell either to retailers and wholesalers or to end users through their own channels of distribution. Typically, they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an exporter's control over the price buyers are charged. A distributor who charges very high prices can stunt the growth of an exporter's market share. Exporters should choose, if possible, distributors who are willing to invest in the promotion of their products and who do not sell directly competing products.

Indirect Exporting. Some companies have few resources available to commit to exporting activities. Others simply

find exporting a daunting task because of a lack of contacts and experience. Fortunately, there is an option for such firms. Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market. The choice of an intermediary depends on many factors, including the ratio of the exporter’s international sales to its total sales, the company’s available resources, and the growth rate of the target market.

Let’s take a closer look at several different types of intermediaries: agents, export management companies, and export trading companies.

Agents. Individuals or organizations that represent one or more indirect exporters in a target market are called agents. Agents typically receive compensation in the form of commissions on the value of sales. Because establishing

a relationship with an agent is relatively easy and inexpensive, it is a fairly common approach to indirect exporting.

Agents should be chosen very carefully because it can be costly and difficult to terminate an agency relationship if problems arise. Careful selection is also essential because agents often represent several indirect exporters simultaneously. Agents might focus their promotional efforts on the products of the company paying the highest commission rather than on the company with the better products.

Export Management Companies. A company that exports products on behalf of an indirect exporter is called an export management company (EMC). An EMC operates contractually, either as an agent (being paid through

commissions based on the value of sales) or as a distributor (taking ownership of the merchandise and earning a profit from its resale).

Export Trading Companies. A company that provides services to indirect exporters in addition to activities directly related to clients' exporting activities is called an export trading company (ETC). Whereas an EMC is restricted to export-related activities, an ETC assists its clients by providing import, export, and countertrade services; developing and expanding distribution channels; providing storage facilities; financing trading and investment projects; and even manufacturing products.

Diff: 3 Page Ref: 310–311 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-123 Question: Explain why an exporter would use a sales representative or a distributor, and discuss why the exporter might be reluctant to offer an open account payment method.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Some companies become deeply involved in the export of their products. Direct exporting occurs when a company sells its products directly to buyers in a target market. Direct exporters operate in many industries, including aircraft (Boeing) (www.boeing.com), industrial equipment (John Deere), apparel (Lands' End), and bottled beverages (Evian). Bear in mind that "direct exporters" need not sell directly to end users. Rather, they take full responsibility for getting their goods into the target market by selling directly to local buyers and not going through intermediary companies. Typically, they rely on either local sales representatives or distributors.

Sales Representatives. A sales representative (whether an individual or an organization) represents only its own

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company's products, not those of other companies. Sales representatives promote those products in many ways, such as by attending trade fairs and making personal visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales.

Distributors. Alternatively, a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. As owners of the products, they accept all the risks associated with generating local sales. They sell either to retailers and wholesalers or to end users through their own channels of distribution. Typically, they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an exporter's control over the price buyers are charged. A distributor who charges very high prices can stunt the growth of an exporter's market share. Exporters should choose, if possible, distributors who are willing to invest in the promotion of their products and who do not sell directly competing products.

Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of nonshipment faced by the importer under the advance payment method.

By the same token, the open account method increases the risk of non-payment for the exporter. Thus, open account is the least favourable for exporters but the most favourable for importers.

Diff: 3 Page Ref: 310–311, 316 Skill: Synthesis Objective: 11-1 Explain how companies use exporting, importing, and countertrade; 11-2 Explain the various means of financing export and import activities.

Question ID: 11-124 Question: Discuss the steps companies can take to avoid export and import blunders, and explain why an advance payment method can help exporters reduce financial risk.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

There are several errors common to companies new to exporting. First, many businesses fail to conduct adequate market research before exporting. In fact, many companies begin exporting by responding to unsolicited requests for their products. If a company enters a market in this manner, it should quickly devise an export strategy to manage its export activities effectively and not strain its resources.

Second, many companies fail to obtain adequate export advice. National and regional governments are often willing and able to help managers and small-business owners understand and cope with the vast amounts of paperwork required by each country's export and import laws. Naturally, more experienced exporters can be extremely helpful as well. They can help novice exporters avoid embarrassing mistakes by guiding them through unfamiliar cultural, political, and economic environments.

To better ensure that it will not make embarrassing blunders, an inexperienced exporter might also want to engage the services of a freight forwarder—a specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees. Freight forwarders also can pack shipments for export and take responsibility for getting a shipment from the port of export to the port of import.

The advance payment method can help exporters reduce financial risk. Export/import financing in which an importer pays an exporter for merchandise before it is shipped is called advance payment. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of non-payment for exporters, it creates the complementary risk of non-shipment for importers—importers might pay for goods but never receive them. Thus advance payment is the most favourable method for exporters but the least favourable for importers.

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Diff: 1 Page Ref: 312, 313–314 Skill: Synthesis Objective: 11-1 Explain how companies use exporting, importing, and countertrade; 11-2 Explain the various means of financing export and import activities.

Question ID: 11-125 Question: Briefly explain the different types of countertrade.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

There are several different types of countertrade: barter, counterpurchase, offset, switch trading, and buyback.

Barter is the exchange of goods or services directly for other goods or services without the use of money. It is the oldest known form of countertrade.

Counterpurchase is the sale of goods or services to a country by a company that promises to make a future purchase of a specific product from that country. This type of agreement is designed to allow the country to earn back some of the currency that it paid for the original imports.

Offset is an agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future. It differs from a counterpurchase in that this type of agreement does not specify the type of product that must be purchased, just the amount that will be spent. Such an arrangement gives a business greater freedom in fulfilling its end of a countertrade deal.

Switch trading is countertrade whereby one company sells to another its obligation to make a purchase in a given country. For example, in return for market access, a firm that wants to enter a target market might promise to buy a product for which it has no use. The company then sells this purchase obligation to a large trading company that makes the purchase itself because it has a use for the merchandise. If the trading company has no use for the merchandise, it can arrange for yet another buyer who needs the product to make the purchase.

Buyback is the export of industrial equipment in return for products produced by that equipment. This practice usually typifies long-term relationships between the companies involved.

Diff: 2 Page Ref: 312–313 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade.

Question ID: 11-126 Question: What financing methods are available to exporters and importers?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Export/import financing methods designed to reduce these risks include advance payment, documentary collection, letter of credit, and open account.

Advance Payment. Export/import financing in which an importer pays an exporter for merchandise before it is shipped is called advance payment. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of non-payment for exporters, it creates the complementary risk of non-shipment for importers—importers might pay for goods but never receive them. Thus advance payment is the most favourable method for exporters but the least favourable for importers.

Documentary Collection. Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties.

Letter of Credit. Export/import financing in which the importer's bank issues a document stating that the bank will

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pay the exporter when the exporter fulfills the terms of the document is called letter of credit. A letter of credit is typically used when an importer's credit rating is questionable, when the exporter needs a letter of credit to obtain financing, and when a market's regulations require it.

Open Account. Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of non-shipment faced by the importer under the advance payment method.

Diff: 2 Page Ref: 313–316 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-127 Question: Describe in detail the process of how the documentary collection procedure works.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties. The documentary collection process can be broken into three main stages and nine smaller steps.

1. Before shipping merchandise, the exporter (with its banker's assistance) draws up a draft (bill of exchange)—a document ordering the importer to pay the exporter a specified sum of money at a specified time. A sight draft requires the importer to pay when goods are delivered. A time draft extends the period of time (typically 30, 60, or 90 days) following delivery by which the importer must pay for the goods. (When inscribed "accepted" by an importer, a time draft becomes a negotiable instrument that can be traded among financial institutions.)

2. Following creation of the draft, the exporter delivers the merchandise to a transportation company for shipment to the importer. The exporter then delivers to its banker a set of documents that includes the draft, a packing list of items shipped, and a bill of lading—a contract between the exporter and shipper that specifies merchandise destination and shipping costs. The bill of lading is proof that the exporter has shipped the merchandise. An international ocean shipment requires an inland bill of lading to get the shipment to the exporter's border and an ocean bill of lading for water transport to the importer nation. An international air shipment requires an air way bill that covers the entire international journey.

3. After receiving appropriate documents from the exporter, the exporter's bank sends the documents to the importer's bank. After the importer fulfills the terms stated on the draft and pays its own bank, the bank issues the bill of lading (which becomes title to the merchandise) to the importer.

Documentary collection reduces the importer's risk of non-shipment because the packing list details the contents of the shipment and the bill of lading is proof that the merchandise was shipped. The exporter's risk of non-payment is increased because, although the exporter retains title to the goods until the merchandise is accepted, the importer does not pay until all necessary documents have been received. Although importers have the option of refusing the draft (and, therefore, the merchandise), this action is unlikely. Refusing the draft—despite all terms of the agreement being fulfilled—would make the importer's bank unlikely to do business with the importer in the future.

Diff: 3 Page Ref: 314–315 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-128 Question: Explain how small exporters increase the probability of getting paid for a shipment.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

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There are seldom easy answers when an exporter is stuck without payment. Here are several pointers on what small businesses can do to reduce the likelihood of not receiving payment.

• Knowledge of the market you are exporting to is your first and best defence. Understanding its culture, the language spoken, and its legal system is ideal. You should also understand if there is typically a payment lag for business debts and customary debt collection procedures.

• Be aware of countries that commonly cause problems when it comes to debt collection. Regularly consult the many free sources of information available on the Internet to learn which countries are problems. Avoid doing business with them and seek markets elsewhere.

• Essential to preventing later collection problems is both parties clearly understanding the payment terms in your export sales agreement. Also be sure the buyer knows precisely when payment is to be issued.

• Do not wait too long to begin collecting a past-due account. Exporters who delay will likely never receive payment.

Begin with firmly worded communications via phone, fax, e-mail, and letter.

• Consult an international trade attorney or hire an international debt collection agency if necessary. If you are encouraged to accept arbitration as a way to resolve the issue, this often poses your best chance of seeing at least partial payment.

Diff: 2 Page Ref: 317 Skill: Concept Objective: 11-2 Explain the various means of financing export and import activities.

Question ID: 11-129 Question: Describe briefly the contractual entry modes companies can use for international expansion, listing the advantages and disadvantages of each.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies sometimes grant other firms the right to use an asset that is essential to the production of a finished product. Licensing is a contractual entry mode in which a company that owns intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. Licensors typically receive royalty payments based on a percentage of the licensee's sales revenue generated by the licensed property.

The licensors might also receive a one-time fee to cover the cost of transferring the property to the licensee.

Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand names. Thus licensing often involves granting companies the right to use process technologies inherent to the production of a particular good.

Advantages of Licensing. There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Second, licensing can be a less risky method of international expansion for a licensor than other entry modes. Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market.

Disadvantages of Licensing. There also are important disadvantages to using licensing. First, it can restrict a

licensor's future activities. Second, licensing might reduce the global consistency of the quality and marketing of a licensor's product in different national markets. Third, licensing might amount to a company "lending" strategically important property to its future competitors. This is an especially dangerous situation when a company licenses assets on which its competitive advantage is based.

Franchising is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period. Franchisers typically receive compensation as flat fees, royalty payments, or both.

Advantages of Franchising. There are several important advantages of franchising. First, franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Second, franchising is an entry mode that allows

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for rapid geographic expansion. Firms often gain a competitive advantage by being first in seizing a market opportunity. Finally, franchisers can benefit from the cultural knowledge and know-how of local managers. This helps lower the risk of business failure in unfamiliar markets and can create a competitive advantage.

Disadvantages of Franchising. Franchising can also pose problems for both franchisers and franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. A major concern is that product quality and promotional messages among franchisees will not be consistent from one market to another.

Second, franchisees can experience a loss of organizational flexibility in franchising agreements. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser's other divisions.

Under the stipulations of a management contract, one company supplies another with managerial expertise for a specific period of time. The supplier of expertise is normally compensated with either a lump-sum payment or a continuing fee based on sales volume. Such contracts are commonly found in the public utilities sectors of developed and emerging markets. Two types of knowledge can be transferred through management contracts—the specialized knowledge of technical managers and the business-management skills of general managers.

Advantages of Management Contracts. Management contracts can benefit organizations and countries. First, a firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk. Financial capital can then be reserved for other promising investment projects that would otherwise not be funded.

Second, governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing. Third, governments use management contracts to develop the skills of local workers and managers.

Disadvantages of Management Contracts. Unfortunately, management contracts also pose two disadvantages for suppliers of expertise. First of all, although management contracts reduce the exposure of physical assets in another country, the same is not true for the supplier's personnel; political or social turmoil can threaten managers' lives.

Second, suppliers of expertise may end up nurturing a formidable new competitor in the local market. After learning how to conduct certain operations, the party that had originally needed assistance may be capable of competing on its own. Firms must weigh the financial returns from a management contract against the potential future problems caused by a newly launched competitor.

When one company designs, constructs, and tests a production facility for a client, the agreement is called a turnkey (build-operate-transfer) project. The term turnkey project is derived from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply "turn a key" to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.

Advantages of Turnkey Projects. Turnkey projects provide benefits to providers and recipients. First, turnkey projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone.

Second, turnkey projects allow governments to obtain designs for infrastructure projects from the world’s leading companies.

Disadvantages of Turnkey Projects. Among the disadvantages of turnkey projects is the fact that a company may be

awarded a project for political reasons rather than for technological know-how. Because turnkey projects are often of high monetary value and awarded by government agencies, the process of awarding them can be highly politicized.

Second, like management contracts, turnkey projects can create future competitors. A newly created local competitor could become a major supplier in its own domestic market and perhaps even in other markets where the supplier operates. Therefore, companies try to avoid projects in which there is danger of transferring their core competencies to others.

Diff: 3

Page Ref: 317–322

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Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-130 Question: Using examples, explain in detail how licensing works. What are its advantages and disadvantages?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies sometimes grant other firms the right to use an asset that is essential to the production of a finished product. Licensing is a contractual entry mode in which a company that owns intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. Licensors typically receive royalty payments based on a percentage of the licensee's sales revenue generated by the licensed property.

The licensors might also receive a one-time fee to cover the cost of transferring the property to the licensee.

Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand names. Thus licensing often involves granting companies the right to use process technologies inherent to the production of a particular good.

Here are a few examples of successful licensing agreements: • Novell (United States) licensed its software to three Hong Kong universities that installed it as the campus-wide standard.

• Hitachi (Japan) licensed from Duales System Deutschland (Germany) technology to be used in the recycling of plastics in Japan.

• Hewlett-Packard (United States) licensed from Canon (Japan) a printer engine for use in its monochrome laser printers.

An exclusive license grants a company the exclusive rights to produce and market a property, or products made from that property, in a specific geographic region. The region can be the licensee's home country or may extend to worldwide markets. A nonexclusive license grants a company the right to use a property but does not grant it sole access to a market. A licensor can grant several or more companies the right to use a property in the same region.

Cross licensing occurs when companies use licensing agreements to exchange intangible property with one another.

For example, Fujitsu of Japan signed a five-year cross-licensing agreement with Texas Instruments of the United States. The agreement allowed each company to use the other's technology in the production of its own goods—thus lowering R&D costs. The very extensive arrangement covered all but a few semiconductor patents owned by each company. Because asset values are seldom exactly equal, cross licensing also typically involves royalty payments from one party to the other.

Advantages of Licensing. There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise.

Second, licensing can be a less risky method of international expansion for a licensor than other entry modes.

Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately.

Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at all—which is what owners get from bootleg versions of their products.

Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies. For example, manufacturers of plastics and other synthetic materials in the Philippines attempted to meet the high standards demanded by the local subsidiaries of Japanese electronics and office equipment producers. To do this,

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D&L Industries of the Philippines upgraded its manufacturing process by licensing materials technology from Nippon Pigment of Japan.

Disadvantages of Licensing. There also are important disadvantages to using licensing. First, it can restrict a

licensor's future activities. Suppose a licensee is granted the exclusive right to use an asset but fails to produce the sort of results that a licensor expected. Because the license agreement is exclusive, the licensor cannot simply begin selling directly in that particular market to meet demand itself or contract with another licensee. A good product and lucrative market, therefore, do not guarantee success for a producer entering a market through licensing.

Second, licensing might reduce the global consistency of the quality and marketing of a licensor's product in different national markets. A licensor might find the development of a coherent global brand image an elusive goal if each of its national licensees is allowed to operate in any manner it chooses. Promoting a global image might later require considerable amounts of time and money to change the misconceptions of buyers in the various licensed markets.

Third, licensing might amount to a company "lending" strategically important property to its future competitors. This is an especially dangerous situation when a company licenses assets on which its competitive advantage is based.

Licensing agreements are often made for several years and perhaps even a decade or more. During this time, licensees often become highly competent at producing and marketing the licensor's product. When the agreement expires, the licensor might find that its former licensee is capable of producing and marketing a better version of its own product. Licensing contracts can (and should) restrict licensees from competing in the future with products based strictly on licensed property. But enforcement of such provisions works only for identical or nearly identical products, not when substantial improvements are made.

Diff: 3 Page Ref: 317–318 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-131 Question: Using examples, explain in detail how franchising works. How is franchising different from licensing?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Franchising is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period. Franchisers typically receive compensation as flat fees, royalty payments, or both. The most popular franchises are those with widely recognized brand names, such as Mercedes, McDonald's, and Starbucks. In fact, the brand name or trademark of a company is normally the single most important item desired by the franchisee. This is why smaller companies with lesser known brand names and trademarks have greater difficulty locating interested franchisees.

Franchising differs from licensing in several ways. First, franchising gives a company greater control over the sale of its product in a target market. Franchisees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions. Second, although licensing is fairly common in manufacturing industries, franchising is primarily used in service industries such as auto dealerships, entertainment, lodging, restaurants, and business services. Third, although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. In addition to the initial transfer of property, franchisers typically offer startup capital, management training, location advice, and advertising assistance to their franchisees.

Some examples of the kinds of companies involved in international franchising include: • Ozemail (Australia) awarded Magictel (Hong Kong) a franchise to operate its Internet phone and fax service in Hong Kong.

• Jean-Louis David (France) awarded franchises to more than 200 hairdressing salons in Italy.

• Brooks Brothers (United States) awarded Dickson Concepts (Hong Kong) a franchise to operate Brooks Brothers stores across Southeast Asia.

Companies based in the United States dominate the world of international franchising. US companies perfected the practice of franchising in their large, homogeneous domestic market having low barriers to interstate trade and investment. Yet franchising is growing in the European Union, with the advent of a single currency and a unified set of franchise laws. Many European managers with comfortable early-retirement packages have discovered franchising to be an appealing second career.

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Despite projections for robust growth, European franchise managers often misunderstand the franchising concept.

One example is when Holiday Inn's franchise expansion in Spain was moving more slowly than expected. According to the company's development director in Spain, Holiday Inn found that it needed to convince local managers that Holiday Inn did not want to "take control" of their hotels. In some eastern European countries, local managers do not understand why they must continue to pay royalties to brand and trademark owners. Franchise expansion in eastern European markets also suffers from a lack of local capital, high interest rates, high taxes, bureaucratic obstacles, restrictive laws, and corruption.

Advantages of Franchising. There are several important advantages of franchising. First, franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Companies following global strategies rely on consistent products and common themes in worldwide markets. Franchising allows them to maintain consistency by replicating the processes for standardized products in each target market. Many franchisers, however, will make small modifications in products and promotional messages when marketing specifically to local buyers.

Second, franchising is an entry mode that allows for rapid geographic expansion. Firms often gain a competitive advantage by being first in seizing a market opportunity. For example, Microtel Inns & Suites of Atlanta, Georgia, is using franchising to fuel its international expansion. Microtel is boldly entering Argentina and Uruguay and eyeing opportunities in Brazil and Western Europe. Rooms cost around $75 per night and target business travelers who cannot afford $200 per night.

Finally, franchisers can benefit from the cultural knowledge and know-how of local managers. This helps lower the risk of business failure in unfamiliar markets and can create a competitive advantage.

Disadvantages of Franchising. Franchising can also pose problems for both franchisers and franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. A major concern is that product quality and promotional messages among franchisees will not be consistent from one market to another. One way to ensure greater control is by establishing in each market a so-called master franchisee, which is responsible for monitoring the operations of individual franchisees.

Second, franchisees can experience a loss of organizational flexibility in franchising agreements. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser's other divisions. For years PepsiCo owned the well-known restaurant chains Pizza Hut, Taco Bell, and KFC. As part of their franchise agreements with PepsiCo, restaurant owners were required to sell only PepsiCo beverages to their customers. Many franchisees worldwide were displeased with such restrictions on their product offerings and were relieved when PepsiCo spun off the restaurant chains.

Diff: 3 Page Ref: 319–320 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-132 Question: Discuss in detail what types of knowledge can be transferred using a management contract. Why are such arrangements attractive?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Under the stipulations of a management contract, one company supplies another with managerial expertise for a specific period of time. The supplier of expertise is normally compensated with either a lump-sum payment or a continuing fee based on sales volume. Such contracts are commonly found in the public utilities sectors of developed and emerging markets. Two types of knowledge can be transferred through management contracts—the specialized knowledge of technical managers and the business-management skills of general managers.

Advantages of Management Contracts. Management contracts can benefit organizations and countries. First, a firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk. Financial capital can then be reserved for other promising investment projects that would otherwise not be funded.

Second, governments can award companies management contracts to operate and upgrade public utilities,

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particularly when a nation is short of investment financing. That is why the government of Kazakhstan contracted with a group of international companies called ABB Power Grid Consortium to manage its national electricity-grid system for 25 years. Under the terms of the contract, the consortium paid past wages owed to workers by the government and invested more than $200 million during the first three years of the agreement. The Kazakhstan government had neither the cash flow to pay the workers nor the funds to make badly needed improvements.

Third, governments use management contracts to develop the skills of local workers and managers. ESB International of Ireland signed a three-year contract not only to manage and operate a power plant in Ghana, Africa, but also to train local personnel in the skills needed to manage it at some point in the future.

Diff: 3 Page Ref: 320–321 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-133 Question: Explain in detail what is a turnkey project. Outline its advantages and disadvantages.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

When one company designs, constructs, and tests a production facility for a client, the agreement is called a turnkey (build-operate-transfer) project. The term turnkey project is derived from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply "turn a key" to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.

Similar to management contracts, turnkey projects tend to be large-scale and often involve government agencies.

But unlike management contracts, turnkey projects transfer special process technologies or production-facility designs to the client. They typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that are then turned over to the client. Under a management contract, the supplier of a service retains the asset—the managerial expertise.

Advantages of Turnkey Projects. Turnkey projects provide benefits to providers and recipients. First, turnkey projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone.

Second, turnkey projects allow governments to obtain designs for infrastructure projects from the world's leading companies.

Disadvantages of Turnkey Projects. Among the disadvantages of turnkey projects is the fact that a company may be awarded a project for political reasons rather than for technological know-how. Because turnkey projects are often of high monetary value and awarded by government agencies, the process of awarding them can be highly politicized. When the selection process is not entirely open, companies with the best political connections often win contracts, usually at inflated prices—the costs of which are typically passed on to local taxpayers.

Second, like management contracts, turnkey projects can create future competitors. A newly created local competitor could become a major supplier in its own domestic market and perhaps even in other markets where the supplier operates. Therefore, companies try to avoid projects in which there is danger of transferring their core competencies to others.

Diff: 2 Page Ref: 321–322 Skill: Concept Objective: 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-134 Question: What are the advantages of pursuing a wholly owned subsidiary as an entry strategy?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

As the term suggests, a wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. Companies can establish a wholly owned subsidiary either by forming a new company and constructing

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entirely new facilities (such as factories, offices, and equipment) or by purchasing an existing company and internalizing its facilities. Whether an international subsidiary is purchased or newly created depends to a large extent on its proposed operations. When a parent company designs a subsidiary to manufacture the latest high-tech products, it typically must build new facilities. The major drawback of creation from the ground up is the time it takes to construct new facilities, hire and train employees, and launch production.

Conversely, finding an existing local company capable of performing marketing and sales will be easier because special technologies are typically not needed. By purchasing the existing marketing and sales operations of an existing firm in the target market, the parent can have the subsidiary operating relatively quickly. Buying an existing company's operations in the target market is a particularly good strategy when the company to be acquired has a valuable trademark, brand name, or process technology.

There are two main advantages to entering a market using a wholly owned subsidiary. First, managers have complete control over day-to-day operations in the target market and access to valuable technologies, processes, and other intangible properties within the subsidiary. Complete control also decreases the chance that competitors will gain access to a company's competitive advantage, which is particularly important if it is technology based.

Managers also retain complete control over the subsidiary's output and prices. Unlike licensors and franchisers, the parent company also receives all profits generated by the subsidiary.

Second, a wholly owned subsidiary is a good mode of entry when a company wants to coordinate the activities of all its national subsidiaries. Companies using global strategies view each of their national markets as one part of an interconnected global market. Thus the ability to exercise complete control over a wholly owned subsidiary makes this entry mode attractive to companies that are pursuing global strategies.

Diff: 2 Page Ref: 323 Skill: Concept Objective: 11-1 Explain how companies use exporting, importing, and countertrade; 11-4 Explain the various types of investment entry modes.

Question ID: 11-135 Question: What is countertrade? Explain the concept of buyback as a type of countertrade, and discuss buyback as a joint venture configuration.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies are sometimes unable to import merchandise in exchange for financial payment. The reason is either that the government of the importer's nation lacks the hard currency to pay for imports or that it intentionally restricts the convertibility of its currency. Fortunately, there is a way for firms to trade by using either a small amount of hard currency or even none at all. Selling goods or services that are paid for, in whole or in part, with other goods or services is called countertrade. Although countertrade often requires an extensive network of international contacts, even smaller companies can take advantage of its benefits.

Nations that have long used countertrade are found mostly in Africa, Asia, Eastern Europe, and the Middle East. A lack of adequate hard currency often forced those nations to use countertrade to exchange oil for passenger aircraft and military equipment. Today, because of insufficient hard currency, developing and emerging markets frequently rely on countertrade to import goods. The greater involvement of firms from industrialized nations in those markets is expanding the use of countertrade.

Buyback is the export of industrial equipment in return for products produced by that equipment. This practice usually typifies long-term relationships between the companies involved.

A buyback joint venture is formed when each partner requires the same component in its production process. It might be formed when a production facility of a certain minimum size is needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant building it. However, by combining resources, the partners can construct a facility that serves their needs while achieving savings from economies of scale production. For instance, this was one reason behind the $500 million joint venture between Chrysler and BMW to build small-car engines in Latin America. Each party benefited from the economies of scale offered by the plant's annual production capacity of 400,000 engines—a volume that neither company could absorb alone.

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Diff: 2 Page Ref: 312 –313 323–325 Skill: Synthesis Objective: 11-1 Explain how companies use exporting, importing, and countertrade; 11-4 Explain the various types of investment entry modes.

Question ID: 11-136 Question: Identify and explain the possible configurations of joint venture. What are the advantages and disadvantages of the joint venture entry mode?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Under certain circumstances, companies prefer to share ownership of an operation rather than take complete ownership. A separate company that is created and jointly owned by two or more independent entities to achieve a common business objective is called a joint venture. Joint venture partners can be privately owned companies, government agencies, or government-owned companies. Each party may contribute anything valued by its partners, including managerial talent, marketing expertise, market access, production technologies, financial capital, and superior knowledge or techniques of research and development.

Forward Integration Joint Venture. In this type of joint venture, the parties choose to invest together in downstream business activities—activities further along in the "value system" that are normally performed by others.

Backward Integration Joint Venture. In other words, the joint venture signals a move by each company into upstream business activities—activities earlier in the value system that are normally performed by others.

Buyback Joint Venture. A buyback joint venture is formed when each partner requires the same component in its production process. It might be formed when a production facility of a certain minimum size is needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant building it. However, by combining resources, the partners can construct a facility that serves their needs while achieving savings from economies of scale production.

Multistage Joint Venture. A multistage joint venture often results when one company produces a good or service required by another. For example, a sporting goods manufacturer might join with a sporting goods retailer to establish a distribution company designed to bypass inefficient local distributors in a developing country.

Advantages of Joint Ventures. Joint ventures offer several important advantages to companies going international.

Above all, companies rely on joint ventures to reduce risk. Generally, a joint venture exposes fewer of a partner's assets to risk than would a wholly owned subsidiary—each partner risks only its own contribution. That is why a joint venture entry might be a wise choice when market entry requires a large investment or when there is significant political or social instability in the target market. Similarly, a company can use a joint venture to learn about a local business environment prior to launching a wholly owned subsidiary. In fact, many joint ventures are ultimately bought outright by one of the partners after it gains sufficient expertise in the local market.

Second, companies can use joint ventures to penetrate international markets that are otherwise off-limits. Some governments either require nondomestic companies to share ownership with local companies or provide incentives for them to do so. Such requirements are most common among governments of developing countries. The goal is to improve the competitiveness of local companies by having them team up with and learn from international partner(s).

Third, a company can gain access to another company's international distribution network through the use of a joint venture.

Finally, companies form international joint ventures for defensive reasons. Entering a joint venture with a local government or government-controlled company gives the government a direct stake in the venture's success. In turn, the local government will be less likely to interfere if it means that the venture's performance will suffer. This same strategy can also be used to create a more "local" image when feelings of nationalism are running strong in a target country.

Disadvantages of Joint Ventures. Among its disadvantages, joint venture ownership can result in conflict between

partners. Conflict is perhaps most common when management is shared equally—that is, when each partner supplies

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top managers in what is commonly known as a "50–50 joint venture." Because neither partner's managers have the final say on decisions, managerial paralysis can result, causing problems such as delays in responding to changing market conditions. Conflict can also arise from disagreements over how future investments and profits are to be shared. Parties can reduce the likelihood of conflict and indecision by establishing unequal ownership, whereby one partner maintains 51 percent ownership of the voting stock and has the final say on decisions. A multiparty joint venture (commonly referred to as a consortium) can also feature unequal ownership. For example, ownership of a four-party joint venture could be distributed 20–20–20–40, with the 40 percent owner having the final say on decisions.

Second, loss of control over a joint venture's operations can also result when the local government is a partner in the joint venture. This situation occurs most often in industries considered culturally sensitive or important to national security, such as broadcasting, infrastructure, and defence. Thus, a joint venture's profitability could suffer because of local government motives based on cultural preservation or security.

Diff: 3 Page Ref: 323–326 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-137 Question: Differentiate between joint ventures and strategic alliances. How do they compare in advantages and disadvantages?

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Under certain circumstances, companies prefer to share ownership of an operation rather than take complete ownership. A separate company that is created and jointly owned by two or more independent entities to achieve a common business objective is called a joint venture. Joint venture partners can be privately owned companies, government agencies, or government-owned companies. Each party may contribute anything valued by its partners, including managerial talent, marketing expertise, market access, production technologies, financial capital, and superior knowledge or techniques of research and development.

Advantages of Joint Ventures. Joint ventures offer several important advantages to companies going international.

Above all, companies rely on joint ventures to reduce risk. Generally, a joint venture exposes fewer of a partner's assets to risk than would a wholly owned subsidiary—each partner risks only its own contribution. That is why a joint venture entry might be a wise choice when market entry requires a large investment or when there is significant political or social instability in the target market. Similarly, a company can use a joint venture to learn about a local business environment prior to launching a wholly owned subsidiary. In fact, many joint ventures are ultimately bought outright by one of the partners after it gains sufficient expertise in the local market.

Second, companies can use joint ventures to penetrate international markets that are otherwise off-limits. Some governments either require nondomestic companies to share ownership with local companies or provide incentives for them to do so. Such requirements are most common among governments of developing countries. The goal is to improve the competitiveness of local companies by having them team up with and learn from international partner(s).

Third, a company can gain access to another company's international distribution network through the use of a joint venture.

Finally, companies form international joint ventures for defensive reasons. Entering a joint venture with a local government or government-controlled company gives the government a direct stake in the venture's success. In turn, the local government will be less likely to interfere if it means that the venture's performance will suffer. This same strategy can also be used to create a more "local" image when feelings of nationalism are running strong in a target country.

Disadvantages of Joint Ventures. Among its disadvantages, joint venture ownership can result in conflict between partners. Conflict is perhaps most common when management is shared equally—that is, when each partner supplies top managers in what is commonly known as a "50–50 joint venture." Because neither partner's managers have the final say on decisions, managerial paralysis can result, causing problems such as delays in responding to changing market conditions. Conflict can also arise from disagreements over how future investments and profits are to be

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shared. Parties can reduce the likelihood of conflict and indecision by establishing unequal ownership, whereby one partner maintains 51 percent ownership of the voting stock and has the final say on decisions. A multiparty joint venture (commonly referred to as a consortium) can also feature unequal ownership. For example, ownership of a four-party joint venture could be distributed 20–20–20–40, with the 40 percent owner having the final say on decisions.

Second, loss of control over a joint venture's operations can also result when the local government is a partner in the joint venture. This situation occurs most often in industries considered culturally sensitive or important to national security, such as broadcasting, infrastructure, and defence. Thus, a joint venture's profitability could suffer because of local government motives based on cultural preservation or security.

Sometimes companies who are willing to cooperate with one another do not want to go so far as to create a separate jointly owned company. A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures, strategic alliances can be formed for relatively short periods or for many years, depending on the goals of the participants.

Strategic alliances can be established between a company and its suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner purchases a portion of the other's stock. In this way, each company has a direct stake in its partner's future performance. This decreases the likelihood that one partner will try to take advantage of the other.

Advantages of Strategic Alliances. Strategic alliances offer several important advantages to companies. First, companies use strategic alliances to share the cost of an international investment project. For example, many firms are developing new products that not only integrate the latest technologies but also shorten the life spans of existing products. In turn, the shorter life span is reducing the number of years during which a company can recoup its investment. Thus many companies are cooperating to share the costs of developing new products.

Second, companies use strategic alliances to tap into competitors' specific strengths. Some alliances formed between Internet portals and technology companies are designed to do just that.

Finally, companies turn to strategic alliances for many of the same reasons that they turn to joint ventures. Some businesses use strategic alliances to gain access to a partner's channels of distribution in a target market. Other firms use them to reduce exposure to the same kinds of risks from which joint ventures provide protection.

Disadvantages of Strategic Alliances. Perhaps the most important disadvantage of a strategic alliance is that it can create a future local or even global competitor. For example, one partner might be using the alliance to test a market and prepare the launch of a wholly owned subsidiary. By declining to cooperate with others in the area of its core competency, a company can reduce the likelihood of creating a competitor that would threaten its main area of business. Likewise, a company can insist on contractual clauses that constrain partners from competing against it with certain products or in certain geographic regions. Companies are also careful to protect special research programs, production techniques, and marketing practices that are not committed to the alliance. Naturally, managers must weigh the potential for encouraging new competition against the benefits of international cooperation.

As in the case of joint ventures, conflict can arise and eventually undermine cooperation. Alliance contracts are drawn up to cover as many contingencies as possible, but communication and cultural differences can still arise.

When serious problems crop up, dissolution of the alliance may be the only option.

Diff: 3 Page Ref: 323–327 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-138 Question: Explain the differences between a turnkey project and a strategic alliance.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

When one company designs, constructs, and tests a production facility for a client, the agreement is called a turnkey (build-operate-transfer) project. The term turnkey project is derived from the understanding that the client, who

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normally pays a flat fee for the project, is expected to do nothing more than simply "turn a key" to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.

Similar to management contracts, turnkey projects tend to be large-scale and often involve government agencies.

But unlike management contracts, turnkey projects transfer special process technologies or production-facility designs to the client. They typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that are then turned over to the client. Under a management contract, the supplier of a service retains the asset—the managerial expertise.

With turnkey projects, one company hires another to complete a specified scope of work. Strategic alliances, on the other hand, involve a level of cooperation between companies that choose to partner to achieve joint objectives.

A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures, strategic alliances can be formed for relatively short periods or for many years, depending on the goals of the participants. Strategic alliances can be established between a company and its suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner purchases a portion of the other's stock. In this way, each company has a direct stake in its partner's future performance. This decreases the likelihood that one partner will try to take advantage of the other.

Diff: 3 Page Ref: 321–322, 326–327 Skill: Synthesis Objective: 11-2 Explain the various means of financing export and import activities; 11-3 Describe the different contractual entry modes that are available to companies.

Question ID: 11-139 Question: Explain in detail the strategic factors that influence a company's international entry mode selection.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The choice of entry mode has many important strategic implications for a company's future operations. Because enormous investments in time and money can go into determining an entry mode, the choice must be made carefully. Several key factors that influence a company's international entry mode selection are the cultural environment, political and legal environments, market size, production and shipping costs, and international experience.

Cultural Environment. The dimensions of culture—values, beliefs, customs, languages, religions—can differ greatly

from one nation to another. In such cases, managers can be less confident in their ability to manage operations in the host country. They can be concerned about the potential not only for communication problems but also for interpersonal difficulties. As a result, managers may avoid investment entry modes in favour of exporting or a contractual mode. On the other hand, cultural similarity encourages confidence and thus the likelihood of investment.

Likewise, the importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market.

Political and Legal Environments. As mentioned earlier in this chapter, political instability in a target market increases the risk exposure of investments. Significant political differences and levels of instability cause companies to avoid large investments and to favour entry modes that shelter assets.

A target market's legal system also influences the choice of entry mode. Certain import regulations, such as high tariffs or low quota limits, can encourage investment. A company that produces locally avoids tariffs that increase product cost; it also doesn't have to worry about making it into the market below the quota (if there is one). But low tariffs and high quota limits discourage market entry by means of investment. Also, governments may enact laws that ban certain types of investment outright.

Market Size. The size of a potential market also influences the choice of entry mode. For example, rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market. High domestic demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. On the other hand, if investors believe that a market is likely to remain relatively small, better options might include exporting or contractual entry.

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Production and Shipping Costs. By helping to control total costs, low-cost production and shipping can give a

company an advantage. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behaviour and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.

Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.

International Experience. Most companies enter the international marketplace through exporting. As companies gain international experience, they tend to select entry modes that require deeper involvement. But this means businesses must accept greater risk in return for greater control over operations and strategy. Eventually, they may explore the advantages of licensing, franchising, management contracts, and turnkey projects. After businesses become comfortable in a particular market, joint ventures, strategic alliances, and wholly owned subsidiaries become viable options.

Diff: 2 Page Ref: 328–329 Skill: Concept Objective: 11-4 Explain the various types of investment entry modes.

Question ID: 11-140 Question: Explain how a country's political environment can influence its choice of market entry strategy, and discuss the risks posed by political instability on the management contract entry mode.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Political instability in a target market increases the risk exposure of investments. Significant political differences and levels of instability cause companies to avoid large investments and to favour entry modes that shelter assets.

In particular, for companies under management contracts, political instability can threaten not just physical resources, but human resources as well. This leads to one major drawback of management contracts as an entry mode. Although management contracts reduce the exposure of physical assets in another country, the same is not true for the supplier's personnel: political or social turmoil can threaten managers' lives.

Diff: 2 Page Ref: 321, 325, 328 Skill: Synthesis Objective: 11-3 Describe the different contractual entry modes that are available to companies; 11-4 Explain the various types of investment entry modes.

Question ID: 11-141 Question: Discuss the advantages of licensing, low-cost production, and low-cost shipping for international companies.

Answer: Specific examples of companies and/or countries to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise.

Second, licensing can be a less risky method of international expansion for a licensor than other entry modes.

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Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately.

Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at all—which is what owners get from bootleg versions of their products.

Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies.

In addition to licensing, low-cost production and shipping can give a company an advantage by helping to control total costs. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behaviour and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.

Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.

Diff: 2 Page Ref: 317–318, 329 Skill: Synthesis Objective: 11-2 Explain the various means of financing export and import activities; 11-4 Explain the various types of investment entry modes.

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Chapter 12 Developing and Marketing Products

Chapter 12 Developing and Marketing Products True/False Question ID: 12-1 Question: Product standardization is more likely when nations share the same level of economic development.

Answer: TRUE Diff: 2 Page Ref: 337 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-2 Question: Cultural differences demand that all companies modify their products to local cultures.

Answer: FALSE Diff: 1 Page Ref: 338 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-3 Question: A brand name is central to a product's personality and the image it presents to buyers.

Answer: TRUE Diff: 1 Page Ref: 338 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-4 Question: A brand name can function as legal property that owners can protect from trespass by competitors.

Answer: TRUE Diff: 2 Page Ref: 338 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-5 Question: The value customers obtain from a product is heavily influenced by the image of the country in which the product is designed, manufactured, or assembled.

Answer: TRUE Diff: 2 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-6 Question: Counterfeit goods are imitation products passed off as legitimate trademarks, patents, or copyrighted works.

Answer: TRUE Diff: 2 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-7 Question: Counterfeiting is common among highly visible brand-name consumer goods.

Answer: TRUE Diff: 2 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-8

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Question: Traditionally, companies managed to extend a product's life by introducing it into different markets consecutively.

Answer: TRUE Diff: 2 Page Ref: 341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-9 Question: Because companies are undertaking new product development at an increasingly rapid pace, product life cycles are becoming shorter.

Answer: TRUE Diff: 2 Page Ref: 341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-10 Question: The rapid pace of technological innovation today extends the life cycles of products.

Answer: FALSE Diff: 2 Page Ref: 341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-11 Question: A push strategy is a promotional strategy designed to pressure channel members to carry a product and promote it to final users.

Answer: TRUE Diff: 1 Page Ref: 341 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-12 Question: A common example of a push strategy is creating consumer demand through direct marketing techniques.

Answer: FALSE Diff: 2 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-13 Question: When distribution channels are lengthy, a push strategy is typically most successful.

Answer: FALSE Diff: 2 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-14 Question: Developing and emerging markets typically have fewer available forms of mass media for use in implementing a pull strategy.

Answer: TRUE Diff: 2 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-15

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Question: A pull strategy is most appropriate when buyers display a great deal of brand loyalty toward one particular brand name.

Answer: TRUE Diff: 2 Page Ref: 343 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-16 Question: Firms that standardize their advertising usually control campaigns from the home office.

Answer: TRUE Diff: 1 Page Ref: 344 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-17 Question: Companies have benefited from the emergence of the Euro-consumer because advertising within the European Union can now be standardized.

Answer: FALSE Diff: 2 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-18 Question: Distribution is the process of sending promotional messages about products to target markets.

Answer: FALSE Diff: 1 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-19 Question: The term encoding refers to any element that disrupts the audience's ability to receive and interpret a promotional message.

Answer: FALSE Diff: 2 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-20 Question: Marketing communication is typically a one-way process from the source to the audience.

Answer: FALSE Diff: 2 Page Ref: 345–346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-21 Question: The dual extension method extends the same home-market product and marketing promotion into target markets.

Answer: TRUE Diff: 2 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-22

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Question: The dual extension method adapts both the product and its marketing communication to suit the target market.

Answer: FALSE Diff: 2 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-23 Question: Low economic development can force communications to be adapted to local conditions.

Answer: TRUE Diff: 2 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-24 Question: Under the dual adaptation method, a company adapts its product to local requirements while retaining the product's original marketing communication.

Answer: FALSE Diff: 2 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-25 Question: The physical path a product follows on its way to customers is called a distribution channel.

Answer: TRUE Diff: 1 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-26 Question: Given the intangible products of service providers, distribution channels are not needed for these companies.

Answer: FALSE Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-27 Question: Generally, the more intermediaries in a distribution channel, the less costly the channel becomes.

Answer: FALSE Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-28 Question: The lower a product's value density, the more localized the distribution system for that product.

Answer: TRUE Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-29 Question: An arm's length price is the price that is charged for products sold among a company's divisions or

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subsidiaries.

Answer: FALSE Diff: 1 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-30 Question: Lower-limit price controls are designed to provide price stability in an inflationary economy.

Answer: FALSE Diff: 2 Page Ref: 352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Multiple Choice Question ID: 12-31 Question: Some argue that because the world is becoming standardized and ________, companies should market the same products the same way in all countries.

A) richer B) heterogeneous C) homogeneous D) poorer Answer: C Diff: 2 Page Ref: 336 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-32 Question: Some argue that ________ is causing people's needs and preferences to converge worldwide.

A) inflation B) religion C) technology D) politics Answer: C Diff: 2 Page Ref: 336 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-33 Question: Lower levels of education and less buying experience mean that consumers in developing countries are ________.

A) more likely to need consumer protection B) less likely to need ethical products C) less likely to need consumer protection D) more likely to buy large quantities of products Answer: A Diff: 2 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-34 Question: Development of a green tea flavoured ice cream for the Japanese market shows that Haagen-Dazs has ________.

A) identified a different market for its product B) adapted its product to local buyer preferences C) promoted its brand name in a new market D) expanded its product promotion

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Answer: B Diff: 3 Page Ref: 338 Skill: Application Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-35 Question: Which of the following refers to the name of one or more items in a product line that identifies the source or character of the items?

A) Product description B) Image tag C) Brand name D) Unique descriptor Answer: C Diff: 1 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-36 Question: Brand names are central to a product's ________.

A) inventory planning B) raw materials C) reproducibility D) personality Answer: D Diff: 1 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-37 Question: A(n) ________ brand image is increasingly important as more consumers and businesspeople travel internationally.

A) consistent global B) segmented national C) adaptive D) differentiated Answer: A Diff: 2 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-38 Question: All company and product brand names are made up of semantic elements or language building blocks called ________.

A) regulatory language B) morphemes C) life cycle stages D) comp titles Answer: B Diff: 1 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-39 Question: ________ seldom offend people in international markets, but ________ can be highly offensive.

A) Product names; brand names

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B) National images; brand names C) Brand names; product names D) Product names; national images Answer: C Diff: 3 Page Ref: 339 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-40 Question: Which of the following is NOT true of national images?

A) National images tend to be static over the long term.

B) National images can be positive for some products but negative for others.

C) When national images change, they change slowly over time.

D) National images affect buyers' perceptions of quality and reliability.

Answer: A Diff: 2 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-41 Question: ________ are imitation products passed off as legitimate trademarks, patents, or copyrighted works.

A) Brand name goods B) Counterfeit goods C) Foreign goods D) Intangible goods Answer: B Diff: 1 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-42 Question: Which of the following is a marketplace of underground transactions that typically appears because a product is either illegal or tightly regulated?

A) Underground market B) Bazaar C) Illegal market D) Black market Answer: D Diff: 1 Page Ref: 340–341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-43 Question: Which of the following is NOT an example of a product that is commonly counterfeited?

A) Perfume B) Books C) Clothing D) Watches Answer: B Diff: 2 Page Ref: 341 Skill: Application Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-44 Question: Countries that top the list for the portion of their markets comprised of counterfeits include each of the

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following EXCEPT ________.

A) China B) India C) Russia D) Spain Answer: D Diff: 3 Page Ref: 340 Skill: Application Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-45 Question: To be included in the Best Global Brands report, a brand must be global, _______, and ________ .

A) valuable; visible B) cultural; expensive C) visible; financially transparent D) financially viable; public Answer: C Diff: 2 Page Ref: 340 Skill: Critical thinking Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-46 Question: Brand assessment for Best Global Brands are based on all of the following EXCEPT _________.

A) the role of the brand in the purchase decision process B) the strength of the brand C) the cultural responsiveness of the brand D) financial performance of the branded product or service Answer: C Diff: 2 Page Ref: 340 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-47 Question: The term ________ refers to a company's efforts to reach distribution channels and target customers through communications such as personal selling, advertising, public relations, and direct marketing.

A) marketing objectives B) distribution policies C) promotion mix D) value density Answer: C Diff: 1 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-48 Question: A promotional mix is composed of all of the following EXCEPT ________.

A) personal selling B) advertising C) public relations D) indirect exporting Answer: D Diff: 1 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

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Question ID: 12-49 Question: When Procter & Gamble hired a fleet of trucks to drive through village squares and hand out free trial packages to potential end users, it employed which of the following?

A) Push strategy B) Pull strategy C) End-point strategy D) Five channel strategy Answer: B Diff: 3 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-50 Question: A promotional strategy designed to create buyer demand that will encourage channel members to stock a company's product is called a(n) ________.

A) pull strategy B) end distribution strategy C) push strategy D) up-channel strategy Answer: A Diff: 1 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-51 Question: Examples of pull strategies include each of the following EXCEPT ________.

A) mass media advertising B) direct marketing techniques C) free trial packages D) encouraging good retail visibility Answer: D Diff: 2 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-52 Question: Which of the following is a promotional strategy designed to pressure channel members to carry a product and promote it to final users?

A) Pull strategy B) Adaptive channel strategy C) Push strategy D) End distribution strategy Answer: C Diff: 1 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-53 Question: Manufacturers of products that are commonly sold through department and grocery stores often use a(n) ________.

A) pull strategy B) exclusive channel strategy C) push strategy D) value chain strategy Answer: C Diff: 3 Page Ref: 342

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Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-54 Question: When there are many levels of intermediaries in a distribution channel, a ________ strategy is often the easiest.

A) push B) pull C) direct function D) brand Answer: B Diff: 2 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-55 Question: Under which of the following circumstances is implementing a push strategy LEAST likely to be difficult?

A) Channel members wield a great deal of power relative to that of producers.

B) Distribution channels are lengthy.

C) Buyers display a great deal of brand loyalty to another product.

D) Distribution channels are short.

Answer: D Diff: 3 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-56 Question: A pull strategy is most appropriate under which of the following circumstances?

A) Channel members wield relatively little power compared to that of producers.

B) Buyers display a great deal of brand loyalty to a particular product.

C) Distribution channels are short.

D) Buyers need to be informed about the features of an industrial product.

Answer: B Diff: 3 Page Ref: 343 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-57 Question: A(n) ________ strategy is suited to industrial products because potential buyers usually need to be informed about a product's special features.

A) push B) pull C) direct sales D) indirect sales Answer: A Diff: 2 Page Ref: 343 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-58 Question: A furniture company that makes its marketing program elements uniform, targeting an entire region with similar products, is demonstrating which of the following?

A) Market regulation B) Local responsiveness C) Standardization

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D) Adaptation Answer: C Diff: 1 Page Ref: 344 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-59 Question: Which of the following statements is true regarding international advertising and promotions?

A) To cut costs, most companies standardize all aspects of their international promotions.

B) Firms that standardize advertising often control campaigns from the home office.

C) Pan-European advertising has historically been successful at reaching the Euro-consumer.

D) International advertising is highly similar to advertising in domestic markets.

Answer: B Diff: 2 Page Ref: 344 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-60 Question: The process of sending messages about products to target markets is called ________.

A) encoding B) distributing C) value density D) marketing communication Answer: D Diff: 1 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-61 Question: Which of the following is LEAST likely to contribute to the success of a pan-European ad?

A) A great deal of visuals B) Few written or spoken words C) Focus on the consumer D) Clever catch phrases Answer: D Diff: 3 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-62 Question: Which of the following occurs when an idea to be communicated is translated into images, words, and symbols?

A) Decoding B) Structuring C) Encoding D) Media parsing Answer: C Diff: 2 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-63 Question: Once an audience receives a message, it ________ the message and interprets its meaning.

A) sources B) decodes

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C) intensifies D) encodes Answer: B Diff: 1 Page Ref: 345–346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-64 Question: ________ refers to anything that disrupts the audience's ability to receive and interpret a promotional message.

A) Noise B) Interpolation C) Blending D) Resonance Answer: A Diff: 2 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-65 Question: Which of the following reflects the correct sequence of the marketing communications process?

A) Promotional message, encoding, decoding, feedback B) Encoding, promotional message, decoding, feedback C) Promotional message, decoding, feedback, encoding D) Encoding, promotional message, feedback, decoding Answer: B Diff: 2 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-66 Question: Which of the following methods extends the same home-market product and marketing promotion into target markets?

A) Product/communications extension B) Product extension, communication adaptation C) Product adaptation, communication extension D) Product/communication adaptation Answer: A Diff: 1 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-67 Question: Under which of the following methods does a company extend the same product into new target markets but alters its promotion?

A) Product/communications extension B) Product extension, communication adaptation C) Product adaptation, communication extension D) Product/communication adaptation Answer: B Diff: 1 Page Ref: 346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-68

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Question: Under which of the following methods does a company adapt its product to the requirements of the international market while retaining the product's original marketing communication?

A) Product/communications extension B) Product extension, communication adaptation C) Product adaptation, communication extension D) Product/communication adaptation Answer: C Diff: 1 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-69 Question: Which of the following methods adapts both the product and its marketing communication to suit the target market?

A) Product/communications extension B) Product extension, communication adaptation C) Product adaptation, communication extension D) Product/communication adaptation Answer: D Diff: 1 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-70 Question: Because it is so costly, a ________ strategy is not common.

A) product/communications extension B) product adaptation, communications extension C) product extension, communications adaptation D) dual adaptation Answer: D Diff: 2 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-71 Question: ________ is often necessary when many important differences exist between the home and target markets.

A) Product invention B) Dual adaptation C) World pricing D) Dual extension Answer: A Diff: 2 Page Ref: 347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-72 Question: Which of the following refers to planning, implementing, and controlling the physical flow of a product from its point of origin to its point of consumption?

A) Channeling B) Distribution C) Production D) Promotional mix Answer: B Diff: 2 Page Ref: 348 Skill: Concept

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Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-73 Question: The physical path a product follows on its way to customers is called a ________.

A) distribution channel B) promotional mix path C) value density D) just-in-time path Answer: A Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-74 Question: Companies along a distribution channel that work together in delivering products to customers are called ________.

A) arbitrageurs B) intermediaries C) solicitors D) reduction planners Answer: B Diff: 1 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-75 Question: A distribution channel in which a manufacturer grants the right to sell its products to only one or a limited number of resellers is called a(n) ________.

A) intensive channel B) push strategy channel C) exclusive channel D) pull strategy channel Answer: C Diff: 1 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-76 Question: An ________ channel is difficult or impossible for outsiders to penetrate.

A) exclusive B) inclusive C) extensive D) intensive Answer: A Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-77 Question: An ________ channel gives producers a good deal of control over the sale of their product by channel members such as wholesalers and retailers.

A) exclusive B) inclusive C) extensive D) intensive

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Answer: A Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-78 Question: A distribution channel in which a producer grants the right to sell its product to many resellers is referred to as a(n) ________.

A) pull channel B) exclusive channel C) intensive channel D) value channel Answer: C Diff: 1 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-79 Question: An ________ channel does not create strong barriers to channel entry for other producers, nor does it provide much control over reseller decisions such as what competing brands to sell.

A) extensive B) intensive C) exclusive D) inclusive Answer: B Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-80 Question: An ________ channel provides buyers with location convenience because of the large number of outlets through which a product is sold.

A) extensive B) intensive C) exclusive D) inclusive Answer: B Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-81 Question: The term ________ refers to the number of intermediaries between producer and buyer.

A) channel composition B) channel differentiation C) channel length D) channel logistics Answer: C Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-82 Question: Which of the following is also known as direct marketing?

A) A two-level channel

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B) A zero-level channel C) A multi-level channel D) A one-level channel Answer: B Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-83 Question: The value of a product relative to its weight and volume is called its ________.

A) promotional density B) duty quotient C) price quotient D) value density Answer: D Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-84 Question: The ________ a product's value density, the more ________ the distribution system.

A) lower; localized B) lower; globalized C) higher; localized D) lower; costly Answer: A Diff: 3 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-85 Question: A pricing policy in which one selling price is established for all international markets is called ________.

A) dual pricing B) price escalation C) worldwide pricing D) transfer pricing Answer: C Diff: 1 Page Ref: 350 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-86 Question: Which of the following is LEAST likely to hinder the establishment of a worldwide pricing policy?

A) Production costs B) Exporting costs C) Local buyer purchasing power D) Guaranteed selling prices Answer: D Diff: 2 Page Ref: 350 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-87 Question: A pricing policy in which a product has a different selling price in export markets than it has in the home market is called ________.

A) dual pricing B) transfer pricing

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C) worldwide pricing D) arm's length pricing Answer: A Diff: 1 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-88 Question: Which of these refers to the price charged for products sold between a company's divisions or subsidiaries?

A) Dual price B) Transfer price C) Worldwide price D) Arm's length price Answer: B Diff: 1 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-89 Question: The free-market price that unrelated parties charge one another for a specific product is called a(n) ________.

A) worldwide price B) transfer price C) dual price D) arm's length price Answer: D Diff: 2 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-90 Question: Upper or lower limits placed on the prices of products sold within a country are known as ________.

A) price controls B) transfer prices C) price escalators D) arm's length prices Answer: A Diff: 1 Page Ref: 352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-91 Question: Which of the following occurs when the price of a good is lower in export markets than it is in the domestic market?

A) Dumping B) Transfer pricing C) Price escalation D) Price controls Answer: A Diff: 1 Page Ref: 352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Scenario: Silk Industries, LLC Silk Industries, LLC, comprises two major divisions: consumer products and industrial products. The consumer product line of the company enjoys a well-recognized brand name and loyal customers worldwide. The managers are considering different types of promotional strategies.

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Question ID: 12-92 Question: If Silk Industries is interested in creating buyer demand that will encourage channel members to stock its products, it should employ a ________.

A) pull strategy B) transfer pricing strategy C) push strategy D) zero-level channel strategy Answer: A Diff: 2 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-93 Question: Which of the following might be most appropriate for its consumer product line?

A) Pull strategy B) Transfer pricing strategy C) Push strategy D) High-level channel strategy Answer: A Diff: 3 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-94 Question: Which of the following might be most appropriate for its industrial product division?

A) Pull strategy B) Transfer pricing strategy C) Push strategy D) Zero-level channel strategy Answer: C Diff: 3 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-95 Question: If Silk Industries is interested in pressuring channel members to carry a product and promote it to final users, it should focus on which of the following?

A) Pull strategy B) Dual pricing C) Push strategy D) Dual adaptation Answer: C Diff: 2 Page Ref: 342 Skill: Application Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Scenario: Old World, Ltd. Old World, Ltd., a London-based furniture manufacturer, is establishing its global distribution, pricing, and promotion strategies. Being new to global business, the firm is seeking your help in making its decisions.

Question ID: 12-96 Question: If Old World wants to grant the right to sell its furniture to only a limited number of resellers, it should consider which of the following approaches?

A) Intensive channel B) Pull strategy channel

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C) Exclusive channel D) Zero-level channel Answer: C Diff: 2 Page Ref: 348 Skill: Application Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-97 Question: If Old World wants to have its furniture sold through as many distribution outlets as possible, it should consider a(n) ________.

A) exclusive channel B) dual-price channel C) zero-level channel D) intensive channel Answer: D Diff: 2 Page Ref: 348 Skill: Application Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-98 Question: Old World should pursue a(n) ________ channel if it decides to greatly intensify its direct marketing efforts.

A) predictive B) dual-price C) zero-level D) exclusive Answer: C Diff: 2 Page Ref: 349 Skill: Application Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-99 Question: If Old World adopts a pricing policy of different selling prices in export markets than it has in the British market, it would be following a ________ strategy.

A) dual pricing B) transfer pricing C) worldwide pricing D) co-adaptor pricing Answer: A Diff: 2 Page Ref: 351 Skill: Application Objective: 12-5 Discuss the elements that influence international pricing strategies.

Scenario: Scooters, Inc. Scooters, Inc. is a producer of pricey scooters. The company's profits come mostly from sales of its luxury line that caters to the rich and famous, similar to the Vespa. Ben Driven, vice president of marketing for Scooters, Inc., has been asked to review the company's worldwide pricing strategy.

Question ID: 12-100 Question: Ben knows that a pricing policy in which one selling price is established for all international markets is called ________.

A) worldwide pricing B) singularized pricing C) dual pricing D) international pricing Answer: A

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Diff: 1 Page Ref: 350 Skill: Application Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-101 Question: Because Scooters, Inc. caters to a very narrow niche of wealthy individuals, the CEO is interested in implementing a worldwide pricing scheme. Which of the following conditions is most likely to help the establishment of such a scheme?

A) Production costs differ from market to market.

B) Currency values fluctuate fairly predictably.

C) Distribution channels are lengthy in each market.

D) Wealthy local buyers have similar levels of purchasing power.

Answer: D Diff: 3 Page Ref: 350 Skill: Application Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-102 Question: Scooters, Inc., has traditionally sold its products at one price in the domestic market and at another price in export markets, which is called a(n) ________ strategy.

A) worldwide pricing B) global pricing C) dual pricing D) international pricing Answer: C Diff: 1 Page Ref: 351 Skill: Application Objective: 12-5 Discuss the elements that influence international pricing strategies.

Fill-In-The-Blank Question ID: 12-103 Question: The four components of a marketing strategy are ________.

Answer: product, price, distribution, and promotion Diff: 1 Page Ref: 337 Skill: Concept Objective: 12-1 Explain the impact globalization is having on international marketing activities.

Question ID: 12-104 Question: A(n) ________ is the name of one or more items in a product line that identifies the source or character of the items.

Answer: brand name Diff: 2 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-105 Question: ________ are language building blocks that make up all company and product brand names.

Answer: Morphemes Diff: 3 Page Ref: 338 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-106 Question: A company's ________ comprises its efforts to reach distribution channels and target customers through communications, such as personal selling, advertising, public relations, and direct marketing.

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Answer: promotion mix Diff: 3 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-107 Question: A promotional strategy designed to create buyer demand that will encourage channel members to stock a company's product is called a(n) ________ strategy.

Answer: pull Diff: 2 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-108 Question: A(n) ________ strategy is a promotional strategy designed to pressure channel members to carry a product and promote it to final users.

Answer: push Diff: 2 Page Ref: 342 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-109 Question: When an idea is ________, it is translated into words, images, and symbols.

Answer: encoded Diff: 2 Page Ref: 345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-110 Question: ________ refers to planning, implementing, and controlling the physical flow of a product from its point of origin to its point of consumption.

Answer: Distribution Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-111 Question: The physical path a product follows on its way to customers is called a(n) ________.

Answer: distribution channel Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-112 Question: A(n) ________ is one in which a manufacturer grants the right to sell its product to only one or a limited number of resellers.

Answer: exclusive channel Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-113 Question: A(n) ________ is one in which a producer grants the right to sell its product to many resellers.

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Answer: intensive channel Diff: 2 Page Ref: 348 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-114 Question: ________ refers to the number of intermediaries between the producer and the buyer.

Answer: Channel length Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-115 Question: In a(n) ________ channel, producers sell directly to final buyers.

Answer: zero-level Diff: 1 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-116 Question: Another term for a zero-level channel is ________.

Answer: direct marketing Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-117 Question: A(n) ________ channel places only one intermediary between the producer and the buyer.

Answer: one-level Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-118 Question: The value of a product relative to its weight and volume is called its ________.

Answer: value density Diff: 3 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-119 Question: The ________ a product's density value, the more localized the distribution system.

Answer: lower Diff: 3 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-120 Question: ________ occurs when a product has a higher selling price in export markets than it has in the home market.

Answer: Price escalation Diff: 2 Page Ref: 351 Skill: Concept

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Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-121 Question: A(n) ________ is the price charged for products sold between a company's divisions or subsidiaries.

Answer: transfer price Diff: 2 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-122 Question: A free-market price that unrelated parties charge one another for a specific product is called a(n) ________.

Answer: arm's length price Diff: 2 Page Ref: 351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Essay Question ID: 12-123 Question: Identify and briefly describe any four factors affecting international product policies.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Laws and Regulations. Companies must often adapt their products to satisfy laws and regulations in a target market.

The fact that many developing countries have fewer consumer protection laws creates an ethical issue for some companies. Ironically, lower levels of education and less buying experience mean that consumers in developing countries are more likely to need protection. However, many governments impose fewer regulations in order to hold down production costs and consumer prices. Unfortunately, this can be an invitation for international distributors to withhold full information about products and their potential dangers.

Cultural Differences. Companies also adapt their products to suit local buyers' product preferences that are rooted in culture. Not all companies need to modify their product to the culture; instead, they may need to identify a different cultural need that it satisfies.

Brand and Product Names. Several issues related to a company's brand name are important concerns for the day-today activities of international managers. A brand name is the name of one or more items in a product line that identifies the source or character of the items. When we see a product labeled with a particular brand name, we assign to that product a certain value based on our past experiences with that brand. That is why a brand name is central to a product's personality and the image that it presents to buyers. It informs buyers about a product's source and protects both customer and producer from copycat products. Brand names help consumers to select, recommend, or reject products. They also function as legal property that owners can protect from trespass by competitors.

Indeed, a strong brand can become a company's most valuable asset and primary source of competitive advantage.

A consistent worldwide brand image is increasingly important as more consumers and businesspeople travel internationally than ever before. An inconsistent brand name can confuse existing and potential customers. Although companies normally keep their brand names consistent across markets, they can create new product names or modify existing ones to suit local preferences.

Companies also need to review the image of their brand from time to time and update it if it seems old-fashioned.

National Image. The value customers obtain from a product is heavily influenced by the image of the country in which it is designed, manufactured, or assembled. We consider the influence of a country’s name when thinking of Italian shoes, German luxury cars, and Japanese electronics. This image can be positive for some products but negative for others.

Because it affects buyers' perceptions of quality and reliability, national image is an important element of product

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policy. Yet national image can and does change slowly over long periods of time.

Counterfeit Goods and Black Markets. Recall that counterfeit goods are imitation products passed off as legitimate trademarks, patents, or copyrighted works—products that normally enjoy legal protection. Because developing nations often are weakest in enforcing such legal protections, they normally have the most active counterfeiting markets. Countries that top the list for the portion of their markets comprised of counterfeits include China, India, Russia, Thailand, and Turkey.

Counterfeiting is common among highly visible brand-name consumer goods, including watches, perfumes, clothing, movies, music, and computer software. Counterfeit products are typically sold to consumers on what is called the black market—a marketplace of underground transactions that typically appears because a product is either illegal (such as counterfeits) or tightly regulated.

Shortened Product Life Cycles. Companies traditionally managed to extend a product's life by introducing it into different markets consecutively. They did this by introducing products in industrialized countries and only later marketing them in developing and emerging markets. Thus, while a product's sales are declining in one market, they might be growing in another.

Advances in telecommunications, however, have alerted consumers around the world to the latest product introductions. Consequently, consumers in developing and emerging markets also demand the latest products and are not happy with receiving what is yesterday's fad in the highly developed nations. Also, the rapid pace with which technological innovation occurs today is shortening the life cycles of products. The actions of international companies themselves actually helped to create this situation. Companies are undertaking new-product development at an increasingly rapid pace and thus shortening the life cycles of their products.

Diff: 2 Page Ref: 337–341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-124 Question: Discuss how a national business environment can influence a firm's decision whether or not to standardize its product, and explain how cultural differences impact product strategies.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Consumers in different national markets often demand products that reflect their unique tastes and preferences.

Cultural, political, legal, and economic environments have a great deal to do with the preferences of both consumers and industrial buyers worldwide. A culture's aesthetics involves, among other things, preferences for certain colours.

Ohio-based Rubbermaid discovered the role of aesthetics as it attempted to increase its international sales.

Consumers in the United States prefer household products in neutral blues or almond; in southern Europe, red is the preferred colour. The Dutch want white. In addition, many European cultures perceive plastic products as inferior and want tight lids on metal wastebaskets as opposed to US-style plastic versions with open tops.

But certain products do appeal to practically all cultures. Although it is not a traditional Asian drink, red wine is sweeping Asian markets such as Hong Kong, Singapore, Taiwan, and Thailand.

Product standardization is more likely when nations share the same level of economic development. In years past, consumers in India faced limited options when it came to purchasing automobiles. Most were made in India, were expensive, and were not fuel-efficient. Thanks to steady economic progress over the past two decades, Indian consumers have a better standard of living and more discretionary income. Being able to afford an imported brandname automobile with a global reputation, such as Suzuki or Ford is more commonplace in Indian cities than it was years ago.

Cultural differences impact product strategies. Companies also adapt their products to suit local buyers' product preferences that are rooted in culture. Häagen-Dazs is an international company that prides itself on its capability to identify the taste preferences of consumers in target markets. It then modifies its base product with just the right flavor to make a product that satisfies consumers' needs. Following years of trial and error developing secret formulas and conducting taste tests, Häagen-Dazs finally launched its green-tea flavour ice cream throughout Japan.

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The taste is that of macha tea—an elite strain of green tea that's been used in elaborate Japanese ceremonies for centuries. Green-tea ice cream was an instant hit and one day may even surpass Häagen-Dazs' perennial flavour champion in Japan—vanilla.

Not all companies need to modify their product to the culture; instead, they may need to identify a different cultural need that it satisfies. Altoids, for example, is a British product that has been used for 200 years to soothe upset stomachs. But the company identified a different use for its product in the United States. Because of its strong flavour, Altoids is sold in the US market as a breath mint and has pushed aside weaker-flavoured candies.

Diff: 2 Page Ref: 336–337, 338 Skill: Synthesis Objective: 12-1 Explain the impact globalization is having on international marketing activities; 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-125 Question: Differentiate between push and pull strategies. Explain the factors that determine whether the push or the pull strategy is appropriate in a given marketing environment.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

There are two general promotional strategies that companies can use to get their marketing message across to buyers. They can rely completely on just one of these or use them in combination.

A promotional strategy designed to create buyer demand that will encourage channel members to stock a company's product is called a pull strategy. In other words, buyer demand is generated in order to "pull" products through distribution channels to end users. Creating consumer demand through direct marketing techniques is a common example of a pull strategy.

By contrast, a push strategy is a promotional strategy designed to pressure channel members to carry a product and promote it to final users. Manufacturers of products commonly sold through department and grocery stores often use a push strategy.

Whether the push or pull strategy is most appropriate in a given marketing environment depends on several factors:

Distribution System. Implementing a push strategy can be difficult when channel members (such as distributors)

wield a great deal of power relative to that of producers. It can also be ineffective when distribution channels are lengthy: the more levels of intermediaries there are, the more channel members there are who must be convinced to carry a product. In such cases, it might be easier to create buyer demand using a pull strategy than to persuade distributors to stock a particular product.

Access to Mass Media. Developing and emerging markets typically have fewer available forms of mass media for use in implementing a pull strategy. Accordingly, it is difficult to increase consumer awareness of a product and generate product demand. Many consumers in these markets cannot afford cable or satellite television, or perhaps even glossy magazines. In such cases, advertisers might turn to billboards and radio. At other times, gaining wide exposure can be difficult because existing media have only local, as opposed to national, reach.

Type of Product. A pull strategy is most appropriate when buyers display a great deal of brand loyalty toward one particular brand name. In other words, brand-loyal buyers know what brand of a product they want before they go shopping. On the other hand, push strategies tend to be appropriate for inexpensive consumer goods characterized by buyers who are not brand loyal. Low brand loyalty means that a buyer will go shopping for a product, not knowing which brand is best, and simply will buy one of those carried by the retailer or wholesaler. A push strategy is also suited to industrial products because potential buyers usually need to be informed about a product's special features and benefits.

Diff: 3 Page Ref: 342–343 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

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Question ID: 12-126 Question: Discuss in detail the problem of counterfeit goods and black markets.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Companies try to protect their intellectual property and trademarks from counterfeit goods. Recall that counterfeit goods are imitation products passed off as legitimate trademarks, patents, or copyrighted works—products that normally enjoy legal protection. Because developing nations often are weakest in enforcing such legal protections, they normally have the most active counterfeiting markets. Countries that top the list for the portion of their markets comprised of counterfeits include China, India, Russia, Thailand, and Turkey.

Counterfeiting is common among highly visible brand-name consumer goods, including watches, perfumes, clothing, movies, music, and computer software. Counterfeit products are typically sold to consumers on what is called the black market—a marketplace of underground transactions that typically appears because a product is either illegal (such as counterfeits) or tightly regulated. Tabletop vendors working the back streets of the world's largest cities represent the retail side of the black market. For example, in Sofia, the capital of Bulgaria, you can buy one CD-ROM that contains 50 software applications for $10; buying all the official versions of these products would cost about $5,000. In Estonia's Kadaka flea market, you can find the full Microsoft Office software bundle for around $18—about one-fiftieth of its official selling price. Increasingly, engineered industrial components such as aircraft parts, medicines, and other pharmaceutical products are also becoming targets of counterfeiters.

Counterfeit goods can damage buyers' image of a brand when the counterfeits are of inferior quality—which is nearly always the case. Buyers who purchase an item bearing a company's brand name expect a certain level of craftsmanship and, therefore, satisfaction. But when the product fails to deliver on the expectations, the buyer is dissatisfied, and the company's reputation is tarnished.

Diff: 2 Page Ref: 340–341 Skill: Concept Objective: 12-2 Describe the types of things managers must consider when developing international product strategies.

Question ID: 12-127 Question: Explain in detail how a product/communications extension (dual extension) promotional strategy works.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A product/communications extension (dual extension) promotional strategy extends the same home-market product and marketing promotion into target markets. Under certain conditions, it can be the simplest and most profitable strategy. For example, because of a common language and other cultural similarities, companies based in Englishspeaking Canadian provinces can sell the same product with packaging and advertising identical to that in the US market—provided the product is not required by the US government to carry any special statements or warnings.

The Canadian companies contain costs by developing a single product and one promotional campaign for both markets. Yet it is important for Canadian companies not to ignore any subtle cultural differences that could cause confusion in interpreting the promotional message.

As the information age continues to knit the world more tightly together, this method will probably grow more popular. Today, consumers in seemingly remote parts of the world are rapidly becoming aware of the latest worldwide fads and fashions. But this strategy appears to be better suited for certain groups of buyers, including brand-conscious teenagers, business executives, and wealthy individuals. The strategy also tends to be better suited for companies that use a global strategy with their products, such as upscale personal items with global brand names—examples include Rolex watches, Hermes scarves and ties, and Coco Chanel (www.chanel.com) perfumes. It can also be appropriate for global brands that have mass appeal and cut across all age groups and social classes— such as Canon, Mars, and Nokia. The strategy also is useful to companies that are the low-cost leaders in their industries: one product and one promotional message keep costs down.

Diff: 2 Page Ref: 345–346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

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Question ID: 12-128 Question: Explain how companies can better manage their salespeople in other cultures.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Today, companies reap a greater portion of their revenues from international sales. How can you become a better global manager of your company's international sales force? Here are some helpful hints on improving the effectiveness of your company's representatives abroad.

Know the Sales Scene. Your company should conduct research before hiring and managing an international sales force, then formulate a targeted sales strategy and empower your sales force to meet their performance targets. The amount of compensation as well as the way in which it is delivered varies from country to country. For example, in the United States a greater portion of salary is based on commission than it is in Europe. Know the salary structure and incentive plans of salespeople with similar jobs at local companies.

Research the Customer. Do not assume that customers abroad have the same needs and preferences as customers at home. Investigate what potential buyers want and how much they are willing to pay. When ECA International (a market information provider) expanded into Asia, it was unsuccessful time and again. The company learned through its sales force that potential customers wanted to buy research piece-by-piece rather than buy a membership in the company. ECA was able to sell its memberships in Asia after it adapted its methods to suit local buyers.

Work with the Culture. "In order to motivate individuals, you need to set realistic objectives for salespeople, and much of that is culturally bound," says John Wada, sales and marketing director for IOR, a cross-cultural management company. Your company should seek answers to a host of questions. Do people in the local culture feel differently about work teams and competition than your sales force at home? How about schedules and deadlines?

Are you moving into a culture where "time is of the essence" or one where time is less important? Your company and its local sales force must understand what is expected of one another.

Learn from Your Representatives. If your salespeople believe they are pushing products that bear no relationship to the local market, their performance will suffer. "I'd do a great job," so the story goes, "but the product just won't sell here." Salespeople may begin focusing on critiquing products rather than selling them. Involve your sales reps in the R&D process so that they have a better sense of what's going on with the product. Perhaps bring your sales force to the home office to learn about your business so they understand their vital link in your company's chain of business activities. Finally, top managers should visit the local office to better comprehend the needs of local customers.

Diff: 2 Page Ref: 343 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-129 Question: Discuss, with specific details, how international advertising differs from advertising in domestic markets.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

International advertising differs a great deal from advertising in domestic markets. Managers must rely on their knowledge of a market to decide whether an ad is suitable for the company's international promotional efforts.

Cultural similarities can mean that ads need only slight modification for different nations, whereas cultural differences may mean that entirely new ads must be created.

Standardizing or Adapting Advertisements. The vast majority of advertising that occurs in any one nation is produced solely for that domestic audience. But companies that advertise in multiple markets must determine the aspects of the advertising campaign that can be standardized across markets and those that cannot. Companies that do market their products across national boundaries try to contain costs by standardizing as many aspects of their campaigns as possible. However, companies seldom standardize all aspects of their international promotions, for a variety of reasons, including differences in culture and laws. Firms that standardize advertising often control campaigns from the home office. This policy helps them to project consistent brand images and promotional messages across all

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markets—the aim of a global strategy. Companies can achieve consistency by standardizing their basic promotional message, creative concepts, graphics, and information content. After a company decides to pursue a global marketing strategy, it naturally tries to get the most for its advertising expenditure.

Case: The Elusive Euro-Consumer. The continuing integration of nations belonging to the European Union is causing many marketers to dream of a day when they can standardize their advertising to appeal to a so-called Euroconsumer. But the Euro-consumer remains a rare, mythical creature that eludes even the world's most clever advertisers.

Diff: 2 Page Ref: 343–345 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-130 Question: Discuss in detail the importance of branding for global companies; and how the national image might affect the best global brands.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Branding and brand name consists of one or more items in a company’s product line that identifies the brand and gives it character. Consumers assign a product certain value based on the brand name and their experiences with that brand. Brand name informs buyers about a product’s source and induces a consumer either to adopt of reject products. There is also a legal property rights associated with a brand name.

Strong brand name can become a company’s most valuable asset and primary source of competitive advantage.

However, brand names needs to be updated from time to time to avoid stagnation and perception as old-fashioned.

Products in international markets need carefully selected brand name to resonate with different cultures and languages. Brand names do not usually offend in international markets, but product names can be offensive if not carefully selected.

The value customers obtain from a product is heavily influenced by the image of the country in which it is designed, manu8factures, or assembled. Examples are Italian shoes, German luxury cars and Japanese electronics. This image can be positive and negative.

Interbrand, the world’s largest brand consultancy firm, developed a ranking for brands called Best Global Brands. To be included in this ranking, a brand must be global, visible, and financially transparent. Brand assessments are based on the financial performance of the branded product or service, the role of the brand in the purchase decision process, and the strength of the brand.

Diff: 2 Page Ref: 338–340 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-131 Question: Using examples, explain in detail the circular process of marketing communications.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The process of sending promotional messages about products to target markets is called marketing communication.

Communicating the benefits of a product can be more difficult in international business than in domestic business for several reasons. Marketing internationally usually means translating promotional messages from one language into another. Marketers must be knowledgeable of the many cultural nuances that can affect how buyers interpret a promotional message. A nation's laws that govern the promotion of products in another country can also force changes in marketing communication.

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Marketing communication is typically considered a circular process. The company that has an idea it wishes to communicate is the source of the communication. The idea is encoded (translated into images, words, and symbols) into a promotional message that the company is trying to get across. The promotional message is then sent to the audience (potential buyers) through various media. Media commonly used by companies to communicate their promotional messages include radio, television, newspapers, magazines, billboards, and direct mailings. After the audience receives the message, they decode the message and interpret its meaning. Information in the form of feedback (purchase or nonpurchase) then flows back to the source of the message. The decoding process by the audience can be disrupted by the presence of noise— anything that disrupts the audience's ability to receive and interpret the promotional message. By ignoring important cultural nuances, companies can inadvertently increase the potential for noise that can cloud the audience's understanding of their promotional message. For example, language barriers between the company and potential buyers can create noise if a company's promotional message is translated incorrectly into the local language.

Diff: 2 Page Ref: 345–346 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-132 Question: Describe the five product and promotional strategies companies use, and the appropriate situations for each.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Product/Communications Extension (Dual Extension). This method extends the same home-market product and marketing promotion into target markets. Under certain conditions, it can be the simplest and most profitable strategy. For example, because of a common language and other cultural similarities, companies based in Englishspeaking Canadian provinces can sell the same product with packaging and advertising identical to that in the US market—provided the product is not required by the US government to carry any special statements or warnings.

The Canadian companies contain costs by developing a single product and one promotional campaign for both markets. Yet it is important for Canadian companies not to ignore any subtle cultural differences that could cause confusion in interpreting the promotional message.

Product Extension/Communications Adaptation. Under this method, a company extends the same product into target

markets but alters its promotion. Communications require adaptation because the product satisfies a different need, serves a different function, or appeals to a different type of buyer. Companies can adjust their marketing communication to inform potential buyers that the product either satisfies their needs or serves a distinct function.

This approach helps companies contain costs because the good itself requires no alteration. Altering communications can be expensive, however, especially when cultural differences among target markets are significant. Filming altered ads with local actors and on location can add significantly to promotional costs.

Product Adaptation/Communications Extension. Using this method, a company adapts its product to the requirements of the international market while retaining the product's original marketing communication. There are many reasons why companies need to adapt their products. One might be to meet legal requirements in the local market.

Moreover, governments can require that firms use a certain amount of local materials, labour, or some other resource in their local production process. If the exact same materials or components are not available locally, the result can be a modified product.

This method can be costly because appropriately modifying a product to suit the needs of local buyers often means the company must invest in production facilities in the local market. If each national market requires its own production facility, cost savings provided by economies of scale in production can be elusive. Still, a company can implement this strategy successfully if it sells a differentiated product for which it can charge a higher price to offset the greater production costs.

Product/Communications Adaptation (Dual Adaptation). This method adapts both the product and its marketing

communication to suit the target market. The product itself is adapted to match the needs or preferences of local buyers. The promotional message is adapted to explain how the product meets those needs and preferences.

Because both production and marketing efforts must be altered, this strategy can be expensive; therefore, it is not very common. It can be implemented successfully, however, if a sufficiently large and profitable market segment

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exists.

Product Invention. This method requires that an entirely new product be developed for the target market. Product invention is often necessary when many important differences exist between the home and target markets. One reason for product invention is that local buyers cannot afford a company's current product because of low purchasing power.

Diff: 3 Page Ref: 345–347 Skill: Concept Objective: 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-133 Question: Discuss in detail the effects of globalization on international marketing activities, and explain how a product/communications adaption (dual adaption) promotional strategy works.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Globalization is transforming the way in which some products are marketed internationally, but not all. Some companies implement a global strategy that uses similar promotional messages and themes to market the same product around the world. Others find that their products require physical changes to suit the tastes of consumers in markets abroad. Other firms' products need different marketing campaigns to reflect the unique circumstances of local markets. How do managers decide when their marketing strategies need modifying?

The product/communications adaption (dual adaption) promotional strategy adapts both the product and its marketing communication to suit the target market. The product itself is adapted to match the needs or preferences of local buyers. The promotional message is adapted to explain how the product meets those needs and preferences.

Because both production and marketing efforts must be altered, this strategy can be expensive; therefore, it is not very common. It can be implemented successfully, however, if a sufficiently large and profitable market segment exists.

Diff: 2 Page Ref: 335–337, 347 Skill: Synthesis Objective: 12-1 Explain the impact globalization is having on international marketing activities; 12-3 Discuss the factors that influence international promotional strategies and the blending of product and promotional strategies.

Question ID: 12-134 Question: Discuss, with examples, the primary concerns of managers when establishing distribution policies.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Managers consider two overriding concerns when establishing channels of distribution: (1) the amount of market exposure a product needs and (2) the cost of distributing a product.

Degree of Exposure. In promoting its product to the greatest number of potential customers, a marketer must determine the amount of exposure needed. An exclusive channel is one in which a manufacturer grants the right to sell its product to only one or a limited number of resellers. An exclusive channel gives producers a great deal of control over the sale of their product by wholesalers and retailers. It also helps a producer to constrain distributors from selling competing brands. In this way, an exclusive channel creates a barrier that makes it difficult or impossible for outsiders to penetrate the channel.

When a producer wants its product to be made available through as many distribution outlets as possible, it prefers to use an intensive channel—one in which a producer grants the right to sell its product to many resellers. An intensive channel provides buyers with location convenience because of the large number of outlets through which a product is sold. It does not create strong barriers to channel entry for other producers, however. Nor does it provide much control over reseller decisions, such as what competing brands to sell.

Large companies whose products are sold through grocery stores and department stores typically take an intensive

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channel approach to distribution. The obstacle for small companies that choose an intensive channel approach is gaining shelf space—especially companies with lesser-known brands. The increasing global trend toward retailers developing their own private label brands (brands created by retailers themselves) exacerbates this problem. In such cases, retailers tend to give their own brands prime shelf space and give lesser-known brands poorer shelf locations that are up high or near the floor.

Channel Length and Cost. Channel length refers to the number of intermediaries between the producer and the buyer. In a zero-level channel—which is also called direct marketing —producers sell directly to final buyers. A onelevel channel places only one intermediary between the producer and the buyer. Two intermediaries make up a twolevel channel, and so forth. In general, the greater the number of intermediaries in a channel, the more costly it becomes. This happens because each additional member adds a charge for its services onto the product's total cost.

This is an important consideration for companies that sell price-sensitive consumer products, such as candy, food, and small household items, that usually compete on the basis of price. Companies that sell highly differentiated products can charge higher prices because of their products' distinctiveness; therefore, they have fewer problems using a channel of several levels.

Diff: 3 Page Ref: 348–349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-135 Question: Discuss in detail the concept of value density and its impact on an organization's distribution policy.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

The value of a product relative to its weight and volume is called its value density. Value density is an important variable in formulating distribution strategies. As a rule, the lower a product's value density, the more localized the distribution system. Most commodities, including cement, iron ore, and crude oil, have low value-density ratios— they're heavy but not particularly "valuable" if gauged in, say, shipping weight per cubic metre. Relative to their values, the cost of transporting these goods is high. Consequently, such products are processed or integrated into the manufacturing process at points close to their original locations. Products with high value density ratios include emeralds, semiconductors, and premium perfumes. Because the cost of transporting these products is small relative to their value, they can be processed or manufactured in the optimal location and then shipped to market. Because Johnson & Johnson's Vistakon contact lenses have high value density, the company produces and inventories its products in one US location and serves the world market from there. When products need to be modified for local markets, companies can design their distribution systems accordingly.

Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-136 Question: Discuss in detail the special problems that can affect distribution systems.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Lack of Market Understanding. Companies can experience a great deal of frustration and financial loss simply by not fully understanding the local market in which they operate. In one now-classic case, Amway Asia Pacific Ltd., the Asian arm of US-based Amway, learned the hard way the pitfalls of overestimating the knowledge of distributors in emerging markets. The company has a worldwide policy of giving distributors a full refund on its soaps and cosmetics if the distributor's customers are dissatisfied—even if the returned containers are empty. But the policy had some bizarre results shortly after Amway entered China. Word of the guarantee spread quickly. Some distributors repackaged the products in other containers, sold them, and took the original containers back to Amway for a refund.

Others scoured garbage bins, gathering bags full of discarded bottles. In Shanghai, returns were beginning to total $100,000 a day. Amway's Shanghai chief Percy Chin admitted, "Perhaps we were too lenient." Amway soon changed its refund policy to allow a refund only for bottles at least half full.

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Theft and Corruption. A high incidence of theft and corruption can present obstacles to distribution. The distribution system in Russia reflects its roughly 75-year experiment with communism. When Acer Computers decided to sell its computers in Russia, it built production facilities in Russia's stable neighbour, Finland, because the company was leery of investing directly in Russia. Acer also considered it too risky to navigate Russia's archaic distribution system on its own. In three years' time, a highway that serves as a main route to get goods overland from Finland to Russia saw 50 Finnish truckers hijacked, two drivers killed, and another two missing. Acer solved its distribution problem by selling its computers to Russian distributors outside its factory in Finland. The Russian distributors, who understood how to negotiate their way through Russia's distribution system, were to deal with distribution problems in Russia.

Diff: 2 Page Ref: 349–350 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-137 Question: Differentiate between worldwide and dual pricing. Is one of these more difficult to achieve?

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

A pricing policy in which one selling price is established for all international markets is called worldwide pricing. In practice, a worldwide pricing policy is very difficult to achieve. First, production costs differ from one nation to another. Keeping production costs the same is not possible for a company that has production bases within each market it serves. As a result, selling prices often reflect these different costs of production.

Second, a company that produces in just one location (to maintain an equivalent cost of production for every product) cannot guarantee that selling prices will be the same in every target market. The cost of exporting to certain markets will likely be higher than the cost of exporting to other markets. In addition, distribution costs differ across markets. Where distribution is efficient, selling prices might well be lower than in locations where distribution systems are archaic and inefficient.

Third, the purchasing power of local buyers must be taken into account. Managers might decide to lower the sales price in a market so that buyers can afford the product and the company can gain market share.

Finally, fluctuating currency values also must be taken into account. When the value of the currency in a country where production takes place rises against a target market's currency, the product will become more expensive in the target market.

Because of the problems associated with worldwide pricing, another pricing policy is often used in international markets. A pricing policy in which a product has a different selling price in export markets than it has in the home market is called dual pricing. When a product has a higher selling price in the target market than it does in the home market (or the country where production takes place), it is called price escalation. It is commonly the result of the reasons just discussed—exporting costs and currency fluctuations.

But sometimes a product's export price is lower than the price in the home market. Under what circumstances does this occur? Some companies determine that domestic market sales are to cover all product costs (such as expenses related to R&D, administration, and overhead). They then require exports to cover only the additional costs associated with exporting and selling in a target market (such as tariffs). In this sense, exports are considered a sort of "bonus."

To successfully apply dual pricing in international marketing, a company must be able to keep its domestic buyers and international buyers separate. Buyers in one market might cancel orders if they discover that they are paying a higher price than are buyers in another market. If a company cannot keep its buyers separate when using dual pricing, buyers could potentially undermine the policy through arbitrage—buying products where they are sold at lower prices and reselling them where they command higher prices. As is often the case, however, the higher selling price of a product in an export market often reflects the additional costs of transportation to the local market and any trade barriers of the target market, such as tariffs. For arbitrageurs to be successful, the profits they earn must be enough to outweigh these additional costs.

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Diff: 2 Page Ref: 350–351 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-138 Question: Explain detail the concept of value-density. Why should companies pay attention to value-density when developing distribution strategies?

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: The value of a product relative to its weight and volume is called its value density. Value density is an important variable in formulating distribution strategies. As a rule, the lower a product's value density, the more localized the distribution system. Most commodities, including cement, iron ore, and crude oil, have low value-density ratios—they're heavy but not particularly "valuable" if gauged in, say, shipping weight per cubic metre. Relative to their values, the cost of transporting these goods is high. Consequently, such products are processed or integrated into the manufacturing process at points close to their original locations. Products with high value density ratios include emeralds, semiconductors, and premium perfumes. Because the cost of transporting these products is small relative to their value, they can be processed or manufactured in the optimal location and then shipped to market.

Because Johnson & Johnson's Vistakon contact lenses have high value density, the company produces and inventories its products in one US location and serves the world market from there. When products need to be modified for local markets, companies can design their distribution systems accordingly.

Diff: 2 Page Ref: 349 Skill: Concept Objective: 12-4 Explain the elements that managers must take into account when designing international distribution strategies.

Question ID: 12-139 Question: Explain the concept of arm's length pricing. What is its relationship to transfer prices?

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Increased regulation of transfer pricing practices today is causing reduced freedom in manipulating transfer prices.

Many governments now regulate internal company pricing practices by assigning products approximate transfer prices based on their free market price. Therefore, most international transfers between subsidiaries now occur at a so-called arm's length price—the free-market price that unrelated parties charge one another for a specific product.

Another factor that is increasing the use of arm's length pricing is pressure on companies to be good corporate citizens in each of their target markets. Developing and emerging markets are hurt most by lost revenue when international companies manipulate prices to reduce tariffs and corporate taxes. They depend on the revenue for building things such as schools, hospitals, and infrastructure, including telecommunications systems and shipping ports. These items in turn benefit international companies by improving the productivity and efficiency of the local business environment. Indeed, some international companies have even developed codes of conduct specifying that transfer prices will follow the principle of arm's length pricing.

Prices charged for goods or services transferred among a company and its subsidiaries are called transfer prices. It is common for parent companies and their subsidiaries to buy from one another. For example, the parent company often licenses technologies to its subsidiaries in return for royalties or licensing fees. Subsidiaries prefer this route to buying on the open market because they typically receive lower prices. Parent companies then buy finished products from subsidiaries at the stated transfer price.

At one time, companies enjoyed a great deal of freedom in setting their transfer prices. Subsidiaries in countries with high corporate tax rates would reduce their tax burdens by charging a low price for their output to other subsidiaries.

The subsidiary lowered the taxes that the parent company must pay by reducing its profits in the high-tax country.

Likewise, subsidiaries in countries with low tax rates would charge relatively high prices for their output.

Transfer prices followed a similar pattern based on the tariffs of different nations. Subsidiaries in countries that charged relatively high tariffs were charged lower prices to lower the cost of the goods in the local market. This

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pattern of transfer prices helped large corporations with many subsidiaries to better manage their global tax burden and become more price-competitive in certain markets.

Diff: 2 Page Ref: 351–352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-140 Question: Discuss in detail how a company factors in the potential for price controls when developing a pricing strategy.

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Pricing strategies must consider the potential for government price controls—upper or lower limits placed on the prices of products sold within a country. Upper-limit price controls are designed to provide price stability in an inflationary economy (one in which prices are rising). Companies that want to raise prices in a price-controlled economy must often apply to government authorities to request permission to do so. Companies with good contacts in the government of the target market might be more likely to get a price-control exemption. Those unable to obtain an exemption will typically try to lessen the impact of upper-limit price controls by reducing production costs.

By contrast, lower-limit price controls prohibit the lowering of prices below a certain level. Governments sometimes impose lower-limit prices to help local companies compete against the less expensive imports of international companies. Other times, lower-limit price controls are designed to ward off price wars that could eliminate the competition and thereby give one company a monopoly in the domestic market.

Diff: 3 Page Ref: 352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

Question ID: 12-141 Question: Explain in detail the concept of "dumping."

Answer: Specific examples of countries and/or companies to illustrate your answers can be drawn from the textbook, class discussions, Internet, and/or newspapers and other publications.

Answer: Dumping occurs when the price of a good is lower in export markets than it is in the domestic market.

Accusations of dumping are often made against competitors from other countries when inexpensive imports flood a nation's domestic market. Although charges of dumping normally result from deliberate efforts to undercut the prices of competitors in the domestic market, changes in exchange rates can cause unintentional dumping. When a country's government charges another nation's producers of dumping a good on its market, antidumping tariffs are typically imposed. Such tariffs are designed to punish producers in the offending nation by increasing the price of their products to a fairer level.

Diff: 2 Page Ref: 352 Skill: Concept Objective: 12-5 Discuss the elements that influence international pricing strategies.

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