International Business The New Realities, 5th edition Tamer Cavusgil Test Bank

International Business The New Realities, 5th edition

BY Tamer Cavusgil

Email: richard@qwconsultancy.com

International Business: The New Realities, 5e (Cavusgil) Chapter 1 Introduction: What Is International Business?

1) International business is defined as the performance of ________ activities by firms across national borders.

A) marketing and fiduciary B) trade and investment C) finance and operational D) accounting and auditing Answer: B Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 2) International business is also known as which of the following?

A) born global business B) laissez-faire business C) cross-border business D) multi-hub business Answer: C Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 3) Which of the following best characterizes the development of international business?

A) It has existed in some form for centuries.

B) It first started in Europe.

C) It developed after the year 2000.

D) Its development has slowed in recent years.

Answer: A Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 4) A few decades ago, international business was largely the domain of ________.

A) service firms B) multinational firms C) smaller firms D) all of the these Answer: B Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 1 .

5) Which of the following is another term for importing?

A) capital investment B) supply side development C) global sourcing D) unilateral procurement Answer: C Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 6) Which of the following is subject to importing and exporting?

A) both finished products and intermediate goods B) finished products but not intermediate goods C) intermediate goods but not raw materials D) raw materials and components, but not finished products Answer: A Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 7) ________ refers to the transfer of assets to another country or the acquisition of assets in that country.

A) International investment B) International trade C) Importing D) Exporting Answer: A Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 8) Each of the following represents a factor of production EXCEPT ________.

A) manufacturing infrastructure B) technology C) government regulations D) managerial talent Answer: C Diff: 2: Moderate Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge

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9) Which of the following would NOT be considered an example of foreign direct investment (FDI)?

A) cross-border purchase of a textile plant B) cross-border purchase of stocks C) purchase of capital assets of a foreign company D) purchase of foreign land for business operations Answer: B Diff: 2: Moderate Skill: Application Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 10) ________ is the total value of products and services produced in a country over the course of a year.

A) GDP B) CAD C) FDI D) PPP Answer: A Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 11) Which of the following best explains why export growth has outpaced the growth of domestic production during the last few decades?

A) Both world exports and domestic production have grown significantly over the past 30 years.

B) The cost to import products is generally higher than the cost to produce domestic products.

C) Growth in gross domestic product in most countries has steadily increased since 1970.

D) Advanced economies now source many of their consumable products from low-cost manufacturing nations.

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking

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12) Each of the following has contributed to the rapid growth of trade among nations EXCEPT ________.

A) the growth of emerging market countries B) the increase in trade barriers C) advances in information technology D) the liberalization of markets Answer: B Diff: 2: Moderate Skill: Application Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge Freehold Investment Corp. (Scenario) Dan Freehold and his business partner, Bethany Quinn, are successful investors engaged in a variety of enterprises. Recently Dan and Bethany have decided to expand their foreign investing operations. They hold a meeting for individuals interested in participating in certain overseas ventures.

13) At the meeting, Dan explains to the attendees that Freehold direct investment projects differ from international trade in that ________.

A) the firm itself is crossing international borders to purchase foreign assets B) the firm is restricting its investments to stocks and does not purchase mutual funds C) the firm has chosen to focus strictly on the technology sector D) the firm is engaging in the transfer of products across national borders Answer: A Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 14) Dan discusses an investment opportunity that involves the purchase of selected securities from the Chinese stock market. This opportunity represents which type of international investment?

A) indirect production B) international portfolio C) foreign direct D) domestic securities Answer: B Diff: 2: Moderate Skill: Application Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking

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15) Bethany presents another opportunity that involves the purchase of a manufacturing plant in South Korea. She explains that this type of strategy will involve ________ ownership on the part of the firm.

A) indirect B) passive C) short-term D) active Answer: D Diff: 2: Moderate Skill: Application Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 16) Phillip Hardy, one of the potential investors, expresses the desire to purchase only those types of assets in which he can maintain a relatively short-term interest. Which of the following investment opportunities would be most suited for Mr. Hardy?

A) a venture that gives investors ownership of the equipment used by multiple South African mining companies B) an initiative to purchase the technology assets of an Indian consulting firm C) the Freehold Eastern Growth Fund, which purchases Eastern European growth stocks D) the Freehold World Climb Project, which maintains partial ownership of an Australian hiking equipment production plant Answer: C Diff: 2: Moderate Skill: Application Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking International Trade Summit (Scenario) An international trade summit is held in Geneva, Switzerland. The purpose of the summit is to cooperatively develop policies that promote international trade. Representatives from 50 different countries attend the summit.

17) One of the attendees represents a leading nation in the international merchandise trade. This attendee is most likely from which of the following countries?

A) New Zealand B) Germany C) Kenya D) Saudi Arabia Answer: B Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking

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18) One of the attendees represents a leading nation in the international services trade. This attendee is most likely from which of the following countries?

A) Brazil B) Greece C) Singapore D) South Africa Answer: C Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 19) One summit attendee pointed out that the total value of her country's products trade typically accounted for more than 100 percent of her nation's GDP. This attendee most likely represents ________.

A) Japan B) United Kingdom C) France D) Netherlands Answer: D Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 20) International business is performed not just by individual firms, but also governments and international agencies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 21) The globalization of markets refers to the growing independence and self-sufficiency of countries worldwide.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 22) International business today is predominantly the domain of large, multinational companies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 6 .

23) Exporting is an entry strategy involving the sale of products or services to customers located abroad.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 24) A country's economic assets are also known as factors of production.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 25) The two primary types of international investment are portfolio investment and foreign direct investment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 26) Over the last few decades, export activity by nations has grown more quickly than has domestic production.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 27) In the past, international trade and investment activities were mainly conducted by companies that sold services.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 28) Although services trade is growing rapidly, the value of merchandise trade is still much larger.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 7 .

29) In a short essay, explain the four trends that provide evidence for the globalization of markets. Provide an example to illustrate one of the trends.

Answer: In practical terms, the globalization of markets is evident in several related trends. First is the unprecedented growth of international trade. For example, in 1960, cross-border trade was modest—about $300 billion per year. Today, it accounts for a substantial proportion of the world economy, with world exports alone amounting to some $16 trillion annually—that is, $16,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge. In 2004, total cross-border bandwidth in digital data transfer and communications was practically zero. Today, total cross-border bandwidth flows now exceed 400,000 gigabits per second. Virtually every type of international transaction now includes a digital component. The third trend is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge. Fourth, globalization has brought about a greater degree of collaboration among nations through such organizations as the World Trade Organization and the International Monetary Fund.

Diff: 2: Moderate Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 30) In a short essay, explain the main differences between international portfolio investment and foreign direct investment.

Answer: a. Types of assets purchased-The first main difference between the two types of investments concerns the types of assets purchased. Portfolio investment involves the purchase of foreign securities, such as stocks and bonds, for the purpose of gaining financial returns. Foreign direct investment involves the purchase of productive assets, such as capital, technology, labor, land, plants, and equipment. b. Types of ownership-The second main difference concerns the level or type of ownership.

Portfolio investment refers to passive ownership, with no active management of or control over the assets purchased. Foreign direct investment, on the other hand, gives investors partial or full ownership of a productive enterprise typically dedicated to manufacturing, marketing, or management activities. c. Interest timeline-The third main difference between the two types of strategies involves the length of interest maintained by investors. In international portfolio investment, investors have a relatively short-term interest in the ownership of their assets. In foreign direct investment, firms usually have a long-term investing interest.

Diff: 2: Moderate Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge

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31) What is meant by the term "entrepôt economies"? In a short essay, explain the concept and provide an example.

Answer: Entrepôt is from the French for "intermediate depot." Such countries import a large volume of products, some of which they process into higher value-added products and some they simply re-export to other destinations. For example, Singapore is a major entrepôt for Southeast Asia, e.g., for transshipping petroleum products that it receives from the Middle East. Hong Kong is an entrepôt for China. The Netherlands is an entrepôt for the greater European Union.

Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 32) In a short essay, describe the major trends in the growth of foreign direct investment (FDI) since the 1980s.

Answer: The dollar volume of FDI has grown immensely since the 1980s, especially in developed (advanced) economies such as Japan, Europe, and North America. FDI inflows to the developing economies began to surpass those to the advanced economies in about 2010. FDI inflows were interrupted in 2001 as investors panicked following the September 11 terrorist attacks in the United States. The inflows were interrupted again in 2008 by the global recession, but then rose sharply in subsequent years. These dips underscore the importance of maintaining stability in the world economy. Despite these setbacks, the overall trend remains strong and growing over time. Particularly significant is the growth of FDI into developing economies, much of which results from their need for modern industrial infrastructure. It reflects the importance of developing economies and emerging markets as target markets and sourcing bases.

Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 33) What are the main differences between products and services? In a short essay, explain the difference between the two and provide three examples of each. Which sector has seen the greatest growth in international trade in recent years?

Answer: Products are defined as tangible merchandise, such as clothing, computers, and cars.

Services, by contrast, are intangible deeds, performances, or efforts performed directly by people working in firms in the services sector. Some examples of services are creating advertising campaigns, underwriting mortgages, and managing restaurant operations. In recent years, services trade has been growing faster than products trade. International trade in services accounts for about one-quarter of all international trade and is growing rapidly.

Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge

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34) In a short essay, identify three sectors in the service industry that are internationalizing rapidly. Explain the types of activities conducted within each sector, and provide examples of three companies that operate in each.

Answer: a. Architectural, construction, and engineering-Activities within this sector include construction, electric power utilities, design, and engineering services for airports, hospitals, and dams.

Companies within this sector include ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, and Skanska AB. b. Banking, finance, and insurance-Activities within this sector include banking services, insurance provision, risk evaluation, and financial management. Companies within this sector include CIGNA, Barclays, HSBC, and Ernst & Young. c. Education, training, and publication-Activities within this sector include management training, technical training, and English language training. Companies within this sector include Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, and Elsevier.

Diff: 1: Easy Skill: Concept Objective: 1-1: Describe the key concepts in international business AACSB: Application of Knowledge 35) In a short essay, explain the meaning of international trade. Describe the two major forms through which international trade takes place.

Answer: International trade describes the exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). Exchange can occur through exporting, an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country. Exchange also can take the form of importing or global sourcing—the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. While exporting represents the outbound flow of products and services, importing is an inbound activity. Both finished products and intermediate goods (for example, raw materials and components) can be imported and exported.

Diff: 1: Easy Skill: Synthesis Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking

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36) What is international business, and how has it transformed the world economy?

Answer: International business refers to the performance of trade and investment activities by firms across national borders. Because it emphasizes crossing national boundaries, we also refer to international business as cross-border business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners.

International business is transforming the world as never before. In the last 50 years, international trade and investment have experienced unprecedented growth. Since the 1980s, emerging markets have provided new impetus to worldwide economic interconnectedness. These fast-growth developing economies—some thirty countries, including Brazil, Russia, India, and China, the so-called BRICs—are experiencing substantial market liberalization, privatization, and industrialization, which are fueling global economic transformation.

Along with market globalization, advances in technology is another megatrend helping to transform the global economy. The rise of information and communication technologies, as well as production and process technologies, has dramatically reduced the cost of conducting business with customers located around the world. E-commerce makes international business increasingly imperative for firms of all sizes and resource levels. Technological advances are allowing globalization to progress more rapidly. Globalization, in turn, is accelerating the development of the latest technologies.

Diff: 2: Moderate Skill: Synthesis Objective: 1-1: Describe the key concepts in international business AACSB: Analytical Thinking 37) Which of the following types of risk is also known as political risk?

A) currency risk B) cross-cultural risk C) commercial risk D) country risk Answer: D Diff: 1: Easy Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 38) Which of the following is NOT an example of a cross-cultural risk factor?

A) negotiation patterns B) decision-making styles C) costs of production D) ethical practices Answer: C Diff: 2: Moderate Skill: Application Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 11 .

39) Fluctuating exchange rates are an example of which of the following?

A) country risk B) political risk C) currency risk D) cross-cultural risk Answer: C Diff: 1: Easy Skill: Application Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking Overseas Expansion (Scenario) Whittaker Semiconductors has recently decided to expand its operations overseas. Amanda Quan, Vice President of International Business, assigned a team of investigators to analyze the risks faced by the company in making this move. Of particular interest were the risks that might affect the success of a new production plant to be located in one of three potential countries.

40) Philip Baxter reported on the risks associated with establishing the plant in Country A. The most significant risk, in his view, was posed by the government's complex bureaucratic structure.

Philip reported the likelihood of significant administrative delays in opening the plant. The risk identified by Philip is an example of which of the following?

A) country risk B) commercial risk C) currency risk D) cross-cultural risk Answer: A Diff: 2: Moderate Skill: Application Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 41) LeShaun Golding researched the risks linked to establishing the plant in Country B. He cited government intervention, lack of local managerial talent, and unethical business practices as the most prominent risks for this location. LeShaun noted all of the following types of risks EXCEPT ________.

A) currency risk B) political risk C) country risk D) cross-cultural risk Answer: A Diff: 2: Moderate Skill: Application Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking

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42) Rosa Suarez reported on her analysis of cross-cultural risks involved with establishing the plant in Country C. Each of the following was most likely discussed in her report EXCEPT ________.

A) language barriers B) lifestyle differences C) religious beliefs D) the level of national debt Answer: D Diff: 2: Moderate Skill: Application Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 43) The level of government intervention in commercial activities is similar across most countries.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 44) Currency risk refers to the risk posed by adverse fluctuations in exchange rates.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking 45) For internationalizing firms, the consequences of poor business management decisions are usually more costly when mistakes occur abroad than when they occur at home.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Analytical Thinking

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46) In a short essay, explain the cross-cultural risk faced by internationalizing firms. What causes this type of risk? Why might it pose a problem for internationalizing firms?

Answer: Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk arises from differences in language, lifestyles, mind-sets, customs, and religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mind-set and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market.

Language is a critical dimension of culture. In addition to facilitating communication, language is a window on people's value systems and living conditions. When translating from one language to another, it is often difficult to find words that convey the same meanings. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers.

Diff: 2: Moderate Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Application of Knowledge 47) In a short essay, discuss how international firms manage the four types of international business risk. Provide an example that illustrates the process of risk management.

Answer: When they undertake international business, companies are routinely exposed to four major types of risk. These are: cross-cultural risk, country risk, currency risk, and commercial risk: 1. Cross-cultural risk: A situation or event where a cultural misunderstanding puts some human value at stake.

2. Country risk: Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.

3. Currency risk: Risk of adverse fluctuations in exchange rates.

4. Commercial risk: Firm's potential loss or failure from poorly developed or executed business strategies, tactics, or procedures.

The four types of international business risks are omnipresent; the firm may encounter them around every corner. Some international risks are extremely challenging. One example is global financial disruptions. The Greek debt crisis has now lingered on for several years and affects not only the European Union but creditors elsewhere.

Although risk cannot be avoided, it can be anticipated and managed. Experienced international firms constantly assess their environments and conduct research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects.

Diff: 1: Easy Skill: Concept Objective: 1-2: Understand how international business differs from domestic business AACSB: Application of Knowledge

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48) Businesses that directly initiate international business transactions are known as ________.

A) focal firms B) fiscal enterprises C) fiduciary trusts D) business affiliates Answer: A Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 49) The Coca-Cola Company is an example of a(n) ________.

A) born global firm B) SME C) multinational enterprise D) NGO Answer: C Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 50) Which of the following countries hosts the greatest number of MNEs? A) Germany B) Japan C) Netherlands D) United States Answer: D Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 51) Each of the following types of organizations is active in international business EXCEPT ________.

A) MNE B) SME C) RND D) NGO Answer: C Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking

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52) Which of the following is an example of a new global challenger?

A) a firm from Russia that is rapidly growing in the communications industry B) a U.S. nonprofit that focuses on fundraising for children's health care C) an MNE from France with large-scale operations across the globe D) an SME from Canada that began international operations early in its development Answer: A Diff: 2: Moderate Skill: Application Objective: 1-3: Identify major participants in international business AACSB: Application of Knowledge 53) Calexor is a telecommunications SME that has been highly successful despite its limited resources. Stakeholders attribute Calexor's success to its ability to serve niche markets. Which of the following, if TRUE, would most strongly support the claim that Calexor's growth can be attributed to niche market sales?

A) Calexor developed an interest in serving niche markets through an R & D experiment.

B) Most of Calexor's sales are in specialty markets that larger competitors do not serve.

C) Calexor's sales in mainstream telecommunications markets have always been strong.

D) Calexor's growth soared after it entered its first overseas market and has continued to climb.

Answer: B Diff: 1: Easy Skill: Critical Thinking Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 54) The world's largest MNEs are concentrated in emerging economies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 55) China has the second most MNEs. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 56) SMEs usually choose exporting as their main strategy for entering foreign markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking

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57) What distinguishes an MNE from an SME? In a short essay, describe the major differences between the two types of firms.

Answer: A multinational enterprise (MNE) is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. Leading MNEs are listed in the Fortune Global 500 (www.fortune.com).

Examples include well-known companies like Nestlé, Sony, Citibank, Unilever, Nokia, Ford, Barclays, DHL, Four Seasons Hotels, and Shell Oil. In recent years, the largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the automotive industry (General Motors and Honda), as well as retailing (Walmart).

Although MNEs employ a range of foreign market entry strategies, they are best known for their foreign direct investment (FDI) activities. They operate in multiple countries, especially in Asia, Europe, and North America, by setting up production plants, marketing subsidiaries, and regional headquarters. MNEs such as Exxon, Honda, and Coca-Cola derive much of their total sales and profits, often more than half, from cross-border operations. In recent years, large MNEs have begun to appear in emerging market countries, such as China, Mexico, and Russia. China currently hosts 95 of the top 500 MNEs, a number that has increased from only 15 countries in the past 10 years.

Small and medium-sized enterprises (SMEs) are manufacturers or service providers with fewer than 500 employees (in the European Union and numerous other countries, they are defined as having fewer than 250 employees). SMEs now make up the majority of companies active in international business. Nearly all firms, including large MNEs, started out small. Compared to large multinationals, SMEs can be more flexible and quicker to respond to global business opportunities. They are usually less bureaucratic, more adaptable, and more entrepreneurial, and often sustain entrepreneurship and innovation in national economies.

Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Application of Knowledge 58) In a short essay, explain why nonprofit organizations might conduct cross-border activities.

Answer: In addition to profit-seeking focal firms in international business, there are numerous nonprofit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). They work on behalf of special causes, such as education, research, health care, human development, and the natural environment, operating internationally either to conduct their activities or to raise funds. Examples of nonprofit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, both of which support health and educational initiatives. CARE is an international nonprofit organization dedicated to reducing poverty. Many MNEs operate charitable foundations that support various initiatives. GlaxoSmithKline (GSK), the giant pharmaceutical firm, operates a number of small country-based foundations in Canada, France, Italy, Romania, Spain, and the United States.

Diff: 1: Easy Skill: Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 17 .

59) What is a born global firm? Explain one strategic or reactive reason why an SME might choose to start as a born global.

Answer: A born global firm is a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Despite the scarce resources typical of most small businesses, born globals usually internationalize within three years of their founding and may export to 20 or more countries, generating over 25 percent of their sales from abroad. In countries like Australia, Denmark, Ireland, and the United States, born globals account for a substantial proportion of national exports. In many cases, born globals offer leading-edge products with strong potential to generate international sales. They leverage the Internet and communications technologies to facilitate early and efficient international operations.

An SME might start as a born global to lower its production costs by establishing manufacturing bases in foreign countries. Alternatively, the company might benefit from establishing international operations as a way to confront its industry competitors.

Diff: 2: Moderate Skill: Synthesis; Concept Objective: 1-3: Identify major participants in international business AACSB: Analytical Thinking 60) The process of targeting and serving markets outside the home country is known as ________.

A) market diversification B) competition intensity C) reactive internationalization D) trade protectionism Answer: A Diff: 1: Easy Skill: Concept Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 61) A U.S. shoe manufacturer is considering internationalizing to promote growth by diversifying its markets. Which of the following, if TRUE, would most strongly support the claim that moving to France would help the company grow through market diversification?

A) Doing business in France would likely expose the company to new ideas for product innovation.

B) French women tend to purchase shoes more frequently than do French men.

C) French consumers represent a sizeable market that could significantly boost the company's sales.

D) Many of the company's U.S. customers have moved overseas to Europe.

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 18 .

62) Which of the following contributes LEAST to increasing a company's profit margins?

A) increasing demand B) increasing global competition C) high-growth markets D) underserved economies Answer: B Diff: 2: Moderate Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 63) Which of the following best explains why the Japanese firm Canon relocated much of its production to China?

A) low-cost financial capital B) low-cost labor C) access to raw materials D) lack of skilled managerial talent in home country Answer: B Diff: 1: Easy Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 64) Which of the following best explains why Taiwanese computer manufacturers established subsidiaries in the United States?

A) low-cost financial capital B) low-cost labor C) access to raw materials D) lack of skilled managerial talent in home country Answer: A Diff: 2: Moderate Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking

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Sterling Auto International (Scenario) Sterling Auto International is a successful car manufacturing company headquartered in Detroit, Michigan. Over the past year, the company implemented multiple efforts to expand its overseas operations. At a recent shareholder's meeting, attendees questioned the CEO's motivations for authorizing certain aspects of the expansion efforts.

65) One shareholder questioned the CEO's rationale for beginning an exploratory effort to establish a new manufacturing plant in India. The CEO responded by explaining that India was an untapped market with a high demand for products such as those produced by Sterling. His rationale represented an example of which of the following reasons for international expansion?

A) investing in a potentially rewarding relationship with a foreign partner B) gaining access to lower-cost or better-value factors of production C) seeking opportunities for growth through market diversification D) better serving key customers that have relocated abroad Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 66) The CEO introduced another overseas effort by noting that it represented an attempt to confront an international competitor. The CEO was most likely referring to which of the following efforts?

A) a new plant established in Vietnam to benefit from low-cost labor B) a sales outlet established in Indonesia, where Sterling could charge more for its products C) a marketing and advertising partnership established with a successful French car retailer D) a distribution center established in London to preempt the growth of a British car manufacturer Answer: D Diff: 2: Moderate Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 67) One shareholder wanted clarification about a research effort that investigated the possibility of setting up a plant in China. The CEO explained that serving China's rapidly growing middle class population would enable Sterling to increase the size of its customer base dramatically. In China, the CEO was most likely interested in ________.

A) avoiding government intervention B) challenging Chinese competitors C) gaining access to innovative ideas D) developing economies of scale Answer: D Diff: 2: Moderate Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 20 .

68) The CEO justified one of the company's moves by pointing out that it not only enabled Sterling to benefit from global sourcing advantages, but it also provided access to new ideas about business methods. The shareholders viewed this justification positively most likely because they understood which of the following?

A) Sourcing advantages are usually more important to growth than obtaining new business ideas.

B) International firms may have more than one motive for international expansion.

C) The most compelling motive for international expansion is to gain new ideas from other markets.

D) This expansion strategy would enable the company to better manage cross-cultural risk.

Answer: B Diff: 2: Moderate Skill: Application Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 69) In discussing the expansion effort to India, the CEO reminded shareholders of Black and Decker's move to partner with the Indian auto retailer Bajaj. The CEO was most likely attempting to justify which of the following?

A) a joint venture that would position Sterling for long-term sales in India B) a marketing effort targeted to American citizens living in India C) a price drop to ward off competition from an emerging Indian auto retailer D) a new manufacturing protocol based on an efficient Indian production method Answer: A Diff: 2: Moderate Skill: Concept Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 70) For manufacturing companies, on a per-unit-of-output basis, high volumes of production are correlated with lower per-unit cost.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking

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71) Why might firms choose to pursue internationalization strategies? In a short essay, identify five major motivations for expanding overseas. Classify these motivations as strategic or reactive and provide an example of each.

Answer: Strategic Motivations a. One reason why firms might expand internationally is to seek opportunities for growth through market diversification. Firms expand to tap into the market potential that exists outside the home country. One example is the expansion of automatic teller machines (ATMs) throughout the world. b. Firms expand to earn higher margins and profits. Foreign markets are often underserved or not served at all. Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their respective home markets, bathroom fixtures manufacturers American Standard and Toto (of Japan) have found a more favorable competitive environment in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam. c. Firms internationalize to gain new ideas about products, services, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, just-in-time inventory techniques were refined by Toyota and then adopted by other manufacturers all over the world. d. Firms might internationalize to be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies often establish international operations in countries where needed raw materials are located, or where raw materials and labor can be more flexibly accessed. One example is the aluminum producer Alcoa, which established operations in Brazil, Guinea, Jamaica, and elsewhere to extract aluminum's base mineral bauxite from local mines. e. Firms expand to gain access to lower-cost or better-value factors of production.

Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher quality, or better overall value at locations worldwide. For example, some Taiwanese computer manufacturers have established subsidiaries in the United States to access low-cost capital. f. Firms internationalize to develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale refers to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per-unit cost of making just 100 cameras. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of products that it manufactures. g. Firms might expand to invest in a potentially rewarding relationship with a foreign partner.

Firms often have long-term strategic reasons for venturing abroad. Joint ventures or projectbased alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term profit-making opportunities. For example, Black and Decker entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long-term sales in the huge Indian market.

Reactive Motivations Firms expand to better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto-parts suppliers followed, establishing their own operations there.

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Strategic or Reactive Motivations Firms might also internationalize to confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitor's home markets to destabilize and curb its growth. If the firm acts to confront an existing competitor, it would be responding reactively. If the firm acts to preempt a competitor, it would be responding proactively.

One example of a proactive response is Caterpillar's preemptive entry into Japan just as its main rival in the earthmoving equipment industry, Komatsu, was getting started in the early 1970s.

Caterpillar's preemptive move hindered Komatsu's international expansion for at least a decade.

Had it not moved proactively to stifle Komatsu's growth in Japan, Komatsu's home market, Caterpillar would certainly have had to face a more potent rival sooner.

Diff: 3: Hard Skill: Concept Objective: 1-4: Describe why firms internationalize AACSB: Analytical Thinking 72) All of the following are reasons to study international business EXCEPT ________.

A) international business contributes to economic prosperity B) international trade is a critical engine for job creation C) international trade and investment have experienced unprecedented decline D) international business provides an opportunity to support sustainability and corporate citizenship Answer: C Diff: 1: Easy Skill: Concept Objective: 1-5: Appreciate why you should study international business AACSB: Analytical Thinking 73) Which of the following, if TRUE, would most strongly support the claim that national prosperity is increased by participation in international business?

A) Countries that participate in international trade have higher GDP per capita than nonparticipating countries.

B) Individuals in advanced economies tend to set purchasing trends for consumers worldwide.

C) For most countries, levels of international trade have increased significantly in recent decades.

D) National literacy levels are strongly correlated with a country's degree of political freedom.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 1-5: Appreciate why you should study international business AACSB: Analytical Thinking

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74) Since the 1980s, emerging market countries have experienced substantial market liberalization and privatization.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 1-5: Appreciate why you should study international business AACSB: Analytical Thinking 75) Firms that do not export tend to create jobs more quickly than do exporting firms.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 1-5: Appreciate why you should study international business AACSB: Analytical Thinking

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International Business: The New Realities, 5e (Cavusgil) Chapter 2 Globalization of Markets and the Internationalization of the Firm 1) Which of the following is characteristic of globalization of markets?

A) lack of skilled labor B) conservatism C) declining trade barriers D) diminishing gap between the rich and the poor Answer: C Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 2) The first phase of globalization was characterized by the ________.

A) rise of steel production B) rise of SMEs C) dominance of MNEs in the agricultural industry D) growth of railroads Answer: D Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 3) The ________ phase of globalization began around 1900 and was associated with the rise of electricity and steel production.

A) first B) second C) third D) fourth Answer: B Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 4) The third phase of globalization was triggered by ________.

A) the end of World War II B) the invention of electricity C) the end of World War I D) the Great Depression Answer: A Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 1 .

5) Which of the following reflects the major contribution of GATT to globalization?

A) It instituted strict controls on international currencies.

B) It simplified patent and copyright laws.

C) It reduced barriers to international trade and investment.

D) It eliminated the divide between the rich and the poor.

Answer: C Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 6) The fourth phase of globalization is characterized by ________.

A) the rise of railroads and ocean transport B) the reduction of barriers to trade by Western industrialized countries C) the initiation of the Marshall Plan to reconstruct Europe D) the enormous growth of cross-border trade and investment Answer: D Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge Internationalization Conference (Scenario) At a conference on business internationalization strategies, representatives of three different businesses meet to discuss a joint venture between their companies. Business A is located in a country that internationalized during the second phase of globalization. Business B is based in a country that internationalized during the third phase of globalization. Business C is located in an emerging market country.

7) The representative from Business A is most likely from ________.

A) China B) United Kingdom C) Mexico D) Brazil Answer: B Diff: 2: Moderate Skill: Application Objective: 2-1: Understand market globalization as an organizing framework AACSB: Analytical Thinking

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8) The representative from Business B is most likely from ________.

A) Panama B) Hungary C) Uganda D) Japan Answer: D Diff: 2: Moderate Skill: Application Objective: 2-1: Understand market globalization as an organizing framework AACSB: Analytical Thinking 9) The representative from Business C is most likely from ________.

A) Italy B) Brazil C) the United States D) France Answer: B Diff: 2: Moderate Skill: Application Objective: 2-1: Understand market globalization as an organizing framework AACSB: Analytical Thinking 10) Over time, the GATT evolved into the ________.

A) World Bank B) International Monetary Fund C) World Trade Organization D) World Intellectual Property Organization Answer: C Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 11) Early multinationals from the third phase of globalization originated in ________.

A) Japan B) China C) India D) Brazil Answer: A Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge

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12) The fourth phase of globalization ________.

A) is characterized by the rise of electricity and steel production B) is characterized by the rise of MNEs from Japan C) witnessed the Bretton Woods Conference of twenty-three nations in 1947 that led to the General Agreement on Tariffs and Trade D) facilitated the globalization of the service sector in such areas as banking and retailing Answer: D Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 13) As market globalization intensifies, ________.

A) the gap between the rich and the poor shrinks rapidly B) the distance between consumers worldwide expands C) individual firms respond to the challenges and new advantages that it brings D) firms internationalize solely as a reaction to it Answer: C Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 14) Which of the following is a driver of globalization?

A) greater emphasis on proactive internationalization B) internationalization of firm's value chain C) integration of world financial markets D) globalization of services Answer: C Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 15) Which of the following is a societal consequence of market globalization?

A) greater emphasis on proactive internationalization B) internationalization of firm's value chain C) new risks and instant rivalry from foreign competitors D) offshoring and the flight of jobs Answer: D Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Analytical Thinking

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16) Firms that are more successful at global competition display each of the following qualities EXCEPT ________.

A) identifying foreign market opportunities aggressively B) approaching internationalization from a reactive standpoint C) actively pursuing partnerships with foreign firms D) focusing intensively on building organizational capacities Answer: B Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge Global Operations Report (Scenario) As Vice President of Global Expansion for Pax Telecom, Deva Mikiri is tasked with preparing a comprehensive report on the company's global operations over the past 20 years. Deva assigns three strategists to collaborate on the History portion of the report, which details the rationale behind Pax's decisions to expand operations in particular areas. Rashid Ahl focuses on early expansion to China, which occurred after China began to make its market more accessible to foreign companies. Markus Teller focuses on Pax's expansion to Eastern Europe, which was motivated by increased industry privatization in key countries. Lavonne Jackson focuses on expansion to Japan, which happened when the company's commercial bank expanded its service network to Asia.

17) To which of the following drivers of market globalization is Markus most likely to attribute his company's expansion to Eastern Europe?

A) advances in technology B) integration of world financial markets C) market liberalization D) industrialization Answer: C Diff: 2: Moderate Skill: Application Objective: 2-1: Understand market globalization as an organizing framework AACSB: Analytical Thinking 18) Nationalization refers to the gradual integration and growing interdependence of national economies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge

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19) The initial phase of globalization was triggered by the introduction of the railroads and ocean transport.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 20) The Great Depression marked the beginning of the second phase of globalization.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 21) The third phase of globalization was triggered by the development of personal computers, the Internet, and Web browsers.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 22) Firms expand abroad mainly as a reaction to market globalization.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 23) Firms often internationalize proactively in order to pursue new markets, find lower-cost inputs, or obtain other advantages.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 24) Offshoring and the flight of jobs are prime drivers of market globalization.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge

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25) Globalization of production activities and services is a dimension of market globalization.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 26) Describe the role of GATT and the WTO in reducing barriers to trade and investment worldwide, and explain how this reduction has led to the integration and interdependence of national economies.

Answer: The Bretton Woods Conference of 23 nations in 1947 led to the General Agreement on Tariffs and Trade (GATT) and a series of negotiations that, over time, reduced barriers to international trade and investment. Participating governments recognized that liberalized trade would stimulate industrialization, modernization, and better living standards. The GATT eventually transformed into the World Trade Organization, a multilateral governing body that grew to include 149 member nations. The WTO aims to regulate and ensure fairness and efficiency in global trade and investment. Global cooperation in the postwar era gave birth to other international organizations such as the International Monetary Fund and the World Bank.

Internationally active firms devise multi-country operations through trade, investment, geographic dispersal of company resources, and integration and coordination of value-chain activities. Governments have facilitated this integration by lowering barriers to international trade and investment, harmonizing their monetary and fiscal policies within regional economic integration blocs (also known as trade blocs), and developing supranational institutions—the World Bank, International Monetary Fund, World Trade Organization, and others—that seek further reductions in trade and investment barriers.

Diff: 2: Moderate Skill: Synthesis; Critical Thinking Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge

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27) Describe the fourth phase of globalization. What is contagion?

Answer: The fourth phase of globalization began in the early 1980s. This phase featured enormous growth in cross-border trade and investment. It was triggered by the development of personal computers, the Internet, and Web browsers. It was also characterized by the collapse of the Soviet Union and the market liberalization of Central and Eastern Europe. Impressive industrialization and modernization in East Asian economies followed. International prosperity began to develop in the emerging markets including Brazil, India, and Mexico.

Contagion refers to the tendency of a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies. Starting in 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis began in the United States and, like a contagious disease, spread around the world.

Diff: 2: Moderate Skill: Synthesis Objective: 2-1: Understand market globalization as an organizing framework AACSB: Application of Knowledge 28) Financial market integration makes it easier for internationally active firms to ________.

A) nationalize manufacturing industries B) minimize offshoring C) increase tariffs on the import of automobiles and industrial machinery D) engage in foreign currency transactions Answer: D Diff: 1: Easy Skill: Concept Objective: 2-1, 2-2: Understand market globalization as an organizing framework, Learn the driving forces of globalization AACSB: Application of Knowledge

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Global Operations Report (Scenario) As Vice President of Global Expansion for Pax Telecom, Deva Mikiri is tasked with preparing a comprehensive report on the company's global operations over the past 20 years. Deva assigns three strategists to collaborate on the History portion of the report, which details the rationale behind Pax's decisions to expand operations in particular areas. Rashid Ahl focuses on early expansion to China, which occurred after China began to make its market more accessible to foreign companies. Markus Teller focuses on Pax's expansion to Eastern Europe, which was motivated by increased industry privatization in key countries. Lavonne Jackson focuses on expansion to Japan, which happened when the company's commercial bank expanded its service network to Asia.

29) In describing the main driver behind Pax's expansion to China, Rashid is most likely to emphasize ________.

A) the high rate of employee attrition in China B) advances in technology C) reduction of barriers to trade D) integration of world financial markets Answer: C Diff: 2: Moderate Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Analytical Thinking 30) Which of the following drivers of market globalization is Lavonne's research most likely to recognize as the factor responsible for the company's expansion to Japan?

A) integration of world financial markets B) the highly conservative nature of the Japanese economy C) the rise of monopoly markets in Japan D) reduction of barriers to investment Answer: A Diff: 2: Moderate Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Analytical Thinking 31) ________ marked the end of the 50-year Cold War and smoothed the integration of former command economies into the global economy.

A) The end of World War II B) The Bolshevik Revolution in Russia C) Free-market reforms in China and the former Soviet Union D) China's move to join the WTO Answer: C Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 9 .

32) The globalization of finance ________.

A) enables companies to minimize offshoring B) contributes to firms' abilities to develop and operate world-scale production and marketing C) discourages innovation D) discourages free international exchange of goods and services Answer: B Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 33) Firms are sometimes motivated to enter new markets because of unfavorable conditions in the home market, such as regulation or declining local industry sales.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 34) Falling trade barriers are facilitated by the WTO. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 35) The end of the Cold War in 1989 hindered the forces of market liberalization in Eastern Europe.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 36) Industrialization implies that emerging markets are increasing their dependence on low-cost labor.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge

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37) How has the adoption of free markets worldwide served as a driver of market globalization?

Provide three examples to support your answer.

Answer: In the past three decades, free-market reforms have smoothed the integration of China, India, Russia, and other formerly protectionist countries into the global economy. Numerous Asian economies—for example, India, Indonesia, Malaysia, and South Korea—embraced free market norms. These events opened much of the world to freer international trade and investment. China, India, and Eastern Europe have become some of the most cost-effective locations for producing goods and services worldwide. Privatization of previously state-owned industries in these countries has encouraged economic efficiency and attracted massive foreign capital to their national economies.

Diff: 2: Moderate Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge 38) What is implied by industrialization? How does it bring about economic development?

Answer: Many emerging markets—rapidly developing economies in Asia, Latin America, and Eastern Europe—have now moved from being low value-adding commodity producers to sophisticated, competitive producers and exporters of premium products. These include such products as electronics, computers, and aircraft. For example, Brazil is now a leading manufacturer of Embraer commercial aircraft. The Czech Republic excels in producing automobiles. India is a leading supplier of software. Economic development results in increased incomes and living standards. Perhaps the most important measure of economic development is gross national income (GNI) per head. Africa and several countries in Asia and Latin America are the lowest-income countries. These areas are also characterized by lower levels of globalization. A critical driver of rising income levels is the nation's volume of international trade.

Diff: 2: Moderate Skill: Concept Objective: 2-2: Learn the driving forces of globalization AACSB: Application of Knowledge

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39) What is meant by the internationalization of a firm's value chain?

Answer: The most direct consequence of market globalization is on the firm's value chain.

Globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a global scale to achieve cost advantages and time efficiencies. In a typical value chain, the firm conducts research and product development (R&D), purchases production inputs, and assembles or manufactures a product or service. Next, the firm performs marketing activities such as pricing, promotion, and selling, followed by distribution of the product in targeted markets and after-sales service.

The value-chain concept is useful in international business because it helps clarify what activities are performed where in the world. For example, exporting firms perform most "upstream" valuechain activities (R&D and production) in the home market and most "downstream" activities (marketing and after-sales service) abroad. Each value-adding activity in the firm's value chain is subject to internationalization. That is, it can be performed in locations outside the home country.

The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and production or to gain closer access to customers. Through offshoring, the firm relocates a major value-chain activity by establishing a factory or other subsidiary abroad. A related trend is global outsourcing, in which the firm delegates performance of a value-adding activity to an external supplier or contractor located abroad.

Diff: 1: Easy Skill: Synthesis Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 40) Which of the following statements is TRUE of technological advances?

A) It provides a means for globalization to happen.

B) It discourages internationalization.

C) It inhibits the growth of new products and services.

D) It helps consolidate traditional values among consumers worldwide.

Answer: A Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 41) Technological leapfrogging is defined as ________.

A) adopting new technology late in the hype cycle B) adopting new technology as soon as it is released C) bypassing certain stages of technology to come up with a radical innovation when upgrading to new products D) boosting demand artificially by postponing the sale of new technology in the market Answer: C Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Information Technology 12 .

42) The science and process of creating and using information resources is known as ________.

A) information design B) information technology C) psychographics D) demographics Answer: B Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 43) Which of the following benefits of IT is specific to smaller firms?

A) It mitigates organizational anarchy.

B) It creates competitive advantages by encouraging organizational learning.

C) It aids in the consolidation of market monopolies.

D) It allows firms to design and produce customized products they can target to narrow, crossnational market niches.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 44) ________ are the most transformative technology in developing economies.

A) Mobile phones B) Televisions C) Intranets D) E-mails Answer: A Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 45) Technological advances have contributed to manufacturing by ________.

A) promoting traditional lifestyles and values B) reducing cross-border flow of factors of production C) promoting nationalization D) reducing production costs Answer: D Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge

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46) Stella manages the production team at Camden Inc., a manufacturer of heavy industry machinery in the United States. She needs to decide if her firm should export finished products or manufacture abroad. Which of the following would most likely help her evaluate the best alternative in this instance?

A) What is the gross national income of the United States?

B) What are the costs of transporting raw materials, components, and finished products?

C) Is employee empowerment culturally favored in the United States?

D) What is the average annual rate of employee turnover in the manufacturing industry?

Answer: B Diff: 2: Moderate Skill: Application Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Analytical Thinking 47) Technological advances have helped make internationalization affordable for all sizes of firms.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 48) The Internet has increased the cost of transmitting voices, data, and images.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 49) The 2011 "Arab Spring" in the Middle East was facilitated in large part by social media.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge 50) While the number of containers transported internationally has decreased, the cost of transportation has increased dramatically.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Application of Knowledge

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51) In a short essay, identify the four areas in which technological advances had their greatest impact on business. Describe the impact of each area on business today.

Answer: Advances in technology, the most important of which have occurred in information technology, digitalization, communications, the Internet, manufacturing, and transportation, are particularly important in driving globalization. These systems help create an interconnected network of customers, suppliers, and intermediaries worldwide and have made the cost of international business affordable for all types of firms. a. Information technology: Information technology (IT) is the science and process of creating and using information resources. Its effect on business has been revolutionary. The cost of computer processing fell by 30 percent per year during the past two decades and continues to fall. IT creates competitive advantages by giving companies new ways to outperform rivals. IT benefits smaller firms too, allowing them to design and produce customized products they can target to narrow, cross-national market niches. b. Communications: The Internet, and Internet-dependent systems such as intranets, extranets, social media, and e-mail connect billions of people and companies. Marketers use the Internet to promote the widest range of products and services to customers worldwide. Transmitting voice, data, and images is essentially costless, making Seoul, Stockholm, and San Jose next-door neighbors. South Korea has nearly 100 percent Internet access and is among the fastest broadband networks worldwide. Koreans use their phones to pay bills, do banking, and watch news programs. c. Manufacturing: Computer-aided design (CAD) of products, robotics, and production lines has transformed manufacturing, mainly by reducing production costs. Revolutionary developments facilitate low-scale and low-cost manufacturing. Firms can make products cost-effectively even in short production runs. Such developments benefit international business by allowing firms to more efficiently adapt products to individual foreign markets, profitably target small national markets, and compete more effectively with foreign competitors that enjoy cost advantages. d. Transportation: The development of fuel-efficient jumbo jets, giant ocean-going freighters, and new transportation technology have greatly reduced shipping times and costs.

Diff: 2: Moderate Skill: Concept Objective: 2-3: Understand the impact of technological advances on globalization AACSB: Analytical Thinking; Information Technology 52) In terms of international business, market globalization can be viewed as a ________.

A) consequence of a strong emphasis on traditional values worldwide B) consequence of the loss of national sovereignty C) driver and consequence of firm-level internationalization D) prime cause of rising diseconomies of scale in emerging economies Answer: C Diff: 3: Hard Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge

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53) A value chain is ________.

A) the sequence of administrative policies implemented to promote economic integration by a government B) the process of relocating manufacturing and production to valuable and cost-effective locations abroad C) the process of integrating national economies during a financial crisis D) the sequence of value-adding activities performed by a firm in the course of developing, producing, marketing, and servicing a product Answer: D Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 54) Regional economic integration blocs ________.

A) reduce trade and investment barriers B) reduce private investments C) adopt a hostile stance toward the private sector D) hinder the cross-border flow of factors of production Answer: A Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 55) Which of the following is an example of a supranational institution?

A) the World Intellectual Property Organization B) UNICEF C) the Red Cross D) the World Trade Organization Answer: D Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 56) Governments have facilitated economic integration by ________.

A) increasing barriers to international trade and investment B) creating supranational institutions to further reduce trade barriers C) adopting different monetary and fiscal policies within the same regional economic integration blocs D) standardizing consumer lifestyles and preferences Answer: B Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 16 .

57) The free movement of capital around the world is also known as ________.

A) bond-based debt financing B) contagion C) the globalization of capital D) common market arrangement Answer: C Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 58) ________ is transforming interactions among customers, employees, business partners and investors, by connecting locations, products, services, and data.

A) Digitization B) A supply chain C) A value chain D) Value migration Answer: A Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 59) Companies strive to drive down prices ________, among other strategies.

A) by centralizing manufacturing and procurement to a single source B) by standardizing what they sell C) by thwarting the growth of supranational institutions D) by discouraging competition Answer: B Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 60) Convergence of consumer preferences has led to an enhanced emphasis on standardization, which implies that ________.

A) the consistently rising prices of consumer goods have led to a demand vacuum in the market B) the distance between consumers worldwide has increased with the advent of technology C) the raw materials, parts, and components sourced by professional buyers are very similar in design and structure D) the globalization of services has adversely affected the quality of service worldwide Answer: C Diff: 2: Moderate Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 17 .

61) Reduction in trade barriers is associated with the emergence of ________.

A) fragmentary monetary and fiscal policies across the borders B) regional economic integration blocs C) widespread violation of intellectual property rights law D) violation of GATT provisions Answer: B Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 62) Governments have facilitated economic integration by lowering barriers to international trade and investment, harmonizing their monetary and fiscal policies within regional economic integration blocs.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 63) In a "common market," barriers to the cross-border flow of factors of production are removed.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 64) The globalization of capital refers to the aggregate activities of firms that gives rise to economic integration.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 65) Converging tastes of consumers worldwide promote traditional lifestyles.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge

18 .

66) Companies strive to decrease their costs and reduce their selling prices through economies of scale and standardization of finished products, among other possibilities.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 67) In a short essay, discuss the impact of market globalization on consumer lifestyles and preferences around the world. Provide examples to illustrate your answer.

Answer: Around the world, consumers spend their money and time in similar ways. Many aspects of lifestyles and preferences are converging. Shoppers in New York, Paris, and Shanghai increasingly demand similar household goods, clothing, automobiles, and electronics. Teenagers everywhere are attracted to iPods, Levi's jeans, and Hollywood movies. Major brands enjoy a global following encouraged by movies, global media, and the Internet. Movies such as Transformers and The Hunger Games have developed global audiences of fans. Convergence of preferences is also occurring in industrial markets, where professional buyers source raw materials, parts, and components that are increasingly standardized—that is, similar or identical in design and structure.

Diff: 2: Moderate Skill: Concept Objective: 2-4: Learn the dimensions of globalization AACSB: Application of Knowledge 68) The most direct implication of market globalization is on the firm's ________.

A) value chain B) founders C) internal stakeholders D) top management Answer: A Diff: 1: Easy Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 69) Which of the following statements is TRUE about value chain and international business?

A) Exporting firms perform most of the downstream value chain activities in the home market.

B) Exporting firms perform most of the upstream value chain activities in the home market.

C) Exporting firms perform most of the upstream value chain activities abroad.

D) Exporting firms perform most of the research and product development and production abroad.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 19 .

70) In a typical value chain, the firm ________.

A) rarely conducts research and development B) performs most upstream value-chain activities abroad, when exporting C) performs marketing activities such as pricing, promotion, and selling D) performs most downstream activities in the home market, when exporting Answer: C Diff: 2: Moderate Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 71) Which of the following statements is TRUE about the firm-level consequences of market globalization?

A) The globalization of markets has narrowed down new business opportunities for internationalizing firms.

B) Globalization drives firms to relocate key value-adding activities to the most advantageous locations around the world.

C) A firm's value chain is not subject to internationalization.

D) Through offshoring, a firm relocates a major value-chain activity by establishing a factory or subsidiary in the home market.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 72) Which of the following stages comes before procurement in a firm's value chain?

A) research and development B) marketing C) manufacturing D) distribution Answer: A Diff: 1: Easy Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 73) Which of the following represents the final stage in a firm's value chain?

A) marketing B) procurement C) research and development D) sales and service Answer: D Diff: 1: Easy Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 20 .

Acme Software (Scenario) Acme Software is a U.S.-based maker of software products for the health care industry. Recently Acme has been investigating whether it would be beneficial to internationalize some of its valuechain activities. Acme hires a consulting group to help determine which, if any, value-chain activities could be conducted abroad to promote business growth. The consulting group identifies two health care software development companies in India that could provide programming services at a lower cost than Acme's current expenditures for programming. In addition, the consultants conduct international market research that shows that German health care companies have a strong demand for the type of software that Acme offers.

74) Which of the following activities in Acme's value chain would be internationalized if Acme decides to establish a development contract with one of the Indian software firms?

A) sales B) distribution C) marketing D) procurement Answer: D Diff: 1: Easy Skill: Application Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Analytical Thinking 75) Which of the following would be most important for the consulting group to consider when deciding whether to recommend that Acme internationalize its sales efforts to Germany?

A) Will Acme save money on advertising by targeting small rather than large companies?

B) How intense is the competition from German companies offering similar products?

C) What type of training is received by programmers in software firms abroad?

D) Is employee empowerment culturally favored in Germany?

Answer: B Diff: 1: Easy Skill: Critical Thinking Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Analytical Thinking

21 .

76) Which of the following would be most important for Acme to determine before outsourcing its programming services to India?

A) What benefits have Indian companies gained historically from internationalizing their valuechain activities?

B) Do Indian businesses outsource value-chain activities to Europe?

C) Would the lower cost of outsourcing allow Acme to sustain a competitive advantage in its business operations?

D) Is either of the Indian health care companies interested in moving their operations abroad?

Answer: C Diff: 1: Easy Skill: Critical Thinking Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Analytical Thinking 77) Globalization results in more demanding buyers who shop for the best deals worldwide.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 78) Market globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a strictly local scale.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-5: Understand firm-level consequences of market globalization AACSB: Application of Knowledge 79) ________ refers to the tendency of a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies.

A) Contagion B) Nationalization C) Internationalization D) Codetermination Answer: A Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge

22 .

80) The ability of a nation to govern its own affairs is known as ________.

A) sovereignty B) liberalization C) interdependence D) homogenization Answer: A Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 81) The relocation of manufacturing and other value-chain activities to cost-effective locations abroad is known as ________.

A) insourcing B) cultural imperialism C) contagion D) offshoring Answer: D Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 82) Which of the following is an example of offshoring?

A) Fahad, a resident of the UAE, can share his views—data and information—about the country's construction industry with his friends in the U.S. B) The IT support services for customers of Mayfair Inc., a U.S. based consumer electronics manufacturer, are based in India.

C) Treat Corp. is a food and beverage manufacturer based in Texas. It decided to move from Houston to Fort Worth in Texas to cut production costs.

D) Lin, a Chinese citizen, decides to move to the U.K. after her application for scholarship is accepted by a leading university in London.

Answer: B Diff: 2: Moderate Skill: Application Objective: 2-6: Understand the societal consequences of globalization AACSB: Analytical Thinking

23 .

83) An underground economy ________.

A) refers to the informal economic sector B) refers to the formal economic sector C) is characterized by dominantly legal transactions D) is regulated and monitored by public authorities Answer: A Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 84) While a degree of cultural imperialism may be at work, it is offset by the countertrend of ________.

A) offshoring B) McDonaldization C) privatization D) local nationalism Answer: D Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge Globalization Debate (Scenario) In his international business class, Professor Jang organizes a debate on the societal effects of market globalization. Juan Prince takes a position that highlights the negative effects of market globalization. He emphasizes how multinational enterprises can wield so much influence that they threaten national sovereignty. He also notes the prevalence of low wages and sweatshop conditions as firms utilize low-cost labor 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.

85) Which of the following is Rina most likely to cite as a counter example to Juan's argument regarding the influence of MNEs on national sovereignty?

A) the dominating influence of market forces on the global economy B) technological advances in computer-aided design of products C) the political influence of large firms such as Walmart D) the actual GDPs of underdeveloped economies Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 2-6: Understand the societal consequences of globalization AACSB: Analytical Thinking

24 .

86) Which of the following most likely supports Rina's argument over Juan's concerning wages and working conditions in developing countries?

A) Most African countries today still suffer from low or negative GDP growth.

B) Vietnam has experienced a fivefold increase in wages as a result of the growth of the footwear industry there.

C) The move of Electrolux to Mexico cost Michigan 2,700 jobs.

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

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 87) Rina is most likely to counter Juan's claim regarding environmental effects by pointing out which of the following?

A) The intensity of environmental pollution is far greater in emerging economies than in undeveloped ones.

B) China's landscape was permanently altered by the construction of the Three Gorges Dam. C) Environmental destruction tends to diminish in the long run, as economies develop.

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

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 2-6: Understand the societal consequences of globalization AACSB: Diverse and Multicultural Work Environments 88) Which of the following statements most likely to counters Juan's argument concerning the homogenization of national cultures?

A) As globalization standardizes superficial aspects of life across national cultures, people resist these forces by insisting on their national identity and taking steps to protect it.

B) Foreign values tend 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: 1: Easy Skill: Critical Thinking Objective: 2-6: Understand the societal consequences of globalization AACSB: Diverse and Multicultural Work Environments

25 .

89) In international economics, codetermination refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries, due to integrated national economies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 90) Large multinationals are not constrained by market forces because they can exert considerable influence on governments through lobbying.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 91) To minimize globalization's harm and reap its benefits, governments should strive for nationalized economic regimes.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 92) The first wave of offshoring began in the 1990s with the exodus of service-sector jobs in credit card processing, software code writing, accounting, health care, and banking services.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 93) Countries that liberalize international trade and investment enjoy faster per-capita economic growth.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 94) Environmental destruction diminishes as economies develop, at least in the long run.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge 26 .

95) As the influence of the Chinese economy grows over time, it is likely that Western countries will embrace some of China's cultural attitudes and behaviors.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Diverse and Multicultural Work Environments 96) In a short essay, explain the concept of sovereignty. How does globalization affect sovereignty?

Answer: Sovereignty is defined as the ability of a nation to govern its own affairs. One country's laws cannot be applied or enforced in another country. Globalization can threaten national sovereignty in various ways. MNE activities can interfere with a government's ability to control its own economy, social structure, and political system. Some corporations are bigger than the economies of small nations. Walmart's internal economy—its total revenues—is larger than the GDP of many of the world's nations, including Israel, Greece, and Poland. Large multinational firms can apply a lot of pressure on governments through lobbying or campaign contributions.

MNEs frequently influence the legislative process. Corporate dominance of individual markets is rare. In reality, market forces generally dominate companies. For example, Ford, Chrysler, and General Motors once dominated the U.S. auto market. Today many more automotive firms compete in the United States. These include Toyota, Honda, Hyundai, Nissan, and BMW. Toyota now leads the global market in annual sales. Home-country market shares of domestic U.S. automakers have tumbled. To minimize globalization's harm and reap its benefits, governments should ensure the freedom to enter and compete in markets, protect private property, enforce the law, and support voluntary exchange through markets rather than through political processes. Banks and financial institutions should be regulated appropriately.

Transparency in the affairs of business and regulatory agencies is critical.

Diff: 2: Moderate Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Application of Knowledge

27 .

97) Discuss the effect of globalization on national culture.

Answer: Globalization exerts strong pressures on national culture. Market liberalization exposes local consumers to global brands, unfamiliar products, and different values. People worldwide are exposed to movies, television, the Internet, and other information sources that promote lifestyles of people in the United States and other advanced economies. Appetites grow for Western products and services, which are seen to signal higher living standards. For example, despite low per-capita income, many Chinese buy consumer electronics such as cell phones and TV sets. Advertising disseminates societal values modeled on Western countries. Hollywood dominates the global entertainment industry.

The flow of cultural influence often goes both ways, too. Cafe Spice is an Indian food company whose founder hails from Mumbai. The firm is transforming American tastes by selling curry dishes and other Indian favorites in cafeterias and supermarkets. Cafe Spice is helping to make Indian cuisine mainstream in the United States. As the influence of the Chinese economy grows over time, Western countries will likely adopt some of China's cultural attitudes and behaviors.

Chinese restaurants and some Chinese traditions are already a way of life in much of the world.

Similar influences are evident from Latin America and other areas in the developing world.

Cultural imperialism is offset by the countertrend of local nationalism. Although many products and services have become largely universal, people's behaviors and attitudes remain relatively stable over time. Religious differences are as strong as ever. Language differences are steadfast across national borders. As globalization standardizes superficial aspects of life across national cultures, people resist these forces by insisting on their national identity and taking steps to protect it. For example, laws exist to protect national language and culture in Belgium, Canada, and France.

Diff: 3: Hard Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Diverse and Multicultural Work Environments

28 .

98) In a short essay, discuss the impact of globalization on Africa.

Answer: Africa is home to the poorest countries. The majority of its one billion people live on less than $2 a day. It is the area least integrated into the world economy and accounts for less than 3 percent of world trade. Although it has abundant natural resources, Africa remains underdeveloped due to many factors including an inadequate commercial infrastructure, lack of access to foreign capital, high illiteracy, government corruption, wars, and the spread of AIDS. One of the most effective ways to alleviate African poverty is to develop more business-based models of development. Several sub-Saharan African countries have recently experienced significant economic growth by increasing international trade in commodities. Africa is a major supplier of petroleum to Europe and the United States. Angola is among the top oil suppliers to China. This activity has developed a ripple effect of economic development. As a result of the boom of certain sectors in Africa, there has been an increase in foreign banks, retailers, and MNEs operations in the continent. Rwanda had developed business opportunities in sectors as diverse as mining, tourism, telecommunications, and real estate. China and India are beating out U.S. firms and quickly increasing their business dealings in Africa. Chinese companies are investing billions of dollars in the continent. International trade and investment are helping to address many of Africa's most pressing development needs. Samsung has set a goal of $10 billion in African sales and is committed to training 10,000 African engineers and technicians to develop the capabilities needed for success. It will take many more years before Africa achieves a critical mass of infrastructure and business culture sufficient to substantially raise average incomes across the continent.

Diff: 3: Hard Skill: Concept Objective: 2-6: Understand the societal consequences of globalization AACSB: Analytical Thinking

29 .

International Business: The New Realities, 5e (Cavusgil) Chapter 3 The Cultural Environment of International Business 1) ________ refers to the values, beliefs, customs, arts, and other products of human thought and work that characterize the people of a given society.

A) Ethnicity B) Heritage C) Culture D) Race Answer: C Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 2) Jordan is employed in an American investment firm and is currently working with some Japanese clients on a new project. He uses a lot of hand gestures during meetings, which his clients find very distracting and rude. This has also led to many misunderstandings between Jordan and his Japanese clients in the recent past. Which of the following best describes such a situation?

A) risk aversion B) organizational anarchy C) cross-cultural risk D) acculturation Answer: C Diff: 2: Moderate Skill: Application Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments 3) Which of the following is TRUE with regard to culture?

A) It captures how the members of the society live.

B) It is absolute.

C) It does not define the collective behavior of each society.

D) It is inherited.

Answer: A Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge

1 .

4) Culture is NOT ________.

A) about beliefs and values of society B) relative C) a collective phenomenon D) inherited Answer: D Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 5) Socialization is defined as ________.

A) the process of segregating people into different racial groups in a society B) the process of adjusting and adapting to a culture other than one's own C) the process of learning the rules and behavioral patterns appropriate to one's given society D) a situation or event in which a cultural misunderstanding puts some human value at stake Answer: C Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 6) Acculturation is defined as the process of ________.

A) segregating ethnic minorities by distinct groups B) adjusting and adapting to a culture other than one's own C) learning the behavioral patterns and rules of one's own society D) forcing minority cultures to adopt the values of the dominant culture Answer: B Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge

2 .

Phone Center (Scenario) The Technix Computer Corporation recently finished construction of a customer service phone center in New Delhi, India. Phone center agents will be responsible for answering technical questions from customers around the globe. Technix has hired 55 local computer experts as phone agents, and a training session is underway. Technical specialists and call center specialists from the United States have flown to India to train the new Indian employees. Hank Patelli, a senior manager of a Technix phone center in Michigan, will oversee the New Delhi phone center for six months until a local manager is hired and trained to replace him.

7) After the first training session, a number of the Michigan employees expressed frustration that the Indian employees lacked technical knowledge because none of them asked questions or offered answers. Which of the following would be the best way for Hank to handle the situation?

A) Remind the American employees that the Indians may be showing respect by remaining silent.

B) Order the Indian employees to interact more during the session.

C) Host a traditional American barbecue so the American and Indian employees can get acquainted.

D) Ignore the complaints of the American employees and continue the training sessions as planned.

Answer: A Diff: 2: Moderate Skill: Application Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments 8) Ashok, one of the Indian employees, asks Hank if the weekend training session could be rescheduled because it is a Hindu festival day. What will be the most likely outcome if Hank agrees to Ashok's request?

A) Instances of absenteeism will become more pervasive among Indian employees.

B) Hank will develop a relationship of trust and understanding with the Indian employees.

C) Hank's decision will create divisiveness between the American and Indian employees leading to irreparable damage.

D) Ashok will replace Hank as manager after six months when Hank returns to the United States.

Answer: B Diff: 1: Easy Skill: Application Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments 9) Culture refers to the inherited attitudinal traits of an individual.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge

3 .

10) Cultural values and attitudes can be transmitted through a variety of sources including parents, teachers, friends, government leaders, movies, television, and the Internet.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 11) Nonverbal communication belongs to the deep cultural makeup that we are unaware of.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 12) Religion belongs to the folk cultural makeup that we are aware of.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Application of Knowledge 13) Businesses based in societies characterized by high uncertainty avoidance encourage managers to take risks and make quick decisions.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments

4 .

14) In a short essay, explain some of the obstacles that international firms often face when dealing with employees, customers, and business partners from other cultures.

Answer: Today, firms conduct business in environments characterized by unfamiliar languages, as well as unique beliefs, norms, and behaviors. Managers need to be able to reconcile these differences to create profitable ventures. Managers not only need to develop empathy and tolerance toward cultural differences but also must acquire a sufficient degree of factual knowledge about the beliefs and values of foreign counterparts. Cross-cultural proficiency is paramount in many managerial tasks, including: managing employees, developing products and services, communicating and interacting with foreign business partners, and negotiating and structuring international business ventures.

Let's consider specific examples of how cross-cultural differences may complicate company activities.

• Pay-for-performance system. In some countries, merit is not the main basis for promoting employees. In China and Japan, a person's age is the most important determinant. But how do such workers perform when Western firms evaluate them using performance-based measures?

• Lifetime employment. In some Asian countries, firms are very protective of their employees who may work for the same company all their lives. The expectations that arise from such devoted relationships can complicate dealings with outside firms. Western managers may struggle to motivate employees who expect they will always have the same job.

• Union-management relationships. In Germany, union bosses hold the same status as top-level managers and are allowed to sit on corporate boards. Many European firms have a business culture in which workers are relatively equal to managers. This approach can reduce the flexibility of company operations because it makes it harder to lay off workers.

• Developing products and services. Cultural differences necessitate adapting marketing activities to suit the specific needs of target markets.

• Providing services. Firms that engage in services such as lodging and retailing substantially interact with customers, implying greater cultural interaction and the potential for cognitive and communication gaps. Imagine a Western lawyer who tries to establish a law office in China.

How about a Western restaurant chain operating in Russia? Both firms will encounter substantial cultural challenges. Differences in language and national character have the same effect as trade barriers.

• Organizational structure. Some companies prefer to delegate authority to country managers, which results in a decentralized organizational structure. Other firms have centralized structures, in which power is concentrated at regional or corporate headquarters. Firms may be bureaucratic or entrepreneurial. How do you deal with a bureaucratic partner or manage distantly located, decentralized subsidiaries?

• Teamwork. Cooperating with partners and host-country nationals to achieve common organizational goals is critical to business success. But what should managers do if foreign and domestic nationals don't get along? The Chinese home appliance manufacturer Haier (www.haier.com) delayed acquiring overseas firms because management felt it lacked the ability to manage foreign nationals and integrate differing cultural systems.

Diff: 3: Hard Skill: Concept Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments 5 .

15) In a short essay, explain why international business managers should engage in critical incident analysis to avoid the self-reference criterion. Describe why an examination of values and attitudes toward culture is important in this analysis.

Answer: International business managers should avoid cultural bias. Problems arise when managers simply assume that foreigners think and behave just like the folks back home. Such ethnocentric assumptions lead to poor business strategies in both planning and execution.

Managers new to international business can find the behavior of a foreigner odd and perhaps improper. For example, it is easy to be offended when a foreigner does not appreciate our food, history, entertainment, or everyday traditions. In this way, cultural bias can be a significant barrier to successful interpersonal communication.

A person's own culture conditions how he or she reacts to different values, behavior, or systems, so most people unconsciously assume that people in other countries experience the world as they do. They view their own culture as the norm; everything else may seem strange. This is known as the self-reference criterion—the tendency to view other cultures through the lens of our own culture. Understanding the self-reference criterion is a critical first step to avoiding cultural bias and ethnocentric mistakes.

Critical incident analysis is a very useful technique that managers use to analyze awkward situations in cross-cultural encounters. The technique encourages a more effective approach to cultural differences by helping managers become more objective and develop empathy for other points of view.

Critical incident analysis involves the following steps: • Identify the situations where you need to be culturally aware to interact effectively with people from another culture, including socializing, working in groups, and negotiating.

• When confronted with seemingly strange behavior, discipline yourself to avoid making hasty judgments. Instead, try to view the situation or the problem in terms of the unfamiliar culture.

Make observations and gather objective information from native citizens or secondary sources.

• Learn to make a variety of interpretations of others' behavior, to select the most likely one in the cultural context, and only then to formulate your own response.

• Learn from this process and improve continually.

An examination of values and attitudes toward culture is important in this analysis. Values represent a person's judgments about what is good or bad, acceptable or unacceptable, important or unimportant, and normal or abnormal. Our values guide the development of our attitudes and preferences. Attitudes are similar to opinions but are often unconsciously held and may not have a rational basis. Prejudices are rigidly held attitudes, usually unfavorable and usually aimed at particular groups of people. Typical values in North America, northern Europe, and Japan include hard work, punctuality, and the acquisition of wealth. People from such countries may misjudge those from developing economies who may not embrace such values.

Diff: 3: Hard Skill: Synthesis Objective: 3-1: Understand culture and cross-cultural risk AACSB: Diverse and Multicultural Work Environments 6 .

16) With regard to the iceberg concept of culture, ________ is(are) the most deeply embedded.

A) conversational patterns B) cooking C) courtship practices D) literature Answer: A Diff: 2: Moderate Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge 17) ________ belong(s) to the folk cultural makeup that we are aware of.

A) Fine arts B) Methods of problem solving C) Nonverbal communications D) Diet Answer: D Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge 18) ________ are ways of behaving and conducting oneself in public and business situations.

A) Manners and customs B) Creative expressions C) Values and attitudes D) Symbolic productions Answer: A Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge 19) Which of the following situations illustrate a polychronic perspective?

A) When a North American talks to a Latin American, he or she may unconsciously back up to maintain personal space.

B) In Islamic countries close interaction between men and women is not encouraged in public places.

C) Latin Americans have a flexible perception of time and may not arrive exactly at the predetermined time for appointments.

D) People in young countries like Australia, Canada, and the United States are relatively focused on schedules, punctuality, and time as a resource.

Answer: C Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 7 .

20) Values in a culture ________.

A) represent the symbolic, material, and creative productions unique to a society B) are rigidly held attitudes, usually unfavorable and usually aimed at particular groups of people C) represent a person's judgments about what is good or bad, acceptable or unacceptable, important or unimportant, and normal or abnormal D) are similar to opinions but are often unconsciously held and may not have a rational basis Answer: C Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 21) Prejudices in a culture ________.

A) represent the symbolic, material, and creative productions unique to a society B) are rigidly held attitudes, usually unfavorable, and usually aimed at particular groups of people C) guide the development of our attitudes and preferences D) represent a person's judgment about what is important and what is not Answer: B Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge 22) In polychronic cultures, ________.

A) members are easily distracted and are inclined to do many tasks at once B) people view time as linear and punctuality as a virtue C) managers make commitments, set deadlines, and adhere to a strict schedule of meetings and activities D) managers and investors are impatient and want quick returns Answer: A Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 23) The culture of which of the following countries has a close conversational distance?

A) Russia B) Sweden C) Brazil D) United States Answer: C Diff: 2: Moderate Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 8 .

24) The purpose of material productions in a society is to ________.

A) enable people to cope with their environments B) help unite people C) distinguish the dominant culture from minority cultures D) segregate people based on race and ethnicity Answer: A Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge 25) ________ are letters, figures, colors, or other characters that communicate a meaning.

A) Rituals B) Symbols C) Norms D) Customs Answer: B Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Written and Oral Communication 26) In cultures with a monochronic view of time, people view time as linear, managers make commitments, set deadlines, and adhere to a strict schedule of meetings and activities.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 27) Company logos, trademarks, national flags, and historical monuments are considered symbolic productions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Application of Knowledge

9 .

28) How is culture like an iceberg? In a short essay, explain the relationship between the iceberg theory and international business relationships.

Answer: Anthropologists use the iceberg metaphor to call attention to the many dimensions of culture—some obvious and some not so obvious. Above the surface, certain characteristics are visible, but below, unseen to the observer, is a massive base of assumptions, attitudes, and values that strongly influence decision making, relationships, conflict, and other dimensions of international business. We are usually unaware of the nine-tenths of our cultural makeup that exists below the surface. In fact, we are often not aware of our own culture unless we come in contact with another one.

In cross-border business, we step into different cultural environments characterized by unfamiliar languages, and unique value systems, beliefs, and behaviors. We encounter customers and business partners who display differing lifestyles, norms, consumption behavior, shopping, and use patterns. These differences influence all dimensions of international business. Understanding cultural differences is necessary in the creation and maintenance of international business relationships.

Diff: 3: Hard Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments

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29) How do cultural perceptions of time relate to international business? In a short essay, provide examples of contrasting cultural time perceptions.

Answer: Time has a strong influence on business. It affects people's expectations about planning, scheduling, profit flows, and promptness in arriving for work and meetings. Japanese managers tend to prepare strategic plans for long periods, such as a decade. The planning horizon for Western companies is much shorter, typically a few years. Some societies are more oriented to the past, others to the present, and still others to the future.

People in past-oriented cultures believe plans should be evaluated in terms of their fit with established traditions, customs, and wisdom. Innovation and change do not occur very often and are justified to the extent they fit with past experience. Europeans are relatively past-oriented, and prefer to conserve traditional ways to doing things.

Young countries like Australia, Canada, and the United States are relatively focused on the present. They tend to have a monochronic orientation to time—a rigid orientation in which people are focused on schedules, punctuality, and time as a resource. They view time as linear, like a river flowing into the future, carrying workers from one activity to the next.

In such cultures, where people are highly focused on the clock, managers make commitments, set deadlines, and follow a strict schedule in meetings. Punctuality is a virtue and time is money.

Throughout the day, workers glance at their watches, their computer's clock, or the clock on the wall. Investors are impatient and want quick returns. Managers have a relatively short-term perspective when it comes to investments and making money. Company profitability is measured on a quarterly basis. In this way, people in the United States have acquired a reputation for being hurried and impatient. Indeed, the word business was originally spelled busyness.

Some cultures have a polychronic perspective on time. In such societies, instead of performing single tasks serially, people are inclined to do many things at once. In this way, members of polychronic cultures are easily distracted. They can change plans often and easily, and long delays are sometimes needed before taking action. Punctuality per se is relatively unimportant, and managers consider time commitments flexible. They do not strictly follow the clock and schedules. They put more value on relationships and spending time with people.

A polychromic orientation also shows a flexible, nonlinear orientation to time, in which the individual takes a long-term perspective and emphasizes human relationships. For example, Chinese and Japanese firms typically are future-oriented. They focus not on how the firm will perform next quarter but on how it will perform a decade from now. Many large Japanese firms offer lifetime employment and invest heavily in employee training. They expect workers to remain with the firm for decades. Latin Americans have a flexible perception of time and may not arrive exactly at the predetermined time for appointments. In the Middle East, strict Muslims view destiny as the will of God ("Inshallah," or "God willing," is a frequently used phrase). They tend to downplay the importance of future planning. They perceive appointments as relatively vague future obligations.

Diff: 3: Hard Skill: Concept Objective: 3-2: Learn the dimensions of culture AACSB: Diverse and Multicultural Work Environments 11 .

30) An idiom ________.

A) refers to the objective analysis of a situation B) refers to the perception about someone or something that may or may not be true C) is a highly ambiguous rhetoric device used in high-context cultures D) is an expression whose symbolic meaning is different from its literal meaning Answer: D Diff: 2: Moderate Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication 31) Which of the following is TRUE about language?

A) Language does not entail facial expressions and gestures.

B) National languages, dialects, and translation facilitate straightforward communication.

C) Language has both verbal and nonverbal characteristics.

D) Business jargons are common across cultures.

Answer: C Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication 32) Advertising themes often convey unfavorable and embarrassing interpretations. This is most likely because ________.

A) popular slogans used in international advertising do not use idiomatic expressions B) advertising themes often lose their original meaning in translation or give the wrong impression C) language is rarely subtle D) colloquial expressions are more likely than not to puzzle native speakers Answer: B Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication 33) ________ is the most common primary language in the world.

A) Chinese B) Arabic C) Spanish D) English Answer: A Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication 12 .

34) ________ is the most populous Muslim country in the world.

A) Saudi Arabia B) Iran C) Egypt D) Indonesia Answer: D Diff: 2: Moderate Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 35) In which of the following countries would alcoholic drinks be prohibited?

A) Saudi Arabia B) Mexico C) Spain D) Italy Answer: A Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 36) Which of the following religions has the largest number of adherents?

A) Islam B) Christianity C) Hinduism D) Judaism Answer: B Diff: 1: Easy Skill: Application Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 37) Which of the following is NOT true about Islam?

A) Islam prohibits gambling.

B) Islam condemns charging interest for money loaned.

C) Islam discourages free trade.

D) Islam prohibits drinking alcoholic drinks.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge

13 .

Restaurant Chain Internationalization (Scenario) Harold Meyer is the vice president of a successful U.S. restaurant chain. He is getting ready to transfer to the Gulf Arab region to help establish the restaurant chain in Saudi Arabia. He is in the process of gathering information to learn about Saudi culture.

38) Which type of religious practices will Harold most likely have to study?

A) Christian B) Jewish C) Confucian D) Islamic Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 39) Harold decides to drop alcoholic drinks from the restaurant chain menu in Saudi Arabia.

Which of the following might have led to his decision?

A) Alcoholic drinks are not allowed in Saudi Arabia.

B) Saudi consumers prefer local alcoholic drinks.

C) Imported alcoholic drinks are more expensive than local drinks.

D) Saudi consumers prefer European alcoholic drinks.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 40) English is the most common primary language in the world.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Application of Knowledge 41) Language has both verbal and nonverbal characteristics.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication

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42) Business jargon unique to a culture can impede communication.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication 43) In a short essay, describe some of the subtleties of language. Provide examples that relate to international business situations.

Answer: Language is a major differentiator between cultural groups and castes and provides an essential means for business leaders to effectively communicate with employees, suppliers, and customers. Language can be classified as verbal and nonverbal. National languages, dialects, and translation tend to complicate verbal communication. It is sometimes difficult to find words to convey the same meaning in a different language. For example, a one-word equivalent to "aftertaste" does not exist in many languages. Even when a word can be translated well into other languages, its concept and meaning may not be universal. For example, the Japanese word muzukashii can be variously translated as "difficult," "delicate," or "I don't want to discuss it," but in business negotiations it usually means "out of the question." Advertising themes often lose their original meaning in translation or give the wrong impression.

Diff: 3: Hard Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Written and Oral Communication

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44) Discuss the economic and business implications of religion.

Answer: Religion appears to have an effect on economic and business activities. For instance, Islam encourages free trade through rules that prohibit restraints on market-based exchange, such as monopolies and price fixing. Islam encourages the free flow of information that facilitates efficient demand and supply. The Qur'an condemns charging interest for money loaned. Thus, banks in Islamic countries have devised methods for financing debt without violating Sharia law.

The Qur'an prohibits drinking alcohol, gambling, and showing too much skin. These restrictions affect firms that deal in alcoholic beverages, resorts, entertainment, and women's clothing. Many multinational firms are reaching out to Muslim communities. Nokia launched a mobile phone application that shows Muslims the direction toward Mecca, Islam's holiest site, when they pray.

Heineken, the Dutch brewing giant, rolled out the nonalcoholic malt drink Fayrouz for the Islamic market. In general, MNEs are allowed to operate as long as they abide by Sharia law, do not exploit people, and earn profits fairly.

Religious affiliations help create bonds of trust and shared commitment, which facilitate lending and trade. Religion can boost GDP in a country by reducing corruption, and by increasing respect for law and order. Religion that promotes moral values should help foster successful economic systems. Conversely, a lack of ethical values tends to coincide with economic decay.

A lawless society cannot sustain normal business activities for long. It is noteworthy, however, that some societies with strong religious values—for example, most Middle Eastern countries and their embrace of Islam, or southern Africa and its many Christian devotees—have not produced high living standards for their citizens. This implies religion alone is insufficient to support economic development. Other factors, such as strong private property rights, political and economic freedom, and an entrepreneurial spirit, are also important.

Diff: 3: Hard Skill: Concept Objective: 3-3: Describe the role of language and religion in culture AACSB: Diverse and Multicultural Work Environments 45) The Internet and other communications technologies imply greater likelihood of crosscultural miscommunications and blunder.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Written and Oral Communication 46) Communications, information, and transportation technologies have decreased people's ability to learn about and connect with unfamiliar cultures.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Written and Oral Communication

16 .

47) Differences in language and national character have similar effects as trade barriers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Application of Knowledge 48) In the advanced economies, firms that engage in services such as lodging and retailing account for a much lesser share of FDI than firms that manufacture products.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Application of Knowledge 49) Cultural differences necessitate adapting marketing activities to suit the specific needs of target markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Diverse and Multicultural Work Environments 50) In companies with decentralized organizational structure, power is concentrated at the regional or corporate headquarters.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Application of Knowledge 51) In China and Japan, a person's age is the most important determinant of employee promotion.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-4: Describe culture's effect in international business AACSB: Diverse and Multicultural Work Environments

17 .

52) In a short essay, explain how a "pay-for-performance system" and "lifetime employment" complicate company activities. Explain how these two cross-cultural differences reflect Hofstede's long-term versus short-term orientation.

Answer: Effective handling of the cross-cultural interface is a critical source of firms' competitive advantage. Managers not only need to develop empathy and tolerance toward cultural differences but also must acquire a sufficient degree of factual knowledge about the beliefs and values of foreign counterparts.

Pay-for-performance system: In some countries, merit is not the main basis for promoting employees. In China and Japan, a person's age is the most important determinant. But how do such workers perform when Western firms evaluate them using performance-based measures?

Lifetime employment: In some Asian countries, firms are very protective of their employees who may work for the same company all their lives. The expectations that arise from such devoted relationships can complicate dealings with outside firms. Western managers may struggle to motivate employees who expect they will always have the same job.

These cross-cultural challenges reflect Hofstede's cultural dimensions of long-term versus shortterm orientation. Long-term versus short-term orientation refers to the degree to which people and organizations defer pleasure or gratification to achieve long-term success. Firms and people in cultures with a long-term orientation tend to take the long view to planning and living. They focus on years and decades. The long-term dimension is best illustrated by the so-called Asian values—traditional cultural orientations of several Asian societies, including China, Japan, and Singapore. These values are partly based on the teachings of the Chinese philosopher Confucius.

They include discipline, loyalty, hard work, regard for education, respect for family, focus on group harmony, and control over one's desires. Scholars credit these values for the East Asian miracle, the remarkable economic growth and modernization of East Asian nations during the last several decades. By contrast, the United States and most other Western countries emphasize a short-term orientation.

Diff: 3: Hard Skill: Synthesis Objective: 3-4: Describe culture's effect in international business AACSB: Diverse and Multicultural Work Environments 53) Low-context cultures tend to ________.

A) emphasize nonverbal messages B) conduct negotiations as efficiently as possible C) view communication as a means to promote smooth, harmonious relationships D) prefer an indirect and polite face-saving style of communication Answer: B Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication

18 .

54) Which of the following is characteristic of collectivist societies?

A) In collectivist societies, each person tends to focus on his or her own self-interest.

B) In collectivist societies, compromise and conformity help maintain group harmony.

C) In collectivist societies, ties among people are relatively loose.

D) In collectivist societies, those who compete best are rewarded financially.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 55) Which of the following countries is an example of a strongly collectivist society?

A) Ireland B) Canada C) Australia D) China Answer: D Diff: 2: Moderate Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Application of Knowledge 56) High power-distance countries are characterized by ________.

A) organizations that grant a high degree of autonomy to lower-level employees B) a strong desire to minimize gaps between the powerful and the weak C) a relative indifference toward social inequalities D) a relative equality in terms of income and power Answer: C Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 57) Firms with high power distance are most likely to be characterized by ________.

A) concentrated power among executives and little autonomy for subordinates B) an equal distribution of power among executives, managers, and lower-level employees C) a minimal gap between the powerful and the weak D) a highly flexible work environment Answer: A Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments

19 .

58) Which of the following is TRUE about low-context cultures?

A) People belonging to low-context cultures do not prefer explicit communications.

B) Low-context cultures emphasize an indirect and polite face-saving style of communication.

C) Low-context cultures rely on elaborate verbal explanations, putting much emphasis on spoken words.

D) People belonging to low-context cultures view communication as a means to promote smooth, harmonious relationships.

Answer: C Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication 59) Which of the following countries exhibit a high-context culture?

A) Japan B) Germany C) The United States of America D) Switzerland Answer: A Diff: 2: Moderate Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication 60) Titania is a country characterized by a high-context culture. This implies that ________.

A) the people of Titania tend to conduct negotiations as efficiently as possible B) the people of Titania tend to use legalistic contracts to conclude agreements C) business is primarily deal-oriented in Titania D) personal relations and goodwill are valued in Titania Answer: D Diff: 2: Moderate Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication 61) Business dealings in low-context cultures are characterized by ________.

A) a high degree of sensitivity to the context B) a high degree of mutual respect C) efficient negotiations D) complex rituals Answer: C Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication

20 .

62) Which of the following refers to the extent to which people can tolerate risk in their lives?

A) uncertainty avoidance B) long-term versus short-term orientation C) power distance D) individualism Answer: A Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 63) Which of the following managers portrays high uncertainty avoidance?

A) Greg manages the market development fund team for a leading computer manufacturing firm.

He is entrepreneurial and makes decisions quickly under tough situations.

B) James is the business head of marketing in a leading automobile manufacturing company. He coaches his team members to become accustomed to risk and organizational change.

C) Henry is the managing editor at Paes publications. He emphasizes careful evaluation of all options and ensuring they are consistent with company policies, which often slows down the progress.

D) David manages the technical team at TR Solutions. He is open to different opinions from team members and is not threatened by differing opinions.

Answer: C Diff: 2: Moderate Skill: Application Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 64) Feminine cultures tend to emphasize ________.

A) interdependence among people B) accumulation of wealth C) ambition D) competitiveness Answer: A Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments

21 .

65) ________ refers to a distinctive tradition or institution strongly associated with a particular society.

A) Cultural metaphor B) Totem C) Moiety D) Cultural pluralism Answer: A Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Application of Knowledge 66) In a deal-oriented culture, managers ________.

A) focus on the task at hand and prefer getting down to business B) hold rigid attitudes, usually unfavorable and usually aimed at particular groups of people C) emphasize affiliations with people D) seek to build trust and rapport and get to know the other party in business interactions Answer: A Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Analytical Thinking Subjective Dimensions of Culture (Scenario) In the last two years, the sales of consumer electronics in China have risen by 9.4 percent.

Moreover, the market is becoming increasingly competitive since a large number of Japanese, European, and American manufacturers are building factories to face the competition from lowcost Chinese manufacturers. Grande Co. is a U.S.-based consumer electronics manufacturer that has been negotiating with Chinese authorities for eight years to open a factory in the country.

Since Grande has spent significant time and energy on negotiation in the past eight years, they should quit and set up a factory in a more responsive society.

67) Which of the following, if TRUE, strengthens the conclusion of the above passage?

A) In China, companies belonging to deal-oriented cultures have been the most successful.

B) American companies best thrive in cultures that are deal-oriented.

C) For the Chinese, relationship is less important than business deals.

D) The management of Grande is characterized by a host country mind-set.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments

22 .

68) Which of the following can be inferred from the above passage?

A) The Chinese culture is more likely than not to be deal-oriented.

B) The Chinese culture is more likely than not to be relationship-oriented.

C) The American culture is more likely than not to be relationship-oriented.

D) The American culture is less likely to take an impersonal approach to business.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 3-5: Learn models and explanations of culture AACSB: Analytical Thinking Restaurant Chain Internationalization (Scenario) Harold Meyer is the vice president of a successful U.S. restaurant chain. He is getting ready to transfer to the Gulf Arab region to help establish the restaurant chain in Saudi Arabia. He is in the process of gathering information to learn about Saudi culture.

69) Harold learned that organizations in Saudi Arabia emphasizes loyalty to the family and tribe and that ties among individuals are highly valued. Based on Harold's observation, Saudi Arabia is ________.

A) a collectivist culture B) an individualistic culture C) characterized by low power distance D) a feminine culture Answer: A Diff: 1: Easy Skill: Critical Thinking Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 70) Japan and China are examples of low-context cultures.

Answer: FALSE Diff: 2: Moderate Skill: Application Objective: 3-5: Learn models and explanations of culture AACSB: Written and Oral Communication 71) In collectivist societies, competition for resources is the norm, and those who compete best are rewarded financially.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments

23 .

72) A cultural metaphor is a generalization about a group of people that may or may not be factual.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Application of Knowledge 73) In societies with low uncertainty-avoidance, companies emphasize stable careers and produce many rules to regulate worker actions and minimize ambiguity.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 74) In deal-oriented cultures, managers focus on the task at hand and prefer getting down to business.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments 75) What are some of the criticisms of Hofstede's study? In a short essay, discuss the limitations of the study.

Answer: While useful, the Hofstede framework has its weaknesses. The original research was based on data collected around 1970. Much has changed since then, including successive phases of globalization, widespread exposure to global media, technological advances, and changes in the role of women in the workforce. In addition, Hofstede's findings are based on the employees of a single company—IBM—in a single industry, making it difficult to generalize. Hofstede's data were collected using questionnaires, which is not effective for probing some of the deep issues that surround culture. Finally, Hofstede did not capture all potential dimensions of culture.

Nevertheless, Hofstede's framework is useful as a general guide and for gaining deeper understanding in cross-national interactions with business partners, customers, and value-chain members.

Diff: 3: Hard Skill: Concept Objective: 3-5: Learn models and explanations of culture AACSB: Diverse and Multicultural Work Environments

24 .

76) Polycentric orientation refers to ________.

A) a host-country mind-set in which the manager develops a strong affinity with the country in which she or he conducts business B) the use of one's own culture as the standard for judging other cultures C) a collectivist mind-set, which emphasizes conformity, duty, prescribed roles, and sacrifice for the greater good D) the tendency to rely on elaborate verbal explanations, putting much emphasis on spoken words Answer: A Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 77) Using one's own culture as a standard for judging other cultures is known as ________.

A) anthropocentric orientation B) ethnocentric orientation C) geocentric orientation D) polycentric orientation Answer: B Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Application of Knowledge 78) As part of opening manufacturing units abroad, a U.S. apparel firm decided to send its apparel production coordinator Chris to Bangladesh. Chris is distressed that people don't come to meetings on time and finds it disrespectful when his team members stand too close to him. Chris may trigger a cross-cultural risk by a(n) ________.

A) ethnocentric orientation B) anthropocentric orientation C) polycentric orientation D) geocentric orientation Answer: A Diff: 2: Moderate Skill: Application Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

25 .

79) Which of the following situations is an example of geocentric orientation?

A) Marsha, CEO of QST Solutions, believes that top level executives at her company should be Americans to avoid any communication gaps.

B) The Gram Group of retail stores decided to open branches in China and focus on changing their policies to suit the Chinese population to maximize profits.

C) Derek, the VP of Banner Technologies, wants managers from the firm's India office to visit the U.S. branch to provide training to American officials visiting India.

D) Chill & Break Inc., an American global coffee company, is used to judging other cultures by the standards of its own culture.

Answer: C Diff: 2: Moderate Skill: Application Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments Japanese Supercenter (Scenario) The Tag-Mart chain of discount superstores is nearing completion of its new supercenter in Tokyo. The Tokyo store is the first foreign store for the large U.S.-based company. Tag-Mart offers a large variety of products at virtually unbeatable prices. A group of Tag-Mart representatives has traveled to Tokyo to inspect the new store and hire a store manager. The top two contenders for the position are Hisako Aoki and Takematsu Sato. Aoki has 25 years of experience managing a local department store renowned for its customer service. Sato, born and raised in Japan, earned a college degree in the U.S. before working six years as a manager at a Texas Tag-Mart.

80) Which of the following best supports the selection of Sato over Aoki?

A) Sato is familiar with both Tag-Mart operations as well as the local customs in Japan.

B) Sato is no more skilled in employee training techniques than Aoki.

C) Sato is clearly more relationship-oriented than Aoki.

D) Sato is likely to discourage homogenization of cultures.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 81) Which of the following, if TRUE, most supports the decision to operate the Tokyo store in a manner similar to Tag-Mart stores in the U.S.?

A) Customer service is of utmost importance to local shoppers.

B) Finding efficient and knowledgeable employees in Tokyo is difficult.

C) Other supercenter stores in Tokyo have gone out of business in the last year.

D) Local shoppers desire both efficiency and low prices.

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 3-6: Understand managerial implications of culture AACSB: Analytical Thinking 26 .

82) Which of the following is most important for Tag-Mart's top management to determine while making a choice between Sato and Aoki as the new store manager?

A) How many shoppers are expected at the Tokyo Tag-Mart grand opening sale?

B) How many locally owned stores will Tokyo Tag-Mart compete against?

C) Would customers at the Tokyo Tag-Mart prefer strong customer service or a U.S.-style shopping experience?

D) What is the average age and annual income of Tokyo Tag-Mart shoppers?

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 83) Which of the following is a cultural barrier inherent to service firms that internationalize via FDI? A) Service firms are unable to infiltrate international markets due to language issues.

B) The source of a firm's funding determines the location of its international subsidiaries.

C) A firm's corporate culture is overly influenced by its national culture.

D) Firms that internationalize via FDI usually make large spending cuts on advertising campaigns.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 84) Managers can achieve effective cross-cultural interaction by ________.

A) resisting cultural homogeneity B) keeping an open mind and being inquisitive C) rushing into conclusions about other's behaviors D) using business jargons to facilitate communication Answer: B Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

27 .

85) Which of the following types of assumptions is the cause of most problems between business managers and foreign employees?

A) geocentric assumptions B) ethnocentric assumptions C) polycentric assumptions D) religious assumptions Answer: B Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 86) Self-reference criterion is ________.

A) the tendency to assume that all people from one culture are the same B) the tendency to understand a culture without regard to country boundaries C) the propensity to view other cultures through the lens of one's own culture D) the propensity to understand culture as an inherited trait Answer: C Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Application of Knowledge 87) In cross-border business, successful managers ________.

A) adhere to a self-reference criterion B) are empathetic to cultural differences C) overly emphasize the importance of business jargons in facilitating effective cross-cultural communication D) ritually avoid analyzing awkward situations in cross-cultural encounters Answer: B Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 88) Cultural intelligence is defined as ________.

A) a person's ability to function effectively in situations characterized by cultural diversity B) the method of analyzing awkward situations in cross-cultural encounters by developing objectivity and empathy for other points of view C) the measurement of the inequalities in power that exist among people D) the information gathered by local firms about those entering foreign markets Answer: A Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Application of Knowledge 28 .

89) Cross-cultural proficiency is characterized by all of the following EXCEPT ________.

A) perceptiveness B) flexibility and adaptability C) valuing personal relationships D) tolerance for ambiguity Answer: D Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Application of Knowledge 90) Managers with a geocentric view of the world ________.

A) are generally better at understanding and accommodating similarities and differences among cultures B) ritually avoid analyzing awkward situations in cross-cultural encounters C) have a strong preference for ambiguity D) tend to view other cultures through the lens of his/her own culture Answer: A Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 91) Cross-cultural risk is often intensified by managers with geocentric tendencies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 92) An ethnocentric orientation positively impacts the ability of managers to manage business projects and new business practices abroad.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 93) Ethnocentric orientation refers to a host-country mind-set in which the manager develops a strong affinity with the country in which she or he conducts business.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

29 .

94) Most companies have a distinctive set of norms, values, and modes of behavior that distinguish them from other organizations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Application of Knowledge 95) Ethnocentric assumptions lead to poor business strategies in both planning and execution.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 96) Managers with an ethnocentric view of the world are generally better at understanding and dealing with similarities and differences among cultures.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 97) Cross-cultural proficiency is characterized by four key personality traits: tolerance for ambiguity, perceptiveness, valuing personal relationships, and flexibility and adaptability.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments 98) Cultural intelligence focuses on specific capabilities important for high-quality personal relationships and effectiveness in culturally diverse settings and work groups.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

30 .

99) In a short essay, discuss the three cultures into which employees are socialized: national culture, professional culture, and corporate culture.

Answer: Employees are socialized into three cultures: national culture, professional culture, and corporate culture. Working effectively within these overlapping cultures is challenging. The influence of professional and corporate culture tends to grow as people are socialized into a profession and workplace.

Most companies have a distinctive set of norms, values, and modes of behavior that distinguish them from other organizations. Such differences are often as distinctive as national culture, so that two firms from the same country can have vastly different organizational cultures. For example, Standard Chartered (www. standardchartered.com), a time-honored British bank, has a conservative culture that may be slow to change. By contrast, Virgin (www.virgin.com), the much younger British music and travel provider, has an experimental, risk-taking culture.

These cultural layers present yet another challenge for the manager: To what extent is a particular behavior caused by national culture? In companies with a strong organizational culture, it is hard to determine where the corporate influence begins and the national influence ends. In the French cosmetics firm L'Oreal (www.loreal.com), the distinction between national and corporate cultures is not always clear. The French have a great deal of experience in the cosmetics and fashion industries, but L'Oreal is a global firm staffed by managers from around the world. Their influence, combined with management's receptiveness to world culture, has shaped L'Oreal into a unique organization, distinctive within French culture.

Diff: 3: Hard Skill: Synthesis Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

31 .

100) In a short essay, describe three guidelines that managers should follow to achieve crosscultural success.

Answer: GUIDELINE 1: Acquire factual knowledge about the other culture, and try to speak the language. Successful managers acquire a base of knowledge about the values, attitudes, and lifestyles of the cultures that they encounter. Managers study the political and economic background of target countries—their history, current national affairs, and perceptions about other cultures. Such knowledge increases understanding about the partner's mind-set, organization, and objectives. Sincere interest in the target culture helps establish trust and respect. It helps lay the foundation for open and productive relationships. Even modest attempts to speak the local language are welcome. Superior language skills help ensure international business success. In the long run, managers who can converse in multiple languages are more likely to negotiate successfully and have positive business meetings.

GUIDELINE 2: Avoid cultural bias. Problems arise when managers simply assume that foreigners think and behave just like the folks back home. Such ethnocentric assumptions lead to poor business strategies in both planning and execution. Managers new to international business can find the behavior of a foreigner odd and perhaps improper. For example, it is easy to be offended when a foreigner does not appreciate our food, history, entertainment, or everyday traditions. In this way, cultural bias can be a significant barrier to successful interpersonal communication. Ethnocentric assumptions lead to poor business strategies in both planning and execution. Managers new to international business often find the behavior of a foreigner hard to explain. For example, it is easy to be offended when our foreign counterpart does not appreciate our food, history, sports, or entertainment or is otherwise inconsiderate. This situation may interfere with the manager's ability to interact effectively with the foreigner, even leading to communication breakdown. In this way, culture can be a significant barrier to successful crosscultural communication.

GUIDELINE 3: Develop cross-cultural skills. Working effectively with counterparts from other cultures requires managers to make an investment in their professional development. Each culture has its own ways of conducting business and negotiations, and solving disputes.

Managers are exposed to high levels of uncertainty. Concepts and relationships can be understood in a variety of ways. To be successful in international business, managers should strive for cross-cultural proficiency.

Diff: 3: Hard Skill: Concept Objective: 3-6: Understand managerial implications of culture AACSB: Diverse and Multicultural Work Environments

32 .

International Business: The New Realities, 5e (Cavusgil) Chapter 4 Ethics, Corporate Social Responsibility, Sustainability and Corporate Governance in International Business 1) ________ refers to the system of procedures and processes by which corporations are managed, directed, and controlled.

A) Corporate governance B) Deceptive marketing C) Global sourcing D) Corporate social responsibility Answer: A Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Application of Knowledge 2) ________ are moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong.

A) Attitudes B) Ethics C) Laws D) Biases Answer: B Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Application of Knowledge 3) ________ means meeting humanity's needs without harming the ability of future generations to meet their needs.

A) Sustainability B) Corporate social responsibility C) Ethical behavior D) Casuistry Answer: A Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Application of Knowledge

1 .

4) Which of the following behaviors of a firm can be called unethical?

A) setting up operations abroad B) manufacturing luxury consumer goods C) tolerating sweatshop conditions D) failing to meet shareholders' expectations with regard to annual profit Answer: C Diff: 2: Moderate Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 5) An international human rights organization recommends that its member countries review their human rights policies on a periodic basis to ensure that their governments are upholding ethical standards for the treatment of prisoners. Which of the following represents the most effective reasoning in support of the organization's recommendation?

A) Ethical policies and practices tend to remain consistent within the same country over time.

B) Nations should emphasize more rehabilitation than retribution in their treatment of prisoners.

C) Nations should enforce only those ethical standards that have been adopted by other nations.

D) Ethical standards change over time, so national policies should be updated as necessary.

Answer: D Diff: 3: Hard Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 6) According to relativists ________.

A) a passive acceptance of others' values is unethical B) ethical truths differ from group to group C) firms and individuals should seek to uphold ethical behavioral standards consistently around the world D) ethical truths are absolute Answer: B Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

2 .

7) An individual who believes in ethical normativism is most likely to view ethical behavioral standards as ________.

A) universal B) constantly changing C) dependent on societal norms D) superior to religious beliefs Answer: A Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 8) ________ represents the apex of the pyramid of ethical behavior.

A) Ethical behavior B) Corporate social responsibility C) Complying with laws and regulations D) Guarding against corruption Answer: B Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 9) ________ represents the base of the pyramid of ethical behavior.

A) Ethical behavior B) Corporate social responsibility C) Complying with laws and regulations D) Guarding against corruption Answer: C Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

3 .

Acme Ethical Standards (Scenario) Four senior managers of Acme International meet to discuss strategies for improving ethical practices in the company's worldwide operations. Jang heads the company's manufacturing division in China, while Luis and Marta are based in the Finland and U.S. sales divisions, respectively. Geoff manages the research and development office, based in Brazil.

10) The managers discuss various ethical problems commonly encountered in their local territories. Which of the following representatives is most likely to label counterfeiting of goods as the biggest challenge in his/her country?

A) Jang B) Luis C) Marta D) Geoff Answer: A Diff: 2: Moderate Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 11) Who among the following managers is most likely to raise concern over the ban on advertising directed at children in his/her country?

A) Marta B) Geoff C) Luis D) Jang Answer: C Diff: 2: Moderate Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Analytical Thinking 12) ________ is most likely to point to a controversial practice in his/her country in which the compensation of top executives is far greater than that of low-ranking subordinates.

A) Geoff B) Luis C) Jang D) Marta Answer: D Diff: 2: Moderate Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Analytical Thinking

4 .

Freedom Shoes (Scenario) Freedom Shoes Inc., a sports shoe company, is considering entering into a contract with an overseas vendor to expand its production capacity. The company investigated several suppliers and found one vendor to be the most attractive in terms of cost and manufacturing efficiency.

However, Freedom's managers have heard reports that the vendor operates factories with sweatshop conditions.

13) Sean, a senior manager in Freedom, adheres to the relativist view regarding ethical standards.

He goes by the rule, "When in Rome, do as the Romans do." Sean is most likely to agree strongly with which of the following views?

A) Freedom should not partner with foreign business entities.

B) Freedom should passively accept the practices that prevail in countries where it does business.

C) Freedom should not hire foreign managers.

D) Freedom should institute a single global code of conduct for all its employees and suppliers.

Answer: B Diff: 2: Moderate Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 14) Standards of ethical behavior are uniform worldwide.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 15) Ethics and appropriate behavior transcend all international business activities and figure prominently in management decisions about financial performance and competitive advantage.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 16) Widespread corruption hinders economic development.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

5 .

17) A corporate culture that advocates profit over sustainability and human welfare cannot lead to employee abuse.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 18) Advances in communications technologies makes it difficult to deceive consumers in foreign countries.

Answer: FALSE Diff: 1: Easy Skill: Application Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Written and Oral Communication 19) Intellectual property rights law enacted in one country are enforceable worldwide.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 20) Piracy is equivalent to counterfeiting.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 21) Grease payments intended to expedite transactions are both accepted and legal in many countries.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

6 .

22) Scholars examining ethics from the perspective of relativism hold that ethical truths are absolute.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 23) Ethical behavior is essential for business success.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 24) In countries with questionable ethical norms, it is usually ill-advised to maintain ethical standards superior to what is required by local laws and values.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 25) Experienced managers scan operations in each country and potential partners for the possibility of ethical abuses. Such scanning is an ongoing process because company operations and environments evolve continuously.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 26) Improper ethical behavior is unlikely to result when bad means are justified by good ends.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

7 .

27) Define ethics. Provide examples of unethical behavior exhibited by firms.

Answer: Ethics are moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong.

As examples of unethical behavior, firms may: • Falsify or misrepresent contracts or financial statements; • Pay or accept bribes, kickbacks, or inappropriate gifts; • Tolerate sweatshop conditions or otherwise abuse employees; • Undertake false advertising and other deceptive marketing practices; • Engage in pricing that is deceptive, discriminatory, or predatory; • Deceive or abuse intermediaries in international channels; and • Engage in activities that harm the natural environment.

Diff: 2: Moderate Skill: Concept Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning 28) What is an ethical dilemma? In a short essay, include one example of an ethical dilemma that a business manager might face.

Answer: An ethical dilemma is a predicament with major conflicts among different interests where determining the most appropriate course of action is confounded by a set of solutions that are equally justifiable, and often equally imperfect. Possible actions may be mutually exclusive: The choice of one automatically negates the other(s).

Example: Imagine you are a manager and visit a factory owned by an affiliate in Colombia, only to discover the use of child labor in the plant. Upon studying the problem, you learn that child labor is accepted in many developing economies. There are more than 50 million children working in India alone. Girls are vulnerable, and may be abused or exploited. Work prevents children from attending school, which would improve their prospects for a better life. But you also learn that without their children's income, families often go hungry. If the kids are dismissed from the plant, many will turn to other income sources, including prostitution and street crime. The age at which children are deemed adults varies worldwide, sometimes as low as 15 years. This situation presents an ethical dilemma because child labor is a human rights violation—but in this case it also provides a necessary source of income and serves a positive purpose that might be thwarted if the children are prevented from working.

Diff: 2: Moderate Skill: Critical Thinking Objective: 4-1: Learn the components of ethical behavior and their importance in international business AACSB: Ethical Understanding and Reasoning

8 .

29) Corruption is defined as ________.

A) the system of procedures and processes by which corporations are managed, directed, and controlled B) a manner of operating a business that meets or exceeds the ethical, legal, commercial, and public expectations of customers C) the abuse of power to achieve illegitimate personal gain D) the tendency to make decisions based purely on cognitive factors Answer: C Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Ethical Understanding and Reasoning 30) ________ is the procurement of products or services from suppliers located abroad.

A) Licensing B) Franchising C) Deceptive marketing D) Global sourcing Answer: D Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 31) ________ refers to offering, giving, receiving, or soliciting anything of value to influence the actions of a government official or a corporate manager.

A) Patenting B) Piracy C) Bribery D) Normativism Answer: C Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 32) Which of the following acts makes it illegal for U.S. firms to offer bribes to foreign parties in order to secure or retain business?

A) the U.S. Foreign Corrupt Practices Act B) the Robinson-Patman Act C) the U.S. Securities Exchange Act D) the Sherman Antitrust Act Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 9 .

33) Which of the following is TRUE with regard to corruption?

A) Countries with minimal corruption fail to attract direct investment.

B) In firms, corruption rarely occurs across the range of value chain activities.

C) Corruption harms the poorest in societies.

D) Under the Sherman Antitrust Act, firms charged for corruption may be fined $2 million and managers can be imprisoned for up to five years.

Answer: C Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Ethical Understanding and Reasoning 34) Which of the following countries has the LEAST corruption?

A) Mexico B) Philippines C) Russia D) Denmark Answer: D Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 35) In countries with minimal corruption ________.

A) commercial laws are unfair and discriminatory B) financial and accounting information is transparent C) direct investment does not take place D) the contribution of the private sector to the national GDP is negligible Answer: B Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 36) The process of reproducing assets without compensating those who originally created them is known as ________.

A) counterfeiting B) bribery C) product differentiation D) trademarking Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 10 .

37) ________ refers to ideas or works created by individuals or firms and includes a variety of proprietary, intangible assets: discoveries and inventions; artistic, musical, and literary works; and words, phrases, symbols, and designs.

A) Global sourcing B) Corporate governance C) Constant capital D) Intellectual property Answer: D Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 38) Trademarks, copyrights, and patents are examples of ________.

A) intellectual property rights B) fundamental rights C) tangible property rights D) ethical rights Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 39) Which of the following grants protections to the creators of art, music, books, software, movies, and TV shows?

A) patent B) trademark C) copyright D) domain registration Answer: C Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 40) ________ confer the exclusive right to manufacture, use, and sell products or processes.

A) Patents B) Trademarks C) Trade secrets D) Copyrights Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 11 .

41) The Nike "swoosh" is an example of a ________.

A) patent B) fad C) copyright D) trademark Answer: D Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 42) Sustainable firms ________.

A) have a high employee turnover rate B) have greater liabilities than assets C) avoid emitting toxic wastes D) actively resist organizational change Answer: C Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Analytical Thinking 43) In 2014, ________ was the largest single source of counterfeit products imported into the U.S., which accounted for 63 percent of Homeland Security seizures, followed by Hong Kong, an administrative region of China, amounting to 25 percent of seizures.

A) China B) The United States C) Iran D) Russia Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 44) Which of the following is TRUE with regard to bribery?

A) Bribery promotes a culture of dishonesty and immorality.

B) Bribery poses no significant threat to market economies.

C) Bribery is considerably rare in developing economies.

D) Bribery is not acceptable in much of the world.

Answer: A Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Ethical Understanding and Reasoning

12 .

Sid Maxwell (Scenario) Sid Maxwell is the head of legal affairs at Hudson Inc., an American toy manufacturer. Hudson's signature toy, the Witty Parakeet, includes an embedded software program that allows the bird to interact with children. Hudson is currently planning to expand its market in Asia but Sid is concerned about reports of software piracy in the region.

45) The software program embedded in Hudson's signature toy, the Witty Parakeet, is an example of a(n) ________.

A) tangible asset B) intellectual property C) trademark D) trade secret Answer: B Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 46) Hudson uses a distinctive sign to enable its customers to easily identify its products. This distinctive sign that the company also uses to distinguish its offerings from that of its competitors is known as a ________.

A) patent B) copyright C) trademark D) users' license Answer: C Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge 47) Which of the following can extend legal protection to Hudson's proprietary software used in its toys?

A) a trademark B) a patent C) a copyright D) a users' license Answer: C Diff: 2: Moderate Skill: Application Objective: 4-2: Recognize ethical challenges in international business AACSB: Application of Knowledge

13 .

48) Corporate social responsibility represents the base of the pyramid of ethical behavior.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Ethical Understanding and Reasoning 49) Corporate social responsibility represents the apex of the pyramid of ethical behavior.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-2: Recognize ethical challenges in international business AACSB: Ethical Understanding and Reasoning 50) Which of the following would most likely be considered an appropriate action for a multinational company in meeting its global corporate social responsibility obligations?

A) lowering production costs for specific manufactured items B) improving the efficiency of assembly line operations C) developing a strategic plan to enter an emerging market D) devoting substantial R&D to poor-country ailments Answer: D Diff: 2: Moderate Skill: Application Objective: 4-3: Understand corporate social responsibility AACSB: Ethical Understanding and Reasoning 51) Which of the following refers to a typical CSR value?

A) increasing profits B) upholding market monopolies C) engaging in philanthropy D) sustaining sweatshops Answer: C Diff: 1: Easy Skill: Concept Objective: 4-3: Understand corporate social responsibility AACSB: Application of Knowledge 52) Failure to adopt CSR behaviors can have high detrimental effects on a company.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-3: Understand corporate social responsibility AACSB: Ethical Understanding and Reasoning

14 .

53) Upholding the right to join labor unions is an example of CSR values.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-3: Understand corporate social responsibility AACSB: Ethical Understanding and Reasoning 54) In a short essay, explain the concept of CSR. List some typical CSR values.

Answer: Corporate social responsibility (CSR) refers to operating a business in a manner that meets or exceeds the ethical, legal and commercial expectations of customers, shareholders, employees and the communities where the firm does business. Adhering to CSR implies a proactive approach to ethical behavior in which firms not only seek to maximize profits, but also to benefit society and the environment.

Typical CSR values include: • Avoiding human rights abuses • Upholding the right to join or form labor unions • Eliminating child labor • Avoiding workplace discrimination • Protecting the natural environment • Guarding against corruption • Undertaking philanthropic efforts Diff: 2: Moderate Skill: Critical Thinking Objective: 4-3: Understand corporate social responsibility AACSB: Ethical Understanding and Reasoning 55) In a short essay, describe how the African MNE Celtel helped improve the conditions for millions of people and businesses around Africa.

Answer: The African MNE Celtel is a leading exemplar. Africa is one of the world's most underserved telecommunications markets. To address pent-up demand, African native Mo Ibrahim launched Celtel, a mobile communications company. Ibrahim had to design, build, and operate phone systems in countries with antiquated or nonexistent infrastructure—including poor roads, as well as scarce electricity, water and other utilities. Celtel developed a plan to deal with corruption. The firm built schools and clinics, trained local staff, and provided health insurance to employees. Because customers lacked access to modern payment methods, Celtel developed a system of cheap, prepaid phone cards. Today Celtel provides mobile phone services in more than 15 African countries, including Uganda, Malawi, Gabon, and Sierra Leone. Ibrahim's firm has proven enormously profitable. While enjoying huge success, he has dramatically improved conditions for millions of people and businesses around Africa.

Diff: 2: Moderate Skill: Application Objective: 4-3: Understand corporate social responsibility AACSB: Ethical Understanding and Reasoning

15 .

56) Firms with a strong social interest ________.

A) openly support the use of sweatshops B) aim to optimize work conditions and diversity in hiring C) are reluctant to provide health insurance to employees D) engage in deceptive marketing Answer: B Diff: 2: Moderate Skill: Concept Objective: 4-4: Understand sustainability AACSB: Ethical Understanding and Reasoning 57) Firms with strong environmental interests are most likely to ________.

A) provide employees educational opportunities B) encourage the use of sweatshops C) optimize diversity in hiring D) minimize pollutants in manufacturing Answer: D Diff: 2: Moderate Skill: Application Objective: 4-4: Understand sustainability AACSB: Ethical Understanding and Reasoning 58) Economic interests refer to a firm's economic impact on ________.

A) the localities where it does business B) the top management of the firm C) the middle management of the firm D) the society as a whole Answer: A Diff: 1: Easy Skill: Concept Objective: 4-4: Understand sustainability AACSB: Analytical Thinking 59) Sustainable practices lead to ________.

A) cost savings from more efficient production B) the abolition of labor unions C) higher employee turnover D) reduced operational flexibility Answer: A Diff: 1: Easy Skill: Concept Objective: 4-4: Understand sustainability AACSB: Analytical Thinking

16 .

Freedom Shoes (Scenario) Freedom Shoes Inc., a sports shoe company, is considering entering into a contract with an overseas vendor to expand its production capacity. The company investigated several suppliers and found one vendor to be the most attractive in terms of cost and manufacturing efficiency.

However, Freedom's managers have heard reports that the vendor operates factories with sweatshop conditions.

60) Which of the following, if TRUE, implies that Freedom has a strong social interest?

A) The top management of Freedom actively engages in positively contributing to the disadvantaged communities in the society.

B) According to Freedom, a firm that fails to institute a green purchasing policy in sourcing its inputs is more likely than not to fail in the long run.

C) Freedom considers that the key to success for MNCs lie in their ability to tap resources effectively and at a lower cost.

D) Despite the overseas vendor's effectiveness, Freedom decides not to enter into a contract with it because according to Freedom, tolerating sweatshop conditions is unethical.

Answer: D Diff: 2: Moderate Skill: Application Objective: 4-4: Understand sustainability AACSB: Analytical Thinking 61) The most advanced companies monitor suppliers to ensure that they use sustainable practices.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-4: Understand sustainability AACSB: Application of Knowledge

17 .

62) In a short essay, describe the three types of interests simultaneously pursued by a sustainable business.

Answer: A sustainable business simultaneously pursues three types of interests: • Economic interests refer to the firm's economic impact on the localities where it does business.

Management considers the effect of the firm's activities on such local concerns as job creation, wages, tax flows, disadvantaged communities, public works, and other areas where the firm can contribute positively to local economic interests.

• Social interests refer to how the firm performs relative to societies and social justice, often termed social impact. The firm with a strong social interest aims to optimize work conditions and diversity in hiring. It avoids using sweatshops, child labor, and other practices that harm workers.

Instead, the sustainable firm provides safe work environments, health insurance, retirement benefits, and educational opportunities for employees.

• Environmental interests refer to the extent of the firm's contribution to preserving environmental quality, commonly known as environmental impact. This concept refers to reducing the effect of the firm's value-chain activities on the natural environment. The sustainable firm maximizes its use of recycled or renewable raw materials and environmentally friendly energy. It minimizes pollutants, designs production lines to use water and energy efficiently, and constantly seeks ways to reduce waste. Many firms establish a green purchasing policy, through which they source inputs that support environmental interests.

Diff: 3: Hard Skill: Concept Objective: 4-4: Understand sustainability AACSB: Application of Knowledge 63) Which of the following approaches to ethical standards for corporate governance reflects the view that the best ethical action is the one that provides the most good or the least harm?

A) common good approach B) utilitarian approach C) virtue approach D) fairness approach Answer: B Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 64) Which of the following approaches to ethical standards for corporate governance reflects the view that the best action emphasizes the welfare of the entire community or nation?

A) rights approach B) utilitarian approach C) common good approach D) virtue approach Answer: C Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 18 .

65) Which of the following is TRUE with regard to the rights approach?

A) It is based on the belief that the best action treats everyone equally and fairly.

B) It produces the greatest balance of good over harm to customers, employees, shareholders, the community, and the natural environment.

C) According to the rights approach, the most important virtues are truth and prudence.

D) It is based on the belief that, regardless of how you deal with an ethical dilemma, human dignity must be preserved.

Answer: D Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 66) Which of the following approaches to ethical standards for corporate governance reflects the view that the best action treats everyone equally and in a just manner?

A) fairness approach B) virtue approach C) utilitarian approach D) rights approach Answer: A Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Analytical Thinking 67) According to the virtue approach ________.

A) the best action emphasizes the welfare of the entire community or nation B) the best action emphasizes moral excellence and righteousness that provide for the full development of our humanity C) the best ethical action is the one that provides the most good or the least harm D) the best action protects and respects the moral rights of everyone involved Answer: B Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Application of Knowledge

19 .

68) Which of the following is TRUE of a code of ethics?

A) It guides decision making by all employees in the firm.

B) It does not define the values and principles that are intended to guide organizational decision making.

C) It emphasizes profit over righteousness.

D) It is a cure for all ethical dilemmas.

Answer: A Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 69) In order to be effective, a corporate code of ethics should be designed to function like a ________.

A) business white paper B) moral compass C) project plan D) political treatise Answer: B Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 70) In a world ever sensitive to social and environmental issues, more and more firms are embracing CSR and sustainability. Such firms are more likely than not to ________.

A) develop closer relations with foreign stakeholders to better understand their needs and work jointly toward solutions B) minimize their contribution to the local community in order to maximize profits C) be reluctant to hire managers from around the world D) favor region-specific CSR standards to global CSR standards for foreign operations Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 4-5: Know the role of corporate governance AACSB: Analytical Thinking

20 .

71) The ________ is a policy platform and practical framework for companies committed to sustainability and responsible business practices. It is the world's largest voluntary corporate citizenship initiative, representing thousands of businesses in more than 135 countries.

A) Organization for Economic Cooperation and Development B) United Nations Global Compact C) International Economic Development Council D) Global Reporting Initiative Answer: B Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Application of Knowledge 72) In terms of CSR and sustainability, going ________ means institutionalizing appropriate behavior into the organization's culture so it becomes part and parcel of strategy.

A) wide B) deep C) local D) global Answer: B Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Application of Knowledge 73) In terms of CSR and sustainability, going wide implies ________.

A) a continuous effort to understand how CSR and sustainability affect every aspect of the firm's operations worldwide B) institutionalizing appropriate behavior into the organization's culture so it becomes part and parcel of strategy C) encouraging unstructured learning among employees D) a sustained effort to reduce control mechanisms throughout the organization Answer: A Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Application of Knowledge 74) The five approaches to analyzing ethical dilemmas often lead to similar solutions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning

21 .

75) Corporate codes of conduct emphasize standards related to ethics and social responsibilities.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 76) The utilitarian approach is based on the belief that, regardless of how one deals with an ethical dilemma, human dignity must be preserved.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 77) The five approaches to analyzing ethical problems rarely conflict with each other.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 78) In helping identify ethical problems, the firm's code of conduct should be tailored to match the norms of each individual region from which the firm operates.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 79) The Global Reporting Initiative (www.globalreporting.org) pioneered the development of the most widely used sustainability reporting framework.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Application of Knowledge

22 .

80) Explain the five different approaches to examining ethical problems. What are the difficulties that are likely to arise while using these approaches?

Answer: Scholars have devised five standards that managers can use to examine ethical dilemmas.

According to the utilitarian approach, the best ethical action is the one that provides the most good or does the least harm, or, stated differently, produces the greatest balance of good over harm to customers, employees, shareholders, the community, and the natural environment.

According to the rights approach, the best action protects and respects the moral rights of everyone involved. It is based on the belief that, regardless of how one deals with an ethical dilemma, human dignity must be preserved.

The fairness approach suggests that the best action treats everyone equally and fairly. Workers should be paid a fair wage that provides a decent standard of living, and colleagues and customers should be treated as we would like to be treated.

According to the common good approach, the best action emphasizes the welfare of the entire community or nation. It asks what action contributes most to the quality of life of all affected people. Respect and compassion for all, especially the vulnerable, should be the basis for decision making.

Finally, according to the virtue approach, the best action emphasizes virtues that provide for the full development of our humanity. The most important virtues are truth, courage, compassion, generosity, tolerance, love, integrity, and prudence.

Using these approaches to analyze ethical dilemmas can be challenging because they occasionally conflict with each other. Not everyone agrees on which standard to use in all situations. Different cultures adhere to differing norms of morality and human rights and basic standards or norms of right and wrong. Many ethical dilemmas are complex and proposed approaches may not provide adequate guidance in determining the best course of action.

Nevertheless, each standard is useful because it helps guide ethical behavior in almost any predicament. In most cases, they lead to similar solutions.

Diff: 3: Hard Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning

23 .

81) What is a code of ethics? What function does it serve for businesses?

Answer: A code of ethics is a document that describes the values and expectations that guide decision making by all employees in the firm. The code aims to function like a moral compass for the firm's operations worldwide. It should be designed to ensure any employee can identify ethical problems and distinguish between right and wrong actions. The code should be general enough to apply to any ethical challenge that confronts the firm. It should list the general principles that guide daily decisions and interactions with customers, employees, and partners.

The code should be created by senior management and disseminated throughout the firm. It should be translated into all languages used by the firm in its international operations.

Diff: 2: Moderate Skill: Concept Objective: 4-5: Know the role of corporate governance AACSB: Ethical Understanding and Reasoning 82) When applying the five-step framework for making ethical decisions, managers should, at first, ________.

A) evaluate alternatives B) examine the facts C) recognize the ethical problem D) implement a decision Answer: C Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Analytical Thinking 83) In the five-step framework for making ethical decisions, implementing a course of action implies ________.

A) assessing how effective the decision was B) reviewing any proposed action to ensure it is acceptable according to company policy and the firm's code of conduct C) determining the nature and dimensions of the ethical problem D) creating new rules, processes, or procedures, and putting these into effect Answer: D Diff: 2: Moderate Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Analytical Thinking

24 .

84) When using the five-step framework for making ethical decisions, which of the following steps involves investigating which individuals have a stake in the outcome?

A) examining the facts B) implementing a decision C) evaluating alternatives D) identifying the ethical problem Answer: A Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Analytical Thinking 85) In the five-step framework for making ethical decisions, which of the following approaches to evaluating actions is being used by a manager who questions whether a proposed action embodies character strengths he/she values?

A) rights approach B) virtue approach C) common good approach D) utilitarian approach Answer: B Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Analytical Thinking 86) When making decisions regarding ethical business actions, managers should ________.

A) minimize employee empowerment to achieve greater control B) focus mainly on the company's obligations to produce profits for its shareholders C) place the highest emphasis on enhancing the company's ability to benefit from a common pool of resources D) balance their obligation to shareholders with explicit contributions to the broader public good Answer: D Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning 87) When it comes to ensuring ethical behavior, experienced managers follow a systematic process.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning

25 .

88) Relying on one's instincts is often the best way to identify an ethical problem.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning 89) Acknowledging the presence of an ethical problem is the first step of the framework for arriving at ethical decisions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning 90) Creating alternatives is the last step of the framework for arriving at ethical decisions.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning 91) According to the framework for arriving at ethical decisions, a course of action must be identified as soon as the ethical problem is detected.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning 92) Evaluation of results is the last step of the framework for arriving at ethical decisions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning

26 .

93) In a short essay, explain the five-step framework for making ethical decisions.

Answer: The five-step framework for making ethical decisions proceeds as follows: 1. Identify the problem: The first step is to acknowledge the presence of an ethical problem. Ask questions such as: Is there something wrong? Is an ethical dilemma present? Is there a situation that might harm personnel, customers, the community, or the nation? In international business, recognizing the issue can be tricky because subtleties of the situation may be outside your knowledge or experience. Often, it is best to rely on one's own instincts—if some action feels wrong, it probably is.

2. Examine the facts: Determine the nature and dimensions of the situation. Have all the relevant persons and groups been consulted? What individuals or groups have a stake in the outcome?

How much weight should be given to the interests of each? Do some parties have a greater stake because they are disadvantaged or have a special need? This stage is often challenging because determining specific details and distinguishing facts from irrelevant information can be tricky.

The process often involves interviewing personnel and stakeholders who may offer differing versions or opinions on the issue at hand. The manager's task is to identify and validate the most useful, valid information that makes clear the true nature of the problem.

3. Create alternatives: Identify potential courses of action and evaluate each. Initially, consistent with the pyramid of ethical behavior, one should review any proposed action to ensure it is legal.

If it violates host or home country laws, or conflicts with international treaties, it should be rejected. Next, any proposed action must be reviewed to ensure it is acceptable according to company policy, the firm's code of conduct, or its code of ethics. If discrepancies are found, the action should be rejected. Finally, each proposed action must be evaluated to assess its consistency with accepted ethical standards.

4. Implement course of action: The chosen plan must be put into action. This implies creating new rules, processes, or procedures, and putting these into effect. Implementation is critical because it determines the success or failure of the chosen action. Managers need to be particularly diligent at this stage, to ensure the action is carried out per plan.

5. Evaluate results: Once the decision is implemented, one will need to assess how effective it was. Results evaluation may require collecting, analyzing, and using information to answer questions about the chosen course of action. The goal is to ensure the action achieves its intended effect, and find out if the firm should modify the approach or pursue a different one.

Diff: 3: Hard Skill: Concept Objective: 4-6: Learn how to apply the framework for making ethical decisions AACSB: Ethical Understanding and Reasoning; Written and Oral Communication

27 .

International Business: The New Realities, 5e (Cavusgil) Chapter 5 Theories of International Trade and Investment 1) ________ refers to the superior features of a country that provide unique benefits in global competition, typically derived from either natural endowments or deliberate national policies.

A) Comparative advantage B) Competitive advantage C) Absolute advantage D) Industrial cluster Answer: A Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 2) Competitive advantage refers to the ________.

A) belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports B) superior features of a country that provide unique benefits in global competition, typically derived from either natural endowments or deliberate national policies C) distinctive assets or competencies of a firm that are difficult for competitors to imitate and are typically derived from specific knowledge, capabilities, skills, or superior strategies D) relative absence of restrictions to the flow of goods and services between nations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 3) Which of the following comparative advantages is acquired over time?

A) labor B) innovative capacity C) arable land D) petroleum reserves Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge

1 .

4) Which of the following is a comparative advantage?

A) close relationships with suppliers B) superior strategies of an organization C) entrepreneurial orientation D) the distinct capabilities of an organization Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 5) Which of the following is TRUE with regard to competitive advantage?

A) Competitive advantages are typically derived from deliberate national policies.

B) A competitive advantage is difficult for competitors to imitate.

C) A competitive advantage is also known as a country-specific advantage.

D) Competitive advantage includes inherited resources, such as arable land.

Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 6) 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: 1: Easy Skill: Application Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 7) In recent years, business executives and scholars have used ________ to refer to the advantages possessed by nations and individual firms in international trade and investment.

A) comparative advantage B) country-specific advantage C) competitive advantage D) cost advantage Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge

2 .

8) Which of the following is TRUE with regard to firm-level theories?

A) Firm-level theories are classical theories, widely accepted since the sixteenth century.

B) Firm-level explanations address the question: "How can internationalizing firms gain and sustain competitive advantage?"

C) Firm-level explanations address the question: "Why do nations trade?"

D) Firm-level theories do not address the issue of organizational performance.

Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 9) ________ is the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

A) Positivism B) Imperialism C) Communism D) Mercantilism Answer: D Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 10) ________ says that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports.

A) Absolute advantage theory B) Factor proportions theory C) Mercantilism D) Communism.

Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 11) Nations running a trade surplus ________.

A) rely solely on imports B) openly discourage export C) export more goods than they import D) import more goods than they export Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 3 .

12) Which of the following is a typical outcome of free trade?

A) Unrestricted international trade generally increases the overall prosperity of poor countries.

B) Free trade sustains inflation in developing economies.

C) Domestically produced products tend to be cheaper than imported products.

D) Lower-cost imports cause living standards to deteriorate.

Answer: A Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge Mercantilism Assignment (Scenario) The final assignment for Daniel Parilla's international business class involves taking an in-depth look at one of the six classical perspectives that explain the rationale for international trade.

Daniel plans to present an argument in favor of mercantilism. Daniel will be attempting to convince his classmates that mercantilism leads to national prosperity. Daniel's peers will be given the opportunity to counter his argument.

13) Which of the following, if TRUE, weakens Daniel's proposition?

A) Mercantilism helps curb inflation.

B) Running a trade surplus is beneficial for nations.

C) Restricting imports reduces the choice of products consumers can buy.

D) Mercantilism tends to benefit firms that import.

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 14) Which of the following statements strengthens the proposition that free trade is beneficial to nations?

A) Free trade increases the standard of living by reducing consumer expenses.

B) Imported products tend to be more expensive than domestically produced products.

C) Unrestricted international trade generally lowers the overall prosperity of poor countries.

D) Unrestricted international trade generally boosts inflation in developed economies.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 5-1: Explain why nations trade AACSB: Analytical Thinking

4 .

15) According to the ________, a country benefits by producing only those products in which it has complete advantage or that it can produce using fewer resources than another country.

A) absolute advantage principle B) comparative advantage principle C) factor proportions theory D) international product cycle theory Answer: A Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 16) Which of the following is TRUE about the theory of absolute advantage?

A) The theory accepts the mercantilist idea that international trade is a zero-sum game.

B) The theory approves the objective of national governments to acquire wealth through restrictive trade policies.

C) The theory emphasizes that nations should open their doors to trade so that people can obtain more goods at cheaper rates.

D) The theory measures a nation's wealth by how much gold and silver it has on reserve.

Answer: C Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 17) 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) neomercantilism Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 18) Which of the following is an element of the comparative advantage principle?

A) per unit cost advantage B) relative efficiency of production C) absolute cost of production D) negative balance of trade Answer: B Diff: 2: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Analytical Thinking 5 .

19) The ________ theory states that countries produce and export goods that require resources available in abundance 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: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 20) Which of the following was the analysis revealed by the "Leontief paradox"?

A) that despite having an abundant pool of labor, the U.S. was exporting capital-intensive goods B) that the U.S. often exported labor-intensive goods and imported more capital-intensive goods C) that international trade was simpler than perceived D) that contrary to the popular belief, new products are more likely to originate in developing economies Answer: B Diff: 2: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 21) In his International Product Life Cycle (IPLC) Theory, Raymond Vernon observed that each product and its manufacturing technologies go through three stages of evolution: introduction, maturity, and ________.

A) decline B) standardization C) growth D) diversification Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge

6 .

22) Which of the following is TRUE about the first stage of evolution in the international product life cycle theory?

A) The product enjoys a temporary monopoly at this stage.

B) The product's inventors mass-produce it and seek to export it.

C) The knowledge about how to produce the product is widespread.

D) The competition intensifies at this stage and export orders begin to come from lower-income countries.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 23) Which of the following is the last stage of evolution in the international product life cycle theory?

A) temporary monopoly B) standardization C) decline D) diversification Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 24) The ________ theory states that a country's export eventually becomes its import.

A) competitive advantage B) factor proportions C) international product life cycle D) new trade Answer: C Diff: 2: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 25) The new trade theory is mainly at odds with the ________ theory.

A) international product life cycle B) comparative advantage C) national competitive advantage D) factor proportions Answer: D Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 7 .

26) Which of the following is TRUE with regard to new trade theory?

A) According to new trade theory, achieving economies of scale is not necessary for superior international performance.

B) According to new trade theory, trade is beneficial even for countries that produce only a limited variety of products.

C) New trade theory suggests that export is less beneficial to firms than commonly believed.

D) New trade theory rests solely on the premise that countries differ in the type and quantity of production factors they possess.

Answer: B Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 27) Comparative advantage includes inherited resources, such as labor, climate, arable land, and petroleum reserves.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 28) Modern business executives use the term comparative advantage when referring to the assets of individual firms.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 29) Mercantilism benefits consumers because restricting imports increases the choice of domestic products they can buy.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 30) Adam Smith attacked the mercantilist view by suggesting that nations benefit most from free trade.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge

8 .

31) Free trade produces lower-cost imports that help consumers save money, thereby increasing their living standards.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 32) According to the absolute advantage principle, national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 33) David Ricardo advanced the comparative advantage theory.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 34) According to the comparative advantage principle, what matters most is the absolute cost of production of the product and not the relative efficiency with which a country can produce the product.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 35) Countries can create or acquire comparative advantage.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 36) Early trade theories failed to consider the fact that the primary participants in international trade are individual firms that differ in significant ways from each other.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 9 .

37) According to the factor proportions theory, differences in the quantity of factors of production held by countries does determine international trade patterns.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 38) Distinguish between comparative and competitive advantages. Provide examples.

Answer: Comparative advantage describes superior features of a nation that provide unique benefits in global competition. The features typically are derived from either natural endowments or deliberate national policies. Also known as country-specific advantage, comparative advantage includes inherited resources, such as labor, climate, arable land, and petroleum reserves, such as those enjoyed by countries in the Middle East. Other types of comparative advantages are acquired over time, such as entrepreneurial orientation, availability of venture capital, and innovative capacity.

Competitive advantage refers to assets and capabilities of a company that are difficult for competitors to imitate. Such advantages help the firm enter and succeed in foreign markets.

These capabilities take various forms, such as specific knowledge, competencies, innovativeness, superior strategies, or close relationships with suppliers. Competitive advantage is also known as firm-specific advantage.

Diff: 3: Hard Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 39) Why do nations trade? What would the world be like without international trade?

Answer: Trade enables countries to use their national resources more efficiently through specialization. Trade allows industries and workers to be more productive. These outcomes help keep the cost of many everyday products low, which translates into higher living standards.

Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Even resource-rich countries like the United States would suffer greatly without trade. Some types of food would become unavailable or very expensive. Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, freight would go undelivered, and people would not be able to heat their homes in winter. In short, not only do nations, companies, and citizens benefit from international trade, modern life would be nearly impossible without it.

Diff: 1: Easy Skill: Critical Thinking Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge

10 .

40) In a short essay, explain the absolute advantage principle. Provide an example of the principle at work.

Answer: Smith's absolute advantage principle states that a country benefits by producing primarily those products in which it has an absolute advantage—those that it can produce using fewer resources than any other country. Each country can increase its wealth by specializing in the production of goods in which it has unique advantages, exporting those goods, and then importing other goods in which it has no particular advantage. If every nation follows this practice, each can consume more than it otherwise could, generally at lower cost.

A modern example of the principle at work involves the nations of Japan and Saudi Arabia.

Japan has no natural holdings of oil, but it manufactures some of the best automobiles in the world. On the other hand, Saudi Arabia produces much oil, but it lacks a substantial car industry.

Given the state of their resources, it would be wasteful for each of these countries to attempt to produce both oil and cars. By trading with each other, Japan and Saudi Arabia each employs its respective resources efficiently in a mutually beneficial relationship. Japan gets oil that it refines to power its cars, and Saudi Arabia gets the cars needed by its citizens. Because each country uses its own resources with optimum efficiency and engages in trade, living standards for its citizens are higher than they would be if they had not engaged in trade.

Diff: 2: Moderate Skill: Critical Thinking Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 41) In a short essay, explain the factor proportions theory. How does the theory differ from other theories?

Answer: The factor proportions theory suggests that each country should export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production. For example, the United States produces and exports capital-intensive products, such as pharmaceuticals and commercial aircraft. Argentina produces land-intensive products, such as wine and sunflower seeds.

This view rests on two premises: • Products differ in the types and quantities of factors (labor, natural resources, and capital) required for their production; and • Countries differ in the type and quantity of production factors that they possess.

Factor proportions theory differs somewhat from earlier theories by emphasizing the importance of each nation's factors of production. The theory states that, in addition to differences in the efficiency of production, differences in the quantity of production factors held by countries also determine international trade patterns. In this way, a country that possesses an abundance of a given production factor (e.g., labor, land) obtains a per-unit-cost advantage in the production of goods that intensively use that factor.

Diff: 2: Moderate Skill: Concept Objective: 5-1: Explain why nations trade AACSB: Application of Knowledge 11 .

42) The ________ is one of the three key modern perspectives that helps explain the development of national competitive advantage.

A) factor proportions theory B) absolute advantage principle C) national industrial policy D) comparative advantage of nations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 43) Which of the following statements would be supported by Michael Porter?

A) Economic prosperity depends primarily on inherited national advantages.

B) The presence of strong competitors in a nation hinders national competitive advantage.

C) The presence of highly demanding customers discourages innovation.

D) Rivalry among industry competitors spurs innovation.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Analytical Thinking 44) According to Porter's competitive advantage of nations, ________ refer to the nature of home-market demand for specific products and services.

A) firm strategy, structure, and rivalry B) factor conditions C) demand conditions D) demand liabilities Answer: C Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge

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45) Which of the following is TRUE about the determinants of national competitive advantage?

A) The presence of strong competitors in a nation adversely affects national competitive advantage.

B) The presence of demanding customers pressures firms to innovate faster and produce better products.

C) Demand conditions describe the nation's position in factors of production, such as labor, natural resources, capital, technology, entrepreneurship, and know-how.

D) Vigorous competitive rivalry among firms lowers national innovativeness.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 46) According to Michael Porter, a nation's factor endowments help determine its ________.

A) national competitive advantage B) demand conditions C) negative balance of trade D) comparative advantage Answer: A Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 47) Which of the following is an example of an industrial cluster?

A) the proliferation of counterfeit goods in the global marketspace B) the elite community of industrialists in the United States C) high productivity of workers in South Korea D) the consumer electronics industry in Japan Answer: D Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge

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48) A proactive economic development plan initiated by the government, often in collaboration with the private sector, that aims to develop or support particular industries within the country is referred to as ________.

A) national endowment policy B) national fiscal policy C) national industrial policy D) policy on national industrial relations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 49) Which of the following is TRUE about national industrial policy?

A) It is designed to create monetary and fiscal policies, such as low-interest loans, that provide a stable supply of capital for company investment needs.

B) It explains why nations attempt to run a trade surplus.

C) It demonstrates that what matters is not the absolute cost of production, but rather the relative efficiency with which two countries can produce the products.

D) It underlines the demerits of rigorous educational systems at the precollege level.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge Kazmia Revitalization (Scenario) The leaders of Kazmia, a small nation in the southern hemisphere, have called a meeting to discuss ways to encourage foreign firms to invest in Kazmia. The country was once a leader in diamond mining and exports; however, the diamond mines have been depleted. Meanwhile, the standard of living in Kazmia has plummeted to its lowest levels, and young people are fleeing the country. Government leaders must devise a plan to reinvigorate the once prosperous nation.

50) According to Porter, Kazmia can attain economic prosperity by systematically cultivating new and superior factor endowments through ________.

A) devaluation of the national currency B) redevelopment of the country's depleted diamond mines C) proactive national industrial policy D) the consolidation of national human rights institutions Answer: C Diff: 1: Easy Skill: Critical Thinking Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Analytical Thinking

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51) In the context of national industrial policy, which of the following actions by the government of Kazmia would be the most beneficial for the long-term economic security of the country?

A) increasing the rate of taxation B) devoting resources to improve national infrastructure C) discouraging foreign trade D) discouraging entrepreneurial ventures undertaken by small firms Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 52) Entrepreneurial orientation and lack of venture capital are examples of country-specific advantages.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 53) According to Porter, the competitive advantage of a nation depends on the collective comparative advantages of the country.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 54) Developing new product designs and new ways of organizing or training are some of the ways in which companies innovate.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 55) The innovativeness of a nation's firms has a significant impact on the national competitive advantage.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge

15 .

56) Firm strategy, structure, and rivalry of Michael Porter's diamond model refer to the presence of clusters of suppliers, competitors, and complementary firms that excel in particular industries.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 57) Industrial cluster refers to a concentration of businesses, suppliers, and supporting firms in the same industry at a particular geographic location, characterized by a critical mass of human talent, capital, or other factor endowments.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 58) In today's world, the most important source of national advantage is a country's natural resources.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 59) National industrial policies designed to build new capabilities and encourage the emergence of new industries typically exclude superior educational systems.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge

16 .

60) What is the connection between the competitive advantage of a firm and the competitive advantage of a nation? In a short essay, explain the nature of the relationship between firms and nations.

Answer: According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation's firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages. For example, Britain achieved a substantial national competitive advantage in the prescription drug industry due to its first-rate pharmaceutical firms, such as GlaxoSmithKline and AstraZeneca. The United States has a national competitive advantage in professional services because of such leading firms as Goldman Sachs (investment banking), Marsh & McLennan (insurance), and McKinsey (consulting). The presence of these and numerous other strong services firms, in turn, has provided the United States with overall national competencies in the global services sector.

At both the firm and national levels, competitive advantage and technological advances grow out of innovation. Innovation also promotes productivity. Productivity is measured as output per unit of labor or capital. The more productive a firm is, the more efficiently it uses its resources. The more productive the firms in a nation are, the more efficiently the nation uses its resources. At the national level, productivity is a key determinant of the nation's long-run standard of living and a basic source of national per-capita income growth.

Diff: 2: Moderate Skill: Concept Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Reflective Thinking

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61) In a short essay, explain why the comparative advantage principle is the foundation and overriding justification for international trade. How does this principle support the competitive advantage of nations theory?

Answer: British political economist David Ricardo explained why it is beneficial for two countries to trade even though one of them may have absolute advantage in the production of all products. Ricardo demonstrated that what matters is not the absolute cost of production, but rather the "relative efficiency" with which the two countries can produce the products. Hence, the comparative advantage principle states that it can be beneficial for two countries to trade without barriers as long as one is "relatively" more efficient at producing goods or services needed by the other. The principle of comparative advantage is the foundation and overriding justification for international trade.

This principle supports the competitive advantage of nations theory. Just as scholars recognized that international business is good for individual nations, they increasingly sought to explain how nations can position themselves for international business success. An important contribution came from Professor Michael Porter in his 1990 book, The Competitive Advantage of Nations.

According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation's firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages.

Diff: 2: Moderate Skill: Synthesis Objective: 5-2: Learn about how nations can enhance their competitive advantage AACSB: Application of Knowledge 62) In which of the following stages of the internationalization process is a firm preoccupied with business in its home market?

A) domestic focus B) experimental involvement C) active involvement D) pre-export Answer: A Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge

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63) According to the internationalization process model, a firm advances to the ________ stage by initiating limited international activity, typically in the form of basic exporting.

A) active involvement B) experimental involvement C) pre-export D) domestic focus Answer: B Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 64) Azure Inc. has established a domestic market in clothing and apparel in Thailand and has received orders from abroad. Currently, the firm is investigating the feasibility of undertaking international business. Azure is in the ________ stage of the internationalization process.

A) active involvement B) experimental involvement C) pre-export D) committed involvement Answer: C Diff: 2: Moderate Skill: Application Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 65) In the ________ stage of the internationalization process, a firm targets numerous foreign markets via various entry modes, especially FDI. A) pre-export B) domestic focus C) experimental involvement D) committed involvement Answer: D Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Analytical Thinking

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66) Born global firms are ________.

A) companies that forgo the domestic focus stage of the internationalization process B) companies that focus mainly on running a trade surplus C) young companies that internationalize early in their evolution D) young companies that focus on the ratio of production costs rather than the absolute cost of production Answer: C Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 67) Which of the following explains the expansion of born global firms despite the scarcity of financial, human, and tangible resources?

A) Globalization has made doing international business easier than ever before.

B) a concerted effort by developing nations for running a trade surplus C) product shortages and supply crunch resulting from import restrictions D) rising inflation in developing economies Answer: A Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 68) Current trends suggest that early internationalizing firms will ________.

A) eliminate MNEs worldwide B) be unable to sustain the rigors of international trade C) become even more common in international business D) significantly dampen entrepreneurial efforts of smaller firms Answer: C Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 69) International entrepreneurship is a new field of scholarly inquiry that is a result of the ________ phenomenon.

A) standardization B) industrial cluster C) localization D) born global Answer: D Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 20 .

70) According to the internationalization process model, internationalization takes place in incremental stages over a short time.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 71) In the internationalization process of a firm, the committed involvement stage follows the active involvement stage.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 72) According to the internationalization process model, a firm is likely to receive unsolicited product orders from abroad before advancing to the pre-export stage.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 73) According to the internationalization process model, a firm starts out in a pre-export phase and is preoccupied with business in its home market.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 74) Born global firms are young companies that internationalize early in their evolution.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 75) Born globals have emerged in large numbers for two main reasons: globalization and advances in communication and transportation technologies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-3: Understand why and how firms internationalize AACSB: Application of Knowledge 21 .

76) Explain the limitations of early trade theories. Discuss born global firms.

Answer: While the concepts of absolute advantage and comparative advantage provide the rationale for international trade, they overlook factors that make contemporary trade complex, including: • Government restrictions such as tariffs (taxes on imports), import barriers, and regulations can hamper international trade.

• Just as Japan did after World War II, governments may target and invest in certain industries, build infrastructure, or provide subsidies, all to boost the competitive advantages of homecountry firms.

• Large-scale production in certain industries may provide economies of scale, and therefore lower prices. Economies of scale tend to compensate for weak national comparative advantages.

Similarly, modern communications and the Internet tend to reduce the cost and complexity of cross-border trade.

• The main participants in international trade are individual firms that differ in significant ways.

Far from being homogeneous enterprises, many are highly entrepreneurial and innovative or have access to exceptional human talent, all of which support international business success.

• International shipping and insurance, critical for cross-border trade to take place, are relatively costly and make imported goods more expensive.

• Traded products are not just commodities anymore, such as milk and beef. Today, most traded goods are relatively complex. They are characterized by strong branding and differentiated features.

• Any services, such as banking and retailing, cannot be exported in the usual sense and must be internationalized via foreign direct investment.

What we see today is an increasing number of young, entrepreneurial firms that intently pursue customers in foreign markets from an early age. Scholars and management consultants alike referred to this relatively novel breed of companies as born global firms. Born globals are innovative start-ups that initiate international business soon after their founding. Mojang, maker of the Minecraft video game, is a born global. Established in 2009 in Sweden, the firm found a ready market for its popular video games. Minecraft sold 1 million games within one month of its launch to gamers worldwide. The first Minecraft convention was held in 2011 in Las Vegas, United States, and attended by 4,500 users from 24 countries. Mojang gamers are located in countries around the world. Born global firms are now found in virtually all economies. This has developed despite the scarcity of financial, human, and tangible resources that characterize most new businesses. Born globals have emerged in large numbers for two main reasons: • Globalization has made doing international business easier than ever before, and • Advances in communication and transportation technologies have reduced the costs of operating internationally.

The born global phenomenon has given rise to a new academic field: international entrepreneurship. Current trends suggest that early internationalizing firms will become even more common in international business.

Diff: 3: Hard Skill: Synthesis Objective: 5-3: Understand why and how firms internationalize AACSB: Analytical Thinking 22 .

77) ________ describes the total value of assets that MNEs own abroad via their investment activities.

A) Monopolistic advantage B) FDI stock C) Absolute advantage D) Variable capital Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 78) Which of the following explains how firms can use FDI to gain and sustain competitive advantage?

A) monopolistic advantage theory B) new trade theory C) Leontief paradox D) factor proportions theory Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 79) A ________ is one or more resources or capabilities a company possesses that few other firms have.

A) factor endowment B) country-specific advantage C) comparative advantage D) monopolistic advantage Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

23 .

80) ________ theory suggests that firms using FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors.

A) Factor proportions B) Monopolistic advantage C) Internalization D) Absolute advantage Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 81) Which of the following refers to an important monopolistic advantage for firms?

A) imitable skills B) unskilled labor C) favorable climate D) proprietary technology Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 82) ________ is an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations.

A) Internalization theory B) Monopolistic advantage theory C) Absolute advantage theory D) Dunning's eclectic paradigm Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

24 .

83) Which of the following is a benefit of internalizing foreign-based value-chain activities?

A) The MNE maintains a monopolistic presence in foreign countries.

B) The MNE eliminates employee turnover.

C) The MNE oversees control of foreign operations and ensures product quality.

D) The MNE learns new manufacturing methods from foreign partners.

Answer: C Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 84) The eclectic paradigm specifies three conditions that determine whether a company will internationalize via FDI. Which of the following refer(s) to one of those conditions?

A) entrepreneurial orientation of national enterprises B) FDI stock C) availability of variable capital in the home country D) location-specific advantages Answer: D Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 85) Which of the following is an example of an ownership-specific advantage?

A) the physical assets owned by a firm B) natural resources of the region where the firm operates C) low-cost labor D) inexpensive capital Answer: A Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

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86) Which of the following is an example of a location-specific advantage?

A) managerial skills B) skilled labor C) proprietary knowledge D) the ability to reduce buyer uncertainty Answer: B Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 87) Which of the following refers to a collaborative venture which results in a new legal entity?

A) non—equity-based strategic alliances B) sole proprietorships C) equity-based joint ventures D) not-for-profit organizations Answer: C Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 88) Maxdime Inc. is an international automobile manufacturer that has decided to work on lowcost fuel-efficient motorbikes. Foray Inc., a domestic automobile company based in China, is willing to partner temporarily with the R&D team of Maxdime to design and launch motorbikes specially for the Chinese market. This is an example of ________.

A) product differentiation B) non—equity-based strategic alliance C) sole proprietorship D) entrepreneurial orientation Answer: B Diff: 2: Moderate Skill: Application Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

26 .

89) Which of the following is TRUE about networks?

A) Networks are neither formal organizations with clearly defined hierarchical structures nor impersonal, decentralized markets.

B) In networks, buyers and sellers share no linkages and rarely interact with each other.

C) In a network, continued interaction among partners leads to competition and rivalry that bring down productivity.

D) Networks represent the economically beneficial short-term relationships the firm undertakes with other business entities.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge Earth-Rite Organic Foods (Scenario) Earth-Rite Organic Foods Inc. is an MNE based in Sweden with subsidiaries located in numerous countries around the world. Earth-Rite has annual sales of $10 billion and employs more than 90,000 individuals worldwide. Earth-Rite currently dominates the organic food industry, but competitors are beginning to catch up because of a growing demand for organic produce. Earth-Rite is considering a collaborative venture with a small chain of organic grocery stores located in Brazil, a country where Earth-Rite has no stores.

90) Which of the following would be the most important for Earth-Rite executives to determine when deciding whether to collaborate with the Brazilian grocery store chain?

A) Did employee empowerment lead to increased efficiencies across Earth-Rite's subsidiaries?

B) Would a collaborative venture allow Earth-Rite to internationalize rapidly?

C) What is the density of venture capitalists in Brazil?

D) Is employee empowerment culturally favored in Brazil?

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Analytical Thinking

27 .

91) Which of the following benefits would Earth-Rite most likely accrue if it entered into a joint venture with the Brazilian grocery store chain?

A) Earth Rite would experience high employee turnover in the home country.

B) Earth Rite would be able to eliminate competition in the foreign markets.

C) Earth Rite would be able to completely eliminate the risk of proprietary knowledge infringement abroad.

D) Earth Rite would have access to the foreign partners' know-how.

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Analytical Thinking 92) Earth-Rite executives are considering internalizing operations in Brazil. Which of the following, if TRUE, best supports this plan?

A) The management of Earth-Rite wants to maximize dissemination of proprietary knowledge.

B) Intermediaries and collaborators ensure greater control over domestic operations.

C) By internalizing operations, Earth-Rite will retain control of product quality.

D) Internalizing value-chain activities increases employee turnover.

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Analytical Thinking 93) Relative efficiency of production refers to the total value of assets that MNEs own abroad via their investment activities.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 94) A benefit of the monopolistic advantage theory is that firms can operate foreign subsidiaries more profitably than the local firms that compete in their own markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

28 .

95) Monopolistic advantage theory suggests that firms that use FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 96) According to the internalization theory, firms must reduce control over foreign operations in order to enhance overall effectiveness.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge 97) According to Dunning's eclectic paradigm, proprietary technology, managerial skills, trademarks or brand names, and economies of scale are examples of ownership-specific advantages.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

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98) In a short essay, discuss the internalization theory. Provide examples.

Answer: Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm. Internalizing value-chain activities (instead of outsourcing them to external suppliers) reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. Internalization also gives the firm greater control over its foreign operations.

For example, the MNE might internalize manufacturing by acquiring or establishing its own plant in the foreign market. This enables the firm to produce needed inputs itself rather than sourcing from independent suppliers. Alternatively, it might internalize the marketing function by establishing its own distribution subsidiary abroad, instead of contracting with an independent foreign distributor to handle its marketing in the foreign market. The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself.

Procter & Gamble initially considered exporting when it entered Japan. With exporting, P&G would have had to contract with an independent Japanese distributor to handle warehousing and marketing of its soap, diapers, and other products. Instead, P&G chose to enter Japan via FDI for three reasons: (1) trade barriers imposed by the Japanese government, (2) the strong market power of local Japanese firms, and (3) the risk of losing control over its proprietary knowledge.

It established its own marketing subsidiary and national headquarters in Tokyo.

Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

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99) In a short essay, explain mercantilism and the monopolistic advantage theory.

Answer: Mercantilism refers to the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports. Mercantilism explains why nations attempt to run a trade surplus—that is, to export more goods than they import. Many people believe that running a trade surplus is beneficial. They subscribe to a view known as neo-mercantilism. Labor unions (which seek to protect home-country jobs), farmers (who want to keep crop prices high), and certain manufacturers (those that rely heavily on exports) all tend to support neo-mercantilism.

However, mercantilism tends to harm firms that import, especially those that import raw materials and parts used in the manufacture of finished products. Mercantilism also harms consumers because restricting imports reduces the choice of products they can buy. Product shortages that result from import restrictions may lead to higher prices—that is, inflation. When taken to an extreme, mercantilism may invite "beggar thy neighbor" policies, promoting the benefits of one country at the expense of others. By contrast, free trade is a generally superior approach.

Monopolistic advantage refers to resources or capabilities a company holds that few other firms have. Monopolistic advantage theory suggests that firms that use FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors. This gives them a degree of monopoly power over local firms in foreign markets.

This monopolistic advantage should be specific to the MNE itself, such as a proprietary technology or a brand name, rather than to the locations where it does business. Monopolistic advantage theory argues that at least two conditions should be present for a firm to target a foreign market over its home market. First, returns accessible in the foreign market should be superior to those available in the home market. This would provide the firm with incentives to expand abroad to take advantage of its monopoly power. Second, returns achievable in the foreign market should be superior to those earned by existing domestic competitors in the foreign market. This would give the firm an opportunity to earn monopoly profits that domestic firms in the foreign market cannot imitate.

Diff: 3: Hard Skill: Critical Thinking Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

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100) What is a collaborative venture? In a short essay, describe the two major types of international collaborative ventures.

Answer: A collaborative venture is a form of cooperation between two or more firms. There are two major types: Equity-based joint ventures that result in a new legal entity; and non—equitybased (project-based) strategic alliances in which firms partner, for a finite duration, to collaborate on projects related to R&D, design, manufacturing, or any other value-adding activity. In both cases, collaborating firms pool resources and capabilities and generate synergy.

In other words, collaboration allows the partners to carry out activities that each might be unable to perform on its own. Collaborating firms share the risk of their joint efforts, which reduces vulnerability for any one partner.

Diff: 2: Moderate Skill: Concept Objective: 5-4: Explain the strategies internationalizing firms use to gain and sustain competitive advantage AACSB: Application of Knowledge

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International Business: The New Realities, 5e (Cavusgil) Chapter 6 Political and Legal Systems in National Environments 1) Which of the following terms indicates potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments?

A) commercial risk B) currency risk C) cross-cultural risk D) country risk Answer: D Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 2) Country risk is considered similar to ________.

A) political risk B) commercial risk C) currency risk D) cross-cultural risk Answer: A Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 3) An individual from a country with a high degree of political risk would most likely be from ________.

A) Canada B) Singapore C) Iraq D) Malaysia Answer: C Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge

1 .

4) An individual from a country with a low degree of political risk would most likely be from ________.

A) Venezuela B) Canada C) Zimbabwe D) Iraq Answer: B Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 5) Which of the following best explains why India was once characterized by high country risk?

A) Taxes and financial incentives benefited Indian businesses over foreign firms.

B) Indian business leaders distrusted most European corporations.

C) The government of India imposes many restrictions on imports and inward foreign investment.

D) Indian leaders feared the modern influences of American firms.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Analytical Thinking 6) Which of the following characterizes country risk?

A) The political and legal systems of adjacent nations greatly impact the country risk of nations that host foreign firms.

B) Country risk will change only after the creation of laws and regulations that affect foreign firms.

C) A nation's country risk level remains fairly constant until the election and installation of a new political leader.

D) Country risk is always present, but its nature and intensity vary over time and from country to country.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge

2 .

7) ________ are the people and organizations that support the political system and receive government resources.

A) Subsidiaries B) Regional trade blocs C) Constituents D) Shell corporations Answer: C Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 8) Which of the following statements is TRUE of country risk?

A) Its nature remains constant over time and across nations.

B) Its intensity seldom varies over time and across nations.

C) It is present only in poor nations.

D) It is always present.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 9) The immediate cause of country risk is a legal or political factor.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 10) Trade unions are not a part of a country's legal system.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Application of Knowledge 11) Country risk can be potentially present in all nations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Analytical Thinking

3 .

12) Describe how the political and legal systems of a host country can both harm and benefit a foreign firm.

Answer: The political and legal systems of a host country can be both beneficial and harmful to a foreign firm. Firms can benefit from preferential subsidies, government incentives, and protection from competition that reduce business costs and influence strategic decision making.

Numerous governments encourage local MNE investment by offering tax holidays and cash incentives to employ local workers.

On the other hand, political or legislative actions can harm business interests. Laws may be unexpectedly strict or result in unintended consequences. Many laws favor host-country interests, that is, interests in foreign countries where the firm has direct operations.

Diff: 2: Moderate Skill: Concept Objective: 6-1: Describe political and legal environments in international business AACSB: Analytical Thinking 13) Describe the two elements that contribute to country risk. Provide examples of countries with high and low country risk, and explain the reasons for these two distinctions.

Answer: The two elements that determine a nation's country risk are the political system and legal system. A political system refers to a set of formal institutions that constitute government.

It includes legislative bodies, political parties, lobbying groups, and trade unions. A political system also defines how these groups interact with each other. A legal system refers to a system for interpreting and enforcing the laws. The laws, regulations, and rules establish norms for conduct. A legal system incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as protecting intellectual property, and taxing economic output. Political and legal systems are both dynamic and constantly changing. The two systems are interdependent because changes in one affect the other.

Country risk can be high or low depending on the political and legal systems of a country. In the wake of war and the emergence of a new political regime, Iraq is one of the riskiest countries.

Zimbabwe is risky because of ongoing corruption (bribery and fraud) and political turmoil. By contrast, Singapore and Canada are characterized with low country risk.

Country risk may affect all firms in a country equally or only a subset. For example, unrest in Zimbabwe has tended to affect all firms in that country. By contrast, in 2017 the Venezuelan government seized a factory owned by General Motors despite the presence of several competitors in Venezuela, such as Toyota and Fiat Chrysler.

Diff: 2: Moderate Skill: Critical Thinking Objective: 6-1: Describe political and legal environments in international business AACSB: Analytical Thinking

4 .

14) Describe country risk and discuss how political and legal systems contribute to country risk.

Explain the differences between political systems and legal systems in your answer.

Answer: Country risk is exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments. Also referred to as political risk, it is one of four major types of international business risks. While the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments. Government intervention, protectionism, and barriers to trade and investment are particularly notable in international business.

Mismanagement or failure of the national economy can lead to financial crises, recessions, market downturns, currency crises, and inflation. Such events usually arise from business cycles, poor monetary or fiscal policies, a defective regulatory environment, or imbalances in the underlying economic fundamentals of the host country.

Political or legislative actions can inadvertently harm business interests, such as laws that are unexpectedly strict or result in unintended consequences. Many laws favor host-country interests—that is, interests in foreign countries where the firm has direct operations.

A political system is a set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The principal functions of a political system are to provide protection from external threats, establish stability based on laws, and govern the allocation of valued resources among the members of a society. A political system also defines how these groups interact with each other.

Each country's political system is unique, having evolved within a particular historical, economic, and cultural context. Political systems are also constantly evolving in response to constituent demands and the evolution of the national and international environment.

Constituents are the people and organizations that support the political system and receive government resources.

A legal system is a system for interpreting and enforcing laws. Laws, regulations, and rules establish norms for conduct. A legal system incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as taxing economic output and protecting intellectual property and other company assets. Political and legal systems are dynamic and constantly changing. The two systems are interdependent—changes in one affect the other. Adverse developments in political and legal systems give rise to country risk. They can result from installation of a new government, shifting values or priorities in political parties, initiatives developed by special interest groups, and the creation of new laws or regulations.

Gradual change is easier for the firm to accommodate, while sudden change is harder to deal with and poses greater risk to the firm.

Unfavorable developments give rise to new conditions that may threaten the firm's products, services, or business activities. For example, a new import tariff may increase the cost of a key component used to manufacture a product. A modification in labor law may alter the hours the firm's employees are allowed to work. The installation of a new political leader may lead to government takeover of corporate assets.

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Country risk is always present, but its nature and intensity vary over time and from country to country.

Diff: 3: Hard Skill: Synthesis Objective: 6-1: Describe political and legal environments in international business AACSB: Analytical Thinking 15) The three major types of current political systems are ________.

A) authoritarianism, socialism, and democracy B) socialism, democracy, and monarchy C) authoritarianism, liberalism, and fascism D) democracy, republicanism, and oligarchy Answer: A Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 16) Religion-based authoritarian states are called ________.

A) theocratic B) secular C) socialistic D) atheistic Answer: A Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 17) A ________ government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry.

A) democratic B) socialistic C) mixed D) authoritarian Answer: D Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge

6 .

18) Which of the following countries is considered a social democracy?

A) Belgium B) Canada C) India D) Libya Answer: C Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 19) ________ fundamental tenet is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit.

A) Socialism's B) Democracy's C) Authoritarianism's D) Theocracy's Answer: A Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 20) Which of the following is the underlying principle of socialism?

A) The welfare of individuals far outweighs the welfare of society.

B) Collective welfare of people outweighs the welfare of the individual.

C) Capital and wealth should be vested in the hands of few and used primarily as a means of profit.

D) The state should protect itself from individual and group interests.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 21) Which form of government is characterized by private property rights and limited government?

A) autocratic B) democratic C) socialist D) authoritarian Answer: B Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 7 .

22) What has been the impact of social democracy on international business relations in some European countries?

A) Regulations have forced foreign firms to invest elsewhere.

B) Politically conscious foreign firms have begun investing in socialist nations.

C) Low income tax rates have encouraged an influx of FDI. D) Political stability has decreased the country risk of socialist nations.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 23) Which of the following is an element of socialism often found in democratic societies?

A) government subsidies for foreign firms B) government sponsored businesses C) government intervention in the affairs of individuals and firms D) government control of information technology Answer: C Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 24) Which of the following pairs of nations are on opposite ends of the political freedom scale?

A) New Zealand and Chile B) China and Vietnam C) Japan and South Korea D) Cuba and Sweden Answer: D Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 25) Which of the following countries is considered a mixed economy?

A) Norway B) Russia C) Vietnam D) China Answer: A Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge

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World Conference (Scenario) At a world conference to be conducted in Tokyo, representatives from nearly every country in the world will gather to discuss issues related to international trade. Representative A is from a authoritarian state. Representative B is from a socialist nation. Representative C hails from a democratic society.

26) Which of the following countries would Representative A most likely be from?

A) Denmark B) Zimbabwe C) Sweden D) Australia Answer: B Diff: 3: Hard Skill: Application Objective: 6-2: Understand political systems AACSB: Application of Knowledge 27) Representative B is most likely from ________.

A) New Zealand B) North Korea C) China D) Canada Answer: C Diff: 3: Hard Skill: Application Objective: 6-2: Understand political systems AACSB: Application of Knowledge 28) Representative C is most likely from ________.

A) Canada B) Sudan C) North Korea D) Zimbabwe Answer: A Diff: 3: Hard Skill: Application Objective: 6-2: Understand political systems AACSB: Application of Knowledge 29) Most democracies include elements of socialism.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Analytical Thinking

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30) A authoritarian government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 31) Authoritarianism's fundamental tenet is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 32) Socialism is based on a collectivist ideology that assumes that the collective welfare of people outweighs the welfare of the individual.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 33) Democracy is characterized by unlimited governmental interference.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 34) Democracy is closely associated with openness.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 35) A market economy is closely associated with capitalism.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge

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36) In a market economy, the government can never intervene to address the inequalities that market economies sometimes produce.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge

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37) Provide an overview of authoritarianism, socialism and democracy. Provide examples of nations which adhere to each system.

Answer: a. Under authoritarianism, the state attempts to regulate most aspects of public and private behavior. Well-known authoritarian states from the past include China (1949—1980s) and the Soviet Union (1918—1991). Authoritarianism centralizes power in the government. The state may seek to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry. Often, the entire population is mobilized in support of the state and a political or religious ideology. Authoritarian states are generally either theocratic (religionbased) or secular (non—religion-based). Usually there is a state party led by a dictator, such as Kim Jong-un in North Korea. Party membership is mandatory for those seeking to advance within the social and economic hierarchy. Power typically is maintained by means of secret police, propaganda disseminated through state-controlled mass media, regulation of free discussion and criticism, and/or the use of terror tactics. Authoritarian states usually do not tolerate activities by individuals or groups such as churches, labor unions, or political parties that are not directed toward the state's goals. b. Socialism's fundamental tenet is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit. It is based on a collectivist ideology in which the collective welfare of people is believed to outweigh the welfare of the individual.

Socialists argue that capitalists earn a disproportionate amount of society's wealth relative to workers. They believe that because the pay of workers does not reflect the full value of their labor, government should control the basic means of production, distribution, and commercial activity. Socialism has manifested itself in much of the world as social democracy and has been most successful in Western Europe. It has played a major role in the political systems of large countries such as Brazil and India, and today remains a viable system in much of the world. In social democratic regimes, such as Italy and Norway, government does intervene in the private sector and business activities. c. Democracy has become the prevailing political system in much of the advanced economies, such as the United States and Japan. Democracy is characterized by two key features: private property rights and limited government. Private property rights means that an individual is able to own property and assets, and to increase one's asset base by accumulating private wealth.

Property includes tangibles such as land and buildings, as well as intangibles such as stocks, contracts, patent rights, and intellectual assets. Limited government means that the government performs only essential functions that serve all citizens, such as national defense, maintaining law and order, diplomatic relations, and the construction of infrastructure such as roads, schools, and public works. State control and interference in the economic activities of private individuals or firms is minimal.

Diff: 2: Moderate Skill: Synthesis Objective: 6-2: Understand political systems AACSB: Application of Knowledge

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38) Explain the connection between democracy and economic freedom. What are some of the characteristics associated with political and economic freedom?

Answer: Compared to authoritarianism and socialism, democracy is associated with greater economic freedom and higher economic living standards. Economic freedom flourishes when governments support the institutions necessary for that freedom, such as freely operating markets and rule of law. The more political freedom in a nation, the more its citizens enjoy economic freedom.

Political freedom is characterized by free and fair elections; the right to form political parties; fair electoral laws; existence of a parliament or other legislative body; freedom from domination by the military, foreign powers, or religious hierarchies; and self-determination for cultural, ethnic, and religious minorities. Economic freedom relates to the extent of government interference in business, the strictness of the regulatory environment, and the ease with which commercial activity is carried out according to market forces.

Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge 39) Explain command economies. Provide examples of nations that exhibit characteristics of command economies and why command economies are no longer common today.

Answer: Command economies are also known as centrally planned economies. A command economy exists when the state is responsible for making all decisions with respect to what goods and services the country produces, the quantity of their production, the prices at which they are sold, and the manner of their distribution. The state owns all productive wealth, land, and capital.

The government allocates resources based on which industries they want to develop. A large bureaucracy with central planners is created to manage the nation's affairs.

But while command economies were common in the 20th century, they proved so inefficient that most have gradually died out. Central planning is less accurate than market forces in synchronizing supply and demand. For example, shortages were so common in the Soviet Union that people often waited in lines for hours to buy basic goods like sugar and bread. Today, countries such as Russia and China still exhibit some characteristics of command economies.

Diff: 2: Moderate Skill: Concept Objective: 6-2: Understand political systems AACSB: Application of Knowledge

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40) Which of the following is characteristic of an effective legal system?

A) a stable and rigid framework of rules and norms across nations B) systematically enforced laws and regulations C) political involvement in business transactions D) universal emphasis on religious law over common and civil law Answer: B Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 41) Which of the following terms refers to the existence of a legal system based on clear rules and fair enforcement?

A) conciliation B) arbitration C) culture of law D) rule of law Answer: D Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 42) The U.S. Securities and Exchange Act encourages confidence in business transactions by ________.

A) protecting public companies from government scrutiny B) evaluating the inner workings of privately owned firms C) requiring public companies to frequently disclose their financial indicators to investors D) shielding investors from bankruptcy and excessive taxation Answer: C Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 43) The U.S. legal system is largely based on ________.

A) common law B) social law C) civil law D) theocratic law Answer: A Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge

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44) The most widespread form of religious law is ________ law.

A) Hindu B) Jewish C) Islamic D) Catholic Answer: C Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 45) Islamic law is based on the ________.

A) Bible B) Bhagavad Gita C) Tanakh D) Qur'an Answer: D Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 46) Which of the following legal systems is largely practiced in the Middle East?

A) religious B) socialist C) civil D) common Answer: A Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 47) Which of the following legal systems is based on legal precedents and past practices set by the nation's courts through interpretation of statutes, legislation, and past rulings?

A) common B) religious C) socialist D) civil Answer: A Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge

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48) Common law can best be described as a system ________.

A) designed from political and legislative regulations B) derived from religious beliefs and moral values C) based on an all-inclusive system of laws that have been codified D) based on legal precedents set by the nation's courts Answer: D Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge Common and Civil Law (Scenario) Zane Computer Corporation is considering the possibility of building a new manufacturing facility in a foreign country in order to lower labor and production costs. The legal department of Zane has raised some issues regarding two countries that 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. Zane's legal experts must determine which system would be the most beneficial to Zane in the long term.

49) Which of the following statements is most likely applicable to Country B? A) Local and national legislatures pass laws.

B) Ethics and morality are the underlying tenets.

C) an all-inclusive system of law that has been codified D) detailed contracts that clearly state all potential contingencies Answer: D Diff: 3: Hard Skill: Application Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 50) Which of the following statements supports Country B over Country A? A) Rules and principles form the starting point for legal reasoning and administering justice.

B) The flexibility of common law allows for judicial interpretation in unique cases.

C) Common law nations administer justice based on a structured set of rules.

D) Laws are primarily legislative in origin and based on laws passed by national and local legislatures.

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 6-3: Understand legal systems AACSB: Application of Knowledge

16 .

51) Which of the following supports Country A over Country B? A) Contractual noncompliance provisions are broader in scope.

B) Contracts are so detailed that they are expensive to draft.

C) higher flexibility compared to other legal systems D) Judges confer with legislators on international business issues.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 6-3: Understand legal systems AACSB: Analytical Thinking 52) Market forces and free trade are encouraged in authoritarian countries.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 53) Common law originated in the United States.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 54) Common law is more flexible than the other legal systems.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 55) Islamic law is also known as code law.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 56) Common law is primarily judicial in origin and based on court decisions.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge

17 .

57) Civil law is primarily legislative in origin and based on laws passed by national and local legislatures.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 58) Islamic law governs relationships among people, between people and the state, and between people and a supreme being.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 59) Compare and contrast common law with civil law specifically as the two systems relate to international business.

Answer: Both common law and civil law systems originated in Western Europe and represent the common values of Western Europeans. A key difference between the two systems is that common law is primarily judicial in origin and based on court decisions, whereas civil law is primarily legislative in origin and based on laws passed by national and local legislatures.

Common law and civil law pose various differences for international business.

With regard to patents and other types of intellectual property, ownership is determined by registration under civil law. Under common law, ownership of intellectual property is determined by prior use. With a civil law system, contracts tend to be briefer because many potential problems are already covered in the civil code. In a common law system, contracts tend to be very detailed, with all possible contingencies spelled out. It is generally more expensive to draft a contract in a common law system than in a civil law system.

Diff: 2: Moderate Skill: Critical Thinking Objective: 6-3: Understand legal systems AACSB: Application of Knowledge

18 .

60) Describe the similarities and differences of common law and civil law, and explain how inadequate or underdeveloped legal systems pose a risk for international businesses.

Answer: Also known as case law, common law is a legal system that originated in England and spread to Australia, Canada, the United States, and former members of the British Commonwealth. The basis of common law is tradition, previous cases, and legal precedents set by the nation's courts through interpretation of statutes, legislation, and past rulings. The national legislature in common-law countries (such as Parliament in Britain and Congress in the United States) holds ultimate power to pass or amend laws. In the United States, because the constitution is difficult to amend, the Supreme Court and even lower courts have much flexibility to interpret the law. Because common law is more open to interpretation by courts, it is more flexible than other legal systems. Thus, judges in a common-law system have substantial power to interpret laws based on the unique circumstances of individual cases, including commercial disputes and other business situations.

Also known as code law, civil law is found in France, Germany, Italy, Japan, Turkey, and Latin America. Its origins go back to Roman law and the Napoleonic Code. Civil law is based on an all-inclusive system of laws that have been "codified"; the laws are clearly written and accessible. It is divided into three separate codes: commercial, civil, and criminal. Civil law is considered complete as a result of catch-all provisions found within the law. Rules and principles form the starting point for legal reasoning and administering justice. The codified rules emerge as specific laws and codes of conduct produced by a legislative body or some other supreme authority.

Both common law and civil law systems originated in western Europe and represent the common values of western Europeans. A key difference between the two systems is that common law is primarily judicial in origin and based on court decisions, whereas civil law is primarily legislative in origin and based on laws passed by national and local legislatures. Common law and civil law pose various differences for international business.

Inadequate or underdeveloped legal systems pose a risk for international business. Just as laws and regulations can lead to country risk, an underdeveloped regulatory environment or poor enforcement of existing laws can pose challenges for the firm. Safeguards for intellectual property are often inadequate. Regulations to protect intellectual property may exist on paper but not be adequately enforced. When an innovator invents a new product, develops new computer software, or produces some other type of intellectual property, another party can copy and sell the innovation without acknowledging or paying the inventor. As reported in the opening vignette, Russia's legal framework is relatively weak and inconsistent. Russian courts lack substantial experience ruling on commercial and international affairs. Due to the unpredictable and potentially harmful legal environment, Western firms frequently abandon joint ventures and other business initiatives in Russia.

19 .

Inadequate legal protection is most common in developing economies, but it can be a factor in developed economies as well. The most recent global financial crisis was precipitated, in part, by insufficient regulation in the financial and banking sectors of the United States, Europe, and other areas. Government authorities have been considering how regulatory structures can be revamped to provide a sounder footing for connecting global savers and investors, as well as a reliable method for dealing with financial instability. Regulators seek to expand the reach of regulation, provide new means to increase transparency and information flows, and find ways to harmonize regulatory policies and legal frameworks across national borders. Banks and other financial institutions are revising disclosure rules to make information more specific and consistent. Some experts suggest the financial crisis is not proof that more regulation is needed.

Rather, they argue for more intelligent regulation, better enforcement of existing regulation, and better supervision of national financial institutions.

Diff: 3: Hard Skill: Synthesis Objective: 6-3: Understand legal systems AACSB: Application of Knowledge 61) The World Bank is classified as a(n) ________.

A) international organization B) regional economic bloc C) special interest group D) competing firm Answer: A Diff: 1: Easy Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 62) The European Union is classified as a(n) ________.

A) international organization B) regional trade organization C) special interest group D) competing firm Answer: B Diff: 1: Easy Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge

20 .

63) The Organization for Economic Co-operation and Development (OECD) is classified as a(n) ________.

A) international organization B) regional trade organization C) special interest group D) competing firm Answer: C Diff: 1: Easy Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 64) Governments regulate international business activity through a complex system of institutions, agencies, and public officials. Agencies that possess such powers in the United States include the U.S. Trade Representative and the International Trade Administration (www.ita.doc.gov). In Canada these functions are handled by ________.

A) Canada's Ministry of Foreign Affairs B) World Trade Organization C) North American Free Trade Agreement D) Public Works and Government Services Canada Answer: A Diff: 3: Hard Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 65) Which of the following is a typical complaint of host-country competitors against foreign firms?

A) Foreign firms burden the host country with infrastructure requirements.

B) Foreign firms do not have to obey host-country laws and regulations.

C) Foreign firms receive financial support from host-country governments.

D) Foreign firms lure host-country workers to the home-country businesses.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 66) Of the five types of participants that are active in transforming political and legal systems, the private sector is the most important.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge

21 .

67) Special interest groups serve the interests of particular countries, industries, or causes.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 68) Government agencies, institutions, and public officials influence the manner in which foreign firms conduct business.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 69) The European Union impacts international trade and business because of its ability to enact and enforce laws and regulations.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Application of Knowledge 70) Explain the purpose of special interest groups. How do these organizations affect international business? Provide examples to support your answer.

Answer: Special interest groups engage in political activity to advance specific causes, ranging from labor rights to environmental protection. They often influence national political processes and produce outcomes with far-reaching consequences for business. Many groups target particular industries and affect individual firms accordingly. Special interest groups operate not only in host countries but also in the home country.

For example, In China, activists are pressuring the government to reduce pollution. Rapid industrialization—especially in the form of factory output, burning coal, and motor vehicles— has contaminated China's air, water, and soil.

Diff: 2: Moderate Skill: Concept Objective: 6-4: Describe the participants in political and legal systems AACSB: Analytical Thinking

22 .

71) ________ is the seizure of corporate assets without compensation.

A) Confiscation B) Expropriation C) Embargo D) Sanction Answer: A Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 72) ________ is seizure of corporate assets with compensation.

A) Confiscation B) Expropriation C) Embargo D) Sanction Answer: B Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Analytical Thinking 73) A(n) ________ is a type of trade penalty imposed on one or more countries by one or more other countries.

A) confiscation B) expropriation C) subsidy D) sanction Answer: D Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 74) A(n) ________ is an official ban on exports to or imports from a particular country, in order to isolate it and punish its government.

A) embargo B) confiscation C) expropriation D) sanction Answer: A Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge

23 .

75) A(n) ________ is a voluntary refusal to engage in commercial dealings with a nation or a company.

A) expropriation B) sanction C) boycott D) confiscation Answer: C Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 76) Boycotts and protests have the potential to harm businesses by ________.

A) preventing businesses from shipping their products to foreign markets B) lost sales and increased costs for public relations activities C) destroying the ability of all local firms to carry on normal business operations D) raising concerns about a firm's foreign operations by initiating lawsuits Answer: B Diff: 2: Moderate Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 77) Expropriation is the term used to describe a host-country government seizing the assets of a foreign corporation and providing compensation in return.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 78) Confiscation is the seizure of assets with compensation.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 79) Nationalization describes government seizure of an entire industry, with or without compensation.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge

24 .

80) An embargo is an official ban on exports to or imports from a particular country.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-5: Identify the types of country risk produced by political systems AACSB: Application of Knowledge 81) Describe the methods used by governments to seize the assets of foreign firms. How would proactive environmental scanning mitigate this risk?

Answer: Governments seize corporate assets in three major ways: confiscation, expropriation, and nationalization. Confiscation refers to the seizure of foreign assets without compensation.

Expropriation refers to the seizure of corporate assets with compensation. Nationalization generally refers to government takeover of an entire industry, with or without compensation.

Proactive environmental scanning can mitigate the risks of these types of seizure. Anticipating country risk requires advance research. Initially, managers develop a comprehensive understanding of the political and legal environment in target countries. They then engage in scanning to assess potential risks and threats to the firm. Scanning allows the firm to improve practices in ways that conform with local laws and political realities and to create a positive environment for business success.

One of the best sources of intelligence in the scanning process is employees working in the host country. They are knowledgeable about evolving events and can evaluate them in the context of local history, culture, and politics. Embassy and trade association officials regularly develop and analyze intelligence on the local political scene. Some consulting firms specialize in country-risk assessment and provide guidelines for appropriate strategic responses. Once the firm has researched the political climate and contingencies of the target environment, it develops and implements strategies to facilitate effective management of relations with policymakers and other helpful contacts in the host country. The firm then takes steps to minimize its exposure to country risks that threaten its performance.

Diff: 3: Hard Skill: Synthesis Objective: 6-5, 6-7: Identify the types of country risk produced by political systems, Know about managing country risk AACSB: Analytical Thinking 82) The United States restricts foreign investments that might affect ________.

A) immigration reforms B) labor negotiations C) national security D) manufacturing technologies Answer: C Diff: 1: Easy Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 25 .

83) Which of the following laws is responsible when Germany largely prohibits comparative advertising, in which a product is promoted as superior to a competing brand?

A) environmental laws B) product and liability laws C) foreign investment laws D) marketing and distribution laws Answer: D Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 84) Income repatriation laws affect MNEs that earn profits in foreign countries by ________.

A) enforcing strict stipulations on cross-border transactions and joint ventures B) limiting the amount of net income or dividends that can be transferred to the home-country headquarters C) restricting the amount of earned income being reinvested in the foreign facility D) imposing restrictions on the distribution of products from the foreign facility Answer: B Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 85) Which type of laws refer to the application of home-country laws to persons or conduct outside national borders? In most cases, such laws are intended to prosecute individuals or firms located abroad for some type of wrongdoing.

A) anti-boycott regulations B) extraterritoriality C) transparency D) anti-dumping policies Answer: B Diff: 1: Easy Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge

26 .

Host-Country Legal System (Scenario) Super Sports, a large sporting goods chain based in Australia, wants to open a store in Norway.

With stores around the world, Super Sports executives realize that legal systems vary from country to country. Having never opened a store in Norway, the Super Sports legal team is investigating Norwegian laws to determine how they would impact the corporation and its ability to do business in Norway.

86) Which of the following is the most important issue to consider when determining the best entry strategy for Super Sports?

A) What are the regulations regarding income repatriation?

B) What type of promotion and advertising is prohibited?

C) What are the restrictions on inward foreign direct investment?

D) Is the recycling of product packaging mandatory?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Analytical Thinking 87) Which of the following supports a decision in favor of Super Sports opening a store in Norway?

A) MNEs may transfer profits back to the home country without restriction.

B) The opening of warehouse-style stores requires the approval of local retailers.

C) Product injury cases generally rule in favor of plaintiffs regardless of evidence.

D) Advertising and marketing of particular products are banned under local distribution laws.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Analytical Thinking 88) Which of the following would most likely oppose the opening of a Super Sports store in Norway?

A) labor unions B) local sports retailers C) international banks D) local sports enthusiasts Answer: B Diff: 2: Moderate Skill: Application Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Analytical Thinking

27 .

89) Manufacturers face legal penalties and lawsuits under product safety and liability laws if they are responsible for damage, injury, or death caused by defective products.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 90) A foreign firm's entry strategy, operations, and performance are often dictated by foreign investment laws.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 91) Governments grant patents and provide other types of protections for intellectual property.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 92) What are some of the risks for firms involved with international e-commerce?

Answer: Firms that undertake e-commerce in countries with weak laws face considerable risk.

In China, for example, the government has developed legislation to ensure security and privacy due to the rapid spread of the Internet and e-commerce. Many consumer-privacy laws have yet to be enacted, and progress has been delayed on the development of methods to protect private data from criminal or competitive eyes. Protections for online contracting methods have been implemented with the recent adoption of e-signature laws. Emergent e-signature laws offer protections for online contracting.

Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Information Technology

28 .

93) Explain extraterritoriality. Provide examples to illustrate how extraterritoriality affects international business.

Answer: Extraterritoriality refers to the application of home-country laws to persons or conduct outside national borders. In most cases, the laws are applied in an attempt to prosecute individuals or firms located abroad for some type of wrongdoing.

Examples of extraterritoriality in international business abound. A French court ordered Yahoo! to bar access to Nazi-related items on its website in France and to remove related messages and images from its sites accessible in the United States. In 2018, the European Union fined Qualcomm $1.2 billion for unfair and anti-competitive practices because, for several years, Qualcomm had paid billions of dollars to Apple to ensure Apple would use only Qualcomm's chipsets in the production of iPhones and iPads. In effect, the European Union fined Qualcomm for unfairly favoring Apple, at the expense of Intel, even though all three companies are based in the United States. Businesses generally oppose extraterritoriality because it tends to increase the costs and uncertainty of operating abroad.

Diff: 3: Hard Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge 94) What is transparency? Explain how transparency varies around the world.

Answer: Transparency is the degree to which firms regularly reveal substantial information about their financial condition and accounting practices. The timing and transparency of financial reporting vary widely around the world. For example, in the United States, public firms are required to report financial results to stockholders and to the Securities and Exchange Commission every quarter. In much of the world, however, financial statements may come out once a year or less often, and they often lack transparency. Not only does greater transparency improve the environment for business decision making, it also improves the ability of citizens to hold companies accountable.

Diff: 2: Moderate Skill: Concept Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Application of Knowledge

29 .

95) Explain why contract laws can represent a country risk arising from the host-country legal environment, and explain the three approaches firms typically employ to settle international contractual disputes.

Answer: Governments in host countries can impose a variety of legal stipulations on foreign companies doing business there, and contract laws represent one form of country risk.

International contracts attach rights, duties, and obligations to the contracting parties. Contracts are used in five main types of business transactions: (1) sale of goods or services, especially large sales, (2) distribution of the firm's products through foreign distributors, (3) licensing and franchising—that is, a contractual relationship that allows a firm to use another company's intellectual property, marketing tools, or other assets for a fee, (4) FDI, especially in collaboration with a foreign entity, in order to create and operate a foreign subsidiary, and (5) joint ventures and other types of cross-border collaborations.

Convergence toward an international standard for international sales contracts is occurring. The United Nations instituted the Convention on Contracts for the International Sale of Goods (CISG), a uniform text of law for international sales contracts. More than 75 countries are now party to the CISG, covering about three-quarters of all world trade. Unless excluded by the express terms of a contract, the CISG is deemed to supersede any otherwise applicable domestic law(s) regarding an international sales transaction.

A legal contract spells out the rights and obligations of each party and is especially important when relationships go awry. Contract law varies widely from country to country, and firms must adhere to local standards. For example, a Canadian firm doing business in Belgium generally must comply with the laws of both Belgium and Canada, as well as with the evolving laws of the European Union.

International contractual disputes arise from time to time, and firms generally employ any of three approaches for resolving them: conciliation, arbitration, and litigation. Conciliation is the least adversarial method. It is a formal process of negotiation with the objective to resolve differences in a friendly manner. The parties in a dispute employ a conciliator, who meets separately with each in an attempt to resolve their differences. Parties can also employ mediation committees—groups of informed citizens—to resolve civil disputes. Arbitration is a process in which a neutral third party hears both sides of a case and decides in favor of one party or the other, based on an objective assessment of the facts. Compared to litigation, arbitration saves time and expense, while maintaining the confidentiality of proceedings. Arbitration is often handled by supranational organizations, such as the International Chamber of Commerce in Paris or the Stockholm Chamber of Commerce. Litigation is the most adversarial approach and occurs when one party files a lawsuit against another in order to achieve desired ends. Litigation is most common in the United States; most other countries favor arbitration or conciliation.

Diff: 3: Hard Skill: Synthesis Objective: 6-6: Identify the types of country risk produced by legal systems AACSB: Analytical Thinking

30 .

96) Which of the following statements is TRUE about managing country risk?

A) Scanning allows a firm to assess the potential country risk.

B) Firms can reduce country risk by entering markets in collaboration with a foreign partner.

C) Country risk can seldom be anticipated by advance research.

D) Home-country employees are the best source for anticipating country risk in host countries.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 6-7: Know about managing country risk AACSB: Application of Knowledge 97) Which of the following would be the best way for a manager to learn about country risks in a host country?

A) analysis of records of competitor firms B) allying with qualified local partners abroad C) host country nationals working abroad D) employees working in the home country Answer: B Diff: 2: Moderate Skill: Concept Objective: 6-7: Know about managing country risk AACSB: Application of Knowledge 98) Which of the following is the LEAST adversarial method of resolving a contractual dispute?

A) trial B) arbitration C) litigation D) conciliation Answer: D Diff: 1: Easy Skill: Concept Objective: 6-7: Know about managing country risk AACSB: Application of Knowledge

31 .

Common and Civil Law (Scenario) Zane Computer Corporation is considering the possibility of building a new manufacturing facility in a foreign country in order to lower labor and production costs. The legal department of Zane has raised some issues regarding two countries that 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. Zane's legal experts must determine which system would be the most beneficial to Zane in the long term.

99) Which of the following questions would be more important for Zane legal experts to consider before recommending Country A or 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 Zane for its manufacturing practices?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 6-7: Know about managing country risk AACSB: Analytical Thinking 100) One of the best sources of intelligence in the scanning process is employees working in foreign countries targeted for market entry Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 6-7: Know about managing country risk AACSB: Application of Knowledge

32 .

International Business: The New Realities, 5e (Cavusgil) Chapter 7 Government Intervention and Regional Economic Integration 1) ________ is(are) at odds with free trade, the unrestricted flow of products, services, and capital across national borders.

A) Lower-cost imports B) Government intervention C) FDI D) Factors of production Answer: B Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 2) Which of the following situations is an example of country risk?

A) Fiesta Corp. is an automobile manufacturer based in the U.S. The company's negotiation attempts with China to open a manufacturing factory in Beijing failed owing to cultural differences.

B) Frostees Inc. is a food and beverages company based in the U.S. Its attempt to set up an outlet in Thailand failed primarily owing to a misinterpretation of the memorandum of understanding by a potential business partner in Thailand.

C) Alpha Corp., a rice manufacturer based in Pakistan, suffered losses when the U.S. Department of Commerce decided to impose tariffs on the import of paddy rice to avoid competition for the domestic industry.

D) Tamiaz LLC is a U.S.-based manufacturer of clothing with outlets in China, Vietnam, and India. The company incurred a loss due to delayed payments from India owing to fluctuations in the currency exchange rates.

Answer: C Diff: 2: Moderate Skill: Application Objective: 7-1: Understand the nature of government intervention AACSB: Analytical Thinking 3) ________ are checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs.

A) Nontariff trade barriers B) Customs C) Quotas D) Subsidies Answer: B Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge

1 .

4) What type of tariff is assessed as a percentage of the value of the imported product?

A) specific tariff B) protective tariff C) reverse tariff D) import tariff Answer: D Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 5) Financing or other resources that a government grants to a firm or group of firms, to ensure their survival or success is referred to as a ________.

A) premium B) subsidy C) quota D) grant Answer: B Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Analytical Thinking 6) A quantitative restriction on specific imports from a specific country for a set period of time is referred to as ________.

A) tariff B) quota C) investment barrier D) country risk Answer: B Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Analytical Thinking

2 .

7) Which of the following is an example of nontariff trade barrier?

A) Gayle Inc. is a U.S.-based retailer that imports cosmetic products manufactured in Thailand.

These products pass through U.S. customs and are subject to a 5 percent import duty.

B) The U.S. imports chocolates manufactured in Belgium that cost $65 a box with taxes.

C) The U.S. Department of Commerce announced that white sugar imports will be limited to 7,500 million tons.

D) Spices imported from India to the U.S. for sale in the domestic market are subject to a 10 percent import duty.

Answer: C Diff: 2: Moderate Skill: Application Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 8) Protectionist policies may also lead to ________.

A) price inflation B) increased choices for buyers C) easy availability of products D) high incentive to improve quality Answer: A Diff: 2: Moderate Skill: Application Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 9) Governments impose offensive barriers to ________.

A) protect domestic industries B) promote national security C) pursue strategic or public policy objectives such as increasing employment D) safeguard the interests of special interest groups Answer: C Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 10) Governments impose defensive barriers to ________.

A) safeguard industries B) promote national security C) protect workers D) all of the these Answer: D Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 3 .

11) Imposing trade restrictions such as tariffs or quotas ________.

A) increases the availability of raw materials B) increases the availability of products sold in the home market C) reduces the availability of products sold in the home market D) decreases the cost of products sold in the home market Answer: C Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 12) Which of the following is TRUE with regard to protectionism?

A) It increases the availability of raw materials for domestic industries.

B) It decreases the cost of products sold in the home market.

C) It increases the availability of products sold in the home market.

D) It can trigger retaliation from foreign governments, which reduces sales prospects for exports.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 13) Which of the following statements is TRUE about protection of an infant industry?

A) Governments can impose temporary trade barriers on foreign imports to ensure that young firms gain a large share of the domestic market.

B) Such protection is easy to remove.

C) Protected companies become more efficient and produce products with lower prices.

D) Protecting infant industries rarely allows countries to develop a modern industrial sector.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 14) ________ refers to a tax imposed on imported products, effectively increasing the cost of acquisition for the customer.

A) Quota B) Tariff C) Embargo D) Subsidy Answer: B Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge

4 .

15) Governments impose export controls for the purpose of ________.

A) improving available opportunities for domestic sales B) boosting derived demand in the domestic market C) preventing the export of certain products to certain countries D) boosting derived demand in foreign markets Answer: C Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 16) Which of the following is an example of an offensive rationale for government intervention?

A) The government of Erbia imposes trade restrictions on the export of plutonium to certain countries.

B) The government of Berylia imposes a trade barrier to curtail the import of low-priced products from manufacturers in the developed economies.

C) The government of Argonia imposes investment barriers to safeguard special interest groups.

D) The government of Rhodia requires foreign companies to enter its huge markets through joint ventures with local firms.

Answer: D Diff: 2: Moderate Skill: Application Objective: 7-1: Understand the nature of government intervention AACSB: Analytical Thinking 17) The Chinese government's policy of requiring foreign firms to enter the Chinese market via joint ventures is intended to ________.

A) limit the amount of FDI B) create jobs for Chinese workers C) protect China's national security D) stimulate foreign investment Answer: B Diff: 1: Easy Skill: Application Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 18) Offensive rationales for government intervention fall into two categories: national strategic priorities and increasing employment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge

5 .

19) A nontariff trade barrier is a government policy, regulation, or procedure that impedes trade through means other than explicit tariffs.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Analytical Thinking 20) Protectionism refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 21) Governments impose defensive barriers to pursue strategic or public policy objectives, such as increasing employment or generating tax revenues.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 22) Governments often impose trade barriers to restrict imports of products to protect infant industries, Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 23) Countries with many high-tech or high value-adding industries, such as information technology, pharmaceuticals, car manufacturing, or financial services, create better jobs and higher tax revenue.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge

6 .

24) In a short essay, describe two methods of government intervention and explain the four major defensive motives for government intervention.

Answer: Government intervention is often motivated by protectionism. Protectionism refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Protectionism is typically manifested by tariffs, nontariff barriers such as quotas, and arbitrary administrative rules designed to discourage imports. A tariff is a tax imposed by government on imported products, effectively increasing cost of acquisition for the customer. A nontariff trade barrier is a government policy, regulation, or procedure that impedes trade through means other than explicit tariffs.

Four major defensive motives are particularly relevant: protection of the nation's economy, protection of an infant industry, national security, and national culture and identity.

1. PROTECTION OF THE NATIONAL ECONOMY: Proponents argue that firms in advanced economies cannot compete with those in developing countries that employ low-cost labor.

Protectionists demand trade barriers to curtail the import of low-priced products. The action is intended to protect jobs and ensure higher wages for workers in advanced economies.

2. PROTECTION OF AN INFANT INDUSTRY: In an emerging industry, companies are often inexperienced and lack the latest technologies and know-how. They also may lack the large size typical of competitors in established industries abroad. A very young industry may need temporary protection from foreign competitors. A government may impose temporary trade barriers on foreign imports to ensure that young firms gain a large share of the domestic market.

3. NATIONAL SECURITY: Countries impose trade restrictions on products viewed as critical to national defense and security. These include military technology and computers that help maintain domestic production in security-related products.

4. NATIONAL CULTURE AND IDENTITY: Governments may impose trade barriers to restrict imports of products or services seen to threaten such national assets. In the United States, authorities opposed Japanese investors' purchase of the Seattle Mariners baseball team because it is viewed as part of the national heritage. France does not allow significant foreign ownership of its TV stations because of concerns about foreign influence on French culture.

Diff: 2: Moderate Skill: Synthesis Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge

7 .

25) In a short essay, describe the negative effects to the economy when a government intervenes in international trade.

Answer: Critics counter that protectionism is at odds with the theory of comparative advantage, according to which nations should engage in more international trade, not less. Trade barriers interfere with country-specific specialization of labor. When countries specialize in the products that they can produce best and then trade for the rest, they perform better in the long run, delivering superior living standards to their citizens. Critics also charge that blocking imports reduces the availability and increases the cost of products sold in the home market. Industries cannot access all the input products they need. Finally, protection can trigger retaliation, whereby foreign governments impose their own trade barriers, reducing sales prospects for exporters.

Diff: 2: Moderate Skill: Concept Objective: 7-1: Understand the nature of government intervention AACSB: Application of Knowledge 26) The United Nations estimated that trade barriers alone cost developing countries ________ in lost trading opportunities with developed countries every year.

A) $100 billion B) $200 billion C) less than $100 billion D) more than $500 billion Answer: D Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 27) Typically, administrative and bureaucratic procedures ________.

A) speed up the investment activities of firms B) hinder the activities of importers C) boost investment activities D) harm late importers Answer: B Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

8 .

28) ________ refers to the requirement that firms include a minimum percentage of locally sourced inputs in the production of given products or services.

A) Quotas B) Regulations and technical standards C) Local content requirements D) Administrative and bureaucratic procedures Answer: C Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 29) In Cadmia, foreign-owned automobile manufacturing companies must be managed by a Cadmian national and most board members must be Cadmian citizens. This exemplifies ________.

A) FDI and ownership restrictions B) administrative and bureaucratic procedures C) regulations and technical standards D) antidumping duty Answer: A Diff: 2: Moderate Skill: Application Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 30) Products are classified under about 8,000 different unique codes in the ________ schedule, a standardized system used worldwide.

A) harmonized (code) tariff B) protective tariff C) revenue tariff D) specific tariff Answer: A Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

9 .

31) A flat fee or fixed amount per unit imposed by a government on an imported product is called a(n) ________.

A) ad valorem tariff B) specific tariff C) protective tariff D) export tariff Answer: B Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 32) Under the ________, Canada, Mexico, and the United States have eliminated nearly all tariffs on product imports from each other.

A) APEC B) FTAAP C) GATT D) NAFTA Answer: D Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 33) ________ represent a major driver of market globalization.

A) Continued reductions in trade restrictions B) Export controls C) Import controls D) Prohibitive tariffs Answer: A Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 34) Nontariff trade barriers have increased in popularity partly because they ________.

A) generate profits for foreign firms B) are easier to conceal from the WTO C) restrict trade by imposing direct tax D) have been fairly successful in eliminating smuggling along international borders Answer: B Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

10 .

35) An import license refers to a ________.

A) tax charged on an imported product whose price is below usual prices in the local market B) list of complex procedures imposed on importers that hinder trade and investment C) complicated system of establishing quotas D) formal permission to import Answer: D Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 36) A(n) ________ is a tax that is assessed as a percentage of the value of the imported product.

A) specific tariff B) export tariff C) subsidy D) ad valorem tariff Answer: D Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 37) Restrictions on the outflow of hard currency from a country or on the inflow of foreign currencies is called ________.

A) antidumping duty B) currency appreciation C) currency control D) currency depreciation Answer: C Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 38) Governments sometimes retaliate against subsidies by imposing ________, tariffs on products imported into a country to offset subsidies given to producers or exporters in the exporting country.

A) local content requirements B) investment incentives C) countervailing duties D) antidumping duties Answer: C Diff: 1: Easy Skill: Application Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 11 .

39) Which of the following may allow a manufacturer to practice dumping?

A) countervailing duties B) subsidies C) currency control D) import license Answer: B Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 40) ________ are used when governments impose limits, under which firms agree to limit exports of certain products.

A) Voluntary export restraints B) Antidumping duties C) Countervailing duties D) Quotas Answer: A Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 41) Governments support domestic industries by ________.

A) incentivizing dumping B) increasing the costs of production of domestic industries C) alienating domestic industries D) adopting procurement policies that restrict purchases to home-country suppliers Answer: D Diff: 2: Moderate Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

12 .

Cotton Quota (Scenario) Cotton growers in the nation of Zanzi export nearly 700,000 bales of cotton every year. Zanzi is the home country for a fabric manufacturing facility that exports high-quality cotton fabric around the world. The government imposed a quota of 1 million bales of cotton that can be imported into Zanzi every year. The local fabric manufacturer is lobbying the government to remove the quota on cotton.

42) Which of the following questions would be most important for government officials to evaluate when considering the controversy over the cotton quota?

A) What would be the short-term effect of additional agricultural quotas?

B) What other nations utilize agricultural quotas and what are the effects?

C) Does the government of Zanzi impose heavy duties on dumping?

D) What will be the long-term effect of the cotton quota on the Zanzi economy?

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 43) Which of the following most supports abolishing the cotton quota over maintaining it?

A) The cotton growers have a competitive edge over foreign cotton growers, and they are profitable.

B) The fabric manufacturer, a prime contributor to the nation's annual revenue, can earn better returns by shifting to another country that does not impose cotton quotas.

C) A competing fabric manufacturer is considering opening a production facility in Zanzi.

D) The price of cotton fabric has remained unchanged over the last decade.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 7-2: Know the instruments of government intervention AACSB: Analytical Thinking 44) Which of the following best supports maintaining the existing cotton quota?

A) Zanzi cotton growers are protected from cheaper cotton imports.

B) Zanzi cotton growers have an advantage when they export cotton fabric to other countries.

C) The local fabric manufacturer pays high prices for cotton.

D) The local fabric manufacturer uses mostly Zanzi-grown cotton.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 7-2: Know the instruments of government intervention AACSB: Analytical Thinking

13 .

45) A import tariff aims to protect domestic industries from foreign competition.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 46) A countervailing duty is a tariff on products imported into a country to offset subsidies given to producers or exporters in the exporting country.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 47) FDI and ownership restrictions increase the competitive advantage of foreigners while diminishing that of the local firms.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 48) Currency controls can help conserve especially valuable currency or reduce the risk of capital flight.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 49) Subsidies may allow a manufacturer to practice dumping—that is, to charge an unusually low price for exported products.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 50) Dumping violates WTO rules because it amounts to unfair competition.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

14 .

51) Import tariffs are a principal instrument of trade intervention. In a short essay, briefly describe the five main types of import tariffs.

Answer: The most common type of tariff is the import tariff, a tax levied on imported products.

Import tariffs are usually ad valorem. They are assessed as a percentage of the value of the imported product. In other cases, a government may impose a specific tariff. A specific tariff is a flat fee or fixed amount per unit of the imported product. It is based on weight, volume, or surface area, such as barrels of oil or square meters of fabric. A revenue tariff is intended to raise money for the government. A tariff on cigarette imports, for example, produces a steady flow of revenue. A protective tariff aims to protect domestic industries from foreign competition. A prohibitive tariff is one so high that no one can import any of the items.

Diff: 2: Moderate Skill: Synthesis Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge 52) In a short essay, explain why agricultural subsidies have been implemented in Europe and the United States. What are the criticisms to these subsidies?

Answer: In Europe and the United States, governments frequently provide agricultural subsidies to supplement the income of farmers and help manage the supply of agricultural commodities.

The U.S. government grants subsidies for more than two dozen commodities, including corn, soybeans, wheat, cotton, and rice. In Europe, the Common Agricultural Policy (CAP) is a system of subsidies that represents about 40 percent of the EU's budget, amounting to tens of billions of euros annually. The CAP and U.S. subsidies have been criticized for promoting unfair competition and high prices because they tend to prevent developing economies from exporting their agricultural goods to Europe and the United States. Subsidies encourage overproduction and therefore lower food prices at home, making agricultural imports from developing countries less competitive.

Diff: 1: Easy Skill: Concept Objective: 7-2: Know the instruments of government intervention AACSB: Application of Knowledge

15 .

53) Explain how quotas work as an instrument of government intervention. What are voluntary export restraints? How can firms use foreign trade zones as a strategy to manage government intervention?

Answer: Quotas restrict the physical volume or value of products that firms can import into a country. In a classic type of quota, the U.S. government imposed an upper limit of roughly 2 million pounds on the total amount of sugar that can be imported into the United States each year. Sugar imports that exceed this level face a tariff of several cents per pound. The upside is that U.S. sugar producers are protected from cheaper imports, giving them a competitive edge over foreign sugar producers. The downside is that U.S. consumers and producers of certain types of products, such as Hershey's and Coca-Cola, pay more for sugar. It also means companies that manufacture products containing sugar may save money by moving production to countries that do not impose quotas or tariffs on sugar.

Governments can impose voluntary quotas, under which firms agree to limit exports of certain products. These are also known as voluntary export restraints, or VERs. For example, import quotas in the European Union led to an impasse in which millions of Chinese-made garments piled up at ports and borders in Europe. The EU impounded the clothing because China had exceeded the voluntary import quotas it had negotiated with the EU. The action created hardship for European retailers, who had ordered their clothing stocks several months in advance.

Firms can use foreign trade zones as a strategy to manage government intervention. In an effort to create jobs and stimulate local economic development, governments establish foreign trade zones (also known as free trade zones or free ports). A foreign trade zone (FTZ) is an area within a country that receives imported goods for assembly or other processing and subsequent reexport. Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the products made from them, enter into the non-FTZ commercial territory of the country where the FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into finished products, which are then re-exported. Alternatively, firms may use FTZs to manage inventory of parts, components, or finished products that the firm will eventually need at some other location. In the United States, for example, Japanese carmakers store vehicles at the port of Jacksonville, Florida, without having to pay duties until the cars are shipped to U.S. dealerships.

Diff: 3: Hard Skill: Synthesis Objective: 7-2: Know the instruments of government intervention AACSB: Analytical Thinking 54) What is the primary ethical concern regarding the import of products from poor countries?

A) Higher tariffs hurt poor nations more than developed nations.

B) Nations lacking economic freedom cannot afford to export.

C) Emerging nations use government intervention to protect domestic industries.

D) Lack of subsidies adversely affects poor countries.

Answer: A Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 16 .

55) In 1930 the United States passed the Smoot-Hawley Tariff Act, which ________.

A) opened foreign markets for U.S. agricultural products B) led to the consolidation of the U.S. banking system C) instituted strict regulations to contain intellectual property theft D) raised U.S. tariffs to near-record highs of more than 50 percent Answer: D Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 56) Which of the following Asian countries had launched an ambitious program of industrialization and export-led development that contributed to its rise from poverty in the 1940s to one of the world's wealthiest countries by the 1980s?

A) Indonesia B) China C) Japan D) India Answer: C Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 57) Which of the following statements is TRUE of NAFTA? A) It introduced a common currency for trade between the U.S., Mexico, and Canada.

B) It overrode the local content requirements and rules of origin for products manufactured in the member nations.

C) It eliminated all tariffs and nontariff trade barriers on goods originating from within North America.

D) It called for stringent rules regarding government procurement practices and the imposition of countervailing duties.

Answer: C Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 58) The imposition of trade barriers by governments is a major factor in the growth of developing nations and global commerce.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge

17 .

59) Subsidies can help counterbalance harmful consequences that disproportionately affect the poor.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 60) Export-led development refers to government policies that impose high tariffs and quotas on imports from the developed world.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 61) Countries as diverse as Chile, Hungary, Turkey, and South Korea have liberalized their previously protected markets, lowering trade barriers and subjecting themselves to greater competition from abroad.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 62) The General Agreement on Tariffs and Trade (GATT) and now the World Trade Organization (WTO) was organized to reduce trade barriers, because high tariffs inhibited free trade and economic growth.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge 63) The global recession and financial crisis that began in 2008 arose largely from inadequate regulation and insufficient enforcement of current regulations in the banking and finance sectors.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Application of Knowledge

18 .

64) In a short essay, explain how the GATT changed international trade.

Answer: In 1947, 23 nations signed the General Agreements on Tariffs and Trade (GATT), the first global effort to systematically reduce trade barriers worldwide. The organization proved extremely effective and resulted in the greatest global decline in trade barriers in history. The GATT created: (1) a process to reduce tariffs through continuous negotiations among member nations; (2) an agency to serve as a watchdog over world trade; and (3) a forum for resolving trade disputes.

The GATT introduced the concept of most favored nation (renamed normal trade relations in 1998), according to which each signatory nation agreed to extend the tariff reductions covered in a trade agreement with a trading partner to all other countries. Thus, a concession to one country became a concession to all.

Diff: 2: Moderate Skill: Concept Objective: 7-3: Explain the evolution and consequences of government trade intervention AACSB: Analytical Thinking 65) Which of the following entry strategies do most firms use in the absence of high tariffs?

A) FDI B) licensing C) joint ventures D) exporting Answer: D Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 66) Which of the following is a method used by some manufacturers to avoid paying high tariffs?

A) assemble products in the target market B) produce a large number of less expensive items in the target market C) employ highly skilled workers in the export location regardless of the cost D) ship products to fewer international locations Answer: A Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge

19 .

67) Firms use foreign trade zones to ________.

A) consolidate market monopolies B) assemble foreign dutiable materials and components into finished products, which are then reexported C) create employment opportunities for the local people D) meet quota demands established by the government Answer: B Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 68) A ________ is an area within a country that receives imported goods for assembly or other processing and subsequent re-export.

A) single market B) trade bloc C) foreign trade zone D) common market Answer: C Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge Minimizing Trade Barriers (Scenario) National Appliance Corporation (NAC) needs to build a new manufacturing facility to meet the increasing demand for professional-grade appliances. NAC managers are considering building the facility in Mexico but are hesitant because of the high tariffs involved. Another possible location for the facility is India; however, the country also imposes high tariffs. Wherever NAC builds a plant, parts will need to be imported from other nations.

69) Which of the following would be most important for NAC managers to consider while taking a decision in favor of building a facility in Mexico or India?

A) Has NAC engaged in dumping in the past?

B) How would appliance parts and finished products be categorized when passing through customs?

C) Is employee empowerment culturally favored in Mexico and India?

D) What entry strategies are available in both countries that would allow NAC to minimize import barriers?

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Analytical Thinking

20 .

70) Given the high trade barriers in Mexico, the management of NAC is most likely to consider ________ to be an inappropriate entry strategy.

A) exporting B) FDI C) joint ventures D) licensing Answer: A Diff: 2: Moderate Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 71) Which of the following must NAC ensure in order to reduce exposure to trade barriers?

A) reduced production B) strong emphasis on quality C) accurate product classification D) obtaining patents for inventions Answer: C Diff: 2: Moderate Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Analytical Thinking 72) Tariffs and most nontariff trade barriers impact importers by making products more expensive.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 73) If high tariffs are present, managers may consider other strategies, such as FDI, licensing, and joint ventures that allow the firm to operate directly in the target market, avoiding import barriers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 74) Tariffs are taxes that will increase the price to consumers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 21 .

75) Maquiladoras refer to export-assembly plants in northern Mexico along the U.S. border that produce components and typically finished products destined for the United States on a tarifffree basis.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 76) One approach for reducing exposure to trade barriers is to have exported products classified in the appropriate harmonized product code.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 77) Obtaining economic development incentives from host- or home-country governments increases the cost of trade and investment barriers.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Application of Knowledge 78) What is a foreign trade zone (FTZ)? In a short essay, explain how FTZs are utilized by firms.

Answer: A foreign trade zone is an area within countries that receives imported goods for assembly or other processing and re-export. Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the products made from them, enter into the non-FTZ commercial territory of the country where the FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into finished products, which are then re-exported.

Alternatively, firms may use FTZs to manage inventory of parts, components, or finished products that the firm will need eventually at some other location. Some firms obtain FTZ status within their own physical facilities. In the United States, for example, Japanese carmakers store vehicles at the Port of Jacksonville, Florida. The cars remain in the Jacksonville FTZ without having to pay duties until they are shipped to U.S. dealerships.

Diff: 2: Moderate Skill: Concept Objective: 7-4: Describe how firms can respond to government trade intervention AACSB: Analytical Thinking

22 .

79) A formal arrangement between two or more countries to reduce or eliminate tariffs is known as a ________.

A) quota arrangement B) free trade agreement C) memorandum of association D) memorandum of understanding Answer: B Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 80) Which of the following terms refers to two or more geographically connected nations in pursuit of free trade relations?

A) grey market B) trading diaspora C) economic bloc D) business strategic unit Answer: C Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 81) Members of ________ allow free trade between members and agree to adopt common tariffs and non-tariff barriers that are applied to imports from nonmember countries.

A) free trade areas B) customs unions C) the NAFTA D) the EFTA Answer: B Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 82) The ________ is the simplest and most common level of regional integration.

A) common market B) political union C) customs union D) free trade area Answer: D Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 23 .

83) Which of the following exemplifies local content requirements?

A) Titania charges a 27 percent tariff on imported dairy products.

B) At least 40 percent of the value of all computers assembled in Titania must be from parts or other inputs produced in Titania.

C) Titania bans imports of firearms.

D) Titania imposes extensive inspections and bureaucratic procedures on the import of alcoholic beverages.

Answer: B Diff: 2: Moderate Skill: Application Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 84) NAFTA is an example of which of the following levels of regional integration?

A) free trade area B) political union C) economic union D) common market Answer: A Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 85) Which of the following is an example of a customs union?

A) NAFTA B) ASEAN C) MERCOSUR D) EFTA Answer: C Diff: 2: Moderate Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 86) The ________ is the level of regional integration that remains an ideal and is yet to be achieved.

A) free trade area B) common market C) political union D) customs union Answer: C Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 24 .

87) NAFTA is a treaty entered into by Canada, Mexico, and the United States.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 88) MERCOSUR, an economic bloc in Latin America, is an example of an economic union.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Application of Knowledge 89) The level of integration of a customs union is greater than that of a free trade area.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-5: Understand regional integration and economic blocs AACSB: Analytical Thinking

25 .

90) Briefly describe the five levels of economic integration.

Answer: There are five possible levels of regional integration. We can think of these levels as a continuum, with economic interconnectedness progressing from a low level of integration—the free trade area—through higher levels to the most advanced form of integration—the political union. The political union represents the ultimate degree of integration among countries, which no countries have yet achieved. The free trade area is the simplest and most common arrangement, in which member countries agree to gradually eliminate formal barriers to trade in products and services within the bloc. Each member country maintains an independent international trade policy with countries outside the bloc. The second level of regional integration is the customs union. It is similar to a free trade area except that member states harmonize their external trade policies and adopt common tariff and nontariff barriers on imports from nonmember countries. In the third stage of regional integration, member countries establish a common market (also known as a single market), in which trade barriers are reduced or removed, common external barriers are established, and products, services, and factors of production such as capital, labor, and technology are allowed to move freely among the member countries. Like a customs union, a common market also establishes a common trade policy with nonmember countries. An economic union is the fourth stage of regional integration, in which member countries enjoy all the advantages of early stages but also strive to have common fiscal and monetary policies. At the extreme, each member country adopts identical tax rates. The bloc aims for standardized monetary policy, which requires establishing fixed exchange rates and free convertibility of currencies among the member states, in addition to allowing the free movement of capital. This standardization helps eliminate discriminatory practices that might favor one member state over another. Through greater mobility of products, services, and production factors, an economic union enables firms within the bloc to locate productive activities in member states with the most favorable economic policies.

Diff: 3: Hard Skill: Synthesis Objective: 7-5: Understand regional integration and economic blocs AACSB: Analytical Thinking 91) Which of the following economic blocs includes Switzerland as a member country?

A) EU B) EFTA C) CAN D) APEC Answer: B Diff: 1: Easy Skill: Concept Objective: 7-6: Identify the leading economic blocs AACSB: Application of Knowledge

26 .

92) Which of the following is responsible for determining the admission of new member countries to the EU? A) the Council of the European Union B) the European Parliament C) the European Court of Justice D) the European Commission Answer: A Diff: 1: Easy Skill: Concept Objective: 7-6: Identify the leading economic blocs AACSB: Application of Knowledge 93) Members of ________ benefited the most from the maquiladora program.

A) NAFTA B) EFTA C) EU D) MERCOSUR Answer: A Diff: 1: Easy Skill: Concept Objective: 7-6: Identify the leading economic blocs AACSB: Application of Knowledge 94) Which of the following has occurred as a result of NAFTA? A) Workers at maquiladoras have instigated union strikes.

B) Mexico's per-capita income has risen substantially.

C) Canadian exports to Europe and Asia have doubled.

D) Foreign investors have been replaced by U.S. firms.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 7-6: Identify the leading economic blocs AACSB: Application of Knowledge 95) Harmonization of standards is one of the steps taken by the EU to become an economic union.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-6: Identify the leading economic blocs AACSB: Application of Knowledge

27 .

96) What has NAFTA accomplished for its members?

Answer: Launched in 1994, NAFTA consists of Canada, Mexico, and the United States. It is the most significant economic bloc in the Americas and comparable to the EU in size. Initially, the accord increased market access between Canada, Mexico, and the United States. It eliminated tariffs and most nontariff barriers for products and services traded in the bloc and made it possible for member-country firms to bid for government contracts in all three countries.

NAFTA also established trade rules and uniform customs procedures and regulations. The members agreed to rules for investment and intellectual property rights. NAFTA also provides for dispute settlement in such areas as investment, unfair pricing, labor issues, and the environment. Since the bloc's inception, Canada and Mexico have become the most important export markets of the United States, accounting for about one-third of U.S. exports. In the threeyear period through 2012, the largest increase in U.S. export growth stemmed from exports to Canada and Mexico. In the 1980s, Mexico's tariffs averaged 100 percent and gradually decreased over time, eventually disappearing under NAFTA. Annual NAFTA foreign investment in Mexico rose dramatically as U.S. and Canadian firms invested in their southern neighbor.

Following NAFTA's passage, Mexico's per-capita income has risen substantially. Mexico is now Latin America's wealthiest country in per-capita income terms.

Diff: 2: Moderate Skill: Synthesis Objective: 7-6: Identify the leading economic blocs AACSB: Analytical Thinking 97) Nations pursuing regional integration seek to ________.

A) increase the scale of the marketplace for firms inside the economic bloc B) help firms increase the scale of operations and enhanced productivity C) attract direct investment from outside the bloc D) all of the these Answer: D Diff: 1: Easy Skill: Concept Objective: 7-7: Understand and explain the advantages and implications of regional integration AACSB: Application of Knowledge 98) Which of the following is the most likely reason for the establishment of the European Community?

A) broaden the power of communism within East Germany B) create strict tariffs for trade and international business C) combine forces against the powerful former Soviet Union D) establish judicial procedures to handle trade violators Answer: C Diff: 2: Moderate Skill: Concept Objective: 7-7: Understand and explain the advantages and implications of regional integration AACSB: Application of Knowledge

28 .

99) Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 7-7: Understand and explain the advantages and implications of regional integration AACSB: Application of Knowledge 100) Describe four advantages of regional integration. Provide an example to illustrate each point.

Answer: a. Expand market size—Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc. For example, while Belgium has a population of just 10 million, the absence of trade barriers with other countries in the EU gives Belgian firms easier access to a total market of roughly 500 million buyers. b. Achieve scale economies and enhanced productivity—Expansion of market size within an economic bloc gives member country firms the opportunity to increase the scale of operations in both production and marketing. This leads to greater concentration and increased efficiency in these activities. For instance, where a German firm may be only moderately efficient when producing 10,000 units of a good strictly for the German market, it greatly increases its efficiency by producing 50,000 units for the much larger EU market. c. Attract direct investment from outside the bloc—Compared to investing in stand-alone countries, foreign firms prefer to invest in countries that are part of an economic bloc because factories that they build within the bloc receive preferential treatment for exports to other member countries. For example, many non-European firms—including General Mills, Samsung, and Tata—have invested heavily in the EU to take advantage of Europe's economic integration.

By establishing operations in a single EU country, these firms gain free-trade access to the entire EU market. d. Acquire stronger defensive and political posture—Economic blocs allow countries to obtain greater bargaining power and political power in world affairs. For example, the EU enjoys greater influence with the World Trade Organization in trade negotiations than any individual member country. Broadly speaking, countries are more powerful when they cooperate together than when they operate as individual entities.

Diff: 3: Hard Skill: Concept Objective: 7-7: Understand and explain the advantages and implications of regional integration AACSB: Application of Knowledge

29 .

International Business: The New Realities, 5e (Cavusgil) Chapter 8 Understanding Emerging Markets 1) ________ refer to post-industrial countries characterized by high per-capita income, highly competitive industries, and well-developed commercial infrastructure.

A) Underground economies B) Emerging markets C) Advanced economies D) Transition economies Answer: C Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 2) ________ are low-income countries characterized by limited industrialization and stagnant economies.

A) Developing economies B) Emerging markets C) Developed economies D) Transition economies Answer: A Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 3) Emerging markets are ________.

A) developing economies where goods and services are directly exchanged for other goods and services B) post-industrial countries characterized by high per-capita income, highly competitive industries, and well-developed commercial infrastructure C) low-income countries characterized by limited industrialization and stagnant economies D) former developing economies that have achieved substantial industrialization, modernization, and rapid economic growth since the 1980s Answer: D Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

1 .

4) Which of the following is an example of a developing economy?

A) Australia B) Bangladesh C) France D) Brazil Answer: B Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 5) ________ make up the largest group of countries and include Bangladesh, Nicaragua, and Zaire.

A) Advanced economies B) Capitalist economies C) Emerging markets D) Developing economies Answer: D Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 6) Advanced economies account for about ________ percent of the world population.

A) 14 B) 42 C) 61 D) 5 Answer: A Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 7) Which of the following is a characteristic of advanced economies?

A) poor quality of life B) low life expectancy C) high purchasing power D) high infant mortality rate Answer: C Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

2 .

8) Developing economies ________.

A) account for nearly two-thirds of world GDP B) are often highly developed in historical and cultural terms C) are characterized by high purchasing power D) have a high literacy rate Answer: B Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 9) Which of the following is typical of developing economies?

A) low levels of bureaucracy and red tape B) low debt levels C) lack of cultural history D) poor education systems Answer: D Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 10) ________ in developing economies deter firms from these countries from participating in the global economy.

A) Low trade volumes B) Bureaucracy and red tape C) High inward FDI D) Lack of a rich cultural heritage Answer: B Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 11) Which of the following is characteristic of emerging markets?

A) minimal trade barriers B) high trade volume C) low inward FDI D) highly developed industry Answer: B Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

3 .

12) Transition economies were once socialist states but have been largely transformed into capitalism-based systems, partly through ________.

A) low inward FDI B) high trade barriers C) low energy consumption D) privatization of state-owned industries Answer: D Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 13) Which of the following is characteristic of emerging markets?

A) low inward foreign direct investment B) minimum regulations C) major focus on services and branded products D) rapidly declining trade barriers Answer: D Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 14) Privatization has provided many opportunities for foreign firms to enter transition economies by ________.

A) initiating joint ventures with local businesses B) the transfer of state-owned industries to private concerns C) exporting products with a high mark-up price D) exporting products of inferior quality Answer: B Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

4 .

Class Reports (Scenario) Prof. Jacob Middleton has divided students in his international business class into three groups.

Each group has been assigned the task of presenting an overview of a major country group and outlining its distinguishing characteristics. Group 1 will discuss advanced economies, Group 2 will address the characteristics of developing economies, and Group 3 will focus on emerging markets.

15) Which of the following refers to a distinctive trait of the type of economy discussed by Group 1?

A) minimal trade barriers B) low trade volume C) low inward FDI D) poor industrialization Answer: A Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 16) Which of the following refers to a distinctive trait of the type of economy discussed by Group 2?

A) substantial competition B) minimal trade barriers C) poor industrialization D) high inward FDI Answer: C Diff: 1: Easy Skill: Application Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 17) Which of the following refers to a distinctive trait of the type of economy discussed by Group 3?

A) low inward FDI B) rapidly liberalizing trade barriers C) highly developed industry D) low trade volume Answer: B Diff: 1: Easy Skill: Application Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

5 .

Economic Development Workshop (Scenario) Members of 50 different countries attended a workshop on economic development hosted by an international organization based in Geneva, Switzerland. Attendees of the workshop learned about techniques designed to assist countries in expanding their degree of economic development.

18) The workshop participants are divided into groups of three. For learning purposes, each group must be made up of individuals from countries with a similar degree of economic development. Which of the following might be grouped together?

A) Representatives from Bangladesh, Nicaragua, and Zaire B) Representatives from Germany, China, and Sudan C) Representatives from the U.S., China, and Belarus D) Representatives from Sudan, Spain, and France Answer: A Diff: 1: Easy Skill: Application Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Analytical Thinking 19) An economy is categorized as advanced, developing, or emerging based on degree of economic development and per-capita income.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 20) Developing economies are countries that have achieved substantial industrialization, modernization, and rapid economic growth since the 1980s.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 21) China is an example of an advanced economy.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

6 .

22) Developing countries lack numerous conditions needed for successful economic development, including low trade barriers and substantial international trade and investment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 23) Bureaucracy and red tape in developing economies deter firms from these countries from participating in the global economy.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 24) Certain emerging markets that have evolved from centrally planned economies to liberalized markets are called transition economies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 25) Privatization and the promotion of new, privately owned businesses have allowed the transition economies to attract substantial direct investment from abroad.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 26) New global challengers are leading firms from emerging markets that are fast becoming key contenders in world markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge

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27) Write a short essay on technology and emerging markets.

Answer: The developing economies are at a very early stage, while the emerging markets are quickly catching up to the advanced economies. Technology is the knowledge and application of tools, techniques, systems, and methods of organization to serve industry, science, and the arts.

Technology is vital to economic development and includes not just hardware computers, telephones, and industrial machinery; it also includes the associated software knowledge management, educational systems, worker skill levels, banking infrastructure, and so forth. In the advanced economies and emerging markets, information and communications technologies have had an enormous impact on knowledge acquisition and on worker and personal productivity.

Absence of such technologies in the developing economies helps explain why they are well behind the other countries in education, economic output, and future prospects.

Diff: 1: Easy Skill: Concept Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Application of Knowledge 28) Where are emerging markets mostly found? What are the factors contributing to their rapid growth?

Answer: Emerging markets are found in East and South Asia, Eastern Europe, Latin America, and a few Africa and the Middle East. Perhaps their most distinguishing characteristic is rapidly improving living standards and a growing middle class with rising economic aspirations. As a result, they have become very attractive destinations for exports, FDI, and global sourcing.

Emerging markets possess numerous advantages that have fostered their rise. The presence of low-cost labor, knowledge workers, government support, low-cost capital, and powerful, highly networked conglomerates have helped make these countries formidable challengers in the global marketplace.

Diff: 2: Moderate Skill: Synthesis Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Analytical Thinking

8 .

29) How do national governments contribute to the problems faced by developing economies?

Provide examples from Africa, and explain measures taken by governments to improve conditions.

Answer: Governments in developing economies are often severely indebted. Some countries in Africa, Latin America, and South Asia have debt levels that approach or exceed their annual gross domestic product. This means it would cost a year's worth of national productive output just to pay off the national debt. Much of Africa's poverty is the result of government policies that discourage entrepreneurship, trade, and investment. Bureaucracy and red tape in developing economies deter firms from these countries from participating in the global economy.

However, several African countries are experiencing economic success, with annual GDP growth now approaching 5 percent per year. Ghana is becoming a regional hub for financial and technological services. Nigeria is enjoying a boom in oil and banking. Zambia is developing strengths in mining and agriculture. Tanzania is investing in major power generation projects.

Stock markets in Botswana, Nigeria, and Zambia are enjoying record investment. Botswana's diamond trade is booming, thanks to investments from South Africa's De Beers. De Beers is a mining company that is investing some of its profits in Botswana to build roads and schools, and treat people with HIV/AIDS. Africa looks increasingly attractive. Coca-Cola sells over 100 brands and has more than 160 bottling and canning plants there. China's telecommunications giant Huawei has established production and sales operations throughout Africa, selling its mobile phones and network solutions. Huawei provides thousands of jobs for Africans. Chinese firms are also making huge investments in Africa installing green energy systems such as solar power.

Improving conditions in Africa are supported by two major trends. First, compared to earlier times, African governments are doing a better job of managing their national economies. Policy reforms in various countries emphasize economic and political freedom. Better governance in several countries is helping drive economic success. Second, parts of Africa are also receiving a steady inflow of direct investment from abroad. China, India, and other emerging market firms are investing billions in Africa to manufacture and market various products and services.

Inspired by such activity, more firms from Europe, Japan, and the United States are exploring Africa for business and investment opportunities.

Diff: 2: Moderate Skill: Synthesis Objective: 8-1: Understand advanced economies, developing economies, and emerging markets AACSB: Reflective Thinking

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Economic Development Workshop (Scenario) Members of 50 different countries attended a workshop on economic development hosted by an international organization based in Geneva, Switzerland. Attendees of the workshop learned about techniques designed to assist countries in expanding their degree of economic development.

30) Emerging markets act as manufacturing bases for global MNEs because of ________.

A) high regulations B) high availability of low-wage workforce C) well-developed infrastructure D) strong intellectual property laws Answer: B Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 31) Which of the following is TRUE about emerging market economies in international business?

A) They account for nearly two-thirds of world GDP and host the world's largest MNEs. B) They have tremendous purchasing power with minimal restrictions on international trade and investment.

C) These markets have evolved from manufacturing economies to service-based economies.

D) Businesses in emerging markets are important targets for machinery, equipment, and technology sales.

Answer: D Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 32) ________ is the procurement of selected value-chain activities, including production of intermediate goods or finished products, from independent suppliers.

A) Purchasing power parity B) Outsourcing C) Privatization D) Nationalization Answer: B Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge

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33) When sourcing relies on foreign suppliers or production bases, it is known as ________.

A) offshoring B) protectionism C) insourcing D) subsidizing Answer: A Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 34) Which of the following is an example of global sourcing?

A) After the recent global recession, major banks in Palladia were funded more quickly under national ownership and control.

B) Titania, a country with a major stake in automobile manufacturing, employs citizens to keep its level of quality and commitment to the automobile industry.

C) Camden Ltd., a Berylia-based pharmaceutical company, has opened manufacturing centers in Rhodia.

D) To manage the steel industry in Cadmia, over 900 coal mines were taken under public ownership.

Answer: C Diff: 2: Moderate Skill: Application Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Analytical Thinking 35) Businesses in emerging markets are important targets for machinery and equipment sales compared to those in advanced economies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 36) Emerging markets are home to high-wage, high-quality labor for manufacturing and assembly operations.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge

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37) Governments and state enterprises in emerging markets are major targets for sales of infrastructure-related products and services.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 38) Outsourcing helps firms become more efficient, concentrate on their core competencies, and obtain competitive advantages.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 39) When sourcing relies on foreign suppliers or production bases, it is known as global sourcing or offshoring.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge 40) Write a short essay on emerging markets as target markets for international business.

Answer: Emerging markets have become important target markets for a wide variety of products and services. The largest emerging markets have doubled their share of world imports in the last few years. The growing middle class in emerging markets implies rising demand for various consumer products, such as electronics and automobiles, and services such as health care.

Roughly one-quarter of Mexico's 122 million people enjoy affluence equivalent to that of the middle class in the advanced economies. In some product categories, demand is growing fastest in emerging markets. For example, the fastest-growing markets for power tool companies such as Black & Decker and Robert Bosch are in Asia, Latin America, Africa, and the Middle East.

Even during the recent global recession, technology firms such as Cisco, Hewlett-Packard, and Intel generated a large and growing proportion of their revenues from sales to such countries.

Diff: 2: Moderate Skill: Application Objective: 8-2: Know what makes emerging markets attractive for international business AACSB: Application of Knowledge

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41) Per-capita GDP converted at market exchange rates does NOT paint an accurate picture of the market potential of an emerging market because ________.

A) it tends to overemphasize the role of pricing in driving growth in emerging markets B) it overlooks the substantial price differences between advanced economies and emerging markets C) prices are usually higher for most products and services in emerging markets D) emerging markets do not support inward FDI Answer: B Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 42) Purchasing power parity is ________.

A) the total income received by all sectors of an economy within a nation B) the value of goods and services that can be purchased with one unit of a country's currency C) an adjustment for prices that reflects the amount of goods that consumers can buy in their home country, using their own currency and consistent with their own standard of living D) the exchange rate in the international currency market Answer: C Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 43) The purchasing power parity concept suggests that ________.

A) in emerging markets, the ability to buy goods and services depends on the influx of FDI from international MNEs B) the fluctuation in exchange rates disrupts international trade because the value of goods and services is mostly inconsistent C) in the future, a unified currency should be used to create equality in the global marketplace and to eliminate disparity D) in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods and services in any two countries Answer: D Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge

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44) The per-capita GDP of the United States in 2018 converted at market exchange rates is ________.

A) $61,687 B) $5,715 C) $11,000 D) $87,300 Answer: A Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 45) Which of the following countries has the highest per-capita GDP using PPP exchange rates in US$?

A) Brazil B) China C) Turkey D) South Korea Answer: D Diff: 1: Easy Skill: Application Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 46) In an informal economy ________.

A) market value of all officially recognized final goods and services produced within a country is substantially lowered B) economic transactions are not officially recorded and are therefore left out of national GDP calculations C) exchange rates are low D) the household income is substantially larger than that in a formal economy Answer: B Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge

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47) Demographic trends indicate that, in the coming two decades, ________.

A) the spending power of middle-class households will substantially decline B) the GDP of advanced economies will decline C) the spending power of low-income households will increase tremendously D) the proportion of middle-class households in emerging markets will continue to grow, representing enormous spending power Answer: D Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 48) Emerging markets are important in international business and trade due to ________.

A) a large informal economy B) low rates of energy consumption C) a high growth rate of middle class population D) low inward FDI Answer: C Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 49) Which of the following emerging market economies has the largest middle-class population?

A) India B) Russia C) Brazil D) China Answer: D Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 50) Which of the following emerging market economies has the highest median household income?

A) Indonesia B) Turkey C) China D) India Answer: B Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge

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51) In the early stages of market research, managers examine three important statistics to estimate market potential: per-capita income, size of the middle class, and market potential indicators.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 52) Per-capita GDP converted at market exchange rates paints an inaccurate picture of market potential because it overlooks the substantial price differences between advanced economies and emerging markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 53) Adjusted per-capita GDP does not represent the number of products consumers can buy in a given country.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 54) Economists estimate real buying power by calculating GDP statistics based on purchasing power parity.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 55) In emerging markets, the size and growth rate of conglomerates serve as signals of a dynamic market economy.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge

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56) Demographic trends indicate that, in the coming two decades, the proportion of middle-class households in emerging markets will become much larger.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Application of Knowledge 57) Why is per-capita income NOT always the best indicator of an emerging market's potential?

What does the concept of purchasing power parity (PPP) suggest?

Answer: When evaluating the potential of individual markets, managers often start by examining aggregate country data, such as gross national income (GNI) or per-capita GDP, expressed in terms of a reference currency such as the U.S. dollar. However, per-capita GDP converted at market exchange rates paints an inaccurate picture of market potential because it overlooks the substantial price differences between advanced economies and emerging markets.

Prices are usually lower for most products and services in emerging markets.

Economists estimate real buying power by calculating GDP statistics based on purchasing power parity (PPP). The PPP concept suggests that, in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods and services in any two countries. Since prices vary greatly among countries, economists adjust ordinary GDP figures for differences in purchasing power. Adjusted per-capita GDP more accurately represents the number of products consumers can buy in a given country, using their own currency and consistent with their own standard of living.

Diff: 2: Moderate Skill: Concept Objective: 8-3: Learn how to assess the true potential of emerging markets AACSB: Analytical Thinking 58) The absence of reliable or consistent governance from recognized government authorities ________.

A) decreases risks B) increases managers' ability to forecast business conditions C) increases business costs D) increases inward FDI Answer: C Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge

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59) Which of the following situations will discourage business activities of foreign firms in an emerging market?

A) allowing foreign firms to access the country's energy resources B) increasing the requirements for licenses, approvals, and paperwork C) using a strong legal framework and patent laws D) investing in a strong Internet infrastructure Answer: B Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 60) Which of the following countries has weak intellectual property protection?

A) China B) the United States C) Australia D) France Answer: A Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 61) Excessive bureaucracy is usually associated with ________.

A) a strong legal framework B) low country risk C) lack of transparency D) low trade barriers Answer: C Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 62) Foreign firms should seek alliances with well-qualified local companies in countries characterized by inadequate legal and political frameworks because ________.

A) such alliances help eliminate business risks completely B) through such partners, foreign firms can access local market knowledge C) such alliances help foreign firms function without distributor networks D) the dominance of family conglomerates in emerging economies is fast declining Answer: B Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge

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63) Which of the following best explains the growth of family conglomerates in emerging markets?

A) declining importance of entrepreneurship B) high rate of innovation C) highly competitive markets D) government protection Answer: D Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 64) Which of the following is characteristic of family conglomerates?

A) low access to capital than most other firms B) wholly owned or controlled by the government C) extensive networks in various industries D) inferior market knowledge Answer: C Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 65) Family conglomerates (FCs) might pose a challenge to firms trying to enter emerging markets because ________.

A) FCs have no more knowledge in manufacturing and distribution than other private players B) FCs are not required to pay taxes C) the owners of FCs are often overly sympathetic to the bureaucratic state machinery D) FCs enjoy substantial competitive advantages that overwhelm late entrants Answer: D Diff: 2: Moderate Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 66) Which of the following countries is home to the Hyundai Group?

A) India B) South Korea C) Russia D) Taiwan Answer: B Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge

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Vytel Communications (Scenario) Vytel Communications is a U.S.-based telecommunications company that is considering doing business in Argentina. Vytel managers hire a consulting firm to investigate the risks and benefits related to doing business in Argentina. The consulting firm identifies a number of challenges that might prohibit Vytel from entering Argentina. In addition, the consultants conduct surveys that indicate a demand for Vytel's products and services.

67) Which of the following would be most important for the consulting firm to evaluate when making a recommendation to Vytel about doing business in Argentina?

A) Is work-life balance uniformly enjoyed by the Argentine workforce?

B) Do Argentine firms frequently outsource their key operations abroad?

C) Would government regulations significantly impede Vytel's ability to make profits?

D) What benefits have been gained in the past by Vytel using foreign distributors?

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Reflective Thinking 68) Which of the following most likely supports the consulting firm's recommendation that Vytel should NOT do business in Argentina?

A) Government bureaucracy in Argentina is limited and is not characterized by red tape.

B) Qualified suppliers and distributors who are eager to work are readily available in Argentina.

C) Import restrictions do not apply to the telecommunications industry in Argentina.

D) In the past, intellectual property rights law have not been enforced in Argentina.

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking 69) Which of the following should be considered by the consulting firm before recommending that Vytel should do business in Argentina?

A) What other emerging markets are dominated by family conglomerates?

B) What has been the historical economic effect of family conglomerates in Argentina?

C) Do family conglomerates control the telecommunications industry in Argentina?

D) What benefits and loans are received by family conglomerates in Argentina?

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking

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70) Which of the following most likely supports the consulting firm's recommendation that Vytel proceed with plans to do business in Argentina?

A) The political conditions in Argentina are stable.

B) Government bureaucrats favor domestic firms to foreign firms.

C) Potential local partners have few government contacts.

D) The Argentine government lacks transparency.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking Maximus Motor Company (Scenario) Maximus Motor Company is a British automobile manufacturer that builds high-end luxury cars for sale around the world. Maximus managers recognize they are missing opportunities in emerging markets, such as India, which have an increasing number of middle-class people ready to purchase affordable cars. Competitors that entered the Indian market experienced significant profits over the last two years. Maximus managers have been assigned the task of determining the best strategy for Maximus to do business in India.

71) Which of the following is likely to be the most beneficial to Maximus if it builds a manufacturing facility in India?

A) legal precedents B) low-cost labor pool C) government regulations D) solid infrastructure Answer: B Diff: 2: Moderate Skill: Application Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking 72) Political instability is associated with corruption and weak legal frameworks that discourage inward investment and the development of a reliable business environment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 73) China, Indonesia, and Russia are examples of advanced economies with strong intellectual property protection.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 21 .

74) Counterfeiting is fairly common in China, Indonesia, and Russia.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 75) Many emerging market economies are dominated by family-owned rather than publicly owned businesses.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge 76) Samsung is an example of a family conglomerate based in South Korea.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Application of Knowledge

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77) In a short essay, describe some of the risks and challenges of doing business in emerging markets. What strategies help firms enter emerging markets successfully?

Answer: Firms that wish to do business in emerging markets face certain risks. First, emerging markets can be politically unstable. The absence of reliable or consistent governance from recognized government authorities adds to business costs, increases risks, and reduces managers' ability to forecast business conditions. Political instability is associated with corruption and weak legal frameworks that discourage inward investment and the development of a reliable business environment.

Second, emerging markets tend to have a weak intellectual property rights framework. Even when they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow.

Third, the presence of bureaucracy, red tape, and lack of transparency present formidable challenges to doing business in emerging markets. Burdensome administrative rules and excessive requirements for licenses, approvals, and paperwork all delay business activities.

Excessive bureaucracy is usually associated with lack of transparency, suggesting that legal and political systems may not be open and accountable to the public. Bribery, kickbacks, and extortion, especially in the public sector, cause difficulty for managers. Where anti-corruption laws are weak, managers may be tempted to offer bribes to ensure the success of business deals.

Moreover, in advanced economies, high-quality roads, drainage systems, sewers, and electrical utilities are taken for granted. However, in emerging markets, such basic infrastructure is often lacking.

To enter emerging markets successfully, firms can adopt the following strategies: 1. customize offerings to unique emerging market needs, 2. partner with family conglomerates.

Diff: 2: Moderate Skill: Critical Thinking Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking

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78) In a short essay, explain why family conglomerates dominate emerging markets. What are the benefits to foreign firms who collaborate with FCs in order to do business in emerging markets?

Answer: Many emerging market economies are dominated by large, family-owned rather than publicly owned businesses. A family conglomerate (FC) is a large, highly diversified company that is privately owned. FCs operate in industries ranging from banking to construction to manufacturing. They control the majority of economic activity and employment in emerging markets like South Korea, where they are called chaebols; in India, where they are called business houses; in Latin America, where they are called grupos; and in Turkey, where they are called holding companies. A typical FC may hold the largest market share in each of several industries in its home country.

The origin and growth of FCs are partly attributable to their special relationships with the government, which often protects FCs by providing subsidies, loans, tax incentives, and market entry barriers to competitors. FCs provide huge tax revenues and facilitate national economic development, which explains why governments are so eager to support them.

For foreign firms that want to do business in emerging markets, FCs can make valuable venture partners. By collaborating with an FC, the foreign firm can: (1) reduce the risks, time, and capital requirements of entering target markets; (2) develop helpful relationships with governments and other key, local players; (3) target market opportunities more rapidly and effectively; (4) overcome infrastructure-related hurdles; and (5) leverage FC's resources and local contacts.

Diff: 3: Hard Skill: Synthesis Objective: 8-4: Evaluate the risks and challenges of emerging markets AACSB: Analytical Thinking 79) In emerging markets, MNEs must set prices appropriate for local conditions because ________.

A) research and development is relatively cheaper in emerging markets B) of high corruption and bureaucracy C) of an inadequate legal framework D) emerging market consumers cannot pay high prices Answer: D Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge

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80) Which of the following is a benefit to a foreign firm collaborating with a family conglomerate in an emerging market?

A) reduced capital requirements B) complete exemption from paying taxes C) complete protection from intellectual property rights violations D) low dependence on technology Answer: A Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge 81) ________ are formal offers made by a buyer to purchase certain products or services.

A) Quotas B) Tariffs C) Tenders D) Microloans Answer: C Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge 82) The new global challengers have become formidable competitors primarily because ________.

A) of instant brand recognition B) of the easy availability of low-cost labor, skilled workforces, government support, and family conglomerates C) of superior market research and customer service D) of substantial government funding, high wages, and value-chain diversification Answer: B Diff: 2: Moderate Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge

25 .

Maximus Motor Company (Scenario) Maximus Motor Company is a British automobile manufacturer that builds high-end luxury cars for sale around the world. Maximus managers recognize they are missing opportunities in emerging markets, such as India, which have an increasing number of middle-class people ready to purchase affordable cars. Competitors that entered the Indian market experienced significant profits over the last two years. Maximus managers have been assigned the task of determining the best strategy for Maximus to do business in India.

83) Which of the following would be most important for Maximus managers in determining the best entry strategy for entering an emerging market such as India, characterized by the presence of family conglomerates?

A) What other firms have partnered with family conglomerates?

B) How often do Indians use their cars and for what purpose?

C) What type of automobile should Maximus manufacture in India?

D) How would Maximus benefit from partnering with a family conglomerate?

Answer: D Diff: 2: Moderate Skill: Application Objective: 8-5: Learn the success strategies for emerging markets AACSB: Analytical Thinking 84) The strategies that MNEs developed decades ago and refined in mature advanced-economy markets are considered most suitable for achieving success in emerging markets.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge 85) MNEs must set prices appropriate for local conditions. Many firms devise innovative products and packaging to keep prices low.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge 86) For foreign firms wanting to do business in emerging markets, family conglomerates can make valuable venture partners.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge

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87) How are large MNEs from advanced economies competing against new emerging market MNEs? In a short essay, describe the methods used by the incumbents to protect market share from emergent firms.

Answer: Advanced-economy firms can counter in various ways. Initially, managers must conduct research to develop an understanding of the new challengers. It is vital to analyze the advantages and strategies of the emergent firms, which often enjoy superior advantages in the industry in the target market. The next step is to acquire new capabilities that improve the firm's competitive advantages. For example, many incumbents are boosting their R&D to invent new, superior products. Others are partnering with competitors to pool resources against emerging market rivals. Incumbent firms can also match global challengers at their own game by leveraging low-cost labor and skilled workers in locations such as China, Mexico, and Eastern Europe. Many advanced economy firms partner with family conglomerates and others in emerging markets on critical value-chain activities such as R&D, manufacturing, and technical support.

Diff: 2: Moderate Skill: Synthesis Objective: 8-5: Learn the success strategies for emerging markets AACSB: Application of Knowledge 88) Businesses foster economic and social development in in emerging markets and developing economies ________.

A) through the mass production of cheap, low-quality goods B) by using strategies developed decades ago and refined in mature advanced-economy markets C) by developing community-oriented social programs D) by implementing cost-effective production methods Answer: C Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge 89) What leading advocate of microfinance was awarded the 2006 Nobel Peace Prize?

A) Muhammad Yunus B) Bill Gates C) Melinda Gates D) Bill Clinton Answer: A Diff: 2: Moderate Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge

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90) Which of the following is TRUE of the Grameen Bank founded by Prof. Muhammad Yunus?

A) It provides funding primarily to global conglomerates.

B) It is a family conglomerate based in Bangladesh.

C) It provides small-scale financial services to aspiring entrepreneurs in poor countries.

D) It sells insurance in India for less than 20 cents.

Answer: C Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge 91) Which of the following best summarizes the argument in favor of microfinance?

A) Microfinance ultimately leads to greater tax revenues for national governments.

B) Recently, mainstream banks have begun to view microfinance as the prime driver of advanced economies.

C) Microfinance allows the underprivileged to create businesses and improve their lives.

D) Microfinance alleviates the pressure on MNEs to support developing economies.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Analytical Thinking 92) Which of the following trends supports improving economic conditions in Africa?

A) direct investment from abroad B) the growing importance of the public sector in Africa C) the gradual liquidation of the mining industry D) the rising cultural affinity toward goods manufactured in the West Answer: A Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge

28 .

93) Which of the following is/are proving vital to the development of Africa?

A) landline telephony B) protectionism C) cell phones D) high regulations Answer: C Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge 94) Increasingly, mainstream banks view microfinance as a source of future growth.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge 95) Microfinance provides large-scale financial services mainly to global conglomerates.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge 96) Africa's GDP has been relatively stagnant since the 1960s because the continent is afflicted by illiteracy, malnutrition, and poor sanitation and water supply.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Application of Knowledge

29 .

97) Briefly explain how microfinancing has helped individuals to rise out of poverty in many developing nations.

Answer: Microfinance provides small-scale financial services, such as "microcredit" and "microloans," that assist entrepreneurs to start businesses in poor countries. By taking small loans, frequently less than $100, small-scale entrepreneurs accumulate sufficient capital to launch successful businesses. The leading advocate of microfinance is economics professor Muhammad Yunus. He founded the Grameen Bank (www.grameen-info.org) that has made small loans to millions of borrowers in South Asia. Aspiring entrepreneurs use the small loans to buy everything from cows that produce milk to sell in markets, to mobile phones that villagers can rent to make calls. The Grameen Bank now has more than 2,500 branches and has inspired similar poverty-reducing efforts. Increasingly, mainstream banks view microfinance as a source of future growth. Various institutions now offer small-scale insurance, mortgage lending, and other financial services in poor countries. In Mexico, Cemex's Patrimonio Hoy program (www.cemex.com) has widened access to cement and other building materials. The program helps poor families build their own homes. Thanks to microfinance, home ownership is a reality for tens of thousands of low-income Mexican families.

Diff: 2: Moderate Skill: Concept Objective: 8-6: Understand corporate social responsibility, sustainability, and the crisis of global poverty AACSB: Analytical Thinking

30 .

International Business: The New Realities, 5e (Cavusgil) Chapter 9 The International Monetary and Financial Environment 1) Which of the following should an international manager keep in mind about the constantly fluctuating exchange rates?

A) The prices the firm charges should be quoted in the firm's currency exclusively.

B) The firm and its customers should use the exchange rate as it stands on the date of each transaction, there is no scope for an agreement between them to use any other specific exchange rate.

C) If goods are bought from a supplier whose currency is appreciating against the buyer's currency, the buyer will have to pay a lesser amount of their currency to complete the purchase.

D) The time taken between placement and delivery of an order can at times go up to a few months; fluctuations in the exchange rate during that time can cost or earn the firm money.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 2) Which of the following is an example of a country that has experienced dollarization?

A) Ecuador B) Japan C) France D) Brazil Answer: A Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 3) What is the value of one country's currency expressed in relation to the currency of another country?

A) countertrade B) monetization C) credit derivative D) exchange rate Answer: D Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge

1 .

4) Which of the following statements is TRUE when a national currency can be undervalued?

A) They cannot be quantified.

B) They remain highly stable.

C) They can result in a trade surplus.

D) They change occasionally.

Answer: C Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 5) Currency risk can best be defined as the risk that occurs when ________.

A) currency values remain constant for prolonged periods B) one currency changes in relation to another currency C) buyers and sellers disagree over which currency to use D) fluctuations in the stock market affect all exchange rates Answer: B Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 6) Which of the following is an example of a currency risk?

A) purchasing products from a supplier in a country whose currency is appreciating against yours B) purchasing products from a supplier in a country with depreciating currency C) selling products to a customer in a country with appreciating currency D) selling products to a to a customer in a country that has the same currency value as the exporter's Answer: A Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 7) A U.S. company buys from a supplier whose currency is increasing against the dollar. Which of the following will the company most likely have to do if the purchasing price is expressed in the supplier's currency?

A) pay less in dollars than originally expected B) pay more in dollars than originally expected C) pay the same amount of dollars as originally expected D) pay part of the transaction in the supplier's currency Answer: B Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 2 .

8) A French company sells goods to a foreign customer whose currency is depreciating against the euro. Which of the following will the company most likely experience when completing the sale?

A) The company will receive fewer euros if the sales price was expressed in the buyer's currency.

B) The company will receive more euros if the sales price was expressed in the buyer's currency.

C) The company will receive fewer euros if the sales price was expressed in euros originally.

D) The company will receive more euros if the sales price was expressed in euros originally.

Answer: A Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 9) Which of the following statements is TRUE about currencies?

A) The British pound is an example of a nonconvertible currency.

B) Hard currencies are highly unstable currencies.

C) Currencies that are used for international transactions are called nonconvertible.

D) Convertible currencies can be readily exchanged for other currencies.

Answer: D Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 10) The U.S. dollar is an example of ________.

A) soft currency B) convertible currency C) nonconvertible currency D) private currency Answer: B Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 11) Which of the following term refers to the type of currency used only for domestic business transactions, and is accepted only by the residents of the issuing country?

A) hard currency B) convertible currency C) nonconvertible currency D) alternative currency Answer: C Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 3 .

12) Which of the following is an effect caused by capital flight?

A) It increases the need for domestic investment holdings.

B) It decreases the ability of the nation to service debt and pay for imports.

C) It reduces harmful currency restrictions.

D) It decreases the nation's supply of hard currencies.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 13) Which of the following resolves the problem of making international payments and facilitates international investment and borrowing among firms, banks, and governments?

A) foreign exchange B) barter C) capital flight D) buyback Answer: A Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 14) If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely NOT occur?

A) European firms would pay more for raw materials imported from the United States.

B) European consumers would purchase fewer U.S. products and services.

C) Fewer Europeans would travel to the U.S. or study at U.S. universities.

D) U.S. exports to Europe would increase.

Answer: D Diff: 2: Moderate Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

4 .

Plas-Tex Exporting (Scenario) Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.

15) Which of the following questions would be more important for Chisholm to evaluate before presenting his manufacturing recommendations to shareholders?

A) What was the impact of the exchange rate on European exports last year?

B) What is the currency risk of exporting additional Plas-Tex products to Europe?

C) How effective has the Plas-Tex marketing campaign been in Europe?

D) What was the impact on Plas-Tex sales when the euro depreciated last year?

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Reflective Thinking 16) Which of the following should be considered closely before Chisholm recommends increasing production to take advantage of the current exchange rate?

A) What is the expected outcome of Plas-Tex negotiations with an Asian manufacturer?

B) How much revenue did Plas-Tex generate from European sales last year?

C) What will be the effect on Plas-Tex if the euro depreciates more than the U.S. dollar?

D) What has been the historic impact of capital flight on Plas-Tex revenues?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 17) Which of the following supports maintaining the current production status instead of increasing production?

A) The euro/dollar exchange rate is unpredictable due to its constant fluctuation.

B) Exporters and importers typically profit from currency speculation.

C) The euro/dollar exchange rate usually remains steady for long periods of time.

D) The cost of living in the U.S. has risen dramatically in the last year.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

5 .

18) Because the firm either accepting or making the payment assumes the risk for the fluctuation, companies have a tendency to prefer handling international business transactions with their own country's currency rather than with the currency of another country.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 19) If the currency of Country A is depreciating against a currency of Country B, exports from Country A to Country B should increase.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 20) The most universally accepted currencies for international business transactions are the British pound, European euro, Japanese yen, and U.S. dollar, which are all considered hard or convertible currencies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 21) The foreign-exchange market is located exclusively in the United States.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 22) Capital flight from a country hinders its ability to service debt and pay for imports.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 23) The French franc is one of the European currencies that was taken out of circulation and replaced by the euro.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 6 .

24) What is the difference between a convertible currency and a nonconvertible currency?

Explain why governments of some countries impose restrictions on currency convertibility.

Answer: A convertible currency can be easily exchanged for other currencies. The most easily convertible are called hard currencies, and include the British pound, European euro, Japanese yen, and U.S. dollar. They are strong, stable currencies that are universally accepted and used most often for international transactions. Nations prefer to hold hard currencies as reserves because of their relative strength and stability in comparison to other currencies.

A currency is nonconvertible when it is not acceptable for international transactions. Some governments may not allow their currency to be converted into a foreign currency.

The governments of some countries impose restrictions on currency convertibility in order to preserve their supply of hard currencies, such as the euro or the U.S. dollar, or to avoid the problem of capital flight. Capital flight is the rapid sell-off by residents or foreigners of their holdings in a nation's currency or other assets. This usually occurs in response to a domestic crisis that causes them to lose confidence in the country's economy. The investors exchange their holdings in the weakening currency for those of another, often a hard currency. Capital flight from a country diminishes its ability to service debt and pay for imports.

Diff: 2: Moderate Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge

7 .

25) Explain the concept of currency risk. How can inflation and interest rates create currency risk?

Answer: Exchange rate fluctuations and similar complications in international business create currency risk, the potential harm that can arise from changes in the price of one currency relative to another. If you buy from a supplier whose currency is appreciating against yours, you may need to pay a larger amount of your currency to complete the purchase. If you expect payment from a customer whose currency is depreciating against your own, currency risk also arises, because you may receive a smaller amount of your currency if the sale price was expressed in the currency of the customer. Of course, if the foreign currency fluctuates in your favor, you may gain a windfall. Exporters or importers usually are not in the business of making money from currency speculation; rather, they worry about losses that arise from currency fluctuations.

Inflation and interest rates can create currency risk. Inflation is an increase in the price of goods and services, so that money buys less than in preceding years. Interest rates and inflation are closely related. In countries with high inflation, interest rates tend to be high because investors expect to be compensated for the inflation-induced decline in the value of their money. If inflation is running at 10 percent, for example, banks must pay more than 10 percent interest to attract customers to open savings accounts.

Inflation occurs when (1) demand for money grows more rapidly than supply, or (2) the central bank increases the nation's money supply faster than the national productive output. For instance, triggered by big increases in the national money supply, inflation ran to more than 400 percent per year in Brazil in the mid-1990s. Inflation is a common challenge for developing economies and emerging markets.

Inflation directly affects the value of the nation's currency. If it results from an excessive increase in the money supply, all else being equal the price of that money (expressed in terms of foreign currencies) will fall.

The link between interest rates and inflation, and between inflation and the value of currency, implies there is a relationship between real interest rates and the value of currency.

Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Application of Knowledge 26) The levels of supply and demand for a currency in a free market vary ________ with its price.

A) rarely B) occasionally C) directly D) inversely Answer: D Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 8 .

27) Which of the following statements is most likely to be TRUE regarding a currency's price if the supply of the currency increases?

A) The price of the currency fluctuates randomly.

B) The price of the currency remains constant.

C) The price of the currency lowers.

D) The price of the currency increases.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 28) If demand for the dollar is low, the price of the dollar is most likely to ________.

A) rise B) remain stable C) fall, then rise D) fall Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 29) Which of the following does the central bank perform in order to accommodate a nation's economic growth?

A) enforce strict regulations on foreign direct investment B) increase the nation's money supply C) establish a voluntary export restraint D) restrict innovation and entrepreneurship Answer: B Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 30) ________ occurs when investors buy stocks whose prices have been rising and sell stocks whose prices have been falling.

A) Switch trading B) Dumping C) Momentum trading D) Herding Answer: C Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 9 .

31) Which of the following is a characteristic of momentum trading?

A) Investors buy stocks as prices fall.

B) Investors sell stocks when others sell.

C) Investors buy stocks as prices rise.

D) Investors buy and sell stocks spontaneously.

Answer: C Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 32) Which of the following statements is TRUE of trade surplus?

A) It is a negative balance of trade.

B) It occurs when there is a net outflow of domestic currency to foreign markets.

C) It occurs when a nation's imports are greater than its exports.

D) It occurs when a nation's exports are greater than its imports.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 33) Each of the following factors significantly affects the balance of trade EXCEPT ________.

A) exchange rate B) market share C) prices of goods D) trade barriers Answer: B Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 34) ________ refers to the government reduction of its currency value relative to the other currency values.

A) Devaluation B) Hyperinflation C) Depreciation D) Fluctuation Answer: A Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge

10 .

35) Which of the following terms refers to the summary of all transactions between one country and the rest of the world over a given period of time?

A) momentum trading B) trade surplus C) exchange rate system D) balance of payments Answer: D Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge High Inflation (Scenario) Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation's money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.

36) Which of the following questions would be more important to evaluate in determining the reason behind the inflation in Country X? A) Has momentum trading of agricultural commodities been occurring in Country X? B) What is the exchange rate between Country X currency and the euro?

C) How quickly was the money supply increased by the central bank of Country X? D) How many pounds of coffee beans are being imported annually to Country X? Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 37) Which of the following is most likely an additional problem faced by Country X due to its inflation?

A) high interest rates B) herding behavior C) balance of trade D) country risk Answer: A Diff: 2: Moderate Skill: Application Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking

11 .

38) Which of the following should be considered before the government takes any action to correct the high rate of inflation?

A) What have been the historical consequences of trade barriers in Country X? B) What is the current price of coffee in the United States and Europe?

C) What will be the long-term effects of currency depreciation to Country X? D) What other industries in Country X could replace agriculture?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 39) All else being equal, the greater the demand for a currency, the higher its price; the lower the demand for a currency, the lower its price.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 40) All else being equal, the greater the supply of a currency, the higher its price; the lower the supply of a currency, the lower its price.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 41) In most high-inflation nations, interest rates are increasing while the purchasing power of the national currency is plummeting.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 42) An increase in a nation's rate of inflation is caused by an oversupply of money and this eventually leads to a decrease in the value of the nation's currency.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge

12 .

43) The central bank also seeks to ensure the safety and soundness of the national financial system by supervising and regulating the nation's banking system.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 44) Momentum trading occurs when investors buy stocks whose prices have been falling and sell stocks whose prices have been rising.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 45) A devaluation is an action taken by the central bank.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge 46) Explain how a nation's economic growth is measured and what stimulates economic growth.

What is the central bank, and how does it affect economic growth?

Answer: Economic growth is the increase in value of the goods and services produced by an economy. It is usually measured as the annual increase in real GDP in which the inflation rate is subtracted from the growth rate. Economic growth results from continual economic activities, including innovation and entrepreneurship. It implies a continued increase in business activities and a corresponding increase in consumer need for money to facilitate more economic transactions.

To accommodate economic growth, the central bank increases the nation's money supply. The central bank is the monetary authority in each country that regulates the money supply, issues currency, and manages the exchange rate of the nation's currency relative to other currencies.

Economic growth is associated with an increase in the supply and demand of the nation's money supply, and by extension, the nation's currency. Thus, economic growth has a strong influence on the supply and demand for national currencies.

Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge

13 .

47) In a short essay, describe the underlying reasons for inflation. Provide an example of a nation that faced a high rate of inflation.

Answer: Inflation occurs when: (1) demand grows more rapidly than supply; or (2) the central bank increases the nation's money supply faster than the rise in national productive output. When a disproportionately large amount of money is introduced into an economy, the result is too much money chasing a relatively fixed supply of goods and services, which causes prices to go up. For instance, triggered by big increases in the national money supply, annual inflation in Brazil ran to more than 1,000 percent in the mid-1990s.

Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Application of Knowledge

14 .

48) Explain the belief that a persistent trade deficit is harmful to the national economy. Why was the Bretton Woods Agreement initiated and why was it terminated?

Answer: Many economists believe a persistent trade deficit is harmful to the national economy.

When a trade deficit becomes severe or persists for a long time, the nation's central bank may devalue its currency. A devaluation is a government action to reduce the official value of its currency relative to other currencies. It is usually accomplished by the buying and selling of currencies in the foreign exchange market. Devaluation aims to deter the nation's residents from importing from other countries, potentially reducing the trade deficit.

At a broader level, governments must manage their balance of payments, the annual accounting of all economic transactions of a nation with all other nations. The balance of payments is the nation's balance sheet of trade, investment, and transfer payments with the rest of the world. It represents the difference between the total amount of money coming into and going out of a country. Consider a Canadian MNE that builds a factory in China. In the process, money flows from Canada to China, generating a deficit item for Canada and a surplus item for China in their respective balance of payments. The balance of payments is affected by other transactions as well, as when citizens donate money to a foreign charity, when governments provide foreign aid, or when tourists spend money abroad.

The Bretton Woods Agreement was initiated to peg the value of the U.S. dollar to an established value of gold, at a rate of $35 per ounce. The U.S. government agreed to buy and sell unlimited amounts of gold in order to maintain this fixed rate. Each of Bretton Woods' other signatory countries agreed to establish a par value of its currency in terms of the U.S. dollar and to maintain this pegged value through central bank intervention. In this way, the Bretton Woods system kept exchange rates of major currencies fixed at a prescribed level relative to the U.S. dollar and, therefore, to each other.

The demise of the Bretton Woods agreement began in the late 1960s when the U.S. government used deficit spending to finance both the Vietnam War and expensive government programs.

Rising government spending stimulated the economy and U.S. citizens began buying more imported goods. This aggravated the U.S. balance of payments, and the United States began to experience trade deficits with Japan, Germany, and other European countries. Over time, demand for U.S. dollars so exceeded supply that the U.S. government could no longer maintain an adequate stock of gold. This situation put pressure on governments in Europe, Japan, and the United States to revalue their currencies. As a result, the link between the U.S. dollar and gold was suspended in 1971, and the promise to exchange gold for U.S. dollars was withdrawn. This action brought an end to the Bretton Woods system.

Diff: 3: Hard Skill: Critical Thinking Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking

15 .

49) The purpose of the Bretton Woods Agreement was to ________.

A) enable the U.S. government to monetarily recover after WWII B) control the fluctuating price of gold used for global trading C) oversee the importing and exporting of international traders D) govern the exchange rates of major international currencies Answer: D Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 50) Which of the following is the most likely underlying reason for the demise of the Bretton Woods system?

A) U.S. trade deficits B) creation of the EU C) gold depreciation D) WTO restrictions Answer: A Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 51) Which of the following best characterizes the functions of the World Bank?

A) monitor interest rates in emerging economies B) provide loans and technical assistance to developing countries for infrastructure development C) offer financial assistance to small businesses D) assist countries suffering from severe balance of payment problems Answer: B Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 52) The Bretton Woods Agreement most likely influenced the current trend towards international free trade when member countries agreed to ________.

A) no longer impose trading tariffs within economic blocs B) provide low interest loans to poor countries C) not impose restrictions on currency trading D) implement a multilateral trade and investment system Answer: C Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge

16 .

53) Which of the following is characteristic of the fixed exchange rate system?

A) utilized by most advanced economies B) rates based on supply and demand forces C) The value of currency is set relative to the value of another.

D) allows for monetary policy flexibility Answer: C Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 54) Which of the following statements is TRUE of a dirty float?

A) Exchange rates fluctuate with occasional central bank intervention.

B) Beneficial exchange rates are offered in trade with certain nations.

C) Fixed exchange rates are set and maintained by the World Bank.

D) Currency values rise and fall according to the U.S. dollar.

Answer: A Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 55) The Bretton Woods Agreement was brought into existence in the late 1960s when the U.S. needed to finance government programs and the Vietnam War. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 56) The International Monetary Fund was created through the Bretton Woods Agreement as a way to monitor the foreign exchange systems and lend money to developing economies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 57) The official price of gold is used to determine the value of all major currencies in the exchange rate system used for international trade today.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge

17 .

58) The Bretton Woods Agreement established International Monetary Fund (IMF; www.imf.org) as an international agency that attempted to stabilize currencies by monitoring the foreign exchange systems of member countries and lending money to developing economies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 59) A pegged exchange rate system is one in which the value of a currency is set relative to the value of another (or to the value of a basket of currencies) at a specified rate.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge 60) The floating exchange rate system is victim to maximum governmental intervention.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge

18 .

61) Describe the two main types of foreign exchange management used today. Provide examples of nations that use each type of system. What are the benefits of each system?

Answer: a. Floating Exchange Rate System—Under this system, governments refrain from systematic intervention and each nation's currency floats independently, according to market forces. Major world currencies—including the Canadian dollar, the British pound, the euro, the U.S. dollar, and the Japanese yen—float independently on world exchange markets. Their exchange rates are determined daily by the forces of supply and demand. b. Fixed Exchange Rate System—The value of a currency is set relative to the value of another (or to the value of a basket of currencies) at a specified rate. The system is sometimes called a pegged exchange rate system. As the reference value rises and falls, so does the currency pegged to it. Many developing economies and some emerging markets use this system today. For example, China pegs its currency to the value of a basket of currencies, and Belize pegs the value of its currency to the U.S. dollar. To maintain the peg, the governments of these countries intervene in currency markets to buy and sell dollars and other currencies, in order to maintain the exchange rate at a fixed, preset level.

The benefit of the floating exchange rate system is that governments have the latitude to modify monetary policy to fit the circumstances that they face at any time. If a country is running a trade deficit, the floating rate system allows for this to be corrected more naturally than if the country uses a fixed exchange rate regime. The benefit of the fixed exchange rate system is that it offers greater stability and predictability of exchange rate movements and promotes greater certainty and stability within a nation's economy.

Diff: 2: Moderate Skill: Application Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Application of Knowledge

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62) Describe four principles or organizations brought about by the Bretton Woods Agreement that remain important to international business and trade today. Why does the integration of financial and monetary activity worldwide continue to grow?

Answer: The following principles or organizations were brought about by the Bretton Woods Agreement and remain important to international business and trade today: a. Bretton Woods instituted the concept of international monetary cooperation, especially among the central banks of leading nations. b. Bretton Woods also established the notion of fixing exchange rates within an international regime to minimize currency risk. c. The agreement created the International Monetary Fund (IMF) and the World Bank. The IMF is an international agency that attempts to stabilize currencies by monitoring the foreign exchange systems of member countries, and by lending money to developing economies. The World Bank is an international agency that provides loans and technical assistance to low- and middle-income countries, with the goal of reducing poverty. d. Finally, Bretton Woods established the importance of currency convertibility in which countries agree to refrain from imposing restrictions on currency trading, and agree not to engage in discriminatory currency arrangements. This principle is an important aspect of the trend toward global free trade that the world is experiencing today.

The growing integration of financial and monetary activity worldwide has several causes, including: • The evolution of monetary and financial regulations worldwide; • The development of new technologies and payment systems and the use of the Internet in global financial activities; • Increased global and regional interdependence of financial markets; and • The growing role of single-currency systems, such as the euro.

Diff: 3: Hard Skill: Critical Thinking Objective: 9-3: Understand the emergence of the modern exchange rate system AACSB: Analytical Thinking 63) Which of the following best describes the role that the international monetary system plays with foreign firms?

A) underwrites stock and bond issues and gives advice on mergers B) establishes regulations for FDI financing C) oversees finance and trade in developing nations D) provides a framework for monetary and foreign exchange activities worldwide Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge

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64) Which of the following statements is TRUE of the global financial system?

A) It consists of the institutional frameworks, rules, and procedures that govern how national currencies are exchanged for one another.

B) It includes key players such as finance ministries and national stock exchanges but excludes commercial banks and central banks.

C) It is built on the activities of firms, banks, and financial institutions engaged in ongoing international financial activity.

D) Since the 1960s, the volume and structure of the global financial system has been reducing.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge 65) The International Monetary Fund stands ready to provide financial assistance in the form of loans and grants to support policy programs intended to correct macroeconomic problems.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge 66) The global financial system is the collective of financial institutions that facilitate and regulate investment and capital flows and make possible massive trading of currencies and financial assets. It reflects the activities of companies, banks, and financial institutions, all engaged in ongoing financial activity.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge 67) The integration of international financial and monetary activity can be attributed to the growing role of single-currency systems, such as the euro.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge

21 .

68) Explain why international financial and monetary activities are becoming more integrated.

What are the risks and benefits of the growing integration of the two activities?

Answer: The growing integration of the financial and monetary activity worldwide is due to a number of drivers. First, the evolution of monetary and financial regulations worldwide has led to integrated financial and monetary activities. The second driver is the development of new technologies and payment systems and the use of the Internet in global financial activities. The third driver is the increased global and regional interdependence of financial markets. Finally, the growing role of single-currency systems, such as the euro, has caused financial and monetary integration.

The globalization of financial flows has yielded many benefits, such as increasing the volume and speed of international capital flows. However, the globalization of financial flows has also led to possibilities of financial risk. Capital flows are much more volatile than FDI-type investments. It is much easier for investors to withdraw and reallocate liquid capital funds than FDI funds, which are directly tied to factories and other permanent operations that firms establish abroad.

Diff: 2: Moderate Skill: Concept Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge

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69) Explain the differences between the international monetary system and the International Monetary Fund. What are the three major types of crises most frequently addressed by the International Monetary Fund?

Answer: Firms seek to get paid for the products and services they sell abroad. Portfolio investors seek to invest in stocks and other liquid assets around the world. The resulting monetary flows take the form of various currencies traded among nations. Accordingly, the international monetary system consists of the institutional frameworks, rules, and procedures that govern how national currencies are exchanged for one another. By providing a framework for the monetary and foreign exchange activities of firms and governments worldwide, the system facilitates international trade and investment. To function well, national governments and international agencies have focused on creating a system that inspires confidence and ensures liquidity in monetary and financial holdings.

The International Monetary Fund (IMF) provides the framework of and determines the code of behavior for the international monetary system. The agency promotes international monetary cooperation, exchange rate stability, and orderly exchange arrangements and encourages countries to adopt sound economic policies. These functions are critical because economic crises can destroy jobs, slash incomes, and cause human suffering. Governed today by 187 countries, the IMF stands ready to provide financial assistance in the form of loans and grants to support policy programs intended to correct macroeconomic problems.

The IMF plays an important role in addressing financial and monetary crises faced by nations around the world. Typical crises fall into three major categories. a. A currency crisis results when the value of a nation's currency depreciates sharply or when its central bank must expend substantial reserves to defend the value of its currency, thereby pushing up interest rates. Currency crises occur more commonly in smaller countries and are sometimes the result of a sudden loss of confidence in the national economy or speculative buying and selling of the nation's currency. b. A banking crisis results when domestic and foreign investors lose confidence in a nation's banking system, leading to widespread withdrawals of funds from banks and other financial institutions. This situation arose in the United States in the 1930s when, during the Great Depression, millions of people panicked about their savings and rushed to withdraw funds from their bank accounts. The crisis led to the failure of numerous banks. Banking crises tend to occur in developing economies with inadequate regulatory and institutional frameworks. These crises can lead to other problems, such as exchange rate fluctuations, inflation, abrupt withdrawal of FDI funds, and general economic instability.

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c. A foreign debt crisis arises when a national government borrows an excessive amount of money, either from banks or from the sale of government bonds. For example, China's total foreign debt now exceeds $200 billion. However, the debt is manageable because China has a huge reserve of foreign exchange. By contrast, Argentina's foreign debt has reached roughly 150 percent of the country's GDP. In an effort to pay its debt, Argentina must use financial resources that it might have invested instead in important national priorities. Indebted governments draw huge sums out of their national money supply, reducing the availability of these funds to consumers and to firms attempting to finance business activities.

Diff: 3: Hard Skill: Critical Thinking Objective: 9-4: Describe the monetary and financial systems AACSB: Application of Knowledge 70) Which of the following levels of the global monetary and financial systems pyramid includes commercial banks?

A) national government level B) national infrastructure level C) international organization level D) firm level Answer: B Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 71) A ________ is a facility for trading securities and other financial instruments, including shares issued by companies, trust funds, pension funds, and corporate and government bonds.

A) stock exchange B) business strategic unit C) grey market D) shell corporation Answer: A Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 72) Which of the following is a characteristic of a bond?

A) It is a short-term loan from a commercial bank.

B) It refers to capital raised by selling corporate shares.

C) It refers to a debt security used to raise capital.

D) It is a debt instrument on which dividends are paid.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 24 .

73) ________ are managers of pensions and mutual funds, as well as insurance companies who have assumed an enormous role in driving capital markets around the world.

A) Entrepreneurs B) Institutional investors C) Angel investors D) Venture capitalists Answer: B Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 74) Which of the following would a firm considering a corporate merger consult for issues related to the merger?

A) private bank B) offshore bank C) commercial bank D) investment bank Answer: D Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 75) Which of the following situations often results in a banking crisis?

A) when investors withdraw funds from financial institutions B) when exchange rates fluctuate dramatically C) when governments borrow excessively from banks D) when a nation's currency rapidly depreciates Answer: A Diff: 2: Moderate Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 76) Which of the following, originally known as the International Bank for Reconstruction and Development, was founded to fund construction of Japan and Europe after World War II? A) The International Monetary Fund B) The Financial Stability Board C) The World Bank D) Bank for International Settlements Answer: C Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 25 .

Global Finance Meeting (Scenario) International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands (as offshore bank). Expert C advises international firms on corporate mergers.

77) Expert A most likely works for which of the following?

A) Union Bank in Switzerland (private bank) B) Bank of America (commercial bank) C) Arab-Malaysian Merchant Bank (merchant bank) D) Goldman Sachs (investment bank) Answer: C Diff: 2: Moderate Skill: Application Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 78) The employer of Expert B can most likely be categorized as which of the following?

A) investment bank B) private bank C) commercial bank D) offshore bank Answer: D Diff: 2: Moderate Skill: Application Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 79) Expert C most likely works for which of the following?

A) Nomura Securities B) Banco General in Panama C) Federal Reserve Bank D) International Monetary Fund Answer: A Diff: 2: Moderate Skill: Application Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge

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80) Investment banks underwrite (guarantee the sale of) stock and bond issues and advise on mergers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 81) Merchant banks provide capital to firms in the form of shares rather than loans.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 82) The Bank for International Settlements is an international organization that fosters cooperation among central banks and other governmental agencies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 83) The Indian rupee is one of the currencies upon which the value of the Special Drawing Right (SDR) is based.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 84) The IMF and the World Bank seldom work together.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge

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85) Describe the role of commercial banks in the global financial sector. Provide a brief description of the activities performed by three different types of commercial banks.

Answer: Banks are important players in the global financial sector. They raise funds by attracting deposits, borrowing money in the interbank market, or issuing financial instruments in the global money market or securities markets. Commercial banks circulate money and engage in a wide range of international financial transactions.

Investment banks underwrite (guarantee the sale of) stock and bond issues and advise on mergers such as the merger of Goldman Sachs in the United States and Nomura Securities in Japan.

Merchant banks provide capital to firms in the form of shares rather than loans. They are essentially investment banks especially equipped to handle international operations. The ArabMalaysian Merchant Bank is an example.

Offshore banks are located in jurisdictions with low taxation and regulation, such as Switzerland or Bermuda. Banco General in Panama and Bank of Nova Scotia in the British Virgin Islands are examples.

Diff: 3: Hard Skill: Synthesis Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge 86) Explain the duties of central banks. How do central banks, such as the Federal Reserve, implement national monetary policies?

Answer: As the official national bank of each country, the central bank regulates the money supply and credit, issues currency, and manages the rate of exchange. The central bank also seeks to ensure the safety and soundness of the national financial system by supervising and regulating the nation's banking system.

A key goal is to keep price inflation low. The central bank regulates the nation's money supply and credit by (1) buying and selling money in the banking system, (2) increasing or decreasing the interest rates on funds loaned to commercial banks, or (3) buying and selling government securities. Many central banks also buy and sell government securities to finance government programs and activities.

Monetary intervention describes how central banks manipulate currency rates, usually with the aim of maintaining stable or orderly exchange rates. Such intervention is achieved by buying or selling currencies in the foreign exchange market. For example, if the central bank of the United States (called the Federal Reserve Bank) wants to support the value of the U.S. dollar, it might buy dollars in the foreign exchange market. By so doing, the supply of dollars is reduced, which increases the value of dollars still in circulation.

Diff: 2: Moderate Skill: Application Objective: 9-5: Identify the key players in the monetary and financial systems AACSB: Application of Knowledge

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87) Which of the following statements is TRUE of the global debt crisis?

A) Fiscal imbalances are the least important source of risk and uncertainty in the global business environment.

B) The smallest proportion of government debt results from national pension and healthcare programs.

C) Debt has substantially decreased in major advanced economies mainly due to excessive government spending.

D) When a government tries to pay down its debt, money is drawn out of the national money supply, which hinders economic activity and reduces tax revenues.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-6: Understand the global debt crisis AACSB: Application of Knowledge 88) The 2008 global financial crisis began in the subprime mortgage market in the United States and spread to banking systems worldwide.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 9-6: Understand the global debt crisis AACSB: Application of Knowledge 89) The largest proportion of government debt results from national pension and healthcare programs.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-6: Understand the global debt crisis AACSB: Application of Knowledge

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International Business: The New Realities, 5e (Cavusgil) Chapter 10 Financial Management and Accounting in the Global Firm 1) Which of the following is the first task in international financial management?

A) managing working capital and cash flow B) managing currency risk C) choosing a capital structure D) managing the diversity of international accounting and tax practices Answer: C Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge 2) Which of the following is the final task in international financial management?

A) managing currency risk B) managing the diversity of international accounting and tax practices C) raising funds for the firm D) managing working capital and cash flow Answer: B Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge 3) In terms of financial management tasks that are key to MNE success, which of the following comes immediately after the task of raising funds for the firms?

A) assesses the financial attractiveness of major investment projects, such as foreign expansion B) determines the ideal long-term mix of financing for the firm's international operations C) learns to operate in a global environment with diverse accounting practices and international tax regimes D) administers funds passing in and out of the firm's value-adding activities Answer: D Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge

1 .

4) In terms of financial management tasks that are key to MNE success, which of the following comes after the task of assessing the financial attractiveness of major investment projects?

A) oversees transactions in various foreign currencies and manages risk exposure resulting from exchange-rate fluctuations B) administers funds passing in and out of the firm's value-adding activities C) obtains financing for funding value-adding activities and investment projects D) learns to operate in a global environment with diverse accounting practices and international tax regimes Answer: A Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge 5) Which of the following is a major purpose of the international capital market?

A) to reduce entrepreneurial initiatives B) to increase the cost of borrowing C) to reduce risk for lenders D) to reduce the money supply for borrowers Answer: C Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge 6) The last task in international financial management is to manage the diversity of international accounting and tax practices.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge

2 .

7) Describe the six major financial management tasks that are critical to firms active in international business transactions.

Answer: • Choosing a capital structure. Determine the ideal long-term mix of financing for the firm's international operations.

• Raising funds for the firm. Obtain financing for funding value-adding activities and investment projects. Financing might come from selling stocks, borrowing money, or using internally generated funds.

• Managing working capital and cash flow. Administer funds passing in and out of the firm's value-adding activities.

• Performing capital budgeting. Assess the financial attractiveness of major investment projects, such as foreign expansion.

• Managing currency risk. Oversee transactions in various foreign currencies and manage risk exposure resulting from exchange-rate fluctuations.

• Managing the diversity of international accounting and tax practices. Learn to operate in a global environment with diverse accounting practices and international tax regimes.

Diff: 2: Moderate Skill: Concept Objective: 10-1: Understand how to choose a capital structure AACSB: Application of Knowledge 8) Which of the following is a debt instrument that specifies the timing of principal and interest payments?

A) stock B) bond C) share D) equity Answer: B Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 9) The sale of corporate bonds to individuals or institutions to raise capital is called ________.

A) debt financing B) equity financing C) multilateral netting D) currency hedging Answer: A Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

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10) Debt financing comes from ________.

A) personal savings of founders B) loans from financial intermediaries C) capital contributed by founders D) selling shares of stock to investors Answer: B Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 11) ________ refers to shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows.

A) Stock B) A bond C) Debt D) A draft Answer: A Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 12) Which of the following financing tactics would most likely help an MNE to avoid bankruptcy?

A) integrating e-commerce opportunities with domestic sales in order to maintain a steady balance of income and expenditures B) agreeing to forward contracts with customers and hedging purchases and sales on future currency rates C) organizing the capital structure so that the amount of debt financing is twice the level of equity financing D) keeping the debt proportion of their capital structure to a level that can be managed even during difficult business conditions Answer: D Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Analytical Thinking

4 .

13) Debt financing can add value to a firm because ________.

A) it enables investors and firms to develop long-term relationships through a joint business endeavor B) some governments allow firms to deduct interest payments from their taxes C) it limits the risk of bankruptcy D) it increases the cash flow toward the company compared to equity financing Answer: B Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 14) How much debt a firm should hold depends partly on the nature of its industry and its target markets. Which of the following firms can sustain a higher debt ratio?

A) an automobile firm in a developing economy B) a software firm that sells software in an emerging economy C) an insurance firm with stable sales in an advanced economy D) a small supplier of construction material in a poor country Answer: C Diff: 3: Hard Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Analytical Thinking 15) Which of the following statements is TRUE of the global money market?

A) A great advantage for investors in the global money market is the ability to access a wide range of investment opportunities.

B) It refers to the collective financial markets where firms and governments raise long-term financing.

C) The maturity period for the funding obtained from the global money market is over ten years.

D) It refers to the collective financial markets worldwide where firms and governments raise short-term financing.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

5 .

16) Which of the following is a benefit for firms that participate in the global capital market?

A) availability of short-term financing B) availability of a large pool of financing sources at a lower, competitive rate C) access to larger funds exclusively in the domestic market D) access to unregulated and secured returns on investment Answer: B Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 17) The unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments is called ________.

A) currency hedging B) commercialization C) currency arbitrage D) securitization Answer: D Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 18) When using equity financing, firms run the risk of ________.

A) diluting the firm's ownership B) regular monthly payments of principal and interest C) incurring a high debt ratio D) severe penalties for late or missed payments of interest Answer: A Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 19) Global equity market refers to ________.

A) the international marketplace in which bonds are bought and sold, primarily through bond brokers B) collective financial markets where firms can borrow money from banks or other financial intermediaries, or sell corporate bonds to individuals or institutions, to raise capital C) the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds D) stock exchanges worldwide where investors and firms meet to buy and sell shares of stock Answer: D Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 6 .

20) Equity financing comes from ________.

A) foreign bonds B) domestic bonds C) capital by selling stocks D) Eurocurrency market Answer: C Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 21) Which of the following statements is TRUE of the Export Import (Ex-IM) Bank in the United States?

A) It is an international agency run by the WTO that provides capital to firms from emerging and developing economies.

B) It is a federal agency for loans and loan guarantees. Governments in the developing world often provide loans to promote inward direct investment projects such as the construction of dams, power plants, and airports.

C) It is a branch of the EU that provides working capital loans to SMEs that are based in the economic bloc.

D) It is a privately owned bank that offers high interest loans to international firms with poor credit ratings.

Answer: B Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 22) Which of the following has contributed to the emergence of a large Eurocurrency market?

A) lower interest rates on Eurocurrency loans B) regulations of home-country banking systems C) loans repaid interest-free at face value D) low interest rates on Eurocurrency deposits Answer: A Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

7 .

23) 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 market C) Eurocurrency market D) offshore financial center Answer: C Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 24) Funding obtained from sources inside a firm is known as ________.

A) structural financing B) grid loan financing C) internal network financing D) intracorporate financing Answer: D Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge Financing Corporate Expansion (Scenario) Intensity Games is an MNE based in San Francisco that manufactures a popular line of video game consoles and accessories. Intensity owns manufacturing facilities in China and Russia, where the components of the game consoles are manufactured and assembled before being shipped around the world. Intensity also owns numerous subsidiaries that manufacture game cartridges for Intensity game platforms. Intensity managers have determined that the firm needs to expand its Chinese facility to accommodate the increasing demand. The firm needs to raise several million dollars to finance the expansion. The financial managers of Intensity are discussing the various financing options available to the firm.

25) Which of the following questions would be more important for Intensity financial managers to evaluate when deciding the best method for the firm to raise funds?

A) What percentage of stock is owned by the CEO of Intensity Games?

B) How will the dividend be paid to shareholders if the firm expands its Chinese facility?

C) What type of debt financing would be most economical for Intensity?

D) At which bank does Intensity do the majority of its business transactions?

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 10-2: Understand how to raise funds for the firm AACSB: Analytical Thinking

8 .

26) Which of the following, if TRUE, supports Intensity raising funds through intracorporate financing to expand its Chinese facility?

A) Intensity would save money on transaction fees and tax deductible interest payments.

B) Intensity's subsidiaries are struggling due to price wars with video game competitors.

C) The Chinese government has offered Intensity a low-interest loan for the expansion.

D) Eurobonds have been a popular choice among MNEs with facilities in China.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 10-2: Understand how to raise funds for the firm AACSB: Analytical Thinking 27) Which of the following is most likely an advantage of Intensity accessing funds through the global capital market instead of domestic sources?

A) The maturity period of instruments is restricted to less than 365 days.

B) access to a vast number of competitive funding sources C) access to short-term financing exclusively D) reduced exposure to currency risk and rate fluctuation Answer: B Diff: 3: Hard Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 28) Which of the following is most likely a disadvantage of Intensity raising funds through equity financing?

A) Intensity management could lose a controlling interest in the firm.

B) Intensity would not be able to repay shareholders at any time.

C) Intensity management would end up in bankruptcy.

D) Intensity could lose money from currency fluctuations in emerging markets.

Answer: A Diff: 3: Hard Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

9 .

Freedom Energy Group (Scenario) Freedom Energy Group (FEG) is a major American energy services group based in Oklahoma.

FEG manufactures products to facilitate oil and gas exploration and is involved in the construction of oil refineries and gas pipelines around the world. FEG managers are considering the purchase of a Canadian energy firm, Maple Leaf Energy, which manufactures pipeline stabilization products. The financial management division of FEG is considering the risks and benefits of purchasing Maple Leaf.

29) Which of the following questions would be more important for FEG financial managers to evaluate before the firm purchases Maple Leaf?

A) What is the anticipated impact of hybrid technology and alternative fuel sources on the gas and oil industry?

B) Should FEG continue to employ Maple Leaf personnel after the acquisition, or should they be given severance packages?

C) What type of global marketing package should be created to inform potential customers about FEG's purchase of Maple Leaf?

D) What mix of debt and equity financing should FEG employ in the purchase and ownership of Maple Leaf?

Answer: D Diff: 3: Hard Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Analytical Thinking 30) Firms obtain debt financing by selling stock bonds to investors.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 31) Debt financing comes from either of two sources: (1) loans from banks and other financial intermediaries, or (2) the sale of corporate bonds to individuals or institutions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 32) The average debt ratio in Germany, Italy, Japan, and numerous developing economies typically exceeds 50 percent. High reliance on debt financing can arise if a country lacks a welldeveloped stock market or other systems for obtaining capital from equity sources.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 10 .

33) A firm in need of long-term financing will most likely turn to the global money market instead of the global capital market.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 34) The global capital market has grown rapidly due to increased government regulation, which has made international movement of capital easier.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 35) The NYSE and the NASDAQ Stock Market are the largest in terms of volumes of shares traded.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 36) When Mexican cement giant Cemex sells dollar-denominated bonds in the United States, it is issuing foreign bonds.

Answer: TRUE Diff: 1: Easy Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 37) When Toyota sells yen-denominated bonds in the United States, it is issuing Eurobonds.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

11 .

38) Discuss two reasons why a nation might NOT consider a firm's high debt ratio a risky approach to international business.

Answer: The riskiness of debt is perceived differently around the world. The average debt ratio in Germany, Italy, Japan, and numerous developing economies typically exceeds 50 percent.

High reliance on debt financing can arise if a country lacks a well-developed stock market or other systems for obtaining capital from equity sources. Under such conditions, firms may have little choice but to borrow money from banks. In other nations, firms maintain close relationships with banks. In Japan, large MNEs are often part of a conglomerate or holding company that includes a bank. Sony Corporation has its own bank, Sony Bank.

Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 39) Describe four factors responsible for the fast-paced growth of the global capital market.

Answer: First, the deregulation of financial markets by national governments led to easier movement of capital across national borders. Second, innovation in information and communication technologies has accelerated the ease and pace of global financial transactions.

Third, globalization of business activity pressures firms to seek new and more cost-effective ways to finance global operations and to be innovative in financial management activities.

Fourth, the securitization of financial instruments has become widespread. Securitization is the process of converting an illiquid financial instrument, such as a bank loan, into a tradable security, such as stocks.

Diff: 2: Moderate Skill: Application Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

12 .

40) Explain the differences between equity financing and debt financing, and discuss the ways international firms obtain equity financing or debt financing.

Answer: Companies obtain capital in two basic ways: by borrowing it or by selling shares of ownership in the firm. Equity financing is selling shares of stock to investors, which provides them with an ownership interest—that is, equity—in the firm. The firm can also retain earnings—that is, reinvest profit rather than paying it out as dividends to investors. In new companies, founders often provide equity financing from their personal savings. Debt financing comes from either of two sources: loans from banks and other financial intermediaries or the sale of corporate bonds to individuals or institutions.

Firms obtain these sources of funding as follows. In equity financing, the firm obtains capital by selling stock, which gives shareholders a percentage of ownership in the firm and, often, a stream of dividend payments. The main advantage is that the firm obtains capital without debt.

However, whenever new equity is sold, the firm's ownership is diluted. Management also risks losing control in the event one or more shareholders acquire a controlling interest.

Internationally, firms obtain equity financing in the global equity market—stock exchanges worldwide where investors and firms meet to buy and sell shares of stock.

In debt financing, a firm borrows money from a creditor (or sells bonds) in exchange for repayment of principal and an agreed-upon interest amount in the future. The main advantage is that the firm does not sacrifice any ownership to obtain needed capital.

Diff: 3: Hard Skill: Critical Thinking Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge 41) What are four advantages to large firms lending funds to their foreign subsidiaries?

Answer: There are several advantages associated with the practice of MNEs loaning funds to their foreign subsidiaries. First, because interest payments are often tax deductible, the borrowing subsidiary's income tax burden is reduced. Second, the effect of an intracorporate loan has little effect on the parent's balance sheet because the funds are simply transferred from one area of the firm to another. Third, a loan within the MNE may save transaction costs (fees charged by banks to exchange foreign currencies and transfer funds between locations) of borrowing funds from banks. Finally, a loan avoids the ownership-diluting effects of equity financing.

Diff: 2: Moderate Skill: Concept Objective: 10-2: Understand how to raise funds for the firm AACSB: Application of Knowledge

13 .

42) Why have global capital markets grown so rapidly in the past decade? Why has the growth of international business pressured multinational firms and international organizations to harmonize world accounting systems?

Answer: Why did global capital markets grow so rapidly in the past decade? We can count at least four reasons. First, governments' deregulation of financial markets eased movement of capital across national borders. Second, innovation in information and communication technologies accelerated the ease and speed of global financial transactions. Third, globalization of business compelled firms to seek new cost-effective ways to finance global operations and conduct financial management activities. Fourth is the widespread securitization of financial instruments resulting in the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds.

Some of the preceding factors contributed to the global financial crisis that began in 2007— 2008. The crisis arose partially because of the large-scale availability of credit and easy movement of capital across national borders. As investors bought commodities and real estate, the prices of such assets became unrealistically high. Eventually investors realized that valuations in credit markets were too risky, so they sold assets on a massive scale. The total world value of financial assets (stocks, bonds, and loans) declined substantially but returned to earlier levels two years later in 2010.

The growth of international business has pressured multinational firms and international organizations to harmonize world accounting systems. Organizations such as the International Accounting Standards Board (IASB), the United Nations, the European Union, and the Asociación Interamericana de Contabilidad (Interamerican Association of Accounting) have sought improvements in accounting measurement, disclosure, and auditing. The IASB is attempting to develop a single set of high-quality, understandable, and enforceable global accounting standards. Harmonization is particularly important to MNEs that seek foreign investors by listing on foreign stock exchanges.

Diff: 3: Hard Skill: Synthesis Objective: 10-2, 10-6: Understand how to raise funds for the firm, Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking 43) Net working capital is ________.

A) the combined total of a firm's equity capital and net losses B) the difference between a firm's current assets and current liabilities C) the difference between a firm's expected profits and current debts D) any currency deposited in a bank outside its country of origin Answer: B Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge

14 .

44) The volume and complexity of a firm's intracorporate transfers depends on ________.

A) the amount of cash available from loans B) the value of the shareholders' stock C) the country from which the firm originates D) the number of subsidiaries and alliances the firm maintains worldwide Answer: D Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 45) Through ________, a subsidiary can defer payment for goods and services received from its parent firm.

A) trade credits B) royalty payments C) fronting loans D) dividend remittances Answer: A Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 46) Which of the following terms is used to refer to compensation paid to the owner of intellectual property?

A) commission fee B) trade credit C) royalty payment D) dividend remittance Answer: C Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 47) Through a ________ the parent company deposits a large sum in a foreign bank, which transfers it to a subsidiary as a loan.

A) trade credit B) dividend remittance C) fronting loan D) royalty payment Answer: C Diff: 2: Moderate Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 15 .

48) Transfer pricing is defined as ________.

A) methods for transferring funds exclusively from foreign subsidiaries to parent corporations B) compensation paid to owners of intellectual property C) the means by which subsidiaries and affiliates charge each other as they exchange goods and services D) the process through which a parent deposits a large sum in a foreign bank, which transfers it to a subsidiary as a loan Answer: C Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 49) ________ is the strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.

A) Herding B) Multilateral netting C) Hedging D) Currency swap Answer: B Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 50) Multilateral netting would enable an MNE with numerous subsidiaries to ________.

A) consolidate intracorporate cash transfers and reduce transaction fees B) charge its subsidiaries as they exchange goods and services with the parent company C) transfer goods and services within the firm without paying host-country taxes D) channel funds from small subsidiaries to large ones without paying interest Answer: A Diff: 2: Moderate Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 51) Intracorporate fund transfers enable MNEs to access cash from subsidiaries through royalty payments, transfer pricing, and multilateral netting.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge

16 .

52) A centralized depository lets managers reduce the size of highly liquid accounts and invest the funds, generally at the higher interest rates offered for large deposits, to generate maximal returns.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge 53) Multilateral netting is the means by which subsidiaries and affiliates charge each other as they exchange goods and services.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge

17 .

54) Describe three methods used to transfer funds within an MNE. Answer: a. Through trade credit, a subsidiary can defer payment for goods and services received from the parent company. Credit terms tend to be longer in foreign markets (90 days) compared to the United States (30 days). b. Dividend remittances are a common method for transferring funds from foreign subsidiaries to the parent, but vary for each subsidiary depending on factors such as tax levels and currency risks. For instance, some host governments levy high taxes on dividend payments, which discourages MNEs from using this approach. Governments can also limit how much MNEs can be remitted. c. Transfer pricing refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same MNE. Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries, minimize foreign exchange risks, and optimize the management of internal cash flows. d. Royalty payments are remuneration paid to the owners of intellectual property. Assuming the subsidiary has licensed technology, trademarks, or other assets from the parent or other subsidiaries, royalties can be an efficient way to transfer funds. Also, because they may be viewed as an expense, royalties are tax-deductible in many countries. The parent MNE can collect royalties from its own subsidiaries as a way of generating funds. e. A fronting loan is a loan between the parent and its subsidiary, channeled through a large bank or other financial intermediary. Fronting allows the parent to circumvent restrictions that foreign governments impose on direct intracorporate loans. If the loan is made through a bank in a tax haven—a country hospitable to business and inward investment because of its low corporate income taxes—the parent can minimize taxes that might be due if the loan were made directly.

While some countries restrict international funds transfers in order to keep money within their borders, such restrictions usually do not apply to the repayment of bank loans. f. Multilateral netting is another method for funds transfer within the MNE. It amounts to strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.

Diff: 3: Hard Skill: Application Objective: 10-3: Explain how to manage working capital and cash flow AACSB: Application of Knowledge

18 .

55) Explain the difference between working capital and net working capital, and discuss why managers employ net present value (NPV) analysis to evaluate domestic and international capital investment projects.

Answer: Working capital refers to the current assets of a company. Net working capital is the difference between current assets and current liabilities. As part of working capital management, firms manage all current accounts, such as cash, accounts receivable, inventory, and accounts payable. Cash comes from various sources, especially sales of goods and services. In the MNE, an important task of working capital management is ensuring cash is available where and when needed. Cash-flow needs arise from everyday activities, such as buying labor and materials, paying interest on debt, and paying taxes and shareholder dividends. To optimize global operations, international finance managers devise strategies for transferring funds among the firm's operations worldwide.

Managers typically employ net present value (NPV) analysis to evaluate domestic and international capital investment projects. NPV is the difference between the present value of a project's incremental cash flows and its initial investment requirement. Four considerations complicate international capital budgeting for an MNE. First, project cash flows are usually in a currency other than the reporting currency of the parent firm. Second, tax rules in the project location and the parent's country usually differ. Third, governments may limit the transfer of funds from the project to the parent firm. Finally, the project may be exposed to country risk, such as government intervention, high inflation, or adverse exchange rates.

Managers employing NPV address these in two ways. One is to estimate the incremental aftertax operating cash flows in the subsidiary's local currency and then discount them at the project's cost of capital, or required rate of return, appropriate for its risk characteristics. If the NPV is positive, the project is expected to earn its required return and add value to the subsidiary. This approach takes the project's perspective in capital budgeting, and managers can use it as a first screening method.

The second approach, called the parent's perspective, estimates future cash flows from the project in the functional currency of the parent—that is, the currency of the primary economic environment in which it operates. Thus, U.S.-based firms' functional currency is the U.S. dollar; for Japan-based firms it is the yen. This conversion forecasts spot exchange rates, or forward rates, and calculates their present value using a discount rate in line with the required return on projects of similar risk. Managers then compute the NPV in the parent's functional currency by subtracting the initial investment cash flow from the present value of the project cash flows. To be acceptable the project must add value to the parent company; it should therefore have positive NPV from the parent's perspective.

Diff: 3: Hard Skill: Application Objective: 10-3, 10-4: Explain how to manage working capital and cash flow, Describe how to perform capital budgeting AACSB: Application of Knowledge

19 .

56) Capital budgeting is intended to ________.

A) assist in the means by which subsidiaries and affiliates charge each other as they exchange goods and services B) help managers decide which international projects provide the best financial return C) defer payment for goods and services received from the parent firm D) eliminate the need for international accounting experts Answer: B Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 57) ________ estimates future cash flows from the project in the functional currency of the parent—that is, the currency of the primary economic environment in which it operates.

A) Project's perspective B) Parent's perspective C) Passive hedging D) Active hedging Answer: B Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 58) Net present value is defined as the ________.

A) combined value of the capital assets of a project and the sales projections B) difference between the present value of a firm's assets and the future project liabilities C) difference between the present value of a project's incremental cash flow and the initial investment D) combined value of a project's initial investment and its incremental cash flow Answer: C Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 59) All of the following are characteristic of the parent's perspective approach in capital budgeting EXCEPT that it ________.

A) estimates future cash flows from the project B) uses the subsidiary's local currency C) forecasts forward rates D) uses the functional currency of the parent Answer: B Diff: 2: Moderate Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 20 .

60) Which of the following is characteristic of the parent's perspective in capital budgeting?

A) It estimates future cash flows from the project in the functional currency.

B) It adds the subsidiary's after-tax operating cash flows with the project's cost of capital.

C) It seldom uses the currency of the primary economic environment in which it operates.

D) It estimates the incremental after-tax operating cash flows in the subsidiary's local currency.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 61) Which of the following is a factor that complicates capital budgeting in the MNE? A) project cash flows in the reporting currency of the parent firm B) government intervention in the project C) similar tax rules in the project location and the parent's country D) government permit to exclusively transfer funds from the project to the parent firm Answer: B Diff: 2: Moderate Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 62) The purpose of capital budgeting is to help managers decide which international projects provide the best financial return.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 63) A parent's perspective approach in capital budgeting can be employed by managers interested in initially screening the appropriateness of an international capital investment project.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 64) Estimating project cash flows is complex and requires forecasting a range of variables that contribute to anticipated revenues and costs over several years.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 21 .

65) Capital budgeting in MNEs is protected from country risks or government intervention.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-4: Describe how to perform capital budgeting AACSB: Application of Knowledge 66) If one U.S. dollar equaled one euro last year, and then the exchange rate shifted so that today one dollar equals two euros, which of the following will most likely occur?

A) Americans will export more U.S. products.

B) Americans will have a lower standard of living.

C) Americans will cancel vacations to Europe.

D) Europeans will import fewer U.S. products.

Answer: D Diff: 3: Hard Skill: Application Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 67) ________ is the currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

A) Translation exposure B) Transaction exposure C) Spot exchange rate D) Multilateral netting Answer: B Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 68) Transaction exposure occurs when ________ are denominated in foreign currencies.

A) accounts receivables B) financial reports C) bank loans D) wages and salaries Answer: A Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge

22 .

69) ________ is the process of combining and integrating the financial results of foreign subsidiaries into the financial statements of the parent firm.

A) Hedging B) Dumping C) Consolidation D) Trade credit Answer: C Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 70) Economic exposure results from exchange-rate fluctuations that affect ________.

A) marketing strategies B) tariffs and duties C) brand personality D) product pricing and inputs and the value of foreign investments Answer: D Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 71) ________ is the currency risk that results from exchange-rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

A) Translation exposure B) Economic or operating exposure C) Transaction exposure D) Interoceptive exposure Answer: B Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 72) International firms operating within the Eurozone are less concerned about currency risk than international firms operating outside the Eurozone mainly because of the ________.

A) tax haven privileges in the bloc B) consistently favorable exchange rates for the bloc C) use of a single currency within the bloc D) economic bloc restrictions that are applicable to all the firms Answer: C Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 23 .

73) What is the rate of exchange quoted by a financial institution for delivery of a currency within 48 hours?

A) spot rate B) prime rate C) direct quote D) repo rate Answer: A Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 74) Which of the following is applied when an American tourist exchanges dollars for the immediate receipt of Japanese yen at a Tokyo bank?

A) the forward rate B) the spot rate C) the discount rate D) the prime rate Answer: B Diff: 2: Moderate Skill: Application Objective: 10-5: Explain how to manage currency risk AACSB: Analytical Thinking 75) ________ are currency traders who seek to minimize their risk of exchange-rate fluctuations, often by entering into forward contracts or similar financial instruments.

A) Venture capitalists B) Arbitragers C) Hedgers D) Speculators Answer: C Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 76) Which of the following is the purpose of a forward contract?

A) reduce corporate exposure to tax audits B) maximize intracorporate finance C) minimize the risk of exchange rate fluctuations D) earn profits from outsourcing activities Answer: C Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 24 .

77) With a futures contract, the purchaser agrees to buy or sell a currency ________.

A) within a certain amount of time, at the rate applicable on that day B) when the exchange rate reaches a set amount C) at any rate after a specified period of time has elapsed D) at a predetermined price on a specific date Answer: D Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge Freedom Energy Group (Scenario) Freedom Energy Group (FEG) is a major American energy services group based in Oklahoma.

FEG manufactures products to facilitate oil and gas exploration and is involved in the construction of oil refineries and gas pipelines around the world. FEG managers are considering the purchase of a Canadian energy firm, Maple Leaf Energy, which manufactures pipeline stabilization products. The financial management division of FEG is considering the risks and benefits of purchasing Maple Leaf.

78) Which of the following should most likely be considered by financial managers before FEG purchases Maple Leaf?

A) How will environmentalists react to the purchase of Maple Leaf by FEG? B) Should FEG integrate the Maple Leaf logo into the FEG marketing campaign?

C) What is the best way for FEG to manage currency fluctuation between U.S. dollars and Canadian dollars?

D) How will NAFTA affect the legal negotiations between FEG and Maple Leaf?

Answer: C Diff: 3: Hard Skill: Application Objective: 10-5: Explain how to manage currency risk AACSB: Analytical Thinking 79) Unlike exporters and licensors, who both face currency risk, managers of foreign investment portfolios can also be impacted by the fluctuation in exchange rates.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 80) Transaction exposure is currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 25 .

81) Gains and losses directly affect cash flows in the case of translation exposure, but cash flows can be significantly affected by transaction exposure.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 82) The direct quote, also known as the normal quote, is the number of units of domestic currency needed to acquire one unit of foreign currency.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 83) Speculators are currency traders who seek profits by investing in currencies with the expectation their value will change in the future.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 84) Currency arbitragers are currency traders who seek to minimize their risk of exchange-rate fluctuations, often by entering into forward contracts or similar financial instruments.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 85) Major supply shocks affect exchange rates when oil-exporting countries suddenly announce a decrease in the supply of oil. In addition to forecasting such events, managers must assess the likely actions of foreign-exchange traders.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge

26 .

86) In passive hedging, the firm frequently reviews total exposure and hedges only a subset of its total exposures, usually those that pose the greatest risk.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 87) Currency swap is an agreement to exchange one currency for another, according to a specified schedule.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 88) Explain the differences between a forward contract and a futures contract.

Answer: A forward contract is an agreement to exchange two currencies at a specified exchange rate on a set future date. No money changes hands until the delivery date of the contract. Banks quote forward prices in the same way as spot prices—with bid and ask prices at which they will buy or sell currencies. The bank's bid-ask spread is a cost for its customers.

Like a forward contract, a futures contract represents an agreement to buy or sell a currency in exchange for another at a specified price on a specified date. Unlike forward contracts, futures contracts are standardized to enable trading in organized exchanges, such as the Chicago Mercantile Exchange. While the terms of forward contracts are negotiated between a bank and its customer, futures contracts have standard amounts and maturity periods. Futures contracts are especially useful for hedging transaction exposure.

Diff: 2: Moderate Skill: Application Objective: 10-5: Explain how to manage currency risk AACSB: Application of Knowledge 89) How has technology affected foreign exchange trading?

Answer: Information technology has increased the speed at which currency transactions take place. Consider UBS, one of the world's largest investment banks based in Switzerland that offers a range of currency-related products. The bank's clients transact nearly all their spot, forward, and currency-swap trades online using UBS's leading-edge computer platforms in dozens of countries. Technology allows customers in remote areas to enjoy the currency trading services that until recently were accessible only in large cities via big banks.

Diff: 2: Moderate Skill: Concept Objective: 10-5: Explain how to manage currency risk AACSB: Information Technology

27 .

90) Describe the three types of currency exposure, and explain the benefits of the consolidation of financial statements.

Answer: Currency fluctuations result in three types of exposure for the firm: transaction exposure, translation exposure, and economic exposure.

Transaction exposure is currency risk firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

Translation exposure results when an MNE translates financial statements denominated in a foreign currency into the functional currency of the parent firm, as part of consolidating international financial results. Consolidation is the process of combining and integrating the financial results of foreign subsidiaries into the parent firm's financial records. Accounting practices usually require the firm to report consolidated financial results in the functional currency.

Economic exposure (also known as operating exposure) results from exchange-rate fluctuations that affect the pricing of products and inputs, and the value of foreign investments. Exchange rate fluctuations help or hurt sales by making the firm's products relatively more or less expensive for foreign buyers.

The consolidation of financial statements provides benefits to an international firm. A critical task in international accounting is foreign currency translation, or translating data denominated in foreign currencies into the firm's functional currency. Each of the firm's subsidiaries abroad normally maintains its financial records in the currency of the country where it is located. When subsidiary results are consolidated into headquarters' financial statements, they must be expressed in the parent's functional currency. Consolidation also facilitates headquarters efforts to plan, evaluate, and control the firm's activities around the world.

Diff: 3: Hard Skill: Critical Thinking Objective: 10-5, 10-6: Explain how to manage currency risk, Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking 91) The current rate method is typically employed when translating records of ________.

A) foreign subsidiaries that are part of the parent firm's operations B) domestic affiliates that conduct business abroad occasionally C) foreign subsidiaries that are considered stand-alone legal entities D) joint venture partnerships that participate in global operations Answer: C Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge

28 .

92) Direct taxes are typically imposed on income from profits, capital gains, royalties, interest, and dividends. Which of the following is a direct tax?

A) customs tax B) corporate income tax C) VAT D) sales tax Answer: B Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge 93) Tax havens are characterized by all of the following EXCEPT that they are ________.

A) legal means to reduce corporate income taxes B) regions where certain taxes are absent C) supported by the World Bank and the EU D) used to establish operations or funnel transactions Answer: C Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge Freedom Energy Group (Scenario) Freedom Energy Group (FEG) is a major American energy services group based in Oklahoma.

FEG manufactures products to facilitate oil and gas exploration and is involved in the construction of oil refineries and gas pipelines around the world. FEG managers are considering the purchase of a Canadian energy firm, Maple Leaf Energy, which manufactures pipeline stabilization products. The financial management division of FEG is considering the risks and benefits of purchasing Maple Leaf.

94) Which of the following most likely supports the purchase of Maple Leaf by FEG? A) Canadian and U.S. accounting systems and regulations are harmonized.

B) Maple Leaf financial records lack transparency despite tax audits.

C) Currency traders anticipate FEG will need to hedge the Canadian dollar.

D) FEG should be able to attain a fronting loan for the purchase of Maple Leaf.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking

29 .

EZ Lawn Currency Risk (Scenario) The EZ Lawn Corporation manufactures lawn equipment such as lawn mowers, blowers, and trimmers. The lawn equipment is assembled in the U.S. at a facility in Florida, but the firm outsources inputs from a number of countries, each with varying degrees of economic stability.

Given the importance of the firm's sourcing activities, EZ Lawn managers are discussing methods that might reduce the currency risk faced by EZ Lawn.

95) Which of the following would most likely minimize the currency risk of EZ Lawn?

A) concentrate all of the EZ Lawn outsourcing to one or two neighboring nations B) relocate a team of EZ Lawn managers overseas to stay abreast of currency changes C) list EZ Lawn stock on foreign stock exchanges to offset any currency losses D) assign an EZ Lawn manager the task of monitoring currency fluctuations Answer: D Diff: 3: Hard Skill: Application Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking 96) Contracting with secondary suppliers outside the U.S. for critical input components would most likely enable EZ Lawn to ________.

A) limit the amount of debt financing necessary for global expansion B) shift production from one country to another in case of currency fluctuations C) purchase components based on currency options instead of currency swaps D) hedge translation exposure by limiting the amount of interest payments Answer: B Diff: 3: Hard Skill: Application Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking 97) Which of the following would most likely be an effective currency risk strategy for EZ Lawn management?

A) increase prices of EZ Lawn products to cover currency issues B) decentralize the entire currency management to local managers C) use a spot rate for long-term transactions between suppliers D) monitor the economic trends of the suppliers' nations Answer: D Diff: 3: Hard Skill: Application Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Analytical Thinking

30 .

98) To minimize currency risk, managers should distinguish economic exposure from transaction and translation exposures.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge 99) Chile, Costa Rica, and the Czech Republic have attracted greater FDI by increasing the transparency of their regulatory systems.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge 100) Current rate method is the translation of foreign currency balance sheet and income statements at an exchange rate that varies with the underlying method of valuation.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge 101) A value-added tax (VAT) is payable at each stage of processing in the value chain of a product or service.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge

31 .

102) What goals does harmonization of world accounting practices aim to achieve?

Answer: Harmonizing world accounting practices aims to achieve several goals: • Reduce the cost of preparing financial statements.

• Increase the efficiency of consolidating financial information from various countries.

• Enhance the reliability of financial reporting by increasing comparability and transparency of accounting practices.

• Facilitate international investment in securities and ventures by helping investors and managers make better decisions.

Diff: 2: Moderate Skill: Concept Objective: 10-6: Understand how to manage the diversity of international accounting and tax practices AACSB: Application of Knowledge

32 .

International Business: The New Realities, 5e (Cavusgil) Chapter 11 Strategy and Organization in the International Firm 1) Strategy is ________.

A) a quality of executive management that provides inspirational guidance and motivation to personnel, leading the firm to a better future B) the pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt C) a planned set of actions that managers employ to make the best use of the firm's resources and core competencies to gain competitive advantage and accomplish organizational objectives D) the procurement of selected value-chain activities, including production of intermediate goods or finished products, from independent suppliers Answer: C Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge 2) When developing strategies, managers start by ________.

A) configuring and coordinating the firm's activities around the world B) deciding which customers to target C) analyzing the particular opportunities and challenges that confront the firm D) examining the firm's specific strengths and weaknesses Answer: D Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge 3) Which of the following activities would be considered last by a manager while developing strategies?

A) analyzing the particular challenges that confront the firm B) deciding how best to contend with competitors C) examining the firm's specific strengths and weaknesses D) analyzing the particular opportunities for the firm Answer: B Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge

1 .

4) ________ refers to using the resources of the firm, without wasting any of them.

A) Efficiency B) Protectionism C) Flexibility D) Currency control Answer: A Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge 5) Firms that want to become globally competitive must seek simultaneously three strategic objectives—efficiency, flexibility, and learning.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge 6) Efficiency refers to emphasizing consensus-based decision making and problem solving, in which managers readily share their knowledge.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge 7) IKEA fared well during the recent global recession. Its value-oriented furniture and housewares appealed to customers during tough economic times.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge

2 .

8) Describe the three strategic objectives for creating a competitive advantage in international business as proposed by Bartlett and Ghoshal. Provide an example to illustrate each objective.

Answer: a. Efficiency—The firm must build efficient international supply chains. Efficiency refers to lowering the costs of the firm's operations and activities on a global scale. MNEs with multiple value chains around the world must pay special attention to how they organize their R&D, manufacturing, supply chain, product, marketing, and customer service activities. For example, automotive companies such as Toyota strive to achieve scale economies by concentrating manufacturing and sourcing activities in a limited number of locations around the world. b. Flexibility—The firm must develop worldwide flexibility to manage diverse country-specific risks and opportunities. The diversity and volatility of the international environment is a special challenge for managers. Therefore, the firm's ability to tap local resources and exploit local opportunities is critical. For example, managers may opt for contractual relationships with independent suppliers and distributors in one country while engaging in direct investment in another. c. Learning—The firm must create the ability to learn from international exposure and exploit learning on a worldwide basis. The diversity of the environment presents the internationalizing firm with unique learning opportunities. Even though the firm goes abroad to exploit its unique advantages, such as technology, brand-name, or management capabilities, managers can add to the stock of capabilities by internalizing new knowledge gained from international exposure.

Thus, the organization can gain new technical and managerial know-how, new product ideas, R&D capabilities, partnering skills, and survival capabilities in unfamiliar environments. As an example, it was Procter & Gamble's research center in Belgium that developed a special capability in water-softening technology, primarily because the water in Europe contains more mineral than in the United States.

Diff: 3: Hard Skill: Synthesis Objective: 11-1: Describe strategy in international business AACSB: Application of Knowledge

3 .

9) How can a firm's strategy make the best use of the firm's resources? How does a firm's decision to have a centralized versus a decentralized organizational structure affect its strategy?

Answer: Strategy is a planned set of actions that managers employ to make best use of the firm's resources and core competencies to gain competitive advantage. When developing strategies, managers start by examining the firm's specific strengths and weaknesses. They then analyze the particular opportunities and challenges that confront the firm. Once they understand the firm's strengths, weaknesses, opportunities, and challenges, they decide which customers to target, what product lines to offer, how best to contend with competitors, and how generally to configure and coordinate the firm's activities around the world.

International strategy is strategy carried out in two or more countries. Managers in experienced MNEs develop international strategies to help the firm allocate scarce resources and configure value-adding activities on a worldwide scale, participate in major markets, implement valuable partnerships abroad, and engage in competitive moves in response to foreign rivals.

A fundamental issue in organizational structure is how much decision-making responsibility the firm should retain at headquarters and how much it should delegate to foreign subsidiaries and affiliates. This is the choice between centralization and decentralization.

A centralized approach gives headquarters considerable authority and control over the firm's activities worldwide. A decentralized approach means substantial autonomy and decisionmaking authority are delegated to the firm's subsidiaries around the world. In every company, management tends to devise a structure consistent with its vision and strategies. Thus, MNEs that emphasize global integration tend to have a centralized structure. Those that emphasize local responsiveness generally are decentralized.

Planning shared by managers at headquarters and at subsidiaries, with negotiation and give-andtake on both sides, is vital to the design of effective strategies.

Diff: 3: Hard Skill: Synthesis Objective: 11-1: Describe strategy in international business AACSB: Analytical Thinking 10) Managers who exemplify an open-minded attitude and who appreciate cultural diversity are described as applying a global ________.

A) sensitivity B) standard C) posture D) mind-set Answer: D Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge

4 .

11) GramTech Solutions is a software development firm based in the United States. The firm's CEO, David Ghaster, wants to open an outlet in India. Being a visionary leader, he would ________.

A) require employees to discover a strategic vision for the firm B) acquire managers with an international mind-set, showing an openness to and awareness of diversity across cultures.

C) commit minimum resources for international ventures because of the currency risk involved D) cut down on employees' cross-cultural training to save capital to open a firm in India Answer: B Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Diverse and Multicultural Work Environments 12) Which of the following is the most critical asset of any organization?

A) goodwill B) computer programs C) human capital D) bonds Answer: C Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 13) Organizational culture is ________.

A) the pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt B) an approach in which a firm views international business as separate from, and secondary to, its domestic business C) a reporting structure inside the firm that specifies the links between people, functions, and processes D) an organizational design in which all international activities are centralized within one division in the firm, separate from domestic units Answer: A Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge

5 .

14) Companies that proactively build a global organizational culture will ________.

A) promote independent headquarters and subsidiaries to avoid miscommunication B) subscribe to ethical standards developed in the home market to avert misunderstanding C) maintain a global perspective in all major initiatives D) adopt multiple corporate languages for business communications Answer: C Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 15) The managerial routines, behaviors, and mechanisms that allow a firm to function as intended are known as ________.

A) organizational designs B) organizational culture C) organizational processes D) organizational structure Answer: C Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 16) Which of the following is a characteristic of a global team?

A) culturally diverse B) similarly trained C) domestically based D) constant face-to-face interaction Answer: A Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Diverse and Multicultural Work Environments

6 .

17) Which of the following is TRUE about global teams?

A) It is a locally distributed group of employees charged with specific problem solving that affects company operations at the domestic scale.

B) To develop global strategies, the team should include culturally diverse managers whose business activities span the globe.

C) Strategic global teams focus on the efficient and effective operation of the business across the whole network.

D) Operational global teams identify or implement initiatives that enhance the long-term direction of the firm in its global industry.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Diverse and Multicultural Work Environments 18) A culturally diverse team would ________.

A) use diverse languages for business communications across various teams across the globe B) follow country-specific ethical standards across the globe C) use local employees, for accountability, for all major company decisions D) create a global view inside the firm while remaining in touch with local realities Answer: D Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Diverse and Multicultural Work Environments 19) Which of the following is an example of a multidomestic industry?

A) chemicals B) telecommunications C) fashion D) aerospace Answer: C Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge

7 .

20) Brogj Inc. is a cosmetics manufacturer based in California, United States. The firm varies its products to suit the different conditions abroad. Brogj is an example of a ________.

A) multidomestic industry B) regional industry C) global industry D) globally integrated industry Answer: A Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 21) A global industry is one in which competition is on a regional or worldwide scale. Which of the following is a global industry?

A) automobiles B) beverages C) publishing D) retailing Answer: A Diff: 3: Hard Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 22) The computer industry is an example of a ________.

A) locally responsive industry B) multidomestic industry C) global industry D) country-by-country competitor Answer: C Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 23) Which of the following is characteristic of a global industry?

A) A small number of major players compete head-on in multiple markets.

B) Competition is designed on a country-by-country basis.

C) Numerous firms compete within the industry worldwide.

D) Different marketing activities are designed to meet local needs across the globe.

Answer: A Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge

8 .

CEO Hiring Interview (Scenario) The Ace Children's Clothing Company is a mature MNE that has been manufacturing and selling children's clothing in Ace stores around the world for 30 years. Ace has seen a downturn in global sales recently due to trendy adult clothing companies branching out into children's clothing. The Ace board of directors is interviewing candidates to replace the outgoing CEO. The board wants a CEO who will take Ace into the future and pull customers back into Ace stores.

Two candidates are being interviewed for the position: Dan Elizarde and Tanya Carson. Tanya and Dan have comparable executive experience with retail clothing companies. Therefore, the board will be basing its final decision on visionary leadership skills.

24) Which of the following characteristics should the winning candidate most likely possess if Ace executives desire a CEO with a global mind-set?

A) open-minded about diversity B) subjective ethical standards C) fluency in two languages D) proponent of cultural imperialism Answer: A Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Diverse and Multicultural Work Environments 25) During the interview, Dan states that he expects Ace to surpass the competition in two years if he becomes CEO. Which of the following traits does Dan most likely exhibit with his statement that might appeal to the board of directors?

A) commitment to the success of Ace B) arrogance about his abilities to help Ace C) recognition of the homogeneity across communities D) subjective ethical standards Answer: A Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 26) During the interview, Tanya describes her idea of expanding the Ace line into maternity clothes to draw in expecting mothers. Which of the following traits of a visionary leader is Tanya most likely exhibiting?

A) subjective morality B) cultural imperialism C) global strategic vision D) dogmatic view Answer: C Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 9 .

27) Which of the following best supports the decision by the Ace board of directors to hire Tanya as the CEO? A) Tanya's recognition of the homogeneity across communities B) Tanya's innovative ideas and ability to spot future retail trends C) Tanya's subjective moral and ethical standards D) Tanya's competitive personality and dogmatic determination Answer: B Diff: 2: Moderate Skill: Application Objective: 11-2: Understand building the global firm AACSB: Analytical Thinking 28) Visionary leadership is a quality of senior management that provides inspirational guidance and motivation to personnel, leading the firm to a better future. Visionary leaders exhibit superior creativity, discipline, and passion in the course of leading others to realization of their vision.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 29) Organizational culture refers to managerial routines, behaviors, and mechanisms that allow the firm to function as intended.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 30) Companies that proactively build a global organizational culture subscribe to accepted ethical and moral standards.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 31) Strategic global teams identify or implement initiatives that enhance the short-term direction of the firm in its global industry.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 10 .

32) Global IT infrastructure and tools such as intranets, the Internet, and electronic data interchange ensure that distant parts of the global network share knowledge and learn from each other.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 33) A multidomestic industry is one in which competition takes place on a country-by-country basis.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-2: Understand building the global firm AACSB: Application of Knowledge 34) Contrast the strategies of multidomestic industries and global industries. Why is there a difference in strategies between the two industries? Provide an example for illustration.

Answer: Industries in which competition takes place on a country-by-country basis are known as multidomestic industries. In such industries, each country tends to have a unique set of competitors. Companies in the food and beverage, consumer products, and fashion industries often may cater to the specific needs and tastes of each of the countries where they do business.

Multidomestic firms adapt their offerings to suit the culture, laws, income level, and other specific characteristics of each country. For example, Coca-Cola varies the formula of its beverages to suit differing conditions abroad.

By contrast, industries such as aerospace, automobiles, telecommunications, metals, computers, chemicals, and industrial equipment are examples of global industries, in which competition is on a regional or worldwide scale. Formulating and implementing strategy is critical. Most global industries are characterized by the existence of a handful of major players that compete head-on in multiple markets. For example, Kodak must contend with the same rivals, Japan's Fuji and the European multinational Agfa-Gevaert, wherever it does business around the world.

Diff: 3: Hard Skill: Synthesis Objective: 11-2: Understand building the global firm AACSB: Analytical Thinking

11 .

35) Describe four traits that characterize visionary leaders, and explain why these traits are especially necessary for a firm that operates within a global matrix structure.

Answer: Visionary leaders are characterized by four major traits: International mind-set and cosmopolitan values. Visionary leadership requires managers to acquire an international mind-set—an openness to, and awareness of, diversity across cultures.

Dogmatic, close-minded managers who lack vision and have difficulty adapting to other cultures are likely to fail. Those who are open minded, committed to internationalization, and ready to adapt to other cultures are likely to succeed.

Willingness to commit resources. The complexities of foreign markets imply that international ventures take more time than domestic ones to become profitable. Visionary leaders commit to them and unswervingly believe the firm will eventually succeed. Commitment drives them to develop the financial, human, and other resources their firms need to achieve their international goals. Highly committed firms engage in systematic international market expansion, allocate necessary resources, and empower structures and processes that ensure ultimate success.

Strategic vision. Visionary leaders articulate a strategic vision—what the firm wants to be in the future and how it will get there. As they develop strategic vision, senior managers focus on the ideal picture of what the firm should become. The picture is a central rallying point for all plans, employees, and employee actions.

Willingness to invest in human assets. Visionary leaders must nurture the most critical asset of any organization—human capital. In global firms, senior leaders adopt such human resource practices as hiring foreign nationals, promoting multi-country careers, and providing crosscultural and language training to develop international super managers.

These leadership traits are especially necessary for a firm operating in a global matrix structure.

The global matrix structure is an arrangement that seeks to leverage the benefits of global strategy and responsiveness to local needs. Specifically, the global matrix structure is a combination of the geographic area, product, and functional structures. It aims to reap the advantages of each while minimizing their disadvantages. To make it work, headquarters management should simultaneously: (1) coordinate and control international operations; (2) respond to needs in individual countries; and (3) maximize interorganizational learning and knowledge sharing among the firm's units worldwide. These tasks can be more easily carried out if managers exhibit the traits of visionary leaders.

Diff: 3: Hard Skill: Synthesis Objective: 11-2: Understand building the global firm AACSB: Analytical Thinking

12 .

36) Global integration is the coordination of the firm's value-chain activities across multiple countries to achieve worldwide efficiency, synergy, and ________ in order to take advantage of similarities between countries.

A) capability B) expertise C) cross-fertilization D) redundancy Answer: C Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 37) Firms that emphasize global integration make and sell ________.

A) unique products that follow a multilocal strategy B) an excessive variety of complex products C) products that require minimal adaptation D) products designed specifically for local markets Answer: C Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 38) Managing a firm's value-chain activities on a country-by-country basis to address diverse opportunities and risks is known as ________.

A) global integration B) global aggregation C) regional coordination D) local responsiveness Answer: D Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 39) Coordinating the international value-chain activities of a firm across multiple countries to achieve maximum efficiency is known as ________.

A) local responsiveness B) global integration C) adaptation D) country-by-country responsiveness Answer: B Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 13 .

40) Which of the following is necessary for local responsiveness to effectively increase a firm's competitiveness?

A) Local managers need to be able to make decisions based on local needs.

B) Corporate executives must standardize marketing and merchandising.

C) Employees must be hired and trained only within a local region.

D) A firm's bankers and financial managers must be locally based.

Answer: A Diff: 2: Moderate Skill: Application Objective: 11-3: Describe the integration-responsiveness framework AACSB: Diverse and Multicultural Work Environments 41) Which of the following best characterizes the concept of global integration?

A) Effective global competition requires that products be specialized based on the market.

B) Making adjustments for unique markets is an essential element of international business.

C) Creating variations of the same product for different markets is an unnecessary expense.

D) The differences in market-to-market distribution channels must be accommodated.

Answer: C Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Analytical Thinking 42) Which of the following would exert pressure on a firm to become locally responsive?

A) the need to monitor and respond to global competitors B) the need to cater to local customer needs C) the desire to capitalize on converging consumer trends D) the desire to provide uniform service to consumers Answer: B Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Diverse and Multicultural Work Environments 43) Which of the following would exert pressure on a U.S.-based clothing company, ZSource Ltd., to become locally responsive?

A) to seek cost reduction through scale economies B) to conduct global sourcing of raw materials, components, energy, and labor C) to monitor and respond to global competitors D) to meet host government requirements and regulations Answer: D Diff: 2: Moderate Skill: Application Objective: 11-3: Describe the integration-responsiveness framework AACSB: Diverse and Multicultural Work Environments 14 .

44) Marketing the same product worldwide is most appropriate for the ________ industry.

A) furniture B) electronics C) food and beverage D) retailing Answer: B Diff: 2: Moderate Skill: Application Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 45) A firm would be compelled to seek global integration when it has to ________.

A) adjust to cultural differences B) cater to local customer needs C) capitalize on converging consumer trends and universal needs D) accommodate differences in distribution channels Answer: C Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Analytical Thinking 46) Global integration is the coordination of the firm's value-chain activities across multiple countries to achieve worldwide efficiency, synergy, and cross-fertilization to take advantage of similarities between countries.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 47) Due to the competition involved in global industries, marketing strategies are determined by the unique needs and regulations of each nation.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 48) Sourcing inputs from large-scale, centralized suppliers allows firms to obtain economies of scale, more consistent quality, lower costs, and generally more efficient operations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 15 .

49) Firms undertake global integration to seek cost reduction through economies of scale.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 50) A company can be compelled to be locally responsive in individual countries to provide uniform services to global customers.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 51) What is the integration-responsiveness framework? Describe the two main components of the framework.

Answer: The discussion about the pressures on the firm of achieving global integration and local responsiveness has become known as the integration-responsiveness (IR) framework. The IR framework has become popular for examining a firm's strategic objectives in international business.

Since efficiency and learning objectives are related, they are often combined into a single dimension, called global integration. Global integration refers to coordination of the firm's valuechain activities across countries to achieve worldwide efficiency, synergy, and cross-fertilization in order to take maximum advantage of similarities across countries. The flexibility objective is also called local responsiveness. Local responsiveness refers to meeting the specific needs of buyers in individual countries.

Diff: 2: Moderate Skill: Application Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge

16 .

52) Describe four factors that might persuade a firm to become locally responsive in a nation where it conducts business.

Answer: • Cater to local customer needs. Particularly in multidomestic industries, buyer needs vary from country to country. The internationalizing firm must adapt its products to meet diverse crossnational needs.

• Accommodate differences in distribution channels. Channels can vary from market to market and may increase the need for local responsiveness. In Latin America, small stores are the most common type of retailer. Foreign firms that ordinarily distribute their goods via large stores must adapt their approach when doing business there.

• Respond to local competition. Foreign firms are disadvantaged in markets that have numerous local competitors. To outdo local rivals, successful MNEs must devise offerings that best meet local demand.

• Adjust to cultural differences. Culture's influence on business activities can be substantial, depending on the market and the product. Where cultural differences are important, such as in sales of food and clothing, the firm must adapt its products and marketing activities accordingly.

Diff: 2: Moderate Skill: Concept Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge 53) Describe local responsiveness and explain how a multidomestic strategy allows an international firm to pursue local responsiveness.

Answer: Many companies seek to respond to specific conditions in individual countries.

Accordingly, local responsiveness refers to managing the firm's value-chain activities, and addressing diverse opportunities and risks, on a country-by-country basis. It emphasizes meeting the specific needs of customers in individual markets. When they operate internationally, firms try to strike the right balance between the objectives of global integration and local responsiveness.

A multidomestic strategy (sometimes called multilocal strategy) is a strategy in which the internationalizing firm develops subsidiaries or affiliates in each of numerous foreign markets.

The firm delegates much autonomy to managers in each foreign unit, allowing them to operate independently and pursue local responsiveness. Using this strategy, headquarters recognizes and emphasizes differences between national markets. As a result, the firm allows subsidiaries to vary product and management practices by country. Country managers are often nationals of the host country and tend to function independently, with little incentive to share knowledge and experience with managers in other countries. Products and services are carefully adapted to suit the unique needs of each country.

Diff: 3: Hard Skill: Synthesis Objective: 11-3: Describe the integration-responsiveness framework AACSB: Application of Knowledge

17 .

54) In the ________ strategy, a firm views international business as separate from, and secondary to, its domestic business.

A) home replication B) multilocal C) global D) transnational Answer: A Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 55) Which of the following is TRUE about foreign units of a company using a multidomestic strategy?

A) They are centralized to ensure efficiency and learning.

B) They are highly controlled by the company's headquarters.

C) They are autonomous and operate independently.

D) They pursue global integration.

Answer: C Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 56) Which of the following characterizes a multidomestic strategy?

A) Subsidiary managers adapt products and services to meet local needs.

B) Management practices are universal across local businesses.

C) Firm executives control all subsidiaries to maximize efficiency.

D) The firm allows subsidiaries to standardize products and services across countries.

Answer: A Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 57) Which of the following is a disadvantage of a multidomestic strategy?

A) lack of opportunities to delegate tasks B) high pressure on headquarters staff C) inefficient manufacturing D) standardized products in culturally different markets Answer: C Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge

18 .

58) Which of the following is an advantage of a multidomestic strategy?

A) standardized organizational culture B) minimal pressure on headquarters staff C) minimum redundancy D) low operating costs Answer: B Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 59) A ________ strategy is characterized by substantial control over country operations by headquarters in order to increase efficiency and integration.

A) multilocal B) home replication C) multidomestic D) global Answer: D Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 60) Which of the following is a characteristic of a transnational strategy to internationalization?

A) minimal pressure on headquarters staff B) decision making is delegated to local managers C) local responsiveness with central control D) international business is viewed as separate from, and secondary to domestic business Answer: C Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge

19 .

Extra Clean Strategy (Scenario) Extra Clean Soap Company has been manufacturing soap products, such as dishwashing liquid, bath soap, and shampoo, for over 20 years from its facility and headquarters in Dublin, Ireland.

A recent opportunity allowed Extra Clean to purchase soap companies in Taiwan and India.

Extra Clean is now servicing both foreign and domestic markets with its products and manufacturing in all three locations. Recent reports from managers in the foreign facilities indicate that Extra Clean sales in Taiwan and India are low due to a lack of local responsiveness.

Extra Clean managers from Ireland, India, and Taiwan are having a teleconference in an attempt to devise a strategy to improve the profitability of Extra Clean.

61) Which of the following questions would be most important for Extra Clean managers to evaluate the integration-responsiveness framework?

A) What types of global IT infrastructure and tools should be used in Dublin to maintain efficiency?

B) Should the Extra Clean headquarters relocate to Taiwan for six months?

C) Would the foreign managers benefit from a training session in Ireland?

D) What type of balance is appropriate between headquarters and country managers?

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Diverse and Multicultural Work Environments 62) Which of the following most likely supports Extra Clean implementing a multidomestic strategy instead of a global strategy?

A) The Taiwan manufacturing facility requires an update in equipment.

B) Extra Clean managers lack internationalization experience.

C) Recent studies have shown that consumer trends in Taiwan, India, and Ireland are converging.

D) Foreign rivals of Extra Clean compete at a global level.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 63) Which of the following most likely supports Extra Clean implementing a transnational strategy?

A) The country managers have been trained in the United States.

B) Extra Clean is a highly centralized organization.

C) Extra Clean could reduce the number of global suppliers.

D) There is high local competition in each of the markets.

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Analytical Thinking 20 .

64) The home replication strategy is often employed as a means of extending a product's life cycle in a foreign market and to replicate home-market success, as it views expansion abroad as an opportunity to generate additional sales for domestic product lines.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 65) When using a home replication strategy, firms delegate autonomy to managers in each foreign unit, allowing them to operate independently and pursue local responsiveness.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 66) When using a multidomestic strategy, products and services are carefully adapted to suit the unique needs of each country.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 67) Global strategy is an approach to internationalization in which headquarters seeks substantial control over its country operations to minimize redundancy and achieve maximum efficiency, learning, and integration worldwide.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Analytical Thinking 68) In a multidomestic strategy, there is maximum pressure on headquarters staff because there is little incentive for decision making by individual managers.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge

21 .

69) Global strategy is an approach to internationalization in which headquarters delegates considerable autonomy to each country manager, allowing him or her to operate independently and pursue local responsiveness, Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 70) Converging buyer characteristics, growing acceptance of global brands, and increased diffusion of uniform technology make it difficult to pursue a global strategy.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge 71) By standardizing international operations as much as possible, yet being adaptable to the needs of local markets, a firm is utilizing a transnational strategy of globalization.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge

22 .

72) Explain the benefits of a multidomestic strategy to firm internationalization. What are some of the disadvantages to this approach?

Answer: The multidomestic approach has several advantages. If the foreign subsidiary includes a factory, locally produced goods and products can be better adapted to local markets. The approach places minimal pressure on headquarters staff because management of country operations is delegated to individual managers in each country. Firms with limited internationalization experience often find multidomestic strategy an easy option as they can delegate many tasks to their country managers (or to foreign distributors, franchisees, or licensees, where they are used).

Nevertheless, multidomestic strategy has some disadvantages. The firm's foreign managers tend to develop strategic vision, culture, and processes that differ substantially from those of headquarters. They have little incentive to share knowledge and experience with managers in the firm's other country markets, which leads to duplication of activities and reduced economies of scale. Limited information sharing also reduces the possibility of developing a knowledge-based competitive advantage. Competition may escalate among the subsidiaries for the firm's resources because subsidiary managers do not share a common corporate vision. While a multidomestic strategy results in firms having a highly responsive presence in different national markets, it leads to inefficient manufacturing, redundant operations, a proliferation of products designed to meet local needs, and generally higher costs of international operations than other strategies.

Diff: 3: Hard Skill: Synthesis Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Application of Knowledge

23 .

73) Discuss the advantages and implementation of a transnational strategy, and explain why this strategy is closely associated with a global matrix structure.

Answer: A transnational strategy is a coordinated approach to internationalization in which the firm strives to be relatively responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning. Transnational strategy combines the major advantages of multidomestic and global strategies while minimizing their disadvantages. It is a flexible approach: standardize where feasible; adapt where appropriate.

To implement a transnational strategy, the firm should: a. Exploit scale economies by sourcing from a reduced set of global suppliers and concentrate manufacturing in relatively few locations where competitive advantages can be maximized. b. Organize production, marketing, and other value-chain activities on a global scale. c. Optimize local responsiveness and flexibility. d. Facilitate global learning and knowledge transfer. e. Coordinate global competitive moves—that is, rather than following a country-by-country approach, deal with competitors on a global, integrated basis.

The global matrix structure is closely associated with transnational strategy. Managerial responsibility for each product is shared by each product unit and the particular geographic areas of the firm. Thus, firms develop a dual reporting system in which, for example, an employee in a foreign subsidiary reports to two managers—the local subsidiary general manager and the corporate product division manager. Often the country manager is superior in authority, with responsibility for appraisal. Global matrix structure recognizes the importance of flexible and responsive country-level operations and shows firms how to link those operations to optimize operational efficiency and competitive effectiveness. The manager working in this structure shares decision making with other managers, wherever they may be, to achieve best practice for the firm's operations worldwide.

Diff: 3: Hard Skill: Synthesis Objective: 11-4: Learn to identify strategies based on the integration-responsiveness framework AACSB: Analytical Thinking 74) In establishing a firm's organizational structure, a fundamental issue is ________.

A) how to optimize local responsiveness and flexibility B) how much decision-making responsibility the firm should retain at headquarters C) how to leverage natural endowments available to the firm D) how the firm should invest in human assets Answer: B Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge

24 .

75) Which of the following gives headquarters considerable authority and control over the firm's activities worldwide?

A) nationalization B) home replication strategy C) centralized approach D) decentralized approach Answer: C Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 76) In which of the following are substantial autonomy and decision-making authority delegated to a firm's subsidiaries around the world?

A) decentralized approach B) global strategy C) transnational strategy D) nationalization Answer: A Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 77) A firm's headquarters is the primary contributor to ________.

A) local market research B) capital planning C) human resource management D) compliance with local laws and regulations Answer: B Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 78) A firm's subsidiary is the primary contributor to ________.

A) transfer pricing B) capital planning C) marketing D) global profitability Answer: C Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge

25 .

79) Armaz Inc., a manufacturing company, has its headquarters located in Texas, U.S., and subsidiaries in India, China, and Vietnam. Which of the following decisions will be the MOST centralized?

A) decision about building factories in Cambodia B) decision about hiring a marketing manager for its India operations C) decision to open a retail store in Vietnam D) decision about marketing newly developed products for the Chinese market Answer: A Diff: 2: Moderate Skill: Application Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking 80) Armaz Inc., a manufacturing company, has its headquarters located in Texas, U.S., and subsidiaries in India, China, and Vietnam. Which of the following decisions will be the LEAST decentralized?

A) decision about building factories in Cambodia B) decision about hiring a marketing manager in the United States C) decision to open a retail store in Vietnam D) decision about developing new products for foreign markets Answer: B Diff: 2: Moderate Skill: Application Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking 81) To establish positive relationships with country managers, senior corporate managers should ________.

A) transfer employees to different countries to maintain a centralized power structure B) encourage subjective ethical and moral standards across different countries C) invite local managers to discuss their experiences at regional and global conferences D) minimize decision making at the local level Answer: C Diff: 2: Moderate Skill: Application Objective: 11-5: Understand organizational structure in international business AACSB: Diverse and Multicultural Work Environments Quik Meal Structure (Scenario) Quik Meal is a fast-growing MNE that manufactures and sells energy gels for consumption by serious athletes, such as marathoners and triathletes. The energy gels produced by Quik Meal taste much better than the gels sold by other firms, which has led to an increase in sales.

Managers and executives with Quik Meal need to determine the best organizational structure for the young firm. Quik Meal has subsidiaries in Japan and Brazil, while company headquarters are based in San Francisco.

26 .

82) Which of the following questions would be more important for Quik Meal executives to evaluate when determining whether to centralize or decentralize the firm's structure?

A) How much modification is needed for Quik Meal products in Japan and Brazil?

B) How many athletes from each country participated in the Olympics?

C) What sports drinks are available and popular in Asia?

D) What is the possibility of Quik Meal establishing a subsidiary in India?

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking 83) Which of the following strengthens the decision by Quik Meal executives to centralize operations?

A) Quik Meal offers five different flavors of energy gels for athletes.

B) Quik Meal executives report a steady rate of sales in the U.S. market.

C) Quik Meal country managers report few requests to alter product ingredients.

D) Quik Meal products use the same trademark and packaging in every country.

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking 84) Organizational structure describes the reporting relationships inside the firm that specify the links between people, functions, and processes.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 85) A decentralized approach means substantial autonomy and decision-making authority are delegated to the firm's subsidiaries around the world.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 86) Headquarters of a firm is the primary contributor to decisions about local market research.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Application of Knowledge 27 .

87) Decisions about local products that will be sold in only one country are typically the joint responsibility of corporate and country-level managers, with the latter taking the lead role.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking 88) In order to facilitate shared decision making between headquarters and country managers, corporate representatives should often visit subsidiary locations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Diverse and Multicultural Work Environments 89) Discuss the factors relevant to a firm's decision to centralize or decentralize foreign operations.

Answer: The choice between headquarters and subsidiary involvement in decision making is a function of the nature of the product, the nature of competitors' operations, and the size and strategic importance of foreign operations. Generally, the larger the financial outlay or the riskier the anticipated result, the more involved headquarters will be in decision making. For example, decisions on developing new products or entering new markets tend to be centralized to headquarters. Decisions involving strategies for two or more countries are best left to headquarters managers who have a more regional or global perspective. Decisions to source products from one country for export to another, or decisions on intracorporate transfer pricing are likely to be centralized. Decisions on global products that are marketed in several countries with common trademarks and brand names are usually the responsibility of headquarters.

Conversely, decisions on local products that are sold only in single-country markets should be the joint responsibility of corporate and respective country managers, with the latter taking the leadership role.

Diff: 2: Moderate Skill: Concept Objective: 11-5: Understand organizational structure in international business AACSB: Analytical Thinking

28 .

90) Which of the following organizational arrangements for foreign operations is most closely associated with home replication strategy?

A) export department B) international division C) geographic area structure D) product structure Answer: A Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 91) International division managers usually oversee ________.

A) large-scale investments B) product development C) distributor relationships D) corporate accounting Answer: C Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 92) Which of the following is an advantage of an international division structure?

A) It leverages the benefits of global strategy while responding to local needs.

B) It allows better balance between global integration and local adaptation.

C) It requires a small resource commitment.

D) It allows concentration and development of international expertise.

Answer: D Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Analytical Thinking 93) Which of the following is a disadvantage of a geographic area structure?

A) geographic area managers' lack of global orientation for developing and managing products B) limited communications and coordination among the subsidiaries within each geographic region C) minimal balance between global integration and local adaptation D) decreased responsiveness to customer needs and wants in each regional/local market Answer: A Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Analytical Thinking

29 .

94) An advantage to firms that use a product structure arrangement is that ________.

A) it requires a small resource commitment B) duplication of corporate support functions for each product division is avoided C) there is limited possibility for excessive focus on products D) individual product lines are coordinated and managed globally Answer: D Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Analytical Thinking 95) Graham Technologies is a U.K.-based consumer electronics manufacturer. The company markets netbooks, smartphones, laptops, and desktops in the international market and each product division operates as a stand-alone profit center with substantial autonomy. This is an example of a ________.

A) global matrix structure B) functional structure C) product structure D) geographic area structure Answer: C Diff: 2: Moderate Skill: Application Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 96) In which of the following types of organizational arrangements would a firm most likely have a division that focused solely on management of an international organization?

A) product structure B) functional structure C) geographic area structure D) international division Answer: B Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge

30 .

97) In which of the following organizational structures does an employee at a foreign subsidiary report to both a local manager and a corporate manager?

A) global matrix structure B) functional structure C) home replication structure D) multidomestic structure Answer: A Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 98) An export department rarely requires much organizational structure until export sales reach a critical point.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 99) Geographic area structure is an organizational design in which management and control are decentralized to the level of individual geographic regions.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge 100) One of the advantages of a global matrix structure is that it provides better management of subsidiaries or products, or operations in many foreign markets.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 11-6: Understand foreign market entry strategies AACSB: Application of Knowledge

31 .

International Business: The New Realities, 5e (Cavusgil) Chapter 12 Global Market Opportunity Assessment 1) A favorable global market opportunity for a firm would most likely lead to ________.

A) a change in product packaging B) the procurement of new distributors C) the establishment of a production facility D) the sale of corporate stock Answer: C Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 2) Which of the following tasks should a shoe manufacturing company perform first if it needs to assess the global market opportunity?

A) assess the suitability of the company's shoes for foreign markets B) analyze the firm's readiness to internationalize C) choose foreign business partners D) screen countries to identify foreign markets Answer: B Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 3) Which of the following tasks in the global market opportunity assessment process should be performed directly before the task of estimating company sales potential?

A) analyze the company's readiness to internationalize B) screen countries to identify target markets C) assess industry market potential D) choose qualified foreign business partners Answer: D Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge

1 .

4) Which of the following processes involves evaluation of a firm's strengths, weaknesses, opportunities, and threats?

A) SWOT B) CORE C) PERT D) PEST Answer: A Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 5) One of the goals that firms most likely want to attain from internationalizing is ________.

A) decrease trade barriers in the foreign markets B) establish their presence in saturated markets C) increase their sales and profits D) minimize country risk Answer: C Diff: 2: Moderate Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking 6) Which of the following questions needs to be addressed by managers to determine the organizational readiness to internationalize?

A) What is the basis of the firm's competitive advantage?

B) Where do people purchase the product or service?

C) Who initiates purchasing?

D) What economic, cultural, geographic, and other factors in the target market may limit sales?

Answer: A Diff: 2: Moderate Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking

2 .

7) Which of the following is an acronym for a diagnostic tool used by organizations to determine international readiness?

A) SWOT B) PEST C) PERT D) CORE Answer: D Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking Happy Pet Internationalization (Scenario) Based in California, the Happy Pet Corporation has 45 pet supply stores across the United States.

Given the firm's success in the U.S. market, Happy Pet managers are considering internationalizing their operations to the EU. The market research conducted by the company identified several established pet product manufacturing companies. Beth Schultz, the founder and CEO of Happy Pet, has expressed concerns about expanding the firm's operations into the EU. She believes internationalizing in the EU is not profitable because of the presence of these established competitors. However, Edward O'Neal, the COO of Happy Pet, believes the corporation is ready for the next step. Happy Pet executives and managers have gathered to discuss their organization's readiness to internationalize.

8) Which of the following questions would be more important for Happy Pet executives to evaluate when determining the firm's readiness to internationalize?

A) What does Happy Pet hope to gain from internationalizing its operations?

B) How are the domestic sales figures of Happy Pet's competitors?

C) What product pricing strategies should Happy Pet adopt?

D) Where would be the best location for a Happy Pet product distribution center?

Answer: A Diff: 3: Hard Skill: Application Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking

3 .

9) Which of the following most likely supports the opinion of Beth Schultz over the opinion of Edward O'Neal?

A) Happy Pet has a monopoly in the U.S. pet products market.

B) Happy Pet's online sales reflect a high demand for premium pet food in the EU. C) Happy Pet's market research identified the presence of market saturation in the EU. D) Happy Pet's competitors have successfully branched into foreign markets.

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking 10) Which of the following should most likely be considered in determining whether Happy Pet is ready to internationalize?

A) What is the market demand for Happy Pet's products in selected target markets?

B) What demands will internationalization make on Happy Pet's financial resources?

C) How will Happy Pet managers determine which foreign market is appropriate?

D) Should Happy Pet relocate its corporate headquarters after internationalizing?

Answer: B Diff: 3: Hard Skill: Application Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking 11) Global market opportunities depend on timing and location, and they often enhance a firm's performance.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 12) When assessing the firm's readiness to internationalize, managers examine their organization to determine the degree to which it has the motivation, resources, and skills necessary to engage in international business successfully.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge

4 .

13) Screening to identify the best countries is an essential task. It is especially important in the early stages of internationalization.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 14) A SWOT analysis is used to estimate company sales potential for each target market.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 15) When assessing the firm's readiness to internationalize, managers peer into their organization to determine the degree to which it has the resources necessary to successfully engage in international business.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 16) CORE asks managers questions about their organizational resources, skills, and motivation to assess the firm's readiness to engage in exporting successfully.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 17) Assessing a firm's readiness to internationalize and suitability of its products and services for foreign markets occurs in the final stage of the global market opportunity assessment process.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge

5 .

18) CORE, a diagnostic tool, is the sole property of the U.S. Department of Commerce.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Analytical Thinking 19) Explain the concept of a global market opportunity, and discuss the key questions to assess a firm's organizational readiness to pursue global market opportunities.

Answer: A global market opportunity is a favorable combination of circumstances, locations, and timing that offers prospects for exporting, investing, sourcing, or partnering in foreign markets. In such locations, the firm may perceive opportunities to sell its products and services; establish factories or other production facilities to produce its offerings cheaper or more competently; procure raw materials, components, or services of lower cost or superior quality; or enter beneficial collaborations with foreign partners. Global market opportunities can enhance company performance, often far beyond what the firm can normally achieve in its home market.

A formal analysis of organizational readiness to internationalize requires managers to address the following questions: • What do we hope to gain from international business? Objectives might include increasing sales or profits, following key customers who locate abroad, challenging competitors in their home markets, or pursuing a global strategy of establishing production and marketing operations at various locations worldwide.

• Is international expansion consistent with other firm goals, now or in the future? The firm should evaluate and manage internationalization in the context of its mission and business plan to ensure it represents the best use of company resources.

• What demands will internationalization place on firm resources, such as management, human resources, and finance, as well as production and marketing capacity? How will the firm meet such demands? Management must ensure it has sufficient production and marketing capacity to serve foreign markets. Channel members become frustrated when inadequate capacity prevents the firm from fulfilling customer orders abroad.

• What is the basis of the firm's competitive advantage? Companies seek competitive advantages by doing things better than their competitors. Competitive advantages can be based on strong R&D, superior input goods, cost-effective or innovative manufacturing capacity, skillful marketing, highly effective distribution channels, or other capabilities.

Diff: 2: Moderate Skill: Application Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge

6 .

20) Describe the purpose of CORE. How does it aid managers?

Answer: CORE (Company Readiness to Export) has been adopted and used widely by individual enterprises, consultants, and the U.S. Department of Commerce. Because it was developed from extensive research on factors that contribute to successful exporting, it is also an ideal tutorial for self-learning and training.

CORE asks managers questions about their organizational resources, skills, and motivation to objectively assess the firm's readiness to successfully engage in exporting. It generates assessments of both organizational and product readiness to identify the useful assets managers have and the additional ones they need to make internationalization succeed. The assessment emphasizes exporting, since it is the typical entry mode for most newly internationalizing firms.

Diff: 2: Moderate Skill: Concept Objective: 12-1: Understand how firms conduct a formal assessment of readiness to internationalize AACSB: Application of Knowledge 21) Which of the following is a primary question to ask when attempting to determine a product's potential in a foreign market?

A) How much is the overall production cost?

B) Is the product safe and reliable?

C) Why do people buy the product?

D) How does the product work?

Answer: C Diff: 1: Easy Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge 22) Even if a firm is confident of its product being sold, it still needs to analyze who initiates the purchase.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Analytical Thinking 23) Products or services that are well-received at a firm's home country are more likely to be accepted in foreign countries as well.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge

7 .

24) Natural disasters in foreign countries is one of the reasons for the emergence of potential target markets for selling products and services.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge 25) When determining a product's potential in numerous foreign markets, it is usually best to assume that buyers have identical needs and purchasing habits across the markets.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge 26) An efficient method of gathering information about a target market is to introduce a product at an industry trade fair.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge 27) Describe the four factors that contribute to the likelihood of success for a product or service in an international market.

Answer: Products or services with the best international prospects tend to have one or more of the following characteristics: • Sell well in the domestic market. Offerings received well at home are likely to succeed abroad, especially where similar needs and conditions exist.

• Cater to universal needs. For example, buyers worldwide demand personal-care products, medical devices, and banking services. International sales may be promising if the product or service is unique or has important features that are appealing to foreign customers and are hard for foreign firms to duplicate.

• Address a need not well served in particular foreign markets. Potential may exist in countries where the product or service does not currently exist, or where demand is just starting to emerge.

• Address a new or emergent need abroad. Demand for some products and services may arise suddenly from a disaster or emergent trend. In Haiti, for example, an earthquake created an urgent need for easy-to-build housing. In emerging markets, growing affluence is spurring demand for restaurants and hospitality services.

Diff: 2: Moderate Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Application of Knowledge

8 .

28) Explain the four factors contributing to product suitability for international markets, and describe how these factors can help an international firm with a gradual elimination screening methodology.

Answer: Products or services with the best international prospects tend to have one or more of the following characteristics: • Sell well in the domestic market. Offerings received well at home are likely to succeed abroad, especially where similar needs and conditions exist.

• Cater to universal needs. For example, buyers worldwide demand personal-care products, medical devices, and banking services. International sales may be promising if the product or service is unique or has important features that are appealing to foreign customers and are hard for foreign firms to duplicate.

• Address a need not well served in particular foreign markets. Potential may exist in countries where the product or service does not currently exist, or where demand is just starting to emerge.

• Address a new or emergent need abroad. Demand for some products and services may arise suddenly from a disaster or emergent trend. In Haiti, for example, an earthquake created an urgent need for easy-to-build housing. In emerging markets, growing affluence is spurring demand for restaurants and hospitality services. Attention to these four factors, among others, can help in implementing the gradual elimination screening method. The researcher that applies gradual elimination starts with a large number of prospective target countries and gradually narrows the choices by examining increasingly specific information. The researcher aims to reduce to a manageable five or six the number of countries that warrant in-depth investigation as potential target markets. Because research is expensive, it is essential to eliminate unattractive markets quickly. Targeting a less-crowded economy with a product that is not yet widely available may be more profitable than targeting saturated and more competitive markets in Europe, Japan, and North America.

In the early stages, the researcher first obtains general information on macro-level indicators like population, income, and economic growth before delving into specific information. Broad screening data are readily available. The researcher then employs more specific indicators, such as import statistics, to narrow the choices. Import statistics help reveal the size of the market, the presence of competitors, and the market's viability for accepting new sales. The level of the country's exports also should be investigated, because some countries, such as Panama and Singapore, function as major transit points for international shipments and may not be actual product users. By analyzing research data and gradually narrowing the choices, the researcher identifies the most promising markets for further exploration.

Diff: 2: Moderate Skill: Concept Objective: 12-2: Determine the suitability of products and services for foreign markets AACSB: Analytical Thinking

9 .

29) Which of the following will be accomplished by potential exporters who are involved in studying import statistics?

A) evaluating the political risk of different markets B) estimating the profitability of domestic sales C) predicting the culture risk of an emerging market D) assessing a market's viability for accepting new sales Answer: D Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 30) Which of the following is the most likely source for foreign market information, assessments, and statistics?

A) World Trade Organization B) Canada's Ministry of Foreign Affairs C) U.S. Department of Commerce D) Council of the European Union Answer: C Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 31) Advances in communications and transportation technology have changed the internationalization tendencies of firms by ________.

A) establishing a cultural presence in a foreign market prior to establishing a facility B) providing accessible information about a product to customers but at a significantly higher cost C) focusing primarily on the need for local intermediaries to sell products in foreign markets D) reducing the risk and difficulty of doing business in markets with unfamiliar cultures Answer: D Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 32) Which of the following is considered a regional hub or gateway country?

A) Singapore B) Ireland C) Canada D) Russia Answer: A Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 10 .

33) Which of the following is management's goal when utilizing gradual elimination?

A) diminish the number of foreign markets served by a large MNE B) lessen the number of corporate managers involved in subsidiary issues C) decrease the need for foreign intermediaries to improve profitability D) reduce the number of nations to investigate as potential foreign markets Answer: D Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 34) When using the process of gradual elimination to screen potential country markets, a researcher should first, ________.

A) delve into specific information B) obtain general information on macro-level indicators such as population, income, and economic growth C) employ specific indicators, such as import statistics D) narrow down the choices with specific indicators, such as economic growth Answer: B Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 35) A researcher who assigns scores to countries for their overall market attractiveness uses ________ to choose the most promising foreign markets.

A) indexing and ranking B) behaviorally anchored rating scales C) thematic apperception tests D) gradual elimination Answer: A Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

11 .

36) According to the Market Potential Indicators index, ________ is an indicator of market intensity.

A) average annual growth rate of primary energy use B) percentage share of middle class in income/consumption C) private consumption as a percentage of GDP and GNI per capita D) per-capita imports from the United States Answer: C Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 37) According to the Market Potential Indicators index, ________ is an indicator of market size.

A) real GDP growth rate B) telephones per 100 habitants C) population per retail outlet D) urban population and electricity consumption Answer: D Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 38) Which of the following dimensions refers to the buying power of the country's residents?

A) market consumption capacity B) market intensity C) market size D) market growth rate Answer: B Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 39) In the Market Potential Indicators index, households with Internet access per 100 inhabitants are an indicator of ________.

A) market intensity B) commercial infrastructure C) country risk D) market consumption capacity Answer: B Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

12 .

40) Which of the following factors is typically most important to firms considering FDI entry?

A) availability of skilled labor and managerial talent B) pricing strategies of competitors C) tariffs applied for exporting D) literacy level of the consumers Answer: A Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 41) The extent of a country's openness to imports is termed ________.

A) market intensity B) market size C) market receptivity D) market growth rate Answer: C Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 42) A country's population is referred to as ________.

A) market intensity B) market size C) market receptivity D) market growth rate Answer: B Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 43) The size and growth rate of a country's middle class is termed as ________.

A) market consumption capacity B) market intensity C) market receptivity D) market size Answer: A Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

13 .

44) The buying power of the country's residents is termed as ________.

A) market intensity B) market size C) market consumption capacity D) market receptivity Answer: A Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 45) Trade as a percentage of GDP is used to measure ________.

A) market intensity B) market size C) market receptivity D) market growth rate Answer: C Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 46) Private consumption as a percentage of GDP is used to measure ________.

A) market intensity B) market size C) market receptivity D) market growth rate Answer: A Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

14 .

All You Cosmetics (Scenario) Executives of All You Cosmetics Company, a Canadian company, have hired a consulting firm, Brown and Associates, to identify foreign markets that might be appropriate for internationalization. Brown consultants have been working for two weeks with All You managers to identify the best foreign markets for the Canadian cosmetics company, which specializes in organic cosmetics and skin care products. So far, Brown consultants have narrowed down the list of countries to fifteen. However, the consultants need to eliminate unattractive markets and reduce the list to five nations, which will then be researched more closely.

47) Which of the following factors should most likely be considered by Brown consultants as they screen countries for All You Cosmetics?

A) Which markets have the highest number of skin cancer cases among women?

B) In which markets are women the primary breadwinners for their families?

C) Which markets have the highest number of environmentally friendly corporations?

D) In which markets are organic cosmetics and skin care products currently unavailable?

Answer: D Diff: 3: Hard Skill: Application Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 48) Which of the following statements most likely supports using gradual elimination for country screening instead of indexing and ranking?

A) All You managers want a list of foreign markets and rank these markets based on specific variables, such as market size and growth rate.

B) All You managers are primarily looking for a market with a large urban population and a great deal of economic freedom.

C) All You managers will consider any reasonable market and want to narrow down the list with increasingly specific information.

D) All You managers have assigned values to different variables within the cosmetic and skin care industry.

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Reflective Thinking

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49) Which of the following would most likely be useful market data for the Brown consultants?

A) discretionary income of young women B) annual health care expenditures C) average level of education D) number of cellular phone subscribers Answer: A Diff: 2: Moderate Skill: Application Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 50) Countries appropriate for firms intending to use FDI as an entry strategy should exhibit a potential for long-term growth with limited political risk.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 51) Born-global companies seldom venture into countries outside their comfort zone.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 52) With a high percentage of college-educated citizens, countries such as China and India have become a source for international firms seeking knowledge workers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 53) Trade as a percentage of GDP is used to measure a country's market receptivity.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

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54) Screening countries to identify target markets is the most time-consuming step for most firms.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 55) Exporting, FDI, and sourcing all have identical screening criteria.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 56) Brazil, Russia, India, and China, known collectively as the BRIC countries, show remarkable potential as target markets in coming years.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 57) Indexing and ranking is the only way to choose markets that offer the most promise.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 58) Ongoing globalization has reduced the cost and risk of entering foreign markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 59) Market intensity is defined as the size and growth rate of the country's middle class.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

17 .

60) Market consumption capacity is the proportion of a country's population concentrated in cities.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 61) According to the indexing and ranking method for choosing the most promising target market, the researcher assigns scores to countries based on their overall market attractiveness.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 62) Explain why it is especially critical for a firm to select the most appropriate market for its product or service during the primary stage of internationalization. What are the negative consequences of making a poor market selection for firms planning to globalize through FDI? Answer: The choice of country markets is particularly important in the early stages of internationalization. Failure to choose the right markets will not only result in a financial loss, but the firm will incur opportunity costs as well. That is, by choosing the "wrong" markets, the firm ties up resources that it might have more profitably applied by choosing the right markets.

When entry is planned through foreign direct investment (FDI), choosing the right market is especially critical because FDI is very costly and sets the stage for further expansion in the same or adjoining markets. With FDI entry, the cost of abandoning the market and terminating relationships can easily exceed millions of dollars.

Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking

18 .

63) Discuss four macroeconomic trends that have the potential to significantly alter the current status of international business and trade. Discuss the questions that managers should investigate to deepen knowledge about the international market potential of a product or service.

Answer: • Who initiates purchasing? Homemakers are usually the chief decision makers for household products. Professional buyers make purchases on behalf of firms.

• Who uses the product or service? Children consume various products, but their parents may be the actual buyers. Employees consume products bought by the firms where they work.

• Why do people buy the product or service? What specific needs does it fulfill? Such needs vary worldwide. In advanced economies, for example, consumers use Honda's gas-powered generators for recreational purposes; in developing economies households buy them for everyday heating and lighting.

• Where do people purchase the product or service? Once the researcher understands where the offering is typically purchased, it is useful to visit likely vendors to assess sales potential, whether the good should be adapted for the market, and how best to price, promote, and distribute it.

• What economic, cultural, geographic, and other factors in the target market may limit sales?

Countries vary substantially in terms of buyer income levels, preferences, climate, and other factors that can inhibit or facilitate purchasing behavior.

Diff: 3: Hard Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge 64) Describe the two methods typically used to screen potential foreign markets for exporting: gradual elimination and indexing and ranking.

Answer: The firm that applies gradual elimination starts with a large number of prospective target countries and then gradually narrows its choices by examining increasingly specific information obtained via research. The firm aims to reduce to a manageable few the number of countries that warrant in-depth investigation as potential target markets. The objective is to identify five or six high-potential country markets that are most promising for the firm. By analyzing research data and gradually narrowing the choices, the researcher eventually identifies the one or two most promising markets for generating sales.

Indexing and ranking is the second primary method for choosing the most promising foreign market. With this method, the researcher assigns scores to countries for their overall market attractiveness. For each country, the researcher first identifies a comprehensive set of marketpotential indicators and then uses one or more of these indicators to represent a variable. Weights are assigned to each variable to establish its relative importance. The more important a variable, the greater its weight. The researcher uses the resulting weighted scores to rank the countries.

Diff: 2: Moderate Skill: Application Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Application of Knowledge

19 .

65) Describe the variables used to identify the best markets for FDI entry. Which countries are popular for FDI entry? Why are they popular?

Answer: Researchers identifying the best locations for FDI usually consider the following variables: • Long-term prospects for growth and substantial returns • Cost of doing business, based on the price and availability of commercial infrastructure, tax rates and wages, and high-level skills and capital markets • Country risk, including regulatory, financial, political, and cultural barriers, and the legal environment for intellectual property protection • Competitive environment and intensity of competition from other firms • Government incentives such as tax holidays, subsidized training, grants, or low-interest loans.

Diff: 2: Moderate Skill: Concept Objective: 12-3: Describe the method firms use to screen countries to identify target markets AACSB: Analytical Thinking 66) Which of the following should be done by a company planning to internationalize when it assesses market industry potential?

A) take action to eliminate deficiencies in the firm B) determine the most desirable attributes in foreign business partners C) develop a 3- to 5-year forecast of industry sales for each target market D) determine how products or services may need to be adapted for each market Answer: C Diff: 2: Moderate Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Analytical Thinking 67) Which of the following market characteristics offers the most potential for a firm's success at internationalization?

A) a widely distributed product or service B) an unaffordable product or service C) an unavailable product or service D) an unknown product or service Answer: C Diff: 1: Easy Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Analytical Thinking

20 .

68) The term industry market potential can best be defined as the ________.

A) expected competition within a foreign market B) predicted industry sales over a particular period of time C) anticipated market growth and expansion D) forecast of a firm's sales in a specific market Answer: B Diff: 1: Easy Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Application of Knowledge 69) In order to estimate industry market potential, managers most likely require ________.

A) market size and growth rates specific to the industry B) manufacturing specifications and production output C) anticipated improvements within public infrastructure D) expected long-term IT needs and e-commerce trends Answer: A Diff: 2: Moderate Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Application of Knowledge 70) Industry market potential is identical to company sales potential.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Application of Knowledge 71) Tapping into supplier networks is one of the methods of estimating industry market potential.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Analytical Thinking

21 .

72) By monitoring key industry-specific indicators, a manager can estimate industry market potential.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-4: Understand how companies conduct in-depth assessment of industry-specific market potential AACSB: Analytical Thinking 73) Compare and contrast industry market potential and company sales potential. How is an estimate of industry market potential helpful to managers? What factors are necessary to determine industry market potential?

Answer: Industry market potential is an estimate of the likely sales for all firms in a particular industry over a specific period. It is different from company sales potential, the share of industry sales the focal firm itself can expect to achieve during a given year. Most firms forecast both industry market potential and company sales potential at least three years into the future.

Estimating industry market potential enables the researcher to refine the analysis and identify the most attractive countries for the firm's product or service, as well as gain industry-specific insights and understand how the firm needs to adapt its product and marketing approaches. To estimate industry market potential, managers obtain data and insights on the following variables for each country: • Size and growth rate of the market and trends in the specific industry • Tariff and nontariff trade barriers to market entry • Standards and regulations that affect the industry • Availability and sophistication of distribution for the firm's offerings in the market • Unique customer requirements and preferences • Industry-specific market potential indicators In addition to generic determinants of demand, each industry sector—from air conditioners to zippers—has its own industry-specific potential indicators or distinctive drivers of demand.

Company sales potential is an estimate of the share of annual industry sales the firm expects to generate in a particular target market. Arriving at it is often more challenging than earlier tasks, because the researcher typically needs to obtain highly refined information from the market and make some fundamental assumptions to project the firm's revenues and expenses three to five years into the future. These estimates are never precise and require quite a bit of judgment and creative thinking.

Diff: 3: Hard Skill: Synthesis Objective: 12-4, 12-6: Understand how companies conduct in-depth assessment of industryspecific market potential, Determine how managers estimate a company's sales potential AACSB: Analytical Thinking

22 .

74) A car rental agency that was planning to internationalize its operations would most likely select a(n) ________.

A) distributor B) intermediary C) franchisor D) licensor Answer: C Diff: 2: Moderate Skill: Application Objective: 12-5: Explain how companies identify and choose foreign business partners AACSB: Application of Knowledge 75) An arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties, or other forms of compensation is known as ________.

A) franchising B) licensing C) outsourcing D) offshoring Answer: A Diff: 1: Easy Skill: Concept Objective: 12-5: Explain how companies identify and choose foreign business partners AACSB: Application of Knowledge 76) ________ refers to a cross-border business alliance whereby partnering firms pool their resources and share costs and risks to undertake a new business venture.

A) International collaborative ventures B) Turnkey operations C) Greenfield investments D) Acquisitions Answer: A Diff: 1: Easy Skill: Concept Objective: 12-5: Explain how companies identify and choose foreign business partners AACSB: Application of Knowledge

23 .

Australian Business Partner (Scenario) The Coffee Cup Corporation (CCC) is a large U.S.-based coffee retailer with stores across America. After months of research, CCC executives have decided to open their first international store in Sydney, Australia. CCC managers have been assigned the task of selecting an appropriate Australian business partner for the coffee company. CCC managers flew to Sydney to interview potential business partners, and they have narrowed the list to three.

77) Business Partner X, who owns a small chain of Sydney coffee shops, has offered to make an equity investment in CCC. Which of the following types of relationships would most likely result if Business Partner X is selected?

A) turnkey operation B) licensing partnership C) franchising partnership D) international collaborative venture Answer: D Diff: 3: Hard Skill: Application Objective: 12-5: Explain how companies identify and choose foreign business partners AACSB: Application of Knowledge 78) Focal firms that intend to sell their trademark and copyrights typically work with foreign licensing partners instead of franchisors.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-5: Explain how companies identify and choose foreign business partners AACSB: Application of Knowledge

24 .

79) Describe the various types of partners an international firm might adopt when expanding internationally. How can a business partner affect a company's sales potential?

Answer: Business partners are critical to success in international business. These partners include distribution-channel intermediaries, facilitators, suppliers, and collaborative venture partners such as joint venture partners, licensees, and franchisees. Once the firm has selected a target market, it must identify the types of partners it needs for its foreign-market venture, negotiate terms with chosen partners, and support and monitor their conduct.

Exporters tend to collaborate with foreign-market intermediaries such as distributors and agents.

Firms that choose to sell their intellectual property, such as know-how, trademarks, and copyrights, tend to work through foreign licensees. These licensing partners are independent businesses that apply intellectual property to produce products in their own country. In franchising, the foreign partner is a franchisee, an independent business abroad that acquires rights and skills from the focal firm to conduct operations in its own market (such as in the fastfood or car-rental industries). The focal firm can also internationalize by initiating an international collaborative venture, a business activity undertaken jointly with other firms. These collaborations may be project based or require equity investments. Other types of international partnerships include global sourcing, contract manufacturing, and supplier partnerships.

Once managers have identified several promising country markets, verified industry market potential, and assessed the availability of qualified business partners, the next step is to determine company sales potential in each country. Company sales potential is an estimate of the share of annual industry sales the firm expects to generate in a particular target market. The competencies and resources of foreign partners, including channel intermediaries and facilitators, influence how quickly the firm can enter and generate sales in the target market.

Diff: 2: Moderate Skill: Critical Thinking Objective: 12-5, 12-6: Explain how companies identify and choose foreign business partners, Determine how managers estimate a company's sales potential AACSB: Analytical Thinking 80) Which of the following tasks is the final stage of assessing the global market opportunities of a firm?

A) screen countries to identify target markets B) assess product suitability for foreign markets C) estimate company sales potential D) assess industry market potential Answer: C Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge

25 .

81) The estimate of the share of annual industry sales the firm expects to generate in a particular target market is known as ________.

A) industry market potential B) company sales potential C) break-even analysis D) SWOT analysis Answer: B Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge 82) Trade audits may provide managers insight regarding ________.

A) manufacturing cost estimates B) company employee opinions C) competitors' offerings and pricing D) market fluctuation tendencies Answer: C Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge 83) ________ is used by some firms to gauge long-term sales potential without fully committing to a foreign market.

A) Competitor assessment B) Test marketing C) Market segmentation D) End-user surveys Answer: B Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge 84) Which of the following market research tools relies on known information about one product to infer the market potential of another product?

A) proxy indicator B) analogy C) trade audit D) comparative surveys Answer: A Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge 26 .

Australian Business Partner (Scenario) The Coffee Cup Corporation (CCC) is a large U.S.-based coffee retailer with stores across America. After months of research, CCC executives have decided to open their first international store in Sydney, Australia. CCC managers have been assigned the task of selecting an appropriate Australian business partner for the coffee company. CCC managers flew to Sydney to interview potential business partners, and they have narrowed the list to three.

85) All of the following are criteria most likely established by CCC managers for choosing the best foreign business partner EXCEPT ________.

A) the requirement for competent management skills and qualified staff B) familiarity with U.S. government franchising regulations C) knowledge about the food and beverage industry D) good connections with the Australian government Answer: B Diff: 2: Moderate Skill: Application Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Analytical Thinking 86) Which of the following statements most likely supports CCC managers selecting Business Partner Y instead of Business Partner Z? A) Business Partner Y has a good reputation in the marketplace.

B) Business Partner Y is fairly young and hence requires experience in the food and beverage industry.

C) Business Partner Y has distinct goals and objectives compared to CCC. D) Business Partner Y has the most experience in the automobile industry but now wants to venture into the food and beverage industry.

Answer: A Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Analytical Thinking 87) Estimates of company market potential provides managers with the information necessary to select the most appropriate business partners.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge

27 .

88) While estimating company sales potential, managers may make multiple estimates based on best-case, worst-case, and most-likely case scenarios.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge 89) Describe the two techniques most often used to estimate company sales potential in developing countries and emerging markets. Provide examples to illustrate how each method works.

Answer: • Analogy. Using this method, the researcher draws on known statistics from one country to gain insights into the same phenomenon for another, similar country. For example, if the researcher knows the total consumption of citrus drinks in Hungary, then—assuming citrus drink consumption patterns do not vary much in neighboring Romania—a rough estimate of Romania's consumption can be made, adjusting, of course, for the difference in population. If a firm knows X number of bottles of antibiotics are sold in a country with Y number of physicians per thousand people, it can assume the same ratio (of bottles per 1,000 physicians) will apply in a similar country.

• Proxy indicators. With proxy indicators, the researcher uses known information about one product category to infer potential about another product category, especially if the two are complementary. A proxy indicator of demand for professional hand tools might be the level of construction activity in the country; for a particular piece of surgical equipment, it might be the total number of surgeries performed.

Diff: 2: Moderate Skill: Concept Objective: 12-6: Determine how managers estimate a company's sales potential AACSB: Application of Knowledge

28 .

International Business: The New Realities, 5e (Cavusgil) Chapter 13 Exporting and Global Sourcing 1) Focal firms that internationalize through exporting will most likely perform ________ in the home market.

A) sales B) distribution C) marketing D) manufacturing Answer: D Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 2) Which of the following services CANNOT be exported?

A) insurance services B) education C) pure services D) construction Answer: C Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 3) ________ will internationalize via FDI because they require direct contact with customers.

A) Insurance firms B) Accountants C) Construction firms D) Retailing firms Answer: D Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 4) The Internet facilitates international trade in the service sector by ________.

A) providing the means to export some types of services to foreign markets B) providing the means to avoid taxes in the foreign market C) allowing firms to attain maximum control by establishing ownership of key assets D) eliminating the need to deal with foreign currency exchange rates Answer: A Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Information Technology 1 .

5) Which of the following is an advantage of exporting?

A) It allows focal firms to attain maximum control by establishing ownership of key assets in the foreign market.

B) It is a high-control strategy that requires substantial resource commitment when compared to equity joint ventures.

C) It minimizes exposure to tariffs and other trade barriers, as well as fluctuations in exchange rates.

D) It increases overall sales volume, improves market share, and reduces per-unit costs of manufacturing and can potentially generate profit margins that are often more favorable than in the domestic market.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 6) Which of the following is most likely a disadvantage to firms who use exporting as an entry strategy?

A) high cost of foreign market entry B) difficulties withdrawing from foreign markets C) The firm must acquire and dedicate capabilities to conduct complex transactions, which can strain organizational resources.

D) high risk due to uncertainty in the political environment of the foreign market Answer: C Diff: 2: Moderate Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 7) After managers have chosen an appropriate market for exporting, the next step is to ________.

A) decide about the resources to be committed B) acquire the skills and competencies to handle export operations C) engage appropriate international trade attorneys D) modify advertising and promotional activities to suit individual markets Answer: A Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge

2 .

8) Which of the following is a characteristic of direct exporting?

A) exporter uses few corporate resources and personnel B) exporter develops a closer relationship with foreign buyers C) exporter contracts with domestic intermediaries D) exporter delegates responsibility of finding buyers Answer: B Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 9) A company-owned subsidiary is ________.

A) accomplished by contracting with intermediaries located in the firm's home market B) typically achieved by contracting with intermediaries located in the foreign market C) a foreign intermediary that serves as an extension of the exporter, negotiating on behalf of the exporter and assuming such responsibilities as local supply-chain management, pricing, and customer service D) a representative office of the focal firm that handles marketing, physical distribution, promotion, and customer service activities in the foreign market Answer: D Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 10) Which of the following activities is applicable to the final stage of exporting?

A) The firm engages appropriate bankers and international trade attorneys.

B) The firm screens the most attractive export markets.

C) The firm needs to refine approaches to suit market conditions.

D) The firm acquires product development and foreign language skills.

Answer: C Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge

3 .

Organic Towel Exports (Scenario) The Organic Towel Company (OTC) employs 400 workers at its facility in Liverpool, England, where the firm has been manufacturing 100% organic cotton towels for five years. OTC sells towels in the United Kingdom primarily to boutique hotels and specialty retail stores, as well as to individual consumers through the company's website. Recently, OTC managers attended a trade show in London where they made contact with numerous foreign market managers. OTC received a request from Earth Waves, an organic clothing store in Toronto, Canada, for a large order of towels. OTC had not been looking into expanding, but firm managers are seriously considering the opportunity to reach a global niche market with their towels.

11) Which of the following questions must be evaluated by OTC managers as a first step to exporting?

A) What are the risks involved in exporting OTC towels to Earth Waves?

B) Do Canadian towel companies have a high success rate when they export?

C) Will OTC save money on domestic marketing by exporting?

D) How can OTC adapt its distribution strategy in Canada?

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Analytical Thinking 12) Which of the following most likely supports OTC exporting their towels to Earth Waves?

A) Domestic sales of OTC towels have dwindled, and a new market is needed.

B) Earth Waves is located in an excellent location in central Toronto.

C) OTC is an SME that can readily adapt to the demands of the Canadian market.

D) The founder of OTC has numerous contacts in Canada.

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Analytical Thinking 13) Which of the following most strongly suggests OTC should NOT export its towels to Earth Waves?

A) OTC managers are risk-takers with the determination to expand OTC. B) OTC's towel manufacturing at the Liverpool facility is nearing maximum capacity.

C) Earth Waves has a large client base and publishes a semiannual catalog.

D) Earth Waves has offered to guide OTC through Canadian regulations.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Analytical Thinking

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14) Which of the following should be considered first in making the decision to export OTC towels to Canada?

A) What is the probability of OTC and Earth Waves entering into a joint venture?

B) How much fluctuation occurs in the exchange rate between the Canadian dollar and the British pound?

C) What is the likelihood of Earth Waves opening a subsidiary in Canada?

D) What documentation would be required for OTC to export towels to Asia?

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Analytical Thinking 15) The Internet provides the means to sell products directly to customers rather than going through traditional wholesale and retail channels.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 16) Compared to other entry strategies, exporting minimizes risk and maximizes flexibility.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 17) Indirect exporting is exporting that is accomplished by contracting with intermediaries located in the home or domestic market.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 18) Exporting and importing collectively refers to international trade.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge

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19) Describe the four-step process many managers use to achieve successful exporting.

Answer: a. Assess Global Market Opportunity—As a first step, management assesses the various global market opportunities available to the firm. Managers analyze the readiness of the firm to carry out exporting. They screen for the most attractive export markets. They identify qualified intermediaries and other foreign business partners. They estimate industry market potential and company sales potential. Participating in foreign trade shows is useful for identifying market potential and foreign intermediaries. b. Organize for Exporting—Managers determine what types of managerial, financial, and productive resources the firm should commit to exporting. Managers also try to establish a timetable for the firm to follow in order to achieve export goals and objectives. Managers also investigate how to implement exporting, either through indirect exporting, direct exporting, or a company-owned subsidiary. c. Acquire Needed Skills and Competencies—Export transactions require specialized skills and competencies in areas such as product development, distribution, logistics, finance, contract law, and currency management. Also useful are foreign language skills and the ability to interact well in foreign cultures. Fortunately, facilitators are available to assist firms that lack specific competencies. They include companies like banks, freight forwarders, and international trade consultants. d. Export Management—In the final stage, the firm implements and manages its exporting strategy, often requiring management to refine approaches to suit market conditions. Product adaptation means modifying a product to make it fit the needs and tastes of the buyers in the target market. When Microsoft markets computer software in Japan, the software must be written in Japanese. In export markets with many competitors, the exporter needs to adapt its products to gain competitive advantage. In addition to adapting products, the firm also may adapt it pricing and distribution approaches.

Diff: 3: Hard Skill: Application Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge 20) In a short essay, explain the factors involved in a firm's decision to use indirect exporting or direct exporting.

Answer: Direct and indirect exporting are not mutually exclusive, and many firms use both, but for different markets. Key considerations for choosing between direct or indirect exporting are: • The time, capital, and expertise that management is willing to commit; • Strategic importance of the foreign market; • Nature of the firm's products, including the need for after-sales support; and • Availability of capable foreign intermediaries in the target market.

Diff: 2: Moderate Skill: Critical Thinking Objective: 13-1: Understand exporting as a foreign market entry strategy AACSB: Application of Knowledge

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

Answer: Beyond initial entry, most firms, large and small, use exporting as part of their internationalization portfolio. Large manufacturing firms typically account for the largest overall value of exports and make up about three-quarters of the total value of exports from the United States. However, the vast majority of exporting firms—more than 90 percent in most countries— are SMEs with fewer than 500 employees.

As an entry strategy, exporting is very flexible. The exporter can both enter and withdraw from markets fairly easily, with minimal risk and expense. Exporting may be employed repeatedly during the firm's internationalization process, generally at the early stages and again from production facilities that the firm eventually establishes at various foreign locations, destined for markets in other countries. Experienced international firms usually export in combination with other strategies, such as joint ventures and FDI. Toyota has used FDI to build factories in key locations in Asia, Europe, and North America from which it exports cars to neighboring countries and regions.

Incoterms have mitigated problems with logistics for international firms. In the past, disputes sometimes arose over who should pay the cost of freight and insurance in international transactions: the seller (that is, the exporter) or the foreign buyer. To eliminate such disputes, a system of universal, standard terms of sale and delivery, known as Incoterms (short for "International Commerce Terms"), was developed by the International Chamber of Commerce.

Commonly used in international sales contracts, Incoterms specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.

Diff: 3: Hard Skill: Critical Thinking Objective: 13-1, 13-2: Understand exporting as a foreign market entry strategy; Describe how to manage export-import transactions AACSB: Application of Knowledge 22) Which of the following documents is the contract between the shipping company and the exporter?

A) pro forma invoice B) bill of lading C) export declaration D) commercial invoice Answer: B Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge

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23) Prox Inc. is a U.S.-based manufacturer of consumer electronics. It decides to export to Mexico and wants to protect its goods against damage, loss, and pilferage. Which of the following documents is applicable here?

A) insurance certificate B) bill of lading C) pro forma invoice D) license Answer: A Diff: 2: Moderate Skill: Application Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge 24) Incoterms were developed by the International Chamber of Commerce in order to ________.

A) provide permission to export B) standardize the cost of shipping and insuring exported items C) define how the buyer and seller share freight and insurance costs D) reduce the costs of shipping and insuring exported products Answer: C Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge 25) The exporter usually first issues a quotation or pro forma invoice upon request by potential customers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge 26) The bill of lading is the "birth certificate" of the goods being shipped and indicates the country where they originate.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Analytical Thinking 27) Exporters usually purchase an insurance certificate to protect the exported goods against damage, loss, pilferage (theft), and, in some cases, delay.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge 8 .

28) Incoterms are universally accepted terms of sale that specify how the buyer and the seller share the cost of freight and insurance in an international transaction and at which point the buyer takes title to the goods.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-2: Describe how to manage export-import transactions AACSB: Application of Knowledge 29) Trade fairs are not only excellent sites to meet potential intermediaries, they also provide the means to become familiar with key players in the local industry and to generally learn about the target market.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-3: Explain identifying and working with foreign intermediaries AACSB: Application of Knowledge 30) The procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent suppliers is known as ________.

A) outsourcing B) franchising C) offshoring D) licensing Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 31) Which of the following is the best example of a back-office BPO (Business Processing Outsourcing) activity?

A) customer service B) billing C) marketing D) technical support Answer: B Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge

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32) Focal firms typically source from external suppliers for all of the following reasons EXCEPT ________.

A) the product or service obtained is non-core B) the product can be purchased inexpensively C) the supplier specializes in providing the product or service D) the supplier offers the same product to competing firms Answer: D Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge Fun Play Global Sourcing (Scenario) Fun Play Inc., a company manufacturing toys for children, has decided to outsource some of its value-chain activities. However, the firm has no experience with global sourcing and has hired a consulting firm to assist its managers. The consulting firm has been assigned the task of determining which activities should be outsourced and where the outsourced activities should be located.

33) Which of the following is most likely to be the consultants' utmost concern while deciding if clothing for Fun Play dolls needs to be outsourced?

A) Is doll clothing part of Fun Play's core competencies?

B) What kind of fabric is used for clothing Fun Play dolls?

C) Do the competitors of Fun Play outsource accounting activities abroad?

D) Does Fun Play intend to follow a strategy of product diversification in the near future?

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 34) Which of the following would most likely be considered by the consultants while deciding whether to keep each value-adding activity in the home country or locate it in a foreign country?

A) Who will be responsible for training suppliers in foreign locations?

B) Can different value-adding activities be effectively configured across the world?

C) Would the HR department of Fun Play be able to ensure smooth repatriation for managers after they complete their assignments abroad?

D) What are the odds in favor of Fun Play's dominating the children's toy segment in its home country?

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking

10 .

35) If Fun Play decides to source from its own wholly owned subsidiary, it would be engaging in ________.

A) offshoring B) contract manufacturing C) cause marketing D) captive sourcing Answer: D Diff: 2: Moderate Skill: Application Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 36) If a computer contains a microprocessor from Costa Rica and a hard disk drive from the Philippines, the computer manufacturer, who is based in Texas and operates across Europe and West Asia, most likely uses ________ as an entry strategy.

A) exporting B) franchising C) global sourcing D) licensing Answer: C Diff: 2: Moderate Skill: Application Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 37) Which of the following is TRUE with regard to global sourcing?

A) Global sourcing has declined significantly in the current phase of globalization.

B) Global sourcing is a low-control strategy in which the focal firm sources from independent suppliers through contractual agreements.

C) Global sourcing refers to the relocation of a business process or entire manufacturing facility to a foreign country.

D) Global sourcing does not represent the firm's initial involvement in international business.

Answer: B Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge

11 .

38) The growth of global sourcing has been driven by ________.

A) the declining demand for highly skilled workers B) the rapidly aging population in advanced economies C) technological advances in communications D) the rising costs of international business Answer: C Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 39) ________ refers to sourcing from the firm's own production facilities.

A) Captive sourcing B) Crowdsourcing C) Business process outsourcing D) Externalization Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 40) Contract manufacturing can best be defined as ________.

A) the outsourcing to independent suppliers of business service functions such as accounting, payroll, human resource functions, travel services, IT services, customer service, or technical support B) the relocation of a business process or entire manufacturing facility to a foreign country C) sourcing from the firm's own production facilities D) an arrangement in which the focal firm contracts with an independent supplier to manufacture products according to well-defined specifications Answer: D Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 41) The pattern or geographic arrangement of locations where the firm carries out value-chain activities is known as ________.

A) configuration of value-adding activity B) internalization C) visual merchandising D) disintermediation Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 12 .

42) The relocation of a business process or entire manufacturing facility to a foreign country is known as ________.

A) offshoring B) captive sourcing C) outsourcing D) subsidizing Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 43) Business activities that would most likely be offshored are characterized by ________.

A) high-value-adding activities that contribute more productively to increasing company performance B) services related to critical, long-term research projects and product development C) routine tasks that do not relate to the firm's primary service or product D) functions related to the firm's core competencies and strategic assets Answer: C Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 44) Which of the following is TRUE with regard to offshoring?

A) Offshoring is common in the service sector, including banking, software code writing, legal services, and customer-service activities.

B) Russia is the current leader in the processing of advanced economies' relocated business services.

C) Offshoring substantially reduces the overall efficiency of MNEs. D) With rapid globalization and internationalization of businesses, offshoring is a visibly declining trend.

Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge

13 .

45) Which of the following statements is TRUE with regard to the R&D activities of a firm?

A) As a strategic asset, R&D activities are of moderate importance to the firm.

B) R&D activities are usually concentrated at home.

C) R&D activities have a low likelihood of being internalized.

D) R&D activities have a high likelihood of being outsourced.

Answer: B Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 46) As a strategic asset, ________ is of the lowest importance to a firm.

A) customer service B) R&D, design C) manufacturing of parts D) marketing and branding Answer: C Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 47) The likelihood of internalizing ________ rather than outsourcing it is considerably high.

A) R&D B) manufacturing of parts C) sales and distribution D) customer service Answer: A Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 48) Which of the following activities is highly important to firms as a strategic asset?

A) manufacturing of parts B) customer service C) sales and distribution D) marketing and branding Answer: D Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking

14 .

49) The use of global sourcing has declined during the current phase of globalization.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 50) In advanced economies, firms generally do not outsource value-chain activities because they fear the loss of proprietary knowledge and trade secrets.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 51) Back office activities can be classified under BPO (Business Process Outsourcing).

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 52) Front office activities cannot be classified under BPO (Business Process Outsourcing).

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 53) Front-office activities typically include internal, upstream business functions.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 54) Firms usually internalize those value-chain activities they consider part of their core competencies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge

15 .

55) Contract manufacturing is an arrangement in which the focal firm contracts with an independent supplier to manufacture products according to well-defined specifications.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 56) Given the complexities of international business, manufacturing is generally the only valuechain activity that firms outsource abroad.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 57) Offshoring is common in the service sector, including banking, software code writing, legal services, and customer-service activities.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 58) The recent economic turndown is expected to pressure advanced-economy firms to seek further ways to reduce costs.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 59) Not all business activities and processes lend themselves to global sourcing.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 60) In the decision about whether to outsource, manufacturing of products is considered of high importance to a firm.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 16 .

61) In the decision about whether to outsource, research and development is considered an important issue for the firm.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 62) The likelihood of a firm internalizing marketing and branding instead of outsourcing it is high.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 63) The likelihood of a firm internalizing research and development instead of outsourcing it is high.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 64) Typically, firms tend to concentrate research and development activities abroad rather than in their home countries.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 65) Industries that benefit the most from global sourcing are characterized by low labor intensity in product and service production.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking

17 .

66) How do firms decide whether or not to outsource? In a short essay, describe the factors that contribute to the decision to internalize or externalize business activities.

Answer: Managers must decide between internalization and externalization—whether each value-adding activity should be conducted in-house or by an external, independent supplier.

Firms usually internalize those value-chain activities that they consider part of their core competencies, or which require the use of proprietary knowledge and trade secrets that they want to control. By contrast, firms will usually source from external suppliers when they can obtain non-core products, components, or services at lower cost or from suppliers specialized in providing them.

Diff: 2: Moderate Skill: Application Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Analytical Thinking 67) In a short essay, describe three key drivers responsible for the recent growth of global sourcing.

Answer: The growth of global sourcing has been driven by three key factors: 1. Technological advances in communications, especially the Internet and international telecommunications. Access to vast online information means focal firms can quickly find suppliers that meet specific needs, anywhere in the world. Firms can communicate continuously with foreign suppliers at very low cost.

2. Falling costs of international business. Tariffs and other trade barriers have declined substantially. Efficient communication and transportation systems have made international procurement cost effective and accessible to any firm.

3. Entrepreneurship and rapid economic transformation in emerging markets. China, India, and other emerging markets have quickly developed as important suppliers of various products and services. Entrepreneurial suppliers aggressively pursue sourcing partnerships with foreign buyers.

Diff: 2: Moderate Skill: Application Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 68) What is offshoring? Describe the types of industries that tend to offshore.

Answer: Offshoring is the relocation of a business process or entire manufacturing facility to a foreign country. It is common in the service sector, including banking, software code writing, legal services, and customer-service activities. Large legal hubs have emerged in India that provide services such as drafting contracts and patent applications, conducting research and negotiations, and performing paralegal work, all on behalf of Western clients.

Diff: 2: Moderate Skill: Concept Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge

18 .

69) Distinguish between captive sourcing and contract manufacturing.

Answer: Captive sourcing refers to sourcing from the firm's own production facilities.

On the other hand, contract manufacturing refers to an arrangement in which the focal firm contracts with an independent supplier to manufacture products according to well-defined specifications. Contract manufacturing accounts for more than half of all manufacturing in the toy, sporting goods, consumer electronics, and automotive industries. It is also common in the pharmaceuticals, furniture, semiconductor, apparel, and footwear industries.

Diff: 3: Hard Skill: Critical Thinking Objective: 13-4: Understand outsourcing, global sourcing, and offshoring AACSB: Application of Knowledge 70) ________ is the primary rationale for sourcing abroad.

A) Superior quality control B) Centralized management of work teams C) Cost efficiency D) Uninterrupted innovation Answer: C Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge Audio Component Outsourcing (Scenario) Echo Corp., a company based in Boston, manufactures high-quality audio components, such as speakers, amplifiers, and receivers for home entertainment systems. Echo has been losing market share in recent years due to the competitive pricing of other audio component manufacturers that engage in global sourcing. Echo managers are attempting to convince Nathan Douglas, the firm's founder and CEO, that global sourcing would enable the firm to be more competitive without sacrificing quality.

71) Which of the following, if TRUE, most supports the argument in favor of global sourcing?

A) There is no scarcity of qualified personnel in and around Boston.

B) Studies show that by reconfiguring their value-chain systems or reengineering their business processes, companies can substantially improve their production efficiency and resource utilization.

C) Camden Audio, Echo's most formidable rival, follows a strategy of product diversification.

D) The rate of employee turnover at Echo has stabilized over the last decade.

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking

19 .

72) Which of the following would be most important to determine in deciding whether to outsource some of Echo's value-chain activities?

A) What are the long-term strategic goals and objectives of Echo?

B) Do engineers working in Echo have the ability to speak one or more European languages?

C) Are Echo employees generally afforded a high degree of workplace freedom?

D) Does Echo intend to increase its annual budget for innovation?

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking 73) Which of the following is a potential benefit that Echo can derive from global sourcing?

A) cheap R&D B) access to qualified personnel in the home country C) strong intellectual property protection D) improved productivity and service Answer: D Diff: 2: Moderate Skill: Application Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking 74) Which of the following is a benefit of global sourcing?

A) bridging of the rich-poor divide B) minimal reliance on suppliers C) access to qualified personnel abroad D) elimination of competitors Answer: C Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge

20 .

75) The strategic view of global sourcing suggests that ________.

A) just as firms achieve gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, they also obtain the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwise-unaffordable development projects B) firms that procure supplies from foreign subsidiaries are more likely than not to lose ground to competitors who primarily bank on their own resources C) a strong legal environment is not the prerequisite for increasing efficiencies by relocating strategic operations abroad D) the firms' innovative activities tend to make mature products obsolete over time Answer: A Diff: 2: Moderate Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 76) Global sourcing becomes a catalyst to overhaul organizational processes and company operations and increases the firm's overall competitive advantages by ________.

A) encouraging firms to train unskilled labor through extensive training programs B) allowing firms to free expensive analysts, engineers, and managers from routine tasks to spend more time on high-value-adding activities C) relaxing quality standards D) installing a system of rewards to motivate employees Answer: B Diff: 2: Moderate Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking 77) Which of the following is TRUE with regard to the risks of global sourcing?

A) Inadequate legal systems, red tape, convoluted tax systems, and complex business regulations complicate local operations in many countries.

B) Firms that source from countries whose currencies are strengthening experience lower costs.

C) Global sourcing weakens competition leading to a considerably risk-free international business environment.

D) Environmental challenges exclude currency fluctuations, tariffs and other trade barriers, high energy and transportation costs.

Answer: A Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking

21 .

78) Which of the following is a major challenge often faced by focal firms that engage in global sourcing?

A) no control over the quality of outputs B) domestic management of local distribution C) increased costs of business travel D) lower-than-expected cost savings Answer: D Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 79) Which of the following is most likely to occur if a U.S. firm outsources some of its business operations to a Japanese company, and the Japanese yen strengthens against the dollar?

A) The probability of intellectual property laws being enforced would significantly decrease in Japan.

B) The U.S. company will experience additional cost savings in using the services of the Japanese company.

C) Outsourcing business operations to Japan would become less expensive.

D) The U.S. company will experience higher costs in using the services of the Japanese company.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking 80) Which of the following refers to a risk, stemming from environmental factors, that is closely associated with global sourcing?

A) weak intellectual property laws B) overreliance on suppliers C) high energy costs D) rapid turnover of skilled employees Answer: C Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge

22 .

81) A focal firm's overreliance on suppliers can potentially lead to ________.

A) reduced control over important value-chain tasks B) added competitive advantage for the focal firm C) an excessive burden on home-country suppliers D) consolidation of the focal firm's network of intermediaries Answer: A Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Analytical Thinking 82) Transformational outsourcing suggests that just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwiseunaffordable development projects.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 83) Global sourcing enables a firm to free expensive analysts, engineers, and managers from routine tasks.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 84) Environmental challenges of global sourcing include currency fluctuations, tariffs and other trade barriers, and adverse macroeconomic events.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 85) Global sourcing eliminates the possibility of new rivals being created in a country.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge

23 .

86) Countries with weak legal environments can erode key strategic assets of firms.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 87) What are the benefits of global sourcing?

Answer: The twin objectives of cost efficiency and achieving strategic goals are often both present in a particular global sourcing activity. Global sourcing can provide other benefits as well, including: 1. faster corporate growth, 2. access to qualified personnel abroad, 3. improved productivity and service, 4. business process redesign, 5. increased speed to market, 6. access to new markets, 7. technological flexibility.

Diff: 2: Moderate Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge

24 .

88) Discuss the major risks associated with global sourcing.

Answer: In addition to potential benefits, global sourcing also brings unexpected complications: 1. Lower-than-expected cost savings. International transactions are often more complex and costly than expected. Conflicts and misunderstandings may arise from differences in the national and organizational cultures between the focal firm and foreign supplier. Initial or ongoing costs can be substantial.

2. Environmental factors. Environmental challenges include currency fluctuations, tariffs and other trade barriers, high energy and transportation costs, adverse macroeconomic events, labor strikes, and natural disasters. Firms that source from countries whose currencies are strengthening experience higher costs. Many countries suffer from poor public infrastructure, as exemplified by power outages and poor road and rail networks.

3. Weak legal environment. Many popular locations for global sourcing (for example, China, India, and Russia) have weak intellectual property laws and poor enforcement, which can erode key strategic assets. Inadequate legal systems, red tape, convoluted tax systems, and complex business regulations complicate local operations in many countries.

4. Inadequate or low-skilled workers. Some foreign suppliers may be staffed by employees who lack appropriate knowledge about the tasks with which they are charged. Other suppliers suffer rapid turnover of skilled employees.

5. Overreliance on suppliers. Unreliable suppliers may put earlier work aside when they gain a more important client. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different priorities and procedures.

6. Risk of creating competitors. As the focal firm shares its intellectual property and businessprocess knowledge with foreign suppliers, it also runs the risk of creating future rivals.

7. Erosion of morale and commitment among home-country employees. Global sourcing can leave employees caught in the middle between their employer and their employer's clients.

Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge 89) In a short essay, explain how global sourcing can affect home-country employees.

Answer: Global sourcing can leave employees caught in the middle between their employer and their employer's clients. When outsourcing forces retained and outsourced staff to work side by side, tensions and uncertainty may diminish employee commitment and enthusiasm.

Diff: 1: Easy Skill: Concept Objective: 13-5: Describe the benefits and risks of global sourcing AACSB: Application of Knowledge

25 .

90) In a short essay, explain how global sourcing can contribute significantly to a firm's ability to achieve its strategic goals. Why is "achievement of strategic goals" actually the best rationale for global sourcing?

Answer: The strategic view of global sourcing—called transformational outsourcing—suggests that just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwise-unaffordable development projects.

Global sourcing allows the firm to free expensive analysts, engineers, and managers from routine tasks to spend more time researching, innovating, managing, and generally undertaking highvalue-adding activities that contribute more productively to increasing company performance. In this way, global sourcing becomes a catalyst to overhaul organizational processes and company operations and increase the firm's overall competitive advantages. It allows the firm to achieve large, longer-term strategic goals.

The best rationale for global sourcing is strategic. The vast majority of companies cite cost cutting as the main reason for global sourcing. After the first year, however, most firms encounter diminishing returns in the amount of money saved. Cost cutting is often a distraction from more beneficial, long-term goals such as enhancing the quality of offerings, improving overall productivity, and freeing up knowledge workers and other core resources that can be redeployed to improve long-term performance. To maximize returns, management should examine tasks and activities in each of the firm's value chains and outsource those in which the firm is relatively weak, that offer relatively little value to the bottom line, or that can be performed more effectively by others, yet are not critical to the firm's core competencies.

Diff: 3: Hard Skill: Synthesis Objective: 13-5, 13-6: Describe the benefits and risks of global sourcing, Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking

26 .

91) In a short essay, describe how cost efficiencies are a benefit to sourcing abroad, and explain how information and communications technology can help reduce costs for an international firm.

Answer: The primary rationale for global sourcing is to reduce the firm's costs of inputs and operations. Labor costs in the emerging markets, such as Indonesia and Mexico, are far less expensive than in the advanced economies. A worker in Indonesia earns only about one dollar per hour. The rate in Mexico is around two dollars per hour. In India, the rate approaches $2.50 per hour. This wage discrepancy explains why MNEs source inputs from emerging markets.

Note, however, that wages have been rising rapidly in China. This is helping raise living standards in China, but also makes the country less attractive as a sourcing destination.

Costs of physically delivering a product to an export market may account for as much as 40 percent of the good's total cost. Skillful supply-chain management reduces this cost while increasing customer satisfaction. Firms use information and communications technologies (ICTs) to streamline supply chains, reducing costs and increasing distribution efficiency. For example, electronic data interchange (EDI) automatically passes orders directly from customers to suppliers through a sophisticated ICT platform. ICTs enhance information sharing and improve efficiency by allowing the firm to track international shipments and clear customs. In efficient systems, suppliers are connected through automated, real-time communications. The focal firm and its supply-chain partners continuously share information to constantly meet marketplace demands.

Diff: 3: Hard Skill: Synthesis Objective: 13-5, 13-6: Describe the benefits and risks of global sourcing, Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking 92) To maximize returns, management should outsource those activities ________.

A) that offer great value to the bottom line B) in which it is relatively weak C) that are critical to the firm's core competencies D) in which it has the greatest expertise and knowledge Answer: B Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge

27 .

93) Which of the following is TRUE with regard to strategies for minimizing the risks of global sourcing?

A) To ensure the success of sourcing ventures, the focal firm must exercise great care to identify and screen potential suppliers and then monitor the activities of those suppliers from which it sources.

B) To maximize returns and minimize risks, management should outsource core business operations.

C) Because production quality in an emerging market rarely varies over time, managers at the focal firm are not obliged to closely monitor manufacturing processes.

D) Firms must refrain from maintaining their own sourcing operations abroad in order to trim costs and minimize risks stemming from frequent currency fluctuations.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking 94) When outsourcing, managers can minimize the risk of creating employee tension by ________.

A) increasing the number of junior managers for foreign assignments B) increasing the annual training budget C) sending domestic managers to foreign countries for training D) reaching a consensus of managers and labor Answer: D Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking 95) A ________ is the firm's integrated network of sourcing, production, and distribution, organized on a worldwide scale and located in countries where competitive advantage can be maximized.

A) demand chain B) buying center C) global supply chain D) decision making unit Answer: C Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge

28 .

96) Critics of global sourcing maintain that it ________.

A) leads to reduced national competitiveness B) results in job losses in host countries C) enhances standards of living D) causes production to drop drastically Answer: A Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge Global Sourcing Debate (Scenario) Prof. Sean Peterson's class of international business has been studying the controversies surrounding global sourcing. Prof. Peterson divided the class into two groups, A and B. Group A was assigned the task of defending global sourcing, whereas Group B was assigned the task of arguing against global sourcing.

97) Which of the following propositions would most likely be presented by Group B? A) Global sourcing adversely affects national competitiveness.

B) Global sourcing improves the efficiency of manufacturing firms.

C) Global sourcing empowers workers in general.

D) Global sourcing is usually undertaken by focal firms to increase efficiency.

Answer: A Diff: 2: Moderate Skill: Application Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking 98) The concept of creative destruction can be reasonably used by Group A to support the view that ________.

A) firms that engage in offshoring are more likely than not to fail in the long run B) offshoring forces unskilled workers to seek additional education C) global sourcing creates opportunities and stimulates innovation D) outsourcing technical jobs leads to brain drain Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking 99) Firms often establish their own sourcing operations abroad to maintain control of outsourced activities and technologies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 29 .

100) Most companies cite cost cutting as the main reason for global sourcing.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 101) Value chain is the collection of logistics specialists and activities that provides inputs to manufacturers or retailers.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 102) A global supply chain is the firm's integrated network of sourcing, production, and distribution, organized on a worldwide scale and located in countries where competitive advantage can be maximized.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 103) The more diverse the firm's global supply chain, the lesser the cost of logistics.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 104) International logistics usually make use of a variety of transportation modes.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 105) Offshoring is a process of creative destruction; according to this view, firms' innovative activities tend to make mature products obsolete over time.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge 30 .

106) What role do logistics play in global sourcing? In a short essay, discuss how logistics relates to cost. Provide an example of a firm that lost money as a result of inadequate logistics.

Answer: Logistics physically moves goods through the supply chain. It incorporates information, transportation, inventory, warehousing, materials handling, and similar activities associated with the delivery of raw materials, parts, components, and finished products.

Managers seek to reduce moving and storage costs by using just-in-time inventory systems.

Internationally, logistics are complex due to wide geographic distances, multiple legal environments, and the often inadequate and costly nature of distribution infrastructure in individual countries. The more diverse the firm's global supply chain, the greater the cost of logistics.

Competent logistics management is critical, especially for just-in-time inventory systems. The California ports of Los Angeles (www.portoflosangeles.org) and Long Beach (www.polb.com) handle more than 40 percent of imports into the United States, processing over 24,000 shipping containers per day. Infrastructure deficiencies and increasing demand can result in long delays, which translate into longer transit times and higher costs for U.S. importers. Because of delays, Toys "R" Us had to build 10 extra days into its supply chain. As a result of poor supply-chain planning, Microsoft's Xbox 360 games console sold out soon after launch. Scarcity led to high prices in unofficial channels. On eBay, Xbox consoles sold for as much as $1,000, compared with the official price of about $400.

Diff: 2: Moderate Skill: Concept Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Application of Knowledge

31 .

107) What are the potential problems that critics point to with regard to global sourcing? Why is offshoring often referred to as a process of "creative destruction"?

Answer: Critics of global sourcing point to three potential problems. Global sourcing can result in (1) job losses in the home country, (2) reduced national competitiveness, and (3) declining standards of living. Regarding the last two concerns, critics worry that, as more tasks are performed at lower cost with comparable quality in other countries, high-wage countries will lose their national competitiveness. Long-held knowledge and skills will eventually drain away to other countries, they fear, and the lower wages paid abroad will eventually pull down wages in the home country, leading to lower living standards. A major concern is job losses. The advanced economies have outsourced millions of jobs to emerging markets in the past decade. Job losses rise when companies increase their sourcing of input and finished goods from abroad. Walmart sources as much as 70 percent of its finished merchandise from abroad. This has led citizens to form a protest group called Walmart-watch.com, which claims millions of U.S. jobs have been lost due to Walmart's global sourcing. Job losses are occurring in developing economies as well.

For example, in the textile industry, Honduras, Indonesia, and Turkey have seen jobs gradually transferred to India and Pakistan.

Offshoring is a process of creative destruction, a concept first proposed by the Austrian economist Joseph Schumpeter. According to this view, firms' innovative activities tend to make mature products obsolete over time: the introduction of personal computers essentially eliminated the typewriter industry, the DVD player eliminated the VCR, and so on. Just as offshoring results in job losses and adverse effects for particular groups and economic sectors, it also creates new advantages and opportunities for firms and consumers alike. Sourcing usually enhances company sustainability for the long term. New industries created through creative destruction will create new jobs and innovative products.

Diff: 3: Hard Skill: Critical Thinking Objective: 13-6: Understand global sourcing strategies and supply-chain management AACSB: Analytical Thinking

32 .

International Business: The New Realities, 5e (Cavusgil) Chapter 14 Foreign Direct Investment and Collaborative Ventures 1) Which of the following is a trend seen in the modern international economy?

A) Firms from both advanced and emerging economies employ FDI. B) Emerging markets are the sole recipient countries for FDI. C) Companies primarily use acquisitions to enter foreign markets.

D) Firms in the service sector use e-commerce exclusively to enter foreign markets.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge ABC Appliance (Scenario) The ABC Appliance Corporation is a Florida-based manufacturer of refrigerators, dishwashers, and other large household appliances. ABC takes advantage of NAFTA, and as a result, the firm has loyal customers across North America. ABC managers would like to expand into the Asian market, but are unsure of the best way to do so. ABC managers are meeting to discuss various possibilities for entering the Asian market.

2) Which of the following questions would most likely be important for ABC managers to evaluate as they consider expanding into the Asian market?

A) What U.S. firms have successfully partnered with Asian companies?

B) Where will ABC management locate the staff needed to oversee an Asian plant?

C) How much control does ABC management want to have over their Asian operations?

D) What are the pricing strategies followed by competitor firms in Asia?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 14-1: Understand international investment and collaboration AACSB: Analytical Thinking

1 .

3) Which of the following most likely supports a decision to enter the Asian market by building a factory near Tokyo?

A) Executives at ABC want the firm to have the flexibility to reconfigure operations at the Japanese plant.

B) The Japanese yen has been fluctuating over the last year and analysts do not anticipate it settling down.

C) ABC managers want to delegate responsibility of much of the Japanese plant to local intermediaries.

D) The CEO of ABC is willing to invest a large amount of capital and other assets to ensure success in Japan.

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 14-1: Understand international investment and collaboration AACSB: Analytical Thinking 4) Which of the following most likely supports a decision to enter the Asian market through a project-based, nonequity collaborative venture with an Asian appliance manufacturer to create an environmentally friendly dishwasher?

A) Asian firms have offered to pool their resources with ABC to create a new legal entity.

B) Managers of both firms have decided not to seek ownership, rather they have decided to pool resources.

C) ABC managers have the financial resources to quickly build a new Asian plant.

D) The Asian government has offered incentives to ABC if the firm builds a plant.

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 14-1: Understand international investment and collaboration AACSB: Analytical Thinking 5) FDI is the most advanced and complex foreign market entry strategy.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge 6) A joint venture is a form of collaboration between two or more firms to create a new, jointly owned enterprise.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge

2 .

7) Foreign direct investment is the highest risk entry strategy.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge 8) International portfolio investment refers to a firm's direct control of foreign operations and is an equity-based method of foreign market entry.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge 9) FDI is also known as foreign direct investment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge 10) International portfolio investment refers to passive ownership of foreign securities.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge

3 .

11) Explain why FDI is a particularly risky foreign entry strategy. How is FDI different from international portfolio investment?

Answer: Foreign direct investment (FDI) is an internationalization strategy where the firm establishes a physical presence abroad through direct ownership of productive assets such as capital, technology, labor, land, plant, and equipment.

FDI is the most advanced and complex foreign market entry strategy. It entails establishing manufacturing plants, marketing subsidiaries, or other facilities in target countries. Because this involves investing substantial resources to establish a physical presence abroad, FDI is riskier than other entry strategies.

International portfolio investment refers to passive ownership of foreign securities, such as stocks and bonds, for the purpose of generating financial returns. International portfolio investment is a form of international investment, but it is not FDI, which seeks ownership control of a business abroad and represents a long-term commitment. The United Nations uses the benchmark of at least 10 percent ownership in the enterprise to differentiate FDI from portfolio investment. However, this percentage may be misleading, because control is not usually achieved unless the investor owns at least 50 percent of a foreign venture.

Diff: 3: Hard Skill: Critical Thinking Objective: 14-1: Understand international investment and collaboration AACSB: Application of Knowledge 12) International portfolio investment is characterized by ________.

A) short-term foreign market speculation B) long-term administration of MNE stocks C) active control of a foreign business D) passive ownership of foreign stocks and bonds Answer: D Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge 13) Firms that anticipate close public scrutiny of their foreign operations often avoid potential difficulties by ________.

A) locating in culturally similar countries B) investing in international securities C) hiring additional local personnel D) diversifying their corporate activities Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking

4 .

14) The rate of inflation is a(n) ________ factor to be considered while selecting the location for FDI. A) profit retention B) market C) infrastructural D) human resource Answer: A Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge 15) Which of the following must be considered in selecting foreign direct investment locations?

A) rate of inflation B) tax rates for profit repatriation C) stability of currency D) all of the above Answer: D Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 16) Which of the following best explains why some service industry firms most likely enter foreign markets through FDI? A) The market abroad is saturated; therefore, the other entry strategies are most likely to fail.

B) The service of the firm requires tough intellectual property laws.

C) The service offered by the firm requires direct contact with customers.

D) The firm's service is not successful domestically, so globalization is required.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 17) Which of the following best exemplifies corporate social responsibility?

A) a computer firm charging a high fee for recycling old computers B) an automobile manufacturer selling low-fuel economy cars and trucks C) a telecommunications firm charging high rates to low-income customers D) an automotive battery firm offering free technical training to students of a deprived community Answer: D Diff: 2: Moderate Skill: Application Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 5 .

18) Which of the following represents an infrastructural factor that firms must consider when selecting an FDI location?

A) size and growth of national market B) political stability C) availability and quality of local manufacturing D) stability of currency Answer: C Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 19) Which of the following represents a human resource factor that firms must consider when selecting an FDI location?

A) intellectual property protection B) transparency and corruption C) extent of bureaucracy and red tape D) involvement of labor unions Answer: D Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 20) The level of taxes in a country is a part of the ________ factor that is considered when selecting an FDI location.

A) political B) profit retention C) market D) infrastructural Answer: B Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge

6 .

Ciao Manufacturing Location (Scenario) An 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 Ciao cars will be equally profitable in other markets. Ciao managers are trying to determine whether Canada or Russia would be the best location for a new automobile manufacturing facility.

21) Which of the following questions is most important for Ciao managers to evaluate in their decision regarding the location of the new manufacturing facility?

A) What would be the costs and availability of skilled labor in Canada and Russia?

B) What other industries manufacture products in Canada and Russia?

C) How much time will it take to train managers in Canada and Russia?

D) How should the current marketing strategies be modified to serve markets in Canada and Russia?

Answer: A Diff: 3: Hard Skill: Application Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 22) Which of the following most likely supports the decision by Ciao managers to build a plant in Russia?

A) The Russian government is transparent and totally corruption-free.

B) Ciao would be able to take advantage of the North American Free Trade Agreement.

C) Intellectual property lawsuits are common in Russia.

D) Land and construction costs are relatively inexpensive in Russia.

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 23) Which of the following should be considered in the decision regarding where to build a new Ciao plant?

A) How many Ciao cars are sold in Italy and Spain each year?

B) What U.S. automakers are the biggest competitors of Ciao?

C) How politically stable are the governments of Russia and Canada?

D) How will Ciao managers handle the language barriers in foreign markets?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking

7 .

24) FDI is the most taxing entry strategy that a firm can choose.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge 25) The challenges faced due to FDI differ from country to country.

Answer: TRUE Diff: 2: Moderate Skill: Application Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge 26) The complexity of the tax system is one of the factors to be considered in selecting FDI locations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Application of Knowledge 27) Many international firms are investing in local communities and establishing global standards of fair treatment for workers in an effort to be socially responsible.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 28) What makes China popular for FDI? What factors contribute to the long-term popularity of FDI in advanced economies?

Answer: According to A. T. Kearney's FDI Confidence Index, China ranks among the top destinations for foreign investment (www.atkearney.com). China is popular because of its size and rapid growth rate. It is an important platform where MNEs manufacture products for export to key markets in Asia and elsewhere. China also holds strategic importance for its long-term potential as a target market and source of competitive advantage.

Advanced economies such as Australia, Canada, Japan, Netherlands, the United Kingdom, and the United States long have been popular destinations for FDI. These countries all share high per-capita GDP, strong GDP growth, high density of knowledge workers, and superior business infrastructure, such as telephone systems and energy sources destinations.

Diff: 2: Moderate Skill: Concept Objective: 14-2: Describe the characteristics of foreign direct investment AACSB: Analytical Thinking 8 .

29) A firm most likely enters the home market of a foreign competitor in order to ________.

A) enter a collaborative venture with the competitor B) gain access to the competitor's government contracts C) force the competitor to expend resources to defend its market D) interfere with the competitor's marketing campaign Answer: C Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 30) Which of the following is an example of a market-seeking motive for FDI? A) a firm wishes to gain access to raw materials B) a firm follows its key customers abroad C) a company wishes to gain access to knowledge D) a company intends to avoid trade barriers Answer: B Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 31) Which of the following is the most likely motive behind firms in the mining industry wanting to enter new foreign markets?

A) access to natural resources B) availability of excessive non-skilled labor force C) increase in refining capacity D) Payment of wages remains the same in both the new market and the existing market.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking 32) A firm that pursues foreign direct investment to take advantage of government incentives is demonstrating a(n) ________ motive.

A) efficiency-seeking B) novelty-seeking C) asset-seeking D) market-seeking Answer: A Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge

9 .

33) A firm that pursues a collaborative venture to access raw materials is demonstrating a(n) ________ motive.

A) efficiency-seeking B) novelty-seeking C) asset-seeking D) market-seeking Answer: C Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 34) Which of the following industries considers proximity to customers especially important in the decision to enter a foreign market?

A) fashion B) automotive C) biotechnology D) mining Answer: A Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking ABC Appliance (Scenario) The ABC Appliance Corporation is a Florida-based manufacturer of refrigerators, dishwashers, and other large household appliances. ABC takes advantage of NAFTA, and as a result, the firm has loyal customers across North America. ABC managers would like to expand into the Asian market, but are unsure of the best way to do so. ABC managers are meeting to discuss various possibilities for entering the Asian market.

35) Which of the following should most likely be considered in making the decision to expand ABC operations into the Asian market?

A) How will domestic competitors of ABC react to an international expansion?

B) What technological and managerial know-how can ABC gain from an Asian expansion?

C) How many managers will need to relocate to Asia to oversee the Asian project?

D) How will ABC utilize the Internet to achieve success in the Asian market?

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking

10 .

36) New markets, new resources, and improved efficiency are the three main motives for firms to enter foreign markets through FDI. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 37) Companies often enter markets through FDI to avoid tariffs and other trade barriers because these usually apply only to exporting.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 38) The existence of a substantial market motivates many firms to produce offerings at or near customer locations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 39) Firms often follow their key customers abroad to preempt other vendors from serving them.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 40) The strategic purpose behind firms competing with rivals in their own market is to force them to expend resources and thus, defend the firm's own market.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 41) Companies opt for FDI to obtain advantages associated with locating at the hub of knowledge development and innovation in a given industry.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 11 .

42) Economies of scale are decreases in per-unit cost of production resulting from increasing output.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 43) International expansion invariably results in a decrease in a firm's economies of scale.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 44) Compared to small firms, large companies usually can access capital at lower cost.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 45) In the context of attaining economies of scope, using individual managers in each European country is more efficient that using the same base of managers all over Europe.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 46) In the fashion industry, customer needs change rapidly and managers often locate factories or assembly operations near important customers.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking 47) Governments encourage inward FDI because it transfers skill and technologies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking

12 .

48) Tariff and other trade barriers for exports and FDI are identical.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 49) By establishing a physical presence inside a country or an economic bloc, the foreign company obtains the same advantages as local firms.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 50) Firms that engage in FDI avoid problematic trade barriers because the physical presence of a foreign firm earns it the same privileges as a local firm.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Application of Knowledge 51) Discuss three reasons for firms seeking new market opportunities. Illustrate each with an example of a firm that sought a new foreign market for that particular motive.

Answer: a. Gain access to new markets or opportunities. The existence of a substantial market motivates many firms to produce offerings at or near customer locations. Local production improves customer service and reduces the cost of transporting goods to buyer locations. Coca-Cola, IBM, Samsung, and Siemens all generate more sales abroad than in their home markets. The opening case highlights Huawei Technologies, a Chinese firm that has invested billions in Africa to gain access to fast-growing mobile phone markets there. b. Follow key customers. Firms often follow their key customers abroad to preempt other vendors from serving them. Establishing local operations also positions the firm to better serve customer needs. Tradegar Industries supplies the plastic that its customer Procter & Gamble uses to manufacture disposable diapers. When P&G built a plant in China, Tradegar followed P&G there, establishing production in China as well. c. Compete with key rivals in their own markets. Some MNEs may choose to confront current or potential competitors directly, in the competitors' home market. The strategic purpose is to weaken the competitor by forcing it to expend resources to defend its market. In the earthmoving equipment industry, Caterpillar entered a joint venture with Mitsubishi to put pressure on the market share and profitability of their common rival, Japan's Komatsu. The need to spend substantial resources to defend its home market reduced Komatsu's ability to expand abroad.

Diff: 2: Moderate Skill: Concept Objective: 14-3: Explain the motives for FDI and collaborative ventures AACSB: Analytical Thinking 13 .

52) Discuss resource and asset-seeking motives for FDI. Why might a company favor acquisition over greenfield investment as an FDI approach?

Answer: Firms frequently want to acquire production factors that are more abundant or less costly in a foreign market. Or they may seek complementary resources and capabilities of partner companies headquartered abroad. Specifically, FDI or collaborative ventures may be motivated by the firm's desire to attain: 1. Raw materials needed in extractive and agricultural industries Firms in the mining, oil, and crop-growing industries have little choice but to go where the raw materials are located. In the wine industry, companies establish wineries in countries suited for growing grapes, such as France and Chile. Oil companies establish refineries in countries with abundant petroleum reserves such as Kuwait.

2. Knowledge or other assets By establishing a local presence through FDI, the firm is better positioned to deepen its understanding of target markets. FDI provides the foreign firm better access to market knowledge, customers, distribution systems, and control over local operations. By collaborating in R&D, manufacturing, and marketing, the focal firm can benefit from the partner's know-how.

3. Technological and managerial know-how The firm may benefit by establishing a presence in a key industrial cluster, such as the robotics industry in Japan, chemicals in Germany, fashion in Italy, or software in the United States.

Companies can obtain many advantages from locating at the hub of knowledge development and innovation in a given industry. Denmark, Finland, Israel, New Zealand, Sweden, and the United States are considered ideal for R&D in the biotechnology industry because they all have abundant pools of biotech knowledge workers. Many firms enter a collaborative venture abroad as a prelude to operating wholly owned FDI. Collaboration with a local partner reduces the risks of entry while allowing the entrant to gain local expertise before launching operations of its own in the market.

An international firm may favor acquisition over greenfield investment as an FDI approach.

Greenfield investment occurs when a firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities. The investing firm typically buys an empty plot of land and builds a production plant, marketing subsidiary, or other facility there for its own use.

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An acquisition is the purchase of an existing company or facility. Multinational enterprises may favor acquisition over greenfield FDI because, by acquiring an existing company, they gain ownership of existing assets such as plant, equipment, and human resources, as well as access to existing suppliers and customers. Unlike greenfield FDI, acquisition provides an immediate stream of revenue and accelerates the MNE's return on investment. However, host-country governments often pressure MNEs to undertake greenfield FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and know-how transfer to locals, and improves linkages to the global marketplace. Many governments offer incentives to encourage greenfield investments. They may be sufficient to offset the advantages of acquisition-based entry.

Diff: 3: Hard Skill: Synthesis Objective: 14-3, 14-4: Explain the motives for FDI and collaborative ventures, Identify the types of foreign direct investment AACSB: Analytical Thinking 53) A firm that builds a new manufacturing facility in a foreign market is participating in a(n) ________.

A) acquisition B) merger C) greenfield investment D) equity participation Answer: C Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 54) The purchase of an existing company or facility is known as a(n) ________.

A) greenfield investment B) licensing C) acquisition D) equity joint venture Answer: C Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge

15 .

55) An arrangement whereby the firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product or service is termed as ________.

A) vertical integration B) horizontal integration C) decentralization D) centralization Answer: A Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 56) How does the acquisition of a foreign company most likely benefit a focal firm in the foreign market?

A) The focal firm can extend its market reach through readily available distribution networks.

B) The MNE avoids domestic and foreign taxation, which enables the firm to invest more resources in the foreign market.

C) Firm managers can reduce their workload by ensuring that all decision-making responsibilities are taken up by foreign managers.

D) The firm eliminates the need to train its own employees by utilizing the workers previously hired by the foreign firm.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Analytical Thinking 57) A(n)________ is a special type of acquisition in which two companies join to form a larger firm.

A) merger B) acquisition C) wholly owned direct investment D) greenfield investment Answer: A Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge

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58) Which of the following terms is used to refer to a focal firm's partial ownership of an existing firm?

A) turnkey operation B) greenfield investment C) direct investment D) equity participation Answer: D Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 59) Collaborative ventures benefit SMEs by providing them with ________.

A) better trained employees B) an increased amount of capital C) larger and newer facilities D) more advanced technology Answer: B Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 60) A firm that develops the capacity to sell its products by investing in marketing and selling operations is ________.

A) acquiring downstream value-chain facilities B) acquiring upstream value-chain facilities C) engaging in centralization D) engaging in decentralization Answer: A Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 61) A firm that owns the activities performed in a single stage of its value chain is demonstrating ________.

A) centralization B) decentralization C) horizontal integration D) reverse integration Answer: C Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Analytical Thinking 17 .

International Business Class (Scenario) Students in Professor Manning's international business class have been assigned the task of explaining the different types of FDI. Professor Manning formed groups among students. The groups are to research their assigned topic and present their information to the class using examples of real-world firms for illustration. Jessica Hanson is the leader of Group A; Manu Patel is the leader of Group B; and Mario Witherspoon is the leader of Group C. 62) During his presentation, Manu describes how a large U.S. retailer entered the Mexican market by purchasing the stores and assets of a Mexican retailer. Which of the following topics was most likely assigned to Group B? A) merger B) turnkey operation C) acquisition D) collaborative venture Answer: C Diff: 3: Hard Skill: Application Objective: 14-4: Identify the types of foreign direct investment AACSB: Analytical Thinking 63) Host-country governments often pressure MNEs to undertake acquisition over greenfield investments.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Analytical Thinking 64) Home Depot made an acquisition investment when it entered the Mexican market by purchasing Home Mart, a domestic store chain.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 65) A greenfield investment is a direct investment to purchase an existing company or facility.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge

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66) A merger is a special type of acquisition.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 67) Vertical integration is an arrangement whereby the firm owns or seeks to own multiple stages of a value chain for producing, selling, and delivering a product or service.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 68) Explain why MNEs prefer acquisition instead of greenfield FDI. Why do foreign governments encourage greenfield FDI? Answer: Multinational enterprises may favor acquisition over greenfield FDI because, by acquiring an existing company, they gain ownership of existing assets such as plant, equipment, and human resources, as well as access to existing suppliers and customers. Unlike greenfield FDI, acquisition provides an immediate stream of revenue and accelerates the MNE's return on investment. However, host-country governments often pressure MNEs to undertake greenfield FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and knowhow transfer to locals, and improves linkages to the global marketplace. Many governments offer incentives to encourage greenfield investments. They may be sufficient to offset the advantages of acquisition-based entry.

Diff: 2: Moderate Skill: Concept Objective: 14-4: Identify the types of foreign direct investment AACSB: Analytical Thinking

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69) Explain the difference between vertical FDI and horizontal FDI. Provide an example that illustrates the difference between vertical and horizontal integration.

Answer: Vertical integration is an arrangement whereby the firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product or service. The firm may acquire downstream value-chain facilities—that is, in marketing and selling operations.

Or the firm may acquire upstream facilities, such as factories or assembly plants.

Horizontal integration is an arrangement in which the firm owns, or seeks to own, the activities performed in a single stage of its value chain. Microsoft's primary business is developing computer software. In addition to producing word processing and spreadsheet software, it has developed foreign subsidiaries that make other types of software, such as a Montreal-based firm that produces software for creating movie animations. Horizontal integration implies the firm invests in its own industry to expand its capacity and activities.

In 2014, Korean appliance manufacturer Samsung Electronics acquired Quietside Corporation, a leading distributor of air conditioners in North America. Samsung bought Quietside to enhance its ability to distribute its own air conditioners in a key foreign market. The acquisition exemplifies downstream vertical integration because appliance distribution is outside Samsung's normal sphere of operations. Subsequently, by contrast, Samsung acquired the manufacturing plants of Amica, a home appliance company in Poland. This acquisition represents horizontal integration because Samsung Electronics' core business is manufacturing appliances and electronic products. By buying Amica's manufacturing plants, Samsung invested in its own industry to expand its production capacity.

Diff: 3: Hard Skill: Critical Thinking Objective: 14-4: Identify the types of foreign direct investment AACSB: Application of Knowledge 70) Which of the following is a characteristic of project-based, nonequity ventures?

A) a broad scope of product development B) a specific agenda and timeframe C) long-term sharing of resources D) formation of a new legal entity Answer: B Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge

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71) Which of the following is a disadvantage of equity joint ventures?

A) termination difficulties B) lesser control over future directions C) imbalanced relationship D) vague contractual partnership Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 72) A consortium is defined as ________.

A) the purchase of an existing company or facility B) two partners forming a new legal entity C) an equity venture to consolidate the value chain D) multiple partners participating on a large-scale project Answer: D Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 73) Which of the following is a characteristic of an equity joint venture?

A) simple management structure B) facilitates knowledge transfer between partners C) easy to terminate D) lesser exposure to political risk Answer: B Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 74) A(n) ________ is a project-based, usually nonequity venture initiated by multiple partners to fulfill a large-scale project.

A) greenfield investment B) acquisition C) merger D) consortium Answer: D Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge

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75) Which of the following is a key reason that a focal firm would most likely enter a collaborative venture with a foreign firm?

A) The foreign firm can fill an important gap in the focal firm's value chain.

B) The foreign firm requires the focal firm's financial resources to compete locally as well.

C) The focal firm wants to duplicate a competitor's marketing strategies abroad.

D) The market abroad is saturated; there is no scope for the focal firm's products or services.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge International Business Class (Scenario) Students in Professor Manning's international business class have been assigned the task of explaining the different types of FDI. Professor Manning formed groups among students. The groups are to research their assigned topic and present their information to the class using examples of real-world firms for illustration. Jessica Hanson is the leader of Group A; Manu Patel is the leader of Group B; and Mario Witherspoon is the leader of Group C. 76) During her presentation, Jessica describes how two automakers joined forces and formed a separate firm by pooling their assets. Which of the following topics was most likely assigned to Group A? A) equity joint venture B) acquisition C) greenfield investment D) vertical integration Answer: A Diff: 3: Hard Skill: Application Objective: 14-5: Understand international collaborative ventures AACSB: Analytical Thinking 77) During his presentation, Mario describes how a large Japanese automaker built a factory in Kentucky. Which of the following topics was most likely assigned to Group C? A) horizontal integration B) equity joint venture C) greenfield investment D) consortium Answer: C Diff: 3: Hard Skill: Application Objective: 14-5: Understand international collaborative ventures AACSB: Analytical Thinking

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78) A new legal entity is created during the formation of a project-based, nonequity venture.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 79) One of the key advantages to an equity joint venture is that the management structure is very simple, which allows for easy adjustments and modifications.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 80) Cross-licensing agreements are a type of project-based, nonequity venture in which the partners agree to allow access to licensed intellectual property developed by the other on preferential terms.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 81) Equity joint ventures have the simplest management structure.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 82) Project-based, nonequity ventures are difficult to set up.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Analytical Thinking 83) The failure rate of collaborative ventures is higher in developing economies than in advanced economies.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge

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84) Describe the advantages of international collaborative ventures, and describe the potential risks of collaboration.

Answer: An international collaborative venture is a cross-border business partnership in which collaborating firms pool their resources and share costs and risks of a new venture. Here the focal firm partners with one or more companies to pursue a joint project or initiative.

International collaborative ventures are also sometimes called "international partnerships" or "international strategic alliances." Collaborative ventures help companies overcome together the often-substantial risks and costs involved in achieving international projects that might exceed the capabilities of any one firm operating alone. Groups of firms sometimes form partnerships to accomplish large-scale goals such as developing new technologies or completing major projects such as power plants. By collaborating, the focal firm can draw on a range of complementary technologies, accessible only from other firms, to innovate and develop new products.

Collaboration is not without risks, however. The potential partner may be a current or potential competitor, is likely to have its own agenda, and will likely gain important competitive advantages from the relationship. Management must protect its hard-won capabilities and other organizational assets to preserve its bargaining power and ability to compete. Harmony is not necessarily the most important goal, and accepting some conflict and tension between the partners may be preferable to surrendering core skills. The firm does not want to become too dependent on its partner.

Diff: 3: Hard Skill: Critical Thinking Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 85) Discuss the four key differences between project-based, nonequity ventures and equity ventures.

Answer: Project-based collaborations differ from traditional equity joint ventures in four important ways: 1. No new legal entity is created. Partners carry on their activity within the guidelines of a contract.

2. Parent companies do not necessarily seek ownership of an ongoing enterprise. Instead, they contribute their knowledge, expertise, staff, and monetary resources to derive knowledge or other benefits.

3. Collaboration tends to have a well-defined timetable and end date; partners go their separate ways once they have accomplished their objectives or have no further reason for continuation.

4. Collaboration is narrower in scope than in equity joint venturing, typically emphasizing a single project, such as development, manufacturing, marketing, or distribution of a new product.

Diff: 2: Moderate Skill: Application Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge

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86) Discuss four strategies that managers can employ in order to increase the chances of a successful collaborative venture.

Answer: 1. Be cognizant of cultural differences. International collaborations require that both parties learn and appreciate each other's corporate and national cultures. Cultural incompatibility can cause anger, frustration, and inefficiency. The partners may never arrive at a common set of values and organizational routines, especially if they are from very distinct cultures—say, Norway and Nigeria. Establishing cultural compatibility is a must.

2. Pursue common goals. When partners have differing goals for the venture, or their goals change over time, they can find themselves operating at cross-purposes. Japanese firms tend to value market share over profitability, while U.S. firms value profitability over market share.

Because different strategies are required to maximize each of these performance goals, a joint venture between Japanese and U.S. firms may fail. To overcome such challenges, partners need to regularly interact and communicate at three levels of the organization: senior management, operational management, and the workforce.

3. Give due attention to planning and management of the venture. Without agreement on questions of management, decision making, and control, each partner may seek to control all the venture's operations, which can strain the managerial, financial, and technological resources of both. In some cases, equal governance and a sense of shared enterprise are best because they help partners view themselves as equals and reach consensus. In other cases, having a dominant partner in the relationship helps ensure success. When one of the partners is clearly the driver or the leader in the relationship, there is less likelihood of a stalemate or prolonged negotiations.

4. Safeguard core competencies. Collaboration takes place between current or potential competitors that must walk a fine line between cooperation and competition. Volkswagen and General Motors succeeded in China by partnering with the Chinese firm, Shanghai Automotive Industry Corporation (SAIC; www.saicmotor.com). The Western firms transferred much technology and know-how to their Chinese partner. Having learned much from them, SAIC is now becoming a significant player in the global automobile industry and even a competitor to its earlier partners.

Diff: 2: Moderate Skill: Application Objective: 14-5: Understand international collaborative ventures AACSB: Application of Knowledge 87) Which of the following is a characteristic of successful international retailers?

A) conservative managers and salespeople and a centralized organizational system B) an entrepreneurial approach to foreign markets and an understanding of the target market C) significant financial borrowings and high foreign and domestic operational costs D) extreme competition and support from home-country governments exclusively Answer: B Diff: 2: Moderate Skill: Concept Objective: 14-6: Discuss the experience of retailers in foreign markets AACSB: Application of Knowledge

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88) While franchising facilitates rapid internationalization, compared to FDI, it affords the firm less control over its foreign operations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 14-6: Discuss the experience of retailers in foreign markets AACSB: Application of Knowledge

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89) Describe the four primary challenges faced by retailers when they expand overseas. Provide examples of mistakes made by retailers in foreign markets.

Answer: 1. Culture and language are a significant obstacle. Compared to most businesses, retailers are close to customers. They must respond to local market requirements by customizing their product and service portfolio, adapting store hours, modifying store size and layout, training local workers, and meeting labor union demands.

2. Consumers tend to develop strong loyalty to indigenous retailers. As Best Buy in Turkey, Home Depot in China, and Walmart in Germany discovered, local firms usually enjoy great allegiance from local consumers.

3. Managers must address legal and regulatory barriers that can be idiosyncratic. Germany limits store hours, and most retailers are closed on Sundays. IKEA has been wary of entering India due to excessive restrictions placed on foreign retailers. China's government introduced regulations that restricted online publishing, which especially affected foreign vendors. The new regulations led Apple to end online sales of iBooks and iTunes Movies.

4. When entering a new market, retailers must develop local sources for thousands of products, including some that local suppliers may be unwilling or unable to provide. When Toys "R" Us entered Japan, local toy manufacturers were reluctant to work with the U.S. firm. Some retailers end up importing many of their offerings, which requires establishing complex and costly international supply chains.

Many retailers have floundered in foreign markets. When the French department store Galleries Lafayette opened in New York City, it could not compete with the city's numerous posh competitors. In its home market in the United Kingdom, Marks & Spencer succeeds with store layouts that blend food and clothing offerings in relatively small spaces, a formula that translated poorly in Canada and the United States. IKEA experienced problems in Japan where consumers value high-quality furnishings, not the low-cost products IKEA offers. Most recently, Home Depot abandoned the Chinese market after only a few years there. As another example, Walmart (www.walmart.com) is the world's largest retailer but failed in Germany because it could not compete with local competitors and eventually exited the market. In Mexico, Walmart constructed massive U.S.-style parking lots for its new supercenters. But most Mexicans don't have cars and city bus stops were too far away, so shoppers could not haul their goods home. In Brazil, most families do their big shopping once a month on payday. Walmart built aisles too narrow and crowded to accommodate the rush and stocked shelves in urban São Paulo with some items that were not needed, such as leaf blowers. Walmart's red, white, and blue banners, reminiscent of the U.S. flag, offended local tastes in Argentina. Sam's Club, Walmart's food discounting operation, failed in Latin America partly because its huge multipack items were too big for local shoppers with low incomes and small apartments. Today Walmart is one of Latin America's most successful retailers. It took Walmart many years to learn to adapt to local market needs.

Diff: 3: Hard Skill: Critical Thinking Objective: 14-6: Discuss the experience of retailers in foreign markets AACSB: Analytical Thinking

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International Business: The New Realities, 5e (Cavusgil) Chapter 15 Licensing, Franchising, and Other Contractual Strategies 1) A ________ is a fee paid periodically to compensate a licensor for the temporary use of its intellectual property, often based on a percentage of gross sales generated from the use of the licensed asset.

A) duty B) residual C) royalty D) tariff Answer: C Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 2) When a firm allows others to use an entire business system in exchange for compensation, the arrangement is known as ________.

A) industrial design rights B) franchising C) joint venture D) equity venture Answer: B Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 3) A cross-border contractual relationship, which is governed by an explicit contract, provides the focal firm with ________ over the foreign partner.

A) a low level of control B) a moderate level of control C) a high level of control D) seldom any control Answer: B Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge

1 .

4) Which of the following is characteristic of cross-border contractual relationships?

A) When compared to FDI, they are less susceptible to volatility and risk, and tend to bring both parties a predictable stream of revenue.

B) The focal firm attains maximum control by establishing a physical presence, and ownership of key assets, in the foreign market.

C) It attracts high attention and criticism for the focal firm because of the local perception of foreign entities.

D) They are governed by a contract that provides the focal firm with no control over the foreign partner.

Answer: A Diff: 2: Moderate Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 5) Which of the following is TRUE about cross-border contractual relationships?

A) It is a more visible strategy than FDI and draws a lot of criticism from the local market.

B) They are more susceptible to volatility and risk compared to FDI. C) They attract less attention and less of the criticism sometimes directed at firms that enter through more visible strategies such as FDI. D) Focal firms use contractual relationships as an advanced entry strategy in foreign markets.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 6) Which of the following is an example of intellectual property?

A) systems of measurement B) McDonald's golden arches C) an unpublished book D) a phone directory Answer: B Diff: 1: Easy Skill: Application Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge

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7) An industrial design is intended to ________.

A) eliminate the possibility of the design being copied B) improve a product's aesthetics and usability as well as increase its production efficiency, performance, or marketability.

C) protect firms from intellectual property theft D) protect information of commercial value Answer: B Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 8) A collective mark ________.

A) is intended to improve the product's aesthetics and usability as well as increase its production efficiency, performance, or marketability B) protects original works of authorship, giving the creator the exclusive right to reproduce the work, display and perform it publicly, and authorize others to perform these activities C) is a distinctive design, symbol, logo, word, or series of words placed on a product label D) is a logo belonging to an organization whose members use it to identify themselves and associate their products with a level of quality or accuracy, geographical origin, or other positive characteristic Answer: D Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 9) The purpose of intellectual property rights is to ________ so they can exploit their inventions not only to recoup their investment costs and create commercial advantage but also to acquire power and market dominance free of direct competition.

A) prevent excessive regulation and government bureaucracy B) grant a firm permission to use another firm's proprietary names C) allow inventors monopoly advantage for a specified period of time D) allow a firm to use an entire business system in exchange for compensation Answer: C Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 10) Contractual entry strategies in international business are cross-border exchanges in which the relationship between the focal firm and its foreign partner is governed by an explicit contract.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 3 .

11) Exporting and foreign direct investing are two common types of contractual entry strategies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 12) Patents provide inventors the right to prevent another person or company from selling or using an invention for up to twenty years.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 13) A patent is granted to those who invent or discover a new and useful process, device, or manufactured product or an improvement on these.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge 14) An industrial design is intended to improve the product's aesthetics and usability as well as increase its production efficiency, performance, or marketability. The Volkswagen logo is a well-known industrial design.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge

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15) Describe six unique qualities shared by all cross-border contractual relationships.

Answer: Cross-border contractual relationships have six unique characteristics: • First, they are governed by a contract that provides the focal firm a moderate level of control over the foreign partner.

• Second, the relationships typically involve the exchange of intangibles (intellectual property) and services.

• Third, contractual relationships can be pursued independently or in conjunction with other foreign market entry strategies. Their use is context specific; that is, a focal firm may pursue a contractual relationship with certain customers, countries, or products, but not others.

• Fourth, cross-border contractual relationships provide for a dynamic, flexible choice. Over time, the focal firm may switch to another way of servicing foreign markets.

• Fifth, the relationships often reduce local perceptions of the focal firm as a foreign enterprise.

Since the focal firm partners with a local firm, it may be able to shield some of the criticism directed towards MNEs. • Finally, cross-border contractual relationships generate a predictable level of earnings from foreign operations. In comparison to FDI, contractual relationships imply reduced volatility and risk.

Diff: 2: Moderate Skill: Concept Objective: 15-1: Explain contractual entry strategies AACSB: Application of Knowledge

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16) Explain the role of intellectual property rights in foreign market contractual strategies. What constitutes the infringement of intellectual property?

Answer: Intellectual property rights (IPRs) are the legal claims that protect the proprietary assets of firms and individuals from unauthorized use by other parties. They derive from patents, trademarks, copyrights, and other protections associated with intellectual property. IPRs provide inventors with a monopoly advantage for a specified period of time, so they can exploit their inventions not only to recoup their investment costs and create commercial advantage, but also to acquire power and market dominance free of direct competition. The availability and enforcement of these rights vary from country to country. Without such legal protection and the assurance of commercial rewards, most firms and individuals would have little incentive to invent.

Infringement of intellectual property is the unauthorized use, publication, or reproduction of products and services protected by a patent, copyright, trademark, or other intellectual property right. Such a violation amounts to piracy and takes the form of production and distribution of counterfeit goods. For example, annual piracy losses in CDs and music exceed $100 million in Brazil, and losses in business software exceed $1 billion in Russia.

Counterfeiters may use a product name that differs only slightly from that of a well-known brand; it is similar enough that buyers associate it with the genuine product but just different enough so that prosecution is hampered. While firms such as Rolex and Tommy Hilfiger are well-known victims, counterfeiting is also common in such industrial products as medical devices and car parts. Counterfeiters even have faked entire motor vehicles. Authorities uncovered 23 unauthorized Apple stores in southeast China, selling fake iPads and counterfeit smartphones.

Diff: 2: Moderate Skill: Application Objective: 15-1, 15-7: Explain contractual entry strategies, Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 17) Which of the following is an example of licensing?

A) Saks Inc. entered China by giving a retail chain in China the authority to use Saks Fifth Avenue name for a flagship department store in Shanghai.

B) An Indian automobile manufacturing company buys engines from a Japanese manufacturer for its environmentally friendly cars.

C) A South-Korean consumer electronics manufacturer produces the screens for its brand of television and sends orders to a factory in China to manufacture the casing for the television.

D) A U.K-based motorcycle manufacturer produces limited-edition customizations of the company's stock models and sells it to customers around the world.

Answer: A Diff: 3: Hard Skill: Application Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge

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18) Which of the following is provided by the licensor in a licensing agreement?

A) a monetary down-payment plus royalties for all products sold locally B) a combination of intellectual property and technical information and assistance C) a storefront or facility and the necessary materials to make the product D) a combination of a lump-sum payment and the intellectual know-how Answer: B Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 19) In a licensing agreement, the licensee provides ________.

A) the rights to use its industrial design B) intellectual property, technical information, and assistance C) a combination of down-payment plus royalty payments D) the know-how and supporting products, such as raw materials and components Answer: C Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 20) Which of the following is NOT provided by the licensor?

A) ongoing managerial guidance B) technical information and assistance C) an advisory role D) trademark Answer: A Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 21) Which of the following is characteristic of exclusive licensing agreements?

A) The licensor is not allowed to interfere with the production or marketing of the licensed asset.

B) It ensures payment from the licensee to the licensor upon receipt of an export shipment.

C) The licensee cannot cancel the contract with the licensor even if sales of the licensed asset are poor.

D) The licensee is prohibited from sharing the licensed asset with another company within a specified region.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge

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22) In a licensing agreement, ________ is responsible for local sales.

A) the licensee B) patent owner C) the licensor D) copyright partner Answer: A Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 23) Which of the following is an example of a trademark licensing agreement?

A) a China-based consumer electronic company that has invented a flexible casing for its MP3 players B) a Thailand-based pharmaceutical company that receives manufacturing knowledge from a U.S-based pharmaceutical C) a tee shirt manufacturer in Bangladesh making shirts with the Harley Davidson logo D) a U.S.-based clothing company that opens a factory in Vietnam and Cambodia to utilize lowlabor costs Answer: C Diff: 3: Hard Skill: Application Objective: 15-2: Understand licensing as an entry strategy AACSB: Analytical Thinking 24) Which of the following is protected under copyright laws?

A) the Nike Swoosh B) the art of Jackson Pollock C) McDonald's clown shaped man with puffed out costume legs D) Winnie the Pooh image Answer: B Diff: 2: Moderate Skill: Application Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 25) Which of the following is characteristic of a know-how agreement?

A) exclusive rights to reproduce original art work B) permission to use manufacturing facilities for a fee C) exchanging technological or management information for royalties D) trading the use of a name brand for management advice Answer: C Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 8 .

26) Cross-licensing often occurs in the semiconductor and chemical industries, and other intellectual property is acquired in reciprocal licensing arrangements between firms in order to ________.

A) divide the costs of production and marketing between competing firms B) avoid research duplication and building on each other's innovations C) protect the inventions and designs of small firms from large MNEs D) decrease the likelihood of industrial spying and theft among firms Answer: B Diff: 2: Moderate Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 27) ________ is the world's leading licensing firm, with $56.6 billion in revenues.

A) Nickelodeon B) The Walt Disney Company C) Mattel D) Major League Baseball Answer: B Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 28) The greatest amount of licensing occurs in the ________ industries.

A) pharmaceutical B) music C) toy D) mining Answer: C Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 29) In a licensing agreement, the licensee is both the owner and user of intellectual property.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge

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30) In a typical licensing agreement, after the relationship is established, the licensor is not required to make a capital investment in the foreign market.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 31) A know-how agreement is one in which the focal firm provides technological or management knowledge about how to design, manufacture, or deliver a product or a service.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge 32) How are trademarks established in the United States and abroad? What are some of the difficulties faced by firms regarding the protection of trademarks? Explain with an example.

Answer: In the United States and a number of other countries, firms acquire rights to trademarks through first use and continuous usage. However, in others, rights to trademarks are acquired through registration with government authorities, and many countries require local use of the registered mark to maintain the registration. When a firm registers its trademark, it formally notifies government authorities that it owns the trademark and is entitled to intellectual property protections. The convention of gaining ownership to a trademark simply through registration has caused concerns for many firms. For example, McDonald's was frustrated to learn, when it wanted to enter South Africa in 1993, that a local trader had already applied both to register the McDonald's trademark for his own use, and to have the company's rights to the trademark withdrawn. The South African Supreme Court actually ruled in favor of the local entrepreneur.

McDonald's eventually won on appeal but only after spending a significant sum in legal fees.

Also, in China, the French apparel company Hermès lost the right to the Chinese version of its name because a local company had already registered it Diff: 2: Moderate Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge

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33) What is cross-licensing? Why does the pharmaceutical industry tend to favor cross-licensing arrangements? Explain your answer in a short essay.

Answer: In some industries, such as pharmaceuticals, chemicals, and semiconductors, technology is acquired in reciprocal licensing arrangements among firms from the same or similar industries. This is known as cross-licensing. In industries where the rate of technological advances is rapid and where innovations often build on each other, technology licensing from competitors provides key advantages. It reduces the costs of innovation by avoiding duplication of research, while reducing the risk of excluding any one firm from access to new developments.

The pharmaceutical industry tends to use cross-licensing agreements because R&D to develop a new drug can cost billions of dollars, and new drugs require long government approval processes. Pharmaceutical firms want to launch their discoveries as quickly as possible. To reduce costs and increase the speed of new drug development, pharmaceutical firms license inventions to each other.

Diff: 2: Moderate Skill: Concept Objective: 15-2: Understand licensing as an entry strategy AACSB: Application of Knowledge

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34) Explain how licensing works as an entry strategy into foreign markets. Describe the risks faced by technological firms that enter licensing agreements in foreign countries.

Answer: A licensing agreement specifies the nature of the relationship between the owner of intellectual property, the licensor, and the user of the property, the licensee. High-technology firms routinely license their patents and know-how to foreign companies. For example, Germany's Cognitec licensed the use of its face recognition technology to U.S. chip manufacturer Intel, which will use the technology to control access to laptops, tablets, and similar devices.

Upon signing a licensing contract, the licensee pays the licensor a fixed amount up front and an ongoing royalty of typically 2 to 5 percent of gross sales generated from using the licensed asset.

The fixed amount covers the licensor's initial costs of transferring the licensed asset to the licensee, including consultation, training in how to deploy the asset, engineering, or adaptation.

Certain types of licensable assets, such as copyrights and trademarks, may have lower transfer costs. The royalty percentage may escalate with increasing sales.

A typical licensing contract runs five to seven years and is renewable at the option of the parties.

Initially, the licensor provides technical information and assistance to the licensee. Once the relationship has been established and the licensee fully understands its role, the licensor usually plays an advisory role but has no direct involvement in the market and provides no ongoing managerial guidance. Most firms enter into exclusive agreements, in which the licensee is not permitted to share the licensed asset with any other company within a prescribed territory. In addition to operating in its domestic market, the licensee may also be permitted to export to other countries.

If the licensor is an MNE, it may enter a licensing arrangement with its own wholly or partly owned foreign affiliate. In this case, licensing is an efficient way to compensate the foreign affiliate, especially when it is a separate legal entity, and transfer intellectual property to it within a formal legal framework. Licensing agreements can present risks to firms in foreign countries.

From the licensor's standpoint, licensing is a relatively passive entry strategy. Profits tend to be lower than those from exporting or FDI, and licensing does not guarantee a basis for future expansion. To earn royalties, the licensor must rely on the licensee's sales and marketing prowess. A weak partner will provide only meager royalties. Also, licensing provides limited control over how the licensor's asset is used. If the licensee produces a substandard product, the licensor's reputation can be harmed. To avoid such problems, experienced firms require foreign licensees to meet minimum quality and performance standards.

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If the licensee is very successful, the licensor may regret not entering the market through a more lucrative entry strategy. Because licensing requires sharing intellectual property with other firms, the risk of creating a future competitor is substantial. The rival may exploit the licensor's intellectual property by entering third countries or creating products based on knowledge gained in the relationship. This scenario has played out in the auto, computer chip, and consumer electronics industries in Asia as Western firms have transferred process technologies to firms in China, Japan, and South Korea. Japan's Sony originally licensed transistor technology from U.S. inventor Bell Laboratories to make hearing aids. But instead Sony used the technology to create small, battery-powered transistor radios and soon grew to become a global leader in this product.

Diff: 3: Hard Skill: Application Objective: 15-2, 15-3: Understand licensing as an entry strategy, Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 35) Explain franchising as a foreign market entry strategy, and why franchising is a more comprehensive strategy than licensing.

Answer: Franchising is an advanced form of licensing in which the focal firm, the franchisor, allows an entrepreneur, the franchisee, the right to use an entire business system in exchange for compensation. As with licensing, an explicit contract defines the terms of the relationship.

Franchising is more comprehensive than licensing because the franchisor prescribes virtually all of the business activities of the franchisee. The franchisor tightly controls the business system to ensure consistent standards. International franchisors employ globally recognized trademarks and attempt to guarantee the customer a uniform retail experience and consistent product quality.

Completely standardized business activities, however, are difficult to replicate across diverse markets. Differences in franchisee resources, key ingredients, worker qualifications, and physical space may necessitate changes to the franchise formula.

Diff: 3: Hard Skill: Critical Thinking Objective: 15-2, 15-4: Understand licensing as an entry strategy, Understand franchising as an entry strategy AACSB: Analytical Thinking 36) Which of the following is an advantage of licensing?

A) It is ideal for products, services, or knowledge that is highly complex.

B) It is easy to maintain control over how the licensed asset is used.

C) It requires very little capital investment in the foreign market.

D) It guarantees a basis for future expansion in the market.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge

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37) An advantage of licensing is that firms are able to ________.

A) enter markets with extensive trade barriers B) guarantee a basis for future expansion C) control how the licensed asset is used D) resolve disputes easily Answer: A Diff: 1: Easy Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 38) By establishing a brand name and market power through a licensing agreement, licensors are able to ________.

A) establish a more durable presence in the local market B) control the use of the licensed asset C) control the dissipation of important intellectual property to competitors D) avoid the risk of creating a future competitor Answer: A Diff: 1: Easy Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 39) The reputation of a licensor will be jeopardized by a licensing agreement if the licensee ________.

A) markets competing products for significantly lower prices B) uses the licensing asset to create products of poor quality C) refuses to pay the agreed upon royalties to the licensor D) does not guarantee future expansion in the market Answer: B Diff: 1: Easy Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 40) Which of the following is a disadvantage of licensing for technological firms?

A) It is not appropriate for entering markets that pose substantial country risk.

B) It requires high capital investment and the presence of the technological firm in the foreign market.

C) It restricts flexibility in the foreign market due to the technological firm's ownership of key assets in the target market.

D) It increases the risk of creating a future competitor.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 14 .

Wonder Cat Licensing (Scenario) Wonder Cat is a popular, new cartoon series created by the U.S-based All Cartoon Channel (ACC). Currently, the only Wonder Cat item available for sale are shirts that are sold exclusively through the ACC Web site. The cartoon series is a big hit in China, and as a result ACC has been approached by a Chinese firm about a licensing agreement. ACC executives are considering the pros and cons of such an agreement before making any final decisions.

41) Which of the following questions would be more important to evaluate before ACC enters a licensing agreement with the Chinese firm?

A) What other cartoon characters in the U.S. have been licensed to Chinese firms?

B) Should the Wonder Cat shirts that were available on the firm's Web site be removed from sale?

C) Will the Wonder Cat products made by the Chinese firm be available for sale on the ACC Web site?

D) How much control will ACC be able to maintain over the use of the Wonder Cat brand?

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Analytical Thinking 42) Which of the following statements most likely supports an ACC decision to enter into a licensing agreement with the Chinese firm?

A) Royalties from toys and apparel would be initially minimal.

B) The Wonder Cat brand's products could be easily counterfeited in other markets except in the Chinese markets.

C) The Chinese government restricts complete ownership of local operations by foreign firms.

D) China exclusively opts for high-control strategies such as FDI. Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Analytical Thinking 43) Which of the following most likely supports an ACC decision to NOT enter a licensing agreement with the Chinese firm?

A) ACC does not want to invest capital for FDI in the Chinese market.

B) ACC desires a low-risk, low-cost strategy to internationalize the Wonder Cat character.

C) The Chinese market restricts ownership of local operations by foreign firms.

D) ACC wants to maintain firm control of how the Wonder Cat character is used.

Answer: D Diff: 3: Hard Skill: Critical Thinking Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Analytical Thinking 15 .

44) Licensing agreements enable energy and defense firms to enter nations that allow the foreign ownership of businesses related to national security.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 45) One of the advantages of licensing is that the levels of risk from such agreements are typically lower than for FDI. Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 46) One of the disadvantages of licensing is that it requires the licensor to make a high capital investment in the foreign market.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 47) Describe five advantages of licensing agreements from the perspective of the licensor.

Answer: a. Licensing requires neither substantial capital investment nor direct involvement of the licensor in the foreign market. Unlike other entry strategies, the licensor need not establish a physical presence in the market or maintain inventory there. b. Licensing makes entry possible in countries that restrict foreign ownership in securitysensitive industries, such as defense and energy. c. Licensing also facilitates entry in markets that are difficult to enter because of trade barriers, tariffs, and bureaucratic requirements, which usually apply only to exporting or FDI. d. Licensing can be used as a low-cost strategy to test the viability of foreign markets. By establishing a relationship with a local licensee, the foreign firm can learn about the target market and devise the best future strategy for establishing a more durable presence there. For example, Swiss pharmaceutical manufacturer Roche entered a licensing agreement with Chugai Pharmaceuticals in Japan, where success requires substantial knowledge of the local market and the drug approval process. The relationship accelerated Roche's penetration of the huge Japanese market. e. Licensing can also help the firm develop its brand name in a target market and preempt the later entry of competitors.

Diff: 2: Moderate Skill: Concept Objective: 15-3: Describe the advantages and disadvantages of licensing AACSB: Application of Knowledge 16 .

48) Which of the following is an example of franchising?

A) An Italian clothing company opens factories in China and Bangladesh to reduce manufacturing costs.

B) A U.S-based quick-service restaurant gives rights to another business to use its entire business system in exchange for compensation and royalties.

C) A U.S.-based animation company allows factories in China to use their famous cartoon character on mugs and stationery.

D) A Germany automobile manufacturer opens an office in the Philippines for its customer care operations.

Answer: B Diff: 3: Hard Skill: Application Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 49) Which of the following is TRUE about franchising as an entry strategy?

A) It provides firms with minimum control over foreign operations.

B) It is an ownership-based international business activity.

C) It provides ownership with greater control but also typically restricts a firm's ability to expand more rapidly abroad.

D) It is typically characterized as an unstable, short-term entry strategy.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 50) Which of the following countries is home to the largest number of franchisors?

A) United States B) Britain C) China D) Canada Answer: A Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge

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51) In a system franchising agreement, the franchisor provides ________.

A) down-payment plus royalty B) production and marketing methods C) lump-sum payment D) sale of related products Answer: B Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 52) In a system franchising agreement, the franchisee provides ________.

A) training and ongoing support B) trademark-protected business concepts C) down-payment plus royalty D) usage rights for products and patents Answer: C Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 53) Which of the following is characteristic of master franchise arrangements?

A) subfranchises to other independent businesses and thus assumes the role of the local franchisor B) The franchisee provides completely standardized business activities, replicated across diverse markets.

C) franchise networks where franchisor provides a lump-sum payment to get started in a foreign market D) franchise networks that pay fewer royalties to franchisors Answer: A Diff: 2: Moderate Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 54) Information technology has increased the success and growth of international franchising operations by ________.

A) eliminating the need for corporate meetings to discuss quality control B) improving communication between MNE managers and their franchisees C) reducing Internet sales and the need for freight forwarding services D) assigning franchisors maximum control to oversee franchisees' activities Answer: B Diff: 2: Moderate Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Information Technology 18 .

55) In typical licensing agreements, the licensee compensates the licensor with a down-payment plus ongoing royalties based on sales.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 56) Franchising is more comprehensive than licensing because the franchisor prescribes virtually all of the business activities of the franchisee.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 57) In a franchising agreement, the franchisee provides training, ongoing support, and the right to participate in cooperative marketing programs to the franchisor.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 58) When compared to licensing agreements, the relationships established in franchising arrangements are typically volatile and short-term.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge 59) In a master franchising agreement, the master franchisee has the right to subfranchise to other independent businesses and thus assume the role of the local franchisor.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-4: Understand franchising as an entry strategy AACSB: Application of Knowledge

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60) Explain franchising as an entry strategy into foreign markets. Describe three advantages and three disadvantages of franchising for the franchisee.

Answer: Franchising is an advanced form of licensing in which the focal firm, the franchisor, allows an entrepreneur, the franchisee, the right to use an entire business system in exchange for compensation. As with licensing, an explicit contract defines the terms of the relationship.

McDonald's, Subway, Hertz, and FedEx are well-established international franchisors. Others that use franchising to expand abroad include Benetton, Body Shop, Yves Rocher, and Marks & Spencer. Franchising is common in international retailing. However, some retailers such as IKEA and Starbucks have a strong preference for internationalizing through company-owned outlets. Ownership provides these firms with greater control over foreign operations but also typically restricts their ability to expand more rapidly abroad.

Although there are various types of franchising, the most typical arrangement is business format franchising (sometimes called system franchising). The franchisor transfers to the franchisee a total business method, including production and marketing methods, sales systems, procedures, and management know-how, as well as the use of its name and usage rights for products, patents, and trademarks. The franchisor also provides the franchisee with training, ongoing support, incentive programs, and the right to participate in cooperative marketing programs. In return, the franchisee pays some type of compensation to the franchisor, usually a royalty representing a percentage of the franchisee's revenues. The franchisee may be required to purchase certain equipment and supplies from the franchisor to ensure standardized products and consistent quality.

The advantages of franchising to the franchisee include: 1. Gain a well-known, recognizable brand name; 2. Acquire training and know-how; receive ongoing support from the franchisor; 3. Operate an independent business; 4. Increase likelihood of business success; and 5. Become part of an established international network.

However, franchisees face a number of disadvantages after establishing a business arrangement with a franchisor: 1. Initial investment or royalty payments may be substantial; 2. Franchisees are required to purchase supplies, equipment, and products from the franchisor only; 3. The franchisor holds much power, including superior bargaining power; 4. Franchisor's outlets may proliferate in the region, creating competition for the franchisee; and 5. Franchisor may impose inappropriate technical or managerial systems on the franchisee.

Diff: 3: Hard Skill: Application Objective: 15-4, 15-5: Understand franchising as an entry strategy, Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge

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61) Which of the following is an advantage of franchising to the franchisor?

A) It is easier to maintain control over a franchisee.

B) It is a low-risk, low-cost entry strategy.

C) There is seldom any risk of franchisees becoming future competitors.

D) There is seldom a requirement for the franchisor to become familiar with foreign laws and regulations.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 62) Which of the following statements is TRUE about international franchisors?

A) Entry into numerous foreign markets is tough and costly.

B) Maintaining control over franchisees is seldom difficult.

C) Franchisors need to invest substantial capital.

D) Franchisees may use franchise knowledge to start a competing business.

Answer: D Diff: 1: Easy Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 63) Which of the following is an advantage of franchising to the franchisee?

A) reduced expenses as the franchisor provides supplies, equipment, and products B) Minimum initial investments or royalty payments are applicable.

C) use of a well-known, recognizable brand name D) The franchisee holds much power, including superior bargaining power.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 64) Which of the following challenges is applicable to the franchisee in a franchising agreement?

A) The franchisee must make their own arrangements to acquire initial training and know-how.

B) The franchisor holds much power, including superior bargaining power.

C) There is no scope to operate an independent business.

D) There is decreased likelihood of business success.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge

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65) To minimize the complexity of franchising, focal firms must ________.

A) bribe government officials to reduce nontariff trade barriers B) have a subjective view of moral and ethical standards C) conduct advance research on the host country's laws on intellectual property D) appoint managers from the home country to avoid legal disputes Answer: C Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Analytical Thinking 66) Which of the following makes it difficult to completely duplicate a food franchise in every global market?

A) different local ingredients B) differences in language C) low bargaining power D) need to invest substantial capital Answer: A Diff: 2: Moderate Skill: Application Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 67) Host-country governments often encourage franchising because most of the money generated by the franchise remains in the local economy.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 68) The franchisor can rapidly internationalize by leveraging the drive and knowledge of local franchisees but risks disseminating its intellectual property to unauthorized parties.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 69) A key challenge faced by the franchisee is the decreased likelihood of operating an independent business.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 22 .

70) Licensing and franchising are complex undertakings and require skillful research, planning, and execution.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-5: Explain the advantages and disadvantages of franchising AACSB: Application of Knowledge 71) ________ is an arrangement in which the focal firm or a consortium of firms plans, finances, organizes, manages, and implements all phases of a project abroad and then hands it over to a foreign customer after training local workers.

A) Home-replication strategy B) Exporting C) Turnkey contracting D) Equity-based collaborative venture Answer: C Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge 72) ________ is an arrangement in which a contractor supplies managerial know-how to operate a hotel, hospital, airport, or other facility in exchange for compensation.

A) Build-operate-transfer B) Management contract C) Leasing D) Exporting Answer: B Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge 73) Which of the following statements is TRUE of leasing?

A) It is an arrangement in which a contractor supplies managerial know-how to operate a hotel, hospital, airport, or other facility in exchange for compensation.

B) The lessor transfers ownership of the property in exchange for a lump-sum payment.

C) It is a high-risk and high-cost method of entering a foreign market.

D) A major advantage for the focal firm is the ability to gain quick access to target markets, while putting assets to use in earning profits.

Answer: D Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge

23 .

74) Leasing is especially beneficial to ________.

A) advanced economies B) economies with high PPP C) First World countries D) developing economies Answer: D Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Analytical Thinking 75) Professional service firms, such as PriceWaterhouseCooper, often enter large international markets through FDI but usually use ________ to enter small markets.

A) equity-based collaborative ventures B) affiliates C) BOT arrangement D) turnkey contracting Answer: B Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge Azoo Government Projects (Scenario) The nation of Azoo needs the assistance of a contractor to construct a new bridge and a subway system. The nation lacks the skilled labor and technical know-how to handle such large-scale projects. Representatives of the Azoo government are reviewing the project bids provided by two different international contractors. Contractor A proposes a turnkey contract for Azoo.

Contractor B proposes a build-operate-transfer arrangement.

76) Contractor A would most likely oversee each of the following EXCEPT ________.

A) designing the bridge B) operating the subway system continuously C) engineering the bridge D) constructing the subway system Answer: B Diff: 3: Hard Skill: Application Objective: 15-6: Understand other contractual entry strategies AACSB: Analytical Thinking

24 .

77) The government of Azoo might select Contractor B in order to ________.

A) prevent the builder from operating in the country for even a short period of time B) avoid rental fee, user fee, and tolls during the operational stage of the bridge and subway system C) build the projects cost-effectively D) increase the number of visitors to Azoo Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 15-6: Understand other contractual entry strategies AACSB: Analytical Thinking 78) Which of the following most likely supports Azoo government's decision to award the project bid to Contractor A? A) Azoo leaders want immediate ownership of the public projects.

B) Azoo leaders want long-term help with operation of the subway.

C) Azoo lacks qualified workers to maintain public works projects.

D) Azoo lacks the financial resources to purchase large machinery.

Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 15-6: Understand other contractual entry strategies AACSB: Analytical Thinking 79) Turnkey contracting is an arrangement in which the focal firm or a consortium of firms plans, finances, organizes, manages, and implements all phases of a project abroad and then hands it over to a foreign customer after training local workers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge 80) Under a build-operate-transfer (BOT) arrangement, a firm or consortium of firms contracts to build a major facility abroad and then transfers ownership to the project sponsor, typically the host-country government or public utility.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge

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81) An arrangement in which a contractor supplies managerial know-how to operate a hotel, hospital, airport, or other facility in exchange for compensation is known as offshoring.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge 82) In international leasing, a major advantage for the lessor is the ability to gain quick access to target markets, while putting assets to use earning profits.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Analytical Thinking 83) Describe three challenges faced by professional service firms when they internationalize.

Answer: Professional service firms encounter three unique challenges in going international: • First, professional qualifications that allow firms to practice law, dentistry, medicine, or accounting in the home country are rarely recognized by other countries. For example, if an individual is a licensed accountant in the U.S. and he would like to practice accounting in Argentina, he must earn local certification in that country.

• Second, professionals who work abroad for long periods generally must obtain employment visas in the countries where they are employed.

• Third, professional services often require intensive interaction with the local public, which necessitates language and cultural skills.

Diff: 2: Moderate Skill: Concept Objective: 15-6: Understand other contractual entry strategies AACSB: Application of Knowledge 84) Which of the following statements is TRUE of infringement of intellectual property?

A) The most commonly counterfeited goods include heavy machinery and computer manufacturing.

B) It amounts to piracy and takes the form of production and distribution of counterfeit goods.

C) It is the ability to control important intellectual property before it reaches competitors.

D) Counterfeiting and piracy can be particularly troublesome in advanced economies because of subjective ethical standards.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Analytical Thinking

26 .

Big Boy Burgers (Scenario) Big Boy Burgers (BBB) is an American fast food restaurant chain that has franchises around the world. Recently, BBB managers have been concerned about protecting the firm's intellectual property, which includes the recipes for its unique burger sauces and specialty burger buns.

Although BBB has never experienced a theft of intellectual property, the firm's managers feel BBB should be more cautious. Managers are meeting with security and legal experts to discuss the options available to the firm that would protect BBB from future international problems.

85) Which of the following questions would be more important for the experts to evaluate when determining how to ensure intellectual property protection for Big Boy Burgers?

A) What should be the penalties for theft of the recipes for their unique burger sauces and specialty burger buns?

B) Is BBB partnering with ethical franchisees that have no intention of becoming BBB competitors in the future?

C) What are the commonly counterfeited goods in the market?

D) How are BBB franchisees modifying recipes and menus to meet the needs and desires of customers in local markets?

Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Analytical Thinking 86) Which of the following statements most likely supports BBB legal experts fully investigating the intellectual property laws of each nation in which BBB has franchises?

A) Intellectual property laws and its enforcement vary from country to country.

B) Patents and trademarks granted in one country will transfer to another country.

C) TRIPS protects the intellectual property of firms doing business in any nation.

D) Nations with numerous IPR violators are beginning to comply with the WTO. Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Analytical Thinking 87) The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was created by the ________.

A) International Monetary Fund (IMF) B) United Nations C) World Trade Organization (WTO) D) World Bank Answer: C Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 27 .

88) Before undertaking contractual entry strategies abroad, management ________.

A) should bribe government officials to ensure protection of intellectual property B) should register patents and copyrights with local governments C) should keep information about intellectual property confidential from all franchisees in countries with weak anti-piracy laws D) understand and follow subjective moral and ethical standards across markets Answer: B Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Analytical Thinking 89) Which of the following is an essential method used by a focal firm to protect its intellectual property (IP) in a foreign country?

A) lobbying foreign governments for stronger intellectual property laws B) avoiding trade in countries with weak intellectual property laws C) bribing foreign government officials D) research to understand IP laws and protections in target countries Answer: D Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 90) Laws that govern contractual obligations are uniform across countries; therefore, it makes contract enforcement abroad easier for firms.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 91) Infringement of intellectual property is the unauthorized use or reproduction of products and services protected by a patent, copyright, trademark, or other intellectual property right.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 92) When consumers buy counterfeit goods, payments are lost to the firm that invented the product and not to illicit enterprises.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 28 .

93) Where counterfeiting and piracy are commonplace, companies are reluctant to invent, innovate, and market legitimate products, which reduces consumer choices and ultimately lowers living standards.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 94) Advanced economies have taken the lead in signing treaties that support international protection of intellectual property.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge 95) Including non-compete clauses in employee contracts helps prevent employees from serving competitors for some years after leaving the firm.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Application of Knowledge

29 .

96) Describe the guidelines for protecting intellectual property.

Answer: In advanced economies, intellectual property is usually protected within established legal systems and methods of recourse. A firm can initiate legal action against someone who infringes on its intellectual assets and will usually achieve a satisfactory remedy. Experienced firms devise sophisticated approaches to reduce the likelihood of intellectual property violations and help avoid their adverse effects, especially in countries with weak property rights.

Before undertaking contractual entry strategies abroad, management needs to understand local intellectual property laws and enforcement procedures, particularly when exposed assets are valuable. The firm should register patents, trademarks, trade secrets, and copyrights with local governments, especially in countries with weak anti-piracy laws. Some companies lobby national governments and international organizations for stronger intellectual property laws and more vigilant enforcement, albeit with limited success.

Management must ensure that licensing and franchising agreements provide for oversight to ensure intellectual property is used as intended. Licensing contracts should include provisions that require the licensee to share improvements or technological developments on the licensed asset with the licensor. Non-compete clauses in employee contracts help prevent employees from serving competitors for some years after leaving the firm.

Monitoring franchisee, distribution, and marketing channels for asset infringements helps avoid problems. The firm should monitor the activities of local business partners for potential leaks of vital information and assets. Trade secrets must be guarded closely. Using password based security systems, surveillance, and firewalls limits access to intellectual property. Intel and Microsoft release only limited information about key technologies to partner firms. The firm can deter much potential piracy by aggressively pursuing criminal prosecution or litigation against those who pilfer its logos, proprietary processes, and other key assets.

Diff: 2: Moderate Skill: Critical Thinking Objective: 15-7: Understand infringement of intellectual property, a global problem AACSB: Analytical Thinking

30 .

International Business: The New Realities, 5e (Cavusgil) Chapter 16 Marketing in the Global Firm 1) In international business, marketing is concerned with ________.

A) disseminating the organizational culture of a firm across global subsidiaries B) identifying, measuring, and pursuing customer needs and market opportunities abroad C) maintaining a steady flow of product-based innovations D) interacting with global business leaders Answer: B Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 2) Which of the following best characterizes the purpose of a global marketing strategy?

A) guides firms on hiring highly skilled resources B) provides managers with demographic data C) helps managers check high employee turnover D) a plan of action the firm develops for foreign markets that guides managerial decision making on how to position itself and its offerings and which customer segments to target.

Answer: D Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 3) ________ is the process of dividing the firm's total customer base into homogeneous clusters in a way that allows management to formulate unique marketing strategies for each group.

A) Brand management B) Customer relationship management C) Market segmentation D) Market diversification Answer: C Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge

1 .

4) In international business, firms frequently formulate market segments by ________.

A) selling only those products that create derived demand for other related products in the market B) grouping countries based on variables, such as level of economic development or cultural dimensions C) grouping competitors based on their hiring strategies D) grouping identical customers in underground economies Answer: B Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 5) A global market segment refers to ________.

A) a group of customers who share similar characteristics across many national markets B) a group of customers belonging to the same generational group within a country C) a group of less-affluent customers in the global market D) a group of buyers in the international market who are largely unaffected by changes in pricing Answer: A Diff: 2: Moderate Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 6) Which of the following is TRUE with regard to a global market segment?

A) A global market segment refers to a group of customers belonging to the same generational group within a country.

B) Firms target global market segments by using a relatively uniform marketing strategy and programs.

C) Buyers in a global market segment are typically characterized by low spending power.

D) Buyers in a global market segment rarely buy products representing luxury and style.

Answer: B Diff: 2: Moderate Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge

2 .

7) ________ refers to a marketing strategy in which the firm develops both the product and its marketing to evoke a distinct impression in the customer's mind, emphasizing differences from competitors' offerings.

A) Positioning B) Standardization C) Diversifying D) Adaptation Answer: A Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 8) Which of the following is TRUE with regard to positioning?

A) Unlike branding, positioning is not intended to evoke the specific attributes that consumers associate with a product.

B) More often than not, positioning dilutes brand equity.

C) Firms develop both the product and its marketing to evoke a distinct impression in the customer's mind.

D) Positioning refers to the process of scaling up production in a market characterized by high demand.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 9) Which of the following is TRUE with regard to a global positioning strategy?

A) A global positioning strategy does not address the shared expectations of a global customer market segment.

B) More often than not, global positioning dilutes brand equity in the international market.

C) A global positioning strategy reduces international marketing costs.

D) Internationalizing firms rarely aim for a global positioning strategy.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 10) Frequent business travelers, who are also affluent and eager spenders, represent a global market segment.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 3 .

11) Market segmentation refers to the process of dividing a firm's total customer base into homogeneous clusters in a way that allows management to formulate unique marketing strategies for each group.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 12) In international business, marketing is concerned with identifying, measuring, and responding to market opportunities abroad.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 13) A reputed American automaker competes in the premium car market segment. It targets affluent buyers with refined tastes who would not mind paying several thousand dollars for a premium car. This is an example of both market segmentation and product positioning.

Answer: TRUE Diff: 2: Moderate Skill: Application Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge 14) What is market segmentation? In a short essay, discuss how international firms use market segmentation.

Answer: Market segmentation refers to the process of dividing the firm's total customer base into homogeneous clusters in a way that allows management to formulate unique marketing strategies for each group. Within each market segment, customers exhibit similar characteristics regarding income level, lifestyle, demographic profile, or desired product benefits.

In international business, firms frequently formulate market segments by grouping countries based on macro-level variables, such as level of economic development or cultural dimensions.

Many MNEs group Latin American countries based on a common language (Spanish) or European countries based on similar economic conditions. This approach has proven most effective for product categories in which governments play a key regulatory role (such as telecommunications, medical products, and processed foods) or where national characteristics prevail in determining product acceptance and usage.

Diff: 2: Moderate Skill: Application Objective: 16-1: Explain global market segmentation AACSB: Application of Knowledge

4 .

15) Explain the purpose of positioning. How does a global positioning strategy assist firms participating in international business? What benefit does a global positioning strategy offer?

Answer: A key objective in pursuing global market segments is to create a unique position in the minds of target customers. Positioning is a marketing strategy in which the firm develops both the product and its marketing to evoke a distinct impression in the customer's mind, emphasizing differences from competitors' offerings. In the theme park business, Disney positions itself as standing for family values and "good, clean fun" to attract families around the world. Starbucks positions its products at customers with sophisticated tastes who do not mind paying several dollars for a cup of coffee.

Positioning may also evoke the specific attributes that consumers associate with a product. Diet Coke elicits an image of someone who wants to lose or maintain weight. When Coca-Cola first entered Japan, research revealed that Japanese women do not like products labeled "diet," nor is the population considered overweight. Thus, management altered the product's positioning in Japan by changing the name to Coke Light.

Internationalizing firms aim for a global positioning strategy, which positions the offering similarly in the minds of targeted buyers worldwide. Starbucks, Volvo, and Sony successfully use this approach. Consumers worldwide view these strong brands in the same way. Global positioning strategy reduces international marketing costs by addressing the shared expectations of a global customer market segment.

Diff: 2: Moderate Skill: Concept Objective: 16-1: Explain global market segmentation AACSB: Analytical Thinking 16) Explain the importance of a global market strategy. How does a global market strategy affect the choice of adaption versus standardization for an international marketing program?

Answer: A global marketing strategy is a plan of action that a firm develops for foreign markets that guides its decision-making on (1) how to position itself and its offerings, (2) which customer segments to target, and (3) to what degree it should standardize or adapt its marketing program elements.

In addition to guiding targeting and positioning, global marketing strategy also articulates the degree to which the firm's marketing program should vary between different foreign markets.

With adaptation, the firm modifies one or more elements of its international marketing program to accommodate specific customer requirements in a particular market.

Standardization makes the marketing program elements uniform, with a view to targeting entire regions, or even the global marketplace, with the same product or service.

Diff: 3: Hard Skill: Synthesis Objective: 16-1, 16-2: Explain global market segmentation, Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

5 .

17) Taken together, the key elements of a company's marketing program are known as the ________.

A) product mix B) value chain C) product lifecycle D) marketing mix Answer: D Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 18) Adaptation is defined as ________.

A) the firm's efforts to make its marketing program elements uniform, with a view to targeting entire regions, or even the global marketplace, with the same product or service B) the firm's attempt at altering its organizational structure to facilitate internationalization C) the firm's efforts to modify one or more elements of its international marketing program to accommodate specific customer requirements in a particular market D) the firm's efforts to minimize employee attrition by rewarding performance Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 19) In which of the following industries is standardization more likely NOT to be pursued?

A) aircraft manufacturing B) pharmaceuticals C) publishing D) credit cards Answer: C Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

6 .

20) Popular consumer electronics such as Apple's iPhone, Samsung's Galaxy smartphone, and Canon digital cameras, as well as well-known fashion accessories such as Rolex watches and Michael Kors handbags, are demonstrating ________.

A) product diversification B) customization C) standardization D) adaptation Answer: C Diff: 2: Moderate Skill: Application Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 21) When managers attempt to standardize their international marketing program, they can expect ________.

A) diminished efficiency B) cost reduction C) brand dilution D) very high profit margins Answer: B Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 22) A global brand can best be defined as ________.

A) a brand with a complicated value-chain B) a brand that focuses on a single generational group within a country C) a brand that uses a variety of marketing campaigns in different markets D) a brand whose positioning, advertising strategy, look, and personality are standardized worldwide Answer: D Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

7 .

23) Adaptation is often necessitated due to ________.

A) differences across countries in language, culture, economic conditions, and other factors B) unstable demand C) high import tariffs D) similarities in customer preferences across various demographic groups worldwide and the increased emphasis on the homogenization of global markets Answer: A Diff: 2: Moderate Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 24) In which of the following industries is an adaptation strategy LEAST likely to be appropriate?

A) consumer electronics B) publishing C) furniture D) television broadcasting Answer: A Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 25) Managers consider several different rationales when adapting marketing program elements, such as ________.

A) high and relatively stable incomes of buyers belonging to the global market segment B) stable demand of consumer goods worldwide C) differences in living standards and economic conditions D) need for improved planning and control Answer: C Diff: 1: Easy Skill: Application Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

8 .

Refrigerator Adaptations (Scenario) Cold-Aire Inc. manufactures refrigerators from its facilities in the United States and China and ships them to retail stores around the world. Kitchen sizes vary around the world, and as a result, refrigerator sizes must vary as well. U.S. retailers want large refrigerators, while European and Asian retailers demand smaller units. Cold-Aire manufactures over 20 different models of refrigerators, which often vary in size by only a few inches. Cold-Aire managers are concerned that the firm is losing money because of product adaptations. Cold-Aire management is meeting to discuss the various cost-saving options for the firm.

26) Which of the following questions would be the most important for Cold-Aire managers to evaluate when determining how the firm could reduce production costs in a single market?

A) Has the demand for Cold-Aire refrigerators declined in recent years?

B) Are customized Cold-Aire refrigerators as user friendly as the ones that are not?

C) Can Cold-Aire standardize its refrigerators?

D) Are Cold-Aire refrigerators likely to have greater demand in warmer countries than in colder regions?

Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 27) Which of the following most likely supports Cold-Aire implementing a regional strategy of refrigerator standardization?

A) Refrigerator sizes within Latin America tend to be similar.

B) Distribution channels in Asian countries are usually complicated.

C) American kitchens are typically more spacious than Asian ones.

D) Customers in Europe demand exterior ice and water dispensers.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 28) Which of the following best supports Cold-Aire making fewer refrigerator adaptations?

A) Adaptation caters to local consumer demands.

B) Standardization reduces manufacturing expenses.

C) Adaptation establishes a sense of buyer loyalty.

D) Standardization limits choices available to consumers.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking

9 .

29) Which of the following would most likely be a result of increased standardization of ColdAire refrigerators?

A) Cold-Aire would stop exporting refrigerators completely.

B) Cold-Aire would open a facility to produce customized refrigerator models.

C) Cold-Aire would implement a uniform international marketing campaign.

D) Cold-Aire would hire fewer workers and pay lower wages.

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 30) Which of the following refers to an advantage for firms that adapt a unique marketing program for an individual market?

A) By doing so, firms decrease their reliance on foreign market intermediaries for large sales.

B) By doing so, firms scale up production substantially to meet the needs of a large and growing market.

C) Products are tailored to specifically meet the exclusive needs of customers in that market.

D) Governments provide heavy tax relief to firms that modify products and services.

Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 31) Adaptation is more costly than standardization because ________.

A) a firm that chooses adaptation over standardization is likely to lose customers in the long run B) adaptation often requires the firm to engage in substantial modifications to product design, manufacturing, pricing, distribution, and communications C) adaptation requires the firm to scale up production without regard to quality D) standardization holds no market risks Answer: B Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking

10 .

32) Perhaps the most important distinction between standardization and adaptation is that ________.

A) standardization helps the firm customize products according to customer preferences, while adaptation helps the firm save time B) standardization helps the firm cut costs, while local adaptation helps the firm more precisely cater to local needs and requirements C) standardization helps the firm cater to the needs of local customers, while adaptation helps the firm save costs through mass production D) standardization helps the firm upgrade quality to suit the unique tastes of consumers, while adaptation emphasizes uniformity Answer: B Diff: 2: Moderate Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Analytical Thinking 33) Standardization refers to the process of making the marketing program elements uniform, with a view to targeting entire regions, or even the global marketplace, with the same product or service.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 34) A standardized marketing approach is appropriate when products have universal specifications.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 35) A standardized marketing approach is appropriate when customers seek similar features in the product or service.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

11 .

36) Commodities, industrial equipment, and technology products lend themselves to a high degree of standardization.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 37) Varying income levels among nations usually necessitate that firms make price adjustments and product modifications for individual markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 38) Adaptation is useful in multidomestic industries such as publishing and software, which tailor their offerings to suit individual markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 39) Briefly discuss the principal advantages of standardization.

Answer: When managers build on commonalities in customer preferences and attempt to standardize their international marketing program, they can expect at least three major benefits: a. Cost Reduction: Standardization reduces costs by making possible economies of scale in design, sourcing, manufacturing, and marketing. Offering a similar marketing program to the global marketplace or across entire regions is more efficient than having to adapt products for each of the numerous individual markets. b. Improved Planning and Control: Standardization provides for improved planning and control of value-adding activities. Fewer offerings mean that management can simplify quality control and reduce the number of parts that it stocks for repairing defective products. Marketing activities are also simplified. Instead of designing a unique marketing campaign for individual countries, the firm is able to standardize its campaigns. c. Ability to portray a consistent image and build global brands: A brand is a name, sign, symbol, or design intended to identify the firm's product and differentiate it from those of competitors. A global brand is when the firm's positioning, advertising strategy, look, and personality are standardized worldwide. Standardization allows the firm to establish and project a globally recognized corporate or product brand. It increases customer interest and reduces the confusion that arises from proliferation of products and marketing programs.

Diff: 2: Moderate Skill: Application Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge 12 .

40) Discuss four factors that would persuade firms to adapt elements of their marketing programs for individual markets. Provide suitable examples.

Answer: Although firms usually prefer to standardize their products, adaptation is often necessitated due to differences across countries in language, culture, economic conditions, and other factors. Adaptation becomes necessary under the following situations: a. Differences in National Preferences: Adaptation makes the offering more acceptable to customers in individual markets. Differences in consumer behavior around the world are a major driver of local adaptation. For example, in Japan, customers favor green tea-flavored ice cream. b. Differences in Laws and Regulations: The promotion of certain products is restricted in some countries. For example, laws in Europe, including Germany, Norway, and Switzerland, restrict advertising directed at children. In Quebec, Canada's French-speaking province, local law requires product packaging to be in both English and French. In some markets, the use of certain sales promotion activities such as coupons and sales contests is restricted. c. Differences in Living Standards and Economic Conditions: Because income levels vary substantially around the world, firms typically adjust both the pricing and the complexity of their product offerings for individual markets. For example, Dell sells simplified versions of its computers in developing economies to accommodate lower local spending power. d. Differences in National Infrastructure: The quality and reach of transportation networks, marketing intermediaries, and overall business infrastructure influence the marketing communications and distribution systems that firms employ abroad. Infrastructure is especially poor in the rural parts of developing economies, necessitating innovative approaches for getting products to customers. Road and rail networks in western China are underdeveloped, so firms use small trucks to reach retailers in outlying communities. Undeveloped media also require substantial adaptations to carry marketing communications. In rural Vietnam, most consumers cannot access television, magazines, or the Internet. Radio, billboards, and brochures are favored for targeting low-income buyers.

Diff: 2: Moderate Skill: Application Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

13 .

41) When is a standardized marketing approach the most appropriate? Define global brand.

Answer: Standardization represents a tendency toward global integration. Standardization is more likely to be pursued in global industries such as aircraft manufacturing, pharmaceuticals, and credit cards. Airbus, Pfizer, and MasterCard use a standardized marketing strategy with great success. Their offerings are largely uniform across many markets worldwide. A standardized marketing approach is most appropriate when market segments and customer needs are consistent across numerous countries. Products that feature universal specifications are also candidates for a standardized approach. In industrial sales, businesses often prefer parts and components of similar specifications, quality, and performance, and other product attributes. The feasibility of standardization varies across industries and product categories. Commodities, industrial equipment, and technology products lend themselves to a high degree of standardization.

A global brand is one whose positioning, advertising strategy, look, and personality are standardized worldwide. A global brand increases the efficiency and effectiveness of marketing programs, stimulates brand loyalty, allows the firm to charge premium prices, increases the firm's leverage with intermediaries and retailers, and enhances the firm's competitive advantage in global markets.

Diff: 2: Moderate Skill: Concept Objective: 16-2: Understand standardization and adaptation of international marketing AACSB: Application of Knowledge

14 .

42) In a short essay, explain why a "one offering-one world" marketing strategy is difficult, and cite an example of an industry that has attempted a "one offering-one world" approach. How does culture affect variances in marketing programs around the world?

Answer: Firms rarely find it feasible or practical to follow a "one offering-one world" strategy across all dimensions of the marketing program. Automotive companies tried for years to market a "world car" that meets customer preferences everywhere and complies with various governments' safety specifications. Ambitious experiments such as the Ford Mondeo failed to meet the approval of customers and regulatory bodies around the world. Ford was forced to modify its design to accommodate climate and geography (which affected engine specifications), government emissions standards, gas prices, and customer preferences for frills such as cup holders. As a compromise, some firms pursue standardization as part of a regional strategy, formulating international marketing elements to exploit commonalities across a geographic region instead of the whole world. General Motors (www.gm.com) markets distinctive car models for China (Buick, HRV), Europe (Opel, Vauxhall), and North America (Cadillac, Chevrolet). Convergence of regional preferences, regional economic integration, harmonization of product standards, and growth of regional media and distribution channels all make regional marketing more feasible than pursuing global marketing approaches.

Culture affects the content of marketing programs because it determines buyer attitudes toward the role and function of advertising, humor content, the depiction of characters (such as the roles of men and women), and decency standards. Advertising conveys a message encoded in language, symbols, colors, and other attributes, each of which may have distinctive meanings.

Buyer receptiveness differs as a function of culture and language.

Diff: 2: Moderate Skill: Synthesis Objective: 16-2, 16-5: Understand standardization and adaptation of international marketing, Understand international marketing communications AACSB: Analytical Thinking 43) Brand equity can best be defined as the ________.

A) market value of a brand B) attractiveness of a brand name C) durability of a brand D) lack of customer confidence in a brand Answer: A Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge

15 .

44) Which of the following characterize the most successful global brands?

A) low visibility B) narrow appeal C) status symbols D) highly complex product features Answer: C Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 45) An American automaker operating in the Asian and the European markets designs various models around a standardized platform. The firm adds parts, features, and regular units to this basic standardized platform according to the preferences of its customers. This exemplifies ________.

A) segmentation B) customer relations management C) brand dilution D) modular architecture Answer: D Diff: 2: Moderate Skill: Application Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 46) All of the following are true of global new-product planning teams EXCEPT ________.

A) they assemble employees with special knowledge and expertise B) they are responsible for global promotion of products and services C) they include geographically diverse employees in team activities D) they determine which elements of the product will be standardized Answer: B Diff: 2: Moderate Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 47) A ________ is a group of managers within a firm that determines which elements of the product will be standardized and which will be adapted locally.

A) research and development team B) global new-product planning team C) customer relations management D) talent management team Answer: B Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 16 .

48) Consumers prefer globally branded products because branding provides a sense of trust and confidence in their purchasing.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 49) A firm can reduce its marketing and advertising costs substantially by focusing on numerous national brands instead of a single global brand.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 50) The weakness of a global brand is best measured by its brand equity.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge 51) Global new-product planning teams formulate best practices that the firm implements in all its units worldwide.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Application of Knowledge

17 .

52) In a short essay, explain why consumers prefer global brands. What are some of the important characteristics of the most successful global brands?

Answer: Consumers frequently prefer globally branded products because global branding provides a sense of trust and confidence in their purchasing.

A strong global brand: 1. increases the efficiency and effectiveness of marketing programs 2. stimulates brand loyalty 3. allows the firm to charge premium prices 4. increases the firm's leverage with intermediaries and retailers 5 enhances the firm's competitive advantage in global markets The firm can reduce its marketing and advertising costs by concentrating on a single global brand instead of numerous national brands. The strength of a global brand is best measured by its brand equity—the market value of the brand.

The most successful global brands tend to have several of the following characteristics: 1. High, conspicuous visibility, such as consumer electronics and jeans.

2. Status symbols, such as cars and jewelry.

3. Widespread appeal, due to innovative features that seem to fit everyone's lifestyle, such as mobile phones, credit cards, and cosmetics.

4. Close identification with a particular country, such as Levi's (U.S. style) and IKEA furniture (Scandinavian style).

Diff: 3: Hard Skill: Concept Objective: 16-3: Describe global branding and product development AACSB: Analytical Thinking 53) Which of the following constitutes a major disadvantage for exporting firms that primarily use independent distributors based abroad?

A) inability to monitor currency exchange rates B) lack of control over pricing C) absence of brand loyalty among customers D) limited access to low-cost labor Answer: B Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge

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54) Locating manufacturing in countries with low-cost labor enables a firm to ________.

A) charge premium prices B) create artificial demand C) standardize products D) charge lower prices Answer: D Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 55) All of the following refer to external factors that impact international pricing EXCEPT ________.

A) cost of manufacturing B) value-added taxes C) shipping D) anticipated fluctuations in currency exchange rates Answer: A Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 56) The problem of end-user prices reaching exorbitant levels in the export market, caused by multilayered distribution channels, intermediary margins, tariffs, and other international customer costs is known as ________.

A) international price escalation B) incremental pricing C) standardization D) puffery Answer: A Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 57) Which of the following refers to a key strategy used by corporations to combat international price escalation?

A) lengthen the distribution channel B) ship assembled products to save additional labor costs C) redesign the product to remove costly features D) centralize production and sourcing to a single location Answer: C Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 19 .

58) Galaxy Inc., a reputed global conglomerate, has suffered substantial losses in recent months owing to the problem of end-user prices shooting high up in the export market. In order to regain its competitive advantage abroad, Galaxy must ________.

A) increase its budget on technical research B) hire a greater number of semiskilled workers C) shorten the distribution channel D) decentralize production and sourcing to a single location Answer: C Diff: 2: Moderate Skill: Application Objective: 16-4: Explain international pricing AACSB: Analytical Thinking 59) The practice of pricing intermediate or finished products exchanged among the subsidiaries and affiliates of the same corporate family located in different countries is known as ________.

A) transfer pricing B) breakeven pricing C) premium pricing D) discounting Answer: A Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 60) Which of the following refers to the price charged for products sold between a company's divisions or subsidiaries?

A) dual pricing B) transfer price C) price skimming D) arm's length price Answer: B Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge

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61) A subsidiary is most likely to receive favorable treatment from an MNE if it is located in a country with ________.

A) lower corporate income-tax rates B) significant restrictions on profit repatriation C) low tariffs for the product in question D) political instability Answer: A Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 62) Which of the following refers to an advantage of firms that enter new markets through FDI? A) low employee attrition B) minimal competition from other players in the market C) direct selling of products to consumers through the Internet D) control over pricing strategy Answer: D Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 63) Gray marketers are ________.

A) typically large business conglomerates B) unauthorized intermediaries C) authorized distributors D) a firm's most effective promotional channels Answer: B Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 64) Gray market activity is also called ________.

A) market diversification B) target costing C) puffery D) parallel importation Answer: D Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge

21 .

International Price Setting (Scenario) The Comfy Couch Corporation (CCC) is a leading American manufacturer of sofas, sectionals, and lounge chairs. Managers from the U.S.-based firm recently met a London retailer who expressed an interest in selling CCC lounge chairs in his stores. The retailer sells a number of different furniture brands in his stores, so CCC managers need to price their furniture appropriately if the firm is to be competitive in the European market.

65) Which of the following questions would be the most important to evaluate before setting a price for the lounge chairs exported to England?

A) What is the mark-up price quoted by the London retailer for CCC's products?

B) What is the average price that Londoners pay for upholstered chairs?

C) How many lounge chairs are sold in London retail stores every year and at what price?

D) Do many global market segments exist in the European Union?

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 16-4: Explain international pricing AACSB: Analytical Thinking 66) Which of the following should most likely be considered by managers of CCC before setting the price for the lounge chairs manufactured by the company?

A) In what other markets could CCC export its high-priced line of furniture?

B) Would the London retailer be able to recommend appropriate intermediaries?

C) What type of pricing strategy best corresponds to the corporate goals of CCC? D) Does CCC plan to implement product diversification in the future?

Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 16-4: Explain international pricing AACSB: Analytical Thinking 67) If CCC managers employ rigid cost-plus pricing they would most likely be disadvantaged because ________.

A) rigid cost-plus pricing often fails to account for local market conditions B) through rigid cost-plus pricing, added costs of doing business abroad cannot be adjusted C) rigid cost-plus pricing overly focuses on the prevailing conditions in the local markets D) rigid cost-plus pricing is primarily driven by buyer demand in the local markets Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 16-4: Explain international pricing AACSB: Analytical Thinking

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68) The root cause of gray market activity is ________.

A) a firm's ability to control production and distribution costs B) a difference in price between national distributors C) the dominance of substandard products in local markets D) a significant difference in price of the same product between two countries Answer: D Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 69) Manufacturers of branded products are concerned about gray market activity because it can lead to ________.

A) a tarnished brand image B) empowerment of distributors C) higher quality outputs D) increased productivity Answer: A Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 70) Rigid cost-plus pricing refers to setting prices to cover only the firm's variable costs, but not its fixed costs.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 71) Prices can affect customers' perception of value.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 72) Rigid cost-plus pricing is typically favored by highly experienced exporters.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge

23 .

73) Incremental pricing refers to setting prices to cover only the firm's variable costs, but not its fixed costs.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 74) When an exporter gains a price advantage because its home-country currency is weakening relative to its customer's currency, then it should consider raising the prices of its products.

Answer: TRUE Diff: 2: Moderate Skill: Concept Objective: 16-4: Explain international pricing AACSB: Analytical Thinking 75) MNEs typically centralize transfer pricing under the direction of the chief financial officer at corporate headquarters.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 76) The root cause of gray market activity is a large enough difference in price of the same product between two countries.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 77) Gray market activity often leads to enhanced brand equity.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 16-4: Explain international pricing AACSB: Application of Knowledge

24 .

78) In a short essay, discuss the three common pricing strategies. How do firms employ each strategy? What are the main advantages and disadvantages of using such strategies?

Answer: The three common pricing strategies in international business are: a. Rigid cost-plus pricing refers to setting a fixed price for all export markets. It is an approach favored by less experienced exporters. In most cases, management simply adds a flat percentage to the domestic price to compensate for the added costs of doing business abroad. The export customer's final price includes a mark-up to cover transporting and marketing the product, as well as profit margins for both intermediaries and the manufacturer. This method often fails to account for local market conditions, such as buyer demand, income level, and competition. b. Flexible cost-plus pricing is used when management includes any added costs of doing business abroad in its final price. Management also accounts for local market and competitive conditions, such as customer purchasing power, demand, competitor prices, and other external variables. This approach is more sophisticated than rigid cost-plus pricing because it accounts for specific circumstances in the target market. c. Incremental pricing refers to setting prices to cover only the firm's variable costs, but not its fixed costs. Here, management assumes fixed costs are already paid from sales of the product in the firm's home country or other markets. The approach enables the firm to offer competitive prices, but it may result in suboptimal profits. When carried to an extreme, incremental pricing may invite competitors to accuse a company of dumping-charging a lower price for exported products, sometimes below manufacturing cost, potentially driving local suppliers out of business.

Diff: 2: Moderate Skill: Application Objective: 16-4: Explain international pricing AACSB: Application of Knowledge 79) Define international price escalation. Discuss how distribution channel length affects international business transactions.

Answer: International price escalation refers to the problem of end-user prices reaching exorbitant levels in the export market caused by multilayered distribution channels, intermediary margins, tariffs, and other international customer costs. International price escalation means the retail price in the export market can be significantly higher than the domestic price, creating a competitive disadvantage for the exporter.

Distribution channel length refers to the number of distributors or other intermediaries that it takes to get the product from the manufacturer to the market. The longer the channel, the more intermediaries the firm must compensate, and the costlier the channel. High channel costs contribute to international price escalation, creating a competitive disadvantage for the firm.

Diff: 2: Moderate Skill: Critical Thinking Objective: 16-4, 16-6: Explain international pricing, Describe international distribution AACSB: Analytical Thinking

25 .

80) Differences in culture, laws, and media availability imply ________.

A) that culture is a weak determinant of buyer attitudes toward the role and function of advertising B) that international advertising expenditures tend to remain unchanged regardless of the firm's foreign operations C) that it is seldom possible to duplicate in foreign markets the type and mix of advertising used in the home market D) that it is difficult to influence buyer perception through media Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 81) Buyer receptiveness differs as a function of ________.

A) culture and language B) lobbying C) media expenses D) product quality Answer: A Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 82) All of the following factors are important to consider about the target audience of an international advertising campaign EXCEPT ________.

A) buying motivations B) entrepreneurial experiences of consumers C) purchasing power D) age and education Answer: B Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge

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International Advertising (Scenario) Quik-Vac Corporation, a U.S.-based company, manufactures small, inexpensive vacuum cleaners that work on rechargeable batteries. Quik-Vac customers typically live in small apartments where a large vacuum cleaner is neither necessary nor easy to use. Quik-Vac managers believe there is a market for the vacuum cleaners outside of the United States, especially in communities where living space is limited. The Quik-Vac marketing department has been assigned the task of creating an advertising campaign to introduce Quik-Vac's offerings to global consumers.

83) Before developing a print media campaign, which of the following must the marketing department of Quik-Vac determine about the company's target market?

A) the number of homes with TVs B) the percentage of people owning radios C) the number of global ad agencies in the target market D) the literacy rate among the target population Answer: D Diff: 2: Moderate Skill: Application Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 84) Standardized advertising, if used by Quik-Vac, would most likely ________.

A) cater to customers with varied preferences worldwide B) simplify Quik-Vac's communications strategy and save costs C) appeal to the highly literate populations only D) make importation of raw materials mandatory for Quik-Vac Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 85) Which of the following can be reasonably inferred if Quik-Vac places increased emphasis on international promotional activities?

A) that it intends to scale down production of vacuum cleaners B) that it is disinclined to enter emerging markets C) that it intends to stimulate an initial purchase, immediate purchase, or increased purchases of its products D) that it is overly dependent on foreign intermediaries Answer: C Diff: 2: Moderate Skill: Critical Thinking Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking

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86) Many MNEs employ relatively standardized advertising around the world, primarily because by doing so ________.

A) they can cater to a wide variety of audiences with different preferences B) they benefit from consumer inputs on effective marketing C) they are able to produce high-quality ads D) they are able to save costs Answer: D Diff: 2: Moderate Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 87) Which of the following is TRUE with regard to global advertising agencies?

A) They are also known as unauthorized intermediaries.

B) They rarely offer additional services such as market research, publicity, and package design.

C) They can create advertising that is both global and sensitive to local conditions.

D) Typically, they do not cater to MNEs. Answer: C Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 88) Promotional activities ________.

A) are intended to stabilize the demand for consumer goods in advanced economies B) are short-term marketing activities intended to stimulate an initial purchase, immediate purchase, or increased purchases of the product C) do not include coupons and demonstrations D) are strategies designed to tap the market potential of products that have a short shelf life in emerging markets and developing economies Answer: B Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 89) Serving a key global customer in a consistent and standardized manner, regardless of where in the world it operates is known as ________.

A) global account management B) offshoring C) marketing communications D) insourcing Answer: A Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 28 .

90) International advertising expenditures vary depending on the size and extent of a firm's foreign operations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 91) Promotional activities are typically long-term marketing activities.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 92) Promotions usually require a high level of intermediary or retailer sophistication to succeed.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge 93) Most MNEs employ advertising agencies to create promotional content and select media for foreign markets.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-5: Understand international marketing communications AACSB: Application of Knowledge; Written and Oral Communication 94) How does culture affect international advertising campaigns? Provide an example of an international advertising campaign that was unsuccessful owing to cultural differences.

Answer: Advertising conveys a message encoded in language, symbols, colors, and other attributes, each of which may have distinctive meanings. Buyer receptiveness differs as a function of culture and language. Culture determines buyer attitudes toward the role and function of advertising, humor content, the depiction of characters (such as the role of men and women), and decency standards.

For example, in China, Nike Inc. ran an ad produced for the U.S. audience in which NBA basketball star LeBron James battles—and defeats—a computer-generated Chinese Kung Fu master. Chinese consumers were offended and China's national government banned the advertisement.

Diff: 3: Hard Skill: Critical Thinking Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 29 .

95) What is global account management? Briefly describe the role of global account management in international business.

Answer: Serving a key global customer in a consistent and standardized manner, regardless of where in the world it operates, is known as global account management (GAM). In a gradually globalizing world, foreign customers increasingly seek uniform and consistent prices, quality, and customer service.

Key accounts such as Migros, Zellers, and Walmart typically purchase from a collection of preferred suppliers that meet their specifications. Suppliers target these key customers by shifting resources from national, regional, and function-based operations to GAM, whose programs feature dedicated cross-functional teams, specialized coordination activities for specific accounts, and formalized structures and processes. Private IT-based portals facilitate the implementation of such systems. Each global customer is assigned a global account manager, or team, who provides the customer with coordinated marketing support and service across various countries.

Diff: 2: Moderate Skill: Critical Thinking Objective: 16-5: Understand international marketing communications AACSB: Analytical Thinking 96) ________ refers to the number of distributors or other intermediaries that it takes to get the product from the manufacturer to the market.

A) Channel depth B) Marketing mix C) Channel length D) Social network Answer: C Diff: 1: Easy Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge 97) A firm that uses the Internet to provide detailed product information and the means for foreigners to buy offerings is using ________.

A) modular architecture B) direct marketing C) lengthy distribution channels D) internal marketing Answer: B Diff: 2: Moderate Skill: Concept Objective: 16-6: Describe international distribution AACSB: Information Technology

30 .

98) Channel length can best be defined as ________.

A) the number of products sold under a single brand name B) the number of transactions a business buyer makes in the market at a given point of time C) the number of intermediaries between the manufacturer and the retailer D) the length of time it takes for goods to be manufactured for sale Answer: C Diff: 2: Moderate Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge 99) Direct marketing entails selling directly to end users.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge 100) Channel length refers to the number of distributors or other intermediaries that it takes to get the product from the manufacturer to the market.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge 101) The longer the channel, the fewer intermediaries the firm must compensate.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge 102) Global account management means serving a key global customer in a consistent and standardized manner, regardless of where in the world it operates.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 16-6: Describe international distribution AACSB: Application of Knowledge

31 .

International Business: The New Realities, 5e (Cavusgil) Chapter 17 Human Resource Management in the Global Firm 1) These managers are citizens of the country where the MNE is headquartered.

A) Third-country nationals B) Expatriates C) Host-country nationals D) Parent-country nationals Answer: D Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments 2) ________ are typically the largest proportion of workers hired abroad and usually work in manufacturing, assembly, basic service activities, clerical work, and other non-managerial functions.

A) Home-country nationals B) Parent-country nationals C) Third-country nationals D) Host-country nationals Answer: D Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments 3) Richard Johnson, an American citizen, is a senior manager in a telecom company based in Texas. He is currently posted in and works from the company's subsidiary in Uganda, Africa.

Richard is a ________.

A) host-country national B) parent-country national C) third-country national D) repatriate Answer: B Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments

1 .

4) ________ are citizens of countries other than the home or host country. They typically work in management and are usually hired because of their special knowledge or skills.

A) Home-country nationals B) Parent-country nationals C) Third-country nationals D) Host-country nationals Answer: C Diff: 1: Easy Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments 5) Which of the following best describes an expatriate?

A) an employee who is assigned to live and work in a foreign country for an extended period B) an employee who returns to his home country after a foreign assignment C) an employee hired on a temporary basis by an MNE D) an employee who is a host-country national Answer: A Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments Employee Categories (Scenario) Styleco Inc. is an international manufacturer of leather wallets and briefcases. Based in Canada, the firm has subsidiaries throughout Europe and Asia. High-level Styleco employees are often relocated for months at a time to foreign offices depending on the needs of the firm. Shelly Eaton, a Canadian, has been sent to manage the Styleco office in Italy. Raj Patel, an Indian, is an experienced software designer who is on assignment for Styleco in its Paris office. Keiko Tran of Japan is employed as a manager in Styleco's Tokyo office. Marcus Field is a Canadian working at the Styleco headquarters in Ontario as a manufacturing engineer.

6) Which of the following employees is most likely a host-country national?

A) Shelly Eaton B) Raj Patel C) Keiko Tran D) Marcus Field Answer: C Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking

2 .

7) Which of the following employees is most likely a third-country national?

A) Raj Patel B) Marcus Field C) Shelly Eaton D) Keiko Tran Answer: A Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 8) Which of the following employees is a parent-country national working in a host country?

A) Marcus Field B) Keiko Tran C) Raj Patel D) Shelly Eaton Answer: D Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 9) Linda Grahams, an American citizen, works in a global conglomerate based in Washington D.C. A few months ago, Linda was assigned to work in the company's office in Hong Kong and live there for the next three years. Which of the following can Linda be best described as?

A) expatriate B) host-country national C) third-country national D) repatriate Answer: A Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 10) International human resource management is usually more complex than domestic human resource management because ________.

A) IHRM managers usually encounter routine situations akin to those present at home B) IHRM managers typically have a low exposure to risks C) IHRM managers are required to both hire and retain talent D) IHRM managers are required to demonstrate greater involvement in employees' personal lives Answer: D Diff: 2: Moderate Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 3 .

11) Which of the following issues most likely complicates international human resource management?

A) equal education opportunities B) health benefit reimbursement C) political risk and terrorism D) vacation and travel policies Answer: C Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 12) All of the following refer to key tasks of IHRM EXCEPT ________.

A) developing global managers B) assessing job performance of expatriates C) evaluating internal accounting practices and audits D) handling labor disputes and strikes Answer: C Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 13) International human resource managers support subsidiary managers by providing IHRM guidelines and by hiring, training, and evaluating employees for international operations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 14) Host-country nationals (HCNs) are citizens of the country where the MNE's subsidiary is located.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 15) Avoiding country bias, nepotism, and other local practices and cultivating a global mind-set are some of the significant challenges of the international staffing policy.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 4 .

16) Host-country nationals (HCNs) are citizens of the country where the MNE is headquartered.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Diverse and Multicultural Work Environments 17) Foreign subsidiaries are never staffed from the home country.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking 18) Margaret Lee, an American and a private bank employee from New York, is assigned to work and reside in Paris for five years. She is most likely to be known as a expatriate in Paris.

Answer: TRUE Diff: 2: Moderate Skill: Application Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Analytical Thinking

5 .

19) In a short essay, discuss the factors that complicate the job of international human resource managers.

Answer: International human resource management is usually more complex than domestic human resource management. Following are six factors that drive this complexity: 1. New HR responsibilities. IHRM managers encounter numerous factors not necessarily present at home, including foreign taxation issues for expatriates, international relocation and orientation, expatriate support, host government relations, language translation services, and repatriation (returning the expatriate to his or her home country).

2. Need for a broader, international perspective. Management must account for all its PCNs, HCNs, and TCNs, who may be nationals of numerous countries. In an emerging market, such as Vietnam, compensation may need to include allowances for housing, education, and other facilities not readily available there. Large MNEs are often challenged by the need to establish a fair and comparable compensation scale for employees, regardless of nationality.

3. Greater involvement in employees' personal lives. Human resource professionals help expatriates and their families with housing arrangements, health care, children's schooling, safety, and security, as well as appropriate compensation given higher living costs in some foreign locations.

4. Managing the mix of expatriates versus locals. Foreign subsidiaries may be staffed from the home country, the host country, and/or third countries. The mix of staff depends on several factors, including the firm's level of international experience, cost of living in the foreign location, and availability of qualified local staff.

5. Greater risk exposure. Employee productivity, labor union activism, employee turnover, and other human resource phenomena are often more pronounced abroad. Exposure to political risk and terrorism are major concerns for IHRM professionals and may require greater compensation and security arrangements for employees and their families.

6. External influences of the government and national culture. Employees must be hired, evaluated, and compensated in ways consistent with country and regional customs and regulations. Laws govern work hours, the firm's ability to dismiss or lay off employees, and severance pay.

Diff: 2: Moderate Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Application of Knowledge 20) In a short essay, discuss the key tasks of international human resource managers.

Answer: There are six key tasks of international human resource managers. First is international staffing—activities related to recruiting, selecting, and placing employees. Second is preparing and training workers. Third is international performance appraisal, providing feedback necessary for employees' professional development. Fourth is formulating compensation and benefits packages that may vary greatly from country to country. Fifth is interacting with labor unions and collective bargaining. Sixth is achieving diversity in the international workforce.

Diff: 2: Moderate Skill: Concept Objective: 17-1: Understand the strategic role of human resources in international business AACSB: Application of Knowledge

6 .

21) Briefly describe the three types of managers commonly found in the foreign subsidiaries of MNEs. What are the distinctive traits of managers with a global mind-set?

Answer: There are three types of managers commonly found in the foreign subsidiaries of MNEs: 1. Parent-country nationals (PCNs). These managers are citizens of the country where the MNE is headquartered. They are also called "home-country nationals."

2. Host-country nationals (HCNs). They are citizens of the country where the MNE's subsidiary is located. They are typically the largest proportion of workers hired abroad and usually work in manufacturing, assembly, basic service activities, clerical work, and other nonmanagerial functions.

3. Third-country nationals (TCNs). They are citizens of countries other than the home or host country. They typically work in management and are usually hired because of their special knowledge or skills.

A geocentric orientation is synonymous with a global mind-set. Managers with a global mind-set are open to multiple cultural and strategic realities on both global and local levels. They do not force headquarters business methods on foreign subsidiaries.

Diff: 2: Moderate Skill: Synthesis Objective: 17-1, 17-2: Understand the strategic role of human resources in international business, Explain international staffing policy AACSB: Analytical Thinking 22) Firms prefer HCNs when ________.

A) the host country environment is complex B) the host country has no specialized knowledge to share C) the parent country is keen on maintaining full control over foreign operations D) managers located in the headquarters adopt a dominantly ethnocentric approach to hiring Answer: A Diff: 2: Moderate Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 23) Under which of the following circumstances would an MNE most likely hire a parentcountry national?

A) when the MNE wants to maintain strong control over its foreign operations B) when the MNE wants to benefit substantially from specialized knowledge available in the host country C) when the MNE wants to transfer specific knowledge or corporate culture from third countries to host-country operations D) when the host country environment is complex Answer: A Diff: 2: Moderate Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 7 .

24) For which of the following activities would parent-country nationals most likely be employed?

A) marketing B) creating a global culture C) research and development D) sales Answer: C Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 25) An MNE would most likely employ a host-country national when ________.

A) it has substantial knowledge regarding upstream value-chain activities B) it emphasizes R&D and manufacturing C) it wants to maintain strong control over local operations D) it needs specialized knowledge about the local market Answer: D Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 26) ________ is the expatriate's return to his or her home country following completion of a foreign assignment.

A) Retrenchment B) Recruitment C) Codetermination D) Repatriation Answer: D Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 27) ________ refers to an employee's ability to function effectively with those from different cultural backgrounds or in different cultural contexts.

A) Reverse culture shock B) Ethnocentrism C) Cultural intelligence D) Cultural pluralism Answer: C Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Application of Knowledge 8 .

28) Which of the following is NOT one of the four dimensions of cultural intelligence?

A) behavioral flexibility B) motivation C) strategy D) introversion Answer: D Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 29) ________ refers to the confusion and anxiety experienced by a person who lives in a foreign culture for an extended period, and it can affect the expatriate or family members and results from an inability to cope with the differences experienced in a foreign environment.

A) Culture shock B) Culture pluralism C) Enculturation D) Segregation Answer: A Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Application of Knowledge 30) Firms with global mind-sets are characterized by ________.

A) diversity in the international workforce B) parochialism C) a strong sense of national pride D) rigid hiring policies Answer: A Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Diverse and Multicultural Work Environments 31) Firms using a(n) ________ primarily use parent country nationals to staff higher-level foreign positions.

A) ethnocentric staffing model B) polycentric staffing model C) geocentric staffing model D) monocentric staffing model Answer: A Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Application of Knowledge 9 .

32) Which of the following most likely occurs as a result of expatriate failure?

A) culture shock B) diminished careers C) acculturation D) knowledge sharing Answer: B Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 33) ________ tends to worsen culture shock.

A) The ability to speak more than one language B) Proximity to family C) Inadequate cross-cultural skills D) High adaptability Answer: C Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Diverse and Multicultural Work Environments International Management Qualifications (Scenario) Core Computer Corporation (CCC) recently opened a customer service facility in New Delhi, India. Managers of the Texas-based firm have been displeased with the local manager hired to run the New Delhi facility because of a variety of problems that took place. CCC managers believe that a representative from the headquarters should manage the Indian facility for one year in order to train personnel and to improve the quality of customer service. Two CCC executives have expressed a desire to work and live in India: Craig Springer and Devon Parks. The CCC human resources department is comparing the qualifications and characteristics of the two men in order to determine which candidate would be the most successful in India.

34) Which of the following would be the most important for human resources managers to determine before deciding who should manage the New Delhi facility?

A) Which candidate possesses the ability to be a flexible and sensitive leader with superior crosscultural knowledge?

B) Which candidate best understands CCC corporate culture in Texas?

C) Which candidate is the most knowledgeable about CCC's products?

D) Which candidate has mentored the most CCC interns and new employees over the past three years?

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 10 .

35) Which of the following, if TRUE, would strengthen the argument in favor of hiring a local manager for the New Delhi facility?

A) Indians are mostly multilingual.

B) Local connections are crucial to achieve success in the local marketplace in India.

C) CCC wants to have strong control over all its foreign operations.

D) The quality of labor in New Delhi is no lesser than that in Texas.

Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 36) Which of the following most supports hiring Craig Springer as manager for CCC's facility in New Delhi?

A) Craig handles work-related stress mostly by exercising and spending time with friends.

B) Craig has served as a manager for six months in CCC's office in Beijing.

C) Craig learned to speak fluently in Spanish and French from his past assignments in Europe.

D) Craig is able to work independently with little direction.

Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 37) Which of the following, if TRUE, most seriously undermines the argument in favor of hiring Devon Parks as manager for CCC's facility in New Delhi?

A) Devon has few local connections in New Delhi, where success is largely determined by local connections and networking.

B) CCC wants to maintain strong control over all its foreign operations including India.

C) Devon is capable of working independently and with little direction.

D) CCC has significantly benefited in the past by hiring PCNs for training local managers in Asia.

Answer: A Diff: 2: Moderate Skill: Critical Thinking Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 38) Typically, country laws do dictate how many employees can come from non-local sources.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Application of Knowledge

11 .

39) Firms usually hire parent country nationals (PCNs) abroad to maintain local control over foreign operations.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 40) Firms prefer HCNs when the host-country environment is complex and their specialized knowledge or local connections are required in the local marketplace.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 41) Worldwide staffing with PCNs helps firms develop an integrated global enterprise.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 42) Developing talent is a multistep collaboration between human resource managers and executive management.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking 43) When managers from headquarters hold key subsidiary positions, an ethnocentric orientation is shown among managers and employees working abroad.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Application of Knowledge

12 .

44) What are the principal characteristics of managers who are best suited to working in foreign environments?

Answer: Managers best suited to working in foreign environments typically have the following characteristics: 1. Job knowledge. In distant locations, managers need sufficient knowledge of the administrative and technical dimensions of their job and organization to fulfill company goals and objectives.

2. Self-reliance. Having an entrepreneurial orientation, a proactive mind-set, and a strong sense of innovativeness are important because expatriate managers frequently function with increased independence abroad and limited support from headquarters.

3. Adaptability. The manager should adjust well to foreign cultures. The most important traits are cultural empathy, flexibility, diplomacy, and a positive attitude for overcoming stressful situations.

4. Interpersonal skills. The best candidates get along well with others. Building and maintaining relationships is key, particularly for managers who interact with numerous colleagues, employees, local partners, and government officials.

5. Leadership ability. The most successful managers view change positively. They skillfully manage threats and opportunities that confront the firm. They collaborate with employees to implement strategies and facilitate successful change.

6. Physical and emotional health. Living abroad can be stressful. Expatriates must learn to adapt to the local culture. Medical care is often different and may be difficult to access.

7. Spouse and dependents prepared for living abroad. The candidate's spouse and other family members need the desire and ability to cope with unfamiliar environments and cultures.

Diff: 2: Moderate Skill: Concept Objective: 17-2: Explain international staffing policy AACSB: Analytical Thinking

13 .

45) In a short essay, discuss the connection between expatriate assignment failure and culture shock. What are the different components of training designed to prepare expatriates for assignments abroad?

Answer: Human resource managers need to prepare expatriates and their families to live and work effectively in new cultural environments. Employees should be trained to understand local government regulations, cultural norms, and language differences, and to adapt to local customs such as gift giving and business dining.

Expatriate assignment failure, the employee's premature return from an international assignment, may occur because an employee is unable to perform well or because his or her family has difficulty adjusting. Such failure is costly to company productivity and goals, and adds to the costs of relocating. Failure can also affect expatriates themselves, leading to diminished careers or problems in their family lives. As many as one-third of foreign assignments end prematurely due to expatriate assignment failure. The rate is particularly high among employees assigned to countries with substantial culture and language differences.

A leading cause of expatriate assignment failure is culture shock—confusion and anxiety experienced by a person who lives in a foreign culture for an extended period. It can affect the expatriate or family members and results from an inability to cope with the differences experienced in a foreign environment. Inadequate language and cross-cultural skills tend to exacerbate culture shock, as the expatriate is unable to function effectively in the foreign environment or fails to communicate well with locals. Most expatriates and their families who experience culture shock overcome it, usually within a few months. But a few give up and return home early.

Training consists of three components: (1) area studies: factual knowledge of the historical, political, and economic environment of the host country; (2) practical information: knowledge and skills necessary to function effectively in a country, including housing, health care, education, and daily living; and (3) cross-cultural awareness: the ability to interact effectively and appropriately with people from different language and cultural backgrounds.

Diff: 2: Moderate Skill: Synthesis Objective: 17-2, 17-3: Explain international staffing policy, Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking

14 .

46) Area studies refer to ________.

A) technical knowledge pertaining to a firm's core competencies B) factual knowledge of the historical, political, and economic environment of the host country C) factual knowledge about a firm's foreign subsidiaries D) knowledge pertaining to daily living abroad Answer: B Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Application of Knowledge 47) How can international human resource managers effectively minimize culture shock for expatriates?

A) by allowing personnel a short trip to the foreign location before the actual assignment B) by training personnel to understand the host country's government, culture, and language C) by inviting foreign employees to the homes of future expatriates for enhancing cultural awareness D) by asking the expatriate to return to the headquarters Answer: B Diff: 2: Moderate Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking International Management Position (Scenario) Global Choppers Inc. is an MNE based in Vancouver that manufactures high-quality motorcycles for sale around the world. The majority of design work is done at the Vancouver headquarters, but manufacturing and assembly are performed in company facilities located in Romania. In order to maintain control over manufacturing quality, Global Choppers sends representatives from the company headquarters to manage the Romanian facility for one-year rotations. Conrad O'Neil has been selected to run the foreign facility for the upcoming year. The human resources department of Global Choppers will be preparing him for his foreign assignment through a variety of training methods.

48) Conrad's training for his assignment in Romania would most likely include ________.

A) technical training B) area studies C) training on developing global managers D) natural disaster management Answer: B Diff: 2: Moderate Skill: Critical Thinking Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 15 .

49) The human resources department of Global Choppers designs trainings for employees in a way that helps them avoid the self-reference criterion. This implies that the training designed by the human resources department of Global Choppers ________.

A) helps counter the tendency of viewing foreign assignments with suspicion and distrust B) does not emphasize cultural awareness C) is inadequately equipped to enhance the cultural intelligence of employees D) helps counter the tendency of viewing other cultures through the lens of one's own culture Answer: D Diff: 2: Moderate Skill: Critical Thinking Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 50) Which of the following sums up the goal of training Conrad for his assignment in Romania?

A) increasing Conrad's effectiveness abroad B) ensuring a smooth repatriation for Conrad C) decreasing the per-unit cost of production D) enhancing overall freedom for employees Answer: A Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 51) Which of the following is the term used to describe an expatriate's return to his/her home country following completion of a foreign assignment?

A) repatriation B) reverse culture shock C) national integration D) codetermination Answer: A Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Application of Knowledge

16 .

52) ________ refers to the tendency to view other cultures through the lens of your own culture.

A) Codetermination B) Self-reference criterion C) Segregation D) Cross-cultural awareness Answer: B Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Application of Knowledge 53) Which of the following best summarizes the goal of cross-cultural awareness training for expatriates?

A) It enables expatriates to cope with reverse-culture shock.

B) It enables expatriates to share knowledge with host-country nationals more effectively.

C) It enables expatriates to significantly upgrade their technical skills.

D) It enables expatriates to effectively communicate with local customers and employees and be sensitive to the host-country's culture.

Answer: D Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 54) Critical incident analysis examines ________.

A) a situation under which an MNE is forced to relocate operations abroad B) an episode in which tension arises between employee and foreign counterpart due to a crosscultural misunderstanding C) an episode in which tension arises between an employee and a manager with regard to performance evaluation D) a critical situation in which the internal stakeholders of a firm fail to reach a consensus with regard to a common issue Answer: B Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking

17 .

55) Training programs designed for preparing employees for assignments abroad consist of area studies, practical information, and cross-cultural awareness.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 56) Cross-cultural awareness training tends to raise intercultural sensitivity and effectiveness.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking 57) Critical incident analysis examines an episode in which tension arises between an employee and a foreign counterpart due to a cross-cultural misunderstanding.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Analytical Thinking

18 .

58) Define repatriation. Discuss some of the difficulties faced by repatriated employees. How can human resource managers assist repatriated employees?

Answer: Repatriation is the expatriate's return to his or her home country following completion of a foreign assignment.

Unless managed well, the expatriate is likely to encounter problems upon returning home. Some returning employees find their international experience is not valued, and they may be placed in lesser or ill-suited positions than what they held abroad. Some expatriates report financial difficulties upon returning, such as inflated housing prices or cuts in pay. Many experience "reverse culture shock," readjustment to parent-country culture. For the employee and family members who have spent several years abroad, psychological readjustment to life in the home country can be stressful.

Human resource managers can proactively provide counseling on the types of problems that employees face upon returning home. While the expatriate is abroad, the firm can monitor the employee's compensation and career path. After returning home, the firm can provide bridge loans and other interim financial assistance, as well as counseling to address both career and psychological needs. The firm needs to ensure the expatriate has a career position equal to, or better than, the one held before going abroad.

Diff: 2: Moderate Skill: Concept; Critical Thinking Objective: 17-3: Describe the process of establishing training needs and programs to help employees perform well in international environments AACSB: Application of Knowledge

19 .

59) In a short essay, explain why some international firms chart global career paths for employees, and discuss the reasons women still do not enjoy equal access to senior management positions in most countries.

Answer: Many firms create career development programs that provide high-potential employees with opportunities to gain experience both at headquarters and in the firm's operations around the world. They do this because, as the firm generates an increasing proportion of sales and earnings from abroad, it needs globally experienced employees capable of managing company operations worldwide. This approach broadens the pool of global talent for managerial positions and visibly demonstrates top management's commitment to global strategy.

Women still do not enjoy equal access to senior management positions in most countries. Even in the advanced economies, they are sometimes not afforded the same opportunities for education and training as their male colleagues. Although evidence suggests just as many women seek international positions as men, relatively few are asked to fill expatriate positions. There are several reasons for this. First, senior managers may assume women do not make suitable leaders abroad or that foreign men do not like reporting to female managers. Firms are reluctant to send women to locations where the demarcation between male and female roles is sharp. Even obtaining a work visa can prove problematic in certain male-dominated countries. In many countries, male managers drink together, go to sports events, or enjoy the night life. Some women may feel uncomfortable in such all-male settings.

Having children and other family obligations can disrupt career paths. Although flexible and part-time work policies are often beneficial to women's progress up the corporate ladder, not all companies provide such opportunities. Finally, because women currently occupy relatively few top management positions (in Europe, they hold only 15-25 percent of senior executive posts), there are fewer women with sufficient experience to be sent abroad for important positions.

Diff: 2: Moderate Skill: Synthesis Objective: 17-3, 17-6: Describe the process of establishing training needs and programs to help employees perform well in international environments, Describe diversity in the international workforce AACSB: Analytical Thinking 60) Which of the following most likely complicates international performance appraisals?

A) overproduction B) distance from the headquarters C) lack of general consensus among managers with regard to reward systems D) cost of doing business abroad Answer: B Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking

20 .

61) ________ makes performance evaluations more complex in the international context.

A) The problem of non-comparable outcomes B) Inadequate cross-cultural skills C) Overproduction D) Knowledge sharing Answer: A Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 62) ________ is a formal process for assessing how effectively employees perform their jobs.

A) Performance planning B) Performance management C) Performance appraisal D) Performance guarantee Answer: C Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 63) Base remuneration is also referred to as ________.

A) incentives B) allowance C) wages D) benefits Answer: C Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 64) Which of the following refers to the additional payment that allows the expatriate to maintain a standard of living similar to that at home?

A) allowance B) benefits C) base remuneration D) wages Answer: A Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge

21 .

65) Given the potential hardships of working abroad, many MNEs also provide ________ to expatriate employees, which is similar to a bonus.

A) wages B) incentives C) base remuneration D) allowance Answer: B Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 66) Which of the following is the best example of a situation in which a firm is compensating an employee with base remuneration?

A) An American engineer working in Japan receives a salary comparable to that of engineers working in the U.S. B) A Dutch computer programmer working in Hong Kong receives an additional payment to cover the cost of relocation.

C) A German accountant working in India receives a one-time bonus for the potential hardships of working abroad.

D) A British manager working in a civil war—torn zone receives additional allowances for working under perceived threat.

Answer: A Diff: 2: Moderate Skill: Application Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 67) Which of the following is TRUE about the taxation of expatriates?

A) Expatriates are exempted from paying taxes while working abroad.

B) Most employers do not reimburse the extra tax burden incurred by expatriates.

C) Most parent countries insist on double taxation for expatriates.

D) Most parent-country governments have devised regulations that allow expatriates to minimize double taxation.

Answer: D Diff: 2: Moderate Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge

22 .

68) Managers typically consider all of the following elements when developing compensation packages for employees working abroad EXCEPT ________.

A) wages B) premium C) incentives D) benefits Answer: B Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 69) Typically, a standardized diagnostic tool is used to evaluate the performance of all firm employees and subsidiaries, both domestic and international.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking 70) The problem of non-comparable outcomes arises because of differences in economic, political, legal, and cultural variables.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking 71) Subsidiary managers are often assessed by multiple evaluators mainly because MNEs are typically characterized by a low level of mutual trust among employees.

Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking 72) Local tradition, culture, and cost of living does influence compensation packages.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking

23 .

73) In expatriate compensation, tax equalization is a special consideration.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 74) Expatriates usually do not receive the benefits normally accorded to home-country employees.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge

24 .

75) Define performance appraisal. Briefly describe the factors that make performance evaluations more complex in the international context and explain the use of incentives in the compensation of employees.

Answer: Performance appraisal is a formal process for assessing how effectively employees perform their jobs. Appraisals help a manager identify problem areas where an employee needs to improve and where additional training is needed. Performance appraisals are typically conducted annually.

The following factors make performance evaluations more complex in the international context: 1. The problem of non-comparable outcomes arises because of differences in economic, political, legal, and cultural variables. For example, the firm should not punish a Mexican subsidiary manager because worker productivity is half that of home-country operations. Senior management must account for worker conditions, factory equipment, and other factors in Mexico that may cause lower productivity.

2. Incomplete information may result because headquarters is separated from foreign units by both time and distance. Headquarters staff often cannot directly observe employees working in foreign subsidiaries. To address this problem, subsidiary managers may be assessed by two evaluators—one from headquarters and one based abroad.

3. Performance outcomes may be affected by the maturity of foreign operations. Relatively new subsidiaries may not achieve the same level of results as older subsidiaries staffed with more experienced personnel.

To avoid inaccurate or biased assessments, management needs to consider the presence of unique circumstances when appraising the performance of foreign subsidiaries, affiliates, and employees.

Given the potential hardships of working abroad, many MNEs also provide incentives to expatriate employees. The incentive is like a bonus intended to motivate the employee to undertake extraordinary efforts to accomplish company goals abroad, particularly in new foreign markets. It is typically a onetime, lump-sum payment.

Diff: 2: Moderate Skill: Synthesis Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking

25 .

76) In a short essay describe the four elements management must consider when compensating expatriates.

Answer: Managers typically consider four elements when developing compensation packages for employees working abroad: (1) base remuneration or wages, (2) benefits, (3) allowances, and (4) incentives.

1. The base remuneration is based on the salary or wages that the employee typically receives in his or her home country. Expatriate salaries are usually paid in the home currency, the local currency, or some combination of both.

2. Benefits include health care plans, life insurance, unemployment insurance, and a certain number of paid vacation days. Benefits vary greatly from country to country to the extent that they may make up a substantial proportion of the total compensation package. They typically account for one-third of the total compensation package but vary as a function of local regulation, industry practice, and taxability. Local regulations and industry practice tend to determine the nature of benefits. Benefits may also vary in terms of whether or not they are tax deductible. Expatriates receive the benefits normally accorded to home country employees.

3. Allowance is an additional payment that allows the expatriate to maintain a standard of living similar to home. The allowance is usually used to pay for housing, and sometimes food and clothing. Additional support may be provided to cover expenses such as relocation and children's education, as well as business-related entertainment and travel. Firms also provide hardship allowances to compensate employees who work in countries with civil strife or other conflicts, or developing countries that lack essential housing, education, and other facilities and services.

4. Given the potential hardships of working abroad, many MNCs also provide incentives to expatriate employees. The incentive is like a bonus intended to motivate the employee to undertake extraordinary efforts to accomplish company goals abroad, particularly in new foreign markets. The incentive is typically a onetime, lump-sum payment often in the tens of thousands of dollars.

Diff: 2: Moderate Skill: Application Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Application of Knowledge 77) Why are taxes a concern for expatriates? Discuss how firms and governments often handle tax issues for employees working abroad.

Answer: In expatriate compensation, tax equalization is a special consideration. Expatriates may face two tax bills for the same pay, one from the host country and one from the home country.

Most parent-country governments have devised regulations that allow the expatriate to minimize double taxation. Often, the expatriate may need to pay income tax in only one country. In cases where additional taxes are incurred by the employee, the employer will usually reimburse the employee for this extra tax burden.

Diff: 2: Moderate Skill: Concept Objective: 17-4: Discuss performance appraisal and compensation of international employees AACSB: Analytical Thinking

26 .

78) Typically, ________ provide a means for collective bargaining, joint negotiations between management and hourly labor and technical staff regarding wages and working conditions.

A) government agencies B) the top management of MNEs C) labor unions (trade unions) D) NGOs Answer: C Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 79) Strikes are an organized, collective refusal to work, with the aim of ________.

A) settling disputes regarding offshore unions B) pressuring management to grant union demands C) pressuring management to unionize D) creating public awareness about social issues Answer: B Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 80) When outsourcing work to foreign suppliers, managers must ensure that ________.

A) wages in the host country are higher than that in the home country B) the local level of productivity is more C) workers in the host country enjoy a high degree of employee empowerment D) worker productivity in the host country meets acceptable levels Answer: D Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 81) All of the following are international labor trends EXCEPT ________.

A) many countries are seeing an influx of immigrants, both legal and illegal, who compete with established workers B) labor is increasingly mobile across national borders thanks to the growing integration of national economies C) rapidly increasing union membership in most advanced economies D) knowledge workers also flock to other nations, seeking work in specialized fields Answer: C Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Analytical Thinking 27 .

82) ________ refers to an industrial relations practice in which labor representatives sit on the corporate board and participate in company decision making.

A) Codetermination B) Standardization C) Repatriation D) Collective bargaining Answer: A Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 83) Which of the following is TRUE with regard to the distinctive features of labor around the world?

A) U.S. labor unions have lost their standing as an important political force.

B) Given the weak ties between Chinese labor and government, Western managers rarely deal with China's national and local governments in managing labor relations.

C) Unions in Europe do not represent white-collar workers.

D) Labor activism and dispute resolution through unions have grown significantly in China in recent years. Given close ties between Chinese labor and government, Western managers usually deal extensively with China's national and local governments in managing labor relations.

Answer: D Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Analytical Thinking 84) Which of the following offsets some of the benefits of paying low wages abroad?

A) high productivity B) high work quality C) cost of training D) expatriate assignment failure Answer: C Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge

28 .

85) Which of the following is TRUE with regard to workforce reduction and employee termination?

A) In the United States, declaring bankruptcy does not enable firms to shed labor during company reorganization.

B) Laying off workers requires management to consider local norms, regulations, and labor unions.

C) Most European countries do not restrict firms' ability to lay off workers.

D) In most countries, the employer is considered the weaker party.

Answer: B Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 86) Which of the following is TRUE with regard to firm strategy in international labor relations?

A) Cross-border linkages give rise to complex interactions among differing national labor systems.

B) Since unions have little influence on the cost of labor, managing labor relations on a global scale is often inessential.

C) Labor relations are more or less consistent around the world.

D) Delegating the management of labor relations to their foreign subsidiaries helps MNEs eliminate risks stemming from labor disputes.

Answer: A Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 87) Through labor relations and the collective bargaining process, management and workers identify and determine job relationships that will apply in the workplace.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 88) Union membership has been increasing in many advanced economies.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge

29 .

89) With rapid globalization, the incidence of strikes has declined worldwide but they remain a powerful weapon with important implications for business.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge 90) Advanced economies tend to pay higher wages.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Analytical Thinking 91) Unions in Europe often represent not only factory workers but white-collar workers such as physicians, engineers, and teachers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Analytical Thinking 92) Most European countries restrict firms' ability to lay off workers.

Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Analytical Thinking 93) Discuss the reasons why labor union membership has declined in recent years.

Answer: Union membership varies widely by country, but it has declined in recent years, especially in advanced economies. In many countries, younger workers are less interested in joining unions and labor laws have become less union friendly than in the past. The trend towards outsourcing of manufacturing and business processes to foreign suppliers also contributes to declining membership. Germany, a nation with a strong tradition of unionized labor, has seen a net outflow of FDI in recent years as German firms have established manufacturing facilities in Eastern Europe and Southeast Asia.

Diff: 2: Moderate Skill: Concept Objective: 17-5: Understand international labor relations AACSB: Application of Knowledge

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94) International experience tends to ________.

A) lower sensitivity B) lower cross-cultural awareness C) enhance problem-solving and crisis management skills D) enhance a greater unease in traveling on foreign assignments Answer: C Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Application of Knowledge 95) Which of the following is TRUE with regard to women in international business?

A) Representation by women in senior management is lowest in Russia and the Philippines.

B) Female senior managers in international business are still more the exception than the norm.

C) Usually, firms do not hesitate to send women to countries where traditional gender roles are the norm.

D) In the United States, unemployment rates are higher for women than for men.

Answer: B Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Application of Knowledge 96) Which of the following is a recent trend regarding women in business?

A) Companies worldwide are substantially increasing the number of women on foreign assignments.

B) The majority of international managers are female.

C) Better-educated women are no more likely to obtain jobs than their less-educated counterparts.

D) New legislation in Norway requires listed and state-owned companies to ensure that women hold no more than 20 percent of seats on corporate boards.

Answer: A Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Application of Knowledge

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97) Which of the following measures would a progressive firm most likely take to ensure female equality in international business?

A) encourage senior executives to learn multiple foreign languages B) limit the number of female executives for international executive posts C) deny leadership roles in foreign assignments to men D) have female executives serve as mentors and role models for aspiring women Answer: D Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Analytical Thinking 98) In traditional societies, women tend to enjoy a high degree of economic independence.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Analytical Thinking 99) Women enjoy equal access to senior management positions in most Asian countries.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Analytical Thinking 100) Representation by women in senior management is lowest in Russia and the Philippines.

Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 17-6: Describe diversity in the international workforce AACSB: Analytical Thinking

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