International Business The Challenges of Globalization Plus 2019, 9E John J. Wild Test Bank

Type:

Test Bank

International Business The Resource: Challenges of Globalization Plus 2019 Edition:

9th Edition

Author(s):

John J. Wild Kenneth Wild

International Business: The Challenges of Globalization, 9e (Wild) Chapter 1 Globalization 1) Which of the following best defines international business?

A) It includes all economic flows between two or more countries.

B) It includes all private economic flows between two or more countries.

C) It includes all business transactions involving two or more countries.

D) It includes all business transactions in countries other than your home country.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

2) Goods and services purchased abroad and brought into a country are called ________.

A) gross domestic products B) exports C) gross national products D) imports Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

3) ________ are all goods and services sold abroad and sent out of a country.

A) Net national products B) Exports C) Gross domestic products D) Imports Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

4) Olive oil prepared in a small Italian oil press factory and sold by large supermarkets in the United States is an example of a ________.

A) net national product B) U.S. export C) U.S. import D) gross domestic product Answer: C AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

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5) Christopher, an accounts manager at a mid-sized health care firm, does not have any direct international responsibilities; however, Christopher would most likely benefit from studying international business issues so that he can ________.

A) conduct better job interviews B) better understand how foreign operations affect the company's competitive position C) supervise and evaluate subordinates who have global assignments D) understand the legalities of importing and exporting products overseas Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 1.1: Identify the types of companies active in international business.

6) A business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in several countries is called a ________.

A) dummy corporation B) shell corporation C) multinational corporation D) domestic corporation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

7) The rise of a new international entity called the ________ suggests that any company, regardless of age, experience, and resources, can engage in international business.

A) transnational corporation B) multinational corporation C) born global firm D) global firm Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

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8) Which of the following is NOT a likely reason to study international business?

A) Global events affect almost all companies.

B) Differences among countries in physical, social, and competitive conditions may cause companies to alter their operating methods from country to country.

C) Business conducted outside the limits of any one country is inexplicably on the decline.

D) Firms may be better able to obtain better or less expensive resources by operating internationally.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.1: Identify the types of companies active in international business.

9) ________ is an effective alternative to traditional distribution channels for firms that sell digitized products.

A) Dual licensing B) Electronic distribution C) Visual merchandising D) Digital switchover Answer: B AACSB: Information technology Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

10) The widening set of interdependent relationships among people from different parts of the world is known as ________.

A) globalization B) offshoring C) franchising D) outsourcing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

11) Globalization is characterized by ________.

A) the demise of democracy within a nation B) national boundaries becoming less relevant C) the fortification of trade barriers D) rigid foreign relations policies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

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12) As a result of globalization, Argonia finds that its national borders are becoming less relevant. This indicates that Argonia is undergoing ________.

A) denationalization B) standardization C) reorganization D) internationalization Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

13) The term ________ refers to entities cooperating across national boundaries.

A) internationalization B) supranationalism C) denationalization D) multiculturalism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

14) Most companies today operate in an environment of increased transparency and scrutiny regarding their business activities. This is due to ________.

A) the rise of the social media B) the prosperity of developing nations C) the heterogeneity in markets D) labor market flexibility in developing nations Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

15) The value of all goods and services produced by a country's domestic and international activities over a one-year period is the country's ________.

A) gross domestic product (GDP) B) gross world product (GWP) C) gross national product (GNP) D) gross state product (GSP) Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

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Scenario: Topsy Turvey Toys and Ureshi Toys Topsy Turvey Toys is a U.S.-based toy retailer that buys all its merchandise from Ureshi Toys, a Japan-based toy manufacturer with production facilities in twelve nations. Ureshi Toys markets its toys globally without modification.

16) Topsy Turvey Toys buying its merchandise from Ureshi Toys is an example of ________.

A) importing B) exporting C) outsourcing D) insourcing Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

17) Ureshi Toys selling its products to Topsy Turvey Toys is an example of ________.

A) outsourcing B) insourcing C) exporting D) importing Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

18) The products that Ureshi Toys manufactures are examples of ________.

A) global products B) niche products C) intangible products D) customized products Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

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19) Ureshi Toys is an example of a(n) ________.

A) domestic company B) multinational company C) direct importer D) shell corporation Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

Scenario: Donna Bader, Globalization Opponent Donna Bader spent her final year at college studying the effect of various economic factors on the economy of developing nations. Based on the results of her study, she concluded that globalization does these countries more harm than good.

20) Upon what assumption does Donna's conclusion rest? Donne assumes that ________.

A) there are no factors other than globalization which influence the economic conditions of a country B) the welfare of individuals matters less than the economic prosperity of a nation C) globalization does not affect the employment rate of developed and developing countries D) the wages paid to all individuals within developed countries are equal Answer: A AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

21) International business includes all commercial transactions between two or more countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

22) Imports are goods and services purchased abroad and brought into a country.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

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

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

24) Gaining some understanding of international business is important for any business student because global events and competition affect almost all companies.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.1: Identify the types of companies active in international business.

25) Extranets give distributors and suppliers access to a company's database to place orders or restock inventories electronically.

Answer: TRUE AACSB: Information technology Skill: Concept Difficulty: Moderate LO: 1.1: Identify the types of companies active in international business.

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26) Summarize each benefit a company might obtain from the globalization of markets.

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

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

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

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

4. Local buyers' needs-The benefit of serving customers with an adapted product may outweigh the benefit of a standardized one.

5. Global sustainability-It ensures that development meets the needs of the present without compromising the ability of the future generations to meet their own needs. Most companies today operate in an environment of increased transparency and scrutiny regarding their business activities. The rise of social media is partly responsible for this trend.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.1: Identify the types of companies active in international business.

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27) Describe key characteristics of a born global firm, and explain why a born global firm would be attuned to international firm management.

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

Perhaps the extreme example of a born global firm is one that reaches out to customers around the world solely through the Internet.

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

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 1.1: Identify the types of companies active in international business.

28) The widening set of interdependent relationships among people from different parts of the world is known as ________.

A) globalization B) offshoring C) franchising D) outsourcing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

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29) Which of the following refers to the use of computer networks to purchase, sell, or exchange products; service customers; and collaborate with partners?

A) e-commerce B) telecommuting C) data virtualization D) virtual hosting Answer: A AACSB: Information technology Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

30) Gentian Violet is a dye manufacturing company that uses computer networks to sell its products, service customers, and collaborate with partners. Which of the following technologies is the company engaging in this scenario?

A) rapid prototyping B) e-business C) simulation D) console automation Answer: B AACSB: Information technology Skill: Application Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

31) Development that meets the needs of the present without compromising the ability of future generations to meet their own needs indicates ________.

A) egalitarianism B) denationalization C) generalizability D) sustainability Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

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32) An established consumer market that primarily comprises the middle class and possesses efficient infrastructure is characteristic of ________ markets.

A) emerging B) frontier C) traditional D) developed Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

33) ________ markets are characterized by the rural population migrating to cities for better pay and thus, overloading cities' infrastructures.

A) Traditional B) Emerging C) Virtual D) Developed Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

34) Konesia is a country in which rising incomes are increasing the global demand for basic products and services. Which of the following is the type of market featured in this country?

A) traditional market B) emerging market C) feudal market D) virtual market Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

35) The population of a(n) ________ market is mostly rural and is characterized by poor infrastructure with little credit or collateral.

A) emerging B) traditional C) developed D) virtual Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

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36) Kireki is a small country with a corrupt government. Its population is rural for most part and citizens have few or no legal rights. Which of the following is the type of market featured in Kireki?

A) developed market B) traditional market C) emerging market D) virtual market Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

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

A) Global offering B) Globalization of production C) Global governance D) Globalization of markets Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

38) Which of the following has NOT been a major force increasing globalization in recent decades?

A) liberalization of cross-border trade B) increase in and expansion of technology C) growing pressure from consumers D) decreasing prices of natural resources Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

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39) Whereas relocating production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of ________.

A) domestic products B) perishables C) services D) global brands Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

40) Crystal Inc. is a multifaceted company that deals with the mining, cutting, and selling of diamonds. It gives distributors and suppliers access to its database to place orders or restock inventories electronically and automatically. Which of the following is the network implemented in the company?

A) intranet B) chaosnet C) extranet D) ethernet Answer: C AACSB: Information technology Skill: Application Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

Scenario: Jeans Unlimited Jeans Unlimited produces clothing for young adults. It designs its clothes at its New York headquarters and produces them at facilities located in two Southeast Asian countries. The company recently received negative press after one of its facilities was found using questionable labor practices, such as, employing children and operating in a manner that damages the environment.

41) Jeans Unlimited manufactures its clothing at facilities located in two Southeast Asian countries. The dispersal of manufacturing activities by the company indicates ________.

A) customization of products B) niche marketing C) globalization of markets D) globalization of production Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

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42) Which of the following statements would most likely be made by a SUPPORTER of globalization?

A) Globalization encourages the adoption of uniform and superior standards for combating environmental problems.

B) Economic growth created by globalization is largely in services, which involves the use of few nonrenewable resources.

C) Global competition discourages resource-saving technologies, which are costly.

D) Air pollution and toxic runoff problems increase with global economic growth.

Answer: A AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

43) The term "globalization of production" refers to convergence in buyer preferences in markets around the world.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

44) The recent expansion of technology has contributed to the growth in international business by creating new products that are important in world trade.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.2: Explain globalization and how it affects markets and production.

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45) How might a company benefit from the globalization of production?

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

The globalization of production can benefit companies through the following ways: 1. Access lower-cost workers-Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Many European and U.S. businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent. Lower cost of land (the factors of production include; land, labor and cost of capital) 2. Access technical expertise-Companies also produce goods and services abroad to benefit from technical know-how.

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

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.2: Explain globalization and how it affects markets and production.

46) Explain how technological innovation has benefited entrepreneurs.

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

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

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

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47) Explain globalization of production and its benefits. Why should a company study international firm management if its leadership commits to globalization of production?

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

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

2. Access to technical expertise-Companies also produce goods and services abroad to benefit from technical know-how.

3. Access to production inputs-Globalization of production allows companies to access resources that are unavailable or more costly at home. The quest for natural resources draws many companies into international markets. If a company commits to the globalization of production, its leadership should study international firm management because this management arena is vastly different from managing a purely domestic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the characteristics of national business environments. Because of widely dispersed production and marketing activities today, firms commonly interact with people in distant locations within the international business environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their operations by closely monitoring globalization, national business environments, and the international business environment.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 1.2: Explain globalization and how it affects markets and production.

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48) Two major forces that underlie the expansion of globalization are falling barriers to trade and investment, and ________.

A) elevation of nationalism B) rise of closed economies C) political stagnation D) technological innovation Answer: D AACSB: Information technology Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

49) As former competitors in many industries link up to challenge others on a worldwide basis, ________ occurs.

A) segregation B) denationalization C) consolidation D) technological stagnation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

50) The purpose of the General Agreement on Tariffs and Trade (GATT) was to ________.

A) create an international currency B) regulate exchange rates C) create regional trade organizations D) promote free trade Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

51) ________ place limits on the quantity of a product being imported.

A) Embargoes B) Trade blocs C) Nontariff barriers (Quotas) D) Anti-dumping duties Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

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52) Which of the following accurately identifies a difference between GATT and the WTO? A) GATT could enforce member compliance with agreements, but the WTO cannot.

B) At its inception, GATT had more member nations than the WTO currently has.

C) GATT withdrew the most-favored-nation clause, but the WTO reinstated it.

D) GATT rules did not cover trade in services, but the rules of the WTO do.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

53) The ________ replaced the institution of GATT while retaining all of the former GATT agreements.

A) World Trade Organization B) Federation of International Trade Association C) Commonwealth of Nations D) International Monetary Fund Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

54) Under the WTO agreement, ________.

A) a dispute resolution mechanism allows countries to bring grievances to the WTO against countries that levy inappropriate trade discrimination measures B) there is no dispute resolution mechanism except for trade involving environmental products C) countries are allowed to place trade barriers on member countries with no particular justification, because like GATT the WTO has no enforcement mechanism D) tariffs are permitted to be levied by developed countries against developing countries but not against each other Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

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55) Some nations encourage ________ because of recent resistance to worldwide trade agreements.

A) regional pacts B) homogeneous markets C) product standardization D) domestic manufacturing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

56) The KOF Index measures the ________.

A) distribution of the global workforce B) extent of globalization C) gross regional product of an area D) extent of technological innovation in a nation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

57) The ________ is an agency created to provide financing for national economic development efforts.

A) Global Financial Markets Association B) World Trade Organization C) Financial Stability Board D) World Bank Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

58) Which of the following was originally created to regulate fixed exchange rates and enforce the rules of the International monetary system?

A) International Monetary Fund B) World Trade Organization C) European Union D) World Bank Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

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59) The General Agreement on Tariffs and Trade (GATT) was designed to promote free trade by reducing both tariffs and nontariff barriers to international trade.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

60) GATT's contribution to trade liberalization made possible the expansion of world trade in the second half of the twentieth century.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

61) The World Trade Organization's dispute settlement system has the ability to penalize offending nations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

62) The goal of a free trade agreement is to abolish all tariffs among member countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

63) Resistance to worldwide trade agreements has resulted in some nations placing greater emphasis on regional pacts.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

64) Gross national product (GNP) is the value of all goods and services imported into a country over a one-year period.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

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65) A characteristic of the world's least-global nations is low levels of corruption.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

66) The role of the World Bank is to provide financing for national economic development efforts for infrastructure development.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

67) The rules of the international monetary system are enforced by the World Bank.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

68) Export-processing zones are special areas in which companies engage in tariff-free importing and exporting.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.3: Detail the forces that drive globalization.

69) Identify the World Trade Organization's (WTO) three main goals and explain how the WTO differs from the General Agreement on Tariffs and Trade (GATT).

Answer: The World Trade Organization (WTO) is the international organization that enforces the rules of international trade. The three main goals of the WTO are to help the free flow of trade, help negotiate the further opening of markets, and settle trade disputes among its members.

It is the power of the WTO to settle trade disputes that really sets it apart from its predecessor, the GATT. The various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. Offenders must realign their trade policies according to WTO guidelines or face fines and, perhaps, trade sanctions (penalties).

Because of its ability to penalize offending nations, the WTO's dispute settlement system truly is the spine of the global trading system. The WTO replaced the institution of GATT but absorbed all of the former GATT agreements. Thus, the GATT institution no longer officially exists.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

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70) Compare and contrast the purposes of the World Bank and the International Monetary Fund.

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

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

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.3: Detail the forces that drive globalization.

71) According to the opponents of globalization, which of the following occurs as a result of worker dislocation brought about by globalization?

A) increased labor costs for companies B) lower workers' wages in developed nations C) surfeit of jobs in developed nations D) increased investment in individual education Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

72) Opponents argue that globalization ________.

A) eliminates manufacturing jobs in developed nations B) generates labor market flexibility in developed nations C) brings an end to practices like outsourcing D) slows down the employment rate in developing nations Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

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73) Globalization is criticized because it ________.

A) does not generate labor market flexibility in developing nations B) prevents developed countries from outsourcing work to developing nations C) creates fewer manufacturing jobs in developing nations D) exploits workers in low-wage nations Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

74) Supporters affirm that globalization ________.

A) brings an end to practices like outsourcing B) causes worker dislocation that gradually lowers wages C) increases wealth and efficiency in all countries D) curbs market flexibility in developed nations Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

75) Which of the following terms is used to refer to widespread job turnover throughout an economy?

A) redeployment B) restructuring C) onboarding D) churning Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

76) Trade unions claim that by permitting international firms to continually move to nations with ________, globalization reduces labor's bargaining power and forces overall labor standards lower.

A) better factory facilities B) higher resource accessibility C) lower labor standards D) lower labor density Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

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77) Critics of globalization argue that it eliminates jobs in developing nations.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

78) Flexible labor markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

79) It is difficult to compare globalization of business over time because shifting national borders have changed the nature of transactions from domestic to international and vice versa.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

80) Critics of globalization believe the overall gains that accrue to national economies are worth the lost livelihoods of some workers.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

81) Research shows that pollution-intensive U.S. companies tend to invest in nations with lenient environmental standards.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

82) International firms tend to support reasonable labor and environmental laws to expand future local markets for their businesses.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

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83) Small businesses will be completely immune to events in the international business environment.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

84) Globalization's impact on jobs and wages is an important topic for debate. Discuss the major points for globalization in the jobs and wages debate, and describe how the actions of large multinational corporations affect the issues in the jobs and wages debate.

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

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

2. Generates Labor Market Flexibility in Developed Nations-Globalization supporters believe globalization creates positive benefits by generating labor market flexibility in developed nations. It is claimed that benefits derive from worker dislocation, or "churning" as it is called when there is widespread job turnover throughout an economy. Flexible labor markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued and in demand. This also allows employees, particularly young workers, to change jobs easily with few negative effects. For instance, a young person can gain experience and skills with an initial employer and then move to a different job that provides a better match between employee and employer.

3. Advances Economies of Developing Nations-Those in favor of globalization argue that globalization and international outsourcing help to advance developing nations' economies.

A multinational corporation (MNC) is a business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in multiple countries. The actions of multinationals have an influence on jobs and wages because these companies generate significant jobs, investment, and tax revenue for the regions and nations they enter. Likewise, they can leave thousands of people out of work when they close or scale back operations. Mergers and acquisitions between multinationals are commonly worth billions of dollars and increasingly involve companies based in emerging markets. Some companies have more employees than many of the smallest countries and island nations have citizens.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 1.4: Outline the debate about globalization's impact on jobs and wages.

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

A) preferential trade area B) export-processing zone C) customs union D) economic union Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.5: Summarize the debate about income inequality.

86) To minimize the economic inequality within developing nations, studies suggest that the nations can boost incomes of their poorest citizens by ________.

A) rejecting globalization and sheltering themselves from exploitation B) embracing globalization and integrating themselves into the global economy C) fortifying trade barriers and discouraging exports D) encouraging economic independence and restricting imports Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.5: Summarize the debate about income inequality.

87) Which of the following statements is true of developing countries that have embraced globalization?

A) The countries have experienced an increase in life expectancy.

B) As a result of extensive commercialism, there has been a decline in personal income.

C) Relying upon developed countries for technology has rendered their talent pool stagnant.

D) Their rich cultural diversity hasn't been affected by exposure to new cultures.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.5: Summarize the debate about income inequality.

88) Pro-globalization economists believe globalization increases wealth in only developing nations.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.5: Summarize the debate about income inequality.

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89) One argument in the debate surrounding globalization is about the inequality between nations. Discuss the major points of the inequality between nations argument and describe how falling barriers to trade and investment might help reduce the inequality between nations.

Answer: The inequality between nations debate questions the widening of the gap in average incomes between rich and poor nations. A widening gap is noticed if the average incomes in high-income countries are compared with the average incomes in middle- and low-income nations. But averages conceal differences between nations. The gap between rich and poor nations is not occurring everywhere: one group of poor nations is closing the gap with rich economies, while a second group of poor countries is falling further behind. For example, China is narrowing the income gap between itself and the United States as measured by GDP per capita, but the gap between Africa and the United States is widening. China's progress is no doubt a result of its integration with the world economy and annual economic growth rates of around 9 percent. Another emerging market, India, is also narrowing its income gap with the United States by embracing globalization. Developing countries that embrace globalization are increasing personal incomes, extending life expectancies, and improving education systems. In addition, post-communist countries that welcomed world trade and investment experienced high growth rates in GDP per capita. But nations that remain closed off from the world economy have performed far worse.

Falling barriers to trade and investment may help reduce the inequality between nations by leveling the global business playing field. Specifically, the WTO launched a new round of negotiations in Doha, Qatar, in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations in particular. Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day—more than six times the value of their combined aid budgets to poor nations. Because 70 percent of poor nations' exports are agricultural products and textiles, wealthy nations had intended to further open these and other labor-intensive industries. Poor nations were encouraged to reduce tariffs among themselves and were to receive help in integrating themselves into the global trading system. Although the Doha round was to conclude by the end of 2004, negotiations are proceeding more slowly than was anticipated.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 1.5: Summarize the debate about income inequality.

90) Critics of globalization say that global consumer-goods companies destroy ________.

A) the homogenization of markets B) societal conformity C) free trade areas D) cultural diversity Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

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91) Which of the following actions can be adopted by developed nations to lessen the negative effects of globalization?

A) restrict the import of goods from developing countries B) slash agricultural subsidies that hurt the exports of developing nations C) discontinue foreign-aid programs to developing countries D) pressurize developing nations to fend for themselves in matters of health and education Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

Scenario: Jeans Unlimited Jeans Unlimited produces clothing for young adults. It designs its clothes at its New York headquarters and produces them at facilities located in two Southeast Asian countries. The company recently received negative press after one of its facilities was found using questionable labor practices, such as, employing children and operating in a manner that damages the environment.

92) Jeans Unlimited plans to set up new facilities that are designed specifically to reduce impact on the environment. The management has emphasized on recycling and reusing most of their resources. What concept is the company emphasizing on in this scenario?

A) sustainability B) standardization C) ethnocentricity D) industrialization Answer: A AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

Scenario: Donna Bader, Globalization Opponent Donna Bader spent her final year at college studying the effect of various economic factors on the economy of developing nations. Based on the results of her study, she concluded that globalization does these countries more harm than good.

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93) Which of the following statements, if true, strengthens Donna's argument?

A) People in low-wage nations have a high mortality rate and no access to healthcare facilities.

B) Because of the increase in employment opportunities, workers from developing countries flock to developed countries.

C) Low-wage nations tend to have poorly developed transport and communication systems.

D) Many companies take advantage of lenient labor laws by setting up facilities in low-income countries.

Answer: D AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

94) Which of the following statements, if true, weakens her argument?

A) The employment rate of developed nations has been declining because of international outsourcing.

B) With the exposure to new technology and cultural trends, the standard of living in developing countries has improved.

C) People in high-wage countries often can't afford hospital care without financial assistance.

D) Labor market flexibility across the world has seen little improvement over the last decade.

Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

95) Her argument is vulnerable to criticism because it fails to ________.

A) quantify the disparity between high-income and low-income nations B) show that political and cultural factors have been taken into account C) demonstrate the importance of market flexibility D) highlight the environmental effect of globalization Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 1.6: Outline the debate about culture, sovereignty, and the environment.

96) Globalization tends to foster two important values, tolerance and ________.

A) nationalization B) diversity C) authoritarianism D) heterogeneity Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.7: Identify how this course will help you to develop skills for your career.

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97) Each ________ is composed of unique cultural, political, legal, and economic characteristics that define business activity within that nation's borders.

A) capital market B) national business environment C) international bond market D) operational center Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.7: Identify how this course will help you to develop skills for your career.

98) ________ involves the idea that a nation-state is autonomous, cannot intervene in the affairs of other nations, and can enter into binding international agreements.

A) National sovereignty B) Authoritarianism C) Cultural liberalism D) Communalism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.7: Identify how this course will help you to develop skills for your career.

99) The global business environment consists of four distinct elements: the forces of globalization, national business environments, the international business environment, and ________.

A) domestic investment opportunities B) technological innovation C) international firm management D) multinational corporations Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 1.7: Identify how this course will help you to develop skills for your career.

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100) Describe the global business environment and each of its four elements.

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

2. The international business environment influences how firms conduct their operations in both subtle and not-so-subtle ways. No business is entirely immune to events in the international business environment, as evidenced by the long-term trend toward more porous national borders.

The drivers of globalization are causing the flows of trade, investment, and capital to grow and become more entwined— often causing firms to search simultaneously for production bases and new markets. Companies today must keep their finger on the pulse of the international business environment to see how it may affect their business activities.

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

4. International firm management is vastly different from managing a purely domestic business.

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

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 1.7: Identify how this course will help you to develop skills for your career.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 2 Cross-Cultural Business 1) ________ consists of specific learned norms based on attitudes, values, and beliefs of a group of people.

A) Ethnology B) Civilization C) Culture D) Doctrine Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

2) Ethnocentricity can be defined as the ________.

A) scientific description of individual human societies B) systematic study of an ethnic group's religious core C) merging of all ethnic practices into one homogeneous culture D) belief that one's own ethnic group or culture is superior to that of others Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

3) Detailed knowledge about a culture that enables people to work happily and effectively within it is called ________.

A) cultural literacy B) cultural imperialism C) cultural diffusion D) cultural divergence Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

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4) Businesspeople seeking to understand more about another culture in order to successfully conduct business within that culture would be best advised to do which of the following?

A) observe the behavior of people who have gained respect within that cultural environment B) rely on stereotypes, which are based on averages, to gain an understanding of the culture C) avoid cultural research studies because they perpetuate unjustified stereotypes and behaviors D) memorize the cultural variations that are typically encountered in a specific cultural environment Answer: A AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

5) Which of the following is defined as a group of people who share a unique way of life within a larger, dominant culture?

A) macroculture B) subculture C) cultural universal D) monoculture Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

6) Certain attitudes can link groups, such as managers, from different nations more closely than managers within a given nation. As a result, international businesspeople should most likely ________.

A) assume that there are few significant cultural differences among nations B) examine relevant groups when comparing nations C) adopt universal operating methods D) avoid cultural imperialism Answer: B AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

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7) Which of the following is a cultural component that implies gauging the beauty and appeal of artwork?

A) customs B) mores C) folkways D) aesthetics Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

8) It is most accurate to say that within most nations' borders, people largely share such essential attributes as ________ and ________.

A) work attitudes; occupations B) lifestyles; education level C) education level; ethnicity D) values; language Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

9) Which of the following terms is used to refer to the positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts?

A) customs B) attitudes C) traditions D) values Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

10) Which of the following statements is true of attitudes?

A) Over the years, they become more rigid than values.

B) They are learned from role models.

C) Because they're formed within a cultural context, they mirror the attitudes of surrounding countries.

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

Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

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11) A(n) ________ is anything that represents a culture's way of life, including gestures, material objects, traditions, and concepts.

A) social structure B) social status C) cultural baggage D) cultural trait Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

12) ________ is increasing the pace of both cultural diffusion and cultural change.

A) Collectivism B) Enculturation C) Fundamentalism D) Globalization Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

13) Contact among countries brings about cultural change, which is a process called ________.

A) cultural collision B) cultural imperialism C) cultural diffusion D) polycentrism Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

14) Cultural change occurs when people integrate into their culture the gestures, material objects, traditions, or concepts of another culture through ________.

A) ethnocentrism B) cultural diffusion C) social stratification D) xenocentrism Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

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15) The practice of exchanging rings at weddings, which was initially a pagan ritual, is now followed by most people across the world. Which of the following does this illustrate?

A) cultural literacy B) cultural encoding C) cultural diffusion D) cultural lag Answer: C AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

16) Which of the following terms is used to refer to habits or ways of behaving in specific circumstances that are passed down through generations?

A) customs B) attitudes C) prejudices D) aesthetics Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

Scenario: The French Government The French Government has placed many restrictions upon the use of the English language within their borders. They argue that the inflow of English movies, music, and literature is responsible for the dilution of their rich culture.

17) Their argument is vulnerable to criticism because ________.

A) most restaurants still display their menu cards in French B) they fail to take other social and cultural factors into account C) they do not distinguish between movies made by studios in England and movies made in Hollywood D) no other country screens French movies or star French actors Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

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18) Surveys conducted by a group of sociologists show that French children display more familiarity with the superheroes of Hollywood movies than with the heroes of their traditional folklore. The French Government can use this fact to prove the effect of ________ within their country.

A) cultural imperialism B) social stratification C) ethnocentrism D) racism Answer: A AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

19) The French Government promotes the concept of ________ by building museums and monuments to preserve the legacies of important events and people.

A) subculture B) national culture C) popular culture D) monoculture Answer: B AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

Scenario: Frankfurter Friday Betty Cleveland is the vice president of Frankfurter Friday, a highly successful hot dog joint in Oceania. Her company decides to expand to Asia and identifies China as the ideal market.

Before she leaves for China, she studies their culture extensively and discovers that the number four is considered extremely unlucky, that not everybody is fluent in China's official language– Mandarin–and that punctuality is a highly valued trait in the country.

20) Which of the following terms describes Betty's effort to learn more about the Chinese culture?

A) cultural literacy B) cultural imperialism C) cultural divergence D) cultural heterogeneity Answer: A AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.1: Explain culture and the need for cultural knowledge.

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21) The first step in analyzing a nation's potential for international business activity is to examine its business climate.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

22) Ethnocentric firms typically use the same business practices in all cultures and markets.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

23) Subcultures mimic the values, preferences, and beliefs of dominant cultures.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

24) Subcultures exist in democratic countries with large populations.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

25) Hispanics comprise a subculture in the United States.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

26) Subcultures contribute to national culture and cannot be safely ignored when making marketing and production decisions.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

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27) A nation's cultural boundaries do not always correspond with its political boundaries.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

28) Subcultures exist only within a nation's borders.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.1: Explain culture and the need for cultural knowledge.

29) Cultures isolated by topographical barriers are characterized by slower cultural change.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

30) Material culture often displays uneven development across a nation's industries.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.1: Explain culture and the need for cultural knowledge.

31) ________ facilitate(s) the process of cultural imperialism.

A) Strict product liability laws B) Relaxed trade and investment barriers C) Technological stagnation D) Social media censorship Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.2: Summarize the cultural importance of values and behavior.

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32) ________ refers to the replacement of one culture's traditions, folk heroes, and artifacts with equivalents from another.

A) Cultural imperialism B) Social stratification C) Cultural encoding D) Social conditioning Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

33) U.S. companies monopolize much of the international entertainment media, which largely portrays U.S. products and lifestyles as glamorous and appealing. This situation would most likely be used as an example of ________.

A) the stronger work ethic typical of developed countries B) the spread of low-context cultures C) cultural fragmentation D) cultural imperialism Answer: D AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.2: Summarize the cultural importance of values and behavior.

34) ________ is a system in which a supervisor walks an employee through every step of an assignment or task, monitoring the results at each stage.

A) Situational attribution B) Situational management C) Social mobility D) Social stratification Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

35) Low levels of class consciousness encourage social mobility and lessen conflict.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.2: Summarize the cultural importance of values and behavior.

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36) The cultural component that deals with elements of imagery and symbolism is known as material culture.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

37) A culture's values tend to become inflexible over time.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

38) Folk customs that spread by cultural diffusion to other regions develop into popular customs.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

39) A nuclear family comprises of one's immediate family, along with grandparents, uncles, aunts, and cousins.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

40) Social status is determined by family heritage, income, and occupation.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.2: Summarize the cultural importance of values and behavior.

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41) Distinguish between attitudes and values. How do cultures differ in their attitudes toward cultural change?

Answer: Ideas, beliefs, and customs to which people are emotionally attached are called values.

Attitudes are positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts. Attitudes reflect underlying values. But unlike values (which generally concern only important matters), people hold attitudes toward both important and unimportant aspects of life. And whereas values remain quite rigid over time, attitudes are more flexible.

Cultures can have varying responses to cultural change. Some countries feel threatened by the diffusion of traits from certain cultures, particularly if there appears to be a risk of cultural imperialism. One example involves French resistance to the influx of American cultural icons such as Mickey Mouse. In other cases, countries may welcome cultural change or at least see its benefits. U.S. audiences have embraced the diffusion of British-style competitive TV shows, such as the type of show that spawned American Idol.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 2.2: Summarize the cultural importance of values and behavior.

42) Explain the concept of culture. Why is it important to avoid ethnocentricity and gain cultural literacy?

Answer: Culture is the set of values, beliefs, rules, and institutions held by a specific group of people. Individuals who are ethnocentric believe their culture is superior to other cultures. It is important to avoid ethnocentricity because it can seriously undermine international business projects. It causes people to view other cultures in terms of their own and, therefore, disregard the beneficial characteristics of other cultures.

Cultural literacy, on the other hand, involves acquiring detailed knowledge about a culture to function effectively within it. Cultural literacy improves a person's ability to manage employees, market products, and conduct negotiations in other countries. The culturally literate manager who compensates for local needs and desires brings his or her company closer to customers and improves the firm's competitiveness.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.2: Summarize the cultural importance of values and behavior.

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43) A folk custom can be defined as ________.

A) behavior shared by a heterogeneous group or by several groups of people B) behavior, often dating back several generations, that is practiced by a homogeneous group of people C) positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts D) positive or negative evaluations, feelings, and tendencies that individuals harbor toward themselves Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

44) Folk customs that spread by cultural diffusion to other regions develop into ________.

A) trash culture B) traditions C) popular customs D) superstitions Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

45) The practice by which managers and other employees find jobs within their own companies for relatives is known as ________.

A) ethnocentrism B) enculturation C) nepotism D) stratification Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

46) Nepotism often prevails in ________ cultures.

A) extended-family B) individualistic C) monotheistic D) nuclear family Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

12 .

47) ________ refers to socially learned traits associated with, and expected of, men or women.

A) Conformity B) Social mobility C) Individualism D) Gender Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

48) Which of the following terms is used to refer to the process of ranking people into social layers or classes?

A) social transformation B) social stratification C) social loafing D) social mobility Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

49) ________ tend to occupy the highest social layer in industrialized countries.

A) Teachers B) Scientists C) Medical doctors D) Business leaders Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

50) ________ is the ability of individuals to move from one stratum of society to another.

A) Social stratification B) Social mobility C) Socialization D) Hierarchical structure Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

13 .

51) A caste system is a system of social stratification in which ________.

A) a person's social status is decided by his acquired wealth B) a person's position in society depends upon his educational qualifications and achievements C) people are born into a social ranking, with no opportunity for social mobility D) people join highly exclusive associations that encourage external interaction Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

52) International businesspeople need to understand social stratification systems where they do business because ________.

A) such systems reflect a culture's willingness to accept new products B) such systems indicate who people in a given culture will likely respect more C) the high similarity among countries lets firms effectively use global hiring practices D) what is an ascribed group membership in one country is an acquired one in another Answer: B AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.3: Describe the roles of social structure and education in culture.

53) A class system is a system of social stratification in which ________.

A) people are divided into various political groups and subgroups B) a person's social rank depends upon his/her parentage C) people join highly exclusive associations that forbid external interaction D) personal ability and actions determine an individual's social status and mobility Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

54) Which of the following is the most common form of social stratification in the world today?

A) racial segregation B) class system C) gender-based division D) language-based stratification Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

14 .

55) ________ is crucial in production facilities where nonnative managers supervise local employees.

A) Ethnocentrism B) Language proficiency C) Cultural isolation D) Individualism Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

56) Lingua franca means ________.

A) link language B) French language C) official language D) Latin language Answer: A AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

57) Which of the following terms is used to refer to the departure of highly educated people from one profession, geographic region, or nation to another?

A) social mobility B) repatriation C) stratification D) brain drain Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

58) Over the last ten years, nearly 90% of medical graduates from Konesia have left the country for higher-paying jobs in the United States. What phenomenon has Konesia been witnessing?

A) vested outsourcing B) brain drain C) redeployment D) repatriation Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 2.3: Describe the roles of social structure and education in culture.

15 .

59) Reverse brain drain is the process by which ________.

A) manual laborers migrate from low-income countries to high-income countries B) professionals are lured back to their homeland C) students from Europe choose to enroll themselves in American universities D) companies in high-income countries hire people from low-income countries to fill whitecollar positions Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

60) Konesia is a country with a number of offshore islands. Its landscape is characterized by deep valleys, rocky plains, and impassable mountains. Which of the following statements about the country is true, keeping its topography in mind?

A) Konesia is the ideal place to set up production facilities for multinational companies.

B) Konesia experiences a slow rate of cultural change.

C) Konesia is a receptive market for foreign automobile companies.

D) Konesia is greatly susceptible to cultural imperialism.

Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 2.3: Describe the roles of social structure and education in culture.

61) Social mobility tends to be higher in less stratified societies.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

62) Nations that invest in worker training programs are usually rewarded with an increase in productivity and a rise in income.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

63) Brain drain is the departure of highly educated people from one profession, geographic region, or nation to another.

Answer: TRUE AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.3: Describe the roles of social structure and education in culture.

16 .

64) Describe brain drain and its impact on an economy. What is reverse brain drain?

Answer: Brain drain is the departure of highly educated people from one profession, geographic region, or nation to another. Brain drain can negatively affect an economy if individuals needed for economic development, such as science and technology professionals, move elsewhere.

Many countries in Eastern Europe experienced high levels of brain drain early in their transition to market economies. Economists, engineers, scientists, and researchers in all fields fled westward to escape poverty. But as these nations continue their long march away from communism, some are luring professionals back to their homelands–a process known as reverse brain drain.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

65) What are the two types of family groups? Why does the family play an important role in affecting business activities across the world?

Answer: There are two different types of family groups: The nuclear family consists of a person's immediate relatives, including parents, brothers, and sisters. This concept of family prevails in Australia, Canada, the United States, and much of Europe.

The extended family broadens the nuclear family and adds grandparents, aunts and uncles, cousins, and relatives through marriage. It is an important social group in much of Asia, the Middle East, North Africa, and Latin America.

Extended families can present some interesting situations for businesspeople unfamiliar with the concept. In some cultures, owners and managers obtain supplies and materials from another company in which someone from the extended family works. Gaining entry into such family arrangements can be difficult because quality and price are not sufficient motives to ignore family ties.

In extended-family cultures, managers and other employees often try to find jobs for relatives inside their own companies. This practice (called "nepotism") can present a challenge to the human resource operations of a Western company, which typically must establish explicit policies on the practice.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.3: Describe the roles of social structure and education in culture.

17 .

66) Religion ________.

A) is the exclusive means by which a society's members communicate with each other B) shapes the attitudes its adherents have toward work, consumption, individual responsibility, and planning for the future C) is the overall framework that determines the roles of individuals within a society, the stratification of the society, and the individuals' mobility within the society D) remains one of the least important elements of culture Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Hard LO: 2.4: Outline how the major world religions can influence business.

67) Religion is confined to national political boundaries.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.4: Outline how the major world religions can influence business.

Scenario: The French Government The French Government has placed many restrictions upon the use of the English language within their borders. They argue that the inflow of English movies, music, and literature is responsible for the dilution of their rich culture.

68) Which of the following statements, if true, strengthens their argument?

A) The Education Board of France has made it mandatory for schools to teach students English as a second language.

B) The sales of English novels have risen sharply, while those of French novels have declined to a corresponding extent.

C) Stores now advertise their presence with two placards; one in English and one in French.

D) French fashions are no longer popular in English speaking countries.

Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 2.5: Explain the importance of personal communication to international business.

18 .

69) Which of the following statements, if true, weakens their argument?

A) Hollywood movies star French actors very often.

B) English novels are more expensive than French novels.

C) Contemporary French artists have failed to come up with original songs.

D) A larger number of children are being given English names than traditional French names.

Answer: C AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 2.5: Explain the importance of personal communication to international business.

70) Upon what assumption does their argument rest? Their argument assumes that ________.

A) the people of France prefer English music and movies to French music and movies B) the people of France no longer speak French C) the people of other countries aren't open to French cultural elements D) Hollywood movies don't have French subtitles Answer: A AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 2.5: Explain the importance of personal communication to international business.

71) When going global with an Internet presence, it is highly beneficial for a business to localize its Web site.

Answer: TRUE AACSB: Information technology Skill: Concept Difficulty: Moderate LO: 2.5: Explain the importance of personal communication to international business.

72) Discuss the concept of lingua franca and how it affects communication in international business.

Answer: A lingua franca is a third or "link" language understood by two parties who speak different native languages. The original lingua franca arose to support ancient trading activities and contained a mixture of Italian and French, along with Arabic, Greek, and Turkish.

Multinational corporations sometimes choose a lingua franca for official internal communications because they operate in many nations, each with its own language. Although only 5 percent of the world's population speaks English as a first language, it is the most common lingua franca in international business, followed closely by French and Spanish.

AACSB: Written and oral communication Skill: Concept Difficulty: Moderate LO: 2.5: Explain the importance of personal communication to international business.

19 .

73) Which of the following terms refers to the technology used in a culture to manufacture goods and provide services?

A) vernacular culture B) popular culture C) trash culture D) material culture Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

74) ________ is often used to measure the technological advancement of a nation's markets or industries.

A) Material culture B) Popular culture C) Trash culture D) Vernacular culture Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

75) ________ cultures value hard work and promote entrepreneurial risk taking.

A) Short-term oriented B) High uncertainty avoidance C) Individualist D) Collectivist Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

76) Which of the following is characterized by low dependence on an organization and a desire for personal time, freedom, and challenges?

A) collectivism B) democracy C) individualism D) anarchy Answer: C AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

20 .

77) According to Hofstede's framework, people generally prefer little consultation between superiors and subordinates in cultures where ________ is high.

A) power distance B) fatalism C) individualism D) self-actualization Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

78) According to Hofstede's framework, organizations which have cultures that score high on ________ tend to be more hierarchical, with power deriving from prestige, force, and inheritance.

A) uncertainty avoidance B) power distance C) short-term orientation D) femininity Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

79) According to Hofstede's framework, a culture with large power distance tends to be characterized by ________.

A) inequality between superiors and subordinates B) the absence of any form of hierarchy C) power derived from hard work and entrepreneurial drive D) a preference for individualism over collectivism Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

21 .

80) Sally, a social worker from the United States, has been stationed in Konesia for a year. She notices several things about the Konesian society; the people who report to her, for example, do so with an excessive amount of submissiveness, and her superior seems to expect the same of her. Which of the following statements about Konesia would be consistent with Hofstede's framework?

A) Konesians work best in an informal environment.

B) Konesia has a large power distance culture.

C) Konesian society is primarily individualistic.

D) Konesians derive power from their entrepreneurial drive.

Answer: B AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

81) According to Hofstede's framework, managers should be more precise in their directions to subordinates when ________.

A) the company has a philosophy of geocentrism B) the society believes age equals wisdom C) uncertainty avoidance is high D) power distance is low Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

82) According to Hofstede's framework, cultures scoring high on the dimension of ________ tend to be characterized by personal assertiveness and the accumulation of wealth, typically translating into an entrepreneurial drive.

A) power distance B) collectivism C) uncertainty avoidance D) masculinity Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

22 .

83) The term "________ culture" describes a country in which the norm is a money-and-things orientation and a belief that it's better to "live to work" than to "work to live."

A) high masculinity B) physiological C) non-fatalistic D) high-femininity Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

84) According to Hofstede's framework, cultures that score high on ________ value respect for tradition, thrift, and perseverance, and have strong work ethics.

A) power distance B) masculinity C) uncertainty avoidance D) long-term orientation Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

85) According to Hofstede's framework, a culture that scores low on ________ is characterized by individual stability and reputation, fulfilling social obligations, and reciprocation of greetings and gifts.

A) collectivism B) uncertainty avoidance C) long-term orientation D) femininity Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

23 .

86) According to Hofstede's framework, a culture that scores low on ________ can change more rapidly because tradition and commitment are not impediments to change.

A) masculinity B) individualism C) long-term orientation D) risk-taking Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

Scenario: Frankfurter Friday Betty Cleveland is the vice president of Frankfurter Friday, a highly successful hot dog joint in Oceania. Her company decides to expand to Asia and identifies China as the ideal market.

Before she leaves for China, she studies their culture extensively and discovers that the number four is considered extremely unlucky, that not everybody is fluent in China's official language– Mandarin–and that punctuality is a highly valued trait in the country.

87) When selecting employees to help her establish their chain in China, she decides not to transfer Craig, as he believes that the people of China are less competent and skilled than the people of his country. What trait does Craig display?

A) individualism B) imperialism C) ethnocentrism D) collectivism Answer: C AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

88) Betty notices that organizations in China tend to be hierarchical with power derived from prestige and force. Which of the following statements is consistent with her observation?

A) Chinese society considers caste system and class system a myth.

B) Chinese men are subordinate to Chinese women.

C) China scores high on the power distance dimension.

D) China owes its success to its individualistic society.

Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

24 .

89) Once in China, Betty witnesses the ease with which Chinese employees incorporate change and new ideas into their work–unlike the people of Oceania who prefer strong systems of rules and guidelines. Which of the following statements within Hofstede's framework is consistent with her observation?

A) China scores low on the uncertainty avoidance dimension.

B) China scores high on the femininity dimension.

C) Chinese organizations are the least entrepreneurial.

D) Chinese organizations have high levels of employee turnover.

Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

90) One of Betty's employees, Dan, oversees the hot dog joint's decor. He designs all menu cards in shades of red and gold because those are considered lucky colors in China. He also uses his knowledge of Feng Shui when designing the building's interior. The cultural component Dan is involved in is ________.

A) ethics B) stratification C) imperialism D) aesthetics Answer: D AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

91) Against Betty's judgment, her boss decides to market Frankfurter's beef sausages in the town of Xunagshi, believing that it would rake in a huge profit. Which of the following, if true, would prove that her boss's decision is a bad one?

A) There are very few vegetarians in Xunagshi.

B) Due to their exposure to the Western culture, the youth of Xunagshi is more open to fast food than the town elders.

C) The traditional dishes of Xunagshi are more expensive than the beef sausages.

D) Xunagshi has a large Hindu population, all of whom are forbidden from eating beef.

Answer: D AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

25 .

92) Businesspeople measure material culture to determine whether a market can support production activities.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

93) People in collectivistic cultures are more focused on the success of the organization.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 2.6: Describe how firms and culture interact in the global workplace.

94) A culture with large power distance tends to be characterized by considerable inequality between superiors and subordinates.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

95) Cultures that score high on uncertainty avoidance tend to be less open to change and new ideas.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

26 .

96) Explain the Hofstede framework briefly.

Answer: The Hofstede framework compares cultures along five dimensions: (1) individualism vs. collectivism; (2) power distance; (3) uncertainty avoidance; (4) masculinity vs. femininity; and (5) long-term orientation.

The individualism vs. collectivism dimension identifies the extent to which a culture emphasizes the individual versus the group. Individualist cultures value hard work and promote entrepreneurial risk taking, thereby fostering invention and innovation. Although people are given freedom to focus on personal goals, they are held responsible for their actions. People in collectivist cultures, however, tend to work toward collective rather than personal goals and are responsible to the group for their actions. In turn, the group shares responsibility for the wellbeing of each of its members.

Power distance conveys the degree to which a culture accepts social inequality among its people.

A culture with large power distance tends to be characterized by much inequality between superiors and subordinates. On the other hand, cultures with small power distance display a greater degree of equality, with prestige and rewards more equally shared between superiors and subordinates.

Uncertainty avoidance identifies the extent to which a culture avoids uncertainty and ambiguity.

A culture with large uncertainty avoidance values security and places its faith in strong systems of rules and procedures in society. Cultures scoring low on uncertainty avoidance tend to be more open to change and new ideas.

Cultures scoring high on masculinity tend to be characterized more by personal assertiveness and the accumulation of wealth, typically translating into an entrepreneurial drive. Cultures scoring low on this dimension (greater tendency toward femininity) generally have more relaxed lifestyles, wherein people are more concerned about caring for others as opposed to material gain.

The dimension of long-term orientation indicates a society's time perspective and an attitude of overcoming obstacles with time, if not with will and strength. A high-scoring culture values respect for tradition, thrift, perseverance, and a sense of personal shame. A low-scoring culture is characterized by individual stability and reputation, fulfilling social obligations, and reciprocation of greetings and gifts. These cultures can change more rapidly because tradition and commitment are not impediments to change.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

27 .

97) Are the Kluckhohn-Strodtbeck and Hofstede frameworks useful for understanding subcultures? Why or why not?

Answer: The frameworks appear to be better suited for analyzing national culture than particular subcultures. Both frameworks describe cultures in terms of dimensions that apply to the entire culture. They attempt to identify features that can be used to understand a culture in an overarching way. They do not allow for the subtleties necessary to differentiate various aspects of subcultures. The frameworks could most likely be applied to subcultures, but their strengths seem to lie in providing succinct portraits of national culture that facilitate comparisons between countries.

AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 2.6: Describe how firms and culture interact in the global workplace.

98) How can a nation's topography affect the existence of subcultures?

Answer: All the physical features that characterize the surface of a geographic region constitute its topography. The topography of an area can serve to promote or weaken subcultures. On the one hand, physically separating topography can reinforce subcultures and help keep them isolated by inhibiting communication. For example, mountain ranges and the formidable Gobi Desert consume two-thirds of China's land surface. Groups living in the valleys of these mountain ranges hold on to their own ways of life and speak their own languages.

At the same time, topography that promotes communication can enhance cultural diffusion.

Some surface features such as navigable rivers and flat plains facilitate travel and contact with others and can potentially lead to more uniformity among cultural groups.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

99) Describe the relationship between culture and the physical environment.

Answer: Although physical environment affects a people's culture, it does not directly determine it. Two aspects of the physical environment that heavily influence a people's culture are topography and climate.

All the physical features that characterize the surface of a geographic region constitute its topography. Some surface features such as navigable rivers and flat plains facilitate travel and contact with others. By contrast, treacherous mountain ranges and large bodies of water can discourage contact. Cultures isolated by topographical features can find themselves less exposed to the cultural traits of other peoples, which can mean slower cultural change. Topography can impact consumers' product needs and can also have a profound impact on personal communication in a culture.

Climate affects where people settle and helps direct systems of distribution. It plays a large role in lifestyle and work habits, to which companies must adapt, and it also impacts customs such as the type of clothing people wear.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

28 .

100) Differentiate between folk and popular customs. Why are popular customs seen as a threat by some cultures? Support your answer with an example.

Answer: A folk custom is behavior, often dating back several generations, that is practiced by a homogeneous group of people. The wearing of turbans by Muslims in southern Asia and the art of belly dancing in Turkey are both folk customs. A popular custom is behavior shared by a heterogeneous group or by several groups. Popular customs can exist in just one culture or in two or more cultures at once. Wearing blue jeans and playing golf are both popular customs across the globe. Folk customs that spread by cultural diffusion to other regions develop into popular customs.

Despite their appeal, popular customs can be seen as a threat by some members of a culture.

Authorities in a devoutly religious district of Indonesia's Aceh province banned Muslim women from wearing tight clothing, short skirts, and blue jeans. Islamic police set up raids to distribute long skirts to women found violating the ban and to confiscate their offending garments.

Violators were released from custody after they provided their identities to police and received advice from Islamic preachers.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 2.6: Describe how firms and culture interact in the global workplace.

29 .

International Business: The Challenges of Globalization, 9e (Wild) Chapter 3 Political Economy and Ethics 1) In ________ cultures, economic systems tend to provide incentives and rewards for a person's private business initiatives.

A) individualist B) high uncertainty avoidance C) feminine D) large power distance Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

2) Which of the following political ideologies states that every aspect of people's lives must be controlled for a nation's political system to be effective?

A) totalitarianism B) capitalism C) anarchism D) pluralism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

3) In a totalitarian political system, ________.

A) political power resides with the citizens of the country B) governments direct most economic activity but few social ones C) an individualistic outlook shapes political debate and policy formation D) one agent monopolizes political power Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

1 .

4) Totalitarian political systems include authoritarian regimes such as ________.

A) democracy and theocracy B) anarchism and pluralism C) communism and fascism D) capitalism and secularism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

5) ________ is the belief that only individuals and private groups should control a nation's political activities.

A) Pluralism B) Anarchism C) Theocracy D) Totalitarianism Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

6) ________ is the belief that both private and public groups play important roles in a nation's political activities.

A) Totalitarianism B) Capitalism C) Anarchism D) Pluralism Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

7) ________ political systems include democracies, constitutional monarchies, and some aristocracies.

A) Totalitarian B) Anarchist C) Fascist D) Pluralistic Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

2 .

8) Konesia is a country whose political leaders do not tolerate opposing viewpoints and often suppress or punish dissidents. The lives of Konesians are tightly controlled by its rulers. Which of the following political systems prevails in the country?

A) totalitarianism B) democracy C) anarchism D) pluralism Answer: A AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Moderate LO: 3.1: Describe the key features of each form of political system.

9) Which of the following is a characteristic of totalitarian governments?

A) Political dissidents can oppose the government with no repercussions.

B) Citizens are guaranteed civil, property, and minority rights.

C) The means of production are owned by the people who use them.

D) Leaders rule without the explicit approval of the people.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

10) A ________ is a political system in which a country's religious leaders serve as its political leaders.

A) democracy B) theocracy C) plutocracy D) septocracy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

3 .

11) Renzi belongs to a country in which religion governs all aspects of his life, whether personal or public. He has to abide by a strict, rigid, code that dictates everything from the clothes he wears to the food he eats. Breaking away from these traditions is not an option since religion plays an important role in the functioning of the nation. What political system prevails in his country?

A) communist totalitarianism B) left-wing totalitarianism C) right-wing totalitarianism D) theocratic totalitarianism Answer: D AACSB: Analytical thinking; Ethical understanding and reasoning Skill: Application Difficulty: Moderate LO: 3.1: Describe the key features of each form of political system.

12) ________ is a political system in which political leaders rely on military and bureaucratic power to support their rule.

A) Secular totalitarianism B) Secular anarchism C) Theocratic totalitarianism D) Theocratic pluralism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

13) Under ________, the government endorses private ownership of property and a marketbased economy but grants little or no political freedom.

A) left-wing totalitarianism B) theocratic totalitarianism C) secular totalitarianism D) right-wing totalitarianism Answer: D AACSB: Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

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14) Which of the following terms is also used to refer to communism?

A) tribal totalitarianism B) right-wing totalitarianism C) left-wing totalitarianism D) civil totalitarianism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

15) Which of the following is an advantage of conducting business in totalitarian nations?

A) International companies are less likely to face local political opposition to their activities.

B) Government deals are always straightforward and transparent.

C) Laws regarding the resolution of contractual disputes are clearly defined.

D) International companies run no risk of their public image being tarnished.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

16) Which of the following is a disadvantage of conducting business in totalitarian nations?

A) Laws regarding the resolution of contractual disputes are rigid and inflexible.

B) Companies have to contend with the interference of local political opposition.

C) A refusal to pay a bribe can result in the forfeiture of investments in the country.

D) The government has little power over the economic activities of the nation.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

17) A ________ is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives.

A) democracy B) theocracy C) plutocracy D) autocracy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

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18) Which of the following statements about representative democracies is true?

A) All citizens participate freely and actively in political processes.

B) Leaders of representative democracies can stay in power indefinitely.

C) Citizens elect individuals from political groups to act on their behalf.

D) Representative democracies across the world share identical features.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

19) In a ________ government, the strongest political parties share power by dividing government responsibilities among themselves.

A) coalition B) bilateral C) totalitarian D) theocratic Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

20) Democracies try to preserve peaceful coexistence among groups of people with diverse cultural, ethnic, and racial backgrounds. These rights are known as ________ rights.

A) indirect B) central C) subcapital D) minority Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

21) The government maintains control over the banking industry in a country. Which of the following is most likely true if the country has a mixed economy?

A) Businesses in most economic sectors of the country are privately owned.

B) The government considers banking sector as important to national security.

C) The country has never experienced threats against its long-term stability.

D) The government views banking as more important than manufacturing.

Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 3.1: Describe the key features of each form of political system.

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22) Which of the following do governments impose upon people to help pay for the consequences of using a particular product?

A) income taxes B) consumption taxes C) property taxes D) value-added taxes Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

Scenario: Susan Goes Global with Grape Fizz Susan is the CEO of Grape Fizz, a global drinks-manufacturing company. She wishes to set up production facilities in other countries and has been advised to assess the political system of each country before she does so.

23) Susan decides not to set up production facilities in Konesia because its business laws are vague and are often interpreted according to the convenience of the government. Bribery is a common feature in conducting business deals there and a refusal to pay up is not an option. What kind of government does Konesia have?

A) democratic B) theocratic C) totalitarian D) pluralist Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

24) Susan also decides not to set up production facilities in Margazo, a country which functions by a strict set of religious tenets, because some of them contradict her company's work policy.

Expecting potential employees to break away from these traditions is not an option since religion plays an important role in the functioning of the nation. What kind of political system prevails in Margazo?

A) pluralistic B) theocracy C) tribal totalitarian D) democracy Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

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25) In a totalitarian system, rulers tightly control people's lives and do not tolerate opposing viewpoints.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

26) Anarchism is the belief that every aspect of people's lives must not be controlled in order for a nation's political system to be effective.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

27) Pluralism is the the belief that both private and public groups play important roles in a nation's political activities.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

28) Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

29) A political system in which a country's religious leaders are also its political leaders is called a theocracy.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

30) Pluralism is a political system in which political leaders rely on military and bureaucratic power.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

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31) Secular totalitarianism is a political system in which government leaders are elected directly by the wide participation of the people or their representatives.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

32) The most peaceful nations today are those that were never controlled and stabilized by colonial powers.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

33) In a coalition government, the strongest political parties share power by dividing government responsibilities among themselves.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

34) The bureaucracy is the part of government that implements the rules and laws passed by elected representatives.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

35) Communists are socialists, but socialists are not necessarily communist.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

36) Totalitarianism is a political ideology that typically involves constant indoctrination of the population by agents of the government to eliminate dissent.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 3.1: Describe the key features of each form of political system.

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37) Totalitarian governments tend to favor government ownership of economic resources.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

38) Compare and contrast the world's three main political ideologies: anarchism, totalitarianism, and pluralism.

Answer: Totalitarianism is the belief that every aspect of people's lives must be controlled for a nation's political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labor. Totalitarian political systems include authoritarian regimes such as communism and fascism.

Anarchism is the belief that only individuals and private groups should control a nation's political activities. An anarchist views public government as unnecessary and unwanted because it tramples personal liberties.

Pluralism is the belief that both private and public groups play important roles in a nation's political activities. Each group (consisting of people with different ethnic, racial, class, and lifestyle backgrounds) serves to balance the power that can be gained by the other. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.1: Describe the key features of each form of political system.

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39) Compare and contrast two prevalent political systems: totalitarianism and democracy, and explain how a country's political system influences its legal system.

Answer: In a totalitarian system, individuals govern without the support of the people, tightly control people's lives, and do not tolerate opposing viewpoints. Nazi Germany under Adolf Hitler and the former Soviet Union under Joseph Stalin are historical examples of totalitarian governments. Today, Myanmar and North Korea are prominent examples of totalitarian governments. Totalitarian leaders attempt to silence those with opposing political views and, therefore, require the near-total centralization of political power. But a "pure" form of totalitarianism is not possible because no totalitarian government is capable of entirely silencing all its critics.

A democracy is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives. Democracy differs from totalitarianism in nearly every respect. The foundations of modern democracy go back at least as far as the ancient Greeks. The Greeks tried to practice a pure democracy, one in which all citizens participate freely and actively in the political process. But a pure democracy is more an ideal than a workable system for several reasons. Some people have neither the time nor the desire to get involved in the political process. Also, citizens are less able to participate completely and actively as a population grows and as the barriers of distance and time increase. Finally, leaders in a pure democracy may find it difficult or impossible to form cohesive policies because direct voting can lead to conflicting popular opinion.

A country's political system also influences its legal system. Totalitarian governments tend to favor public ownership of economic resources and enact laws limiting entrepreneurial behavior.

By contrast, democracies tend to encourage entrepreneurial activity and protect business with strong property-rights laws. The rights and responsibilities of parties to business transactions also differ from nation to nation. Political systems and legal systems, therefore, are naturally interlocked. A country's political system inspires and endorses its legal system, and its legal system legitimizes and supports its political system.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 3.1: Describe the key features of each form of political system.

40) Central planning is rooted in the ideology that ________.

A) the welfare of a group is more important than individual well-being B) individual concerns should be placed above group consensus C) individual and group concerns are just as important as government concerns D) privatization will enhance a country's economic well-being Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.2: Explain how the three types of economic systems differ.

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41) In a command economy, the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold are planned by ________.

A) government officials B) private industries C) individual entrepreneurs D) local trade associations Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.2: Explain how the three types of economic systems differ.

42) In Country X, all dimensions of economic activity, including pricing and production decisions, are determined by the central government. Which term best describes Country X? A) market economy B) mixed economy C) command economy D) democratic economy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.2: Explain how the three types of economic systems differ.

43) Which of the following terms refers to an economic system in which the government owns and controls all types of economic activity?

A) socialism B) sovereign nationalism C) political bureaucracy D) pluralism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

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44) Robert believes that social and economic equality can be obtained only by establishing an economic system in which the government owns and controls all types of economic activity.

However, he does not think of himself as a communist, but as a socialist. Which of the following statements about Robert is true?

A) Robert does not believe that a violent revolution is needed to seize control over resources.

B) Robert does not think that political dissidents should go unpunished.

C) Robert believes that the pricing of goods should be left to the discretion of laborers.

D) Robert believes that the means of production should be owned by the people who use them.

Answer: A AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 3.2: Explain how the three types of economic systems differ.

45) Both Pat and Terry believe that social and economic equality can be obtained only by establishing an economic system in which the government owns and controls all types of economic activity. Which of the following statements proves that Pat is a communist and Terry is a socialist?

A) Unlike Terry, Pat believes that the government should decide the prices at which goods are sold.

B) Unlike Pat, Terry does not believe in the elimination of political opponents.

C) Unlike Terry, Pat believes that the means of production should be owned only by the public.

D) Unlike Pat, Terry believes that a violent revolution is necessary to seize control over resources.

Answer: B AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 3.2: Explain how the three types of economic systems differ.

46) What do communists and socialists have in common?

A) Both believe in the elimination of political opponents.

B) Both believe that the government should control all types of economic activity.

C) Both believe that the pricing of goods should be the responsibility of individuals.

D) Both believe that a violent revolution is necessary to seize control over resources.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

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47) The segment of the economic environment comprising independently owned firms that seek to earn profits is called the ________.

A) political sector B) private sector C) democratic sector D) public sector Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

48) Which of the following philosophies asserts that ownership of the means of production belongs in the hands of individuals and private businesses?

A) capitalism B) communism C) tribalism D) socialism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

49) In a market economy, the patterns of resource allocation are most directly influenced by ________.

A) government administrators who monitor the equilibrium of supply and demand B) industry coalitions that strive to improve the efficiency of production and service C) consumer group alliances that negotiate with firms to improve product quality D) consumers who "vote" by their personal decision to buy or not buy products Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

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Scenario: Susan Goes Global with Grape Fizz Susan is the CEO of Grape Fizz, a global drinks-manufacturing company. She wishes to set up production facilities in other countries and has been advised to assess the political system of each country before she does so.

50) Susan thinks that it would be easiest setting up production facilities in a country whose government leaders are elected directly by the wide participation of the people or by their representatives. Which of the following political systems should the country have?

A) anarchist B) democratic C) theocratic D) fascist Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

51) A value-added tax is a tax levied on each party that adds value to a product throughout its production and distribution.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

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52) Describe the three main types of economic systems.

Answer: A country's economic system consists of the structure and processes that it uses to allocate its resources and conduct its commercial activities. Every economy displays a tendency toward individualist or collectivist economic values. If national economies are arranged on a horizontal scale that is anchored by two extremes, at one end of the scale is a theoretical pure centrally planned economy, at the other end is a theoretical pure market economy, and in between is a mixed economy.

A centrally planned economy is a system in which a nation's land, factories, and other economic resources are owned by the government. The government makes nearly all economy-related decisions—including who produces what and the prices of products, labor, and capital. Central planning agencies specify production goals for factories and other production units, and they even decide prices. The ultimate goal of central planning is to achieve a wide range of political, social, and economic objectives by taking complete control over the production and distribution of a nation's resources.

A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership. In a mixed economy, the government owns fewer economic resources than does the government in a centrally planned economy. Yet in a mixed economy, the government tends to control the economic sectors that it considers important to national security and long-term stability. Many mixed economies also maintain generous welfare systems to support the unemployed and provide health care for the general population.

In a market economy, the majority of a nation's land, factories, and other economic resources are privately owned, either by individuals or businesses. This means that who produces what and the prices of products, labor, and capital in a market economy are determined by the interplay of two forces: supply and demand. Market economics is rooted in the belief that individual concerns should be placed above group concerns.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 3.2: Explain how the three types of economic systems differ.

16 .

53) Discuss the factors that contributed to the collapse of centrally planned economies.

Answer: Centrally planned economies collapsed due to the following reasons. First, they failed to create economic value. They failed to see that commercial activities succeed when they create economic value for customers. Along the way, scarce resources were wasted in the pursuit of commercial activities that were not self-sustaining. They failed to innovate and create efficiencies.

Second, they failed to provide incentives for economic success. Government ownership of economic resources drastically reduced incentives for businesses to maximize the output obtained from those resources. Except for aerospace, nuclear power, and other sciences (in which government scientists excelled), there were few incentives to create new technologies, new products, and new production methods. The result was little or no economic growth and consistently low standards of living.

Third, they failed to achieve rapid growth. Leaders in communist nations took note of the high rates of economic growth in countries such as Hong Kong, Singapore, South Korea, and Taiwan—called Asia's four tigers. That a once-poor region of the world had so rapidly achieved such astounding growth awakened central planners to the possibilities. They realized that an economic system based on private ownership fosters growth much better than one hampered by central planning.

Finally, centrally planned economies failed to satisfy consumer needs. People in centrally planned economies were tired of a standard of living that had slipped far below that found in market economies. Ironically, although central planning was conceived as a means to create a more equitable system of distributing wealth, too many central planners failed to provide even basic necessities such as adequate food, housing, and medical care.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.2: Explain how the three types of economic systems differ.

54) Discuss the challenges China faces as it continues its experiment on "socialism with Chinese characteristics."

Answer: Three factors have posed challenges for China in its transition to a market economy.

First, political and social problems pose threats to China's future economic performance. For the most part, political leaders restrict advanced democratic reforms. Protests sporadically arise from time to time whenever ordinary Chinese citizens grow impatient with political progress.

Another potential problem is unemployment. Intensified competition and the entry of international companies into China are placing greater emphasis on efficiency and the cutting of payrolls in some industries. But the biggest contributor to the unemployed sector seems to be migrant workers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better-paying factory work or construction jobs.

Another key issue is reunification of "greater China." China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of "one country, two systems." Although the economic freedoms of people in Hong Kong have remained largely intact, the rest of China has continued along lines drawn by the communist leadership.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.2: Explain how the three types of economic systems differ.

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55) Explain the benefits and drawbacks of a value-added tax.

Answer: Many countries impose a value added tax (VAT)—a tax levied on each party that adds value to a product throughout its production and distribution. The United States has not previously implemented a VAT tax, but the nation's considerable debt level is causing speculation that it may soon impose one. Supporters of the VAT system contend that it distributes taxes on retail sales more evenly between producers and consumers. Consumers pay no additional tax at the point of sale because the government has already collected taxes from each party in the value chain. Still, consumers end up paying the tax because producers and distributors must increase prices to compensate for their tax burdens. So the poor are not overly burdened, many countries exclude the VAT on certain items such as children's clothing.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.2: Explain how the three types of economic systems differ.

56) The U.S. legal system is largely based on ________.

A) common law B) social law C) civil law D) theocratic law Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

57) ________ is based on the cumulative wisdom of judges' decisions on individual cases through history.

A) Common law B) Civil law C) Statutory law D) Bureaucratic law Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

18 .

58) ________ is a legal system which is based on a detailed set of written rules and statutes that constitute a legal code and it is also based on a codification of what is and is not permissible.

A) International law B) Civil law C) Tribal law D) Common law Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

59) A legal tradition based on religious teachings is called ________ law.

A) democratic B) common C) civil D) theocratic Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

60) Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages are called ________.

A) antitrust laws B) theocratic laws C) anarchist laws D) bilateral laws Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

Scenario: Susan Goes Global with Grape Fizz Susan is the CEO of Grape Fizz, a global drinks-manufacturing company. She wishes to set up production facilities in other countries and has been advised to assess the political system of each country before she does so.

19 .

61) Susan is worried that San Tarino's demand that she must use locally available raw material and employ local workers might interfere with the quality and efficiency of her business. San Tarino, on the other hand, views this as a way to foster local business activity and lessen regional unemployment. What are these laws called?

A) local content requirements B) antitrust laws C) nationalization laws D) internalization policies Answer: A AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Moderate LO: 3.3: Summarize the main elements of each type of legal system.

Scenario: Stephanie Wong Stephanie Wong, a Chinese-American, owns a consultancy that advises clients on strategies for business expansions into China. Wong is to lead a symposium for small and mid-sized exporters who are planning on expanding their businesses in China. Therefore, she is preparing answers in advance for questions that symposium participants would most likely ask.

62) The first question that Stephanie expects participants to ask is: "Which is more important for the Chinese, contacts or contracts?" Which of the following is the most effective response Stephanie could give for this question?

A) Contracts are critical because of their extreme importance in Chinese business.

B) Face-to-face communications and personal relationships take priority over written contracts.

C) Non-Chinese businesspeople should take time to agree on a legal contract before developing personal relationships.

D) Business relationships are established only after successful legal dealings are concluded.

Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Moderate LO: 3.3: Summarize the main elements of each type of legal system.

63) Which of the following factors should the legal experts of Wayne's consider while evaluating the legal systems of Paribo and Kirawi?

A) the profits made by local companies in the countries B) the prevalence of crime in the two countries C) the resolution of contractual dispute with local vendors D) the profits made by international companies in other countries Answer: C AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

20 .

64) Which of the following statements is true of Kirawi, a democratic nation whose legal system is based on common law?

A) The law is based on religious teachings and is enforced by the country's religious leaders.

B) The law is inflexible and is applied the same way in all situations.

C) The law is based on a detailed set of written rules that constitute a legal code.

D) The law is interpreted on the basis of tradition, precedent and usage.

Answer: D AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

65) Which of the following statements is true of Paribo, a democratic nation whose legal system is based on civil law?

A) The law is based on religious teachings and is enforced by the country's religious leaders.

B) The law is flexible and its interpretations differ with situations.

C) The law is based on a detailed set of written rules that constitute a legal code.

D) The law is interpreted on the basis of tradition, precedent and usage.

Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

66) Which of the following, if true, demonstrates that Kirawi has an unstable business environment?

A) Its business laws are inflexible and cannot be interpreted according to the comfort of government officials.

B) Its government does not enforce product liability laws or protect individual property rights.

C) Its activities are bound by several multilateral agreements conducted with neighboring countries.

D) Its private sector comprises independently owned firms that exist to make profits.

Answer: B AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 3.3: Summarize the main elements of each type of legal system.

67) A common law system is based on tradition, judge-made precedent, and usage in which the courts assign a preeminent position to existing case law to guide dispute resolution.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

21 .

68) Islamic law is the most widely practiced theocratic legal system today.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

69) Describe the importance of a nation's legal system, and identify the main differences between the three main types of legal systems.

Answer: A country's legal system is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Many cultural factors—including ideas on social mobility, religion, and individualism influence a nation's legal system. Likewise, many laws and regulations are enacted to safeguard cultural values and beliefs.

Key characteristics of each type of legal system in use around the world (common law, civil law, and theocratic law), include: 1. Common law: A common law legal system reflects three elements: Tradition. A country's legal history Precedent. Past cases that have come before the courts Usage. How laws are applied in specific situations Under common law, the justice system decides cases by interpreting the law on the basis of tradition, precedent, and usage. Yet each law may be interpreted somewhat differently in each case to which it is applied. In turn, each new interpretation sets a precedent that may be followed in later cases. As new precedents arise, laws are altered to clarify vague wording or to accommodate situations not previously considered.

2. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters.

3. Theocratic law: A legal tradition based on religious teachings is called theocratic law. Three prominent theocratic legal systems are Islamic, Hindu, and Jewish law. Islamic law is the most widely practiced theocratic legal system today. Islamic law was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

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70) Explain each of the following terms, giving examples of each: patent, trademark, and copyright.

Answer: A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Patents can be sought for any invention that is new, useful, and not obvious to any individual of ordinary skill in the relevant technical field. Patents motivate companies to pursue inventions and make them available to consumers because they protect investments companies make in research and development.

Trademarks are words or symbols that distinguish a product and its manufacturer. The Nike "swoosh" is a trademark, as is the name "Lexus." Trademark law creates incentives for manufacturers to invest in developing new products. It also benefits consumers because they know what to expect when they buy a particular brand. In other words, you would not expect a canned soft drink labeled "Coca-Cola" to taste like one labeled "Sprite."

Copyrights give creators of original works the freedom to publish or dispose of them as they choose. A copyright is typically denoted by the well-known symbol ©, a date, and the copyright holder's name. A copyright holder has the legal rights to: Reproduce the copyrighted work Derive new works from the copyrighted work Sell or distribute copies of the copyrighted work Perform the copyrighted work Display the copyrighted work publicly Copyright holders include artists, photographers, painters, literary authors, publishers, musical composers, and software developers. Works created after January 1, 1978, are automatically copyrighted for the creator's lifetime plus 50 years. Publishing houses receive copyrights for either 75 years from the date of publication or 100 years after creation, whichever comes first.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.3: Summarize the main elements of each type of legal system.

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71) Explain the purpose of antitrust laws. How would the Friedman philosophy of corporate social responsibility most likely support a decision by a company to expand internationally into a country with weak antitrust laws? Include a description of the Friedman philosophy in your answer.

Answer: Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages are called antitrust (antimonopoly) laws. These laws try to provide consumers with a wide variety of products at fair prices. The United States and European Union are the world's strictest antitrust regulators. Companies based in strict antitrust countries often argue that they are at a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated segments of a certain market. That is why firms in strict antitrust countries often lobby for exemptions in certain international transactions. Small businesses also argue that they could better compete against large international companies if they could join forces without fear of violating antitrust laws.

In the absence of a global antitrust enforcement agency, international companies must concern themselves with the antitrust laws of each nation where they do business. The Friedman philosophy of corporate responsibility - named for its main supporter, the late economist Milton Friedman - says that a company's sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law. If a company moved operations from a country having strict antitrust laws to a country having no such laws, managers subscribing to the Friedman philosophy would most likely applaud this decision. They would most likely argue that the company is doing its duty to increase profits for owners and, moreover, is operating within the law in the foreign country. Many people disagree with this argument against socially responsible activities.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 3.3: Summarize the main elements of each type of legal system.

72) Which of the following is an important factor in forming successful business ventures in China?

A) following the strategies of western countries for establishing business relationships B) focusing on establishing tight formal contracts C) giving high importance to written contracts D) establishing a trusting relationship before proceeding with business Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 3.4: Outline the global legal issues facing international firms.

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73) ________ refers to the transfer of ownership of resources from the private to the public sector.

A) Nationalization B) Expropriation C) Federalization D) Conversion Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

74) A ________ is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.

A) patent B) trademark C) watertight D) copyright Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

75) Expropriation is best defined as the ________.

A) transference of ownership of resources from private to public sector with no compensation B) transference of ownership from private to public sector with compensation to private owners for their losses C) conversion of state-owned property to privately owned property D) conversion of state-owned property to privately owned property with no compensation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

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76) Shimmer and Sparkle is an American jewelry store which discovers that several shops in developing countries are selling counterfeited necklaces under their name and label. Which of the following problems are they facing?

A) patent expiration B) trademark infringement C) copyright expiration D) monopolization Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

77) Which of the following statements referring to intellectual property rights and violations is INCORRECT? A) Richer countries claim looser regulation of intellectual property rights will hinder innovation.

B) Companies can register a global patent, trademark, or copyright through the World Trade Organization (WTO).

C) The International Anti-Counterfeiting Coalition estimates international trade in counterfeit products at $600 billion a year.

D) Developing markets claim tougher regulation of IPRs will slow, if not halt, their economic development.

Answer: B AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Moderate LO: 3.4: Outline the global legal issues facing international firms.

78) Which of the following functions does a copyright perform?

A) It protects the trade secrets of an organization, including its business plans.

B) It prevents a company from monopolizing an invention.

C) It distinguishes the product and manufacturers from competitors through distinct words and symbols.

D) It gives creators of original work the freedom to publish or dispose of them as they choose.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

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79) Product liability laws are those which ________.

A) provide consumers with a wide variety of products at fair prices B) add value to a product throughout its production and distribution C) protect people from defective products D) define the taxation on locally manufactured products Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

80) On a recent trip to Hong Kong, a group of tourists found several Prada bags being sold on the pavement. They cost only a few dollars and were clearly fake; though they bore the Prada trademark. This is an example of ________.

A) piracy B) monopolization C) ethnocentrism D) nationalization Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 3.4: Outline the global legal issues facing international firms.

Scenario: Susan Goes Global with Grape Fizz Susan is the CEO of Grape Fizz, a global drinks-manufacturing company. She wishes to set up production facilities in other countries and has been advised to assess the political system of each country before she does so.

81) Susan finally settles upon Valmira because it has a stable business environment. Which of the following factors, if true, proves her decision to be a good one?

A) Valmira does not enforce any product liability laws.

B) Valmira's legal system protects individual property rights satisfactorily.

C) The business laws of Valmira are flexible and can be interpreted according to the comfort of government officials.

D) The government of Valmira does not allow the private sector to flourish.

Answer: B AACSB: Application of knowledge; Reflective thinking Skill: Critical Thinking Difficulty: Moderate LO: 3.4: Outline the global legal issues facing international firms.

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Scenario: Stephanie Wong Stephanie Wong, a Chinese-American, owns a consultancy that advises clients on strategies for business expansions into China. Wong is to lead a symposium for small and mid-sized exporters who are planning on expanding their businesses in China. Therefore, she is preparing answers in advance for questions that symposium participants would most likely ask.

82) Stephanie also expects participants to ask: "Are the Chinese as formal and business-oriented as Americans are?" Which of the following would most likely be Stephanie's response?

A) The Chinese operate very much like Americans, for them business is more important than pleasure.

B) The Chinese dislike guessing games; give them your sales pitch right away and let the meeting develop.

C) Don't overlook the importance of personal relationships; friendship comes before business.

D) The Chinese are very flexible and will easily adapt to your culture's way of doing business.

Answer: C AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

83) Another question that Stephanie anticipates concerns the acceptability of certain topics of discussion like: "Should we avoid discussing our families and spouses?" Which of the following represents the most effective response to this question?

A) Absolutely, family is kept completely separate from business in China.

B) Yes, because it is considered very rude by businesspeople to discuss family.

C) No, Chinese businesspeople may invite business partners to family functions.

D) It's fine to discuss family, but never agree to go to a business partner's house.

Answer: C AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Moderate LO: 3.4: Outline the global legal issues facing international firms.

84) Trademark protection typically lasts indefinitely, provided the word or symbol continues to be distinctive.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

28 .

85) Product liability laws hold only manufacturers responsible for damage, injury, or death caused by defective products.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

86) Developed nations have the toughest product liability laws, while developed countries have more relaxed laws.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.4: Outline the global legal issues facing international firms.

87) ________ is the layer of corporate social responsibility whereby a corporation donates money and, perhaps, employee time toward a specific social cause.

A) Risk management B) Strategic Corporate Social Responsibility (CSR) C) Socialist Corporate Social Responsibility (CSR) D) Traditional philanthropy Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

88) ________ is the layer of corporate social responsibility whereby a company develops a code of conduct that it will follow in its global operations and agrees to operate with greater transparency.

A) Strategic Corporate Social Responsibility (CSR) B) Risk management Corporate Social Responsibility (CSR) C) Traditional philanthropy D) Task orientation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 3.5: Describe the main issues of global ethics and social responsibility.

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89) ________ is the layer of corporate social responsibility in which a business builds social responsibility into its core operations to create value and build competitive advantage.

A) Risk management B) Traditional philanthropy C) Strategic Corporate Social Responsibility (CSR) D) Political polity Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

90) Horizon Ltd. is a software company that, over the last year, incorporated social responsibility into its core operations to create value and build competitive advantage. Which layer of corporate social responsibility does Horizon Ltd. function at?

A) risk management B) traditional philanthropy C) strategic Corporate Social Responsibility (CSR) D) political Corporate Social Responsibility (CSR) Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Moderate LO: 3.5: Describe the main issues of global ethics and social responsibility.

91) Which of the following philosophies maintains that a company's sole responsibility is to maximize profits for its owners?

A) utilitarian view B) righteous moralist view C) Friedman view D) cultural relativist view Answer: C AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

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92) The ________ view states that a company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context.

A) Friedman B) cultural relativist C) righteous moralist D) utilitarian Answer: B AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

93) The ________ view says that a company should maintain its home-country ethics wherever it operates because the home-country's view of ethics and responsibility is superior to others' views.

A) Friedman B) righteous moralist C) cultural relativist D) utilitarian Answer: B AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

94) Which of the following philosophies maintains that a company should maximize "good" outcomes and minimize "bad" outcomes wherever it operates?

A) Friedman view B) righteous moralist view C) cultural relativist view D) utilitarian view Answer: D AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

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95) ________ is the environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity.

A) Carbon footprint B) Greenhouse log C) Carbon cycle D) Greenhouse check Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

96) ________ measures the indirect carbon dioxide emissions from the whole life cycle of products—from their manufacture to eventual breakdown.

A) Primary footprint B) Secondary footprint C) Tertiary footprint D) Internalized footprint Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

97) Which of the following does the secondary footprint measure?

A) the burning of fossil fuels B) direct energy consumption C) indirect carbon dioxide emissions D) emissions caused by natural forces Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

98) The cultural relativist view says that a company's sole responsibility is to maximize profits for its owners while operating within the law.

Answer: FALSE AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

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99) Corporate social responsibility is the practice of going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 3.5: Describe the main issues of global ethics and social responsibility.

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100) Describe four corporate responsibility issues and explain how these issues can impact a company's international relations.

Answer: Conscientious business leaders realize that the future of their companies rests on healthy workforces and environments worldwide. The following are four issues of corporate responsibility.

1. BRIBERY AND CORRUPTION Similar to other cultural and political elements, the prevalence of corruption varies from nation to nation. In certain countries, bribes are routinely paid to distributors and retailers to push a firm's products through distribution channels. Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity.

2. LABOR CONDITIONS AND HUMAN RIGHTS To fulfill their responsibilities to society, companies are monitoring the actions of their own employees and the employees of companies with whom they conduct business. Pressure from human rights activists drove conscientious apparel companies to introduce codes of conduct and monitoring mechanisms for their international suppliers.

3. FAIR TRADE PRACTICES Fair trade products are those that involve companies working with suppliers in more equitable, meaningful, and sustainable ways. TransFair USA is the nonprofit organization that independently certifies fair trade products. The Fair Trade model of international trade benefits more than 1 million farmers and farm laborers in 58 developing countries across Africa, Asia, and Latin America. Fair Trade products now include coffee, tea, herbs, cocoa, chocolate, fruit, rice, sugar, flowers, honey, and spices. TransFair USA certifies that a product meets criteria in the following categories: Fair Prices, Fair Labor Conditions, Direct Trade, Democratic Community Development, and Environmental Sustainability.

4. ENVIRONMENT Concern for the environment and ecosystem is no longer left to government agencies and nongovernmental organizations. Today companies pursue "green" initiatives to reduce their toll on the environment and to reduce operating costs and boost profit margins.

These types of corporate responsibility issues have an impact on international relations because they affect political relations. The political relations between a company's home country and the nations in which it does business affect its international business activities. Favorable political relationships foster stable business environments and increase international cooperation in many areas, including the development of international communications and distribution infrastructures. In turn, a stable environment requires a strong legal system through which disputes can be resolved quickly and fairly. In general, favorable political relations lead to increased business opportunities and lower risk.

AACSB: Application of knowledge; Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 3.5: Describe the main issues of global ethics and social responsibility.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 4 Economic Development of Nations 1) Which of the following terms refers to the broadest measure of economic development of a country?

A) gross domestic product (GDP) B) purchasing power parity (PPP) C) gross national product (GNP) D) human development index (HDI) Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

2) The measure of the value of production that occurs within a country's borders without regard to whether the production is done by domestic or foreign factors of production is its ________.

A) net national product (NNP) B) gross national product (GNP) C) gross domestic product (GDP) D) gross national income (GNI) Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

3) The ________ of a country is its gross national product divided by its population.

A) GNP per capita B) GDP per capita C) purchasing power parity D) purchasing power Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

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4) The relative ability of two countries' currencies to buy the same basket of goods in those two countries is called ________.

A) gross national product B) gross domestic product C) purchasing power D) purchasing power parity Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

5) ________ is the value of goods and services that can be purchased with one unit of a country's currency.

A) Potential output B) Gross national product C) Purchasing power D) Gross domestic product Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

6) Gross national income (GNI), the broadest measure of economic activity for a country, is defined as the ________.

A) total of all consumption and investment that takes place in a national economy B) income generated in one country, regardless of who owns the productive assets C) total of all economic activity in one country less services, such as government administration, health services, and education D) income generated by both total domestic production and the international production activities of national companies Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

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7) Which of the following terms is used to refer to the exchange of goods and services for other goods and services instead of money?

A) fiat money B) letter of credit C) barter D) guanxi Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

8) The GDP per capita of a country is lower than that of France. If the GDP per capita of the country is adjusted for PPP, the country's revised GDP is higher than that of France. Which of the following is most likely true about the country?

A) The cost of living in the country is higher than that of France.

B) The cost of living in the country is lower than that of France.

C) The cost of living in the country is approximately equal to that of France.

D) The cost of living in the country has increased over the past decade.

Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 4.1: Explain economic development and how it is measured.

9) The GDP per capita of a country is higher than that of Thailand. If the GDP per capita of the country is adjusted for PPP, the country's revised GDP is lower than that of Thailand. Which of the following is most likely true about the country?

A) There are fewer goods available for purchase in the country than in Thailand.

B) The cost to buy everyday goods in the country is approximately the same as in Thailand.

C) It costs less to buy everyday goods in the country than in Thailand.

D) It costs more to buy everyday goods in the country than in Thailand.

Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 4.1: Explain economic development and how it is measured.

3 .

10) Which of the following measures the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living?

A) category development index B) gross national product index C) human development index D) purchasing power index Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

11) A company is conducting a research on new markets by comparing countries in terms of their human development index (HDI) scores. The company wishes to expand into a market where individuals experience a very high level of total well-being. Which of the following countries would the company most likely choose?

A) Russia B) Mexico C) China D) Japan Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 4.1: Explain economic development and how it is measured.

12) Which of the following is true about economic development of a nation?

A) The purchasing power parity is a poor indicator of a people's total well-being.

B) GDP is a larger figure and includes a nation's income generated from exports, imports, and international operations.

C) Illegal activities such as gambling and black market transactions are considered in GDP and GNP. D) Using gross product figures to compare production across countries accounts for different cost of living in each country.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

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13) Which of the following statements is true of national production?

A) Marketers use GDP or GNP figures to determine whether a country's population is wealthy enough to purchase its products.

B) Per capita numbers provide a detailed picture of development of the entire country.

C) Gross product figures accurately indicate whether a nation's economy is growing or shrinking.

D) Volunteer work and unpaid household work are considered in GDP and GNP. Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

14) Nations having the poorest infrastructures and lowest personal incomes are called ________.

A) developed countries B) newly industrialized countries C) emerging markets D) developing countries Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

15) A country that has recently increased the portion of its national production and exports derived from industrial operations is called a(n) ________.

A) newly industrialized country (NIC) B) developing country C) emerging market D) developed country Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

16) Both GDP and GNP measure a nation's income per person.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

5 .

17) Volunteer work and unpaid household work are not included in GNP. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

18) Barter is an alternative for buyers who lack money needed to pay for exports.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

19) The concept of purchasing power parity (PPP) must be applied to understand the true value of a currency in its home country.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

20) The human development index (HDI) demonstrates that high national income alone guarantees human progress.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

21) Nations with the poorest infrastructures and lowest personal incomes are called developing countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

22) One of the key obstacles faced by countries in economic transition is the lack of managerial expertise.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.1: Explain economic development and how it is measured.

6 .

23) How does economic development in countries affect international business?

Answer: Economic development is an increasingly important topic for international businesspeople as companies pursue business opportunities in emerging markets. Productivity is a key factor that drives economic growth and rising living standards. For a company to boost its productivity, it must increase the value of its outputs using the same amount of inputs, create the same value of outputs with fewer inputs, or do both at the same time.

Raising living standards in an economy depends in large part on unlocking the gains that productivity offers. Mixed economies in Western Europe continue to privatize state-owned companies to boost productivity and competitiveness. Former centrally planned economies in Eastern Europe implemented free market reforms to raise living standards. Even North Korea (with one of the lowest standards of living outside Africa) is being compelled to consider economic reform.

As the poorest nations invest in the fundamental drivers of productivity growth (such as basic infrastructure), the richest nations exploit the latest technological advancements.

Information technology is driving productivity gains in online customer service, online purchasing of materials and parts, outsourcing operations, and other areas of business.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

24) Differentiate between GDP and GNP. Briefly discuss the drawbacks of using GDP and GNP as indicators of economic development.

Answer: Gross national product (GNP) is the value of all goods and services produced by a country's domestic and international activities over a one-year period. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy over a one-year period. GDP is a narrower figure that excludes a nation's income generated from exports, imports, and the international operations of its companies.

Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks. First, for a variety of reasons, many of a nation's transactions do not get counted in either GDP or GNP. Second, gross product figures do not indicate whether a nation's economy is growing or shrinking—they are simply a snapshot of one year's economic output. Third, per capita numbers provide an average figure for an entire country, which does not give us a very detailed picture of development. Finally, country comparisons using gross product figures can be misleading.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

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25) How are countries classified? Explain with examples.

Answer: Nations are commonly classified as being developed, newly industrialized, or developing.

Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life are developed countries. People in developed countries usually receive the finest health care and benefit from the best educational systems in the world. Countries in this category include Australia, Canada, Japan, New Zealand, and the United States.

Countries that recently increased the portion of their national production and exports derived from industrial operations are newly industrialized countries (NICs). The NICs are located primarily in Asia and Latin America. Most listings of NICs include Asia's "four tigers" (Hong Kong, South Korea, Singapore, and Taiwan), Brazil, China, India, Malaysia, Mexico, South Africa, and Thailand.

Nations with the poorest infrastructures and lowest personal incomes are called developing countries (also called less-developed countries). These countries often rely heavily on one or a few sectors of production, such as agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but typically lack the necessary resources and skills to do so. Most lists of developing countries include many nations in Africa, the Middle East, and the poorest formerly communist nations in Eastern Europe and Asia.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.1: Explain economic development and how it is measured.

26) Does greater economic freedom guarantee a higher standard of living? Provide examples of two specific countries to support your answer.

Answer: Factors making up each country's economic freedom rating include trade policy, government intervention in the economy, property rights, black markets, and wage and price controls. Most developed economies are rated completely "free" or "mostly free."

It can only be said that countries with the greatest economic freedom tend to have the highest standards of living, whereas those with the lowest freedom tend to have the lowest standards of living. The United States and Zimbabwe are two examples: the U.S. has high economic freedom and a high GNI, while Zimbabwe has low economic freedom and a low GNI. Greater economic freedom does not guarantee a high per capita income, however. A country can rank very low on economic freedom yet have a higher per capita income than a country with far greater freedom. Saudi Arabia, for instance, has relatively low economic freedom with a relatively high GNI. AACSB: Application of knowledge; Reflective thinking Skill: Synthesis Difficulty: Hard LO: 4.1: Explain economic development and how it is measured.

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27) ________ is the process by which a nation changes its fundamental economic organization and creates new free-market institutions.

A) Central planning B) Economic transition C) Industrialization D) Economic liberalism Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.2: Describe economic transition and its main obstacles.

28) Which of the following is a major obstacle to economic transition?

A) lack of government support B) environmental degradation C) privatization D) black markets Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.2: Describe economic transition and its main obstacles.

29) Economic transition is the process of moving from ________.

A) developed to developing economies B) centrally planned to free-market economies C) developed to emerging economies D) free-market to centrally planned economies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.2: Describe economic transition and its main obstacles.

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30) What is economic transition? Describe the obstacles that countries face during economic transition.

Answer: Economic transition is the process through which countries move from centrally planned economies to stronger market economies. This process involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. It typically involves four reform measures: (1) stabilizing the economy; (2) allowing prices to reflect supply and demand; (3) legalizing private business; and (4) reducing barriers to trade.

Transition from central planning to free-market economics generates tremendous international business opportunities. Yet difficulties arising from years of socialist economic principles hampered progress from the start, and some countries still endure high unemployment rates.

Countries in transition face four key obstacles. These are: lack of managerial expertise, lack of capital, cultural differences, and environmental degradation.

Recent years are seeing higher quality management in transition countries. Reasons for this trend include improved education, opportunities to study and work abroad, and changes in work habits caused by companies investing locally. Economic transition is expensive. The governments of many countries in transition cannot afford all the investments required of them. Economic transition and reform make deep cultural impressions on a nation's people. It can, in many cases, lead to culture shock. The environment in these countries becomes highly polluted. Countries in transition often suffer periods during which the negative effects of a market economy seem to outweigh its benefits.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.2: Describe economic transition and its main obstacles.

31) What is privatization? What role does it play in economic transition?

Answer: The selling of government-owned economic resources to private operators is called privatization. Privatization helps eliminate subsidized materials, labor, and capital formerly provided to government-owned companies. It also curtails the practice of appointing managers for political reasons rather than for their professional expertise. To survive, newly privatized companies must produce competitive products at fair prices because they are subject to forces of the free market. The overall aim of privatization is to increase economic efficiency, boost productivity, and raise living standards.

Economic transition is the process through which countries move from centrally planned economies to stronger market economies. This process involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. It typically involves four reform measures: (1) stabilizing the economy; (2) allowing prices to reflect supply and demand; (3) legalizing private business; and (4) reducing barriers to trade.

During economic transition, privatization occurs as part of establishing a free market system. To solidify the new economy, governments must legalize private business, sell state-owned companies, and support property rights as this legalization helps in increasing economic efficiency, boosting productivity and raising the standard of living of a country.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 4.2: Describe economic transition and its main obstacles.

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32) Which results in a loss of assets, without compensation?

A) repatriation B) confiscation C) expropriation D) inflation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

33) ________ is the forced transfer of assets from a company to the government with compensation.

A) Expropriation B) Nationalization C) Confiscation D) Localization Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

34) Which of the following is a disadvantage of local requirement laws to foreign companies?

A) They do not foster local business activity and increase regional and national unemployment.

B) They make it necessary for the government to resort to expropriation and confiscation.

C) The companies are forced to bring in raw material and workers from their own countries.

D) Companies required to hire local personnel might be forced to take on inadequately trained workers.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

35) ________ refers to the transfer of ownership of resources from the private to the public sector.

A) Nationalization B) Expropriation C) Federalization D) Conversion Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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36) Had the government taken over (with compensation) the assets of Global Trading but not those of any other company, the government's actions would be an example of ________.

A) expropriation B) nationalization C) confiscation D) communism Answer: A AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Moderate LO: 4.3: Outline the various sources of political risk.

37) Had the government taken over the assets of Global Trading without compensation, and not taken over the assets of any other company, the government's actions would be an example of ________.

A) expropriation B) nationalization C) confiscation D) communism Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Moderate LO: 4.3: Outline the various sources of political risk.

38) ________ is the chance that political forces may change a country's business environment in ways that lead investors to lose some or all of the value of their investment or be forced to accept a lower-than-projected rate of return.

A) Governmental risk B) Operating risk C) Transaction risk D) Political risk Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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39) Expropriation is best defined as the ________.

A) transference of ownership of resources from private to public sector with no compensation B) transference of ownership from private to public sector with compensation to private owners for their losses C) conversion of state-owned property to privately owned property D) conversion of state-owned property to privately owned property with no compensation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

40) CADE International has foreign operations in Taiwan, India, and China. The firm pays an annual insurance premium to the Overseas Private Investment Corporation. The firm is most likely protecting itself from ________.

A) privatization B) natural disasters C) nationalization D) financial instability Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

41) Political risk that affects all firms in a country is referred to as ________.

A) micropolitical risk B) macropolitical risk C) inclusive political risk D) exclusive political risk Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

42) ________ is political risk that affects only a specific firm or firms within a specific industry.

A) Inclusive political risk B) Exclusive political risk C) Micropolitical risk D) Macropolitical risk Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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43) ________ has one of the highest levels of macropolitical risk.

A) Saudi Arabia B) Chile C) Brazil D) Afghanistan Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

44) Christopher Electronics plans to expand into foreign markets. Top executives want the firm to focus only on locations where the rule of law prevails. Which of the following should most likely be considered by Christopher?

A) wealthier, westernized countries B) developing, non-Western countries C) emerging economies experiencing rapid growth D) countries inclined toward totalitarian-style government Answer: A AACSB: Application of knowledge Skill: Application Difficulty: Moderate LO: 4.3: Outline the various sources of political risk.

45) Which of the following statements about approaches to political risk management is NOT true?

A) Passive political risk management discourages managers from fully or partially hedging their bets against exposure to political hazards.

B) Passive political risk management assumes that it is difficult, if not impossible, to systematically model political risk.

C) Active political risk management assumes that positive and negative political events in any country are neither independent nor random events.

D) Active political risk management assumes that political events unfold in observable patterns that statistical methods can detect.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.3: Outline the various sources of political risk.

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46) CADE Enterprises, a U.S. manufacturer, received assistance from the Overseas Private Investment Corporation when it expanded operations into Saudi Arabia. Which of the following types of support did CADE most likely receive from OPIC? A) financial capital B) cultural training C) legal guidance D) political risk insurance Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Moderate LO: 4.3: Outline the various sources of political risk.

47) A solid grasp of local values, customs, and traditions can help reduce a company's exposure to political risk.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

48) Expropriation involves the forced transfer of assets from a company to the government with compensation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

49) Among asset seizure approaches, expropriation is more common than confiscation and nationalization.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

50) Lobbying is the policy of hiring people to represent a company's views on political matters.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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51) Civil conflict, tax discrimination, weak legal systems, and terrorist actions are political risks faced by MNEs operating in foreign countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

52) Expropriation is said to have occurred when a foreign national company dispossesses a home-country company through uncompetitive practices.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

53) If a foreign company is taken over by the host-country government and some form of compensation is paid, confiscation is said to have occurred.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

54) A government can limit the economic activities of a foreign firm that resists its effort to introduce home-country nationals into the company.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

55) Foreign properties expropriated by a government cannot be reclaimed.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

56) The immediate cause of country risk is a legal or political factor.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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57) Nationalization describes government seizure of an entire industry, with or without compensation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.3: Outline the various sources of political risk.

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58) Explain the three types of property seizure. Why might property seizure be a risk for a business operating in a totalitarian nation?

Answer: Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization.

The forced transfer of assets from a company to the government without compensation is called confiscation. Usually the former owners have no legal basis for requesting compensation or the return of assets.

The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensation.

There is no framework for legal appeal, and compensation is typically far below market value.

Today, governments rarely resort to confiscation or expropriation because these acts can force companies to leave the nation and can jeopardize future investment in the country.

Whereas expropriation involves one or several companies in an industry, nationalization means government takeover of an entire industry. Nationalization is more common than confiscation and expropriation. Likely candidates for nationalization include industries important to a nation's security and those that generate large revenues. In recent years, Venezuela's President Hugo Chavez nationalized that country's telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela.

In general, a government may nationalize an industry to: 1. Use subsidies to protect an industry for ideological reasons.

2. Save local jobs in an ailing industry to gain political clout.

3. Control industry profits so they cannot be transferred to low-tax-rate countries.

4. Invest in sectors, such as public utilities, that private companies cannot afford.

The extent of nationalization varies widely from country to country. Whereas the governments of Cuba, North Korea, and Vietnam control practically every industry, those of the United States and Canada own very few. Many countries, including France, Mexico, Poland, and India, try to strike a balance between government and private ownership.

Property seizure is a risk in a totalitarian nation because totalitarianism is the belief that every aspect of people's lives must be controlled for a nation's political system to be effective.

Totalitarianism disregards individual liberties and treats people as slaves of the political system.

The state reigns supreme over institutions such as family, religion, business, and labor.

Totalitarian political systems include authoritarian regimes such as communism and fascism.

Totalitarian systems deny citizens the constitutional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject concepts such as freedom of expression, periodically held elections, guaranteed civil and property rights.

AACSB: Application of knowledge; Reflective thinking Skill: Synthesis Difficulty: Hard LO: 4.3: Outline the various sources of political risk.

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59) Local content regulations are primarily intended to ________.

A) address cultural differences between local employees and expatriates B) encourage MNEs to increase production activities in a country C) address contract negotiation difficulties D) assess local tax rates on MNEs Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.4: Explain how companies can manage political risk.

60) SJC Enterprises, a global firm, operates a facility in Angola. Managers want to reduce the firm's vulnerability to political risk in Angola. All of the following actions would most likely accomplish this task except ________.

A) reducing net investment in the subsidiary B) purchasing capital equipment outright C) buying inputs from local suppliers D) being a good corporate citizen Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

61) ________ refers to governmental action to dispossess a company or investor.

A) Equity dilution B) Deracination C) Expropriation D) Earnings stripping Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

62) ________ occurs if ownership of a property or assets of a company is transferred to the host government.

A) Internalization B) Nationalization C) Deportation D) Deracination Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

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63) Country risk is considered similar to ________.

A) political risk B) commercial risk C) currency risk D) cross-cultural risk Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

64) Rockwall Enterprises is planning to expand the firm by establishing operations outside of the U.S. In which of the following countries would Rockwall most likely be able to establish operations most quickly?

A) Bangladesh B) Zimbabwe C) Uganda D) Australia Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

65) Which of the following statements is true about the political risks in a global marketing environment?

A) The political risk of low-income countries is lesser than high-income countries.

B) The more a country is developed, the greater is the political risk.

C) Political risk is a major deterrent for companies that want to invest abroad.

D) A country with high political risks attracts more investors.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.4: Explain how companies can manage political risk.

66) An individual from a country with a high degree of political risk would most likely be from ________.

A) Canada B) Singapore C) Syria D) Japan Answer: C AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

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67) An individual from a country with a low degree of political risk would most likely be from ________.

A) Venezuela B) Switzerland C) Zimbabwe D) Iraq Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

68) Guanxi, in the Chinese business context, means ________.

A) bribing government officials B) manufacturing inexpensive products C) personal relationships D) preference for communism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

Scenario: Cleanshot USA in Russia When Cleanshot USA, a photography products company, decided to enter the international arena, it chose Russia as its main market. Although Russia has been in transition for years, Cleanshot managers believe their company has tremendous opportunities there.

69) Russia is in transition from ________.

A) a capitalist economy to a mixed economy B) a centrally planned economy to a free-market economy C) a market economy to a centrally planned economy D) a mixed economy to a centrally planned economy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

70) The Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

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71) Managers who take an active approach to political risk management are likely to rely on statistical modeling to quantify the precise degree of political risk.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

72) International companies often must customize products to comply with local standards if they are to do business in a particular country.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

73) Expropriation is the term used to describe a host-country government seizing the assets of a foreign corporation and providing no compensation in return.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

74) Political risk occurs when the property of an MNE is threatened through either confiscation or expropriation.

Answer: TRUE AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

75) Political risk insurance is more likely to be purchased by MNEs that apply an active approach to political risk management.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

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76) International companies never have to customize products to comply with local standards if they are to do business in a particular country.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

77) Political risk tends to be higher in developing countries compared to industrialized countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

78) U.S. individuals are exempt from being prosecuted for bribery under the Foreign Corrupt Practices Act. Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

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79) Briefly explain each of the three main methods companies use to manage political risk.

Answer: International companies benefit from monitoring and attempting to predict political changes that can negatively affect their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attractive, international companies find other ways to manage political risks, including: 1. ADAPTATION: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets.

Localization entails modifying operations, the product mix, or some other business element— even the company name—to suit local tastes and culture.

Development assistance lets an international business assist the host country or region in improving the quality of life for locals.

Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing.

2. INFORMATION GATHERING International firms attempt to gather information that will help them predict and manage political risk. Two sources that companies use to conduct accurate political risk forecasting are Current Employees with Relevant Information and Agencies Specializing in Political-Risk Services.

3. POLITICAL INFLUENCE Managers must work within the established rules and regulations of each national business environment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politicians directly or through lobbyists. Lobbying is the policy of hiring people to represent a company's views on political matters. Bribes often represent attempts to gain political influence.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.4: Explain how companies can manage political risk.

24 .

80) Explain each of the four means of incorporating risk into business strategies when companies employ an adaptation strategy.

Answer: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: 1. Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

2. Localization entails modifying operations, the product mix, or some other business element— even the company name—to suit local tastes and culture.

3. Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.

4. Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association also insures U.S. exporters against loss due to a variety of causes.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.4: Explain how companies can manage political risk.

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81) Explain the risk-management method of "adaptation." Why would it most likely be less costly and time-consuming to pursue this method in a nation that practices civil law rather than in a nation that practices common law?

Answer: Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies: 1. Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

2. Localization entails modifying operations, the product mix, or some other business element— even the company name— to suit local tastes and culture.

3. Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit.

4. Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association also insures U.S. exporters against loss due to a variety of causes.

Pursuing adaptation in a nation that practices civil law would most likely be less costly and timeconsuming because of the lack of room for arbitrary interpretation of the law. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters.

AACSB: Diverse and multicultural work environments; Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 4.4: Explain how companies can manage political risk.

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82) Describe the Foreign Corrupt Practices Act, and explain how it relates to corporate social responsibility.

Answer: The Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations (except when a person's life is in danger). A bribe constitutes "anything of value"—money, gifts, and so forth—and cannot be given to any "foreign government official" empowered to make a "discretionary decision" that may be to the payer's benefit. The law also requires firms to keep accounting records that reflect their international activities and assets.

Bribery and corruption are corporate social responsibility issues. In certain countries, bribes are routinely paid to distributors and retailers to push a firm's products through distribution channels.

Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity. The Foreign Corrupt Practices Act addresses this issue by making bribery illegal.

AACSB: Ethical understanding and reasoning; Reflective thinking; Application of knowledge Skill: Synthesis Difficulty: Hard LO: 4.4: Explain how companies can manage political risk.

Scenario: Cleanshot USA in Russia When Cleanshot USA, a photography products company, decided to enter the international arena, it chose Russia as its main market. Although Russia has been in transition for years, Cleanshot managers believe their company has tremendous opportunities there.

83) Which of the following challenges is Cleanshot most likely to face in Russia?

A) organized crime B) too many competitors C) low demand for the products of non-Russian companies D) fading underground economy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 4.5: Describe China's and Russia's experiences with economic transition.

84) Given the lack of available hard currency, Russian businesses often use goods and services as payment for other products they buy from abroad. This practice is referred to as ________.

A) letter of credit B) fiat money C) barter D) guanxi Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 4.5: Describe China's and Russia's experiences with economic transition.

27 .

85) Why are many mixed economies converting to market-based systems? How does the role of government change when a mixed economy transitions to a market economy?

Answer: Many mixed economies are remaking themselves to more closely resemble free markets. When assets are owned by the government there seems to be less incentive to eliminate waste or to practice innovation. Extensive government ownership on a national level tends to result in a lack of accountability, rising costs, defective products, and slow economic growth.

Many government-owned businesses in mixed economies need large infusions of taxpayer money to survive as world-class competitors, which raises taxes and prices for goods and services. Underpinning the move toward market-based systems is the sale of government-owned businesses.

In a market economy, the government has relatively little direct involvement in business activities. Even so, it usually plays four important roles: enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment, and preserving political stability.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 4.5: Describe China's and Russia's experiences with economic transition.

86) Compare and contrast the business environments in China and Russia.

Answer: Doing Business–China and Russia share certain similarities in terms of what it takes to do business in those countries. In both cultures, patience is required to develop business arrangements. The quality of personal interactions also appears to be very important. In Russia, individual personalities have a significant impact on business dealings. In China, personal relationships are highly valued and must be established first before business agreements.

Economic Obstacles–Similar obstacles that both countries face are political and social problems that can lead to social unrest, and a lack of managerial expertise stemming from the fact that such expertise was not required of managers in both countries' centrally planned economies. The countries differ with respect to certain other key obstacles, however. China's progress is hindered by issues concerning unification, which is not a challenge faced by Russia. In addition, Russia maintains an unstable investment climate, while China has attracted huge sums of investment due to its immense population, rising incomes, and expanding opportunities.

AACSB: Application of knowledge; Reflective thinking Skill: Synthesis Difficulty: Hard LO: 4.5: Describe China's and Russia's experiences with economic transition.

28 .

International Business: The Challenges of Globalization, 9e (Wild) Chapter 5 International Trade Theory 1) The term ________ refers to the voluntary exchange of goods, services, assets, or money between one person or organization and another across national borders.

A) sales B) transaction C) international trade D) strategic management Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

2) The importance of trade for a nation can be measured by ________.

A) examining the amount of wealth acquired by the national government through restrictive trade policies B) the living standards of people involved in only trade activities C) the number of acquired territories the nation has that serves as sources of inexpensive raw materials D) examining the volume of its trade relative to its total output Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

3) Most of the world merchandise trade is composed of trade in ________.

A) minerals B) services C) manufactured goods D) agricultural products Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

1 .

4) A majority of the total world merchandise trade occurs among ________.

A) middle-income and low-income economies B) high-income economies C) newly industrialized countries D) emerging markets Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

5) The smallest portion of the total world trade comprises trade between ________.

A) high-income and middle-income nations B) low-income and middle-income nations C) developed countries D) First World member countries Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

6) The danger of trade dependency is that ________.

A) it often leads to the exploitation of developed countries B) political turmoil in a country might affect all dependent countries C) the countries involved in trade often get into rivalry over trade tariff issues D) it is difficult to end trade activities with current trade partners and find new trade partners Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

7) The condition that results when a nation's exports are greater than its imports is called ________.

A) a trade deficit B) a trade surplus C) mercantilism D) dumping Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

2 .

8) The condition that results when the value of a country's imports is greater than the value of its exports is called ________.

A) a trade deficit B) economies of scale C) a trade surplus D) absolute advantage Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

Scenario: Better Mousetrap Inc. Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.

9) In reviewing his fulfillment process, Jack realizes that different customers opt for different types of shipping based on their preferences. Which of the following would most likely help Jack provide better shipping service to his customers?

A) introduce overnight delivery but at a very high cost B) reduce costs by implementing a cheaper but slower delivery method C) implement a universal delivery method to capitalize on efficiency gains D) offer customers a choice of delivery methods with different speeds and costs Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.1: Describe the benefits, volume, and patterns of international trade.

10) International trade is the purchase, sale, or exchange of goods and services across national borders.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

11) The value of trade passing through the borders of all countries always exceeds the amount of goods and services they produce.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

3 .

12) Most of the world's merchandise trade is composed of trade in manufactured products.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

13) Trade in services tends to be relatively more important for the world's richest countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

14) When a country's currency is stronger relative to other nations, domestic products are more expensive than imports.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

15) Trade deficit occurs when the value of a country's exports is greater than the value of its imports.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.1: Describe the benefits, volume, and patterns of international trade.

16) According to Adam Smith, international trade should not be restricted by tariffs and quotas in order to give a country an absolute advantage.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

4 .

17) Discuss the dangers of trade dependency.

Answer: The dangers of trade dependency become apparent when a nation experiences economic recession or political turmoil, which then also harms dependent nations. Trade dependency is a concern in Mexico, which for 30 years was a favorite destination for the investments of U.S. companies. Mexican factories assemble all sorts of products headed for the U.S. market, including refrigerators, mobile phones, and many types of garments. But a weak education system, corruption, an outdated infrastructure, and drug-related violence are forcing some companies to abandon Mexico for locations in Asia and Europe. This move has left many Mexicans unemployed. Although trade dependency was a blessing for Mexico for years, it is now feeling the pain as some companies shift jobs out of the country. The best way for Mexico to cope with its dependency on the United States is to improve its competitiveness and make it the preferred destination among all emerging markets.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.1: Describe the benefits, volume, and patterns of international trade.

5 .

18) Describe the potential benefits of international trade. Why would a nation trading with a neomercantilist country be at a disadvantage?

Answer: The purchase, sale, or exchange of goods and services across national borders is called international trade. This is in contrast to domestic trade, which occurs between different states, regions, or cities within a country. In recent years, nations that embrace globalization are seeing trade grow in importance for their economies. One way to measure the importance of trade to a nation is to examine the volume of an economy's trade relative to its total output.

International trade is opening doors to new entrepreneurial opportunity across the globe. It also provides a country's people with a greater choice of goods and services. International trade is an important engine for job creation in many countries. The U.S. Department of Commerce calculates that, for every $1 billion increase in exports, 22,800 jobs are created in the United States. It is also estimated that 12 million U.S. jobs depend on exports and that these jobs pay on average from 13 to 18 percent more than those not related to international trade. Expanded trade benefits other countries similarly.

Nations dealing with a neomercantilist trading partner will be at a disadvantage because neomercantilist countries limit their imports. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant. The practice of mercantilism rested upon three essential pillars: trade surpluses, government intervention, and colonialism.

The mercantilist and colonial policies greatly expanded the wealth of nations that implemented them. This wealth allowed nations to build armies and navies to control their far-flung colonial empires and to protect their shipping lanes from attack by other nations. It was a source of a nation's economic power that in turn increased its political power relative to other countries.

Today, countries seen by others as trying to maintain a trade surplus and expand their national treasuries at the expense of other nations are accused of practicing neomercantilism or economic nationalism.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5.1: Describe the benefits, volume, and patterns of international trade.

6 .

19) Discuss the volume of international trade, and explain the role government and chance play in the growth of international trade.

Answer: The value and volume of international trade continues to increase. Today world merchandise exports are valued at more than $14 trillion, and service exports are nearly $3 trillion. Perhaps not surprisingly, the United States ranks first in commercial services exports and ranks third in merchandise exports (behind Germany and China). Most of world merchandise trade is composed of trade in manufactured goods. The dominance of manufactured goods in the trade of merchandise has persisted over time and will likely continue to do so. The reason is its growth is much faster than trade in the two other classifications of merchandise-mining and agricultural products. Although the importance of trade in services is growing for many nations, it tends to be relatively more important for the world's richest countries. Trade in services accounts for around 20 percent of total world trade.

Government and chance play a role in fostering the national competitiveness of industries in international trade. First, governments, by their actions, can often increase the competitiveness of firms and perhaps even entire industries. Governments of emerging markets could increase economic growth by increasing the pace of privatization of state-owned companies, for example.

Privatization forces those companies to grow more competitive in world markets if they are to survive. Second, although chance events can help the competitiveness of a firm or an industry, it can also threaten it.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5.1: Describe the benefits, volume, and patterns of international trade.

20) ________ 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

21) The measures of a nation's well-being other than the financial wealth accumulated through exports are irrelevant according to ________.

A) mercantilism B) absolute advantage theory C) factor proportions theory D) new trade theory Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

7 .

22) According to mercantilism, what should a country's primary goal be?

A) protecting citizens from unfair labor practices B) encouraging imports to prevent resource depletion C) promoting exports to enlarge gold and silver holdings D) ensuring sufficient labor for low-wage jobs in the textile industry Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

23) One of the major pillars upon which the practice of mercantilism rested was ________.

A) economies of scale B) pricing mechanism C) excessive imports D) trade surpluses Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

24) According to mercantilism, the accumulation of national wealth depended on the ________.

A) increase in a nation's trade surplus B) increase in a nation's trade deficit C) expansion of a nation's total value of trade D) expansion of a nation's total volume of trade Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

25) Which of the following statements is incorrect with regard to the importance of colonies for mercantilist nations?

A) They served as sources of inexpensive raw materials.

B) They served as markets for higher-priced finished goods.

C) They served as a source of military protection.

D) They served as a source of profits for mercantilist powers.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

8 .

26) Nations following the theory of ________ believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors.

A) absolute advantage B) comparative advantage C) mercantilism D) factor proportions Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

27) Today, countries seen by others as trying to maintain a trade surplus and expand their national treasures at the expense of other nations are accused of practicing ________.

A) totalitarianism B) anti-mercantilism C) social stratification D) economic nationalism Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

28) Another term for neomercantilism is ________.

A) new trade B) free trade C) economic nationalism D) political nationalism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

29) Trade between most nations is presently characterized by a certain degree of isolationism.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

9 .

30) Mercantilism states that nations should only concern themselves with accumulating financial wealth.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

31) Mercantilist countries used to amass wealth by acquiring less-developed territories around the world.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

32) Mercantilism views competition for the world's wealth as a positive-sum game.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

10 .

33) Explain mercantilism. What were its major flaws?

Answer: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant.

Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s.

The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain.

How Mercantilism Worked-When navigation was a fairly new science, Europeans explored the world by sea and claimed the lands they encountered in the name of the European monarchy that financed their voyage. Early explorers landed in Africa, Asia, and the Americas, where they established colonies. Colonial trade was conducted for the benefit of mother countries, and colonies were generally treated as exploitable resources.

In recent times, former colonies have struggled to diminish their reliance on the former colonial powers. For example, in an effort to decrease their dependence on their former colonial powers, African nations are welcoming trade relationships with partners from Asia and North America.

But because of geographic proximity, the European Union is still often preferred as a trading partner.

Flaws of Mercantilism-Despite its seemingly positive benefits for any nation implementing it, mercantilism is inherently flawed. Mercantilist nations believed that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors— called a zero-sum game. The main problem with mercantilism is that, if all nations were to barricade their markets from imports and push their exports onto others, international trade would be severely restricted. In fact, trade in all nonessential goods would likely cease altogether. In addition, paying colonies little for their exports but charging them high prices for their imports impaired their economic development. Thus, their appeal as markets for goods was less than it would have been if they were allowed to accumulate greater wealth.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

11 .

34) Discuss the three essential pillars of the theory of mercantilism.

Answer: The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation's well-being, such as living standards or human development, are irrelevant.

Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s.

The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain. The practice of mercantilism rested upon three essential pillars: trade surpluses, government intervention, and colonialism.

Trade Surpluses-Nations believed they could increase their wealth by maintaining a trade surplus-the condition that results when the value of a nation's exports is greater than the value of its imports. In mercantilism, a trade surplus meant that a country was taking in more gold on the sale of its exports than it was paying out for its imports. A trade deficit is the opposite conditionone that results when the value of a country's imports is greater than the value of its exports. In mercantilism, trade deficits were to be avoided at all costs.

Government Intervention-Governments actively intervened in international trade to maintain a trade surplus. According to mercantilism, the accumulation of wealth depended on increasing a nation's trade surplus, not necessarily expanding its total value or volume of trade. The governments of mercantilist nations did this by either banning certain imports or imposing various restrictions on them, such as tariffs or quotas. At the same time, they subsidized industries based in the home country to expand exports. Governments also typically outlawed the removal of their gold and silver to other nations.

Colonialism-Mercantilist nations acquired territories (colonies) around the world to serve as sources of inexpensive raw materials and as markets for higher-priced finished goods. These colonies were the source of essential raw materials, including tea, sugar, tobacco, rubber, and cotton. These resources would be shipped to the mercantilist nation, where they were incorporated into finished goods such as clothing, cigars, and other products. These finished goods would then be sold to the colonies. Trade between mercantilist countries and their colonies were a huge source of profits for the mercantilist powers. The colonies received low prices for basic raw materials but paid high prices for finished goods.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.2: Explain how mercantilism worked and identify its inherent flaws.

35) 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: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

12 .

36) Who proposed the theory of absolute advantage?

A) David Ricardo B) Adam Smith C) Bertil Ohlin D) Raymond Vernon Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

37) Which theory suggests that a country should export those goods and services for which it is more productive than other countries and import those goods and services for which other countries are more productive?

A) mercantilism B) comparative advantage C) absolute advantage D) specialization of countries Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

38) The theory of absolute advantage measures a nation's wealth by determining the ________.

A) amount of gold it has on reserve B) quantity of minerals it has on reserve C) total trade volume in the country D) living standards of its people Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

39) The theory of absolute advantage destroys the mercantilist idea that international trade is a ________.

A) positive-sum game B) zero-sum game C) negative-sum game D) win-win game Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

13 .

40) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

41) When there are gains to be had by both countries that are party to an exchange, international trade is considered a(n) ________.

A) positive-sum game B) equal-sum game C) negative-sum game D) zero-sum game Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

42) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

43) The theory of comparative advantage was proposed by ________.

A) David Ricardo B) Adam Smith C) Bertil Ohlin D) Raymond Vernon Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

14 .

44) To complete his business bookkeeping work each month, a business owner spends about 20 hours and in the process, has to give up $900 in income. If he hired a bookkeeper to do the work, the job would be completed in 15 hours and would cost him $600. Should the owner hire the bookkeeper or continue to do the work himself?

A) He should hire the bookkeeper because the bookkeeper has an absolute advantage in completing the books.

B) He should do the bookkeeping himself because he has an absolute advantage in completing the books.

C) He should hire the bookkeeper only if the bookkeeper agrees to give him a discount on the service price.

D) He should hire the bookkeeper only if the bookkeeper is willing to complete the work in 12 hours.

Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

45) Country A produces a ton of coffee using one unit of resources. Country B produces two tons of coffee using one unit of resources. Which of the following is true regarding Country A and Country B? A) Country A has an absolute advantage in producing coffee.

B) Country B has an absolute advantage in producing coffee.

C) Neither Country A nor Country B has an absolute advantage in producing coffee.

D) Both Country A and Country B have an absolute advantage in producing coffee.

Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

46) According to the theory of ________, trade is beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

A) absolute advantage B) mercantilism C) comparative advantage D) factor proportions Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

15 .

47) Which theory suggests that a country should produce and export those goods and services for which it is relatively more productive than other countries and import those goods and services for which other countries are relatively more productive?

A) relative advantage B) comparative advantage C) absolute advantage D) specialization of countries Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

48) Which of the following is an assumption made by the comparative advantage theory?

A) maximization of production and consumption B) government interference and control in trade activities C) creation of trade deficits D) creation of trade surpluses Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

49) Both absolute and comparative advantage theories assume that ________ is the only resource used in the production process.

A) land B) labor C) capital D) equipment Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

16 .

50) A product's components are manufactured in a country that can produce them at a very low cost while maintaining its quality. These components are then assembled in another country where productivity in assembly is high. This process resembles the theory of ________.

A) comparative advantage B) mercantilism C) the international product life cycle D) factor proportions Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

51) Much production in the world today closely resembles what is predicted by the ________.

A) new trade theory B) international product life cycle C) theory of comparative advantage D) theory of factor proportions Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

Scenario: Foodland and Drinkland Two countries, Foodland and Drinkland, produce food and drinks. In Foodland, one resource unit produces 20 tons of food and one resource unit produces 10 tons of drinks. In Drinkland, one resource unit produces 12 tons of food and one resource unit produces 24 tons of drinks.

Foodland Drinkland

Food Drinks 20 10 12 24

52) Based on the above scenario, which of the following statements is true?

A) Foodland has an absolute advantage in producing food.

B) Foodland has an absolute advantage in producing drinks.

C) Drinkland has an absolute advantage in producing both food and drinks.

D) Drinkland has an absolute advantage in producing food.

Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

17 .

53) Which of the following statements is true of the above scenario?

A) Foodland has a comparative advantage in producing drinks.

B) Drinkland cannot trade with Foodland because trade is too expensive.

C) Drinkland has an absolute advantage in producing drinks.

D) Foodland should stop producing food and just produce drinks.

Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

54) If these two countries were to gain from trading with each other, this would support the notion that trade is a ________.

A) zero-sum game B) negative experience C) positive-sum game D) form of economic nationalism Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

55) Which theory suggests that a country should produce and export those goods and services for which it is relatively more productive than other countries and import those goods and services for which other countries are relatively more productive?

A) relative advantage B) comparative advantage C) absolute advantage D) specialization of countries Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

56) The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

18 .

57) The theory of absolute advantage measures a nation's wealth by the standard of living of its people.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

58) Economist David Ricardo developed the theory of comparative advantage.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

59) The ability of a nation to produce a good more efficiently than any other nation is called its absolute advantage.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

60) The theories of comparative advantage and absolute advantage assume that countries are driven only by the maximization of production and consumption.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

61) The theories of comparative and absolute advantage assume that specialization in the production of one particular good results in efficiency gains.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

19 .

62) Explain how the theory of absolute advantage conflicts with the theory of mercantilism.

Answer: The theory of mercantilism conflicts with another trade theory, the theory of absolute advantage. Scottish economist Adam Smith first put forth the trade theory of absolute advantage in 1776. The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. In other words, a nation with an absolute advantage can produce a greater output of a good or service than other nations using the same amount of, or fewer, resources.

The theory of absolute advantage destroys the mercantilist idea that international trade is a zerosum game. Instead, because there are gains to be had by both countries party to an exchange, international trade is a positive-sum game. The theory also calls into question the objective of national governments to acquire wealth through restrictive trade policies. It argues that nations should instead open their doors to trade so their people can obtain a greater quantity of goods more cheaply. The theory does not measure a nation's wealth by how much gold and silver it has on reserve but by the living standards of its people.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

20 .

63) Explain the theory of comparative advantage using an example, and describe its assumptions and limitations.

Answer: An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that, if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

For example, suppose that investor Warren Buffett has previously installed many hot tubs and can do the job in one week, twice as fast as the hot tub installer. Thus, Buffett now holds absolute advantages in both investing and hot tub installation. Although the professional installer is at an absolute disadvantage in both hot tub installation and investing, he is less inefficient in hot tub installation. Despite his absolute advantage in both areas, however, Buffett would still have to give up $200,000 (one week's pay) to take time off from investing to complete the work.

Is this a wise decision? No. Buffett should hire the professional installer to do the work for $10,000. The installer earns money he would not earn if Buffett did the job himself. And Warren Buffett earns more money by focusing on his investing than he would save by installing the hot tub himself.

The theory of comparative advantage makes several important assumptions that limit real-world application of the theories. First, it is assumed that countries are driven only by the maximization of production and consumption. This is often not the case. Governments often get involved in international trade out of a concern for workers or consumers.

Second, the theories assume that there are only two countries engaged in the production and consumption of just two goods. This is obviously not the situation that exists in the real world.

There currently are more than 180 countries and a countless number of products being produced, traded, and consumed worldwide.

Third, it is assumed that there are no costs for transporting traded goods from one country to another. In reality, transportation costs are a major expense of international trade for some products. If transportation costs for a good are higher than the savings generated through specialization, trade will not occur.

Fourth, the theories consider labor the only resource used in the production process because labor accounted for a large portion of the total production cost of goods at the time the theories were developed. Moreover, it is assumed that resources are mobile within each nation but cannot be transferred between nations. But labor, and especially natural resources, can be difficult and costly to transfer between nations.

Finally, it is assumed that specialization in the production of one particular good does not result in gains in efficiency. But we know that specialization results in increased knowledge of a task and perhaps even future improvements in how that task is performed. Thus, the amount of resources needed to produce a specific amount of a good should decrease over time.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.3: Detail the theories of absolute advantage and comparative advantage.

21 .

64) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.4: Summarize the factor proportions theory of trade.

65) The focus of factor proportions theory is on the ________.

A) productivity of the production process B) cost-effectiveness of the production process C) use of depleting production factors D) use of expensive production factors Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.4: Summarize the factor proportions theory of trade.

66) Which theory listed below is also called the Heckscher-Ohlin theory?

A) relative advantage B) comparative advantage C) factor proportions theory D) specialization of countries Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.4: Summarize the factor proportions theory of trade.

22 .

67) Factor proportions theory differs from the theory of comparative advantage in that the focus of factor proportions theory is on the ________.

A) usage of the most abundant factors of production, while the focus of the comparative advantage theory is on the productivity of the production process B) accumulation of financial wealth in the form of gold by encouraging imports and discouraging exports, while the comparative advantage theory focuses on usage of the most abundant factors of production C) productivity of the production process, while the comparative advantage theory focuses on maximization of production and consumption D) minimization of trade surpluses, whereas the comparative advantage theory focuses on the mercantilist idea that international trade is a zero-sum game Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.4: Summarize the factor proportions theory of trade.

68) Which factors of production did Leontief focus on?

A) land and labor B) land and technology C) capital and labor D) labor and technology Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.4: Summarize the factor proportions theory of trade.

69) Factor proportions theory states that factors in great supply relative to demand will be more costly than factors in short supply relative to demand.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.4: Summarize the factor proportions theory of trade.

70) Factor proportions theory states that a country will produce and export those goods that require resources abundantly available within the country.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.4: Summarize the factor proportions theory of trade.

23 .

71) The factor proportions theory of international trade was developed by Heckscher-Ohlin.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.4: Summarize the factor proportions theory of trade.

72) How does the theory of comparative advantage differ from the factor proportions theory?

Include a description of the factor proportions theory in your answer.

Answer: An English economist named David Ricardo developed the theory of comparative advantage in 1817. He proposed that, if one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.

In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. The theory resulted from the research of two economists, Eli Heckscher and Bertil Ohlin, and is therefore sometimes called the Heckscher–Ohlin theory.

Factor proportions theory differs considerably from the theory of comparative advantage. The theory of comparative advantage states that a country specializes in producing the good that it can produce more efficiently than any other good. Thus, the focus of the theory (and absolute advantage as well) is on the productivity of the production process for a particular good. By contrast, factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest-not the goods in which it is most productive.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5.4: Summarize the factor proportions theory of trade.

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73) Discuss the factor proportions theory and describe the evidence on this theory.

Answer: In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.

Factor proportions theory breaks a nation's resources into two categories: labor on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor.

Evidence on Factor Proportions Theory: The Leontief Paradox-Despite its conceptual appeal, factor proportions theory is not supported by studies that examine the trade flows of nations. The first large-scale study to document such evidence was performed by a researcher named Wassily Leontief in the early 1950s. Leontief tested whether the United States, which uses an abundance of capital equipment, exports goods requiring capital-intensive production and imports goods requiring labor-intensive production. Contrary to the predictions of the factor proportions theory, his research found that U.S. exports require more labor-intensive production than its imports.

This apparent paradox between the predictions using the theory and the actual trade flows is called the Leontief paradox. Leontief's findings are supported by more recent research on the trade data of a large number of countries.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 5.4: Summarize the factor proportions theory of trade.

74) Explain the factor proportions theory and discuss why it is at odds with the new trade theory.

Answer: In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. Factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest-not the goods in which it is most productive.

In contrast, the new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies. Because the theory emphasizes productivity rather than a nation's resources, it is in line with the theory of comparative advantage but at odds with factor proportions theory.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5.4: Summarize the factor proportions theory of trade.

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75) The international product life cycle theory was developed by ________.

A) Milton Friedman B) Karl Marx C) Michael Porter D) Raymond Vernon Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

76) The international product life cycle theory was put forth for ________.

A) service goods B) abundant resources C) manufactured goods D) natural resources Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

77) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

78) During which of the following stages of the international product life cycle theory does high purchasing power and buyer demand in an industrialized nation encourage a company to design and introduce a product concept?

A) product decline stage B) new product stage C) maturing product stage D) standardized product stage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

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79) During which stage of the international product life cycle theory does demand rise and remain sustained for a fairly lengthy period of time?

A) product decline stage B) new product stage C) maturing product stage D) standardized product stage Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

80) In which stage of the international product life cycle does the innovating firm's country become a net importer of the product?

A) new product stage B) maturing product stage C) standardized product stage D) never Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

81) In the ________ of the international product life cycle, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels.

A) product decline stage B) new product stage C) maturing product stage D) standardized product stage Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

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Scenario: Better Mousetrap Inc. Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.

82) Wallace's executive team reviews the stages of the international product life cycle to understand better what to expect when the product is sold overseas. Since there is virtually no export market for the product at present, the product is most likely in which of the following stages of the international product life cycle?

A) maturing product stage B) new product stage C) product decline stage D) standardized product stage Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

83) Wallace expects that markets abroad will soon become fully aware of the existence of the product and its benefits. Which of the following life cycle stages will the product be a part of during that period?

A) maturing product stage B) product decline stage C) standardized product stage D) new product stage Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 5.5: Explain the international product life cycle theory.

84) Eventually, Wallace expects that domestic production of the mousetrap will cease altogether.

This would happen in the ________ stage of the product life cycle.

A) new product B) maturing product C) adapted product D) standardized product Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.5: Explain the international product life cycle theory.

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85) According to the international product life cycle theory, the innovating firm's country is primarily an exporter of the product in all three stages.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.5: Explain the international product life cycle theory.

86) Discuss the limitations of the international product life cycle theory. How well does the theory explain current trade patterns?

Answer: Raymond Vernon developed the international product life cycle theory at a time when most new products were being developed and sold first in the United States. One reason U.S. companies were strong globally in the 1960s was that their domestic production bases were not destroyed during the Second World War, as was the case in Europe (and to some extent Japan).

In addition, during the war, the production of many durable goods in the United States, including automobiles, was shifted to the production of military transportation and weaponry. This laid the foundation for enormous postwar demand for new capital-intensive consumer goods, such as autos and home appliances. Furthermore, advances in technology that were originally developed with military purposes in mind were integrated into consumer goods. A wide range of new and innovative products like televisions, photocopiers, and computers met the seemingly insatiable appetite of consumers in the United States.

The theory seemed to explain world trade patterns quite well when the United States dominated world trade. But today the theory's ability to accurately depict the trade flows of nations is weak.

The United States is no longer the sole innovator of products in the world. New products spring up everywhere as companies continue to globalize their research and development activities.

Furthermore, companies today design new products and make product modifications at a very quick pace. The result is quicker product obsolescence and a situation in which companies replace their existing products with new product introductions. This is forcing companies to introduce products in many markets simultaneously to recoup a product's research and development costs before sales decline and the product is dropped. The theory has a difficult time explaining the resulting trade patterns.

In fact, older theories might better explain today's global trade patterns. Much production in the world today more closely resembles what is predicted by the theory of comparative advantage.

For example, Boeing's components are made in countries that can produce them at a high level of productivity. Components are later assembled in a chosen location. This pattern resembles the theory of comparative advantage. Finally, the theory is challenged by the fact that more companies are operating in international markets from their inception. Many small companies are teaming up with companies in other markets to develop new products or production technologies. This strategy is particularly effective for small companies that would otherwise be unable to participate in international production or sales.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.5: Explain the international product life cycle theory.

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87) Explain how both the international product life cycle theory and the new trade theory ultimately result in lower priced goods. Include a definition of "first mover advantage" in your answer.

Answer: The international product life cycle theory says that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle.

In stage 1, the new product stage, the high purchasing power and demand of buyers in an industrialized country drive a company to design and introduce a new product concept. In stage 2, the maturing product stage, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. As exports begin to account for an increasingly greater share of total product sales, the innovating company introduces production facilities in the countries with the highest demand. Near the end of the maturity stage, the product begins generating sales in developing nations, and perhaps some manufacturing presence is established there.

In stage 3, the standardized product stage, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. As the market becomes more price-sensitive, the company begins searching aggressively for low-cost production bases in developing nations to supply a growing worldwide market. Furthermore, as most production now takes place outside the innovating country, demand in the innovating country is supplied with imports from developing countries and other industrialized nations.

The pressure to lower prices also exists in the new trade theory. The new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies.

First-Mover Advantage-According to the new trade theory, as a company increases the extent to which it specializes in the production of a particular good, output rises because of gains in efficiency. Regardless of the amount of a company's output, it has fixed production costs such as the cost of research and development and the plant and equipment needed to produce the product. The theory states that, as specialization and output increase, companies can realize economies of scale, thereby pushing the unit costs of production lower. That is why as many companies expand, they lower prices to buyers and force potential new competitors to produce at a similar level of output if they want to be competitive in their pricing.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5.5: Explain the international product life cycle theory.

88) Which of the following is an argument offered by the new trade theory?

A) It is in line with the factor proportions theory.

B) There are gains to be made from specialization and increasing economies of scale.

C) The companies first to market forgo the opportunities to create barriers to entry.

D) Market forces alone play a role in assisting the home companies in a country.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5.6: Outline the new trade theory and the first-mover advantage.

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89) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5.6: Outline the new trade theory and the first-mover advantage.

Scenario: Chuck Praeger, Global Entrepreneur Chuck Praeger has made a name for himself by selling high-quality golf equipment to customers in Europe. He would like to expand his business into the Pacific Rim countries and has therefore, begun making inquiries into potential distributors.

90) Chuck is convinced that his golf equipment will sell itself. But he is preparing a special presentation for Asian customers because he wants to make a good first impression. As an expert in culture of the Pacific Rim countries, which of the following would be your most likely advice to Chuck?

A) Be sure to have a tight legal contract ready, to avoid product piracy problems.

B) Aggressive salesmanship is unlikely to work in Pacific Rim countries.

C) Have plenty of English-language business cards to pass around because most Asians know English and like the language.

D) Avoid the confusion introduced by third-party contacts.

Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.6: Outline the new trade theory and the first-mover advantage.

91) Chuck believes that his business has grown because of his personal involvement in every step of the way. What advice do you offer Chuck as he continues to expand his business in new Asian markets?

A) Contact distributors directly to avoid misunderstandings that can arise when using third-party contacts.

B) Always stick to corporate settings when doing business to avoid misunderstandings that can arise in less formal environments.

C) Protect your interests by insisting on detailed contracts from the start.

D) Use proper intermediaries as required in Pacific Rim nations.

Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.6: Outline the new trade theory and the first-mover advantage.

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Scenario: Better Mousetrap Inc. Better Mousetrap Inc. is a manufacturing company that sells pest control products. Recently the company launched an innovative mousetrap with a unique design that has been selling well in the U.S. market. Senior Vice President Marc Wallace, even recommended expanding sales overseas in order to increase company revenues.

92) Jack has always handled product returns on a case-by-case basis, but he is often unprepared to deal with too many cases of returns. Which of the following would most likely help Jack increase his repeat business?

A) continuing with the current system, since it is already well-established B) accepting returns but crediting customer accounts slowly to discourage future returns C) planning for returns and giving prompt credits to customers D) avoiding receiving returns when possible to discourage the loss of revenue Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 5.6: Outline the new trade theory and the first-mover advantage.

93) National competitive advantage theory states that a nation's competitiveness in an industry depends on ________.

A) the capacity of companies to create barriers to entry B) the capacity of the industry to innovate and upgrade C) the availability of government subsidies for industry development D) the availability of cheap factors of production in the nation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

94) According to the Porter diamond, which of the following is an example of an advanced factor?

A) labor forces in the nation B) technological infrastructure in the nation C) climate in the nation D) natural resources in the nation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

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95) Which element of national competitive advantage theory divides resources into two groups: basic and advanced?

A) demand conditions B) factor conditions C) related and supporting industries D) firm, strategy, structure, and rivalry Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

96) An absolute advantage is the economic and strategic advantage gained by being the first company to enter an industry.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

97) National competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

98) According to Michael Porter, advanced factors account for the sustained competitive advantage a country enjoys in a product.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

99) Companies that belong to a nation's internationally competitive industries exist in isolation from supporting industries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

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100) Explain how the national competitive advantage theory supports and builds upon the factor proportions theory.

Answer: The factor proportions theory is an international trade theory that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.

Factor proportions theory breaks a nation's resources into two categories: labor on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor.

The national competitive advantage theory supports and builds on the factor proportions theory, with "advanced factors." Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the production of certain products. The national competitive advantage theory states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. This theory identifies four elements present to varying degrees in every nation that form the basis of national competitiveness. The Porter diamond consists of (1) factor conditions; (2) demand conditions; (3) related and supporting industries; and (4) firm strategy, structure, and rivalry.

In terms of the first element, factor conditions, factor proportions theory considers a nation's resources, such as a large labor force, natural resources, climate, or surface features, as paramount factors in what products a country will produce and export. Porter acknowledges the value of such resources, which he terms basic factors, but he also discusses the significance of what he calls advanced factors.

Advanced factors include the skill levels of different segments of the workforce and the quality of the technological infrastructure in a nation. Advanced factors are the result of investments in education and innovation, including worker training and technological research and development. Whereas basic factors can be the initial spark for why an economy begins producing a certain product, advanced factors account for the sustained competitive advantage a country enjoys in that product.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 5:7: Describe the national competitive advantage theory and the Porter diamond.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 6 Political Economy of Trade 1) Free trade ________.

A) is another term for managed trade B) implies that the national government exerts minimal influence on the exporting and importing decisions of private firms C) proposes that national governments should directly help domestic firms by providing export subsidies and tax breaks D) suggests that the national government should actively intervene to ensure that domestic firms' exports receive an equitable share of foreign markets and that imports are controlled to minimize losses of domestic jobs and market share in specific industries Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

2) Which of the following is true of government interventions in a country's trade practices?

A) Lower restrictions should be placed on products coming from countries where a government has a large sphere of political influence.

B) A major political motive behind government intervention in trade is the protection of infant industries.

C) Government interventions help companies take advantage of economies of scale and be the first movers in their industries.

D) Governments intervene to protect only imports, as the protection of exports is handled by private agencies.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

3) Managers should understand the effect of trade protectionism because ________.

A) trade protectionism may limit the number of people permitted to practice a specific profession B) trade protectionism requires the payment of high insurance rates to transport goods internationally C) trade protectionism may prevent companies' enactment of merger and acquisition agreements D) trade protectionism may make it difficult for a company to buy what it needs from foreign suppliers Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

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4) Which of the following do products designated as dual use require before exports can take place?

A) currency controls B) countervailing duties C) special government approval D) local content requirements Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

5) Which of the following is an example of a dual use product?

A) a blowdryer B) a GPS navigation device C) a food processor D) a vacuum cleaner Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

6) ________ refers to the unwanted cultural influence in a nation that can cause great distress and lead governments to block imports it believes to be harmful.

A) Cultural imperialism B) Cultural protectionism C) Dumping D) Capitalism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

7) Which of the following is the main cultural motive behind government intervention in trade?

A) promotion of strategic trade policies B) protection of jobs C) protection of national identity D) protection of young industries from competition Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

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8) Which of the following statements is true about cultural influences?

A) Culture and trade are independent of each other.

B) Unwanted cultural influence in a nation can cause governments to block imports that it believes are harmful.

C) The cultures of countries are independent of the effects of exposure to the people and products of other cultures.

D) The culture of the United States is readily adapted into the local culture of countries all over the world.

Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

9) Which of the following countries is seen as a threat to national cultures around the world?

A) United States B) India C) Russia D) France Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

10) The purpose of ________ is to force companies from other nations to use local resources in their production processes, particularly labor.

A) administrative delays B) currency controls C) local content requirements D) voluntary export restraints Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

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11) Which of the following statements is true of local content requirements?

A) It is a strategy mainly used by developed nations.

B) This strategy enforces companies to locate their manufacturing facilities in their home countries.

C) Local content requirements hurt domestic producers through their effect on prices.

D) It forces companies from other countries to employ local resources in their production processes.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

12) ________ can occur when a firm sells its goods in a foreign market at a price below what it charges in its home market.

A) Predatory pricing B) Dumping C) Foreign trade duties D) Subsidies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

13) A(n) ________ is calculated to offset the advantage an exporter receives from a subsidy.

A) compound tariff B) export promotion C) countervailing duty D) substitution tariff Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

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Scenario: Not-So-Free Freeland Freeland is a semi-closed economy whose government believes in protecting national identity and building a self-sustained economy. The government's priority is to protect local jobs and provide opportunities to Freeland's emerging industries to flourish without the threat of external competition.

14) Which of the following motives is least likely attributed to Freeland's restriction on free trade?

A) political motives B) economic motives C) social motives D) cultural motives Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

15) Freeland's protection of its national identity is an example of a(n) ________.

A) political motive B) economic motive C) cultural motive D) social motive Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

16) Which of the following motives illustrates Freeland's efforts to protect local jobs?

A) political motive B) economic motive C) cultural motive D) social motive Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

5 .

17) Freeland's efforts to provide opportunities to its emerging industries is an example of its ________.

A) political motive B) economic motive C) cultural motive D) social motive Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

18) Industries considered essential to national security often receive government-sponsored protection.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

19) The most common economic reasons for nations' attempts to influence international trade are the protection of young industries from competition and the promotion of a strategic trade policy.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

20) The protection of infant industries by a nation's government can cause domestic companies to become complacent toward innovation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

21) The protection of infant industries by a nation's government can cause more economic harm than good.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

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22) Nations often restrict trade in goods and services to achieve cultural objectives, the most common being protection of national identity.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

23) Unwanted cultural influence in a nation can cause governments to block imports that it believes are harmful.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

24) Tariffs are taxes placed on goods being imported into a country. A tariff can act as a barrier to trade by increasing the cost of the imported goods to the consumers.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.1: Explain why governments sometimes intervene in trade.

7 .

25) Describe the main political motives behind government intervention in trade.

Answer: Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. Yet a trade policy based purely on political motives is seldom wise in the long run. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.

Protect Jobs- Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade creates job losses at home.

Preserve National Security-Industries considered essential to national security often receive government-sponsored protection. This is true for both imports and exports.

Respond to "Unfair" Trade- Many observers argue that it makes no sense for one nation to allow free trade if other nations actively protect their own industries. Governments often threaten to close their ports to another nation's ships or to impose extremely high tariffs on its goods if the other nation does not concede on some trade issue that is seen as being unfair. In other words, if one government thinks another nation is not "playing fair," it will often threaten to retaliate unless certain concessions are made.

Gain Influence- Governments of the world's largest nations may become involved in trade to gain influence over smaller nations. The United States goes to great lengths to gain and maintain control over events in all of Central, North, and South America, and the Caribbean basin.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

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26) Explain why job protection is a political motive for governments to restrict free trade. Why might a government interested in job protection insist on local content requirements for international firms doing business in that country?

Answer: Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.

Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade creates job losses at home. Ohio lost around 215,000 manufacturing jobs over a recent 14 year period. Most of those jobs went to China and the nations of Central and Eastern Europe. The despair of unemployed workers and the pivotal role of Ohio in presidential elections lured politicians to the state who promised Ohio lower income taxes, expanded worker retraining, and greater investment in the state's infrastructures.

A government interested in preserving jobs might consider local content requirements because often those requirements include local labor. Local content requirements are laws stipulating that producers in the domestic market must supply a specified amount of a good or service. These requirements can state that a certain portion of the end product consists of domestically produced goods or that a certain portion of the final cost of a product has domestic sources. The purpose of local content requirements is to force companies from other nations to use local resources in their production processes-particularly labor. Similar to other restraints on imports, such requirements help protect domestic producers from the price advantage of companies based in other, low-wage countries. Today, many developing countries use local content requirements as a strategy to boost industrialization. Companies often respond to local content requirements by locating production facilities inside the nation that stipulates such restrictions.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 6.1: Explain why governments sometimes intervene in trade.

9 .

27) What is meant by dumping? Describe the various roles of the World Trade Organization, including when a country is accused of dumping.

Answer: When a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production, it is said to be dumping. Charges of dumping are made (fairly or otherwise) against companies from almost every nation at one time or another and can occur in any type of industry. For example, Western European plastic producers considered retaliating against Asian competitors whose prices were substantially lower in European markets than at home. More recently, U.S. steel producers and their powerful union charged that steelmakers in Brazil, Japan, and Russia were dumping steel on the U.S. market at low prices. The problem arose as those nations tried to improve their economies through increased exporting of all products, including steel.

The three main goals of the WTO are to help the free flow of trade, to help negotiate further opening of markets, and to settle trade disputes among its members. One key component of the WTO that was carried over from GATT is the principle of nondiscrimination called normal trade relations (formerly called "most favored nation status")-a requirement that WTO members extend the same favorable terms of trade to all members that they extend to any single member.

The WTO cannot punish the country in which the company accused of dumping is based because dumping is an act by a company, not a country. The WTO can respond only to the actions of a country that retaliates against a company that is dumping. The WTO allows a nation to retaliate against dumping if it can show that dumping is actually occurring, can calculate the damage to its own companies, and can show that the damage is significant. The normal way a country retaliates is to charge an antidumping duty-an additional tariff placed on an imported product that a nation believes is being dumped on its market. But such measures must expire within five years of the time they are initiated unless a country can show that circumstances warrant their continuation.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.1: Explain why governments sometimes intervene in trade.

28) Which of the following is an instrument that governments use to promote trade?

A) embargoes B) tariffs C) export financing D) administrative delays Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

10 .

29) Which of the following would most likely be used as a subsidy to entice firms to locate or expand facilities in a particular community?

A) quotas B) an embargo C) a granting of corporate citizenship status D) reduced utility rates Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

30) A(n) ________ is a geographic area where imported or exported goods receive preferential tariff treatment.

A) free trade zone B) foreign trade zone C) fair trade zone D) economic incentive zone Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

31) Which of the following statements is true of export financing?

A) Small businesses that have just started to export are financially stable and seldom require financing from government agencies.

B) The Ex-Im Bank finances the export activities of companies all over the world.

C) Governments usually offer loans to exporters with above-market interest rates.

D) Governments may promote exports by offering loan guarantees.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.2: Outline the instruments that governments use to promote trade.

32) Which of the following financial companies in the United States is involved in activities of selling of goods abroad, and offers insurance on foreign accounts receivable?

A) National Cooperative Bank B) Overseas Private Investment Corporation C) Export-Import Bank D) Inter-American Development Bank Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

11 .

33) Country X protects its domestic manufacturers from foreign competition by using a variety of nontariff barriers. Which of the following is not one of those nontariff barriers?

A) foreign trade zones B) product standards C) regulatory controls D) local purchase requirements Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.2: Outline the instruments that governments use to promote trade.

34) A foreign trade zone is primarily used by governments to ________.

A) protect currency rates B) enforce tariffs and duties C) monitor foreign investments D) spur economic development Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

35) Government trade promotion agencies ________.

A) enable imports at discounts B) set up foreign trade zones across the country C) advertise in other countries to promote the nation's exports D) place voluntary export restraints on companies that fail to export adequately Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.2: Outline the instruments that governments use to promote trade.

36) The Export-Import Bank of the United States provides financing for U.S. exports through direct loans and loan guarantees.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

12 .

37) The major purpose of foreign trade zones is to implement barriers to trade and commerce.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.2: Outline the instruments that governments use to promote trade.

38) Describe each instrument that governments use to promote trade.

Answer: 1. Subsidies-Financial assistance to domestic producers in the form of cash payments, lowinterest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports.

2. Export Financing-Governments often promote exports by helping companies finance their export activities. They can offer loans that a company could otherwise not obtain or charge them an interest rate that is lower than the market rate. Another option is for a government to guarantee that it will repay the loan of a company if the company should default on repayment; this is called a loan guarantee.

3. Foreign Trade Zones-Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

4. Special Government Agencies-The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries. These offices are designed to promote the home country's exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation's exports.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.2: Outline the instruments that governments use to promote trade.

13 .

39) Describe the role of special government agencies in promoting exports and imports.

Answer: The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries.

These offices are designed to promote the home country's exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation's exports. For example, Chile's Trade Commission, ProChile, has commercial offices in 40 countries and a Web site.

Governments not only promote trade by encouraging exports but also can encourage imports that the nation does not or cannot produce. For example, the Japan External Trade Organization (JETRO) is a trade promotion agency of the Japanese government. The agency coaches small and medium-sized overseas businesses on the protocols of Japanese deal making, arranges meetings with suitable Japanese distributors and partners, and even assists in finding temporary office spaces.

For all companies, and particularly small ones with fewer resources, learning the government regulations in other countries is a daunting task. A company must know whether its product is subject to a tariff or quota, for instance. Fortunately, it is now possible to get answers to many such questions through the Internet.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.2: Outline the instruments that governments use to promote trade.

40) Which of the following is a method of restricting trade?

A) export financing B) local content requirements C) subsidy D) foreign trade zones Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

41) Which of the following will add to the cost of an imported product by levying an additional tax upon it?

A) tariffs B) quotas C) local content requirements D) embargoes Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

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42) Which of the following is an import tariff?

A) transit tariff B) ad valorem tariff C) sua sponte tariff D) complex tariff Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

43) Which of the following statements is true of tariffs?

A) Tariffs increase an imported product's appeal to buyers.

B) Transit tariffs are the most widely-levied tariffs.

C) Ad valorem tariffs are levied as a specific fee for each unit of an imported product.

D) Export tariffs are used by countries when they believe an export's price is lower than it should be.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

44) Products manufactured in Brazil are transported through Mexico on their way to England.

Mexico applies a tariff on the goods. What type of tariff is implemented by Mexico?

A) transit tariff B) ad valorem tariff C) export tariff D) compound tariff Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

45) The most common tariffs used today are the ________ tariffs.

A) import B) transit C) inverted D) export Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

15 .

46) A(n) ________ tariff is levied as a percentage of the value of an imported product.

A) specific B) compound C) ad valorem D) transit Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

47) A(n) ________ tariff (or duty) is levied as a particular fee for each unit of an imported product.

A) specific B) compound C) ad valorem D) transit Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

48) A(n) ________ tariff (or duty) is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.

A) specific B) compound C) ad valorem D) transit Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

49) Which of the following statements is true of tariffs?

A) They are the major source of government revenue in developed nations.

B) They increase products' appeal to buyers.

C) They lower the effective prices of imports.

D) They protect domestic producers.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

16 .

50) Using tariffs to generate government revenue is most common among ________.

A) developed countries B) developing countries C) western nations D) First World nations Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

51) A ________ is a numerical limit on the quantity of a good that may be imported into a country during some time period.

A) quota B) numerical export control C) voluntary export restraint D) regulatory control Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

52) Which of the following is true of quotas?

A) They are the most common type of trade barrier.

B) They help domestic producers maintain their market shares and prices.

C) Their licenses are granted by governments to other nation companies on a five-year basis.

D) They lead to a decrease in the prices of intermediate goods.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

53) A country imposes a tariff on goods that it sells abroad at the request of another nation. This is an example of a(n) ________.

A) embargo B) ad valorem tariff C) compound tariff D) voluntary export restraint Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

17 .

54) Countries might impose a(n) ________ in response to the threat of an import quota or total ban on a product by an importing nation.

A) embargo B) ad valorem tariff C) compound tariff D) voluntary export restraint Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

55) A(n) ________ imposes a low tariff rate on a limited amount of imports of a specified good, but imposes a prohibitively high tariff on the good above that limited amount.

A) tariff rate quota B) numerical export control C) voluntary export restraint D) ad valorem tariff Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

56) The U.S. government has decided to impose a tariff rate quota on sugar imports into the United States. Which of the following would benefit from this decision?

A) soft drink producers B) domestic sugar producers C) steel producers D) consumers of sugar products Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

57) A(n) ________ is an absolute ban on the exporting and importing of goods to a particular destination.

A) voluntary export restraint B) embargo C) ad valorem tariff D) tariff rate quota Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

18 .

58) Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a country are called ________.

A) local content requirements B) administrative delays C) voluntary export restraints D) import quotas Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

59) Purposely understaffing customs offices to cause time delays, requiring special licenses that take a long time to obtain, and requiring air carriers to land at inconvenient airports are all examples of ________.

A) local content requirements B) import quotas C) administrative delays D) voluntary export restraints Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

60) ________ make it more difficult for importers of nonessential goods to acquire foreign exchange.

A) Currency controls B) Restricted access to distribution networks C) Numerical export controls D) Public-sector procurement policies Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

19 .

61) ________ can occur when a firm sells its goods in a foreign market at a price below what it charges in its home market.

A) Predatory pricing B) Dumping C) Foreign trade duties D) Subsidies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

Scenario: Konesia Joins the World Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market economy. The government wants to encourage trade but also wants to find a balance so that local businesses and industries are not harmed.

62) Which of the following would be Konesia's least appropriate method to restrict unwanted trade?

A) introduce an administrative delay B) impose a quota C) reduce tariffs D) impose a currency control Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

63) If Konesia chooses to levy tariffs as a percentage of the stated price of an imported product, this would be an example of a(n) ________.

A) compound tariff B) specific tariff C) ad valorem tariff D) tariff-quota Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

20 .

64) Which of the following is the most likely reason for Konesia's government to impose an import quota?

A) to maintain adequate supplies of a product in the home market B) to maintain market shares and prices of domestic producers C) to restrict the supply of a product to world markets D) to maintain the exports of a product at target levels Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

Scenario: Excelsior's Limited Excelsior's Limited, a manufacturer of health and beauty aids, is expanding its presence in several countries around the world. Excelsior's president is surprised at some of the responses the company is receiving from other countries.

65) Excelsior's Limited tried to sell its product in Canada, but was told that at least forty percent of the product must be manufactured in Canada. This is an example of a(n) ________.

A) administrative delay B) local content requirement C) tariff D) embargo Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

66) When Excelsior's Limited tried to convert its earnings from one country, the government stipulated that the company had to exchange its currency at a very unfavorable rate. This is an example of a(n) ________.

A) administrative delay B) currency control C) subsidy D) tariff Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

21 .

67) France gave Excelsior's Limited permission to export its product as long as the company obtained a special license first. Excelsior has been waiting six months for the license and is wondering if it will ever arrive. Excelsior's Limited is experiencing a(n) ________.

A) administrative delay B) local content requirement C) embargo D) currency control Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

68) A disadvantage of protection from import competition is the added cost of continuing to produce a good domestically that could be supplied more efficiently by an international supplier.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

69) The automobile industry is typically protected for national security reasons.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

70) Products that are of use in both industrial and military applications are designated as dual-use products.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

71) Customs duties decrease the total amount of a good's production cost.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

22 .

72) An import tariff is levied by the government of a country that a product is passing through on its way to its final destination.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

73) A compound tariff on an imported product is calculated partly as a percentage of its stated price and partly as a specific fee for each unit.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

74) Tariffs are a source of government revenue mostly among developing nations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

75) Tariffs tend to exact a cost on countries as a whole because they reduce consumer choices.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

76) Consumers are benefitted when a government imposes import quotas on products.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

77) A voluntary export restraint refers to a quota that a nation imposes on its exports, usually at the request of another nation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

23 .

78) An embargo is the most restrictive nontariff trade barrier available.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

79) Restrictions on the convertibility of one currency into others is called currency controls.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

80) When a company exports a product at a price lower than the price normally charged in its domestic market, it is said to be dumping.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.3: Describe the instruments that governments use to restrict trade.

81) Explain why governments impose restrictions on free trade.

Answer: Governments impose restrictions on free trade for reasons that are political, economic, or cultural-or some combination of the three. Countries often intervene in trade by strongly supporting their domestic companies' exporting activities. But the more emotionally charged intervention occurs when a nation's economy is underperforming. In tough economic times, businesses and workers often lobby their governments for protection from imports that are eliminating jobs in the domestic market.

Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.

Although governments intervene in trade for highly charged cultural and political reasons, they also have economic motives for their intervention. The most common economic reasons for nations' attempts to influence international trade are the protection of young industries from competition and the promotion of a strategic trade policy.

Nations often restrict trade in goods and services to achieve cultural objectives, the most common being protection of national identity. Culture and trade are intertwined and greatly affect one another. The cultures of countries are slowly altered by exposure to the people and products of other cultures. Unwanted cultural influence in a nation can cause great distress and cause governments to block imports that it believes are harmful.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

24 .

82) Describe the different types of tariffs and provide an example of each.

Answer: We can classify a tariff into one of three categories. An export tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export's price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination.

Transit tariffs have been almost entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product.

The import tariff is by far the most common tariff used by governments today.

We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

83) Explain how tariffs protect domestic producers, and describe how a foreign trade zone might offset the effects of tariffs.

Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers.

Nations can use tariffs to protect domestic producers. For example, an import tariff raises the cost of an imported good and increases the appeal of domestically produced goods. In this way, domestic producers gain a protective barrier against imports.

While tariffs are designed to restrict trade, most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The U.S. Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the U.S. market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 6.3: Describe the instruments that governments use to restrict trade.

25 .

84) What are voluntary export restraints and how are they used?

Answer: A unique version of the export quota is called a voluntary export restraint (VER)—a quota that a nation imposes on its own exports, usually at the request of another nation. Countries normally self-impose a voluntary export restraint in response to the threat of an import quota or total ban on the product by an importing nation. The classic example of the use of a voluntary export restraint is from the 1980s when Japanese carmakers were making significant market share gains in the United States. The closing of U.S. carmakers' production facilities in the United States was creating a volatile anti-Japan sentiment among the population and the U.S. Congress. Fearing punitive legislation if Japan did not limit its automobile exports to the United States, the Japanese government and its carmakers self-imposed a voluntary export restraint on cars headed for the United States.

Consumers in the country that imposes an export quota benefit from lower-priced products (due to their greater supply) as long as domestic producers do not curtail production. Producers in an importing country benefit because the goods of producers from the exporting country are restrained, which may allow them to increase prices. Export quotas hurt consumers in the importing nation because of reduced selection and perhaps higher prices. Yet export quotas might allow these same consumers to retain their jobs if imports were threatening to put domestic producers out of business. Again, detailed economic studies are needed to determine the winners and losers in any particular export quota case.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.3: Describe the instruments that governments use to restrict trade.

85) The term protectionism, when applied to international trade, refers to ________.

A) governmental restrictions and competitive support actions to affect trade flows B) payments to dock workers to prevent pilferage of imported shipments C) border checks to prevent entry of illegal aliens D) methods used to prevent intellectual property theft Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

86) Which of the following is prompting farmers in many developed nations to discover new ways to manage risk and increase agricultural efficiency?

A) enforcement of trade embargoes and tariffs B) exposure of agribusiness to market forces C) provision of extensive government subsidies D) designation of agricultural products as dual use products Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

26 .

87) The ________ proposes that tariffs be imposed on imported manufactured goods to give U.S. firms temporary protection from foreign competition until they can fully establish themselves.

A) national defense argument B) infant industry argument C) industrial policy D) strategic trade theory Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

88) According to the ________ argument, as an industry grows and matures, it gains the knowledge it needs to become more innovative, efficient, and competitive.

A) maturing industry B) infant industry C) standardized product D) developing economy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

89) Which of the following is true regarding the protection of infant industries from international competition?

A) It is difficult for governments to identify the industries worth protecting.

B) Protection of infant industries helps domestic companies become innovative.

C) Protection from competition leads to improved quality and lower prices.

D) Protection leads to more economic good than harm.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

27 .

90) Which of the following is a result of the protection of domestic companies from international competition?

A) Consumers need to pay less for products.

B) There are increased incentives to cut production costs and improve quality.

C) Companies become more reliant on protection.

D) Protection increases a company's incentives to obtain the knowledge it needs to become more competitive.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

91) Rice imports to a nation under a quota limit of 8,500 tons are charged a tariff of 15 percent.

Imports of rice above the quota limit are charged a tariff of 60 percent. This is an example of a(n) ________.

A) export quota B) voluntary export restraint C) ad valorem tariff D) tariff-quota Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 6.4: Summarize the main features of the global trading system.

92) A(n) ________ is an absolute ban on the exporting and importing of goods to a particular destination.

A) voluntary export restraint B) embargo C) ad valorem tariff D) tariff rate quota Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

28 .

93) Which of the following statements is true of embargoes?

A) An embargo may be placed on one or a few goods or may completely ban trade in all goods.

B) An embargo is the least restrictive nontariff barrier available.

C) An embargo is usually employed for economic reasons.

D) Embargoes are used frequently today because they are easy to implement.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

94) The ________ altered the U.S. trade policy from a stance of free trade to one of protectionism in the 1930s.

A) Norris-LaGuardia Act B) Smoot-Hawley Act C) Wheeler-Lea Act D) Taft-Hartley Act Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

95) In which of the following ways did the Uruguay Round of Negotiations modify the original General Agreement on Tariffs and Trade (GATT) treaty?

A) It helped standardize intellectual property rules around the world.

B) It called on developing and least-developed economies to cut agricultural tariffs significantly.

C) It relaxed the additional tariffs imposed on companies charged with dumping.

D) It increased barriers to trade in all developed, developing and least-developed nations.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

96) The Uruguay Round of Negotiations created the TRIPS Agreement to ________.

A) help standardize the intellectual property rules around the world B) increase the exposure of national agricultural sectors to market forces C) drastically reduce tariffs and nontariff barriers in agricultural trade D) include international trade in services for the first time Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

29 .

97) One of the main goals of the World Trade Organization is to ________.

A) encourage dumping among trading nations B) restrict the free flow of trade C) provide favorable terms of trade to a few selected countries D) settle trade disputes among its members Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

98) A requirement that all WTO members extend the same favorable terms of trade to all members that they extend to any single member is called ________.

A) normal trade relations B) antidumping duties C) local content requirements D) countervailing duties Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

Scenario: Not-So-Free Freeland Freeland is a semi-closed economy whose government believes in protecting national identity and building a self-sustained economy. The government's priority is to protect local jobs and provide opportunities to Freeland's emerging industries to flourish without the threat of external competition.

99) The belief that Freeland's emerging industries need protection from international competition during their development phase is an example of ________.

A) a local content requirement B) a normal trade relation C) the infant industry argument D) the political motive of Freeland Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

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Scenario: Konesia Joins the World Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market economy. The government wants to encourage trade but also wants to find a balance so that local businesses and industries are not harmed.

100) Konesia has created a hybrid form of trade restriction-a lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota. This is an example of a(n) ________.

A) compound tariff B) export quota C) ad valorem tariff D) tariff-quota Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

101) The pattern of imports and exports that occurs in the absence of trade barriers is called free trade.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 6.4: Summarize the main features of the global trading system.

102) When one World Trade Organization member files a complaint against another, decisions are to be rendered in less than one year.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

103) The World Trade Organization can punish a company that exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

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104) Define subsidies. What are their disadvantages? In what ways do the protection of infant industries produce similar drawbacks?

Answer: Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports. It is nearly impossible to calculate the amount of subsidies a country offers its producers because of their many forms. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.

In a similar way, the protection of infant industries can produce complacency and prevent an industry from being fully competitive. According to the infant industry argument, a country's emerging industries need protection from international competition during their development phase until they become sufficiently competitive internationally. This argument is based on the idea that infant industries need protection because of a steep learning curve. In other words, only as an industry grows and matures does it gain the knowledge it needs to become more innovative, efficient, and competitive.

Protection from international competition can cause domestic companies to become complacent toward innovation. This can limit a company's incentives to obtain the knowledge it needs to become more competitive. The most extreme examples of complacency are industries within formerly communist nations. When their communist protections collapsed, nearly all companies that were run by the state were decades behind their competitors from capitalist nations. To survive, many government-owned businesses required financial assistance in the form of infusions of capital or outright purchase.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 6.4: Summarize the main features of the global trading system.

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105) Describe the purpose of a foreign trade zone. How is it used to promote trade?

Answer: Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.

Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The U.S. Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the U.S. market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

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106) Discuss the benefits and drawbacks of strategic trade policy. How are the drawbacks of subsidies similar to the drawbacks of strategic trade policy?

Answer: Benefits of Strategic Trade Policy—Supporters of strategic trade policy argue that it results in increased national income. Companies should earn a good profit if they obtain first-mover advantages and solidify positions in their markets around the world. Advocates claim that strategic trade policies helped South Korea build global conglomerates (called Chaebol) that dwarf competitors. For years, South Korean shipbuilders received a variety of government subsidies, including low-cost financing. The Chaebol helped South Korea to emerge strongly from the global economic crisis because of their market power and the wide range of industries in which they compete. Such policies had spin-off effects on related industries, and local suppliers to the Chaebol are now thriving.

Drawbacks of Strategic Trade Policy—Although it sounds as if strategic trade policy has only benefits, there can be drawbacks as well. Lavish government assistance to domestic companies in the past caused inefficiency and high costs for both South Korean and Japanese companies.

Large government concessions to local labor unions hiked wages and forced Korea's Chaebol to accept low profit margins.

In addition, when governments decide to support specific industries, their choice is often subject to political lobbying by the groups seeking government assistance. It is possible that special interest groups could capture all the gains from assistance with no benefit for consumers. If this were to occur, consumers could end up paying more for lower-quality goods than they could otherwise obtain.

Like strategic trade policy, government subsidies can also encourage complacency in an industry and prevent it from becoming competitive internationally. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 6.4: Summarize the main features of the global trading system.

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107) Describe the three categories of tariffs, and explain how the Smoot–Hawley Act of 1930 influenced tariffs in the United States.

Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers.

We can classify a tariff into one of three categories. An export tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export's price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination. Transit tariffs have been almost entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product. The import tariff is by far the most common tariff used by governments today.

We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.

The Smoot-Hawley Act of 1930 caused a major increase in the number of U.S. tariffs. World trade volume reached a peak in the late 1800s, only to be devastated when the United States passed the Smoot–Hawley Act in 1930. The act represented a major shift in U.S. trade policy from one of free trade to one of protectionism. The act set off round after round of competitive tariff increases among the major trading nations. Other nations felt that, if the United States was going to restrict its imports, they were not going to give exports from the United States free access to their domestic markets. The Smoot–Hawley Act, and the global trade wars that it helped to usher in, crippled the economies of the industrialized nations and helped spark the Great Depression. Living standards around the world were devastated throughout most of the 1930s.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 6.4: Summarize the main features of the global trading system.

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108) Write a short note on the World Trade Organization and its influence on the environment.

Answer: Steady gains in global trade and rapid industrialization in many developing and emerging economies have generated environmental concerns among both governments and special interest groups. Of concern to many people are levels of carbon dioxide emissions–the principal greenhouse gas believed to contribute to global warming. Most carbon dioxide emissions are created from the burning of fossil fuels and the manufacture of cement.

The World Trade Organization has no separate agreement that deals with environmental issues.

The WTO explicitly states that it is not to become a global environmental agency responsible for setting environmental standards. It leaves such tasks to national governments and the many intergovernmental organizations that already exist for such purposes. The WTO works alongside existing international agreements on the environment, including the Montreal Protocol for protection of the ozone layer, the Basel Convention on international trade or transport of hazardous waste, and the Convention on International Trade in Endangered Species.

Nevertheless, the preamble to the agreement that established the WTO does mention the objectives of environmental protection and sustainable development. The WTO also has an internal committee called the Committee on Trade and Environment. The committee's responsibility is to study the relationship between trade and the environment and to recommend possible changes in the WTO trade agreements.

In addition, the WTO does take explicit positions on some environmental issues related to trade.

Although the WTO supports national efforts at labeling "environmentally friendly" products as such, it states that labeling requirements or policies cannot discriminate against the products of other WTO members. Also, the WTO supports policies of the least developed countries that require full disclosure of potentially hazardous products entering their markets for reasons of public health and environmental damage.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 6.4: Summarize the main features of the global trading system.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 7 Foreign Direct Investment 1) Which type of investment involves the acquisition of foreign assets for the purpose of controlling them?

A) foreign direct investment B) foreign portfolio investment C) capital investment D) controlling ownership Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

2) ________ represents passive holdings of securities such as foreign stocks, bonds, or other financial assets.

A) Direct investment B) Portfolio investment C) Capital investment D) Controlling ownership Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

3) Which of the following is a major driver of foreign direct investment?

A) vertical integration B) horizontal integration C) globalization D) cultural diversity Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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4) A(n) ________ advantage is the one that a company gains from incorporating a business activity within itself rather than leaving it to a relatively inefficient market.

A) ownership B) internalization C) location D) comparative Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

5) Exports and imports of tourism and business consulting are included in the ________ account of a country's balance of payments.

A) services B) merchandise C) capital D) savings Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

6) Exports and imports of tangible goods are included in the ________ account of a country's balance of payments.

A) savings B) capital C) merchandise D) services Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

7) Exports and imports of computer software, electronic components, and apparel are included in the ________ account of a country's balance of payments.

A) services B) capital C) merchandise D) savings Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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8) The balance of payments is useful to international business people for which of the following reasons?

A) warning of new policies that could affect a country's business climate B) indicating stability in a country's foreign policy C) signaling increased riskiness of lending to countries D) predicting future technological changes Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

Scenario: Global Manufacturing Inc. (GMI) Global Manufacturing Inc., a fast-growing U.S. company, plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest. The components will then be taken to maquiladoras for final assembly. GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B. 9) GMI's investments are examples of ________.

A) foreign direct investment B) portfolio investment C) vertical integration D) horizontal integration Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

10) Which of the following systems of production is used by GMI? A) job B) craft C) rationalized D) customized Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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11) GMI's purchase of the Brazilian company is best classified as a(n) ________.

A) greenfield investment B) portfolio investment C) acquisition D) merger Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

12) GMI's subsidiary for component B in Thailand is best described as a(n) ________.

A) greenfield investment B) portfolio investment C) acquisition D) merger Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

Scenario: Happyland Happyland is a country characterized by beautiful beaches, vast natural resources, and a highly skilled labor force. Happyland is now encouraging foreign direct investment flows. The country has been exporting textiles, computer hardware, and software programs. The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.

13) Happyland's international trade situation illustrates that the country is experiencing a ________.

A) current account deficit B) capital account deficit C) current account surplus D) capital account surplus Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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14) Transactions involving the export of Happyland's textile and computer products are included in its ________ account.

A) capital B) merchandise C) services D) income payments Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

15) If Happyland advertises its beaches and attracts tourists, the tourism-related income would be recorded in its ________ account.

A) capital B) services C) income payments D) merchandise Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

16) If Happyland is successful in attracting foreign direct investment, transactions involving those investments would appear in the country's ________ account.

A) capital B) services C) income payments D) merchandise Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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Scenario: Blickinstock at the Crossroads Auto parts supplier, Blickinstock Ltd., would like to expand its presence in Latin America. To that end, Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary. Keith Moon, Blickinstock's vice president of global business development, will be making a presentation to the board outlining the company's options.

17) Blickinstock has identified a company that it can acquire or merge with. Which of the following statements would represent the least likely reason for Blickinstock to go ahead with the merger?

A) The merger would help increase Blickinstock's global competitiveness.

B) The merger would allow the company to get a foothold in the nascent Latin American market.

C) The merger would help to fill the gaps in Blickinstock's product line.

D) The merger would bring in increased cash-flows that Blickinstock can use to acquire other firms.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

18) If board members ask about the maquiladora industry, Keith would explain that it refers to ________.

A) Mexico's low-cost labor union B) the cross-border drug trafficking problem that threatens to limit legitimate production in Mexico C) the low-wage, 130-mile-wide strip along the U.S.-Mexico border that comprises a special economic region D) Latin America's new model for business that restricts foreign investors to take advantage of government incentives Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

19) All factors of production are internationally mobile.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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20) Portfolio investment is the purchase of physical assets of a company in another country to gain a degree of management control.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

21) Increasing globalization is causing a growing number of international companies from emerging markets to undertake FDI. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

22) Developed countries have historically been the major participants behind cross-border mergers and acquisitions.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

23) Firms from emerging markets account for a greater share of global mergers and acquisitions than developed markets.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

24) Foreign direct investment is acquisition of foreign assets for the purpose of controlling them.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

25) Building a subsidiary abroad from the ground up is called a greenfield investment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

7 .

26) The soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

27) In industries having a limited number of small firms, foreign direct investment decisions frequently resemble a "follow the leader" scenario.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

28) A majority of the regulatory changes that governments around the world introduced in recent years are unfavorable to FDI. Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

29) The merchandise account includes exports and imports of tangible goods.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

30) The income payments account includes income earned on home country assets held abroad.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

31) A current account surplus occurs when a country exports more goods and receives more income from abroad than it imports and pays abroad.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

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32) One reason a home country may discourage foreign direct investment outflows is to protect its "sunset" industries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

33) What two factors propel growth in foreign direct investment?

Answer: The two main drivers of FDI flows are globalization and international mergers and acquisitions.

Globalization—Years ago, barriers to trade were not being reduced, and new, creative barriers seemed to be popping up in many nations. This presented a problem for companies that were trying to export their products to markets around the world. This resulted in a wave of FDI as many companies entered promising markets to get around growing trade barriers. But then the Uruguay Round of GATT negotiations created renewed determination to further reduce barriers to trade. As countries lowered their trade barriers, companies realized that they could now produce in the most efficient and productive locations and simply export to their markets worldwide. This set off another wave of FDI flows into low-cost, newly industrialized nations and emerging markets. Forces causing globalization to occur are, therefore, part of the reason for long-term growth in foreign direct investment. Increasing globalization is also causing a growing number of international companies from emerging markets to undertake FDI. Mergers and Acquisitions—The number of mergers and acquisitions (M&As) and their rising values also underlie long-term growth in foreign direct investment. In fact, cross-border M&As are the main vehicle through which companies undertake foreign direct investment. Companies based in developed nations have historically been the main participants behind cross-border M&As, but firms from emerging nations are accounting for an ever greater share of global M&A activity.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.1: Describe the worldwide pattern of foreign direct investment (FDI).

34) The realization that companies can start production in the most efficient and productive locations in the world and export to markets worldwide led to a new surge of foreign direct investment into ________.

A) First World nations B) low-income nations C) high-income nations D) newly industrialized nations Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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35) Which of the following is least likely a reason for companies to seek cross-border mergers and acquisitions?

A) to get a foothold in new geographic markets B) to raise company budgets for increased research and development activities C) to increase a firm's global competitiveness D) to fill the gaps in companies' product lines in a global industry Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

36) Which of the following is a form of foreign direct investment?

A) participating a contract manufacturing arrangement B) foreign bond ownership C) participation in a joint venture D) mutual fund ownership Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

37) According to the international product life cycle theory, in which of the following stages is a good produced in the home country because of uncertain domestic demand and to keep production close to the research department?

A) standardized product stage B) maturing product stage C) declining product stage D) new product stage Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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38) According to the international product life cycle theory, in which stage of a product's life cycle does a company directly invest in production facilities in countries where demand is great enough to warrant production facilities?

A) new product stage B) maturing product stage C) standardized product stage D) declining product stage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

39) In which stage of the international product life cycle does the innovating firm's country become a net importer of the product?

A) new product stage B) maturing product stage C) standardized product stage D) never Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

40) Which international trade theory originated in the marketing field?

A) new trade theory B) product life cycle theory C) country similarity theory D) theory of competitive advantage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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41) The ________ theory states that when an aspect of the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the efficiency-reducing aspect.

A) market power B) eclectic C) international product life cycle D) market imperfections Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

42) The requirement that a sufficient portion of a product's content must originate within a certain market to escape tariff charges is an example of a(n) ________.

A) ad valorem tariff B) market imperfection C) tariff-quota D) subsidy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

43) Which of the following theories states that firms undertake foreign direct investment, when the features of a particular location combine with ownership and internalization advantages, to make the location appealing for investment?

A) market power theory B) international product life cycle theory C) market imperfections theory D) eclectic theory Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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44) Which theory explains why a firm would choose to enter a foreign market via FDI rather than exploit its ownership advantages internationally through other means?

A) eclectic theory B) internalization theory C) relative factor endowments D) national competitive advantage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

45) The possibility that a company will create a future competitor by charging another company for access to its knowledge is a(n) ________ that can encourage FDI. A) ownership advantage B) internalization advantage C) market imperfection D) trade barrier Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

46) The ________ theory states that a firm tries to establish a dominant presence in an industry by undertaking foreign direct investment.

A) eclectic B) market power C) market imperfections D) international product life cycle Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

47) Which of the following is an example of a greenfield investment?

A) an agricultural business acquisition in South-east Asia's former agricultural region B) the construction of an entirely new steel manufacturing subsidiary overseas C) a merger between a U.S. and a non-U.S. company D) the purchase of an existing business that is still in its infancy Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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48) In the maturing product stage of the international product life cycle theory, increased competition creates pressures to reduce production costs.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

49) According to the market imperfections theory, competition is a common market imperfection.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

50) Trade barriers and specialized knowledge are examples of market imperfections.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

51) The possibility that a company will create a future competitor by charging another company for access to its knowledge is a market imperfection that can encourage foreign direct investment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

52) The eclectic theory states that firms undertake foreign direct investment only when the features of a particular location make the location appealing for investment.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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53) According to the eclectic theory that explains FDI, an ownership advantage is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

54) According to the eclectic theory that explains FDI, an internalization advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics of that location.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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55) Using any two of the four theories that appear in your text, explain why companies engage in foreign direct investment.

Answer: International Product Life Cycle Theory—The international product life cycle is used to explain foreign direct investment. The international product life cycle theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates pressures to reduce production costs. In response, a company builds production capacity in lowcost developing nations to serve its markets around the world.

Market Imperfections (Internalization)—A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry—called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge.

Eclectic Theory—The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI. Market Power Theory—Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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56) Explain the theory of market imperfections and describe the two major market imperfections.

Answer: A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry—called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge.

Trade Barriers—One common market imperfection in international business is trade barriers, such as tariffs. For example, the North American Free Trade Agreement stipulates that a sufficient portion of a product's content must originate within Canada, Mexico, or the United States for the product to avoid tariff charges when it is imported to any of these three markets.

Specialized Knowledge—The unique competitive advantage of a company sometimes consists of specialized knowledge. This knowledge could be the technical expertise of engineers or the special marketing abilities of managers. When the knowledge is technical expertise, companies can charge a fee to companies in other countries for use of the knowledge in producing the same or a similar product. But when a company's specialized knowledge is embodied in its employees, the only way to exploit a market opportunity in another nation may be to undertake FDI. The possibility that a company will create a future competitor by charging another company for access to its knowledge is another market imperfection that can encourage FDI. Rather than trade a short-term gain (the fee charged another company) for a long-term loss (lost competitiveness), a company will prefer to undertake investment.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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57) Explain the market power theory of FDI, and discuss why the decision whether or not to follow rivals into a new international market is important.

Answer: Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

One way a company can achieve market power (or dominance) is through vertical integration— the extension of company activities into stages of production that provide a firm's inputs (backward integration) or absorb its output (forward integration). Sometimes a company can effectively control the world supply of an input needed by its industry if it has the resources or ability to integrate backward into supplying that input. Companies may also be able to achieve a great deal of market power if they can integrate forward to increase control over output. For example, they could perhaps make investments in distribution to leapfrog channels of distribution that are tightly controlled by competitors.

Whether or not to follow rivals into a new international market is an important managerial decision. FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market. When firms based in industrial countries moved back into South Africa after the end of apartheid, their competitors followed. Of course, each market can sustain only a certain number of rivals. Firms that cannot compete choose the "least damaging option."

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

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58) How does the eclectic theory explain the concept of FDI? How can a host country offer incentives to attract FDI? Answer: The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI. Host countries offer a variety of incentives to encourage FDI inflows. These take two general forms—financial incentives and infrastructure improvements.

Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time—extending as far out as five years or more. A country may also offer low-interest loans to investors.

Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements—better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 7.2: Summarize each theory that attempts to explain why FDI occurs.

59) A company can achieve market power through ________.

A) ownership advantages B) internalization advantages C) horizontal integration D) vertical integration Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

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60) Coca-Cola has collaborative arrangements whereby it produces concentrate that it sells to other companies to bottle its drinks. Which of the following terms best describes this type of arrangement?

A) vertical integration B) horizontal integration C) link alliance D) scale alliance Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

61) The extension of a company's activities into stages of production that absorb the company's outputs is known as ________.

A) forward integration B) backward integration C) an internalization advantage D) an ownership advantage Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

62) Making investments in distribution in order to leapfrog channels of distribution that are tightly controlled by competitors is an example of ________.

A) an internalization advantage B) an ownership advantage C) forward integration D) backward integration Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

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63) Which of the following countries would a watchmaker most prefer to manufacture its watches in, in order to capitalize on buyer perceptions of high quality?

A) China B) Thailand C) Mexico D) Switzerland Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

64) Firms engage in FDI when the firms they supply have already invested abroad. This practice of "following clients" is observed in industries having ________.

A) a huge number of clients B) only large companies as clients C) suppliers who are geographically scattered around the world D) suppliers who have close working relationships with producers Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

65) Which of the following is true of a "follow the leader" scenario in the context of foreign direct investment?

A) Companies that practice "follow the leader" supply each other with inputs.

B) Companies that practice "follow the leader" pressurize each other to follow environmentally safe methods.

C) It is a frequent practice in industries with a limited number of large firms.

D) It is common in industries in which producers source component parts from suppliers.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

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66) A country's ________ is a summary of all economic transaction between one country and the rest of the world, over a given period of time.

A) balance of payments B) chart of accounts C) global financial system D) international monetary system Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

67) The ________ records exports and imports of goods and services, investment income, and gifts.

A) current account B) capital account C) debt account D) official reserves account Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

68) Which of the following is recorded in the capital account of a country's balance of payments?

A) income payments B) income receipts C) foreign official assets D) unilateral transfers Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

69) Which of the following accounts within the current account of the United States' balance of payments includes financial gains earned on U.S. assets held abroad?

A) income receipts account B) income payments account C) merchandise account D) services account Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

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70) The ________ account within the United States' current account includes financial gains compensated to entities in other nations that is earned on assets they hold in the United States.

A) income receipts B) income payments C) merchandise D) services Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

71) When a U.S. subsidiary in another country remits profits back to its parent company in the U.S., the receipt of profits is recorded in the ________.

A) income receipts account and given a plus sign B) income receipts account and given a minus sign C) income payments account and given a plus sign D) income payments account and given a minus sign Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

72) Which of the following occurs in a country's balance of payments when a country exports more goods and services and receives more income from abroad than it imports and pays abroad?

A) current account deficit B) capital account surplus C) current account surplus D) capital account deficit Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.3: Outline the important management issues in the FDI decision.

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Scenario: Global Manufacturing Inc. (GMI) Global Manufacturing Inc., a fast-growing U.S. company, plans for a production system in which two components of its product will be manufactured in locations where the cost of production is lowest. The components will then be taken to maquiladoras for final assembly. GMI plans to purchase an existing company in Brazil to produce component A and build a subsidiary in Thailand to produce component B. 73) In which of the following accounts would GMI's purchase of the company in Brazil appear?

A) the current account of the United States B) the current account of Brazil C) the capital account of the Thailand D) the capital accounts of Brazil and the United States Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.3: Outline the important management issues in the FDI decision.

74) Rationalized production is a system of production in which each of a product's components is produced in the same location so that the cost of producing that product is lowest.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

75) A potential problem with a rationalized production model is that a work stoppage in one country can bring the entire production process to a standstill.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

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76) Describe any three management issues involved in foreign direct investment decisions.

Answer: 1. Control—Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Perhaps the company wants to be certain that its product is being marketed in the same way in the local market as it is at home. Or maybe it wants to ensure that the selling price remains the same in both markets. Some companies try to maintain ownership of a large portion of the local operation, say, even up to 100 percent, in the belief that greater ownership gives them greater control. Yet for a variety of reasons, even complete ownership does not guarantee control.

2. Purchase-or-Build Decision—Another important matter for managers is whether to purchase an existing business or to build a subsidiary abroad from the ground up—called a greenfield investment. An acquisition generally provides the investor with an existing plant, equipment, and personnel. The acquiring firm may also benefit from the goodwill the existing company has built up over the years and, perhaps, brand recognition of the existing firm. The purchase of an existing business may also allow for alternative methods of financing the purchase, such as an exchange of stock ownership between the companies. Factors that can reduce the appeal of purchasing existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location.

3. Production Costs—Many factors contribute to production costs in every national market.

Labor regulations can add significantly to the overall cost of production. Companies may be required to provide benefits packages for their employees that are over and above hourly wages.

More time than was planned for might be required to train workers adequately to bring productivity up to an acceptable standard. Although the cost of land and the tax rate on profits can be lower in the local market (or purposely lowered to attract multinationals), it cannot be assumed that they will remain constant.

4. Customer Knowledge—The behavior of buyers is frequently an important issue in the decision of whether to undertake foreign direct investment. A local presence can help companies gain valuable knowledge about customers that could not be obtained from the home market. For example, when customer preferences for a product differ a great deal from country to country, a local presence might help companies to better understand such preferences and tailor their products accordingly.

5. Following Clients—Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs.

6. Following Rivals—FDI decisions frequently resemble a "follow the leader" scenario in industries having a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the "first mover" might result in being shut out of a potentially lucrative market.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

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77) Discuss the role entrepreneurs and small businesses play in the expansion of FDI. What are some of the surprises that managers face as they invest in new markets abroad?

Answer: Entrepreneurs and small businesses also play a role in the expansion of FDI inflows.

There is no data on the portion of FDI contributed by small businesses, but we know from anecdotal evidence that these companies are engaged in FDI. Unhindered by many of the constraints of a large company, entrepreneurs investing in other markets often demonstrate an inspiring can-do spirit mixed with ingenuity and bravado.

Building facilities in a market abroad can be difficult. Managers can minimize risk by preparing their companies for a number of surprises they might face.

1. Human Resource Policies-Companies cannot always import home country policies without violating local laws or offending local customs. Countries have differing requirements for plant operations and their own regulations regarding business operations.

2. Labor Costs-France has a minimum wage of about $12 an hour, whereas Mexico has a minimum wage of nearly $5 a day. But Mexico's real minimum wage is nearly double that due to government-mandated benefits and employment practices. Such differences are not always obvious.

3. Mandated Benefits-These include company supplied clothing and meals, required profit sharing, guaranteed employment contracts, and generous dismissal policies. These costs can exceed an employee's wages and are typically not negotiable.

4. Labor Unions-In some countries, organized labor is found in nearly every industry and at almost every company. Rather than dealing with a single union, managers may need to negotiate with five or six different unions, each of which represents a distinct skill or profession.

5. Information-Sometimes there simply is no reliable data on factors such as labor availability, cost of energy, and national inflation rates. These data are generally high quality in developed countries and suspect in emerging and developing ones.

6. Personal and Political Contacts-These contacts can be extremely important in developing and emerging markets and can be the only way to establish operations. But complying with locally accepted practices can cause ethical dilemmas for managers.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 7.3: Outline the important management issues in the FDI decision.

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78) Explain the concept of balance of payments and describe its two major components.

Answer: A country's balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation. International transactions that result in payments (outflows) to entities in other nations are reductions in the balance of payments accounts and are therefore recorded with a minus sign. International transactions that result in receipts (inflows) from other nations are additions to the balance of payments accounts and thus are recorded with a plus sign.

Any nation's balance of payments consists of two major components-the current account and capital account. The current account is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. The merchandise account includes exports and imports of tangible goods such as computer software, electronic components, and apparel. The services account includes exports and imports of services such as tourism, business consulting, and banking services. Suppose a company in the United States receives payment for consulting services provided to a company in another country. The receipt is recorded as an "export of services" and assigned a plus sign in the services account in the balance of payments.

The capital account is a national account that records transactions involving the purchase or sale of assets. Suppose a U.S. citizen buys shares of stock in a Mexican company on Mexico's stock market. The transaction would show up on the capital accounts of both the United States and Mexico—as an outflow of assets from the United States and an inflow of assets to Mexico.

Conversely, suppose a Mexican investor buys real estate in the United States. That transaction also shows up on the capital accounts of both nations—as an inflow of assets to the United States and as an outflow of assets from Mexico.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.3: Outline the important management issues in the FDI decision.

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79) Why is it important to assess R&D costs when considering FDI? Given its costs, how can FDI benefit the host country with access to technology, management skills, and employment?

Answer: R&D costs are important production costs for companies considering FDI, and they have increased in recent years. As technology becomes an increasingly powerful competitive factor, the soaring cost of developing subsequent stages of technology has led multinationals to engage in cross-border alliances and acquisitions. For instance, huge multinational pharmaceutical companies are intensely interested in the pioneering biotechnology work done by smaller, entrepreneurial startups.

One indicator of technology's significance in foreign direct investment is the amount of R&D conducted by companies' affiliates in other countries. The globalization of innovation and the phenomenon of foreign direct investment in R&D are not necessarily motivated by demand factors such as the size of local markets. They instead appear to be encouraged by supply factors, including gaining access to high-quality scientific and technical human capital.

Even given its costs, FDI can benefit a host country by providing new technology and labor skills to its citizens. Investment in technology, whether in products or processes, tends to increase the productivity and the competitiveness of a nation. That is why host nations have a strong incentive to encourage the importation of technology. For years, developing countries in Asia were introduced to expertise in industrial processes as multinationals set up factories within their borders.

Many formerly communist nations suffer from a lack of management skills needed to succeed in the global economy. By encouraging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of their domestic companies. Furthermore, locals who are trained in modern management techniques may eventually start their own local businesses—further expanding employment opportunities. Yet detractors argue that, although FDI may create jobs, it may also destroy jobs because less competitive local firms may be forced out of business.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 7.3: Outline the important management issues in the FDI decision.

80) Partnerships between a government and a host company in the context of foreign direct investment lead to ________.

A) increased exploitation of workers in the home country B) domination of industries in the home country by large international firms C) increased market access for the host company D) increased control for the host country over its operations Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.4: Explain why governments intervene in FDI.

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81) A greenfield investment is another name for a company's decision to ________.

A) acquire an interest in an existing foreign operation B) implement sustainable marketing practices C) construct a new facility in a foreign market D) build a facility for a local company Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.4: Explain why governments intervene in FDI. 82) Which of the following is a reason behind intervention by a host country on matters related to FDI? A) to keep their balance of payments under control B) to protect their outdated technology and management skills C) to strictly encourage the establishment of sunset industries D) to decrease the country's competitiveness in the global market Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.4: Explain why governments intervene in FDI. 83) ________ are those that use outdated and obsolete technologies or employ low-wage workers with few skills.

A) Business-agile enterprises B) Sunset industries C) Greenfield investments D) Shell corporations Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.4: Explain why governments intervene in FDI. 84) Ownership restrictions and performance demands are used by ________.

A) host countries to promote FDI B) host countries to restrict FDI C) home countries to promote FDI D) home countries to restrict FDI Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.4: Explain why governments intervene in FDI.

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Scenario: Blickinstock at the Crossroads Auto parts supplier, Blickinstock Ltd., would like to expand its presence in Latin America. To that end, Blickinstock is trying to decide whether to purchase an existing company in a remote region of Argentina or build its own subsidiary. Keith Moon, Blickinstock's vice president of global business development, will be making a presentation to the board outlining the company's options.

85) If Blickinstock's home government tries to stop the company from investing in Latin America, the government is most likely trying to ________.

A) protect its balance of payments B) prevent a monopoly situation from occurring C) discourage the entry of a "sunset" company D) protect the "sunset" companies in Latin America Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.4: Explain why governments intervene in FDI. 86) A system of production in which each of a product's components is produced in the location where the cost of producing that component is lowest is called ________ production.

A) rationalized B) craft C) job D) customized Answer: A AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 87) Which of the following statements is true of rationalized production?

A) It depends on a large number of distribution channels which leads to inefficiency.

B) It depends on a large number of distribution channels which increases the cost of production.

C) It can bring the entire production process to a standstill, if work is stopped in one country.

D) It is an unethical method of production as it uses questionable labor practices to reduce costs.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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88) Which of the following is the type of production illustrated in the automobile industry?

A) customized production B) rationalized production C) job production D) craft production Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 89) If a Japanese citizen invests in the Australian stock market, the transaction would show up on the capital account in the balance of payments of ________.

A) Japan B) Australia C) both Japan and Australia D) neither Japan nor Australia Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 90) The ________ records transactions involving the purchase and sale of assets.

A) current account B) capital account C) debt account D) official reserves account Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 91) Home nations discourage foreign direct investment outflows because it ________.

A) discourages cooperation between countries B) replaces jobs in the home nation C) fails to protect the "sunset" industries in the home nation D) decreases long-term competitiveness of companies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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92) A home country encourages outflows of foreign direct investment because it ________.

A) helps in replacing jobs at home B) sends resources out of the home country C) tends to increase the long-term competitiveness of firms D) takes the place of all the exports and imports in the country Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 93) Which of the following methods is being used when a host country provides lower tax rates and low-interest loans to firms from abroad for encouraging inflows of foreign direct investment?

A) financial incentives B) sanctions C) local content requirements D) embargoes Answer: A AACSB: Application of knowledge Skill: Application Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 94) Tax breaks on profits earned abroad and political pressures are used by ________.

A) host countries to promote FDI B) host countries to restrict FDI C) home countries to promote FDI D) home countries to restrict FDI Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 95) Which of the following methods is used by a host country to restrict incoming foreign direct investment?

A) differential tax rates for earnings abroad B) insurance to cover the risk of overseas investments C) low-interest loans to investors D) performance demands Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 32 .

96) Which of the following is used by home-country governments to promote outbound foreign direct investment?

A) political pressure B) performance demands C) ownership restrictions D) sanctions Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 97) Which of the following is used by home country governments to limit outbound foreign direct investment?

A) ownership restrictions B) differential tax rates C) tax breaks D) low-interest loans Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. Scenario: Happyland Happyland is a country characterized by beautiful beaches, vast natural resources, and a highly skilled labor force. Happyland is now encouraging foreign direct investment flows. The country has been exporting textiles, computer hardware, and software programs. The net result of the trade is that Happyland exports far more goods and services and receives more income from abroad than it imports and pays abroad.

98) Which of the following methods will Happyland use to encourage foreign direct investment inflows?

A) tax incentives B) sanctions C) ownership restrictions D) performance demands Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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99) Which of the following methods will Happyland use to discourage foreign direct investment inflows?

A) tax incentives B) low-interest loans C) performance demands D) tax breaks Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 100) Ownership restrictions are never used by host countries to restrict incoming foreign direct investment.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI. 101) Performance demands made by host countries to restrict incoming FDI apply exclusively to businesses in cultural industries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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102) Discuss why a host country might promote or restrict foreign direct investment.

Answer: Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of "following clients" is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs. When Mercedes opened its first international car plant in Tuscaloosa County, Alabama, auto-parts suppliers also moved to the area from Germany—bringing with them additional investment in the millions of dollars.

Nations often intervene in the flow of FDI to protect their cultural heritages, domestic companies, and jobs. They can enact laws, create regulations, or construct administrative hurdles that companies from other nations must overcome if they want to invest in the nation. Yet rising competitive pressure is forcing nations to compete against each other to attract multinational companies. The increased national competition for investment is causing governments to enact regulatory changes that encourage investment. The majority of regulatory changes that governments introduced in recent years are more favorable to FDI. In a general sense, a bias toward protectionism or openness is rooted in a nation's culture, history, and politics. Values, attitudes, and beliefs form the basis for much of a government's position regarding foreign direct investment. For example, South American nations with strong cultural ties to a European heritage (such as Argentina) are generally enthusiastic about investment received from European nations. South American nations with stronger indigenous influences (such as Ecuador) are generally less enthusiastic.

Opinions vary widely on the appropriate amount of foreign direct investment a country should encourage. At one extreme are those who favor complete economic self-sufficiency and oppose any form of FDI. At the other extreme are those who favor no governmental intervention and booming FDI inflows. Between these two extremes lie most countries, which believe a certain amount of FDI is desirable to raise national output and enhance the standard of living for their people.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

35 .

103) Identify why a home country might support or discourage outgoing foreign direct investment.

Answer: Home nations (those from which international companies launch their investments) may also seek to encourage or discourage outflows of FDI for a variety of reasons. But home nations tend to have fewer concerns because they are often prosperous, industrialized nations.

For these countries, an outward investment seldom has a national impact—unlike the impact on developing or emerging nations that receive the FDI. Nevertheless, among the most common reasons for discouraging outward FDI are the following: 1. Investing in other nations sends resources out of the home country—As a result, fewer resources are used for development and economic growth at home. On the other hand, profits on assets abroad that are returned home increase both a home country's balance of payments and its available resources.

2. Outgoing FDI may ultimately damage a nation's balance of payments by taking the place of its exports—This can occur when a company creates a production facility in a market abroad, the output of which replaces exports that used to be sent there from the home country.

3. Jobs resulting from outgoing investments may replace jobs at home—This is often the most contentious issue for home countries. The relocation of production to a low-wage nation can have a strong impact on a locale or region. However, the impact is rarely national, and its effects are often muted by other job opportunities in the economy. In addition, there may be an offsetting improvement in home country employment if additional exports are needed to support the activity represented by the outgoing FDI. But foreign direct investment is not always a negative influence on home nations. In fact, under certain circumstances, governments might encourage it. Countries promote outgoing FDI for the following reasons: 1. Outward FDI can increase long-term competitiveness—Businesses today frequently compete on a global scale. The most competitive firms tend to be those that conduct business in the most favorable location anywhere in the world, continuously improve their performance relative to competitors, and derive technological advantages from alliances formed with other companies.

2. Nations may encourage FDI in industries identified as "sunset" industries—Sunset industries are those that use outdated and obsolete technologies or employ low-wage workers with few skills. These jobs are not greatly appealing to countries having industries that pay skilled workers high wages. By allowing some of these jobs to go abroad and retraining workers in higherpaying skilled work, they can upgrade their economies toward "sunrise" industries. This represents a trade-off for governments between a short-term loss of jobs and the long-term benefit of developing workers' skills.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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104) Explain the various methods that host countries use to restrict and promote foreign direct investment.

Answer: Financial Incentives-Host governments of all nations grant companies financial incentives if they will invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time—extending as far out as five years or more. A country may also offer low-interest loans to investors.

The downside of these types of incentives is they can allow multinationals to create bidding wars between locations that are vying for the investment. In such cases, the company typically invests in the most appealing region after the locations endure rounds of escalating incentives.

Companies have even been accused of engaging other governments in negotiations to force concessions from locations already selected for investment. The cost to taxpayers of attracting FDI can be several times what the actual jobs themselves pay—especially when nations try to one-up each other to win investment.

Infrastructure Improvements-Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements—better seaports suitable for containerized shipping, improved roads, and increased telecommunications systems.

Host countries also have a variety of methods to restrict incoming FDI. Again, these take two general forms—ownership restrictions and performance demands.

Ownership Restrictions—Governments can impose ownership restrictions that prohibit nondomestic companies from investing in certain industries or from owning certain types of businesses. Such prohibitions typically apply to businesses in cultural industries and companies vital to national security. Also, most nations do not allow FDI in their domestic weapons or national defense firms. Another ownership restriction is a requirement that nondomestic investors hold less than a 50 percent stake in local firms when they undertake foreign direct investment.

But nations are eliminating such restrictions because companies today often can choose another location that has no such restriction in place. When General Motors was deciding whether to invest in an aging automobile plant in Jakarta, Indonesia, the Indonesian government scrapped its ownership restriction of an eventual forced sale to Indonesians because China and Vietnam were also courting GM for the same financial investment.

Performance Demands—More common than ownership requirements are performance demands that influence how international companies operate in the host nation. Although typically viewed as intrusive, most international companies allow for them in the same way they allow for home country regulations. Performance demands include ensuring that a portion of the product's content originates locally, stipulating the portion of output that must be exported, or requiring that certain technologies be transferred to local businesses.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 7.5: Describe the policy instruments governments use to promote and restrict FDI.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 8 Regional Economic Integration 1) The process whereby countries in a geographic area cooperate with one another to reduce or eliminate barriers to the international flow of products, people, or capital is called ________.

A) regional economic integration B) protectionism C) mercantilism D) economic nationalism Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

2) Regional economic integration is also referred to as ________.

A) mercantilism B) nationalism C) protectionism D) regionalism Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

3) The European Union is an example of ________ integration.

A) regional B) relative C) global D) bilateral Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

4) Which of the following is an important goal of regional economic integration?

A) to increase the selling prices of products B) to raise the living standards of people C) to limit the choice of products available to customers D) to establish a socialist government Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

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5) A(n) ________ eliminates trade barriers among member countries, and is the lowest level of regional economic integration.

A) free trade area B) customs union C) common market D) economic union Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

6) Which of the following is the greatest extent of regional economic integration?

A) free trade area B) political union C) common market D) customs union Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

7) Economic integration whereby countries remove all barriers to trade among themselves, but each country determines its own barriers against nonmembers, is called a(n) ________.

A) economic union B) customs union C) common market D) free trade area Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

8) Countries belonging to a ________ maintain whatever policies they see fit against nonmember countries.

A) economic union B) customs union C) common market D) free trade area Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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9) A(n) ________ combines the elimination of internal trade barriers among member countries with the adoption of common external trade policies toward nonmembers.

A) free trade area B) customs union C) common market D) economic union Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

10) The main difference between a free trade area and a customs union is that the members of a customs union ________.

A) agree to the free movement of all factors of production B) harmonize their tax, monetary, and fiscal policies and create a common currency C) agree to treat trade with all nonmember nations in a similar manner, by having a common external tariff.

D) accept a common stance on economic and political policies regarding nonmember nations Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

11) In a(n) ________, members eliminate internal trade barriers, adopt a common external policy toward nonmembers, and eliminate barriers to the movement of the factors of production.

A) free trade area B) customs union C) common market D) economic union Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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12) Economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, set a common trade policy against nonmembers, and coordinate their economic policies is called a(n) ________.

A) customs union B) common market C) economic union D) free trade area Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

13) A(n) ________ requires member nations to harmonize their tax, monetary, and fiscal policies and create a common currency.

A) customs union B) economic union C) free trade area D) common market Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

14) Country X wants to encourage trade by eliminating trade barriers with the three countries along its borders. However, Country X wants each of the countries to be able to establish their own trade policies even though this may lead to problems with trade deflection. Which form of economic integration is Country X most likely considering?

A) economic union B) common market C) customs union D) free trade area Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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15) Higher levels of trade between nations result in ________.

A) higher product prices B) lesser specialization C) greater purchasing power D) trade diversion Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

16) An increase in the level of trade among nations that results from regional economic integration is called ________.

A) trade diversion B) mercantilism C) trade creation D) economic nationalism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

17) Which of the following is a result of trade creation?

A) The demand for goods tends to increase.

B) Purchasing power of consumers decreases.

C) Consumers have a limited choice for selection of goods.

D) Imported goods are seldom available at lower prices.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

18) Which of the following is a potential drawback of regional economic integration?

A) ethnocentricity B) trade diversion C) economic nationalism D) protectionism Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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19) Which of the following is true of trade diversion?

A) It increases the purchasing power of consumers.

B) It increases the level of trade between nonmember nations.

C) It generally increases the prices of products in a nation.

D) It guarantees consumers a wider selection of goods.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

20) The least amount of sovereignty that must be surrendered to a trading bloc occurs in a ________.

A) economic union B) common market C) free trade area D) political union Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

Scenario: Moonland Union Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

21) As a first stage of cooperation, the countries agree to remove all barriers to trade among themselves. Each country also maintains policies it sees fit against nonmembers. At this stage, Moonland Union can be described as a ________.

A) free trade area B) political union C) common market D) customs union Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

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22) If these twenty-six nations continue to eliminate all barriers to trade among themselves and set a common trade policy against nonmembers, they would create a ________.

A) free trade area B) preferential trading area C) customs union D) political union Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

23) Some countries in Moonland Union are interested not just in free trade among themselves and a common trade policy against nonmembers, but also in removing all barriers to the movement of labor and capital among themselves. This type of integration is best described as a ________.

A) free trade area B) preferential trading area C) customs union D) common market Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

24) Country M wants member nations to harmonize their tax, monetary, and fiscal policies and wants to create a common currency. Country M is requesting for the creation of a(n) ________ in the Moonland nations.

A) free trade area B) economic union C) customs union D) common market Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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25) Country X advocates the greatest level of integration possible for the member nations of the Moonland Union. Which of the following is Country X most likely to support?

A) political union B) free trade area C) customs union D) economic union Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

26) The regional trading bloc that Zucoland will be joining is most likely a(n) ________.

A) economic union B) free trade area C) customs union D) political union Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

27) If all countries in the bloc are asked to give up the greatest amount of sovereignty, they would most likely be joining a(n) ________.

A) economic union B) free trade area C) customs union D) political union Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

28) Which of the following would the government of Zucoland most likely experience as a benefit of joining the trading bloc?

A) trade diversion B) increased national sovereignty C) greater consensus D) production shifts to low-wage nations Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

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29) Which of the following would the government of Zucoland most likely experience as a benefit of joining the trading bloc?

A) increased national sovereignty B) increased military security C) trade diversion D) higher-wage employment Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

30) Trade agreements hinder competitors from other nations to enter the domestic market.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

31) A group of nations in a geographic region undergoing economic integration is called a regional trading bloc.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

32) A common market area is the greatest extent of national integration.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

33) In a customs union, each country can maintain whatever policy it sees fit against nonmember countries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

9 .

34) Countries belonging to a free trade area must concede a certain amount of their national autonomy to the supranational union of which they are a part.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

35) A common market requires that member nations create a common currency.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

36) A political union makes it mandatory for nations to accept a common stance on all economic and political policies within their territories.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

37) The increase in the level of trade between nations that results from regional economic integration is called trade creation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

38) A result of trade creation is that buyers pay lower prices for imported goods and services after trade barriers are removed.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

39) The greatest benefit of regional integration is trade diversion.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.1: Outline the levels of economic integration and its debate.

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40) Economic integration can unintentionally reward a less efficient producer within a trading bloc.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

41) When trade diversion occurs, buyers will likely pay more for products.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

42) In regional economic integration, industries that require mostly unskilled labor tend to shift production to low-wage nations within a trading bloc.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

43) A benefit of regional economic integration is that it always expands employment opportunities in all nations.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

44) The least amount of sovereignty that must be surrendered to a trading block occurs in a free trade agreement.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

45) The goal of the Single European Act was to remove remaining barriers, increase harmonization, and thereby enhance the competitiveness of European companies.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

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46) The primary purpose of the Gulf Cooperation Council (GCC) at its formation was to create a political union between Iraq and Iran.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

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47) Differentiate among the five levels of economic and political integration.

Answer: There are five levels of economic and political integration for regional trading blocs.

1. Free Trade Area—Economic integration whereby countries seek to remove all barriers to trade among themselves, but each country determines its own barriers against nonmembers, is called a free trade area. A free trade area is the lowest level of economic integration that is possible between two or more countries. Countries belonging to the free trade area strive to remove all tariffs and nontariff barriers, such as quotas and subsidies, on international trade in goods and services. However, each country is able to maintain whatever policy it sees fit against nonmember countries. These policies can differ widely from country to country. Countries belonging to a free trade area also typically establish a process by which trade disputes can be resolved.

2. Customs Union—Economic integration whereby countries remove all barriers to trade among themselves, but set a common trade policy against nonmembers, is called a customs union. Thus, the main difference between a free trade area and a customs union is that the members of a customs union agree to treat trade with all nonmember nations in a similar manner. Countries belonging to a customs union might also negotiate as a single entity with other supranational organizations, such as the World Trade Organization.

3. Common Market—Economic integration whereby countries remove all barriers to trade and the movement of labor and capital among themselves, but set a common trade policy against nonmembers, is called a common market. Thus, a common market integrates the elements of free trade areas and customs unions and adds the free movement of important factors of production— people and cross-border investment. This level of integration is very difficult to attain because it requires members to cooperate to at least some extent on economic and labor policies.

4. Economic Union—Economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, set a common trade policy against nonmembers, and coordinate their economic policies is called an economic union. An economic union goes beyond the demands of a common market by requiring member nations to harmonize their tax, monetary, and fiscal policies and to create a common currency. Economic unions require that member countries concede a certain amount of their national autonomy (or sovereignty) to the supranational union of which they are a part.

5. Political Union—Economic and political integration whereby countries coordinate aspects of their economic and political systems is called a political union. A political union requires member nations to accept a common stance on economic and political matters regarding nonmember nations. However, nations are allowed a degree of freedom in setting certain political and economic policies within their territories. Individually, Canada and the United States provide early examples of political unions. In both these nations, smaller states and provinces combined to form larger entities.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

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48) Discuss the benefits and drawbacks of regional integration.

Answer: Benefits of Regional Integration—Nations engage in specialization and trade because of the potential for gains in output and consumption. Higher levels of trade between nations should result in greater specialization, increased efficiency, greater consumption, and higher standards of living.

1. Trade Creation—Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available.

Another result of trade creation is that buyers can acquire goods and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-priced products tend to drive higher demand for goods and services because they increase purchasing power.

2. Greater Consensus—The World Trade Organization (WTO) works to lower barriers on a global scale. Efforts at regional economic integration differ in that they comprise smaller groups of nations—ranging from several countries to as many as 30 or more. The benefit of trying to eliminate trade barriers in smaller groups of countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 153 countries that comprise the WTO. 3. Political Cooperation—There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

4. Employment Opportunities—Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage.

Drawbacks of Regional Integration-Some of the drawbacks of regional integration are as follows.

1. Trade Diversion—The flip side of trade creation is trade diversion—the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can actually result in increased trade with a less-efficient producer within the trading bloc and reduced trade with a more efficient, nonmember producer. In this sense, economic integration can unintentionally reward a less efficient producer within the trading bloc.

Unless there is other internal competition for the producer's good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer.

2. Shifts in Employment—The formation of a trading bloc promotes efficiency by significantly reducing or eliminating barriers to trade among its members. The surviving producer of a particular good or service, then, is likely to be the bloc's most efficient producer. Industries requiring mostly unskilled labor, for example, tend to respond to the formation of a trading bloc by shifting production to a low-wage nation within the bloc.

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3. Loss of National Sovereignty—Successive levels of integration require that nations surrender more of their national sovereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in a free trade area. By contrast, a political union requires nations to give up a high degree of sovereignty in foreign policy. This is why a political union is so hard to achieve. Long histories of cooperation or animosity between nations do not become irrelevant when a group of countries forms a union. Because one member nation may have very delicate ties with a nonmember nation with which another member may have very strong ties, the setting of a common foreign policy can be extremely tricky.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

49) Discuss free trade areas as a level of regional economic integration. How can regional integration enable employment opportunities?

Answer: Economic integration whereby countries seek to remove all barriers to trade among themselves, but each country determines its own barriers against nonmembers, is called a free trade area. A free trade area is the lowest level of economic integration that is possible between two or more countries. Countries belonging to the free trade area strive to remove all tariffs and nontariff barriers, such as quotas and subsidies, on international trade in goods and services.

However, each country is able to maintain whatever policy it sees fit against nonmember countries. These policies can differ widely from country to country. Countries belonging to a free trade area also typically establish a process by which trade disputes can be resolved.

Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage. Regional integration has opened doors for young people in Europe. Forward-looking young people have abandoned extreme nationalism and have taken on what can only be described as a "European" attitude that embraces a shared history. Those with language skills and a willingness to pick up and move to another EU country get to explore a new culture's way of life while earning a living. As companies seek their future leaders in Europe, they will hire people who can think across borders and across cultures.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

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50) Discuss "political union" as a level of economic integration and "political cooperation" as a benefit of economic integration.

Answer: Economic and political integration whereby countries coordinate aspects of their economic and political systems is called a political union. A political union requires member nations to accept a common stance on economic and political matters regarding nonmember nations. However, nations are allowed a degree of freedom in setting certain political and economic policies within their territories. Individually, Canada and the United States provide early examples of political unions. In both these nations, smaller states and provinces combined to form larger entities. A group of nations currently taking steps in this direction is the European Union.

There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 8.1: Outline the levels of economic integration and its debate.

51) Explain the concepts of trade creation and trade diversion. Who are the winners and losers in each scenario?

Answer: Trade Creation—Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available.

Another result of trade creation is that buyers can acquire goods and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-priced products tend to drive higher demand for goods and services because they increase purchasing power.

Trade Diversion—The flip side of trade creation is trade diversion—the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can actually result in increased trade with a less-efficient producer within the trading bloc and reduced trade with a more efficient, nonmember producer. In this sense, economic integration can unintentionally reward a less efficient producer within the trading bloc. Unless there is other internal competition for the producer's good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.1: Outline the levels of economic integration and its debate.

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52) Currently the most sophisticated and advanced example of regional integration is occurring in ________.

A) Asia B) Europe C) North America D) Africa Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

53) In 1951, Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris and created the ________.

A) European Union B) European Economic Community C) European Coal and Steel Community D) European Community Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

54) Which of the following treaties was signed by the members of the European Coal and Steel Community in 1957 for creating the European Economic Community?

A) the Treaty of Rome B) the Maastricht Treaty C) the Treaty of Paris D) the Treaty of Versailles Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

55) Which of the following materialized the EU's goals of removing trade barriers, increasing harmonization, and enhancing the competitiveness of European companies?

A) the Maastricht Treaty B) the European Monetary Union C) the Single European Act D) the Copenhagen Criteria Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

17 .

56) The ________ called for banking in a single common currency, setting up of monetary and fiscal targets, and political union of the European Union members.

A) Maastricht Treaty B) European Monetary Union C) Single European Act D) Copenhagen Criteria Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

57) The European Union plan that established its own central bank and currency in January 1999 is known as the ________.

A) Single European Act B) European Monetary Union C) Copenhagen Criteria D) Southern Common Market Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

58) The ________ is the common currency of the European Union.

A) franc B) pound C) euro D) mark Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

59) Which of the following statements about the euro is true?

A) It was adopted by all existing EU members when it was first initiated.

B) It must be adopted by countries as a precondition to joining the EU. C) It cannot be used by countries that are not members of the EU. D) It was designed to eliminate currency as a barrier to trade in the EU. Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.2: Describe integration in Europe and its enlargement.

18 .

60) Which of the following countries has been facing difficulties in negotiations regarding its application for European Union membership?

A) Bulgaria B) Czech Republic C) Romania D) Turkey Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

61) For countries to become members of the European Union, they have to meet certain demands laid down by the EU referred to as the ________.

A) Copenhagen Criteria B) Closer Economic Relations Agreement C) Andean Community D) Euro-Plus Pact Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

62) Which of the following institutions is least likely to play an important role in monitoring and enforcing economic and political integration in the European Union?

A) European Parliament B) Council of the European Union C) European Court of Human Rights D) European Commission Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

63) The main purpose of the ________ is to debate and amend legislation proposed by the European Commission of the EU. A) European Parliament B) Council of the European Union C) Court of Auditors D) Court of Justice Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

19 .

64) The Council of the European Union is the ________ body of the European Union.

A) legislative B) executive C) judicial D) monitoring Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

65) No proposed legislation becomes EU law unless the ________ votes it into law.

A) Council of the European Union B) European Parliament C) Court of Auditors D) European Commission Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

66) The European Commission is the ________ body of the European Union.

A) legislative B) executive C) financial D) monitoring Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

67) The Court of Justice is the ________ of the European Union.

A) court of honor B) court of appeals C) small-claims court D) arbitral tribunal Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

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68) The European Free Trade Association was formed in 1960 to focus on trade in ________.

A) consumer goods B) agricultural goods C) industrial goods D) services Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

69) Which of the following is currently a member of the European Free Trade Association?

A) Slovakia B) Ireland C) Norway D) Italy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

70) Which of the following is best classified as an economic union?

A) Southern Common Market (MERCOSUR) B) European Union (EU) C) North American Free Trade Agreement (NAFTA) D) Andean Community Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 8.2: Describe integration in Europe and its enlargement.

71) The Maastricht Treaty called for political union of the member nations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

72) Ombudsman and Data Protection Supervisor are the EU institutions that fulfill secondary and support roles.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

21 .

73) The Council of the European Union is the legislative body of the EU. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

74) The Court of Justice is the court of appeals of the European Union.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

75) Like the European Union commissioners, EU justices are required to act in the interest of their native countries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.2: Describe integration in Europe and its enlargement.

76) The European Free Trade Association focuses on trade only in consumer goods, and not in manufactured goods.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

77) The European Union (EU) and European Free Trade Association (EFTA) created the European Economic Area (EEA).

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.2: Describe integration in Europe and its enlargement.

22 .

78) Describe the structure of the European Union.

Answer: Five EU institutions play particularly important roles in monitoring and enforcing economic and political integration.

European Parliament—The European Parliament consists of 736 members elected by popular vote within each member nation every five years. As such, they are expected to voice their particular political views on EU matters. The European Parliament fulfills its role of adopting EU law by debating and amending legislation proposed by the European Commission. It exercises political supervision over all EU institutions—giving it the power to supervise commissioner appointments and to censure the commission. It also has veto power over some laws (including the annual budget of the EU). There is a call for increased democratization within the EU, and some believe this could be achieved by strengthening the powers of the Parliament. The Parliament conducts its activities in Belgium (in the city Brussels), France (in the city Strasbourg), and Luxembourg.

Council of the European Union—The council is the legislative body of the EU. When it meets, it brings together representatives of member states at the ministerial level. The makeup of the council changes depending on the topic under discussion. For example, when the topic is agriculture, the council is composed of the ministers of agriculture from each member nation. No proposed legislation becomes EU law unless the council votes it into law. Although passage into law for sensitive issues such as immigration and taxation still requires a unanimous vote, some legislation today requires only a simple majority to win approval. The council also concludes, on behalf of the EU, international agreements with other nations or international organizations. The council is headquartered in Brussels, Belgium.

European Commission—The commission is the executive body of the EU. It comprises commissioners appointed by each member country—larger nations get two commissioners, smaller countries get one. Member nations appoint the president and commissioners after being approved by the European Parliament. It has the right to draft legislation, is responsible for managing and implementing policy, and monitors member nations' implementation of, and compliance with, EU law. Each commissioner is assigned a specific policy area, such as competitive policy or agricultural policy. Although commissioners are appointed by their national governments, they are expected to behave in the best interest of the EU as a whole, not in the interest of their own country. The European Commission is headquartered in Brussels, Belgium.

Court of Justice—The Court of Justice is the court of appeals of the EU and is composed of 27 judges (one from each member nation) and eight advocates general who hold renewable six-year terms. One type of case that the Court of Justice hears is one in which a member nation is accused of not meeting its treaty obligations. Another type is one in which the commission or council is charged with failing to live up to its responsibilities under the terms of a treaty. Like the commissioners, justices are required to act in the interest of the EU as a whole, not in the interest of their own countries. The Court of Justice is located in Luxembourg.

Court of Auditors—The Court of Auditors comprises 27 members (one from each member nation) appointed for renewable six-year terms. The court is assigned the duty of auditing the EU accounts and implementing its budget. It also aims to improve financial management in the EU and report to member nations' citizens on the use of public funds. As such, it issues annual reports and statements on implementation of the EU budget. The court employs roughly 800 auditors and staff to assist it in carrying out its functions. The Court of Auditors is based in Luxembourg.

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AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.2: Describe integration in Europe and its enlargement.

79) While ________ encourages free trade among Canada, Mexico and the United States, manufacturers and distributors must abide by local content requirements and rules of origin.

A) NAFTA B) LAFTA C) CAN D) CAFTA-DR Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

80) Which of the following countries is a member of the North American Free Trade Agreement (NAFTA)?

A) Costa Rica B) Honduras C) Venezuela D) Canada Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

81) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

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82) The ________ was established in 2006 between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and later the Dominican Republic.

A) NAFTA B) LAFTA C) CAFTA-DR D) CAN Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

83) The main objectives of the Andean Community include ________.

A) introduction of tariffs for trade among member countries B) separate policies in both transportation and certain industries C) a common external tariff D) a common currency Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

84) In today's world, the Andean Community is best described as an incomplete ________.

A) free-trade area B) customs union C) economic union D) political union Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

85) ALADI refers to the ________.

A) Latin American Integration Association B) Association of Southeast Asian Nations C) Asia Pacific Economic Cooperation D) Latin American Free Trade Association Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

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86) Today, the Southern Common Market (MERCOSUR) acts as a(n) ________.

A) economic union B) political union C) customs union D) preferential trading area Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

87) The main challenge facing the Caribbean Community and Common Market (CARICOM) is that ________.

A) the bloc has not yet signed an agreement calling for a single market B) military conflicts continue to hamper efforts to move toward political union C) most members trade more with nonmembers than they do with each other D) the bloc has had no success in persuading Chile to become a member Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

88) The common market between Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua is referred to as the ________.

A) Latin American Integration Association B) Central American Common Market C) Andean Community D) Southern Common Market Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

89) Which of the following countries of the Central American Common Market has adopted the U.S. dollar as its official currency?

A) El Salvador B) Honduras C) Nicaragua D) Costa Rica Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

26 .

90) The Free Trade Area of the Americas (FTAA) is a trade agreement ________.

A) between Mexico, Canada, and the U.S. B) among the South American nations C) that has been proposed to create the largest free trade area on the planet D) that includes the United States and the European Union Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

Scenario: Learning the Americas' Way The newly-formed countries that emerged after the break-up of the United Frontier States (UFS) are interested in learning more about integration in the Americas. Because the former UFS nations have many similarities with the countries of North and South America, they believe they can learn from the integration experience in the Americas. To that end, they pose the following questions.

91) The regional trade agreement between Canada, Mexico, and the United States to eliminate tariffs and non-tariff barriers between themselves is known as the ________.

A) Central American Free Trade Agreement B) Andean Community C) Caribbean Community and Common Market D) North American Free Trade Agreement Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

92) ________ is an example of a free trade agreement.

A) NAFTA B) Mercosur C) European Union D) APEC Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

27 .

93) Bolivia, Colombia, Ecuador, and Peru belong to the ________.

A) Latin American Free Trade Association (LAFTA) B) Central American Common Market C) Andean Community D) Latin American Integration Association (ALADI) Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

94) The Andean Community most closely resembles a(n) ________.

A) economic union B) customs union C) common market D) political union Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

95) Canada and the United States are early examples of political unions.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

96) The North American Free Trade Agreement membership includes Canada, Mexico, and the United States.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

97) The Southern Common Market is also referred to as MERCOSUR. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

28 .

98) Today, the Southern Common Market acts as a political union.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.3: Describe integration in the Americas and its prospects.

99) The main difficulty CARICOM will continue to face is that most members trade more with nonmembers than they do with each other.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

100) Explain the Single European Act and how it helped to integrate Europe. How did the Single European Act help prompt the creation of NAFTA? Answer: By the mid-1980s, EU member nations were frustrated by remaining trade barriers and a lack of harmony on several important matters, including taxation, law, and regulations. The important objective of harmonizing laws and policies was beginning to appear unachievable. A commission that was formed to analyze the potential for a common market by the end of 1992 put forth several proposals. The goal was to remove remaining barriers, increase harmonization, and thereby enhance the competitiveness of European companies. The proposals became the Single European Act (SEA) and went into effect in 1987.

As companies positioned themselves to take advantage of the opportunities that the SEA offered, a wave of mergers and acquisitions swept across Europe. Large firms combined their special understanding of European needs, capabilities, and cultures with their advantage of economies of scale. Small and medium-sized companies were encouraged through EU institutions to network with one another to offset any negative consequences resulting from, for example, changing product standards.

Accelerating integration in Europe caused new urgency in the task of creating a North American trading bloc that included Mexico. Mexico joined what is now the World Trade Organization in 1987 and began privatizing state-owned enterprises in 1988. Talks among Canada, Mexico, and the United States in 1991 eventually resulted in the formation of the North American Free Trade Agreement (NAFTA). NAFTA became effective in January 1994 and superseded the U.S.– Canada Free Trade Agreement. Today NAFTA comprises a market with 445 million consumers and a GDP of around $16 trillion.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

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101) Briefly describe regional integration efforts in Central America and the Caribbean.

Answer: Attempts at economic integration in Central American countries and throughout the Caribbean basin have been much more modest than efforts elsewhere in the Americas.

Caribbean Community and Common Market (CARICOM)—The Caribbean Community and Common Market (CARICOM) trading bloc was formed in 1973. There are 15 full members, 5 associate members, and 7 observers active in CARICOM. Although the Bahamas is a member of the community, it does not belong to the common market. As a whole, CARICOM has a combined GDP of nearly $30 billion and a market of almost 6 million people.

A key CARICOM agreement calls for establishment of a CARICOM Single Market, which would establish the free movement of factors of production including goods, services, capital, and labor. The main difficulty CARICOM will continue to face is that most members trade more with nonmembers than they do with one another simply because members do not have the imports each other needs.

Central American Common Market (CACM)—The Central American Common Market (CACM) was formed in 1961 to create a common market among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Together, the members of CACM comprise a market of 33 million consumers and have a combined GDP of about $120 billion. The common market was never realized, however, because of a long war between El Salvador and Honduras and guerrilla conflicts in several countries. Yet renewed peace is creating more business confidence and optimism, which is driving double-digit growth in trade between members.

Furthermore, the group has not yet created a customs union. External tariffs among members range between 4 and 12 percent. The tentative nature of cooperation was obvious when Honduras and Nicaragua slapped punitive tariffs on each other's goods during a recent dispute.

But officials remain positive, saying that their ultimate goal is European-style integration, closer political ties, and adoption of a single currency—probably the dollar. In fact, El Salvador has adopted the U.S. dollar as its official currency, and Guatemala already uses the dollar alongside its own currency, the quetzal.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.3: Describe integration in the Americas and its prospects.

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102) Compare and contrast the slow progress of the Andean Community and the Economic Community of West African States (ECOWAS). Why have these trade blocs not been more successful?

Answer: Formed in 1969, the Andean Community includes four South American countries located in the Andes mountain range—Bolivia, Colombia, Ecuador, and Peru. Today the Andean Community comprises a market of around 97 million consumers and a combined GDP of about $220 billion. The main objectives of the group include tariff reduction for trade among member nations, a common external tariff, and common policies in both transportation and certain industries. The Andean Community had the ambitious goal of establishing a common market by 1995, but delays mean that it remains a somewhat incomplete customs union.

Several factors hamper progress. Political ideology among member nations is somewhat hostile to the concept of free markets and favors a good deal of government involvement in business affairs. Also, inherent distrust among members makes lower tariffs and more open trade hard to achieve. The common market will be difficult to implement within the framework of the Andean Community. One reason is that each country has been given significant exceptions in the tariff structure that they have in place for trade with nonmember nations. Another reason is that countries continue to sign agreements with just one or two countries outside the Andean Community framework. Independent actions impair progress internally and hurt the credibility of the Andean Community with the rest of the world.

The Economic Community of West African States (ECOWAS) was formed in 1975 but restarted efforts at economic integration in 1992 because of a lack of early progress. One of the most important goals of ECOWAS is the formation of a customs union, an eventual common market, and a monetary union. Together, the ECOWAS nations comprise a large portion of the economic activity in sub-Saharan Africa.

Progress on market integration is almost nonexistent. In fact, the value of trade occurring among ECOWAS nations is just 11 percent of the value that the trade members undertake with third parties. But ECOWAS has made progress in the free movement of people, construction of international roads, and development of international telecommunication links. Some of its main problems are due to political instability, poor governance, weak national economies, poor infrastructures, and poor economic policies.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 8.3: Describe integration in the Americas and its prospects.

103) The major objective of the Association of Southeast Asian Nations (ASEAN) is to ________.

A) approach the European Union to resolve disputes between member countries B) safeguard the region's economic and political stability C) introduce barriers to trade and investment D) increase members' tariff rates from an average of 7.5 percent to 15 percent Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

31 .

104) Which of the following is part of ASEAN? A) Cuba B) Cambodia C) Peru D) Greenland Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

105) The primary purpose of the Gulf Cooperation Council at its formation was to ________.

A) cooperate with the increasingly powerful trading blocs in Europe at the time B) create the largest free trade area on the planet C) increase members' tariff rates from an average of 7.5 percent to 15 percent D) introduce barriers to trade and investment Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

106) A group of fifty-three nations on the African continent joined forces in 2002 to create the ________.

A) Economic Community of West African States B) African Union C) African Unification Front D) Organization of the African Unity Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 8.4: Summarize integration in Asia and elsewhere.

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Scenario: Moonland Union Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

107) The process undertaken by these twenty-six countries is an example of ________.

A) foreign direct investment B) protectionism C) economic nationalism D) regional economic integration Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

108) The stated aim of Asia Pacific Economic Cooperation (APEC) is to strengthen the multilateral trading system.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

109) Describe the Association of Southeast Asian Nations (ASEAN).

Answer: Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the Association of Southeast Asian Nations (ASEAN) in 1967. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1998. Together, the 10 ASEAN countries comprise a market of about 560 million consumers and a GDP of nearly $1.1 trillion. The three main objectives of the alliance are to (1) promote economic, cultural, and social development in the region; (2) safeguard the region's economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully.

Companies involved in Asia's developing economies are likely to be doing business with an ASEAN member. This is a more likely prospect as China, Japan, and South Korea accelerate their efforts to join ASEAN. China's admission would allow the club to bridge the gap between less advanced and more advanced economies.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

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110) Describe some of the cultural challenges of doing business with countries of Central and Eastern Europe. How do these challenges compare with the challenges of doing business with ASEAN countries?

Answer: The countries of Central and Eastern Europe that belong to the EU represent a land of opportunity. But like doing business anywhere, understanding of local culture can be a big advantage. Entrepreneurs who have succeeded in the Czech Republic offer this advice.

Formalities—Czech society is rather formal, hence it is necessary to use titles like "doctor" and "mister." It's rarely appropriate to use first names unless they are close friends.

Business Relationships—Making money is obviously important and the ultimate goal for any business. Still, building personal relationships, establishing good references, and doing favors for others can smooth the way for newcomers.

Czech Partners—Being communist for 40 years before it became a capitalist democracy has left its mark on the Czech people and their culture. Finding a local partner who can handle the inevitable cultural difficulties that arise is crucial.

Local Professionals—It is a good idea to hire a Czech accountant or someone familiar with Czech laws, taxes (including a VAT tax of 19 percent), and red tape. An attorney who is bilingual can also interpret differences between Czech and U.S. laws.

Who's in Charge—Companies need a "responsible person" (or jednatel in Czech) who is in charge of all aspects of the business. Some Czechs still feel more comfortable working with this jednatel rather than unfamiliar company reps.

Businesses unfamiliar with operating in ASEAN countries should exercise caution in their dealings. Some inescapable facts about ASEAN that warrant consideration are the following: Diverse Cultures and Politics—The Philippines is a representative democracy, Brunei is an oilrich sultanate, and Vietnam is a state-controlled communist country. Business policies and protocol must be adapted to each country.

Economic Competition—Many ASEAN nations are feeling the effects of China's power to attract investment from multinationals worldwide. Whereas ASEAN members used to attract around 30 percent of foreign direct investment into Asia's developing economies, it now attracts about half that amount.

Corruption and Shadow Markets—Bribery and shadow (unofficial) markets are common in many ASEAN countries, including Indonesia, Myanmar, the Philippines, and Vietnam.

Corruption studies typically place these countries at or very near the bottom of nations surveyed.

Political Change and Turmoil—Several nations in the region recently elected new leaders.

Indonesia in particular has gone through presidents at a fast clip recently. Companies must remain alert to shifting political winds and laws regarding trade and investment.

Border Disputes—Parts of Thailand's borders with Cambodia and Laos are tested frequently.

Hostilities break out sporadically between Thailand and Myanmar over border alignment and ethnic Shan rebels operating along the border.

Lack of Common Tariffs and Standards—Doing business in ASEAN nations can be costly.

Harmonized tariffs, quality and safety standards, customs regulations, and investment rules would cut transaction costs significantly.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 8.4: Summarize integration in Asia and elsewhere.

34 .

111) Explain how political cooperation is a benefit of regional integration. How has the Gulf Cooperation Council (GCC) evolved towards political cooperation?

Answer: There can also be political benefits from efforts toward regional economic integration.

A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts.

Several Middle Eastern nations formed the Gulf Cooperation Council (GCC) in 1980. Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The primary purpose of the GCC at its formation was to cooperate with the increasingly powerful trading blocs in Europe at the time—the EU and EFTA. The GCC has evolved, however, to become as much a political entity as an economic one. Its cooperative thrust allows citizens of member countries to travel freely in the GCC without visas. It also permits citizens of one member nation to own land, property, and businesses in any other member nation without the need for local sponsors or partners.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Moderate LO: 8.4: Summarize integration in Asia and elsewhere.

35 .

International Business: The Challenges of Globalization, 9e (Wild) Chapter 9 International Financial Markets 1) Company debt normally takes the form of ________, and it is an asset that can be traded anywhere at any time.

A) global bonds B) equity C) stocks D) bank loans Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

2) The stock market is also known as the ________.

A) capital market B) foreign-exchange market C) bond market D) equity-capital market Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

3) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

1 .

4) ________ 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

5) The ease with which bondholders and shareholders may convert their investments into cash is called ________.

A) barter B) clearing C) countertrade D) liquidity Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

6) An expanded money supply ________.

A) reduces the cost of borrowing B) increases interest rates C) makes it difficult for financial institutions to lend money D) diminishes entrepreneurial initiatives in a country Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

7) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

2 .

8) One of the major forces responsible for the rapid growth rate of the international capital market is ________.

A) economic nationalism B) information technology C) currency control D) extensive regulation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

9) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

10) The international bond market consists of all bonds sold by issuing companies, governments, or other organizations ________.

A) within their own countries B) outside their own countries C) within developing nations D) within developed nations Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

11) Eurobonds are popular because ________.

A) they are less risky than traditional bonds B) they are always denominated in euros C) governments of nations in which they are sold do not regulate them D) European companies are considered very stable Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

3 .

12) The absence of government regulation in the Eurobond market ________.

A) substantially reduces the cost of issuing a bond B) lowers the risk level of the bond C) makes Eurobonds less popular than foreign bonds D) exists because of the difficulty of regulating a multi-country market Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

13) Bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold are called ________.

A) municipal bonds B) foreign bonds C) Eurobonds D) domestic bonds Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

14) Foreign bonds issued in the U.S. and denominated in USD are called ________.

A) bulldog bonds B) Yankee bonds C) samurai bonds D) dragon bonds Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

15) Liquidity refers to the ease with which bondholders and shareholders may convert their investments to cash.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

4 .

16) An excess money supply creates a borrower's market, forcing interest rates up and the cost of borrowing down.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

17) Investors increase risk by holding international securities whose prices move independently.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

18) With the help of microfinance, low-income entrepreneurs can borrow money at competitive rates without having to put anything up as collateral.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

19) Increased regulation of national capital markets has been instrumental in the slowing down the expansion of the international capital market.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

20) Securitization is the unbundling and repackaging of hard-to-trade financial assets into liquid financial instruments.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

21) An offshore financial center is a territory whose financial sector features very few regulations and few, if any, taxes.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

5 .

22) Booking centers are usually located on small territories with high taxes and/or secrecy laws.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

23) Booking centers are typically home to offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

24) Issuing bonds internationally is an increasingly popular way to obtain needed funding.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.1: Explain the importance of the international capital market.

6 .

25) Describe the purposes of the international capital market. What factors account for its rapid growth?

Answer: The international capital market is a network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. It consists of both formal exchanges (in which buyers and sellers meet to trade financial instruments) and electronic networks (in which trading occurs anonymously). This market makes use of unique and innovative financial instruments specially designed to fit the needs of investors and borrowers located in different countries that are doing business with one another. Large international banks play a central role in the international capital market. They gather the excess cash of investors and savers around the world and then channel this cash to borrowers across the globe.

1. Expands the Money Supply for Borrowers—The international capital market is a conduit for joining borrowers and lenders in different national capital markets. A company that is unable to obtain funds from investors in its own nation can seek financing from investors elsewhere, making it possible for the company to undertake an otherwise impossible project.

2. Reduces the Cost of Money for Borrowers—An expanded money supply reduces the cost of borrowing.

3. Reduces Risk for Lenders—The international capital market expands the available set of lending opportunities.

Around 40 years ago, national capital markets functioned largely as independent markets. But since that time, the amount of debt, equity, and currencies traded internationally has increased dramatically. This rapid growth can be traced to three main factors: Information Technology: Information is the lifeblood of every nation's capital market because investors need information about investment opportunities and their corresponding risk levels.

Large investments in information technology over the past two decades have drastically reduced the costs, in both time and money, of communicating around the globe. Investors and borrowers can now respond in record time to events in the international capital market. The introduction of electronic trading after the daily close of formal exchanges also facilitates faster response times.

Deregulation: Deregulation of national capital markets has been instrumental in the expansion of the international capital market. The need for deregulation became apparent in the early 1970s, when heavily regulated markets in the largest countries were facing fierce competition from less regulated markets in smaller nations.

Financial Instruments: Greater competition in the financial industry is creating the need to develop innovative financial instruments.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

7 .

26) Explain the role of equity in a national capital market. What factors are responsible for the growth of the international equity market?

Answer: Equity is part ownership of a company in which the equity holder participates with other part owners in the company's financial gains and losses. Equity normally takes the form of stock—shares of ownership in a company's assets that give shareholders (stockholders) a claim on the company's future cash flows. Shareholders may be rewarded with dividends—payments made out of surplus funds—or by increases in the value of their shares. Of course, they may also suffer losses due to poor company performance—and thus decreases in the value of their shares.

Dividend payments are not guaranteed but are determined by the company's board of directors and based on financial performance. In capital markets, shareholders can sell one company's stock for that of another or liquidate them—exchange them for cash. Liquidity, which is a feature of both debt and equity markets, refers to the ease with which bondholders and shareholders may convert their investments into cash.

Four factors are responsible for much of the past growth in the international equity market.

1. Spread of Privatization—As many countries abandoned central planning and socialist-style economics, the pace of privatization accelerated worldwide. A single privatization often places billions of dollars of new equity on stock markets.

2. Economic Growth in Emerging Markets—Continued economic growth in emerging markets is contributing to growth in the international equity market. Companies based in these economies require greater investment as they succeed and grow. The international equity market becomes a major source of funding because only a limited supply of funds is available in these nations.

3. Activity of Investment Banks—Global banks facilitate the sale of a company's stock worldwide by bringing together sellers and large potential buyers. Increasingly, investment banks are searching for investors outside the national market in which a company is headquartered. In fact, this method of raising funds is becoming more common than listing a company's shares on another country's stock exchange.

4. Advent of Cybermarkets—The automation of stock exchanges is encouraging growth in the international equity market. The term cybermarkets denotes stock markets that have no central geographic locations. Rather, they consist of global trading activities conducted on the Internet.

Cybermarkets (consisting of supercomputers, high-speed data lines, satellite uplinks, and individual personal computers) match buyers and sellers in nanoseconds. They allow companies to list their stocks worldwide through an electronic medium in which trading takes place 24 hours a day.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Moderate LO: 9.1: Explain the importance of the international capital market.

8 .

27) The world's three most important financial centers are ________.

A) Zurich, Paris, and Washington B) China, Brazil, and Mexico C) Tokyo, London, and New York D) Dubai, Beijing, and Germany Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

28) Which of the following represents a country or territory whose financial sector features very few regulations and few, if any, taxes?

A) offshore financial center B) interbank market C) international financial services district D) Eurocurrency market Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

29) An offshore financial center is usually characterized by ________.

A) extensive regulations B) economic and political instability C) excellent telecommunications D) high taxes Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

30) Which of the following is NOT one of the top four locations for trading foreign exchange?

A) London B) New York C) Tokyo D) Hong Kong Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

9 .

31) ________ are usually located on small island nations or territories with favorable tax and/or secrecy laws.

A) Cybermarkets B) Over-the-counter markets C) Booking centers D) Operational centers Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

32) A bond issue floated by a U.S. company in dollars in London, Luxembourg, and Switzerland by a syndication of bonds is an example of a ________.

A) global bond B) domestic bond C) Eurobond D) foreign bond Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

33) Which of the following factors is responsible for growth in the international equity market?

A) advent of cybermarkets B) spread of countertrade C) centrally planned economies D) government partnerships Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

34) Which of the following terms refers to a stock market with no central geographic location?

A) cybermarket B) foreign exchange market C) capital market D) international bond market Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

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35) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

36) British pounds of a British trading company that are deposited in a U.S. bank are called ________.

A) Eurodollars B) U.S. dollars C) Europounds D) Pounds Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

37) Rates that the world's largest banks charge one another for loans are called ________.

A) interbank interest rates B) London Interbank Bid Rates C) exchange rates D) official bank rates Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

38) A currency used as an intermediary to convert funds between two other currencies in the foreign exchange market is called a ________.

A) local currency B) vehicle currency C) community currency D) private currency Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

11 .

39) Why is London most likely the top market for trading foreign exchange?

A) The British pound is the world's top trading currency.

B) Most multinational firms are headquartered in London.

C) London is uniquely positioned geographically in terms of time zones.

D) British traders have always been the most sophisticated in the world.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

Scenario: ABC Software ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China.

40) The company's financial advisors recommend that ABC Software conduct most of its business in a vehicle currency. Which of the following is true of vehicle currencies?

A) A vehicle currency is a contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.

B) The U.S. dollar, Australian dollar, Japanese yen, and British pound are all examples of vehicle currencies.

C) The U.S. dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.

D) The Chinese yuan is expected to become a vehicle currency in the near future as China's position in world trade continues to grow.

Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

41) Foreign bonds issued and traded in Asia outside Japan and normally denominated in dollars are called ________.

A) bulldog bonds B) Yankee bonds C) samurai bonds D) dragon bonds Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

12 .

42) The spread of nationalization encourages the growth of the international equity market.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

43) A Eurocurrency refers to a currency on deposit outside its country of issue.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

44) The London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

45) The forces of supply and demand play no role in determining rates of exchange and currency prices.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

46) Currency arbitrage is the instantaneous purchase and sale of a currency in different markets for profit.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

47) Companies use interest arbitrage to find better interest rates abroad than those that are available in their home countries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.2: Describe the main components of the international capital market.

13 .

48) What is an offshore financial center? Differentiate between an operational center and a booking center, providing examples for each.

Answer: An offshore financial center is a country or territory whose financial sector features very few regulations and few, if any, taxes. These centers tend to be economically and politically stable and provide access to the international capital market through an excellent telecommunications infrastructure. Most governments protect their own currencies by restricting the amount of activity that domestic companies can conduct in foreign currencies. So companies can find it hard to borrow funds in foreign currencies and thus turn to offshore centers, which offer large amounts of funding in many currencies. In short, offshore centers are sources of (usually cheaper) funding for companies with multinational operations.

Offshore financial centers fall into two categories: Operational centers see a great deal of financial activity. Prominent operational centers include London (which does a good deal of currency trading) and Switzerland (which supplies a great deal of investment capital to other nations).

Booking centers are usually located on small island nations or territories with favorable tax and/or secrecy laws. Little financial activity takes place here. Rather, funds simply pass through on their way to large operational centers. Booking centers are typically home to offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information. Some important booking centers are the Cayman Islands and the Bahamas in the Caribbean; Gibraltar, Monaco, and the Channel Islands in Europe; Bahrain and Dubai in the Middle East; and Singapore in Southeast Asia.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

49) How does the international capital market reduce the cost of money for borrowers? What are the two components for every quoted exchange rate?

Answer: An expanded money supply reduces the cost of borrowing. Similar to the prices of potatoes, wheat, and other commodities, the "price" of money is determined by supply and demand. If its supply increases, its price—in the form of interest rates—falls. That is why excess supply creates a borrower's market, forcing down interest rates and the cost of borrowing.

Projects regarded as infeasible because of low expected returns might be viable at a lower cost of financing.

There are two components to every quoted exchange rate: the quoted currency and the base currency. If an exchange rate quotes the number of Japanese yen needed to buy one U.S. dollar (¥/$), the yen is the quoted currency and the dollar is the base currency. When any exchange rate is designated, the quoted currency is always the numerator and the base currency is the denominator.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

14 .

50) What is the role of debt in national capital markets, and what form does company debt normally take? Describe the different types of international bonds.

Answer: Debt consists of loans, for which the borrower promises to repay the borrowed amount (the principal) plus a predetermined rate of interest. Company debt normally takes the form of bonds—instruments that specify the timing of principal and interest payments. The holder of a bond (the lender) can force the borrower into bankruptcy if the borrower fails to pay on a timely basis. Bonds issued for the purpose of funding investments are commonly issued by privatesector companies and by municipal, regional, and national governments.

One instrument used by companies to access the international bond market is called a Eurobond—a bond issued outside the country in whose currency it is denominated. In other words, a bond issued by a Venezuelan company, denominated in U.S. dollars, and sold in Britain, France, Germany, and the Netherlands (but not available in the United States or to its residents) is a Eurobond. Because this Eurobond is denominated in U.S. dollars, the Venezuelan borrower both receives the loan and makes its interest payments in dollars.

Eurobonds are popular (accounting for 75 to 80 percent of all international bonds) because the governments of countries in which they are sold do not regulate them. The absence of regulation substantially reduces the cost of issuing a bond. Unfortunately, it increases its risk level—a fact that may discourage some potential investors. The traditional markets for Eurobonds are Europe and North America.

Companies also obtain financial resources by issuing so-called foreign bonds—bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold. For example, a yen-denominated bond issued by the German carmaker BMW in Japan's domestic bond market is a foreign bond. Foreign bonds account for about 20 to 25 percent of all international bonds.

Foreign bonds are subject to the same rules and regulations as the domestic bonds of the country in which they are issued. Countries typically require issuers to meet certain regulatory requirements and to disclose details about company activities, owners, and upper management.

Thus BMW's samurai bonds (the name for foreign bonds issued in Japan) would need to meet the same disclosure and other regulatory requirements that Toyota's bonds in Japan must meet.

Foreign bonds in the United States are called Yankee bonds, and those in the United Kingdom are called bulldog bonds. Foreign bonds issued and traded in Asia outside Japan (and normally denominated in dollars) are called dragon bonds.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

15 .

51) Briefly describe any two of the three main components of the international capital market.

Answer: The international bond market consists of all bonds sold by issuing companies, governments, or other organizations outside their own countries. Issuing bonds internationally is an increasingly popular way to obtain needed funding. Typical buyers include medium-sized to large banks, pension funds, mutual funds, and governments with excess financial reserves. Large international banks typically manage the sales of new international bond issues for corporate and government clients.

The international equity market consists of all stocks bought and sold outside the issuer's home country. Companies and governments frequently sell shares in the international equity market.

Buyers include other companies, banks, mutual funds, pension funds, and individual investors.

The stock exchanges that list the greatest number of companies from outside their own borders are Frankfurt, London, and New York. Large international companies frequently list their stocks on several national exchanges simultaneously and sometimes offer new stock issues only outside their country's borders.

All the world's currencies that are banked outside their countries of origin are referred to as Eurocurrency and trade on the Eurocurrency market. Thus U.S. dollars deposited in a bank in Tokyo are called Eurodollars, and British pounds deposited in New York are called Europounds.

Japanese yen deposited in Frankfurt are called Euroyen, and so forth.

Because the Eurocurrency market is characterized by very large transactions, only the very largest companies, banks, and governments are typically involved. Deposits originate primarily from four sources: 1. Governments with excess funds generated by a prolonged trade surplus 2. Commercial banks with large deposits of excess currency 3. International companies with large amounts of excess cash 4. Extremely wealthy individuals AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.2: Describe the main components of the international capital market.

52) The market in which currencies are bought and sold and their prices determined is called the ________.

A) Eurocurrency market B) international capital market C) international bond market D) foreign exchange market Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.3: Outline the functions of the foreign exchange market.

16 .

53) The ________ is the currency that dominates the foreign exchange market.

A) Japanese yen B) British pound C) U.S. dollar D) Australian dollar Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.3: Outline the functions of the foreign exchange market.

54) The world's largest banks exchange currencies at spot and forward rates in the ________.

A) International Finance Corporation B) Eurocurrency market C) Interbank market D) World Bank Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.3: Outline the functions of the foreign exchange market.

55) Banks in the interbank market ________.

A) provide long-term loans to small-sized and medium-sized companies B) provide long-term loans to large companies C) offer advice on trading strategies D) exchange currencies exclusively at spot rates Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.3: Outline the functions of the foreign exchange market.

56) In the interbank market, the process of aggregating the currencies that one bank owes another and then carrying out that transaction is called ________.

A) swapping B) dumping C) hedging D) clearing Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.3: Outline the functions of the foreign exchange market.

17 .

57) What is the foreign exchange market? Explain why investors use this market.

Answer: Unlike domestic transactions, international transactions involve the currencies of two or more nations. To exchange one currency for another in international transactions, companies rely on a mechanism called the foreign exchange market—a market in which currencies are bought and sold and their prices are determined. Financial institutions convert one currency into another at specific exchange rate—the rate at which one currency is exchanged for another.

Rates depend on the size of the transaction, the trader conducting it, general economic conditions, and sometimes government mandate.

The foreign exchange market is not really a source of corporate finance. Rather, it facilitates corporate financial activities and international transactions. Investors use the foreign exchange market for four main reasons.

Currency Conversion—Companies use the foreign exchange market to convert one currency into another.

Currency Hedging—The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency hedging. International companies commonly use hedging for one of two purposes: 1. To lessen the risk associated with international transfers of funds.

2. To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment.

Currency Arbitrage—It is the instantaneous purchase and sale of a currency in different markets for profit.

Currency Speculation—It is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency's price will go either up or down in the future.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.3: Outline the functions of the foreign exchange market.

58) A(n) ________ is a system that allocates financial resources in the form of debt and equity according to their most efficient uses.

A) international equity market B) forward market C) capital market D) eurocurrency market Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

18 .

59) ________ refers to the most commonly quoted interest rate that London banks charge other large banks that borrow Eurocurrency.

A) London Interbank Offer Rate (LIBOR) B) London Interbank Bid Rate (LIBID) C) Spot rate D) Cross rate Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

60) The rate at which one currency is expressed in relation to the currency of another country is called the ________.

A) exchange rate B) interbank interest rate C) official cash rate D) prime rate Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

61) The bid-ask spread in the foreign exchange market is the ________.

A) price at which a bank will buy a currency B) price of currency in the foreign exchange market C) difference between the bid and ask quotes for a currency D) the time lapsed between a bid quote and an ask quote Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

62) Investors use the foreign exchange market for ________.

A) stock dilution B) currency speculation C) market capitalization D) mean reversion Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

19 .

63) The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency ________.

A) hedging B) arbitrage C) speculation D) conversion Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

64) ________ is the instantaneous purchase and sale of a currency in different markets for profit.

A) Currency hedging B) Currency arbitrage C) Currency speculation D) Currency conversion Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

65) The profit-motivated purchase and sale of interest-paying securities denominated in different currencies is called ________.

A) currency conversion B) currency hedging C) interest arbitrage D) interbank interest rates Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

66) The purchase or sale of a currency with the expectation that its value will change and generate a profit is called ________.

A) currency hedging B) currency arbitrage C) currency speculation D) currency conversion Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

20 .

67) In a quoted exchange rate of $1.69/British pound, the British pound is called the ________.

A) base currency B) counter currency C) cross currency D) quoted currency Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

68) An exchange rate of ¥117.87/$ indicates ________.

A) that 117.87 yen buys one dollar B) that 117.87 dollars buys one yen C) a direct quote on the dollar D) an indirect quote on the yen Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

69) While designating an exchange rate, the numerator indicates the ________.

A) base currency B) transaction currency C) quoted currency D) cross currency Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

70) While designating an exchange rate, the ________ is always the denominator.

A) counter currency B) base currency C) cross currency D) quoted currency Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

21 .

71) The exchange rate between the euro (€) and the dollar is €0.8461/$. Which of the following is the correct direct quote on the dollar?

A) $2.20/€ B) $1.1819/€ C) $5.50/€ D) $0.8461/€ Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.4: Explain the different types of currency quotes and exchange rates.

72) An exchange rate calculated using two other exchange rates is called a(n) ________.

A) interest arbitrage B) forward contract C) forward rate D) cross rate Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

73) Which of the following is an exchange rate that requires delivery of the traded currency within two business days?

A) forward rate B) spot rate C) cross rate D) prime rate Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

74) The exchange rate at which a bank will purchase a currency is called a ________ rate.

A) prime B) buy C) ask D) forward Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

22 .

75) Outright forward transactions involve the exchange of currency on a future date beyond two business days at a fixed exchange rate, known as the ________.

A) spot rate B) forward rate C) option rate D) reverse transaction rate Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

76) ________ is the simultaneous purchase and sale of foreign exchange for two different dates.

A) Currency hedging B) Currency speculation C) Currency swap D) Currency arbitrage Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

77) A(n) ________ is a right to exchange a specific amount of a currency on a specific date at a specific rate.

A) forward contract B) currency option C) currency hedging D) interest arbitrage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

23 .

Scenario: Sally Goes to Japan Sally Johnson has identified a market for her company's products in Japan. She is excited about expanding her company, but knows that she needs to learn how the foreign exchange market works before she can successfully sell her products abroad.

78) If Sally sees a quote of ¥117.87/$, she should know that ________.

A) the yen is the base currency here B) this is a direct quote on the dollar C) this is a direct quote on the yen D) the quote is in U.S. dollars Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.4: Explain the different types of currency quotes and exchange rates.

79) Which of the following is true about a quote of ¥117.87/$?

A) It is equal to $.008484/¥.

B) The quote is in U.S. dollars.

C) This is an indirect quote on the yen.

D) It costs a little more than a dollar to buy one yen.

Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.4: Explain the different types of currency quotes and exchange rates.

Scenario: ABC Software ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China.

80) If ABC Software simultaneously purchases and sells foreign exchange for two different dates, the company is said to be involved in ________.

A) increasing its foreign exchange rate risk B) conducting a currency swap C) entering an arbitrage situation D) buying and selling at the spot rate Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

24 .

81) If ABC Software holds a currency option to purchase Swiss francs at SF 1.67/$ in 30 days, at the end of which the exchange rate is SF1.70/$, then ABC Software ________.

A) is required to follow through on a currency exchange B) has succeeded in hedging against exchange rate risk C) would exercise its currency option D) would not exercise its currency option Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.4: Explain the different types of currency quotes and exchange rates.

82) Currency speculation is the purchase or sale of a currency with the expectation that its value will remain fluctuate.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

83) In any exchange rate, the quoted currency is always the numerator.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

84) Exchange rate risk is the risk of fluctuation in exchange rates.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

85) Two firms participating in a swap must use the same currency.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

25 .

86) An exchange rate requiring delivery of the traded currency within two business days is called a cross rate.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

87) If an individual is traveling to another country and wants to exchange currencies at his bank before departing, he will be quoted the spot rate since he is exchanging that will be delivered to him with two business days.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 9.4: Explain the different types of currency quotes and exchange rates.

88) Forward rates represent the expectations of currency traders and bankers regarding a currency's future spot rate.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

89) International banks participate in the swap market by acting as broker or by undertaking half of a swap for its own account.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.4: Explain the different types of currency quotes and exchange rates.

26 .

90) Identify and explain the types of currency instruments used in the forward market.

Answer: When a company knows that it will need a certain amount of foreign currency on a certain future date, it can exchange currencies using a forward rate—an exchange rate at which two parties agree to exchange currencies on a specified future date. Forward rates represent the expectations of currency traders and bankers regarding a currency's future spot rate. Reflected in these expectations are a country's present and future economic conditions (including inflation rate, national debt, taxes, trade balance, and economic growth rate) as well as its social and political situation. The forward market is the market for currency transactions at forward rates.

To insure themselves against unfavorable exchange-rate changes, companies commonly turn to the forward market. It can be used for all types of transactions that require future payment in other currencies, including credit sales or purchases, interest receipts or payments on investments or loans, and dividend payments to stockholders in other countries. But not all nations' currencies trade in the forward market, such as countries experiencing high inflation or currencies not in demand on international financial markets.

A forward contract is a contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. Forward contracts are commonly signed for 30, 90, and 180 days into the future, but customized contracts (say, for 76 days) are possible. Forward contracts belong to a family of financial instruments called derivatives— instruments whose values derive from other commodities or financial instruments. These include not only forward contracts but also currency swaps, options, and futures.

A currency swap is the simultaneous purchase and sale of foreign exchange for two different dates. Currency swaps are an increasingly important component of the foreign exchange market.

Recall that a forward contract requires exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. In contrast, a currency option is a right, or option, to exchange a specific amount of a currency on a specific date at a specific rate. In other words, whereas forward contracts require parties to follow through on currency exchanges, currency options do not.

Similar to a currency forward contract is a currency futures contract—a contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

27 .

91) Explain the concept of cross rates. Include the description of a vehicle currency and the role it plays in the foreign exchange market.

Answer: International transactions between two currencies other than the U.S. dollar often use the dollar as a vehicle currency. For example, a retail buyer of merchandise in the Netherlands might convert its euros to U.S. dollars and then pay its Japanese supplier in U.S. dollars. The Japanese supplier may then take those U.S. dollars and convert them to Japanese yen. This process was more common years ago, when fewer currencies were freely convertible and when the United States greatly dominated world trade. Today, a Japanese supplier may want payment in euros. In this case, both the Japanese and the Dutch companies need to know the exchange rate between their respective currencies. To find this rate using their respective exchange rates with the U.S. dollar, the cross rate is calculated which refers to the exchange rate calculated using two other exchange rates.

Cross rates between two currencies can be calculated using both currencies' indirect or direct exchange rates with a third currency.

Although the United Kingdom is the major location of foreign exchange trading, the U.S. dollar is the currency that dominates the foreign exchange market. Because the U.S. dollar is so widely used in world trade, it is considered a vehicle currency—a currency used as an intermediary to convert funds between two other currencies. The currencies most often involved in currency transactions are the U.S. dollar, European Union euro, Japanese yen, and British pound.

One reason the U.S. dollar is a vehicle currency is because the United States is the world's largest trading nation. The United States is so heavily involved in international trade that many companies and banks maintain dollar deposits, making it easy to exchange other currencies with dollars. Another reason is that, following the Second World War, all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency. In turn, the dollar's value was tied to a specific value of gold—a policy that held wild currency swings in check. Although world currencies are no longer linked to the value of gold (see Chapter 10), the stability of the dollar, along with its resistance to inflation, helps people and organizations maintain their purchasing power better than their own national currencies. Even today, people in many countries convert extra cash from national currencies into dollars.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

28 .

92) Explain the function of spot rates and the spot market.

Answer: Spot rates are exchange rates that require delivery of the traded currency within two business days. Exchange of the two currencies is said to occur "on the spot," and the spot market is the market for currency transactions at spot rates.

The spot market assists companies in performing any one of three functions: 1. Converting income generated from sales abroad into their home-country currency 2. Converting funds into the currency of an international supplier 3. Converting funds into the currency of a country in which they wish to invest The spot rate is available only for trades worth millions of dollars. That is why it is available only to banks and foreign exchange brokers. If an individual is traveling to another country and wants to exchange currencies at his bank before departing, he will not be quoted the spot rate.

Rather, banks and other institutions will give him a buy rate (the exchange rate at which the bank will buy a currency) and an ask rate (the rate at which it will sell a currency). In other words, he will receive bid and ask quotes. These rates reflect the amounts that large currency traders are charging, plus a markup.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.4: Explain the different types of currency quotes and exchange rates.

93) ________ in the foreign exchange market specialize in currency futures and options transactions.

A) Securities exchanges B) Eurocurrency markets C) Interbank markets D) Over-the-counter markets Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

94) ________ is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants.

A) Securities exchanges B) Eurocurrency market C) Interbank market D) Over-the-counter market Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

29 .

95) Fully convertible currencies are also called ________.

A) external currencies B) hard currencies C) unlimited currencies D) soft currencies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

96) Governments impose currency restrictions in their countries to ________.

A) encourage future investment outflows B) indirectly reduce imports and exports C) protect currencies from speculators D) exhaust their reserve of hard currencies Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

97) Which of the following is used by governments for the convertibility of currencies in their countries?

A) multiple exchange rates B) countertrade C) import deposit requirements D) OTC market Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

30 .

Scenario: Trader's Paradise Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets.

98) To insure against potential losses that result from adverse changes in exchange rates, Trader's Paradise should use currency ________.

A) swap B) speculation C) hedging D) arbitrage Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

99) If Trader's Paradise purchases and sells the euros simultaneously in different markets for profit, it would be engaging in currency ________.

A) swap B) speculation C) hedging D) arbitrage Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

100) If Trader's Paradise purchases euros expecting the value to rise and generate a profit for the company, it is engaging in currency ________.

A) swap B) speculation C) hedging D) arbitrage Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

31 .

101) When doing business with former communist countries, Trader's Paradise insists on getting paid in a currency that can be traded freely in the foreign exchange market. The price of this currency is determined by the forces of supply and demand. Which of the following is the mode of payment illustrated in this scenario?

A) soft currency B) nonconvertible currency C) local currency D) hard or convertible currency Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

Scenario: ABC Software ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China.

102) ABC Software has had difficulty obtaining funds to expand. A friend of the CEO recommends that the company should explore an offshore financial center, which ________.

A) is a country or territory whose financial sector features very few regulations and few, if any, taxes B) tends to be characterized by political and economic instability making, it is an inexpensive but risky source of funds C) typically lends money to companies that have had difficulty getting financing elsewhere because of poor credit records D) is a financial center located in a resort community and is characterized by poor telecommunications infrastructure Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

103) All foreign exchange transactions can be performed in the over-the-counter (OTC) market.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

32 .

104) A convertible currency is a currency accepted by both residents and non residents of a country for the payment of goods or services.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

105) One goal of currency restriction is to preserve hard currencies to pay for imports and to finance trade deficits.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

106) Differentiate between currency speculation and currency arbitrage.

Answer: Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency's price will go either up or down in the future. Suppose a trader in London believes that the value of the Japanese yen will increase over the next three months. She buys yen with pounds at today's current price, intending to sell them in 90 days. If the price of yen rises in that time, she earns a profit; if it falls, she takes a loss. Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors. Similar to arbitrage, currency speculation is commonly the realm of foreign exchange specialists rather than the managers of firms engaged in other endeavors.

Currency arbitrage is the instantaneous purchase and sale of a currency in different markets for profit. Suppose a currency trader in New York notices that the value of the European Union euro is lower in Tokyo than it is in New York. The trader can buy euros in Tokyo, sell them in New York, and earn a profit on the difference. High-tech communication and trading systems allow the entire transaction to occur within seconds. But note that, if the difference between the value of the euro in Tokyo and the value of the euro in New York is not greater than the cost of conducting the transaction, the trade is not worth making.

Currency arbitrage is a common activity among experienced traders of foreign exchange, very large investors, and companies in the arbitrage business. Firms whose profits are generated primarily by another economic activity, such as retailing or manufacturing, take part in currency arbitrage only if they have very large sums of cash on hand.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

33 .

107) Briefly describe the three main institutions of the foreign exchange market.

Answer: The three main components of the foreign exchange market are the interbank market, securities exchanges, and the over-the-counter market.

It is in the interbank market that the world's largest banks exchange currencies at spot and forward rates. Companies tend to obtain foreign exchange services from the bank where they do most of their business. Banks satisfy client requests for exchange quotes by obtaining quotes from other banks in the interbank market. For transactions that involve commonly exchanged currencies, the largest banks often have sufficient currency on hand. Yet rarely exchanged currencies are not typically kept on hand and may not even be easily obtainable from another bank. In such cases, banks turn to foreign exchange brokers, who maintain vast networks of banks through which they obtain seldom-traded currencies.

In the interbank market, then, banks act as agents for client companies. In addition to locating and exchanging currencies, banks commonly offer advice on trading strategy, supply a variety of currency instruments, and provide other risk-management services. They also help clients manage exchange rate risk by supplying information on rules and regulations around the world.

Securities exchanges specialize in currency futures and options transactions. Buying and selling currencies on these exchanges entails the use of securities brokers, who facilitate transactions by transmitting and executing clients' orders. Transactions on securities exchanges are much smaller than those in the interbank market and vary with each currency.

The over-the-counter (OTC) market is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants. All foreign exchange transactions can be performed in the OTC market, where the major players are large financial institutions.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

34 .

108) What is currency speculation? Why do some governments protect their markets from currency speculation?

Answer: Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency's price will go either up or down in the future. Suppose a trader in London believes that the value of the Japanese yen will increase over the next three months. She buys yen with pounds at today's current price, intending to sell them in 90 days. If the price of yen rises in that time, she earns a profit; if it falls, she takes a loss. Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors. Similar to arbitrage, currency speculation is commonly the realm of foreign exchange specialists rather than the managers of firms engaged in other endeavors.

One goal of currency restriction is to protect a currency from speculators. For example, in the wake of the Asian financial crisis years ago, some Southeast Asian nations considered controlling their currencies to limit the damage done by economic downturns. Malaysia stemmed the outflow of foreign money by preventing local investors from converting their Malaysian holdings into other currencies. Although the move also curtailed currency speculation, it effectively cut off Malaysia from investors elsewhere in the world.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

35 .

109) Why do governments impose currency restrictions and how can companies get around such restrictions?

Answer: Certain government policies are frequently used to restrict currency convertibility.

Governments can require that all foreign exchange transactions be performed at or approved by the country's central bank. They can also require import licenses for some or all import transactions. These licenses help the government control the amount of foreign currency leaving the country. Some governments implement systems of multiple exchange rates, specifying a higher exchange rate on the importation of certain goods or on imports from certain countries.

The government can thus reduce importation while ensuring that important goods still enter the country. It also can use such a policy to target the goods of countries with which it is running a trade deficit.

Other governments issue import deposit requirements that require businesses to deposit certain percentages of their foreign exchange funds in special accounts before being granted import licenses. In addition, quantity restrictions limit the amount of foreign currency that residents can take out of the home country when traveling to other countries as tourists, students, or medical patients.

Finally, one way to get around national restrictions on currency convertibility is countertrade— the practice of selling goods or services that are paid for, in whole or in part, with other goods or services. One simple form of countertrade is a barter transaction, in which goods are exchanged for others of equal value. Parties exchange goods and then sell them in world markets for hard currency.

AACSB: Reflective thinking Skill: Concept Difficulty: Moderate LO: 9.5: Describe the instruments and institutions of the foreign exchange market.

36 .

International Business: The Challenges of Globalization, 9e (Wild) Chapter 10 International Monetary System 1) When the value of a country's currency declines, the price of its ________.

A) exports and imports on world markets declines B) exports and imports on world markets increases C) exports on world markets declines and the price of its imports increases D) exports on world markets increases and the price of its imports declines Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

2) A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

A) practices unethical conduct B) experiences a trade deficit C) ends up bankrupt D) improves its profits Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

3) When the Brazilian Real changes from 1000 Real per U.S. Dollar to 1500 Real per U.S. Dollar, the Real is ________.

A) devalued B) revalued C) unchanged, unless the government intervenes D) accelerated Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

1 .

4) In a freely fluctuating exchange-rate system, if the inflation in Country A rises in relation to inflation in Country B, what will the currency in country A do in relation to the currency in country B? A) It will strengthen.

B) It will weaken.

C) It will remain the same.

D) It will lead to deflation.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

5) ________ is an activity under the monetary policy of a nation.

A) Increasing taxes B) Lowering taxes C) Increasing government spending D) Selling government securities Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

6) The major objective of the European Central Bank is to ________.

A) set monetary policy for EU countries that adopt the euro B) ensure that EU interest rates are equal to U.S. rates C) control taxes as a means of monitoring EU debt D) reduce spending by EU countries Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

7) The lowering of taxes in the U.S. by its government is an example of the ________.

A) fiscal policy B) monetary policy C) social policy D) foreign affairs policy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

2 .

8) To cool off an inflationary economy, a government might ________.

A) lower interest rates B) raise interest rates C) lower foreign exchange rates D) raise foreign exchange rates Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

9) The exchange rate at the beginning of a year between the Indian Rupee (R) and the U.S. dollar is R43.125/$. The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively. What would be the new exchange rate at the end of the year?

A) R49.8224/$ B) R37.327/$ C) R0.0267/$ D) $37.327/R Answer: A AACSB: Analytical thinking Skill: Critical Thinking Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

10) The inefficient market view holds that prices of financial instruments ________.

A) are dependent on political efficiency B) are not dependent on political efficiency C) do not reflect all publicly available information D) reflect all publicly available information at any given time Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

11) Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates?

A) financial analysis B) fundamental analysis C) probability bounds analysis D) technical analysis Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

3 .

12) Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates?

A) financial analysis B) fundamental analysis C) value chain analysis D) technical analysis Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.

Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.

13) Sam already knows that the ________ tells us the value of one country's currency we must pay to receive a certain amount of another.

A) exchange rate B) par value C) law of one price D) purchasing power parity theory Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

14) Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

A) exchange price B) law of one price C) fixed exchange-rate system D) floating exchange-rate system Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

4 .

15) A company exports will decline as the value of their currency gets stronger.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

16) Translating subsidiary earnings from a strong host currency into a weak home currency increases stated earnings in the home currency.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

17) The intentional lowering of the value of a currency by a nation's government is called devaluation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

18) Devaluation increases the price of a country's exports in the global market and increases the price of its imports.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

19) Currency devaluation decreases the consumers' buying power in the country whose currency is being devalued.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

20) In order to capture the gains from currency translation, managers prefer exchange rates that are stable.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

5 .

21) As the unpredictability of exchange rates increases, so does the cost of insuring against the accompanying risk.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

22) Fluctuating exchange rates increase the need for currency hedging.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

23) Inflation is a result of the supply and demand for a currency.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

24) Full employment or low unemployment rates can lead to higher inflation.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

25) Inflation in an economy can be controlled by increasing the interest rates.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

6 .

26) Briefly describe how exchange rates influence business activities.

Answer: Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison.

Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company's long-term competitiveness.

Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company's financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

7 .

27) Explain how exchange rates adjust to inflation.

Answer: An important component of the concept of purchasing power parity is that exchange rates adjust to different rates of inflation in different countries. Such adjustment is necessary to maintain purchasing power parity between nations. Suppose that at the beginning of the year the exchange rate between the Mexican peso and the U.S. dollar is 8 pesos/$ (or $0.125/peso). Also suppose that inflation is pushing consumer prices higher in Mexico at an annual rate of 20 percent, whereas prices are rising just 3 percent per year in the United States. To find the new exchange rate (Ee) at the end of the year, the following formula can be used: Ee = Eb (1 + i1)/(1 + i2), where Eb is the exchange rate at the beginning of the period, i1 is the inflation rate in country 1, and i2 is the inflation rate in country 2. Plugging the numbers for this example into the formula, gives the following value: Ee = 8 pesos/$[(1 + 0.20)/(1 + 0.03)] = 9.3 pesos/$ Because the numerator of the exchange rate is in pesos, the inflation rate for Mexico must also be placed in the numerator for the ratio of inflation rates. Thus, it can be noticed that the exchange rate adjusts from 8 pesos/$ to 9.3 pesos/$ because of the higher inflation rate in Mexico and the corresponding change in currency values. Higher inflation in Mexico reduces the number of U.S. dollars that a peso will buy and increases the number of pesos that a dollar will buy. In other words, whereas it had cost only 8 pesos to buy a dollar at the beginning of the year, it now costs 9.3 pesos.

For example, companies based in Mexico must pay more in pesos for any supplies bought from the United States. But U.S. companies will pay less, in dollar terms, for supplies bought from Mexico. Also, tourists from the United States would be delighted, as vacationing in Mexico becomes less expensive, but Mexicans will find the cost of visiting the United States more expensive.

This discussion illustrates at least one of the difficulties facing countries with high rates of inflation. Both consumers and companies in countries experiencing rapidly increasing prices see their purchasing power eroded. Developing countries and countries in transition are those most often plagued by rapidly increasing prices.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

8 .

28) Discuss the role of business confidence and psychology in currency values.

Answer: PPP overlooks the human aspect of exchange rates—the role of people's confidence and beliefs about a nation's economy and the value of its currency. Many countries gauge confidence in their economies by conducting a business confidence survey. The largest survey of its kind in Japan is called the tankan survey. It gauges business confidence four times each year among 10,000 companies.

Investor confidence in the value of a currency plays an important role in determining its exchange rate. Suppose several currency traders believe that the Indian rupee will increase in value. They will buy Indian rupees at the current price, sell them if the value increases, and earn a profit. However, suppose that all traders share the same belief and all follow the same course of action.

The activity of the traders themselves will be sufficient to push the value of the Indian rupee higher. It does not matter why traders believed the price would increase. As long as enough people act on a similar belief regarding the future value of a currency, its value will change accordingly.

That is why nations try to maintain the confidence of investors, businesspeople, and consumers in their economies. Lost confidence causes companies to put off investing in new products and technologies and to delay the hiring of additional employees. Consumers tend to increase their savings and not increase their debts if they have lost confidence in an economy. These kinds of behaviors act to weaken a nation's currency.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

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29) Explain how movement in a currency's exchange rate affects the activities of both domestic and international companies. Discuss how companies can export successfully despite having a strong currency.

Answer: Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison.

Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company's long-term competitiveness.

A strong and rising currency makes a nation's exports more expensive. Here's how companies can export successfully despite a strong currency.

Prune Operations—Cut costs and boost efficiency by downsizing staff and reworking factories at home to maintain production levels, and pursue customers abroad when export earnings decline.

Adapt Products—Win customer business and loyalty by tailoring products to the needs of global customers and in this way the company may retain its business despite its higher prices.

Source Abroad—Source abroad for raw materials and other inputs to the production process— the supplier will likely earn an extra profit, and the company will get a better deal than is available domestically.

Freeze Prices—A last resort may be to freeze prices of goods in foreign markets—this might boost overall profits if sales improve.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

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30) Explain the concept of devaluation, and explain the effect devaluation has on the price of a country's imports. Discuss how international companies can adjust to a weak currency.

Answer: The intentional lowering of the value of a currency by the nation's government is called devaluation. The reverse, the intentional raising of its value by the nation's government, is called revaluation. Devaluation lowers the price of a country's exports on world markets and increases the price of its imports because the value of the country's currency is now lower on world markets. Thus, a government might devalue its currency to give its domestic companies an edge over competition from other countries. But devaluation reduces the buying power of consumers in the nation. It can also allow inefficiencies to persist in domestic companies because there is now less pressure to be concerned with production costs. Revaluation has the opposite effects: it increases the price of exports and reduces the price of imports.

A weak and falling currency makes a nation's imports more expensive. Here's how companies can adjust to a weak currency.

Source Domestically—Source domestically for raw materials and components to lower the cost of production inputs, avoid exchange-rate risk, and shorten the supply chain.

Grow at Home—Fight for the business of domestic customers now that imported products of foreign competitors are priced high because of their relatively strong currencies.

Push Exports—Exploit the price advantage that can be obtained from the country's weak currency by expanding the company's reach and depth abroad—people love a good bargain in all countries.

Reduce Expenses—Counteract the rising cost of imported energy by using the latest communication and transportation technologies to reduce air travel, cut utility bills, and slash shipping costs.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

31) Devaluation of a nation's currency ________.

A) gives foreign companies in the country an edge over domestic companies B) leads to a decline in the supply of goods and services C) lowers the price of a country's exports D) increases consumers' buying power Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

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32) The lowering of the value of a currency by a nation's government is called ________.

A) devaluation B) securitization C) fundamental disequilibrium D) currency hedging Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

33) Which of the following lowers the price of a country's exports on world markets and increases the price of its imports?

A) revaluation B) devaluation C) currency hedging D) currency arbitrage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

34) Predictable exchange rates reduce the need for ________.

A) currency conversion B) currency swap C) currency depreciation D) currency hedging Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

35) Which of the following stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency?

A) purchasing power parity B) the law of one price C) the comparative advantage theory D) the efficient market view Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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36) If a kilogram of coal costs €1.5 in Germany and $1 in the United States, the law of one price calculates the expected exchange rate between the euro and the dollar to be ________.

A) €0.67/$ B) €1.5/$ C) $1.67/€ D) $0.12/€ Answer: B AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

37) When the law of one price is violated, a(n) ________ opportunity arises.

A) dumping B) countertrade C) arbitrage D) devaluation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

38) A(n) ________ opportunity helps in buying a product in one country and selling it in another country where it has a higher value.

A) barter B) buyback C) countertrade D) arbitrage Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

39) Which of the following talks about the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries?

A) the Fisher effect B) the law of one price C) purchasing power parity D) cross rates Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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40) A government buys its own securities on the open market when the ________.

A) inflation rate in the country is high B) inflation rate in the country is low C) interest rates in the country are high D) interest rates in the country are low Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

41) Which of the following states that the country with the higher interest rate should have the higher inflation?

A) the Fisher Effect B) the International Fisher Effect C) the Interest Rate Inflation Theory D) the Forward rate theory Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

42) Which of the following represents the Fisher effect?

A) Cross Rate = Real Interest Rate + Nominal Interest Rate B) Real Interest Rate = Nominal Interest Rate + Spot Rate C) Nominal Interest Rate = Real Interest Rate + Inflation Rate D) Real Interest Rate = Nominal Interest Rate + Unemployment Rate Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

43) If money were free from all controls when transferred internationally, the real rate of interest would ________.

A) be the same in all countries B) be the same as the inflation rate C) create arbitrage opportunities across countries D) create arbitrage opportunities in developed countries Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

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44) The International Fisher Effect implies that ________.

A) the country with the higher interest rate should have lower inflation B) the currency of the country with the lower interest rate will strengthen in the future C) the currency of the country with the higher interest rate will strengthen in the future D) interest rates and inflation are not linked at all Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

45) The ________ theory seeks to define the relationship between currencies based on relative inflation.

A) inflation growth rate B) revaluation C) purchasing power parity D) interest rate Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

46) According to purchasing power parity theory, if Brazilian inflation was 6 percent and inflation in Argentina was 12 percent, the Brazilian real would be expected to ________.

A) rise by the difference in inflation rates B) fall by the difference in inflation rates C) rise by 4.5 percent D) stay the same Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

47) According to the efficient market view, future exchange rates are most accurately forecasted by ________.

A) forward exchange rates B) cross rate C) interbank interest rates D) buy rate Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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48) The efficient market view holds that ________.

A) companies can search for new pieces of information to improve forecasting B) forward exchange rates provide the least accurate forecasts of future exchange rates C) companies must spend time and money collecting and examining information believed to affect future exchange rates D) prices of financial instruments reflect all publicly available information at any given time Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

49) Which of the following is true of the techniques used for forecasting exchange rates?

A) Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period.

B) The human element involved in forecasting exchange rates perfect the techniques.

C) Fundamental analysts estimate the timing, magnitude, and direction of future exchange rate changes using charts and models of past data trends.

D) Technical analysts often consider a country's balance-of-payments situation while forecasting exchange rates.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

50) An exchange-rate system in which the exchange rate for converting one currency into another is set by international governmental agreement is called a ________ system.

A) floating exchange-rate B) fixed exchange-rate C) cross rate D) spot rate Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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Scenario: Color-Me-Green Inc. Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally.

Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year.

51) Suppose Country A has a currency called the Pulse (P). At the beginning of the year, the exchange rate between the Pulse and the U.S. dollar was P150/$. The inflation rate in Country A is running at an annual rate of 250 percent, whereas inflation in the U.S. is running at 2 percent.

Which of the following would most likely be the new exchange rate that Color-Me-Green can expect at the end of the year?

A) P525/$ B) P514.70/$ C) P43.71/$ D) $43.71/P Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 10.2: Outline the factors that help determine exchange rates.

52) In Country B, Color-Me-Green is faced with a tight labor market and a low unemployment rate. This low unemployment rate will most likely result in ________.

A) lower interest rates B) lower wages for workers C) higher purchasing power D) higher rate of inflation Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

53) In an attempt to raise money in Country B, Color-Me-Green was quoted an interest rate of 14 percent by a local bank. This quoted rate is called the ________ rate.

A) cross B) artificial C) nominal D) exchange Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

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Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.

Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.

54) Sam has been studying the price of wheat across markets. If a kilogram of wheat costs €1.5 in France and $1 in the United States, the law of one price would tell us ________.

A) the expected exchange rate between the euro and the dollar is €1.5/$ B) wheat is overpriced in France C) wheat is underpriced in France D) an arbitrage opportunity does not exist in the international wheat market Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

55) Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then knows that ________.

A) the expected exchange rate between the euro and the dollar is €1.5/$ B) wheat is priced higher in France C) wheat is priced lower in France D) an arbitrage opportunity does not exist in the international wheat market Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 10.2: Outline the factors that help determine exchange rates.

56) It the actual euro/dollar exchange rate on currency markets is €1.2/$, and a kilogram of wheat still costs $1 in the U.S. and €1.5 in France, Sam also knows that the price of a kilogram of wheat in France is ________.

A) $1.25 B) $.80 C) €.80 D) €1.2 Answer: A AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 10.2: Outline the factors that help determine exchange rates.

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57) Sam's mentor is excited about the wheat prices in France and the U.S. because he sees an opportunity to buy wheat in the U.S. and sell it in France, which is known as a(n) ________.

A) exchange rate profit B) arbitrage opportunity C) violation of purchasing power parity D) violation of the law of one price Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

58) The law of one price stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

59) It is the nature of arbitrage to even out excessive fluctuation by destroying its own profitability.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

60) Purchasing power parity does not hold for single products, it is meaningful only when applied to a basket of goods.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

61) According to Fisher effect, real interest rate is the sum of the nominal interest rate and the expected rate of inflation over a specific period.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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62) Investor confidence in the value of a currency plays an has no role in determining its exchange rate.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

63) A market is efficient if the prices of financial instruments quickly reflect new public information made available to traders.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

64) According to the efficient market view for forecasting exchange rates, spot exchange rates are perfect predictors of future exchange rates.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

65) Fundamental analyses used for forecasting exchange rates estimate the timing, magnitude, and direction of future exchange rate changes.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

66) Technical analysis employs charts of past trends in currency prices and other factors to forecast exchange rates.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

67) The value of a currency expressed in relation to the currency of another country is called the exchange rate.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

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68) The IMF asset whose value is based on a "weighted basket" of four currencies is called a special drawing right.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.2: Outline the factors that help determine exchange rates.

69) Why do managers prefer that movements in exchange rates be predictable? How does the Big Mac index help determine whether a currency is overvalued or undervalued, and what are its drawbacks?

Answer: Managers prefer that movements in exchange rates be predictable. Predictable exchange rates reduce the likelihood that companies will be caught off-guard by sudden and unexpected rate changes. They also reduce the need for costly insurance (usually by currency hedging) against possible adverse movements in exchange rates. Rather than purchasing insurance, companies would be better off spending their money on more productive activities, such as developing new products or designing more efficient production methods.

The usefulness of the law of one price is that it helps us determine whether a currency is overvalued or undervalued. Each year, The Economist magazine publishes what it calls its "Big Mac Index" of exchange rates. This index uses the law of one price to determine the exchange rate that should exist between the U.S. dollar and other major currencies. It employs the McDonald's Big Mac as its single product to test the law of one price. The Big Mac is used because each one is fairly identical in quality and content across national markets and almost entirely produced within the nation in which it is sold.

The drawbacks of the Big Mac index reflect the fact that applying the law of one price to a single product is too simplistic a method for estimating exchange rates. Nonetheless, academic studies find that currency values tend to change in the direction suggested by the Big Mac index.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

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70) Differentiate between efficient and inefficient market views and discuss the implications of the two schools of thought for companies.

Answer: A great deal of debate revolves around the issue of whether markets themselves are efficient or inefficient in forecasting exchange rates. A market is efficient if prices of financial instruments quickly reflect new public information made available to traders. The efficient market view thus holds that prices of financial instruments reflect all publicly available information at any given time. As applied to exchange rates, this means that forward exchange rates are accurate forecasts of future exchange rates.

A forward exchange rate reflects a market's expectations about the future values of two currencies. In an efficient currency market, forward exchange rates reflect all relevant publicly available information at any given time; they are considered the best possible predictors of exchange rates. Proponents of this view hold that there is no other publicly available information that could improve the forecast of exchange rates over that provided by forward rates. To accept this view is to accept that companies do waste time and money collecting and examining information believed to affect future exchange rates. But there is always a certain amount of deviation between forward and actual exchange rates. The fact that forward exchange rates are less than perfect inspires companies to search for more accurate forecasting techniques.

The inefficient market view holds that prices of financial instruments do not reflect all publicly available information. Proponents of this view believe companies can search for new pieces of information to improve forecasting. But the cost of searching for further information must not outweigh the benefits of its discovery.

Naturally, the inefficient market view is more compelling when the existence of private information is considered. Suppose a single currency trader holds privileged information regarding a future change in a nation's economic policy—information that she believes will affect its exchange rate. Because the market is unaware of this information, it is not reflected in forward exchange rates. The trader will no doubt earn a profit by acting on her store of private information.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

71) Discuss the challenges involved in forecasting exchange rates.

Answer: The business of forecasting exchange rates is a rapidly growing industry. This trend seems to provide evidence that a growing number of people believe it is possible to improve on the forecasts of exchange rates embodied in forward rates. Difficulties of forecasting remain, however. Despite highly sophisticated statistical techniques in the hands of well-trained analysts, forecasting is not a pure science. Few, if any, forecasts are ever completely accurate because of unexpected events that occur throughout the forecast period.

Beyond the problems associated with the data used by these techniques, failings can be traced to the human element involved in forecasting. For example, people might miscalculate the importance of economic news becoming available to the market, placing too much emphasis on some elements and ignoring others.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

22 .

72) Explain the impact of added costs, trade barriers, and investor psychology on the ability of purchasing power parity (PPP) to predict exchange rates accurately.

Answer: Purchasing power parity is better at predicting long-term exchange rates (more than 10 years), but accurate forecasts of short-term rates are most beneficial to international managers.

Even short-term plans must assume certain things about future economic and political conditions in different countries, including added costs, trade barriers, and investor psychology.

Impact of Added Costs—There are many possible reasons for the failure of PPP to predict exchange rates accurately. For example, PPP assumes no transportation costs. Suppose that the same basket of goods costs $100 in the United States and 950 kroner ($150) in Norway.

Seemingly, one could make a profit through arbitrage by purchasing these goods in the United States and selling them in Norway. However, if it costs another $60 to transport the goods to Norway, the total cost of the goods once they arrive in Norway will be $160. Thus no shipment will occur. Because no arbitrage opportunity exists after transportation costs are added, there will be no leveling of prices between the two markets and the price discrepancy will persist. Thus even if PPP predicts that the Norwegian krone is overvalued, the effect of transportation costs will keep the dollar/krone exchange rate from adjusting. In a world in which transportation costs exist, PPP does not always correctly predict shifts in exchange rates.

Impact of Trade Barriers—PPP also assumes no barriers to international trade. However, such barriers certainly do exist. Governments establish trade barriers for many reasons, including helping domestic companies remain competitive and preserving jobs for their citizens. Referring back to the previous example, suppose the Norwegian government imposes a 60 percent tariff on the $100 basket of imported goods or makes its importation illegal. Because no leveling of prices or exchange-rate adjustment will occur, PPP will fail to predict exchange rates accurately.

Impact of Business Confidence and Psychology—Finally, PPP overlooks the human aspect of exchange rates—the role of people's confidence and beliefs about a nation's economy and the value of its currency. Many countries gauge confidence in their economies by conducting a business confidence survey. The largest survey of its kind in Japan is called the tankan survey. It gauges business confidence four times each year among 10,000 companies.

Investor confidence in the value of a currency plays an important role in determining its exchange rate. Suppose several currency traders believe that the Indian rupee will increase in value. They will buy Indian rupees at the current price, sell them if the value increases, and earn a profit. However, suppose that all traders share the same belief and all follow the same course of action.

The activity of the traders themselves will be sufficient to push the value of the Indian rupee higher. It does not matter why traders believed the price would increase. As long as enough people act on a similar belief regarding the future value of a currency, its value will change accordingly.

That is why nations try to maintain the confidence of investors, businesspeople, and consumers in their economies. Lost confidence causes companies to put off investing in new products and technologies and to delay the hiring of additional employees. Consumers tend to increase their savings and not increase their debts if they have lost confidence in an economy. These kinds of behaviors act to weaken a nation's currency.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

23 .

73) Compare and contrast the two main techniques for forecasting exchange rates.

Answer: Fundamental analysis uses statistical models based on fundamental economic indicators to forecast exchange rates. These models are often quite complex, with many variations reflecting different possible economic conditions. These models include economic variables such as inflation, interest rates, money supply, tax rates, and government spending.

Such analyses also often consider a country's balance-of-payments situation and its tendency to intervene in markets to influence the value of its currency.

Another method of forecasting exchange rates is technical analysis—a technique that uses charts of past trends in currency prices and other factors to forecast exchange rates. Using highly statistical models and charts of past data trends, analysts examine conditions that prevailed during changes in exchange rates, and they try to estimate the timing, magnitude, and direction of future changes. Many forecasters combine the techniques of both fundamental and technical analyses to arrive at potentially more accurate forecasts.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.2: Outline the factors that help determine exchange rates.

74) The ________ is the collection of agreements and institutions that govern exchange rates.

A) Bretton Woods Agreement B) Plaza Accord C) international monetary system D) international bond market Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

75) In the earliest days of international trade, ________ was the internationally accepted currency for payment of goods and services.

A) British pound B) U.S. dollar C) silver D) gold Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

24 .

76) The gold standard is a ________ because it secured nations' currencies to the value of gold.

A) floating exchange-rate system B) fixed exchange-rate system C) linked exchange-rate system D) free float system Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

77) ________ was the first nation to implement the gold standard in the early 1700s.

A) The United States B) Britain C) France D) Japan Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

78) The value of a currency expressed in terms of gold is called its ________.

A) book value B) net asset value C) par value D) carrying value Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

79) Under the gold standard, if the U.S. dollar was fixed at $30/oz of gold and Japan was fixed at ¥75/oz of gold, what would be the Yen/dollar exchange rate?

A) ¥2.50/$ B) $2.50/¥ C) ¥0.40/$ D) ¥2250/$ Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

25 .

80) The purchasing power parity theory claims that a change in relative ________ between two countries must cause a change in ________ in order to keep the prices of goods in two countries fairly similar.

A) exchange rates; inflation B) inflation; exchange rates C) interest rates; inflation D) interest rates; exchange rates Answer: B AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

81) The ________ refers to an international monetary system in which countries agreed to buy or sell their paper currencies in exchange for gold on the request of any individual or firm and to allow the free export of gold.

A) foreign exchange system B) free market system C) gold standard D) mercantilism Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

82) Under the gold standard, ________.

A) currency values were determined by supply and demand B) countries agreed to buy or sell their paper currencies for gold C) countries were free to adopt any nation's exchange-rate system D) the dollar's value was allowed to fall on currency markets Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

26 .

83) Which of the following created a new international monetary system based on the value of the U.S. dollar?

A) Plaza Accord B) Bretton Woods Agreement C) Louvre Accord D) Jamaica Agreement Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

84) Which of the following features did Bretton Woods Agreement incorporate in the international monetary system based on the U.S. dollar?

A) floating exchange rates B) trade imbalance corrections C) an enforcement mechanism D) a strict ban on devaluation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

85) An economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments is called ________.

A) revaluation B) statistical discrepancy C) the Fisher effect D) fundamental disequilibrium Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

86) The World Bank was created by the ________.

A) Jamaica Agreement B) Bretton Woods Agreement C) Smithsonian Agreement D) Plaza Accord Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

27 .

87) The Bretton Woods conference sought to do which of the following?

A) end the gold standard B) create the International Monetary Fund C) terminate the International Bank for Reconstruction and Development D) provide no-interest capital loans to emerging economies around the world Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

88) The ________ is an IMF asset whose value is based on a weighted basket of four currencies, including the U.S. dollar, European Union euro, Japanese yen, and British pound.

A) special drawing right B) gold standard C) Eurobond D) currency board Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

89) The international monetary system created by the Bretton Woods Agreement collapsed because ________.

A) of its heavy dependence on the stability of the dollar B) it was not accepted by a majority of the world's nations C) it did not have the funds necessary for its functioning D) it favored only the developed countries and was of no help to struggling nations Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

90) The gold standard effectively created a floating exchange-rate system.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

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91) The Bretton Woods Agreement was an accord among nations to create a new international monetary system based on the value of the U.S. dollar.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

92) To provide funding for countries' efforts toward economic development, the Bretton Woods Agreement created the International Bank for Reconstruction and Development.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

93) The European monetary system is still in practice today.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

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94) Briefly describe the gold standard, its advantages, and why it collapsed.

Answer: In the earliest days of international trade, gold was the internationally accepted currency for payment of goods and services. Using gold as a medium of exchange in international trade has several advantages. First, the limited supply of gold made it a commodity in high demand. Second, because gold is highly resistant to corrosion, it can be traded and stored for hundreds of years. Third, because it can be melted into either small coins or large bars, gold is a good medium of exchange for both small and large purchases.

But gold also has its disadvantages. First, the weight of gold made transporting it expensive.

Second, when a transport ship sank at sea, the gold sank to the ocean floor and was lost. Thus merchants wanted a new way to make their international payments without the need to haul large amounts of gold around the world. The solution was found in the gold standard—an international monetary system in which nations linked the value of their paper currencies to specific values of gold. Britain was the first nation to implement the gold standard in the early 1700s.

The gold standard required a nation to fix the value (price) of its currency to an ounce of gold.

The value of a currency expressed in terms of gold is called its par value. Each nation then guaranteed to convert its paper currency into gold for anyone demanding it at its par value. The calculation of each currency's par value was based on the concept of purchasing power parity.

This provision made the purchasing power of gold the same everywhere and maintained the purchasing power of currencies across nations.

All nations fixing their currencies to gold also indirectly linked their currencies to one another.

Because the gold standard fixed nations' currencies to the value of gold, it is called a fixed exchange-rate system—one in which the exchange rate for converting one currency into another is fixed by international governmental agreement. This system and the use of par values made calculating exchange rates between any two currencies a very simple matter.

The gold standard was quite successful in its early years of operation. In fact, this early record of success is causing some economists and policy makers to call for its rebirth today. Three main advantages of the gold standard underlie its early success.

First, the gold standard drastically reduces the risk in exchange rates because it maintains highly fixed exchange rates between currencies. Deviations that do arise are much smaller than they would be under a system of freely floating currencies. The more stable exchange rates are, the less companies are affected by actual or potential adverse changes in them. Because the gold standard significantly reduced the risk in exchange rates and, therefore, the risks and costs of trade, international trade grew rapidly following its introduction.

Second, the gold standard imposes strict monetary policies on all countries that participate in the system. Recall that the gold standard requires governments to convert paper currency into gold if demanded by holders of the currency. If all holders of a nation's paper currency decided to trade it for gold, the government must have an equal amount of gold reserves to pay them. That is why a government cannot allow the volume of its paper currency to grow faster than the growth in its reserves of gold. By limiting the growth of a nation's money supply, the gold standard also was effective in controlling inflation.

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Third, the gold standard can help correct a nation's trade imbalance. The exact opposite occurs in the case of a trade surplus: The inflow of gold supports an increase in the supply of paper currency, which increases demand for, and therefore the cost of, goods and services. Thus exports will fall in reaction to their higher price until trade is once again in balance.

Collapse of the Gold Standard-Nations involved in the First World War needed to finance their enormous war expenses, and they did so by printing more paper currency. This certainly violated the fundamental principle of the gold standard and forced nations to abandon the standard. The aggressive printing of paper currency caused rapid inflation for these nations. When the United States returned to the gold standard in 1934, it adjusted its par value from $20.67/oz of gold to $35.00/oz to reflect the lower value of the dollar that resulted from inflation. Thus the U.S. dollar had undergone devaluation. Yet Britain returned to the gold standard several years earlier at its previous level, which did not reflect the effect inflation had on its currency.

Because the gold standard links currencies to one another, devaluation of one currency in terms of gold affects the exchange rates between currencies. The decision of the United States to devalue its currency and Britain's decision not to do so lowered the price of U.S. exports on world markets and increased the price of British goods imported into the United States. People quickly lost faith in the gold standard because it was no longer an accurate indicator of a currency's true value. By 1939, the gold standard was effectively dead.

AACSB: Reflective thinking Skill: Concept Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

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95) Describe the most important features of the international monetary system created by the Bretton Woods Agreement.

Answer: In 1944, representatives from 44 nations met in the New Hampshire resort town of Bretton Woods to lay the foundation for a new international monetary system. The resulting Bretton Woods Agreement was an accord among nations to create a new international monetary system based on the value of the U.S. dollar. The new system was designed to balance the strict discipline of the gold standard with the flexibility that countries needed to deal with temporary domestic monetary difficulties.

Fixed Exchange Rates—The Bretton Woods Agreement incorporated fixed exchange rates by tying the value of the U.S. dollar directly to gold and the value of other currencies to the value of the dollar. The par value of the U.S. dollar was fixed at $35/oz of gold. Other currencies were then given par values against the U.S. dollar instead of gold.

Built-in Flexibility—The new system also incorporated a degree of built-in flexibility. For example, although competitive currency devaluation was ruled out, large devaluation was allowed under the extreme set of circumstances called fundamental disequilibrium which referred to an economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments. In this situation, a nation can devalue its currency more than 10 percent. Yet devaluation under these circumstances should accurately reflect a permanent economic change for the country in question, not temporary misalignments.

World Bank—To provide funding for countries' efforts toward economic development, the Bretton Woods Agreement created the World Bank—officially called the International Bank for Reconstruction and Development (IBRD). The immediate purpose of the World Bank was to finance European reconstruction following the Second World War. It later shifted its focus to the general financial needs of developing countries.

International Monetary Fund—The Bretton Woods Agreement established the International Monetary Fund (IMF) as the agency to regulate the fixed exchange rates and enforce the rules of the international monetary system. At the time of its formation, the IMF had just 29 members, but today it consists of 185 countries.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

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96) Explain the differences between a monetary policy and a fiscal policy, and discuss why the IMF was established.

Answer: Because of the damaging effects of inflation, governments try to manage the supply of and demand for their currencies. They do this through the use of two types of policies designed to influence a nation's money supply. Monetary policy refers to activities that directly affect a nation's interest rates or money supply. Selling government securities reduces a nation's money supply because investors pay money to the government's treasury to acquire the securities.

Conversely, when the government buys its own securities on the open market, cash is infused into the economy and the money supply increases.

Fiscal policy involves using taxes and government spending to influence the money supply indirectly. For example, to reduce the amount of money in the hands of consumers, governments increase taxes—people are forced to pay money to the government coffers. Conversely, lowering taxes increases the amount of money in the hands of consumers. Governments can also step up their own spending activities to increase the amount of money circulating in the economy or cut government spending to reduce it.

The Bretton Woods Agreement established the International Monetary Fund (IMF) as the agency to regulate the fixed exchange rates and enforce the rules of the international monetary system.

At the time of its formation, the IMF had just 29 members—today 185 countries belong.

Included among the main purposes of the IMF are: • Promoting international monetary cooperation.

• Facilitating expansion and balanced growth of international trade.

• Promoting exchange stability, maintaining orderly exchange arrangements, and avoiding competitive exchange devaluation.

• Making the resources of the fund temporarily available to members.

• Shortening the duration and lessening the degree of disequilibrium in the international balance of payments of member nations.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 10.3: Explain attempts to construct a system of fixed exchange rates.

97) Under the Jamaica Agreement ________.

A) currency values were determined by supply and demand B) countries agreed to buy or sell their paper currencies for gold C) countries were free to adopt any exchange-rate system D) the dollar's value was allowed to fall on currency markets Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

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98) A system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates is called a ________.

A) managed float system B) linked exchange-rate system C) free float system D) fixed exchange-rate system Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

99) Today's international monetary system is considered to be a ________ system.

A) fixed exchange B) free float C) managed float D) linked exchange rate Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

100) The ________ was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar.

A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Louvre Accord Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

101) What occurred at the Louvre Accord?

A) Central banks allowed the dollar's value to fall.

B) The value of the U.S. dollar was stabilized.

C) EU members adopted a common currency.

D) An exchange rate mechanism was established.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

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102) A ________ is a monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

A) currency option B) currency board C) currency speculation D) currency arbitrage Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

103) The ________ limited the fluctuations of European Union members' currencies within a specified trading range.

A) exchange rate mechanism B) special drawing right C) currency board D) free float system Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

104) The ________ called for large-scale reduction of the debt owed by poorer nations, the exchange of old loans for new low-interest loans, and the making of debt instruments that would be tradable on world financial markets.

A) Brady Plan B) Louvre Accord C) Bretton Woods Agreement D) Smithsonian Agreement Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

105) Today's international monetary system remains in large part a managed float system.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

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106) A government with a currency board is legally bound to hold an amount of foreign currency that is at least equal to the amount of domestic currency.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.4: Describe efforts to create a system of floating exchange rates.

107) Explain how a pegged exchange-rate system works. Why would a country choose to follow this system?

Answer: Pegged exchange-rate arrangements "peg" a country's currency to a more stable and widely used currency in international trade. Countries then allow the exchange rate to fluctuate within a specified margin (usually 1 percent) around a central rate.

Many small countries peg their currencies to the U.S. dollar, European Union euro, the special drawing right (SDR) of the IMF, or other individual currency. Belonging to this first category are the Bahamas, El Salvador, Iran, Malaysia, Netherlands Antilles, and Saudi Arabia. Other nations peg their currencies to groups, or "baskets," of currencies. For example, Bangladesh and Burundi tie their currencies (the taka and Burundi franc, respectively) to those of their major trading partners. Other members of this second group are Botswana, Fiji, Kuwait, Latvia, Malta, and Morocco.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.4: Describe efforts to create a system of floating exchange rates.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 11 International Strategy and Organization 1) ________ is the process of identifying and selecting an organization's objectives and deciding how the organization will achieve those objectives.

A) Stratification B) Planning C) Economic transition D) Value chain analysis Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

2) A ________ is a course of actions taken by managers to help a company meet its objectives.

A) mission statement B) vision C) strategy D) core competency Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

3) Which of the following clarifies the organization's purpose, values, and direction?

A) code of ethics B) SWOT analysis C) strategic plan D) mission statement Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

4) Which of the following is the first stage of the strategy-formulation process?

A) identification of value-creating activities B) formulation of strategies C) identification of company mission and goals D) identification of core competency Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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5) Which of the following statements is true of objectives?

A) Objectives of individual business units in a company tend to be stated in the most general terms.

B) Objectives become more precise at the level of individual departments.

C) Objectives at the highest level in an organization tend to be more specific.

D) Objectives at the highest level in an organization are more concrete as they contain numerical targets.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.1: Explain the company analysis techniques that precede strategy selection.

6) Which term refers to the major objectives that a firm wants to accomplish through pursuing a specific course of action?

A) tactics B) value chains C) strategic goals D) control frameworks Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

7) Which of the following statements is true of the environmental forces that affect strategy formulation?

A) Socialist economic systems normally levy light taxes on business profits.

B) Countries that excessively spend on R&D tend to have lower levels of prosperity.

C) Approval of the host government is almost always necessary for making direct investments.

D) Free-market economies tend to levy high taxes on business profits.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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8) Adapting products and their marketing strategies in each of the national markets of a company to suit local preferences is called a ________ strategy.

A) multinational B) blue ocean C) global D) retrenchment Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

9) Companies often establish largely independent, self-contained units in each of its national markets to implement a ________ strategy.

A) retrenchment B) global C) multinational D) blue ocean Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

10) Which of the following strategies is appropriate for companies in industries where buyer preferences do not converge across national borders?

A) retrenchment strategy B) global strategy C) multidomestic strategy D) mass customization strategy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

11) The main benefit of a multidomestic strategy is that it ________.

A) exploits scale economies in product development and marketing B) is cost-saving due to product and marketing standardization C) takes advantage of location economies D) responds quickly and effectively to emerging buyer preferences Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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12) What strategy involves adapting products and their marketing strategies to national markets to suite local preferences?

A) Global strategy B) Stability strategy C) Multinational strategy D) Low cost leadership Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

Scenario: Beanstalk International Beanstalk International is a rapidly growing company with well-established subsidiaries in several nations. The company wants to follow a strategy of adapting its products and marketing activities in each national market to suit local preferences. This strategy aims at creating value for its customers.

13) Which of the following should managers at Beanstalk conduct to identify and distinguish between the primary and support activities in the organization?

A) fundamental analysis B) structural analysis C) value chain analysis D) technical analysis Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

14) Strategy is the set of planned actions that managers take to help a company meet its objectives.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

15) All parties ranging from suppliers and employers to consumers who are affected by a company's activities are called its stakeholders.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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16) Objectives at the highest level in a company are always stated in the most specific terms.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

17) Objectives of individual business units in an organization exclusively contain numerical targets of performance.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.1: Explain the company analysis techniques that precede strategy selection.

18) Core competencies are the special ability of a company that competitors find extremely difficult or impossible to equal.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

19) Core competencies are developed by organizations over long periods of time.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

20) Technology development along with business infrastructure, human resource management and procurement are examples of a support activities in the value chain of an organization.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

21) Marketing and sales are examples of a support activities in the value chain of an organization.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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22) Support activities such as, business infrastructure, human resource management, technology development, and procurement (sourcing) provides the inputs and infrastructure required by the primary activities, in value-chain analysis.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

23) The scope of a corporation's operations refers to the size of its operations.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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24) Differentiate between primary and support activities that create value for a company's customers. How can managers determine whether an activity enhances customer value?

Answer: Value-chain analysis divides a company's activities into primary activities and support activities that are central to creating customer value. Primary activities include inbound and outbound logistics, production (goods and services), marketing and sales, and customer service.

Primary activities involve the creation of the product, its marketing and delivery to buyers, and its after-sales support and service. Support activities include business infrastructure, human resource management, technology development, and procurement (sourcing). Each of these activities provides the inputs and infrastructure required by the primary activities.

Each primary and support activity is a source of strength or weakness for a company. Managers determine whether each activity enhances or detracts from customer value, and they incorporate this knowledge into the strategy-formulation process. Analysis of primary and support activities often involves finding activities in which improvements can be made with large benefits.

Primary Activities—When analyzing primary activities, managers often look for areas in which the company can increase the value provided to its customers. For example, managers might examine production processes and discover new, more efficient manufacturing methods to reduce production costs and improve quality. Customer satisfaction might be increased by improving logistics management that shortens the time it takes to get a product to the buyer or by providing better customer service.

Support Activities—Support activities assist companies in performing their primary activities.

For example, the actions of any company's employees are crucial to its success. Production, logistics, marketing, sales, and customer service all benefit when employees are qualified and well trained. International companies can often improve the quality of their products by investing in worker training and management development. In turn, ensuring quality can increase the efficiency of a firm's manufacturing, marketing and sales, and customer service activities.

Effective procurement (or sourcing) can locate low-cost, high-quality raw materials or intermediate products and ensure on-time delivery to production facilities. Finally, a sophisticated infrastructure not only improves internal communication but also supports organizational culture and each primary activity.

AACSB: Reflective thinking Skill: Concept Difficulty: Moderate LO: 11.1: Explain the company analysis techniques that precede strategy selection.

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25) Explain the differences between a mission statement and a business-level strategy.

Answer: Mission statements often spell out how a company's operations affect its stakeholders—all parties, ranging from suppliers and employees to stockholders and consumers, who are affected by a company's activities. Some companies place corporate brands center stage and take on the mission of creating well-liked brands above all else. The mission statements of other businesses focus on other issues, including superior shareholder returns, profitability, market share, and corporate social responsibility. Still other companies make their mission to be the interests of consumers.

Managers must formulate separate business-level strategies for each business unit. For some companies, this means creating just one strategy. This is the case when the business-level strategy and the corporate-level strategy are one and the same because the corporation is involved in just one line of business. For other companies, this can mean creating dozens of strategies.

The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace. Each business unit must decide whether to sell the lowest-priced product in an industry or to integrate special attributes into its products. A business unit can use one of three generic business-level strategies for competing in its industry—low-cost leadership, differentiation, or focus. These strategies can be applied to practically all firms in all markets worldwide.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 11.1: Explain the company analysis techniques that precede strategy selection.

26) Which of the following is a special ability of a company that competitors find extremely difficult to equal?

A) comparative advantage B) absolute advantage C) core competency D) economy of scale Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

27) ________ is the process of dividing a company's activities into primary and support activities and identifying those that create value for customers.

A) Fundamental analysis B) Technical analysis C) Structural analysis D) Value-chain analysis Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

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28) Which of the following is considered as a primary activity in an organization?

A) infrastructure B) after-sales support and service C) procurement D) human resource management Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

29) According to value-chain analysis, marketing and sales are considered as ________.

A) tertiary activities B) primary activities C) support activities D) core competencies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

30) Which of the following is considered as a support activity in an organization?

A) inbound logistics B) human resource management C) procurement D) customer service Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

31) A ________ strategy typically increases the cost structure for international companies and forces them to charge higher prices to recover such costs.

A) retrenchment B) global C) multidomestic D) blue ocean Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

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32) A strategy of adapting products and their marketing strategies in each national market to suit local preferences is referred to as a ________ strategy.

A) global B) retrenchment C) multinational D) blue ocean Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

33) Companies that produce entire inventories of products or components in one or very few optimal locations are most likely to follow a ________ strategy.

A) retrenchment B) global C) blue ocean D) multinational Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

34) Companies that typically design promotional campaigns and advertising strategies at their headquarters are most likely to follow a ________ strategy.

A) retrenchment B) global C) blue ocean D) multidomestic Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

35) Global products are most commonly seen in industries where there is ________.

A) little convergence of buyer preference across national borders B) low pressure to contain costs C) high demand for customized products D) significant price competition Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

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36) A ________ strategy can create cost savings due to product and marketing standardization.

A) retrenchment B) multidomestic C) blue ocean D) global Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

37) The main benefit of a multinational strategy is that it allows companies to ________.

A) closely monitor buyer preferences in each local market B) save costs due to product and marketing standardization C) customize its products and services D) respond effectively to emerging buyer preferences E) A and D Answer: E AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

38) Organic growth refers to an organization's corporate strategy that relies on growth ________.

A) through mergers and acquisitions B) based on strategic alliances C) generated internally D) achieved from joint ventures Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

39) A strategy designed to reduce the scale or scope of a corporation's business is called a ________ strategy.

A) growth B) differentiation C) retrenchment D) stability Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

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40) A retrenchment strategy is designed to ________.

A) encourage growth through joint ventures B) reduce the scale or scope of a corporation's operations C) focus exclusively on internally generated growth D) guard against organizational change Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

41) A company that is closing factories with unused capacity and laying-off workers is most likely following a ________ strategy.

A) growth B) retrenchment C) stability D) combined Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

42) A company that is selling unprofitable business units is most likely following a ________ strategy.

A) growth B) retrenchment C) stability D) combined Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

43) Which of the following strategies is designed to increase the scale or scope of a corporation's operations?

A) stability strategy B) growth strategy C) retrenchment strategy D) differentiation strategy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

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44) Which of the following strategies is used when Ryanair engages in aggressive cost cutting in order to be Europe's leading low-cost airline?

A) differentiation strategy B) focus strategy C) low-cost leadership strategy D) retrenchment strategy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

45) A business-level strategy in which a company exploits economies of scale is called a ________.

A) differentiation strategy B) stability strategy C) low-cost leadership strategy D) retrenchment strategy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

46) Decreasing levels of customer loyalty to an organization's products is a major disadvantage of the ________ strategy.

A) blue ocean B) stability C) low-cost leadership D) growth Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

47) A ________ strategy is one in which a company designs its products to be perceived by buyers as unique throughout its industry.

A) differentiation B) stability C) low-cost leadership D) retrenchment Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

13 .

48) What strategy is used when Noritake compares the ceramic tableware it makes (www.noritake.com) from common tableware by emphasizing its superior quality?

A) differentiation strategy B) stability strategy C) mass customization strategy D) retrenchment strategy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

49) Which of the following is a characteristic based on which products are typically differentiated?

A) brand loyalty B) brand equity C) product design D) product cost Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

50) A ________ strategy is one in which a company emphasizes on serving the needs of a narrowly defined market segment by being the low-cost leader, differentiating its product, or both.

A) global B) focus C) stability D) retrenchment Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

14 .

51) A ________ strategy often means designing products and promotions aimed at consumers who are either dissatisfied with existing choices or who want something distinctive.

A) global B) stability C) low-cost leadership D) focus Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

52) A(n) ________ strategy deals with the primary and supports activities in an organization that create value for customers.

A) business-level B) department-level C) corporate-level D) international Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

Scenario: Beanstalk International Beanstalk International is a rapidly growing company with well-established subsidiaries in several nations. The company wants to follow a strategy of adapting its products and marketing activities in each national market to suit local preferences. This strategy aims at creating value for its customers.

53) Which of the following is a primary activity that creates value for Beanstalk's customers?

A) firm infrastructure B) procurement C) human resource management D) inbound logistics Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

15 .

54) Which of the following is a support activity that creates value for Beanstalk's customers?

A) production B) marketing and sales C) customer service D) technology development Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

55) The strategy that Beanstalk would most likely want to follow is called a ________ strategy.

A) multinational B) retrenchment C) global D) stability Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 11.2: Describe the various strategies that companies use to reach their goals.

Scenario: TeleToys Inc. TeleToys Inc., a U.S.-based company, recently opened eighteen new toy stores in Brazil, acquired a women's clothing company in Canada, and closed its men's clothing line in Australia.

The company has a structure that organizes its global operations into geographic regions.

56) TeleToys recently opened eighteen new toy stores in Brazil. This move can best be described as a ________ strategy.

A) growth B) stability C) retrenchment D) differentiation Answer: A AACSB: Reflective thinking Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

16 .

57) The closing of TeleToys' Australian men's clothing line can best be described as a(n) ________ strategy.

A) organic growth B) stability C) retrenchment D) global Answer: C AACSB: Reflective thinking Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

58) Free-market economies tend to levy high taxes on business profits whereas socialist economic systems normally levy lighter taxes.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

59) A multinational strategy should allow a company to charge higher prices and/or gain market share.

Answer: TRUE AACSB: Reflective thinking Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

60) A global strategy entails having a separate strategy for each nation in which a company markets its products.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

61) A multinational strategy is best suited to industries in which price competitiveness is a key success factor.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

17 .

62) The main benefit of a multinational strategy is that it allows companies to monitor buyer preferences closely in each local market.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

63) A global strategy does not allow a company to modify its products except for the most superficial features.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

64) A growth strategy is designed to reduce the scale or scope of a corporation's operations.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

65) A joint venture is an example of a growth strategy of an organization.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

66) Corporations that reduce the scale of their operations by laying off managers and salespeople in national markets that are not generating adequate sales revenue are using a stability strategy.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

67) The purpose of a combination strategy is to mix growth, retrenchment, and stability strategies across a corporation's business units.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

18 .

68) A low-cost leadership strategy typically requires a company to have a large market share.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

69) Companies that pursue the low-cost leadership position also try to contain administrative costs and the costs of activities, including marketing, advertising, and distribution.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

70) A differentiation strategy is often implemented when a company wants to exploit economies of scale to have the lowest cost structure.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

71) A focus strategy works best with mass-marketed products aimed at price-sensitive buyers.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

72) Decentralized decision making concentrates decision making at a high organizational level in one location, such as at headquarters.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

19 .

73) Briefly describe the strategy formulation process of international organizations.

Answer: The strategy-formulation process involves both planning and strategy. Strategy formulation permits managers to step back from day-to-day activities and get a fresh perspective on the current and future direction of the company and its industry.

Identify Company Mission and Goals—Most companies have a general purpose for why they exist that they express in a mission statement—a written statement of why a company exists and what it plans to accomplish. For example, one company might set out to supply the highest level of service in a market segment—a clearly identifiable group of potential buyers. Another might strive to be the lowest-cost supplier in its segment worldwide. The mission statement often guides decisions such as which industries to enter or exit and how to compete in chosen segments.

Identify Core Competency and Value-Creating Activities—Before managers formulate effective strategies, they must analyze the company, its industry (or industries), and the national business environments in which it is involved. They should also examine industries and countries being targeted for potential future entry. A value-chain analysis is the process of dividing a company's activities into primary and support activities and identifying those that create value for customers. Primary activities include inbound and outbound logistics, production (goods and services), marketing and sales, and customer service. Primary activities involve the creation of the product, its marketing and delivery to buyers, and its after-sales support and service. Support activities include business infrastructure, human resource management, technology development, and procurement (sourcing). Each of these activities provides the inputs and infrastructure required by the primary activities.

Formulate Strategies—the strengths and special capabilities of an international company, along with the environmental forces it faces, strongly influence its strategy. Companies engaged in international business activities can approach the market using either a multinational or a global strategy.

1. Multinational Strategy—Some international companies choose to follow a multinational (multidomestic) strategy which involves adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market.

2. Global Strategy—Other companies decide that what suits their operations is a global strategy.

This strategy involves offering the same products using the same marketing strategy in all national markets. Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 11.2: Describe the various strategies that companies use to reach their goals.

20 .

74) Briefly describe the three generic business-level strategies, providing an example of each.

Answer: In addition to stipulating the overall corporate strategy, managers must also formulate separate business-level strategies for each business unit. For some companies, this means creating just one strategy. This is the case when the business level strategy and the corporatelevel strategy are one and the same because the corporation is involved in just one line of business. For other companies, this can mean creating dozens of strategies.

The key to developing an effective business-level strategy is deciding on a general competitive strategy in the marketplace. Each business unit must decide whether to sell the lowest-priced product in an industry or to integrate special attributes into its products. A business unit can use one of three generic business-level strategies for competing in its industry—low-cost leadership, differentiation, or focus. These strategies can be applied to practically all firms in all markets worldwide.

Low-Cost Leadership Strategy—A strategy in which a company exploits economies of scale to have the lowest cost structure of any competitor in its industry is called a low-cost leadership strategy. Companies that pursue this position also try to contain administrative costs and the costs of their various primary activities, including marketing, advertising, and distribution.

Although cutting costs is important for firms that pursue a low-cost leadership position, other important competitive factors such as product quality and customer service cannot be ignored.

Factors underlying the low-cost leadership position (efficient production in large quantities) help guard against attack by competitors because of the large upfront cost of getting started. The strategy typically requires a company to have a large market share because achieving low-cost leadership tends to rely on large-scale production to contain costs. One negative aspect of the low-cost leadership strategy is low customer loyalty.

Differentiation Strategy—A differentiation strategy is one in which a company designs its products to be perceived as unique by buyers throughout its industry. The perception of uniqueness can allow a company to charge a higher price and enjoy greater customer loyalty than it could as a low-cost leader. But a perception of exclusivity, or meeting the needs of a small group of buyers, tends to force a company into a lower market-share position. A company using this strategy must develop a loyal customer base to offset its smaller market share and higher costs of producing and marketing a unique product.

Focus Strategy—A focus strategy is one in which a company focuses on serving the needs of a narrowly defined market segment by being the low-cost leader, by differentiating its product, or both. Increasing competition often means more products distinguished by price or differentiated by quality, design, and so forth. In turn, a greater product range leads to the continuous refinement of market segments. Today many industries consist of large numbers of market segments and even smaller subsegments. For example, some firms try to serve the needs of one ethnic or racial group, whereas others, often entrepreneurs and small businesses, focus on a single geographic area.

AACSB: Reflective thinking Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

21 .

75) Explain how a global strategy complements a corporate growth strategy.

Answer: Some companies decide that what suits their operations is a global strategy—a strategy of offering the same products using the same marketing strategy in all national markets.

Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations. They also tend to perform product research and development in one or a few locations and typically design promotional campaigns and advertising strategies at headquarters. So-called global products are most common in industries characterized by price competition and, therefore, pressure to contain costs. They include certain electronic components, a wide variety of industrial goods such as steel, and some consumer goods such as paper and writing instruments.

The main benefit of a global strategy is cost savings due to product and marketing standardization. These cost savings can then be passed on to consumers to help the company gain market share in its market segment. A global strategy also allows managers to share lessons learned in one market with managers at other locations.

The main problem with a global strategy is it can cause a company to overlook important differences in buyer preferences from one market to another. A global strategy does not allow a company to modify its products except for the most superficial features, such as the color of paint applied to a finished product or a small add-on feature. This can present a competitor with an opportunity to step in and satisfy unmet needs of local buyers, thereby creating a niche market.

A growth strategy is designed to increase the scale or scope of a corporation's operations. Scale refers to the size of a corporation's activities, scope to the kinds of activities it performs.

Yardsticks commonly used to measure growth include geographic coverage, number of business units, market share, sales revenue, and number of employees. Organic growth refers to a corporate strategy of relying on internally generated growth. For example, management at 3M strongly encourages entrepreneurial activity, often spinning off business units to nurture the best ideas and carry them to completion.

Other methods of growth include mergers and acquisitions, joint ventures, and strategic alliances. These tactics are used when companies do not wish to invest in developing certain skills internally or when other companies already do what managers are trying to achieve.

Common partners in implementing these strategies include competitors, suppliers, and buyers.

Corporations typically join forces with competitors to reduce competition, expand product lines, or expand geographically. A common motivation for joining forces with suppliers is to increase control over the quality, cost, and timing of inputs.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.2: Describe the various strategies that companies use to reach their goals.

22 .

76) Explain the different ways in which products can be differentiated, providing an example of each.

Answer: A differentiation strategy is one in which a company designs its products to be perceived as unique by buyers throughout its industry. The perception of uniqueness can allow a company to charge a higher price and enjoy greater customer loyalty than it could as a low-cost leader. But a perception of exclusivity, or meeting the needs of a small group of buyers, tends to force a company into a lower market-share position. A company using this strategy must develop a loyal customer base to offset its smaller market share and higher costs of producing and marketing a unique product.

One way products can be differentiated is by improving their reputation for quality. Ceramic tableware for everyday use is found at department stores in almost every country. But the ceramic tableware made by Japanese producer Noritake differentiates itself from common tableware by emphasizing its superior quality. The perception of higher quality allows manufacturers to charge higher prices for their products worldwide.

Other products are differentiated by distinctive brand images. Armani and DKNY, for example, are relatively pricey global clothing labels appealing to a young, fashionable clientele. Each is continually introducing new textures and colors that are at once stylish and functional. Another example is Italian carmaker Alfa Romeo, which does not compete in the fiercely competitive mass-consumer segment of the global automobile industry. If it were to do so, it would have to be price-competitive and offer a wider selection of cars. Instead, Alfa Romeo offers a highquality product with a brand image that rewards the Alfa Romeo owner with status and prestige.

Another differentiating factor is product design—the sum of the features by which a product looks and functions according to customer requirements. Special features differentiate both goods and services in the minds of consumers who value those features. Manufacturers can also combine several differentiation factors in formulating their strategies.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.2: Describe the various strategies that companies use to reach their goals.

77) Companies involved in more than one line of business must first formulate a ________ strategy.

A) business-level B) department-level C) corporate-level D) global-level Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

23 .

78) Stability is designed to ________.

A) guard against organizational change B) increase the scale or scope of a corporation's operations C) support the stability strategies of an organization D) support the retrenchment strategies of an organization Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

79) What strategy involves a company working on serving the needs of a narrowly defined market segment?

A) differentiation strategy B) focus strategy C) stability strategy D) retrenchment strategy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

80) The way in which a company divides its activities among separate units and coordinates activities among those units is referred to as ________.

A) organizational structure B) organizational network analysis C) organizational diagnostics D) organizational climate Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

81) ________ decision making occurs at a high organizational level in one location, such as an organization's headquarters.

A) Centralized B) Facilitative C) Participative D) Consultative Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

24 .

82) ________ decision making disperses decisions to lower organizational levels, such as to international subsidiaries.

A) Decentralized B) Top-down C) Authoritative D) Top management Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

83) Decentralized decision making is beneficial when ________.

A) all subsidiaries use the same inputs in production B) fast-changing national business environments put a premium on local responsiveness C) one subsidiary's output is another's input D) it aims to create a single global organizational culture Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

84) The lines of authority in an organization that run from top management to individual employees and specify internal reporting relationships is called ________.

A) grapevine communication B) symbolic interactionism C) value chain D) chains of command Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

25 .

Scenario: Beanstalk International Beanstalk International is a rapidly growing company with well-established subsidiaries in several nations. The company wants to follow a strategy of adapting its products and marketing activities in each national market to suit local preferences. This strategy aims at creating value for its customers.

85) Beanstalk managers know that the drawback of such an adaptive strategy is that it ________.

A) does not allow companies to exploit scale economies in product development, manufacturing, and marketing B) can cause a company to overlook important differences in buyer preferences across various markets C) is applicable only to industries in which price-competitiveness is a key success factor D) does not allow a company to modify its products except for the most superficial features Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 11.3: Outline the key issues behind the selection of organizational structure.

Scenario: TeleToys Inc. TeleToys Inc., a U.S.-based company, recently opened eighteen new toy stores in Brazil, acquired a women's clothing company in Canada, and closed its men's clothing line in Australia.

The company has a structure that organizes its global operations into geographic regions.

86) Which of the following strategies should TeleToys follow if it wants buyers to perceive its products as unique?

A) retrenchment strategy B) global strategy C) differentiation strategy D) low-cost leadership strategy Answer: C AACSB: Reflective thinking Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

87) Which of the following features is TeleToys least likely to use in order to create a perception of having unique products?

A) brand image B) reputation for quality C) product design D) low cost Answer: D AACSB: Reflective thinking Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

26 .

88) TeleToys' organizational structure can best be referred to as a(n) ________ structure.

A) international division B) global product C) global matrix D) international area Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 11.3: Outline the key issues behind the selection of organizational structure.

89) Decentralization can help foster participative management practices.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

90) In an International Area Structure, a general manager is assigned to each country or region, and each geographic division operates as a self-contained unit, with decision making the responsibility of the country or regional managers.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

91) An international division structure reduces the authority of country managers in an organization's subsidiaries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

92) A main goal of the global product structure is to bring together geographic and product area managers in joint decision making.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

27 .

93) A global matrix structure is an organizational structure that divides worldwide operations according to a company's product areas.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

94) The main purpose of self-managed teams is to help break down barriers between departments.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

28 .

95) Differentiate between a multinational and a global strategy. Identify the main benefits and the main drawbacks of each.

Answer: Some international companies choose to follow a multinational (multidomestic) strategy—a strategy of adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market. Each subsidiary typically undertakes its own product research and development, production, and marketing. In many ways, each unit functions largely as an independent company. Multinational strategies are often appropriate for companies in industries in which buyer preferences do not converge across national borders, such as certain food products and some print media.

The main benefit of a multinational strategy is that it allows companies to monitor buyer preferences closely in each local market and to respond quickly and effectively to emerging buyer preferences. Companies hope that customers will perceive a tailored product as delivering greater value than do competitors' products. A multinational strategy, then, should allow a company to charge higher prices and/or gain market share.

The main drawback of a multinational strategy is that companies cannot exploit scale economies in product development, manufacturing, or marketing. The multinational strategy typically increases the cost structure for international companies and forces them to charge higher prices to recover such costs. As such, a multinational strategy is usually poorly suited to industries in which price competitiveness is a key success factor. The high degree of independence with which each unit operates also may reduce opportunities to share knowledge among units within a company.

Other companies decide that what suits their operations is a global strategy—a strategy of offering the same products using the same marketing strategy in all national markets. Companies that follow a global strategy often take advantage of scale and location economies by producing entire inventories of products or components in a few optimal locations. They also tend to perform product research and development in one or a few locations and typically design promotional campaigns and advertising strategies at headquarters. So-called global products are most common in industries characterized by price competition and, therefore, pressure to contain costs. They include certain electronic components, a wide variety of industrial goods such as steel, and some consumer goods such as paper and writing instruments.

The main benefit of a global strategy is cost savings due to product and marketing standardization. These cost savings can then be passed on to consumers to help the company gain market share in its market segment. A global strategy also allows managers to share lessons learned in one market with managers at other locations.

The main problem with a global strategy is it can cause a company to overlook important differences in buyer preferences from one market to another. A global strategy does not allow a company to modify its products except for the most superficial features, such as the color of paint applied to a finished product or a small add-on feature. This can present a competitor with an opportunity to step in and satisfy unmet needs of local buyers, thereby creating a niche market.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 11.3: Outline the key issues behind the selection of organizational structure.

29 .

96) Describe the four key approaches to corporate strategy, providing an example of each.

Answer: Companies involved in more than one line of business must first formulate a corporatelevel strategy. This means, in part, identifying the national markets and industries in which the company will operate. It also involves developing overall objectives for the company's different business units and specifying the role that each unit will play in reaching those objectives. The four key approaches to corporate strategy are growth, retrenchment, stability, and combination.

1. A growth strategy is designed to increase the scale or scope of a corporation's operations.

Scale refers to the size of a corporation's activities, scope to the kinds of activities it performs.

Yardsticks commonly used to measure growth include geographic coverage, number of business units, market share, sales revenue, and number of employees. Organic growth refers to a corporate strategy of relying on internally generated growth. For example, management at 3M strongly encourages entrepreneurial activity, often spinning off business units to nurture the best ideas and carry them to completion.

Other methods of growth include mergers and acquisitions, joint ventures, and strategic alliances. These tactics are used when companies do not wish to invest in developing certain skills internally or when other companies already do what managers are trying to achieve.

Common partners in implementing these strategies include competitors, suppliers, and buyers.

Corporations typically join forces with competitors to reduce competition, expand product lines, or expand geographically. A common motivation for joining forces with suppliers is to increase control over the quality, cost, and timing of inputs.

2. The exact opposite of a growth strategy is a retrenchment strategy—a strategy designed to reduce the scale or scope of a corporation's businesses. Corporations often cut back the scale of their operations when economic conditions worsen or competition increases. They may do so by closing factories with unused capacity and laying off workers. Corporations can also reduce the scale of their operations by laying off managers and salespeople in national markets that are not generating adequate sales revenue. Corporations reduce the scope of their activities by selling unprofitable business units or those no longer directly related to their overall aims. Weaker competitors often resort to retrenchment when national business environments grow more competitive.

3. A stability strategy is designed to guard against change. Corporations often use a stability strategy when trying to avoid either growth or retrenchment. Such corporations have typically met their stated objectives or are satisfied with what they have already accomplished. They believe that their strengths are being fully exploited and their weaknesses fully protected against.

They also see the business environment as posing neither profitable opportunities nor threats.

They have no interest in expanding sales, increasing profits, increasing market share, or expanding the customer base; at present, they want simply to maintain their present positions.

4. The purpose of a combination strategy is to mix growth, retrenchment, and stability strategies across a corporation's business units. For example, a corporation can invest in units that show promise, retrench in those for which less exposure is desired, and stabilize others. In fact, corporate combination strategies are quite common because international corporations rarely follow identical strategies in each of their business units.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

30 .

97) How do national and international business environments influence multinational strategy formulation?

Answer: National differences in language, religious beliefs, customs, traditions, and climate complicate strategy formulation. Language differences can increase the cost of operations and administration. Manufacturing processes must sometimes be adapted to the supply of local workers and to local customs, traditions, and practices. Marketing activities sometimes can result in costly mistakes if they do not incorporate cultural differences.

Differences in political and legal systems also complicate international strategies. Legal and political processes often differ in target countries to such an extent that firms must hire outside consultants to teach them about the local system. Such knowledge is important to international companies because the approval of the host government is almost always necessary for making direct investments. Companies need to know which ministry or department has the authority to grant approval for a big business deal—a process that can become extremely cumbersome.

Different national economic systems further complicate strategy formulation. Negative attitudes of local people toward the impact of direct investment can generate political unrest. Economic philosophy affects the tax rates that governments impose. Whereas socialist economic systems normally levy high taxes on business profits, free-market economies tend to levy lighter taxes.

The need to work in more than one currency also complicates international strategy. To minimize losses from currency fluctuations, companies must develop strategies to deal with exchange-rate risk.

Finally, apart from complicating strategy, the national business environment can affect the location in which a company chooses to perform an activity. For example, a nation that spends a high portion of its GDP on research and development attracts high-tech industries and high-wage jobs and, as a result, prospers. By contrast, countries that spend relatively little in the way of R&D tend to have lower levels of prosperity.

Some international companies choose to follow a multinational (multidomestic) strategy—a strategy of adapting products and their marketing strategies in each national market to suit local preferences. In other words, a multinational strategy is just what its name implies—a separate strategy for each of the multiple nations in which a company markets its products. To implement a multinational strategy, companies often establish largely independent, self-contained units (or subsidiaries) in each national market. Each subsidiary typically undertakes its own product research and development, production, and marketing. In many ways, each unit functions largely as an independent company. Multinational strategies are often appropriate for companies in industries in which buyer preferences do not converge across national borders, such as certain food products and some print media.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Moderate LO: 11.3: Outline the key issues behind the selection of organizational structure.

31 .

98) When should managers consider decentralized decision making? What benefits might emerge?

Answer: Decentralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness. Decentralized decisions can result in products that are better suited to the needs and preferences of local buyers because subsidiary managers are in closer contact with the local business environment. Local managers are more likely to perceive environmental changes that managers at headquarters might not notice. By contrast, central managers may not perceive such changes or would likely get a secondhand account of local events. Delayed response and misinterpreted events could then result in lost orders, stalled production, and weakened competitiveness.

Decentralization can also help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies. Decentralization also can increase personal accountability for business decisions.

When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.3: Outline the key issues behind the selection of organizational structure.

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99) Discuss the major points of differences between centralization and decentralization, and explain the differences between an international area structure and a global product structure.

Answer: A vital issue for top managers is determining the degree to which decision making in the organization will be centralized or decentralized. Centralized decision making concentrates decision making at a high organizational level in one location, such as at headquarters.

Decentralized decision making disperses decisions to lower organizational levels, such as to international subsidiaries.

In a discussion of centralization versus decentralization of decision making, it is important to remember two points: 1. Companies rarely centralize or decentralize all decision making. Rather, they seek an approach that will result in the greatest efficiency and effectiveness.

2. International companies may centralize decision making in certain geographic markets while decentralizing it in others. Numerous factors influence this decision, including the need for product modification and the abilities of managers at each location.

An international area structure organizes a company's entire global operations into countries or geographic regions. The greater the number of countries in which a company operates, the greater the likelihood it will organize into regions—say, Asia, Europe, and the Americas— instead of countries. Typically, a general manager is assigned to each country or region. Under this structure, each geographic division operates as a self-contained unit, with most decision making decentralized in the hands of the country or regional managers. Each unit has its own set of departments—purchasing, production, marketing and sales, R&D, and accounting. Each also tends to handle much of its own strategic planning. Management at the parent-company headquarters makes decisions regarding overall corporate strategy and coordinates the activities of various units.

The international area structure is best suited to companies that treat each national or regional market as unique. It is particularly useful when there are vast cultural, political, or economic differences between nations or regions. When they enjoy a great deal of control over activities in their own environments, general managers become experts on the unique needs of their buyers.

On the other hand, because units act independently, allocated resources may overlap and crossfertilization of knowledge from one unit to another may be less than desirable.

A global product structure divides worldwide operations according to a company's product areas.

Each product division is then divided into domestic and international units. Each function— R&D, marketing, and so forth—is thus duplicated in both the domestic and international units of each product division.

The global product structure is suitable for companies that offer diverse sets of products or services because it overcomes some coordination problems of the international division structure.

Because the primary focus is on the product, activities must be coordinated among a product division's domestic and international managers so they do not conflict.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 11.3: Outline the key issues behind the selection of organizational structure.

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100) What type of work teams might emerge in organizations that practice decentralized decision making?

Answer: Globalization is forcing companies to respond more quickly to changes in the business environment. The formation of teams can be highly useful in improving responsiveness by cutting across functional boundaries, such as that between production and marketing, that slow decision making in an organization. Although a matrix organization accomplishes this by establishing cross-functional cooperation, companies do not always want to change their entire organizational structure to reap the benefits that cross-functional cooperation provides. In such cases, companies can implement several different types of teams without changing the overall company structure.

Decentralized decision making promotes the emergence of self-managed teams.

A self-managed team is one in which employees from a single department take on the responsibilities of their former supervisors. When used in production, such teams often reorganize the methods and flow of production processes. Because they are "self-managed," they reduce the need for managers to watch over their every activity. The benefits of self-managed teams typically include increased productivity, product quality, customer satisfaction, employee morale, and company loyalty. In fact, the most common self-managed teams in many manufacturing companies are quality-improvement teams, which help reduce waste in the production process and, therefore, lower costs.

A cross-functional team is one composed of employees who work at similar levels in different functional departments. These teams work to develop changes in operations and are well suited to projects that require coordination across functions, such as reducing the time needed to get a product from the idea stage to the marketplace. International companies also use cross-functional teams to improve quality by having employees from purchasing, manufacturing, and distribution (among other functions) work together to address specific quality issues. For the same reason, cross-functional teams can help break down barriers between departments and reorganize operations around processes rather than by functional departments. Finally, large international corporations are creating so-called global teams—groups of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems. For example, Nortel Networks of Canada created a global team of top executives from Britain, Canada, France, and the United States that traveled to Asia, Europe, and North America looking for ways to improve product-development practices.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 11.3: Outline the key issues behind the selection of organizational structure.

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101) A(n) ________ structure separates domestic from international business activities by creating a separate global branch with its own manager.

A) international area B) international division C) global matrix D) global product Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

102) An organizational structure that organizes a company's entire global operations into countries or geographic regions is referred to as a(n) ________ structure.

A) international area B) international division C) global matrix D) global product Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

103) A(n) ________ structure is best suited to companies that treat each national market as unique due to the vast cultural, political, or economic differences between nations.

A) international division B) international area C) global matrix D) global product Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

104) Which of the following is an advantage of a company with an international area structure?

A) Country managers have very little authority.

B) The subsidiaries fail to develop organizational cultures suited to their locations.

C) Individual responsibility and accountability is foggy.

D) When general managers become experts on the unique needs of their buyers.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.4: Describe various international organizational structures and types of work teams.

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105) An organizational structure that splits the chain of command between product and area divisions is referred to as a(n) ________ structure.

A) international area B) international division C) global matrix D) global product Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

106) A team in which employees from a single department take on responsibilities of their former supervisors is called a ________ team.

A) cross-functional B) self-managed C) global D) virtual Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

107) ________ teams are self-managed teams that help reduce waste in the production processes of many manufacturing companies.

A) Cross-functional B) Quality-improvement C) Interdependent D) Virtual Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

108) A ________ team is one composed of employees who work at similar levels in different operative departments in an organization.

A) self-managed B) global C) virtual D) cross-functional Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

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109) ________ teams can help break down barriers between departments and reorganize operations around processes in an organization.

A) Cross-functional B) Self-managed C) Global D) Virtual Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

110) A team of top managers from both headquarters and international subsidiaries who meet to develop solutions to company-wide problems is referred to as a ________ team.

A) virtual B) global team C) cross-functional team D) self-managed team Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 11.4: Describe various international organizational structures and types of work teams.

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111) Describe any three organizational structures that are common for a vast majority of international companies.

Answer: An international division structure separates domestic from international business activities by creating a separate international division with its own manager. In turn, the international division is typically divided into units corresponding to the countries in which a company is active—say, China, Indonesia, and Thailand. Within each country, a general manager controls the manufacture and marketing of the firm's products. Each country unit typically carries out all of its own activities with its own departments such as marketing and sales, finance, and production.

Because the international division structure concentrates international expertise in one division, divisional managers become specialists in a wide variety of activities such as foreign exchange, export documentation, and host government relations. By consigning international activities to a single division, a firm can reduce costs, increase efficiency, and prevent international activities from disrupting domestic operations. These are important criteria for firms new to international business and whose international operations account for a small percentage of their total business.

An international area structure organizes a company's entire global operations into countries or geographic regions. The greater the number of countries in which a company operates, the greater the likelihood it will organize into regions—say, Asia, Europe, and the Americas— instead of countries. Typically, a general manager is assigned to each country or region. Under this structure, each geographic division operates as a self-contained unit, with most decision making decentralized in the hands of the country or regional managers. Each unit has its own set of departments—purchasing, production, marketing and sales, R&D, and accounting. Each also tends to handle much of its own strategic planning. Management at the parent-company headquarters makes decisions regarding overall corporate strategy and coordinates the activities of various units.

The international area structure is best suited to companies that treat each national or regional market as unique. It is particularly useful when there are vast cultural, political, or economic differences between nations or regions. When they enjoy a great deal of control over activities in their own environments, general managers become experts on the unique needs of their buyers.

On the other hand, because units act independently, allocated resources may overlap and crossfertilization of knowledge from one unit to another may be less than desirable.

A global product structure divides worldwide operations according to a company's product areas.

For example, divisions in a computer company might be Internet and Communications, Software Development, and New Technologies. Each product division is then divided into domestic and international units. Each function—R&D, marketing, and so forth—is thus duplicated in both the domestic and international units of each product division.

The global product structure is suitable for companies that offer diverse sets of products or services because it overcomes some coordination problems of the international division structure.

Because the primary focus is on the product, activities must be coordinated among a product division's domestic and international managers so they do not conflict.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 11.4: Describe various international organizational structures and types of work teams.

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112) Explain participative management and accountability in a decentralized organization, and discuss the probable accountability issues in a global matrix structure. Include a description of the global matrix structure in your answer.

Answer: Decentralization can help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies.

Decentralization also can increase personal accountability for business decisions. When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

A global matrix structure splits the chain of command between product and area divisions. Each manager reports to two bosses—the president of the product division and the president of the geographic area. A main goal of the matrix structure is to bring together geographic area managers and product area managers in joint decision making. In fact, bringing together specialists from different parts of the organization creates a sort of team organization. The popularity of the matrix structure has grown among companies trying to increase local responsiveness, reduce costs, and coordinate worldwide operations.

The matrix structure resolves some of the shortcomings of other organizational structures, especially by improving communication among divisions and increasing the efficiency of highly specialized employees. At its best, the matrix structure can increase coordination while simultaneously improving agility and local responsiveness.

However, the global matrix structure suffers from two major shortcomings. First, the matrix form can be quite cumbersome. Numerous meetings are required simply to coordinate the actions of the various division heads, let alone the activities within divisions. In turn, the need for complex coordination tends to make decision making time consuming and slows the reaction time of the organization. Second, individual responsibility and accountability can become foggy in the matrix organization structure. Because responsibility is shared, managers can attribute poor performance to the actions of the other manager. Moreover, the source of problems in the matrix structure can be hard to detect and corrective action difficult to take.

AACSB: Reflective thinking Skill: Synthesis Difficulty: Hard LO: 11.4: Describe various international organizational structures and types of work teams.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 12 Analyzing International Opportunities 1) Which of the following is not one of the three steps in increasing market share, revenue, and profits?

A) assess alternative markets B) evaluate respective costs, benefits, and risks C) perform a situation analysis D) select market with most potential for entry or expansion Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

2) The first step in the screening process for potential markets and sites is to ________.

A) select a favorable market or site B) measure the market or site potential C) identify the basic appeal of a market D) assess the national business environment Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

3) Which of the following steps of the market screening process involves examining the cost of transporting goods?

A) identification of basic appeal of a market B) assessment of the national business environment C) measurement of market or site potential D) selection of the market or site Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

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4) Which of the following steps of the market screening process involves the analysis of the quality of workforce, materials, and infrastructure?

A) identification of basic appeal of a market B) assessment of the national business environment C) measurement of market or site potential D) selection of the market or site Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

5) Countries differ significantly in their cultures, politics, laws, and economies. International managers must work to understand these differences and to incorporate their understanding into market- and site-selection decisions. Which of the following steps of the market screening process involves an evaluation of the government bureaucracy?

A) identification of basic appeal of a market B) assessment of the national business environment C) measurement of market or site potential D) selection of the market or site Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

6) Which of the following is a characteristic of foreign direct investment?

A) relatively low financial investment B) low exposure to political risk C) high profit potential D) simple management Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

7) The key element of political risk of greatest concern for global companies is ________.

A) the cost of transporting materials and goods B) government regulation, government bureaucracy, and political stability C) currency and liquidity problems D) letting past political events blind future opportunities Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

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8) A type of risk faced by businesses that decisions made by the government, events, or conditions will significantly affect the profitability of a business is known as ________.

A) volatility risk B) systemic risk C) political risk D) credit risk Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

9) Which of the following is a characteristic of foreign direct investment?

A) relatively low financial investment B) low exposure to political risk C) high profit potential D) simple management Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

10) Which of the following steps of the screening process for potential markets involves the evaluation of fiscal and monetary policies of a nation?

A) identification of basic appeal of a market B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

11) Which of the following steps of the market screening process examines the effects of country image on market-entry decisions?

A) identification of basic appeal of a market B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

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12) Which of the following is most likely to be caused by poor fiscal and monetary policies of a nation's central bank?

A) increasing levels of productivity B) decreasing budget deficits C) appreciating currency D) high rates of inflation Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

13) ________ refers to the continuous monitoring of events in other locations keeps managers aware of potential business opportunities and threats.

A) Operations research B) Logistics C) Warehousing D) Environmental scanning Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

14) Which of the following statements is true about country image and its effects on global companies?

A) It embodies all important facets of a nation's business environment.

B) If a country's image is positive in one product class, it tends to be positive in all other product classes as well.

C) An image, once formed, seldom changes over time.

D) Products made in emerging countries are evaluated more positively than products made in developed countries.

Answer: A AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

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15) ________ is the most common form of international business activity.

A) Exporting B) Licensing C) Greenfield strategy D) Management contract Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

16) Which of the following is a characteristic of exporting?

A) high financial exposure B) rapid market entry C) logistical simplicity D) local market knowledge Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

Scenario: Chong's Analysis of International Markets John Chong is an inexperienced entrepreneur in global business. He wants to sell his product, Zulu doll, a toy for kids below the age of eight, in every corner of the world. He wants to examine all potential markets but wants to keep his costs low. John has asked you to explain a few things about analyzing international markets.

17) When screening a potential market, which of the following would you advise John to do first?

A) assess the national business environment B) select the market C) identify basic appeal for markets D) measure market potential Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

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18) Which stage of the market-screening process is John involved in, while examining government regulations and bureaucracy in a market?

A) assessment of the national business environment B) selection of the market C) identification of the basic appeal for markets D) measurement of market potential Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

19) Which step of the market-screening process involves determining the income elasticity of the Zulu doll?

A) select the market or site B) assessment of the national business environment C) identification of the basic appeal for markets D) measure market or site potential Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

20) The first step in identifying potential markets is to assess the basic demand for a product.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

21) Companies that require particular resources to carry out local business activities must be sure they are available.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

22) A country's climate plays an important role in determining the basic demand for a company's product.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.1: Explain the importance of examining basic appeal and national factors.

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23) Cultural elements do not have any influence what kinds of products are sold and how they are sold in a country.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

24) Consumer products such as toothpaste and soft drinks undergo extensive adaptation to suit local preferences.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

25) Governments bar international companies from entering economic sectors like energy exploration for security reasons.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

26) Government regulations can quickly eliminate a market or site from further consideration.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

27) Stable currency values make it easier for firms to predict future earnings accurately in terms of the home-country currency.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

28) Products made in emerging countries tend to be evaluated more positively than those from relatively more developed countries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

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29) Companies usually modify or adapt elements of their marketing plan to be used in different markets in which they sell their products.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

30) Briefly discuss the important political and legal forces that should be analyzed in the market/site screening process.

Answer: Political and legal forces also influence the market and site-location decision.

Important factors include government regulation, government bureaucracy, and political stability.

A nation's culture, history, and current events cause differences in attitudes toward trade and investment. Some governments take a strong nationalistic stance, whereas others are quite receptive to international trade and investment. A government's attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country.

Government regulations can quickly eliminate a market or site from further consideration. First of all, they can create investment barriers to ensure domestic control of a company or industry.

One way in which a government can accomplish this is by imposing investment rules on matters such as business ownership—for example, forcing foreign companies into joint ventures.

Governments can extend investment rules to bar international companies entirely from competing in certain sectors of the domestic economy. The practice is usually defended as a matter of national security. Economic sectors commonly declared off-limits include television and radio broadcasting, automobile manufacturing, aircraft manufacturing, energy exploration, military-equipment manufacturing, and iron and steel production. Such industries are protected either because they are culturally important, are engines for economic growth, or are essential to any potential war effort. Host governments often fear that losing control in these economic sectors means placing their fate in the hands of international companies.

Second, governments can restrict international companies from freely removing profits earned in the nation. This policy can force a company to hold cash in the host country or to reinvest it in new projects there. Such policies are normally rooted in the inability of the host-country government to earn the foreign exchange needed to pay for badly needed imports.

Third, governments can impose very strict environmental regulations. In most industrial countries, factories that produce industrial chemicals as their main output or as byproducts must adhere to strict pollution standards. Regulations typically demand the installation of expensive pollution-control devices and close monitoring of nearby air, water, and soil quality. While protecting the environment, such regulations also increase short-term production costs. Many developing and emerging markets have far less strict environmental regulations. Regrettably, some companies are alleged to have moved production of toxic materials to emerging markets to take advantage of lax environmental regulations and, in turn, lower production costs. Although such behavior is roundly criticized as highly unethical, it will occur less often as nations continue cooperating to formulate common environmental protection policies.

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Finally, governments can also require that companies divulge certain information.

Government Bureaucracy-A lean and smoothly operating government bureaucracy can make a market or site more attractive. Yet a bloated and cumbersome system of obtaining approvals and licenses from government agencies can make it less appealing. In many developing countries, the relatively simple matter of obtaining a license to establish a retail outlet often means acquiring numerous documents from several agencies. The bureaucrats in charge of these agencies generally are little concerned with providing businesses with high-quality service. Managers must be prepared to deal with administrative delays and a maze of rules.

Political Stability-Every nation's business environment is affected to some degree by political risk. Political risk is the likelihood that a society will undergo political changes that negatively affect local business activity. Political risk can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to remove profits from the country in which they were earned. The key element of political risk that concerns companies is unforeseen political change. Political risk tends to rise if a company cannot estimate the future political environment with a fair degree of accuracy. An event with a negative impact that is expected to occur in the future is not, in itself, bad for companies because the event can be planned for and necessary precautions taken. It is the unforeseen negative events that create political risk for companies.

Managers' perceptions of a market's political risk are often affected by their memories of past political unrest in the market. Yet managers cannot let past events blind them to future opportunities. International companies must try to monitor and predict political events that threaten operations and future profits. By investigating the political environment proactively, managers can focus on political risk and develop action plans for dealing with it.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

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31) What is country image? Explain how it affects the screening process using examples.

Answer: Country image embodies every facet of a nation's business environment. It is highly relevant to the selection of sites for production, R&D, or any other activity. For example, country image affects the location of manufacturing or assembly operations because products must typically be stamped with labels identifying where they were made or assembled—such as "Made in China" or "Assembled in Brazil." Although such labels do not affect all products to the same degree, they can present important positive or negative images and boost or dampen sales.

Products made in relatively developed countries tend to be evaluated more positively than products from less developed countries. This relation is due to the perception among consumers that the workforces of certain nations have superior skills in making particular products. For example, consumer product giants Procter & Gamble (www.pg.com) and Unilever have manufacturing facilities in Vietnam. But Vietnamese consumers tend to shun these companies' locally made Close-Up toothpaste and Tide detergent, and instead they seek the identical products and brands produced in neighboring countries, such as Thailand. As one young Vietnamese shopper explained, "Tide from Thailand smells nicer." A general perception among Vietnamese consumers is that goods from Japan or Singapore are the best, followed by Thai goods. Unfortunately for Procter & Gamble and Unilever in Vietnam, many goods from other countries are smuggled in and sold on the black market, thereby denying the companies local sales revenue.

A country's image can be positive in one product class but negative in another. For example, the fact that Volkswagen's new Beetle is made in Mexico for the U.S. market has not hurt the Beetle's sales. But affluent consumers might be apprehensive to buy a hand-built Rolls-Royce automobile if it were produced in Mexico. Because Rolls-Royce buyers pay for the image of a brilliantly crafted luxury car, the Rolls-Royce image probably would not survive intact if the company were to produce its cars in Mexico.

Finally, country image can and does change over time. For example, "Made in India" has traditionally been associated with low-technology products such as soccer balls and many types of textile products. But today world-class computer software companies increasingly rely on the software-development skills of engineers located in southern India.

AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 12.1: Explain the importance of examining basic appeal and national factors.

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32) Discuss the importance of cultural factors when assessing a national business environment, and explain why cultural differences between markets create difficulties when conducting international research.

Answer: Cultural Factors—Although countries display cultural similarities, they differ in language, attitudes toward business, religious beliefs, traditions, customs, and countless other ways. Some products are sold in global markets with little or no modification. These products include industrial machinery such as packaging equipment, consumer products such as toothpaste and soft drinks, and many other types of goods and services. Yet many other products must undergo extensive adaptation to suit local preferences, such as books, magazines, ready-toeat meals, and other products.

Cultural elements can influence what kinds of products are sold and how they are sold. A company must assess how the local culture in a candidate market might affect the salability of its product.

Cultural elements in the business environment can also affect site-selection decisions. When substantial product modifications are needed for cultural reasons, a company might choose to establish production facilities in the target market itself. Yet serving customers' special needs in a target market must be offset against any potential loss of economies of scale due to producing in several locations rather than just one. Today companies can minimize such losses through the use of flexible manufacturing methods.

A qualified workforce is important to a company no matter what activity it is to undertake at a particular site. Also, a strong work ethic among the local workforce is essential to having productive operations. Managers must assess whether an appropriate work ethic exists in each potential country for the purposes of production, service, or any other business activity. An adequate level of educational attainment among the local workforce for the planned business activity is also very important. Although product-assembly operations may not require an advanced education, R&D, high-tech production, and certain services normally will require extensive higher education.

Cultural Differences—When conducting international research, marketers who conduct research in unfamiliar markets must pay attention to the ways in which cultural variables influence information. Perhaps the single most important variable is language. For example, if researchers are unfamiliar with a language in the market they are investigating, they might be forced to rely on interpreters. Interpreters might unintentionally misrepresent certain comments or be unable to convey the sentiment with which statements are made.

Researchers might also need to survey potential buyers through questionnaires written in the local language. To avoid any misstatement of questions or results, questionnaires must be translated into the language of the target market and the responses then translated back into the researcher's language. Written expressions must be highly accurate so that results do not become meaningless or misleading. The potential to conduct written surveys is also affected by the illiteracy rates among the local population. A written survey is generally impossible to conduct in countries with high illiteracy rates such as Morocco, Nigeria, and so on. Researchers would probably need to choose different information-gathering technique, such as personal interviews or observing retail purchases.

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Companies that have little experience in an unfamiliar market often hire local agencies to perform some or all of their market research. Local researchers know the cultural terrain. They understand which practices are acceptable and which types of questions can be asked. And they typically know whom to approach for certain types of information. Perhaps most importantly, they know how to interpret the information they gather and are likely to understand its reliability.

But a company that decides to conduct its own market research must, if necessary, adapt its research techniques to the local market. Many cultural elements that are taken for granted in the home market must be reassessed in the host business environment.

AACSB: Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

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33) Discuss how companies identify the basic appeal for products when screening a potential market, and explain how international organizations provide the essential information to researchers.

Answer: Determining Basic Demand—The first step in searching for potential markets means finding out whether there is a basic demand for a company's product. Important in determining this basic appeal is a country's climate. For example, no company would try to market snowboards in Indonesia, Sri Lanka, or Central America because they receive no snowfall. The same product, on the other hand, is well suited for markets in the Canadian Rockies, northern Japan, and the Swiss Alps. Although this stage seems simple, it cannot be taken too lightly. A classic example is when, during its initial forays into international business, Wal-Mart (www.walmart.com) found ice-fishing huts in its Puerto Rico inventory and no snowshoes at its stores in Ontario, Canada.

Certain countries also ban specific goods. Islamic countries, for instance, forbid the importation of alcoholic products, and the penalties for smuggling are stiff.

Determining Availability of Resources: Companies that require particular resources to carry out local business activities must be sure they are available. Raw materials needed for manufacturing must either be found in the national market or imported. Yet imports may encounter tariffs, quotas, or other government barriers. Managers must consider the additional costs of importing to ensure that total product cost does not rise to unacceptable levels.

The availability of labor is essential to production in any country. Many companies choose to relocate to countries where workers' wages are lower than they are in the home country. This practice is most common among makers of labor-intensive products—those for which labor accounts for a large portion of total cost. Companies considering local production must determine whether there is enough labor available locally for production operations.

Companies that hope to secure financing in a market abroad must determine the availability and cost of local capital. If local interest rates are too high, a company might be forced to obtain financing in its home country or in other markets in which it is active. On the other hand, access to low-cost financing may provide a powerful inducement to a company that is seeking to expand internationally.

There are excellent sources of much free and inexpensive information about product demand in particular countries. For example, the International Trade Statistics Yearbook published by the United Nations lists the export and import volumes of different products for each country. It also furnishes information on the value of exports and imports on an annual basis for the most recent five-year period. The International Trade Center, based in Geneva, Switzerland, also provides current import and export figures for more than 100 countries.

International development agencies, such as the World Bank, the International Monetary Fund, and the Asian Development Bank, also provide valuable secondary data. For example, the World Bank publishes annual data on each member nation's population and economic growth rate.

Today, most secondary sources supply downloadable data through the Internet or through traditional printed versions.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 12.1: Explain the importance of examining basic appeal and national factors.

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34) Which of the following steps should occur in the screening process for potential markets after the basic demand for a product has been identified?

A) assessment of the national business environment B) selection of the market or site C) measurement of the market or site potential D) assessment of climate suitability Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

35) Which of the following is the final step in the screening process for potential markets and sites?

A) assessment of the national business environment B) measurement of market or site potential C) selection of the market or site D) assessment of climate suitability Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

36) Which of the following steps of the market screening process involves the determination of a product's income elasticity?

A) identification of basic appeal of a product B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

37) A typical industry analysis does not include the ________.

A) names, production volumes, and market shares of the largest competitors B) structure of the wholesale and retail distribution networks C) background on the market, including population figures and key social trends D) history of currency fluctuations Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.2: Describe how companies measure and select a market or site.

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38) The sensitivity of demand for a product relative to changes in income is called ________.

A) income elasticity B) demand shaping C) income distribution D) market intensity Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

39) In the context of the sensitivity of demand for a product relative to changes in income, a coefficient greater than 1.0 conveys a(n) ________.

A) surplus product B) economic equilibrium C) economic surplus D) income-elastic product Answer: D AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

40) If the income-elasticity coefficient for coffee is 0.5, the demand for coffee will ________.

A) decrease 0.5 percent for every 1.0 percent increase in income B) increase 1.0 percent for every 5.0 percent increase in income C) increase 0.5 percent for every 1.0 percent increase in income D) decrease 0.5 percent for every 0.5 percent increase in income Answer: C AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 12.2: Describe how companies measure and select a market or site.

41) Which of the following is an income-elastic product?

A) food B) utilities C) jewelry D) beverages Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

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42) When creating a market-potential indicator for an emerging market, an estimate of the wealth or buying power of a market can be formed by examining the ________.

A) market intensity B) market growth rate C) market size D) market receptivity Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

43) Which of the following variables attempts to estimate market openness when creating a market-potential indicator for an emerging market?

A) market consumption capacity B) market receptivity C) market size D) market intensity Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

44) When creating a market-potential indicator for an emerging market, ________ is estimated by determining a nation's volume of international trade as a percentage of GDP. A) market receptivity B) market intensity C) market consumption capacity D) market size Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

45) During which stage of the market or site screening process do managers normally want to visit locations?

A) identification of basic appeal of a product B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

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46) Issues regarding potential threat from substitute products in a market are addressed in ________.

A) security analysis B) technical analysis C) product fit analysis D) competitor analysis Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

47) Which of the following stages of the market or site screening process involves an assessment of potential threat from substitute products?

A) identification of basic appeal of a product B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

48) Which of the following stages of the market or site screening process involves competitor analysis?

A) identification of basic appeal of a product B) measurement of market or site potential C) assessment of the national business environment D) selection of the market or site Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

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Scenario: Chong's Analysis of International Markets John Chong is an inexperienced entrepreneur in global business. He wants to sell his product, Zulu doll, a toy for kids below the age of eight, in every corner of the world. He wants to examine all potential markets but wants to keep his costs low. John has asked you to explain a few things about analyzing international markets.

49) Which of the following stages of the market-screening process would require John to visit a potential market personally?

A) assessment of the national business environment B) selection of the market C) identification of the basic appeal for markets D) measurement of market potential Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.2: Describe how companies measure and select a market or site.

50) A product's income-elasticity refers to the sensitivity of the demand of a product relative to changes in the income of consumer population.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

51) A product for which demand increases more relative to an increase in income has an incomeelasticity coefficient less than 1.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.2: Describe how companies measure and select a market or site.

52) Food and utilities are examples of income-inelastic products.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.2: Describe how companies measure and select a market or site.

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53) Assessing potential in emerging markets by ranking locations using market-potential indicators is useful only for companies involved in exporting.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.2: Describe how companies measure and select a market or site.

54) While assessing the market potential of emerging markets, market consumption capacity is generally obtained through estimates of energy consumption.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.2: Describe how companies measure and select a market or site.

55) Which of the following is an example of a legal force that is used to assess the national business environment?

A) resource quality B) environmental regulations C) workforce qualifications D) liquidity issues Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

56) When developing a market-potential indicator for an emerging market, the size of the market is typically estimated from the nation's ________.

A) income elasticity B) GDP C) total population D) GDP at purchasing power parity Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

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57) When developing a market-potential indicator for an emerging market, market growth rate is typically estimated from the ________.

A) per capita private consumption B) GDP C) total population D) percentage of a market's population in the middle class Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

58) When developing a market-potential indicator for an emerging market, market intensity is typically estimated from the ________.

A) per capita private consumption B) GDP C) total population D) percentage of a market's population in the middle class Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

59) When developing a market-potential indicator for an emerging market, the ________ factor attempts to assess channels of distribution and communication.

A) market size B) market intensity C) commercial infrastructure D) economic freedom Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

60) When creating a market-potential indicator for an emerging market, market consumption capacity is often estimated from the ________.

A) growth in gross domestic product B) percentage of a market's population in the middle class C) gross domestic product at purchasing power parity D) amount of energy the total population produces Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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61) The annual income considered below the poverty line in one country is the annual income of a middle-class family in another country. Which of the following difficulties associated with conducting international market research does this scenario illustrate?

A) availability of data B) protection of data C) marketability of data D) comparability of data Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

62) Some researches consist of errors due to misinterpretations by foreign language interpreters.

Which of the following difficulties associated with conducting international market research does this example signify?

A) protection of data B) availability of data C) cultural differences D) political differences Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

63) In countries with high illiteracy rates, a(n) ________ should not be used to collect information.

A) personal interview B) written survey C) focus group D) field research Answer: B AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

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64) The process of obtaining information that already exists within the company or that can be obtained from outside sources is called ________.

A) secondary market research B) data mining C) data harvesting D) scientific data archiving Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

65) ________ is relatively inexpensive because it has already been collected, analyzed, and summarized by another party.

A) Primary data B) Secondary data C) Raw data D) Transaction data Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

66) Which of the following is a source of secondary data for conducting international market research?

A) surveys B) interviews C) focus groups D) trade associations Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

67) The process of collecting and analyzing original data and applying the results to current research needs is called ________.

A) primary market research B) secondary market research C) data harvesting D) data mining Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

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68) An exhibition at which members of an industry showcase their latest products, study activities of rivals, and examine recent trends and opportunities is called a(n) ________.

A) focus group B) trade show C) environmental survey D) field research Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

69) A(n) ________ is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities.

A) focus group B) field research C) expo D) trade mission Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

70) Small and medium-sized companies often find trade missions very appealing because ________.

A) it gives companies an opportunity to visit new places B) such trips are usually cheap even for the smallest of businesses C) it provides access to important business officials and executives D) it helps companies analyze the strategies of all major competitors Answer: C AACSB: Application of knowledge; Written and oral communication Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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71) An ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes is called ________.

A) data harvesting B) peer production C) survey research D) environmental scanning Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

Scenario: Chong's Analysis of International Markets John Chong is an inexperienced entrepreneur in global business. He wants to sell his product, Zulu doll, a toy for kids below the age of eight, in every corner of the world. He wants to examine all potential markets but wants to keep his costs low. John has asked you to explain a few things about analyzing international markets.

72) The income-elasticity coefficient for Zulu doll is 1.2, which means the demand for Zulu doll will ________.

A) increase 1.2 percent for every 1.0 percent increase in income B) decrease 1.0 percent for every 1.2 percent increase in income C) decrease 1.2 percent for every 1.0 percent increase in income D) remain stagnant since 1.2 is the equilibrium value Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

Scenario: Markowitz Tools Susan Markowitz is analyzing potential markets where Markowitz Tools can sell its products, and she has narrowed her search to three markets. Country A is a developing country with a low literacy rate, Country B has a group-oriented culture, and Country C is a highly developed nation.

73) If Susan wants to obtain information in the least expensive way, she should use ________.

A) secondary market research B) consumer panels C) structured interviews D) large focus groups followed by surveys Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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74) Which of the following would be most appropriate for conducting primary market research on attitudes, behaviors, and purchasing habits in Country B? A) Internet-based research B) focus groups C) consumer panels D) data from trade agencies Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

75) Which of the following would be the least expensive method in terms of both time and money, for conducting a market research in Country C? A) structured interviews B) surveys C) data from the Internet D) focus groups Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

Scenario: Indy Bats LLC Indy Bats LLC is looking for new markets for its products. Matt Johnson has been appointed head of a special team that has been given the responsibility of identifying new markets for the company's products. The company is especially interested in exploring emerging economies.

76) For several emerging markets, Matt has collected data on the number of telephones, TVs, and fax machines per capita, and population per retail outlet, which assesses the ________.

A) economic freedom B) commercial infrastructure C) market growth rate D) market size Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

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77) If Matt wants to estimate an emerging market's spending capacity, he should focus on the ________.

A) population in the middle class B) need for consumer products C) demand for consumer and industrial products D) volume of imports Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

78) If Matt wants to estimate the extent to which free-market principles predominate in an emerging market, Matt should consider the variable called ________.

A) economic freedom B) commercial infrastructure C) market receptivity D) market intensity Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

79) The potential to conduct written surveys is independent of the literacy rates among the local population.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

80) The process of obtaining information that already exists within the company or that can be obtained from outside sources is called secondary market research.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.3: Identify the main sources of secondary market research data.

81) Secondary data tends to be very expensive because it has already been analyzed and summarized by another party.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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82) Industry data cannot indicate how individuals feel about a company or its products.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

83) Interviews and focus groups are two main sources of secondary data that help managers make informed decisions.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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84) What types of information are found in a typical industry analysis? How can companies use this information?

Answer: The information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than in emerging markets. In fact, for the most developed markets, research agencies exist for the sole purpose of supplying market data to companies. Euromonitor is one such company with an extensive global reach in consumer goods.

The company sells reports and does company-specific studies for many international corporations and entrepreneurs. Some of the information in a typical industry analysis includes: 1. Names, production volumes, and market shares of the largest competitors 2. Volume of exports and imports of the product 3. Structure of the wholesale and retail distribution networks 4. Background on the market, including population figures and key social trends 5. Total expenditure on the product (and similar products) in the market 6. Retail sales volume and market prices of the product 7. Future outlook for the market and potential opportunities The value of such information supplied by specialist agencies is readily apparent—these reports provide a quick overview of the size and structure of a nation's market for a product. Reports vary in their cost (depending on the market and product), but many can be had for around $750 to $1,500. The company also allows online purchase of reports in small segments for as little as $20 each.

Thus companies that enter the market in industrialized countries often have a great deal of data available on that particular market. What becomes important then is the forecast for the growth or contraction of a potential market. One way of forecasting market demand is determining a product's income elasticity—the sensitivity of demand for a product relative to changes in income. The income-elasticity coefficient for a product is calculated by dividing a percentage change in the quantity of a product demanded by a percentage change in income. A coefficient greater than 1.0 conveys an income-elastic product, or one for which demand increases more relative to an increase in income. These products tend to be discretionary purchases, such as computers, video games, jewelry, or expensive furniture—generally not considered essential items. A coefficient less than 1.0 conveys an income-inelastic product, or one for which demand increases less relative to an increase in income. These products are considered essential and include food, utilities, and beverages.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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85) Describe any five variables commonly included in creating a market-potential analysis for an emerging market.

Answer: The main variables commonly included in market-potential analyses are: Market Size—This variable provides a snapshot of the size of a market at any point in time. It does not estimate the size of a market for a particular product but rather the size of the overall economy. Market-size data allow managers to rank countries from largest to smallest, regardless of a particular product. Market size is typically estimated from a nation's total population or the amount of energy it produces and consumes.

Market Growth Rate—This variable reflects the fact that, although the overall size of the market (economy) is important, so too is its rate of growth. It helps managers avoid markets that are large but shrinking and instead target those that are small but rapidly expanding. It is generally obtained through estimates of growth in gross domestic product (GDP) and energy consumption.

Market Intensity—This variable estimates the wealth or buying power of a market from the expenditures of both individuals and businesses. It is estimated from per capita private consumption and/or per capita gross domestic product (GDP) at purchasing power parity.

Market Consumption Capacity—The purpose of this variable is to estimate spending capacity. It is often estimated from the percentage of a market's population in the middle class, thereby concentrating on the core of an economy's buying power.

Commercial Infrastructure—This factor attempts to assess channels of distribution and communication. Variables may include the number of telephones, televisions, fax machines, or personal computers per capita; the density of paved roads or number of vehicles per capita; and the population per retail outlet. An increasingly important variable for businesses relying on the Internet for sales is the number of Internet hosts per capita. But because these data become outdated quickly, care must be taken to ensure accurate information from the most current sources.

Economic Freedom—This variable attempts to estimate the extent to which free-market principles predominate. It is typically a summary of government trade policies, government involvement in business, the enforcement of property rights, and the strength of the black market.

Market Receptivity—This variable attempts to estimate market "openness." One way it can be estimated is by determining a nation's volume of international trade as a percentage of gross domestic product (GDP). If a company wants to see how receptive a market is to goods from its home country, it can ascertain the amount of per capita imports entering the market from the home country. Managers can also examine the growth (or decline) in these imports.

Country Risk—This variable attempts to estimate the total risk of doing business, including political, economic, and financial risks. Some market-potential estimation techniques include this variable in the market-receptivity variable.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

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86) What are the factors managers consider when analyzing industrialized markets? Discuss why the comparability of data is a major challenge while conducting international research.

Answer: The information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than in emerging markets. In fact, for the most developed markets, research agencies exist for the sole purpose of supplying market data to companies. Euromonitor is one such company with an extensive global reach in consumer goods.

The company sells reports and does company-specific studies for many international corporations and entrepreneurs. Some of the information in a typical industry analysis includes: 1. Names, production volumes, and market shares of the largest competitors 2. Volume of exports and imports of the product 3. Structure of the wholesale and retail distribution networks 4. Background on the market, including population figures and key social trends 5. Total expenditure on the product (and similar products) in the market 6. Retail sales volume and market prices of the product 7. Future outlook for the market and potential opportunities The value of such information supplied by specialist agencies is readily apparent—these reports provide a quick overview of the size and structure of a nation's market for a product.

The comparability of data is a challenge of conducting international research. Data obtained from other countries must be interpreted with great caution. Because terms such as poverty, consumption, and literacy differ greatly from one country to another, such data must be accompanied by precise definitions.

The different ways in which countries measure data also affect comparability across borders. For instance, some countries state the total quantity of foreign direct investment in their nations in terms of its monetary value. Others specify it in terms of the number of investment projects implemented during the year. But a single foreign direct investment into an industrialized nation can be worth many times what several or more projects are worth in a developing nation. To gather a complete picture of a nation's investments researchers will often need to obtain both figures. Moreover, reported statistics may not distinguish between foreign direct investment (accompanied by managerial control) and portfolio investment (which is not accompanied by managerial control). Misinterpreting data because one does not know how they are compiled or measured can sabotage even the best marketing plans and production strategies.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 12.3: Identify the main sources of secondary market research data.

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87) Define secondary market research and briefly discuss any three secondary data sources.

Answer: Companies can consult a variety of sources to obtain information on a nation's business environment and markets. The particular source that managers should consult depends on the company's industry, the national markets it is considering, and how far along it is in its locationscreening process. The process of obtaining information that already exists within the company or that can be obtained from outside sources is called secondary market research. Managers often use information gathered from secondary research activities to broadly estimate market demand for a product or to form a general impression of a nation's business environment. Secondary data are relatively inexpensive because they have already been collected, analyzed, and summarized by another party.

International Organizations—There are excellent sources of much free and inexpensive information about product demand in particular countries. For example, the International Trade Statistics Yearbook published by the United Nations lists the export and import volumes of different products for each country. It also furnishes information on the value of exports and imports on an annual basis for the most recent five-year period. Today, most secondary sources supply downloadable data through the Internet or through traditional printed versions.

Government Agencies—Commerce departments and international trade agencies of most countries typically supply information about import and export regulations, quality standards, and the size of various markets. These data are normally available directly from these departments, from agencies within each nation, and from the commercial attaché in each country's embassy abroad. In fact, visiting embassies and attending their social functions while visiting a potential location are excellent ways of making contact with potential future business partners.

Industry and Trade Associations—Companies often join associations composed of firms within their own industry or trade. In particular, companies trying to break into new markets join such associations to make contact with others in their field. The publications of these organizations keep members informed about current events and help managers to keep abreast of important issues and opportunities. Many associations publish special volumes of import and export data for domestic markets. They frequently compile directories that list each member's top executives, geographic scope, and contact information such as phone numbers and addresses. Today, many associations also maintain informative Web sites.

Service Organizations—Many international service organizations in fields such as banking, insurance, management consulting, and accounting offer information to their clients on cultural, regulatory, and financial conditions in a market.

Internet-Companies engaged in international business are quickly realizing the wealth of secondary research information available on the Internet and the World Wide Web. These electronic resources are usually user friendly and have vast amounts of information.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.3: Identify the main sources of secondary market research data.

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88) An unstructured but in-depth interview of a small group of individuals by a moderator to learn the group's attitudes about a company or its products is called a ________.

A) focus group B) literature review C) consumer panel D) brainstorming session Answer: A AACSB: Interpersonal relations and teamwork Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

89) ________ cannot indicate how individuals feel about a company or its product.

A) Surveys B) Industry data C) Consumer panels D) Interviews Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

90) It is often difficult to conduct focus groups in ________ cultures where people have a tendency to agree with others in the group.

A) collectivist B) masculine C) low uncertainty avoidance D) long term oriented Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

91) Research in which people record information in personal diaries on their attitudes, behaviors, or purchasing habits is called a ________.

A) survey B) focus group C) consumer panel D) literature review Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

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92) Research in which an interviewer asks current or potential buyers to answer written or verbal questions to obtain facts, opinions, or attitudes is called a ________.

A) survey B) covert observational research C) consumer panel D) brainstorming session Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

93) The single greatest advantage of ________ is the ability to collect vast amounts of data in a single sweep.

A) survey research B) focus groups C) consumer panels D) interviews Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

Scenario: Markowitz Tools Susan Markowitz is analyzing potential markets where Markowitz Tools can sell its products, and she has narrowed her search to three markets. Country A is a developing country with a low literacy rate, Country B has a group-oriented culture, and Country C is a highly developed nation.

94) Which of the following methods would be most appropriate for conducting primary market research in Country A? A) Internet research B) verbal questioning C) written surveys D) consumer panels Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.4: Describe common methods used to conduct primary market research.

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Scenario: Indy Bats LLC Indy Bats LLC is looking for new markets for its products. Matt Johnson has been appointed head of a special team that has been given the responsibility of identifying new markets for the company's products. The company is especially interested in exploring emerging economies.

95) To estimate an emerging market's openness, Matt could analyze its ________.

A) market receptivity B) differentiation strategy C) commercial infrastructure D) country risk Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 12.4: Describe common methods used to conduct primary market research.

96) The process of collecting and analyzing original data and applying the results to current research needs is called primary market research.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 12.4: Describe common methods used to conduct primary market research.

97) Trade missions are advantageous to small businesses as they are the most inexpensive method of getting introduced to important business contacts.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.4: Describe common methods used to conduct primary market research.

98) Focus group interviews tend to work best when moderators are natives of the countries where the interviews are held.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.4: Describe common methods used to conduct primary market research.

99) The single greatest disadvantage of survey research is that it provides access to only a small amount of data in a single sweep.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.4: Describe common methods used to conduct primary market research.

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100) What is primary market research? Describe any four primary market research methods.

Answer: Although secondary information is very useful in the early stages of the screening process, sometimes more tailored data on a location are needed. Under such circumstances, it might be necessary to conduct primary market research—the process of collecting and analyzing original data and applying the results to current research needs. This type of information is very helpful in filling in the blanks left by secondary research. Yet it is often more expensive to obtain than secondary research data because studies must be conducted in their entirety.

Trade shows and Trade Missions—An exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities is called a trade show. Trade shows are held on a continuing basis in virtually all markets and normally attract companies from around the globe. They are typically held by national or global industry trade associations or by government agencies. An excellent source of trade shows and exhibitions worldwide is Expo Central. A trade mission is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities.

Interviews and Focus Groups—Although industry data are useful to companies early in the screening process for potential markets, subsequent steps must assess buyers' emotions, attitudes, and cultural beliefs. Industry data cannot tell us how individuals feel about a company or its product. This type of buyer information is required when deciding whether to enter a market and when developing an effective marketing plan.

Surveys—Research in which an interviewer asks current or potential buyers to answer written or verbal questions to obtain facts, opinions, or attitudes is called a survey. For example, if Saucony wants to learn about consumer attitudes toward its latest women's aerobics shoe, it could ask a sample of women about their attitudes toward the shoe. Verbal questioning could be done in person or over the telephone, whereas written questioning could be done in person, through the mail, or through forms completed at Saucony's Web site. The results would then be tabulated, analyzed, and applied to the development of a marketing plan.

Environmental Scanning—An ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes is called environmental scanning. The environmental scanning process entails obtaining both factual and subjective information on the business environments in which a company is operating or considering entering. The continuous monitoring of events in other locations keeps managers aware of potential business opportunities and threats. Environmental scanning contributes to making well-informed decisions and the development of effective strategies. It also helps companies develop contingency plans for a particularly volatile environment.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 12.4: Describe common methods used to conduct primary market research.

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101) Discuss the importance of field trips in last stage of the market-screening process. How do trade shows and trade missions help companies conducting primary international research?

Answer: In the fourth stage of the process of screening a potential market, the importance of top managers making a personal visit to each remaining potential market or site cannot be overstated. Such trips typically involve attending strings of meetings and engaging in tough negotiations. The trip represents an opportunity for managers to see firsthand what they have so far seen only on paper. It gives them an opportunity to experience the culture, observe in action the workforce that they might soon employ, or make personal contact with potential new customers and distributors. Any remaining issues tend to be thoroughly investigated during field trips so that the terms of any agreement are known precisely in the event that a particular market or site is chosen. Managers can then usually return to the chosen location to put the terms of the final agreement in writing.

Trade shows and trade missions help companies conducting primary international research. An exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities is called a trade show.

Trade shows are held on a continuing basis in virtually all markets and normally attract companies from around the globe. They are typically held by national or global industry trade associations or by government agencies. An excellent source of trade shows and exhibitions worldwide is Expo Central.

Not surprisingly, the format and scope of trade shows differ from country to country. For example, because of its large domestic market, shows in the United States tend to be oriented toward business opportunities within the U.S. market. In line with U.S. culture, the atmosphere tends to be fairly informal. Conversely, because of the relatively smaller market of Germany and its participation in the European Union, trade shows there tend to showcase business opportunities in markets all across Europe and tend also to be quite formal.

A trade mission is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities. Businesspeople who attend trade missions are typically introduced both to important business contacts and well-placed government officials.

Small and medium-sized companies often find trade missions very appealing for two reasons.

First, the support of government officials gives them additional clout in the target country as well as access to officials and executives whom they would otherwise have little opportunity to meet.

Second, although such trips can sometimes be expensive for the smallest of businesses, they are generally worth the money because they almost always reap cost-effective rewards. Trade missions to faraway places sometimes involve visits to several countries to maximize the return for the time and money invested. For instance, a trade mission for European businesspeople to Latin America may include stops in Argentina, Brazil, Chile, and Mexico. A trade mission to Asia for North American or European companies might include stops in China, Hong Kong, Japan, South Korea, and Thailand.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 12.4: Describe common methods used to conduct primary market research.

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102) Explain why the availability of data is a challenge when conducting international research.

How do interviews and focus groups help in the availability of data?

Answer: When trying to target specific population segments, marketing managers require highly detailed information. Fortunately, companies are often spared the time, money, and effort of collecting firsthand data for the simple reason that it has already been gathered. This is particularly true in highly industrialized countries, including Australia, Canada, Japan, those in Western Europe, and the United States, where both government agencies and private research firms supply information. Three of these information suppliers are SymphonyIRI Group, Survey Research Group, and ACNielsen.

In many emerging and developing countries, however, previously gathered quality information is hard to obtain. Even when market data are available, their reliability is questionable. For example, analysts sometimes charge the governments of certain emerging markets with trying to lure investors by overstating estimates of gross income and consumption levels. In addition to deliberate misrepresentation, tainted information can also result from improper local collection methods and analysis techniques. But research agencies in emerging and developing markets that specialize in gathering data for clients in industrialized countries are developing higher-quality techniques of collection and analysis.

Interviews and focus groups can act as a primary source of international information. Although industry data are useful to companies early in the screening process for potential markets, subsequent steps must assess buyers' emotions, attitudes, and cultural beliefs. Industry data cannot tell us how individuals feel about a company or its product. This type of buyer information is required when deciding whether to enter a market and when developing an effective marketing plan. Therefore, many companies supplement the large-scale collection of country data with other types of research such as interviews with prospective customers.

Interviews, of course, must be conducted carefully if they are to yield reliable and unbiased information. Respondents in some cultures might be unwilling to answer certain questions or may intentionally give vague or misleading answers to avoid getting too personal. For example, although individuals in the United States are renowned for their willingness to divulge all sorts of information about their shopping habits and even their personal lives, this is very much the exception among other countries.

An unstructured but in-depth interview of a small group of individuals (8 to 12 people) by a moderator to learn the group's attitudes about a company or its product is called a focus group.

Moderators guide a discussion on a topic and interfere as little as possible with the free flow of ideas. The interview is recorded for later evaluation to identify recurring or prominent themes among the participants. This type of research helps marketers to uncover negative perceptions among buyers and to design corrective marketing strategies. Because subtle differences in verbal and body language could go unnoticed, focus group interviews tend to work best when moderators are natives of the countries in which the interview is held. Ironically, it is sometimes difficult to conduct focus groups in collectivist cultures because people have a tendency to agree with others in the group. In such instances, it might be advisable to conduct a consumer panel— research in which people record in personal diaries information on their attitudes, behaviors, or purchasing habits.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 12.4: Describe common methods used to conduct primary market research.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 13 Selecting and Managing Entry Modes 1) ________ is the most common form of international business activity.

A) Exporting B) Licensing C) Countertrade D) Joint Venture Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

2) Which of the following steps of the strategy development process for exports involves performing market research and interpreting results obtained from the research?

A) identification of a potential market B) match needs of the market to the company's abilities C) initiation of meetings D) commitment of resources Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

3) Which of the following steps of the strategy development process for exports involves establishing relationships with potential local distributors?

A) identification of a potential market B) match market needs to the company's abilities C) initiation of meetings D) commitment of resources Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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4) What is the first step in selecting a foreign market?

A) identification of potential market B) monitoring major markets C) evaluating host country's trade policies D) assessing general legal and political environments Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

5) Which of the following is true of distributors?

A) The use of distributors increases the exporter's control over the price buyers are charged.

B) They are compensated with a fixed salary plus commissions based on the value of their sales.

C) They are seldom required to take ownership of the merchandise when it enters their country.

D) They can stunt the growth of the exporter's market share by charging very high prices.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

6) ________ occur(s) when a firm sells its products to a domestic customer, which in turn exports the product, in either its original form or a modified form.

A) Indirect exporting B) Direct exporting C) Intercorporate transfers D) Intracorporate transfers Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

7) Which of the following allows a country to earn back some of the currency it pays out for imports?

A) switch trading B) counterpurchase C) buyback D) barter Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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8) ________ refers to any one of several different arrangements that business parties negotiate so that they can trade goods for good, primarily with countries that have limited amounts of foreign exchange.

A) Factoring B) Offset C) Countertrade D) Barter Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

9) The sale of goods and services to a country by a company that promises to buy a specific product from that country in the future is called a(n) ________.

A) counterpurchase B) offset C) joint venture D) barter Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

10) A company proposes that in exchange for a hard-currency sale, it will make a hard-currency purchase of an unspecified product from the buyer nation in the future. Which of the following is the company proposing?

A) a counterpurchase B) an offset C) a buyback D) a barter Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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11) An offset agreement differs from a counterpurchase agreement in that an offset agreement ________.

A) fails to specify the type of product that must be purchased B) fails to specify the amount that will be spent on the purchase C) fails to give a business greater freedom in fulfilling its end of a countertrade deal D) fails to make a hard-currency purchase of any product from that nation in the future Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

12) ________ is a countertrade whereby one company sells to another its obligation to make a purchase in a given country.

A) Franchising B) Joint venture C) Switch trading D) Barter Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

13) Buyback is defined as ________.

A) the export of industrial equipment in return for products produced by that equipment B) an agreement that a company will offset a hard-currency sale to a nation by making a hardcurrency purchase of an unspecified product from that nation in the future C) the sale of goods or services to a country by a company that promises to make a future purchase of a specific product from that country D) the exchange of goods or services for a certain amount of money Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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14) The export of industrial equipment in return for products produced by that equipment is called ________.

A) barter B) franchising C) offset D) buyback Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

15) Which of the following statements is true of countertrade?

A) Countertrade is practiced by countries when there is a lack of hard currency.

B) Countertrade involves products whose prices on world markets tend to remain steady.

C) Countertrade usually involves industrial products and computer softwares.

D) Hedging risk in countertrade is prohibited.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

16) Which of the following is a strategic factor that influences a company's international entry mode selection?

A) market consumption capacity B) market receptivity C) market size D) market intensity Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

17) Which of the following is an advantage of exporting?

A) vulnerability to tariffs B) logistical complexities C) potential conflicts with distributors D) access to new markets Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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Scenario: Owen's HomeCare Products Owen McCain, owner of Owen's HomeCare Products, is considering going international. He feels that the products he manufactures will be well-received, especially in developing countries.

He wants to understand the exporting process and then scale his exporting activities accordingly.

18) Through his research, Owen learns that the first step in developing a successful export strategy is ________.

A) initiation of meetings with intermediaries B) identification of a potential market C) commitment of resources D) matching of market needs to company abilities Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

19) Which of the following steps would Owen implement toward the end while developing a successful export strategy?

A) initiation of meetings with intermediaries B) identification of a potential market C) commitment of resources D) matching of market needs to company abilities Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

20) If Owen's HomeCare Products decides to sell their products to intermediaries who then resell them to buyers in target markets, the company would be engaging in ________ and use the services of an Export Management Company (EMC).

A) indirect exporting B) counterpurchase C) an acquisition D) a joint venture Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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Scenario: Wang's Techno Toys Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the domestic market. Continually increasing and stiff competition at home has now forced Wang's Techno Toys to enter international markets through direct exports.

21) Which of the following will most likely help Techno Toys sell its toys directly to buyers in the target market?

A) agents B) sales representatives C) export management companies D) export trading companies Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 13.1: Describe how companies use exporting, importing, and countertrade.

22) Which of the following occurs when a company sells its products to buyers in a target market without going through intermediary companies?

A) direct export B) indirect export C) contract manufacturing D) licensing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

23) ________ take ownership of the merchandise when it enters their country and accept all the risks associated with generating local sales.

A) Agents B) Distributors C) Sales representatives D) Freight forwarders Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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24) A(n) ________ exports products on behalf of an indirect exporter.

A) local distributor B) subsidiary C) sales representative D) export management company Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

25) The most common method used for buying and selling goods internationally is exporting.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

26) Most large companies use exporting to increase sales and open up new markets when the domestic market has become saturated.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

27) Companies can achieve economies of scale in production by expanding into international markets.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

28) Direct exporting is when a company sells its products directly to buyers in a target market.

Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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29) Typically, indirect exporting relies on local sales representatives or distributors.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

30) Distributors are firms who take ownership of the merchandise when it enters their country.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

31) Agency relationships are popular among exporters because they are easy to terminate should difficulties arise.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

32) Countertrade provides a way for firms to trade either by using a small amount of hard currency or even none at all.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

33) Countertrade is not an option for smaller companies because of the cash outlays involved.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

34) Buyback is the export of industrial equipment in return for products produced by that equipment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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35) A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.1: Describe how companies use exporting, importing, and countertrade.

36) Letters of credit are popular among traders because it reduces the risk of non-shipment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

37) Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand names.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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38) Explain why companies consider exporting. Describe the four-step model of developing a successful export strategy.

Answer: Companies generally begin exporting for three main reasons.

1. Expand sales-Most large companies use exporting as a means of expanding total sales when the domestic market has become saturated. By going international, they tend to achieve economies of scale.

2. Diversify sales-Companies can offset slow sales in one national market with increased sales in another.

3. Gain experience-Companies often use exporting as a low-cost, low-risk way of getting started in international business.

Companies are often drawn into exporting when customers in other countries solicit their goods.

In this way, companies become aware of their products' international potential and get their first taste of international business. Yet a company should not fall into the habit of simply responding to random international requests for its products. A more logical approach is to research and analyze international opportunities and to develop a coherent export strategy. A business with such a strategy actively pursues export markets rather than sitting back and waiting for international orders to come in.

Step 1: Identify a potential market—To identify whether demand exists in a particular target market, a company should perform market research and interpret the results. Novice exporters should focus on one or only a few markets. For example, a first-time Brazilian exporter might not want to export simultaneously to Argentina, Britain, and Greece. A better strategy would likely be to focus on Argentina because of its cultural similarities with Brazil (despite having a different, though related, language). The company could then expand into more diverse markets after it gains initial international experience in a nearby country. The would-be exporter should also seek expert advice on the regulations and general process of exporting and any special issues related to a selected target market.

Step 2: Match needs to abilities—The next step is to determine whether the company is capable of satisfying the needs of the market.

Step 3: Initiate Meetings—Holding meetings early with potential local distributors, buyers, and others is a must. Initial contact should focus on building trust and developing a cooperative climate among all parties. The cultural differences between the parties will come into play already at this stage. Beyond building trust, successive meetings are designed to estimate the potential success of any agreement if interest is shown on both sides. At the most advanced stage, negotiations take place and details of agreements are finalized.

Step 4: Commit resources—After all the meetings, negotiations, and contract signings, it is time to put the company's human, financial, and physical resources to work. First, the objectives of the export program must be clearly stated and should extend out at least three to five years. For small firms, it may be sufficient to assign one individual the responsibility for drawing up objectives and estimating resources. Yet as companies expand their activities to include more products and/or markets, many firms discover the need for an export department or division. The head of this department usually has the responsibility (and authority) to formulate, implement, and evaluate the company's export strategy.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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39) Why would an exporter use a sales representative or a distributor? Why would the exporter be reluctant to offer an open account payment method?

Answer: Some companies become deeply involved in the export of their products. Direct exporting occurs when a company sells its products directly to buyers in a target market. Direct exporters operate in many industries, including aircraft, industrial equipment, apparel, and bottled beverages. Direct exporters need not sell directly to end users. Rather, they take full responsibility for getting their goods into the target market by selling directly to local buyers and not going through intermediary companies. Typically, they rely on either local sales representatives or distributors.

Sales Representatives—A sales representative (whether an individual or an organization) represents only its own company's products, not those of other companies. Sales representatives promote those products in many ways, such as by attending trade fairs and making personal visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they are hired by a company and normally are compensated with a fixed salary plus commissions based on the value of their sales.

Distributors—Alternatively, a direct exporter can sell in the target market through distributors, who take ownership of the merchandise when it enters their country. As owners of the products, they accept all the risks associated with generating local sales. They sell either to retailers and wholesalers or to end users through their own channels of distribution. Typically, they earn a profit equal to the difference between the price they pay and the price they receive for the exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an exporter's control over the price buyers are charged. A distributor who charges very high prices can stunt the growth of an exporter's market share. Exporters should choose, if possible, distributors who are willing to invest in the promotion of their products and who do not sell directly competing products.

Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of nonshipment faced by the importer under the advance payment method. By the same token, the open account method increases the risk of nonpayment for the exporter. Thus, open account is the least favorable for exporters but the most favorable for importers.

AACSB: Analytical thinking; Application of knowledge Skill: Synthesis Difficulty: Hard LO: 13.1: Describe how companies use exporting, importing, and countertrade.

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40) What is countertrade? Explain the concept of buyback as a type of countertrade, and discuss buyback as a joint venture configuration.

Answer: Companies are sometimes unable to import merchandise in exchange for financial payment. The reason is either that the government of the importer's nation lacks the hard currency to pay for imports or that it intentionally restricts the convertibility of its currency.

Fortunately, there is a way for firms to trade by using either a small amount of hard currency or even none at all. Selling goods or services that are paid for, in whole or in part, with other goods or services is called countertrade. Although countertrade often requires an extensive network of international contacts, even smaller companies can take advantage of its benefits.

Nations that have long used countertrade are found mostly in Africa, Asia, Eastern Europe, and the Middle East. A lack of adequate hard currency often forced those nations to use countertrade to exchange oil for passenger aircraft and military equipment. Today, because of insufficient hard currency, developing and emerging markets frequently rely on countertrade to import goods. The greater involvement of firms from industrialized nations in those markets is expanding the use of countertrade.

Buyback is the export of industrial equipment in return for products produced by that equipment.

This practice usually typifies long-term relationships between the companies involved.

A buyback joint venture is formed when each partner requires the same component in its production process. It might be formed when a production facility of a certain minimum size is needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant building it. However, by combining resources, the partners can construct a facility that serves their needs while achieving savings from economies of scale production. For instance, this was one reason behind the $500 million joint venture between Chrysler and BMW to build small-car engines in Latin America. Each party benefited from the economies of scale offered by the plant's annual production capacity of 400,000 engines—a volume that neither company could absorb alone.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 13.1: Describe how companies use exporting, importing, and countertrade.

41) Companies involved in direct exporting typically rely on ________.

A) distributors B) agents C) export management companies D) All of the above Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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42) Which of the following is a method of export/import financing?

A) offset B) buyback C) switch trading D) documentary collection Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

43) Which of the following normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter prior to shipment of merchandise?

A) documentary collection B) letter of credit C) advance payment D) open account Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

44) Advance payment is commonly used for export/import financing when ________.

A) two parties are unfamiliar with each other B) the buyer has obtained credit for the transaction C) the transaction is for a relatively high amount D) the buyer has good credit rating at banks Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

45) Export/import financing in which a bank acts as an intermediary without accepting financial risk is called ________.

A) documentary collection B) counterpurchase C) buyback D) open account Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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46) Which of the following financing methods entails the greatest risk for importers?

A) documentary collection B) advance payment C) confirmed letter of credit D) open account Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

47) Which of the following financing methods entails the lowest risk for exporters?

A) supersedeas bond B) advance payment C) letter of credit D) open account Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

48) What is the primary risk an exporter faces with documentary collection?

A) bank changing terms B) importer defaulting C) issuing bank defaulting D) importer failing to pay account balance Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

49) A document ordering the importer to pay the exporter a specified sum of money at a specified time is called a ________.

A) bill of lading B) letter of credit C) bill of exchange D) management contract Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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50) Which of the following requires an importer to pay for the imported goods when they are delivered?

A) sight draft B) onboard bill of lading C) air way bill of lading D) time draft Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

51) A ________ extends credit to the importer by requiring payment at some specified time after the importer receives the goods.

A) sight draft B) time draft C) bill of lading D) bill of exchange Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

52) What document serves as a title to the goods in question under the document collection payment method?

A) sight draft B) bill of lading C) bill of exchange D) trade acceptance Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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53) Which of the following is a method of export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document?

A) sight draft B) bill of lading C) letter of credit D) bill of exchange Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

54) Martin Exporting requests ABC Bank to add its own guarantee of payment to a letter of credit, which creates a(n) ________.

A) advised letter of credit B) confirmed letter of credit C) irrevocable letter of credit D) unconfirmed letter of credit Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

55) Which of the following letters of credit can be modified without obtaining approval from either the exporter or the importer, by the bank issuing the letter of credit?

A) revocable letter of credit B) confirmed letter of credit C) at sight letter of credit D) irrevocable letter of credit Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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56) A(n) ________ is guaranteed by both the exporter's bank in the country of export and the importer's bank in the country of import.

A) confirmed letter of credit B) transferrable letter of credit C) revocable letter of credit D) irrevocable letter of credit Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

57) Letters of credit are popular among traders because the risk of non shipment are assumed by ________.

A) distributors B) importers C) exporters D) banks Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

58) Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called ________.

A) advance payment B) open account C) a letter of credit D) documentary collection Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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Scenario: Wang's Techno Toys Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the domestic market. Continually increasing and stiff competition at home has now forced Wang's Techno Toys to enter international markets through direct exports.

59) In some countries, people exchange electronic goods for Techno Toys instead of paying money for them. This practice is known as ________.

A) offset B) counterpurchase C) switch trading D) barter Answer: D AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 13.2: Explain the various methods of export/import financing.

60) Which of the following methods of export/import financing is Techno Toys' bank using if it acts as an intermediary without accepting financial risk?

A) documentary collection B) buyback C) letter of credit D) advance payment Answer: A AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 13.2: Explain the various methods of export/import financing.

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Scenario: Gro-Tru Grows To Europe Gro-Tru, a maker of chemical fertilizers and pesticides, sees enormous growth potential in Central Europe. The company has received several inquiries from potential importers in the region, but in most cases, the potential importers have expressed difficulty in obtaining the hard currency to pay for Gro-Tru's products. Alistair Green, vice-president for business development, is exploring how Gro-Tru can meet the needs of the potential market.

61) Alistair has identified an option that might help the firm deal with the importer's inability to pay with hard currency. The option involves selling goods or services that are paid for in whole or part with other goods or services. Which of the following methods is Alistair considering?

A) auction B) bidding C) countertrade D) tendering Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

62) Which of the following methods would Gro-Tru be implementing if it exchanges its products directly for other goods or services without the use of money?

A) barter B) offset C) switch trading D) buyback Answer: A AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

63) Gro-Tru would be engaging in ________, if it decides that in exchange for a hard-currency sale it would make a hard-currency purchase of an unspecified product from the importing nation in the future.

A) barter B) offset C) switch trading D) buyback Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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64) One option that intrigues Alistair is the process in which one company sells to another its obligation to make a purchase in a given country. This arrangement is known as ________.

A) barter B) offset C) switch trading D) buyback Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

65) In his research, Alistair discovers a type of arrangement in which industrial equipment is exported in return for products produced by that equipment. This arrangement is known as ________.

A) barter B) offset C) switch trading D) buyback Answer: D AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

Scenario: Sports Stuff Inc. Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.

66) Herb knows that much of the success his company enjoys is due to the patents and copyrights that protect the company's products. If Sports Stuff chooses an entry mode in which it grants another firm the right to use its intangible property for a specified period of time, it would be engaging in ________.

A) a turnkey project B) franchising C) licensing D) a joint venture Answer: C AACSB: Analytical thinking; Written and oral communication Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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67) Herb has been exploring another type of entry mode that requires ongoing assistance on the part of one firm, often in the form of start-up capital, management training, or location advice.

Herb is most likely considering ________.

A) a strategic alliance B) franchising C) licensing D) a joint venture Answer: B AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

68) Matching market needs to the company's abilities is the first step in developing a successful export strategy.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

69) Advance payment is the most favorable method of payment collection for exporters.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

70) Advance payment made by an importer to an exporter normally takes the form of a sight draft.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.2: Explain the various methods of export/import financing.

71) A time draft extends the period of time following delivery by which the importer must pay for goods.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

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72) The open account method of export/import financing is used when the two parties are unfamiliar with each other.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.2: Explain the various methods of export/import financing.

73) Cross licensing occurs when companies use licensing agreements to swap intangible property with one another.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.2: Explain the various methods of export/import financing.

74) Discuss the steps companies should take to avoid export and import blunders. How can an advance payment method help exporters reduce financial risk?

Answer: There are several errors common to companies new to exporting. First, many businesses fail to conduct adequate market research before exporting. In fact, many companies begin exporting by responding to unsolicited requests for their products. If a company enters a market in this manner, it should quickly devise an export strategy to manage its export activities effectively and not strain its resources.

Second, many companies fail to obtain adequate export advice. National and regional governments are often willing and able to help managers and small-business owners understand and cope with the vast amounts of paperwork required by each country's export and import laws.

Naturally, more experienced exporters can be extremely helpful as well. They can help novice exporters avoid embarrassing mistakes by guiding them through unfamiliar cultural, political, and economic environments.

To better ensure that it will not make embarrassing blunders, an inexperienced exporter might also want to engage the services of a freight forwarder—a specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees. Freight forwarders also can pack shipments for export and take responsibility for getting a shipment from the port of export to the port of import.

The advance payment method can help exporters reduce financial risk. Advance payment refers to export/import financing in which an importer pays an exporter for merchandise before it is shipped. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of nonshipment for importers—importers might pay for goods but never receive them. Thus advance payment is the most favorable method for exporters but the least favorable for importers.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 13.2: Explain the various methods of export/import financing.

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75) What are the different financing methods available to exporters and importers?

Answer: Export/import financing methods designed to reduce risks include advance payment, documentary collection, letter of credit, and open account.

Advance Payment—Export/import financing in which an importer pays an exporter for merchandise before it is shipped is called advance payment. This method of payment is common when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the form of a wire transfer of money from the bank account of the importer directly to that of the exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the complementary risk of nonshipment for importers—importers might pay for goods but never receive them. Thus advance payment is the most favorable method for exporters but the least favorable for importers.

Documentary Collection—Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties.

Letter of Credit—Export/import financing in which the importer's bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document is called letter of credit. A letter of credit is typically used when an importer's credit rating is questionable, when the exporter needs a letter of credit to obtain financing, and when a market's regulations require it.

Open Account—Export/import financing in which an exporter ships merchandise and later bills the importer for its value is called open account. Because some receivables may not be collected, exporters should reserve shipping on open account only for their most trusted customers. This payment method is often used when the parties are very familiar with each other or for sales between two subsidiaries within an international company. The exporter simply invoices the importer (as in many domestic transactions), stating the amount and date due. This method reduces the risk of non-shipment faced by the importer under the advance payment method.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.2: Explain the various methods of export/import financing.

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76) Describe the process of how the documentary collection procedure works using an example.

Answer: Export/import financing in which a bank acts as an intermediary without accepting financial risk is called documentary collection. This payment method is commonly used when there is an ongoing business relationship between two parties. The documentary collection process can be broken into three main stages and nine smaller steps.

1. Before shipping merchandise, the exporter (with its banker's assistance) draws up a draft (bill of exchange)—a document ordering the importer to pay the exporter a specified sum of money at a specified time. A sight draft requires the importer to pay when goods are delivered. A time draft extends the period of time (typically 30, 60, or 90 days) following delivery by which the importer must pay for the goods.

2. Following creation of the draft, the exporter delivers the merchandise to a transportation company for shipment to the importer. The exporter then delivers to its banker a set of documents that includes the draft, a packing list of items shipped, and a bill of lading—a contract between the exporter and shipper that specifies merchandise destination and shipping costs. The bill of lading is proof that the exporter has shipped the merchandise. An international ocean shipment requires an inland bill of lading to get the shipment to the exporter's border and an ocean bill of lading for water transport to the importer nation. An international air shipment requires an air way bill that covers the entire international journey.

3. After receiving appropriate documents from the exporter, the exporter's bank sends the documents to the importer's bank. After the importer fulfills the terms stated on the draft and pays its own bank, the bank issues the bill of lading (which becomes title to the merchandise) to the importer.

Documentary collection reduces the importer's risk of nonshipment because the packing list details the contents of the shipment and the bill of lading is proof that the merchandise was shipped. The exporter's risk of nonpayment is increased because, although the exporter retains title to the goods until the merchandise is accepted, the importer does not pay until all necessary documents have been received. Although importers have the option of refusing the draft (and, therefore, the merchandise), this action is unlikely. Refusing the draft—despite all terms of the agreement being fulfilled—would make the importer's bank unlikely to do business with the importer in the future.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.2: Explain the various methods of export/import financing.

77) The biggest advantage of an export management company is usually its ________.

A) knowledge of the target market's cultural, political, legal, and economic conditions B) well-developed and extensive distribution channels and storage facilities C) well-rounded experience in countertrade-related activities D) financial understanding of investment projects and its manufacturing expertise Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.3: Describe the different types of contractual entry modes.

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78) A way for firms to trade by using either a small amount of hard currency, or even none at all, is called ________.

A) indirect exporting B) countertrade C) licensing D) a joint venture Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

79) Which of the following refers to the exchange of goods or services directly for other goods or services without the use of money?

A) offset B) barter C) counterpurchase D) switch trading Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

80) Which of the following is a contractual entry mode?

A) wholly owned subsidiaries B) licensing C) joint ventures D) exporting Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

81) Which of the following is a contractual entry mode in which a company owning intangible property grants another firm the right to use that property for a specified period of time?

A) franchising B) licensing C) management contract D) strategic alliance Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

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Scenario: Sports Stuff Inc. Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.

82) Which of the following entry modes would Sports Stuff be implementing if it hires a company to design, construct, and test a production facility on its behalf?

A) joint venture B) turnkey project C) wholly owned subsidiary D) franchising Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

83) In a backward integration joint venture, the parties choose to invest together in downstream business activities.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.3: Describe the different types of contractual entry modes.

84) The most important disadvantage of a strategic alliance is that it can create a future local or even global competitor.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.3: Describe the different types of contractual entry modes.

85) Low tariffs and high quota limits encourage market entry by means of investment.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.3: Describe the different types of contractual entry modes.

27 .

86) Explain franchising with examples. Mention the advantages and disadvantages associated with franchising. How is franchising different from licensing?

Answer: Franchising is a contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period.

Franchisers typically receive compensation as flat fees, royalty payments, or both. The most popular franchises are those with widely recognized brand names, such as Mercedes, McDonald's, and Starbucks. In fact, the brand name or trademark of a company is normally the single most important item desired by the franchisee. This is why smaller companies with lesser known brand names and trademarks have greater difficulty locating interested franchisees.

Franchising differs from licensing in several ways. First, franchising gives a company greater control over the sale of its product in a target market. Franchisees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions.

Second, although licensing is fairly common in manufacturing industries, franchising is primarily used in service industries such as auto dealerships, entertainment, lodging, restaurants, and business services. Third, although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. In addition to the initial transfer of property, franchisers typically offer startup capital, management training, location advice, and advertising assistance to their franchisees.

Some examples of the kinds of companies involved in international franchising include: • Ozemail (Australia) awarded Magictel (Hong Kong) a franchise to operate its Internet phone and fax service in Hong Kong.

• Jean-Louis David (France) awarded franchises to more than 200 hairdressing salons in Italy.

• Brooks Brothers (United States) awarded Dickson Concepts (Hong Kong) a franchise to operate Brooks Brothers stores across Southeast Asia.

Advantages of franchising—There are several important advantages of franchising. First, franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Companies following global strategies rely on consistent products and common themes in worldwide markets. Franchising allows them to maintain consistency by replicating the processes for standardized products in each target market. Many franchisers, however, will make small modifications in products and promotional messages when marketing specifically to local buyers.

Second, franchising is an entry mode that allows for rapid geographic expansion. Firms often gain a competitive advantage by being first in seizing a market opportunity. For example, Microtel Inns & Suites of Atlanta, Georgia, is using franchising to fuel its international expansion. Microtel is boldly entering Argentina and Uruguay and eyeing opportunities in Brazil and Western Europe. Rooms cost around $75 per night and target business travelers who cannot afford $200 per night.

Finally, franchisers can benefit from the cultural knowledge and know-how of local managers.

This helps lower the risk of business failure in unfamiliar markets and can create a competitive advantage.

Disadvantages of franchising—Franchising can also pose problems for both franchisers and franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. A major concern is that product quality and promotional messages among franchisees will not be consistent from one market to another. One way to ensure greater control is by establishing in each market a so-called master franchisee, which is responsible for monitoring the operations of individual franchisees.

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Second, franchisees can experience a loss of organizational flexibility in franchising agreements.

Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser's other divisions. For years PepsiCo owned the well-known restaurant chains Pizza Hut, Taco Bell, and KFC. As part of their franchise agreements with PepsiCo, restaurant owners were required to sell only PepsiCo beverages to their customers. Many franchisees worldwide were displeased with such restrictions on their product offerings and were relieved when PepsiCo spun off the restaurant chains.

AACSB: Application of knowledge Skill: Concept Difficulty: Hard LO: 13.3: Describe the different types of contractual entry modes.

29 .

87) Discuss the advantages of licensing, low-cost production, and low-cost shipping for international companies.

Answer: There are several advantages to using licensing as an entry mode into new markets.

First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise.

Second, licensing can be a less risky method of international expansion for a licensor than other entry modes. Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately.

Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at all—which is what owners get from bootleg versions of their products.

Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies.

In addition to licensing, low-cost production and shipping can give a company an advantage by helping to control total costs. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.

Companies that produce goods with high shipping costs naturally prefer local production.

Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.

AACSB: Analytical thinking; Application of knowledge Skill: Synthesis Difficulty: Hard LO: 13.3: Describe the different types of contractual entry modes.

30 .

88) Which of the following statements is true of licensing?

A) Licensing restricts finances needed for international expansion.

B) Cross licensing grants a company the right to use a property but does not grant it sole access to a market.

C) A major advantage of licensing is that it is the least risky method of international expansion.

D) Licensing increases the likelihood that a licensor's product will appear on the black market.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

89) Which of the following is a contractual entry mode in which one company supplies another with intangible property and other assistance over an extended period?

A) franchising B) management contract C) licensing D) strategic alliance Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

90) When one company is hired to design, construct, and test a production facility for a client, the arrangement is called ________.

A) a turnkey project B) licensing C) a joint venture D) franchising Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

91) Which of the following is an investment entry mode?

A) licensing B) franchising C) joint venture D) turnkey project Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

31 .

92) Which of the following is an advantage of wholly owned subsidiaries?

A) The parent company receives all profits generated by the subsidiary.

B) They are the least expensive investment entry modes.

C) They help in the sharing of the cost of an international investment project.

D) They are the least risky when compared to other investment entry modes.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

93) A ________ is a separate company created and owned by two or more independent entities to achieve a common business objective.

A) wholly owned subsidiary B) joint venture C) strategic alliance D) turnkey project Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

94) Which of the following types of joint ventures involve parties investing together in downstream business activities?

A) backward integration B) forward integration C) multistage D) buyback Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

95) A ________ joint venture is formed when each partner requires the same component in its production process.

A) backward B) multistage C) forward D) buyback Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

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96) Which of the following is a disadvantage of strategic alliances?

A) They are the most expensive among the investment entry modes.

B) They increase the likelihood that one partner will try to take advantage of the other.

C) They create future competitors.

D) They fail to tap into their competitors' specific strengths.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

Scenario: Sports Stuff Inc. Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and markets sports products. The company is looking to expand its operations into the European market. Herb believes that if the company expands its product line to include products reflecting sports that are popular in Europe, the company will achieve success there.

97) The CEO of Sports Stuff has decided that the company needs to retain complete control over its operations in Europe. To achieve this objective, Herb would most likely recommend that the firm establish a ________.

A) joint venture B) cross licensing agreement C) wholly owned subsidiary D) strategic alliance Answer: C AACSB: Analytical thinking; Application of knowledge Skill: Application Difficulty: Hard LO: 13.4: Describe the various kinds of investment entry modes.

98) The board of directors of Sports Stuff is concerned with the firm's lack of experience in foreign markets. To minimize this problem, Herb recommends that the firm create a ________ with a local partner.

A) joint venture B) turnkey project C) wholly owned subsidiary D) franchise Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 13.4: Describe the various kinds of investment entry modes.

33 .

99) Franchising is primarily used in service industries.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

100) The primary advantage of franchising is that franchisees have a great degree of organizational flexibility.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

101) Under a turnkey project, one company supplies another with managerial expertise for a specific period of time.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 13.4: Describe the various kinds of investment entry modes.

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102) What are the advantages of pursuing a wholly owned subsidiary as an entry strategy?

Answer: A wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. Companies can establish a wholly owned subsidiary either by forming a new company and constructing entirely new facilities (such as factories, offices, and equipment) or by purchasing an existing company and internalizing its facilities. Whether an international subsidiary is purchased or newly created depends to a large extent on its proposed operations.

When a parent company designs a subsidiary to manufacture the latest high-tech products, it typically must build new facilities. The major drawback of creation from the ground up is the time it takes to construct new facilities, hire and train employees, and launch production.

Conversely, finding an existing local company capable of performing marketing and sales will be easier because special technologies are typically not needed. By purchasing the existing marketing and sales operations of an existing firm in the target market, the parent can have the subsidiary operating relatively quickly. Buying an existing company's operations in the target market is a particularly good strategy when the company to be acquired has a valuable trademark, brand name, or process technology.

There are two main advantages to entering a market using a wholly owned subsidiary. First, managers have complete control over day-to-day operations in the target market and access to valuable technologies, processes, and other intangible properties within the subsidiary. Complete control also decreases the chance that competitors will gain access to a company's competitive advantage, which is particularly important if it is technology-based. Managers also retain complete control over the subsidiary's output and prices. Unlike licensors and franchisers, the parent company also receives all profits generated by the subsidiary.

Second, a wholly owned subsidiary is a good mode of entry when a company wants to coordinate the activities of all its national subsidiaries. Companies using global strategies view each of their national markets as one part of an interconnected global market. Thus the ability to exercise complete control over a wholly owned subsidiary makes this entry mode attractive to companies that are pursuing global strategies.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.4: Describe the various kinds of investment entry modes.

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103) What are the differences between a turnkey project and a strategic alliance?

Answer: When one company designs, constructs, and tests a production facility for a client, the agreement is called a turnkey (build–operate–transfer) project. The term turnkey project is derived from the understanding that the client, who normally pays a flat fee for the project, is expected to do nothing more than simply 'turn a key' to get the facility operating. The company awarded a turnkey project completely prepares the facility for its client.

Similar to management contracts, turnkey projects tend to be large-scale and often involve government agencies. But unlike management contracts, turnkey projects transfer special process technologies or production-facility designs to the client. They typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that are then turned over to the client. Under a management contract, the supplier of a service retains the asset—the managerial expertise.

With turnkey projects, one company hires another to complete a specified scope of work.

Strategic alliances, on the other hand, involve a level of cooperation between companies that choose to partner to achieve joint objectives.

A relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures, strategic alliances can be formed for relatively short periods or for many years, depending on the goals of the participants. Strategic alliances can be established between a company and its suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner purchases a portion of the other's stock. In this way, each company has a direct stake in its partner's future performance. This decreases the likelihood that one partner will try to take advantage of the other.

AACSB: Analytical thinking; Application of knowledge Skill: Synthesis Difficulty: Hard LO: 13.4: Describe the various kinds of investment entry modes.

104) Which of the following statements best differentiates between franchising and licensing?

A) Licensing gives a company greater control than franchising over the sale of its product in a target market.

B) Franchising is common in manufacturing industries while licensing is primarily used in service industries.

C) Franchising requires ongoing assistance from the franchiser while licensing normally involves a one-time transfer of property.

D) Licensees must often meet strict guidelines on product quality, day-to-day management duties, and marketing promotions unlike franchisees.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.5: Outline key strategic factors in selecting an entry mode.

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105) Products for which there are fewer substitutes can more easily absorb higher shipping and production costs.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.5: Outline key strategic factors in selecting an entry mode.

106) Identify the strategic factors that influence a company's international entry mode selection.

Explain any three of them.

Answer: The choice of entry mode has many important strategic implications for a company's future operations. Because enormous investments in time and money can go into determining an entry mode, the choice must be made carefully. Several key factors that influence a company's international entry mode selection are the cultural environment, political and legal environments, market size, production and shipping costs, and international experience.

Cultural Environment—The dimensions of culture—values, beliefs, customs, languages, religions—can differ greatly from one nation to another. In such cases, managers can be less confident in their ability to manage operations in the host country. They can be concerned about the potential not only for communication problems but also for interpersonal difficulties. As a result, managers may avoid investment entry modes in favor of exporting or a contractual mode.

On the other hand, cultural similarity encourages confidence and thus the likelihood of investment. Likewise, the importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market.

Political and Legal Environments—Political instability in a target market increases the risk exposure of investments. Significant political differences and levels of instability cause companies to avoid large investments and to favor entry modes that shelter assets.

A target market's legal system also influences the choice of entry mode. Certain import regulations, such as high tariffs or low quota limits, can encourage investment. A company that produces locally avoids tariffs that increase product cost; it also doesn't have to worry about making it into the market below the quota (if there is one). But low tariffs and high quota limits discourage market entry by means of investment. Also, governments may enact laws that ban certain types of investment outright.

Market Size—The size of a potential market also influences the choice of entry mode. For example, rising incomes in a market encourage investment entry modes because investment allows a firm to prepare for expanding market demand and to increase its understanding of the target market. High domestic demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. On the other hand, if investors believe that a market is likely to remain relatively small, better options might include exporting or contractual entry.

Production and Shipping Costs—By helping to control total costs, low-cost production and shipping can give a company an advantage. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.

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Companies that produce goods with high shipping costs naturally prefer local production.

Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.

International Experience—Most companies enter the international marketplace through exporting. As companies gain international experience, they tend to select entry modes that require deeper involvement. But this means businesses must accept greater risk in return for greater control over operations and strategy. Eventually, they may explore the advantages of licensing, franchising, management contracts, and turnkey projects. After businesses become comfortable in a particular market, joint ventures, strategic alliances, and wholly owned subsidiaries become viable options.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 13.5: Outline key strategic factors in selecting an entry mode.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 14 Developing and Marketing Products 1) Governments in developing countries impose fewer consumer protection laws in order to ________.

A) hold down production costs and consumer prices B) enable companies to focus on profit-making exclusively C) decrease the flow of foreign direct investment into the country D) decrease the complexity of the legal procedures for foreign direct investment Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

2) Which element of the marketing mix includes the development of the tangible and intangible features that meet customer needs in diverse markets?

A) product B) pricing C) promotion D) place Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

3) ________ are imitation products passed off as legitimate trademarks, patents, or copyrighted works.

A) Giffen goods B) Counterfeit goods C) Inferior goods D) Intangible goods Answer: B AACSB: Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

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4) Which of the following is true of counterfeit goods?

A) Developed nations normally have the most active counterfeiting markets.

B) Counterfeiting is more common among less visible local brands than global brands.

C) Most counterfeit products are imitations of products that normally enjoy legal protection.

D) Engineered industrial components and medicines are among the few categories of products that cannot be counterfeited.

Answer: C AACSB: Ethical understanding and reasoning Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

5) Which of the following is a marketplace of underground transactions that typically appear because a product is either illegal or tightly regulated?

A) black market B) niche market C) two-sided market D) vertical market Answer: A AACSB: Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

6) A company that makes its marketing program elements uniform, targeting an entire region with similar products, is demonstrating ________.

A) customization B) segmentation C) standardization D) differentiation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

7) Product differentiation is more likely when nations share the same level of economic development.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

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8) A brand name can function as a form of intellectual property.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

9) The value customers obtain from a product is heavily influenced by the image of the country in which the product is manufactured.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

10) All company and product brand names are made up of morphemes.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

11) Counterfeiting is common among highly visible brand-name consumer goods.

Answer: TRUE AACSB: Ethical understanding and reasoning Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

12) Because developing nations often are weakest in enforcing such legal protections, they normally have the most active counterfeiting markets.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

13) Products could be in the decline stage in one country, while at the same time be in the growth stage of the product life cycle in another country.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

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14) The rapid pace of technological innovation today extends the life cycles of products.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.1: Describe the factors to consider in developing international product strategies.

15) Explain the effect of counterfeit goods and black markets on international product strategies.

Answer: Companies try to protect their intellectual property and trademarks from counterfeit goods. Counterfeit goods are imitation products passed off as legitimate trademarks, patents, or copyrighted works—products that normally enjoy legal protection. Because developing nations often are weakest in enforcing such legal protections, they normally have the most active counterfeiting markets. Countries that top the list for the portion of their markets comprised of counterfeits include China, India, Russia, Thailand, and Turkey.

Counterfeiting is common among highly visible brand-name consumer goods, including watches, perfumes, clothing, movies, music, and computer software. Counterfeit products are typically sold to consumers on what is called the black market—a marketplace of underground transactions that typically appears because a product is either illegal (such as counterfeits) or tightly regulated. Tabletop vendors working the back streets of the world's largest cities represent the retail side of the black market. Increasingly, engineered industrial components such as aircraft parts, medicines, and other pharmaceutical products are also becoming targets of counterfeiters.

Counterfeit goods can damage buyers' image of a brand when the counterfeits are of inferior quality—which is nearly always the case. Buyers who purchase an item bearing a company's brand name expect a certain level of craftsmanship and, therefore, satisfaction. But when the product fails to deliver on the expectations, the buyer is dissatisfied, and the company's reputation is tarnished.

AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

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16) Discuss how a national business environment can influence a firm's decision to standardize or differentiate its product. How do cultural differences impact product strategies?

Answer: Consumers in different national markets often demand products that reflect their unique tastes and preferences. Cultural, political, legal, and economic environments have a great deal to do with the preferences of both consumers and industrial buyers worldwide. A culture's aesthetics involves, among other things, preferences for certain colors. Ohio-based Rubbermaid discovered the role of aesthetics as it attempted to increase its international sales. Consumers in the United States prefer household products in neutral blues or almond; in southern Europe, red is the preferred color. The Dutch want white. In addition, many European cultures perceive plastic products as inferior and want tight lids on metal wastebaskets as opposed to U.S.-style plastic versions with open tops.

But certain products do appeal to practically all cultures. Although it is not a traditional Asian drink, red wine is sweeping Asian markets such as Hong Kong, Singapore, Taiwan, and Thailand.

Product standardization is more likely when nations share the same level of economic development. In years past, consumers in India faced limited options when it came to purchasing automobiles. Most were made in India, were expensive, and were not fuel-efficient. Thanks to steady economic progress over the past two decades, Indian consumers have a better standard of living and more discretionary income. Being able to afford an imported brand-name automobile with a global reputation, such as Suzuki or Ford is more commonplace in Indian cities than it was years ago.

Cultural differences do have an impact on product strategies. Companies adapt their products to suit local buyers' product preferences that are rooted in culture. Häagen-Dazs is an international company that prides itself on its capability to identify the taste preferences of consumers in target markets. It then modifies its base product with just the right flavor to make a product that satisfies consumers' needs. Following years of trial and error developing secret formulas and conducting taste tests, Häagen-Dazs finally launched its green-tea flavor ice cream throughout Japan. The taste is that of macha tea—an elite strain of green tea that's been used in elaborate Japanese ceremonies for centuries. Green-tea ice cream was an instant hit and one day may even surpass Häagen-Dazs' perennial flavor champion in Japan—vanilla.

Not all companies need to modify their product to the culture; instead, they may need to identify a different cultural need that it satisfies. Altoids, for example, is a British product that has been used for 200 years to soothe upset stomachs. But the company identified a different use for its product in the United States. Because of its strong flavor, Altoids is sold in the U.S. market as a breath mint and has pushed aside weaker-flavored candies.

AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 14.1: Describe the factors to consider in developing international product strategies.

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17) Describe any four factors that affect international product strategies.

Answer: Laws and Regulations—Companies must often adapt their products to satisfy laws and regulations in a target market. The fact that many developing countries have fewer consumer protection laws creates an ethical issue for some companies. Ironically, lower levels of education and less buying experience mean that consumers in developing countries are more likely to need protection. However, many governments impose fewer regulations in order to hold down production costs and consumer prices. Unfortunately, this can be an invitation for international distributors to withhold full information about products and their potential dangers.

Cultural Differences—Companies also adapt their products to suit local buyers' product preferences that are rooted in culture. Not all companies need to modify their product to the culture; instead, they may need to identify a different cultural need that it satisfies.

Brand and Product Names-Several issues related to a company's brand name are important concerns for the day-to-day activities of international managers. A brand name is the name of one or more items in a product line that identifies the source or character of the items. When an individual sees a product labeled with a particular brand name, he/she assigns to that product a certain value based on his/her past experiences with that brand. That is why a brand name is central to a product's personality and the image that it presents to buyers. It informs buyers about a product's source and protects both customer and producer from copycat products. Brand names help consumers to select, recommend, or reject products. They also function as legal property that owners can protect from trespass by competitors.

Indeed, a strong brand can become a company's most valuable asset and primary source of competitive advantage. A consistent worldwide brand image is increasingly important as more consumers and business people travel internationally than ever before. An inconsistent brand name can confuse existing and potential customers. Although companies normally keep their brand names consistent across markets, they can create new product names or modify existing ones to suit local preferences. Companies also need to review the image of their brand from time to time and update it if it seems old-fashioned.

National Image—The value customers obtain from a product is heavily influenced by the image of the country in which it is designed, manufactured, or assembled. Individuals consider the influence of a country's name when they think of Italian shoes, German luxury cars, and Japanese electronics. This image can be positive for some products but negative for others.

Because it affects buyers' perceptions of quality and reliability, national image is an important element of product policy. Yet national image can and does change slowly over long periods of time.

AACSB: Application of knowledge; Ethical understanding and reasoning Skill: Concept Difficulty: Moderate LO: 14.1: Describe the factors to consider in developing international product strategies.

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18) Which component of the marketing mix encompasses all efforts by an international firm to enhance the desirability of its products among potential buyers?

A) product B) price C) place D) promotion Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

19) Which of the following statements is true about international promotions?

A) Most companies standardize all aspects of their international promotions to cut costs.

B) Firms that standardize advertising often control campaigns from the home office.

C) Companies that adapt their advertising to different markets project a consistent brand image.

D) Companies discourage blending product and promotional strategies in a communication process.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

20) ________ refers to anything that disrupts the audience's ability to receive and interpret a promotional message.

A) Noise B) Interpolation C) Feedback D) Resonance Answer: A AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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21) The term ________ refers to a company's efforts to reach distribution channels and target customers through communications such as personal selling, advertising, public relations, and direct marketing.

A) social marketing B) viral marketing C) promotion mix D) positioning Answer: C AACSB: Written and oral communication; Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

22) Which term refers to the mix of advertising, personal selling, sales promotion, and public relations used by a firm to market its products?

A) marketing mix B) promotion mix C) public relations mix D) communications mix Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

23) A pull rather than a push strategy is most likely preferable when ________.

A) self-service is not predominant B) the price of a product is high relative to incomes C) there are few governmental restrictions on advertising D) there are a large number of languages and a low literacy rate Answer: C AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

24) A promotional strategy designed to create buyer demand that will encourage channel members to stock a company's product is called a ________.

A) pull strategy B) push strategy C) retrenchment strategy D) stability strategy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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25) Which of the following is a push strategy that companies use to promote their products?

A) mass media advertising B) direct marketing techniques C) free trial packages D) retail product stocking Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

26) Which of the following is a promotional strategy designed to pressure channel members to carry a product and promote it to final users?

A) differentiation strategy B) retrenchment strategy C) push strategy D) pull strategy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

27) As a promotional strategy, manufacturers of products that are commonly sold through department and grocery stores often use ________.

A) a push strategy B) a pull strategy C) retrenchment strategy D) stability strategy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

28) A ________ is used for a product's promotion when there are many levels of intermediaries in its distribution channel.

A) push strategy B) pull strategy C) retrenchment strategy D) stability strategy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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29) A push strategy for international sales is most likely preferable to a pull strategy when ________.

A) there are few prohibitions on advertising B) the price of the product is high relative to incomes C) people rely on friends' opinions before buying a product D) literacy rates are high Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

30) Which of the following circumstances would best require a pull strategy to be implemented for product promotion?

A) channel members wield relatively lesser power compared to that of producers B) buyers display a great deal of brand loyalty to a particular product C) distribution channels are short D) buyers need to be informed about the features of a product before purchase Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

31) A ________ strategy is best suited for the promotion of industrial products because potential buyers usually need to be informed about a product's special features before purchase.

A) push B) pull C) stability D) differentiation Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

32) The process of sending messages about products to target markets is called ________.

A) customer relations B) customer service C) market segmentation D) marketing communication Answer: D AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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33) Which of the following occurs when an idea to be communicated is translated into images, words, and symbols?

A) compiling B) encoding C) parsing D) processing Answer: B AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

34) When the receiver re-translates the sent message he/she is engaging in ________.

A) preprocessing B) decoding C) parsing D) compiling Answer: B AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

35) Which of the following reflects the correct sequence of the marketing communication process?

A) promotional message; encoding; decoding; feedback B) encoding; promotional message; decoding; feedback C) promotional message; decoding; feedback; encoding D) encoding; decoding; promotional message; feedback Answer: B AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

36) Which of the following communication strategies uses the same home-market product and marketing promotion in target markets?

A) product/communications extension B) product extension/communications adaptation C) product adaptation/communications extension D) product/communications adaptation Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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37) Which of the following communication strategies expands the same product into new target markets but alters its marketing promotion?

A) product/communications extension B) product extension/communications adaptation C) product adaptation/communications extension D) product/communications adaptation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

38) Which of the following communication strategies adapts a product to the requirements of the international market while retaining its original marketing communication?

A) product/communications extension B) product extension/communications adaptation C) product adaptation/communications extension D) product/communications adaptation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

39) Which of the following communication strategies adapts both the product and its marketing communication to suit the target market?

A) product/communications extension B) product extension/communications adaptation C) product adaptation/communications extension D) product/communications adaptation Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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40) A ________ strategy can be implemented successfully for communicating promotional messages only if a sufficiently large and profitable market segment exists.

A) dual extension method B) product extension/communications adaptation method C) product adaptation/communications extension method D) dual adaptation method Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

41) ________ requires that an entirely new product be developed for the target market when many important differences exist between the home and target markets.

A) Product invention B) Product adaptation C) Dual adaptation D) Dual extension Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

Scenario: Silk Industries LLC Silk Industries LLC comprises two major divisions: consumer products and industrial products.

The consumer product line of the company is well-recognized and consists of loyal customers worldwide. The management is considering different types of promotional strategies for the two product divisions.

42) If Silk Industries is interested in creating buyer demand that will encourage channel members to stock its products, it should employ ________.

A) a pull strategy B) a push strategy C) horizontal integration D) vertical integration Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 14.2: Outline the international promotional strategies and methods available to firms.

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43) Which promotional strategy would be most appropriate for Silk Industries consumer product line?

A) horizontal integration B) vertical integration C) push strategy D) pull strategy Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 14.2: Outline the international promotional strategies and methods available to firms.

44) Which of the following would be most appropriate for Silk Industries products sold through grocery stores?

A) horizontal integration B) vertical integration C) push strategy D) pull strategy Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 14.2: Outline the international promotional strategies and methods available to firms.

45) If Silk Industries provides a promotional allowance to its channel members to carry a product and promote it to final users, it is using ________.

A) pull strategy B) push strategy C) vertical integration D) horizontal integration Answer: B AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

46) A push strategy is a promotional strategy designed to pressure channel members to promote a product to final users.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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47) A common example of a push strategy is the creation of consumer demand through a television advertising campaign.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

48) A pull strategy is the most efficient promotional strategy when distribution channels are lengthy.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

49) Emerging markets typically have fewer forms of mass media for use in implementing a pull strategy.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

50) A push strategy is most appropriate when buyers display a great deal of brand loyalty toward one particular brand name.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

51) Firms that standardize their advertising usually control campaigns from the home office.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

52) In marketing, advertising is a paid form of communication, done by an identifiable sponsor for the purpose of informing, persuading, influencing or reminding the target market about the product the firm is offering.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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53) The marketing communication process involves encoding and decoding of the promotional message.

Answer: TRUE AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

54) Effective communication is when the message received is understood in the same way that the sender transmitted.

Answer: TRUE AACSB: Written and oral communication Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

55) By ignoring important cultural nuances, companies can inadvertently decrease the potential for noise that can cloud the audience's understanding of their promotional message.

Answer: FALSE AACSB: Written and oral communication; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

56) Dual extension method extends the same home-market product and marketing promotion into target markets.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

57) The product adaptation/communications extension method adapts the product to suit the target market; however, it uses its original marketing communication.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

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58) Under the dual adaptation method, a company adapts its product to local requirements while retaining the product's original marketing communication.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.2: Outline the international promotional strategies and methods available to firms.

59) How does the dual extension method work as a promotional strategy?

Answer: A product/communications extension (dual extension) promotional strategy extends the same home-market product and marketing promotion into target markets. Under certain conditions, it can be the simplest and most profitable strategy. For example, because of a common language and other cultural similarities, companies based in English-speaking Canadian provinces can sell the same product with packaging and advertising identical to that in the U.S. market—provided the product is not required by the U.S. government to carry any special statements or warnings. The Canadian companies contain costs by developing a single product and one promotional campaign for both markets. Yet it is important for Canadian companies not to ignore any subtle cultural differences that could cause confusion in interpreting the promotional message.

As the information age continues to knit the world more tightly together, this method will probably grow more popular. Today, consumers in seemingly remote parts of the world are rapidly becoming aware of the latest worldwide fads and fashions. But this strategy appears to be better suited for certain groups of buyers, including brand-conscious teenagers, business executives, and wealthy individuals. The strategy also tends to be better suited for companies that use a global strategy with their products, such as upscale personal items with global brand names—examples include Rolex watches, Hermes scarves and ties, and Coco Chanel (www.chanel.com) perfumes. It can also be appropriate for global brands that have mass appeal and cut across all age groups and social classes—such as Canon, Mars, and Nokia. The strategy also is useful to companies that are the low-cost leaders in their industries: one product and one promotional message keep costs down.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

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60) Using examples, explain the circular process of marketing communication.

Answer: The process of sending promotional messages about products to target markets is called marketing communication. Communicating the benefits of a product can be more difficult in international business than in domestic business for several reasons. Marketing internationally usually means translating promotional messages from one language into another. Marketers must be knowledgeable of the many cultural nuances that can affect how buyers interpret a promotional message. A nation's laws that govern the promotion of products in another country can also force changes in marketing communication.

Marketing communication is typically considered a circular process. The company that has an idea it wishes to communicate is the source of the communication. The idea is encoded (translated into images, words, and symbols) into a promotional message that the company is trying to get across. The promotional message is then sent to the audience (potential buyers) through various media. Media commonly used by companies to communicate their promotional messages include radio, television, newspapers, magazines, billboards, and direct mailings. After the audience receives the message, they decode the message and interpret its meaning.

Information in the form of feedback (purchase or nonpurchase) then flows back to the source of the message. The decoding process by the audience can be disrupted by the presence of noise— anything that disrupts the audience's ability to receive and interpret the promotional message. By ignoring important cultural nuances, companies can inadvertently increase the potential for noise that can cloud the audience's understanding of their promotional message. For example, language barriers between the company and potential buyers can create noise if a company's promotional message is translated incorrectly into the local language.

AACSB: Application of knowledge; Written and oral communication Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

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61) Describe the five communication strategies that companies commonly use and cite situations where the strategies are used.

Answer: Product/Communications Extension (Dual Extension)—This method extends the same home-market product and marketing promotion into target markets. Under certain conditions, it can be the simplest and most profitable strategy. For example, because of a common language and other cultural similarities, companies based in English-speaking Canadian provinces can sell the same product with packaging and advertising identical to that in the U.S. market—provided the product is not required by the U.S. government to carry any special statements or warnings.

The Canadian companies contain costs by developing a single product and one promotional campaign for both markets. Yet it is important for Canadian companies not to ignore any subtle cultural differences that could cause confusion in interpreting the promotional message.

Product Extension/Communications Adaptation—Under this method, a company extends the same product into target markets but alters its promotion. Communications require adaptation because the product satisfies a different need, serves a different function, or appeals to a different type of buyer. Companies can adjust their marketing communication to inform potential buyers that the product either satisfies their needs or serves a distinct function. This approach helps companies contain costs because the good itself requires no alteration. Altering communications can be expensive, however, especially when cultural differences among target markets are significant. Filming altered ads with local actors and on location can add significantly to promotional costs.

Product Adaptation/Communications Extension—Using this method, a company adapts its product to the requirements of the international market while retaining the product's original marketing communication. There are many reasons why companies need to adapt their products.

One might be to meet legal requirements in the local market. Moreover, governments can require that firms use a certain amount of local materials, labor, or some other resource in their local production process. If the exact same materials or components are not available locally, the result can be a modified product.

This method can be costly because appropriately modifying a product to suit the needs of local buyers often means the company must invest in production facilities in the local market. If each national market requires its own production facility, cost savings provided by economies of scale in production can be elusive. Still, a company can implement this strategy successfully if it sells a differentiated product for which it can charge a higher price to offset the greater production costs.

Product/Communications Adaptation (Dual Adaptation)—This method adapts both the product and its marketing communication to suit the target market. The product itself is adapted to match the needs or preferences of local buyers. The promotional message is adapted to explain how the product meets those needs and preferences. Because both production and marketing efforts must be altered, this strategy can be expensive; therefore, it is not very common. It can be implemented successfully, however, if a sufficiently large and profitable market segment exists.

Product Invention—This method requires that an entirely new product be developed for the target market. Product invention is often necessary when many important differences exist between the home and target markets. One reason for product invention is that local buyers cannot afford a company's current product because of low purchasing power.

AACSB: Written and oral communication Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

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62) Briefly discuss the effects of globalization on international marketing activities and explain how a dual adaption method works as a promotional strategy.

Answer: Globalization is transforming the way in which some products are marketed internationally, but not all. Some companies implement a global strategy that uses similar promotional messages and themes to market the same product around the world. Others find that their products require physical changes to suit the tastes of consumers in markets abroad. Other firms' products need different marketing campaigns to reflect the unique circumstances of local markets.

The product/communications adaption (dual adaption) promotional strategy adapts both the product and its marketing communication to suit the target market. The product itself is adapted to match the needs or preferences of local buyers. The promotional message is adapted to explain how the product meets those needs and preferences. Because both production and marketing efforts must be altered, this strategy can be expensive; therefore, it is not very common. It can be implemented successfully, however, if a sufficiently large and profitable market segment exists.

AACSB: Application of knowledge; Written and oral communication; Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 14.2: Outline the international promotional strategies and methods available to firms.

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63) Differentiate between the push and pull promotional strategies. Explain the factors that determine whether the push or the pull strategy is appropriate in a given marketing environment.

Answer: There are two general promotional strategies that companies can use to get their marketing message across to buyers. They can rely completely on just one of these or use them in combination. A promotional strategy designed to create buyer demand that will encourage channel members to stock a company's product is called a pull strategy. In other words, buyer demand is generated in order to "pull" products through distribution channels to end users.

Creating consumer demand through direct marketing techniques is a common example of a pull strategy.

By contrast, a push strategy is a promotional strategy designed to pressure channel members to carry a product and promote it to final users. Manufacturers of products commonly sold through department and grocery stores often use a push strategy.

Whether the push or pull strategy is most appropriate in a given marketing environment depends on several factors: Distribution System—Implementing a push strategy can be difficult when channel members (such as distributors) wield a great deal of power relative to that of producers. It can also be ineffective when distribution channels are lengthy: the more levels of intermediaries there are, the more channel members there are who must be convinced to carry a product. In such cases, it might be easier to create buyer demand using a pull strategy than to persuade distributors to stock a particular product.

Access to Mass Media—Developing and emerging markets typically have fewer available forms of mass media for use in implementing a pull strategy. Accordingly, it is difficult to increase consumer awareness of a product and generate product demand. Many consumers in these markets cannot afford cable or satellite television, or perhaps even glossy magazines. In such cases, advertisers might turn to billboards and radio. At other times, gaining wide exposure can be difficult because existing media have only local, as opposed to national, reach.

Type of Product—A pull strategy is most appropriate when buyers display a great deal of brand loyalty toward one particular brand name. In other words, brand-loyal buyers know what brand of a product they want before they go shopping. On the other hand, push strategies tend to be appropriate for inexpensive consumer goods characterized by buyers who are not brand loyal.

Low brand loyalty means that a buyer will go shopping for a product, not knowing which brand is best, and simply will buy one of those carried by the retailer or wholesaler. A push strategy is also suited to industrial products because potential buyers usually need to be informed about a product's special features and benefits.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.2: Outline the international promotional strategies and methods available to firms.

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64) The physical path a product follows on its way to customers is called a(n) ________.

A) distribution channel B) demand chain C) critical path D) external value network Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

65) Companies along a distribution channel that work together in delivering products to customers are called ________.

A) subsidiaries B) intermediaries C) value chains D) value networks Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

66) Which of the following refers to planning, implementing, and controlling the physical flow of a product from its point of origin to its point of consumption?

A) customization B) distribution C) communication D) promotion Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

67) A distribution strategy under which a company sells through as many outlets as possible, so that the consumers encounter the product virtually everywhere they go: supermarkets, drug stores, gas stations, and the like is called ________.

A) intensive channel B) exclusive channel C) zero-level channel D) two-level channel Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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68) A(n) ________ channel creates a barrier that makes it difficult or impossible for outsiders to penetrate.

A) exclusive B) intensive C) selective D) two-level Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

69) A(n) ________ channel gives producers a good deal of control over the sale of their product by channel members such as wholesalers and retailers.

A) exclusive B) intensive C) two-level D) selective Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

70) A distribution channel in which a producer grants the right to sell its product to many resellers is referred to as a(n) ________.

A) one-level channel B) zero-level channel C) exclusive channel D) intensive channel Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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71) A(n) ________ channel does not create strong barriers to channel entry for other producers, nor does it provide much control over reseller decisions such as what competing brands to sell.

A) one-level B) zero-level C) exclusive D) intensive Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

72) A(n) ________ channel provides buyers with location convenience because of the large number of outlets through which a product is sold.

A) intensive B) exclusive C) one-level D) zero-level Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

73) ________ refers to the number of intermediaries between producer and buyer.

A) Critical path B) Channel length C) Frequency D) Value density Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

74) Which of the following is also known as direct marketing?

A) an intensive channel B) an exclusive channel C) a zero-level channel D) a two-level channel Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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75) A(n) ________ channel places a single intermediary between the producer and the buyer.

A) intensive B) exclusive C) one-level D) two-level Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

Scenario: Old World Ltd. Old World Ltd., a London-based furniture manufacturer, is establishing its global distribution, pricing, and promotion strategies. Being new to global business, the firm is seeking your help in making its decisions.

76) If Old World wants to grant the right to sell its furniture to only a limited number of resellers, it should consider a(n) ________ channel.

A) intensive B) exclusive C) two-level D) selective Answer: B AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

77) If Old World wants to have its furniture sold through as many distribution outlets as possible, it should consider a(n) ________ channel.

A) exclusive B) intensive C) one-level D) zero-level Answer: B AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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78) Old World should pursue a(n) ________ channel if it decides to greatly intensify its direct marketing efforts.

A) intensive B) one-level C) zero-level D) selective Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

79) The physical path a product follows on its way to customers is called a channel of distribution.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.3: Explain the factors to consider when designing international distribution strategies.

80) Service providers do not need distribution channels because they market intangible goods.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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81) Explain the primary concerns of managers when establishing distribution policies.

Answer: Managers consider two overriding concerns when establishing channels of distribution: (1) the amount of market exposure a product needs and (2) the cost of distributing a product.

Degree of Exposure-In promoting its product to the greatest number of potential customers, a marketer must determine the amount of exposure needed. An exclusive channel is one in which a manufacturer grants the right to sell its product to only one or a limited number of resellers. An exclusive channel gives producers a great deal of control over the sale of their product by wholesalers and retailers. It also helps a producer to constrain distributors from selling competing brands. In this way, an exclusive channel creates a barrier that makes it difficult or impossible for outsiders to penetrate the channel.

When a producer wants its product to be made available through as many distribution outlets as possible, it prefers to use an intensive channel—one in which a producer grants the right to sell its product to many resellers. An intensive channel provides buyers with location convenience because of the large number of outlets through which a product is sold. It does not create strong barriers to channel entry for other producers, however. Nor does it provide much control over reseller decisions, such as what competing brands to sell.

Large companies whose products are sold through grocery stores and department stores typically take an intensive channel approach to distribution. The obstacle for small companies that choose an intensive channel approach is gaining shelf space—especially companies with lesser-known brands. The increasing global trend toward retailers developing their own private-label brands (brands created by retailers themselves) exacerbates this problem. In such cases, retailers tend to give their own brands prime shelf space and give lesser-known brands poorer shelf locations that are up high or near the floor.

Channel Length and Cost-Channel length refers to the number of intermediaries between the producer and the buyer. In a zero-level channel—which is also called direct marketing — producers sell directly to final buyers. A one-level channel places only one intermediary between the producer and the buyer. Two intermediaries make up a two-level channel, and so forth. In general, the greater the number of intermediaries in a channel, the more costly it becomes. This happens because each additional member adds a charge for its services onto the product's total cost. This is an important consideration for companies that sell price-sensitive consumer products, such as candy, food, and small household items, that usually compete on the basis of price. Companies that sell highly differentiated products can charge higher prices because of their products' distinctiveness; therefore, they have fewer problems using a channel of several levels.

AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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82) What is value density and what is its impact on an organization's distribution policy?

Answer: The value of a product relative to its weight and volume is called its value density.

Value density is an important variable in formulating distribution strategies. As a rule, the lower a product's value density, the more localized the distribution system. Most commodities, including cement, iron ore, and crude oil, have low value-density ratios—they're heavy but not particularly "valuable" if gauged in, say, shipping weight per cubic meter. Relative to their values, the cost of transporting these goods is high. Consequently, such products are processed or integrated into the manufacturing process at points close to their original locations. Products with high value density ratios include emeralds, semiconductors, and premium perfumes. Because the cost of transporting these products is small relative to their value, they can be processed or manufactured in the optimal location and then shipped to market. Because Johnson & Johnson's Vistakon contact lenses have high value density, the company produces and inventories its products in one U.S. location and serves the world market from there. When products need to be modified for local markets, companies can design their distribution systems accordingly.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.3: Explain the factors to consider when designing international distribution strategies.

83) How can a lack of market understanding, theft, and corruption affect distribution?

Answer: Lack of Market Understanding—Companies can experience a great deal of frustration and financial loss simply by not fully understanding the local market in which they operate. In one now-classic case, Amway Asia Pacific Ltd., the Asian arm of U.S.-based Amway, learned the hard way the pitfalls of overestimating the knowledge of distributors in emerging markets.

The company has a worldwide policy of giving distributors a full refund on its soaps and cosmetics if the distributor's customers are dissatisfied—even if the returned containers are empty. But the policy had some bizarre results shortly after Amway entered China. Word of the guarantee spread quickly. Some distributors repackaged the products in other containers, sold them, and took the original containers back to Amway for a refund. Others scoured garbage bins, gathering bags full of discarded bottles. In Shanghai, returns were beginning to total $100,000 a day. Amway soon changed its refund policy to allow a refund only for bottles at least half full.

Theft and Corruption—A high incidence of theft and corruption can present obstacles to distribution. The distribution system in Russia reflects its roughly 75-year experiment with communism. When Acer Computers decided to sell its computers in Russia, it built production facilities in Russia's stable neighbor, Finland, because the company was leery of investing directly in Russia. Acer also considered it too risky to navigate Russia's archaic distribution system on its own. In three years' time, a highway that serves as a main route to get goods overland from Finland to Russia saw 50 Finnish truckers hijacked, two drivers killed, and another two missing. Acer solved its distribution problem by selling its computers to Russian distributors outside its factory in Finland. The Russian distributors, who understood how to negotiate their way through Russia's distribution system, were to deal with distribution problems in Russia.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.3: Explain the factors to consider when designing international distribution strategies.

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84) The value of a product relative to its weight and volume is called its ________.

A) face value B) value investing C) real value D) value density Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

85) Which of the following is implied by a product with a low value density?

A) the distribution system is more localized B) the product is more valuable C) the cost of shipping the product is negligible D) the product is processed in areas away from their original locations Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

86) Which of the following products has a low value-density ratio?

A) semiconductors B) emerald C) crude oil D) premium perfumes Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

87) Which of the following is true of the value densities of products?

A) The cost of transporting goods with high value-density ratios is high relative to their value.

B) Products with high value-density ratios are integrated into the manufacturing process at points close to their original locations.

C) Most commodities, including cement, iron ore, and crude oil, have high value-density ratios.

D) The lower a product's value density, the more localized the distribution system.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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88) A pricing policy in which one selling price is established for all international markets is called ________.

A) dual pricing B) value-based pricing C) worldwide pricing D) target pricing Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

89) A pricing policy in which a product has a different selling price in export markets than it has in the home market is called ________.

A) dual pricing B) cost-plus pricing C) penetration pricing D) premium pricing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

90) When a product has a higher selling price in the target market than it does in the home market or the country where production takes place, it is called ________.

A) price skimming B) price escalation C) price dispersion D) price fixing Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

91) 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 AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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92) The free-market price that unrelated parties charge one another for a specific product is called a(n) ________.

A) worldwide price B) transfer price C) dual price D) arm's length price Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

93) Upper or lower limits placed on the prices of products sold within a country are known as ________.

A) price controls B) transfer prices C) price escalators D) arm's length prices Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

94) Which of the following occurs when the price of a good is lower in export markets than it is in the domestic market?

A) skimming B) dumping C) transfer pricing D) price escalation Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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Scenario: Old World Ltd. Old World Ltd., a London-based furniture manufacturer, is establishing its global distribution, pricing, and promotion strategies. Being new to global business, the firm is seeking your help in making its decisions.

95) If Old World adopts different selling prices in export markets than it has in the British market, it would be following a ________ pricing strategy.

A) dual B) transfer C) target D) worldwide Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

Scenario: Scooters Inc. Scooters Inc. is a producer of pricey scooters. The company's profits come mostly from the sales of its luxury line that caters to the esteem needs of the rich population. Ben Driven, vice president of marketing for Scooters Inc., has been asked to review the company's pricing strategy.

96) Ben knows that a pricing policy in which one selling price is established for all international markets is called ________.

A) worldwide pricing B) value-based pricing C) dual pricing D) arm's length pricing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

97) Because Scooters Inc. caters to a very narrow niche of wealthy individuals, the CEO is interested in implementing a worldwide pricing scheme. Which of the following is most likely a reason for the establishment of such a scheme?

A) Their production costs differ from market to market.

B) The currency values fluctuate fairly predictably.

C) Their distribution channels are lengthy in each market.

D) Their customers have similar levels of purchasing power.

Answer: D AACSB: Analytical thinking Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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98) Scooters Inc. has traditionally sold its products at one price in the domestic market and at another price in export markets, which is called a(n) ________ pricing strategy.

A) target B) value C) dual D) arm's length Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

99) The more intermediaries there are in a distribution channel, the more costly the channel becomes.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

100) The lower a product's value density, the more localized is the distribution system for that product.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

101) An arm's length price is the price that is charged for products sold among a company's divisions or subsidiaries.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 14.4: Describe the two main international pricing strategies and factors to consider.

102) Antidumping tariffs punish producers in the offending nation by increasing the price of their products to a fairer level.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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103) Differentiate between worldwide and dual pricing. Which one of these is more difficult to achieve and why?

Answer: A pricing policy in which one selling price is established for all international markets is called worldwide pricing. In practice, a worldwide pricing policy is very difficult to achieve.

First, production costs differ from one nation to another. Keeping production costs the same is not possible for a company that has production bases within each market it serves. As a result, selling prices often reflect these different costs of production.

Second, a company that produces in just one location (to maintain an equivalent cost of production for every product) cannot guarantee that selling prices will be the same in every target market. The cost of exporting to certain markets will likely be higher than the cost of exporting to other markets. In addition, distribution costs differ across markets. Where distribution is efficient, selling prices might well be lower than in locations where distribution systems are archaic and inefficient.

Third, the purchasing power of local buyers must be taken into account. Managers might decide to lower the sales price in a market so that buyers can afford the product and the company can gain market share.

Finally, fluctuating currency values also must be taken into account. When the value of the currency in a country where production takes place rises against a target market's currency, the product will become more expensive in the target market.

Because of the problems associated with worldwide pricing, another pricing policy is often used in international markets. A pricing policy in which a product has a different selling price in export markets than it has in the home market is called dual pricing. When a product has a higher selling price in the target market than it does in the home market (or the country where production takes place), it is called price escalation. It is commonly the result of exporting costs and currency fluctuations.

But sometimes a product's export price is lower than the price in the home market. Some companies determine that domestic market sales are to cover all product costs (such as expenses related to R&D, administration, and overhead). They then require exports to cover only the additional costs associated with exporting and selling in a target market (such as tariffs). In this sense, exports are considered a sort of "bonus."

To successfully apply dual pricing in international marketing, a company must be able to keep its domestic buyers and international buyers separate. Buyers in one market might cancel orders if they discover that they are paying a higher price than are buyers in another market. If a company cannot keep its buyers separate when using dual pricing, buyers could potentially undermine the policy through arbitrage—buying products where they are sold at lower prices and reselling them where they command higher prices. As is often the case, however, the higher selling price of a product in an export market often reflects the additional costs of transportation to the local market and any trade barriers of the target market, such as tariffs. For arbitrageurs to be successful, the profits they earn must be enough to outweigh these additional costs.

AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 14.4: Describe the two main international pricing strategies and factors to consider.

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International Business: The Challenges of Globalization, 9e (Wild) Chapter 15 Managing International Operations 1) Which of the following terms refers to the decision of whether to produce a component internally or to outsource it from another company?

A) buyer decision process B) decision problem C) per curiam decision D) make-or-buy decision Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

2) The process of assessing a company's ability to produce enough output to satisfy market demand is called ________.

A) capacity planning B) lean production C) process management D) product structure modeling Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

3) Kathleen, a manager at Parker Airline, has the responsibility of deciding how many passengers Parker Airline can serve at a given time. Kathleen is most likely involved with ________.

A) operations management B) services production planning C) capacity planning D) service operations management Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

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4) The make-or-buy decision primarily relates to ________.

A) reducing production B) acquiring components C) forming joint ventures D) obtaining foreign facilities Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

5) ________ refers to the concentration of production facilities in one location.

A) Lean production B) Continuous production C) Centralized production D) Horizontal integration Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

6) ________ refers to a situation in which facilities are spread over several locations, with one facility for each national business environment in which the company markets its products.

A) Continuous production B) Decentralized production C) Vertical integration D) Lean production Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

7) A British toy company manufactures all of its product lines in a single facility in Europe.

Which of the following is the company demonstrating?

A) continuous production B) lean production C) centralized production D) horizontal integration Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

2 .

8) An Asian jewelry company maintains production facilities in South Korea, Vietnam, and Malaysia. Which of the following is the company exemplifying?

A) lean production B) decentralized production C) vertical integration D) continuous production Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

9) A company that sells undifferentiated products in all their markets and do not need to locate near their markets in order to stay on top of changes in buyer preferences use ________.

A) vertical integration B) centralized production C) lean production D) continuous production Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

10) The decentralization of production facilities is a typical policy for companies that pursue ________.

A) a multinational strategy B) a global strategy C) mass customization D) vertical integration Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

11) The centralization of production facilities is a typical policy for companies that pursue ________.

A) horizontal integration B) product differentiation C) a global strategy D) a multinational strategy Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

3 .

12) Companies with decentralized production facilities are often pursuing ________ strategies.

A) low-cost B) differentiation C) retrenchment D) combination Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

13) Deciding the sequence of operations a company will use to create its product is called ________.

A) product planning B) capacity planning C) location economies D) process planning Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

14) Which of the following determines the process that a company will use to create its product?

A) a firm's multinational strategy B) a firm's global strategy C) a firm's corporate-level strategy D) a firm's business-level strategy Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

15) Which of the following will a company that is pursuing a low-cost leadership strategy most likely use for creating its product?

A) implement handcrafted artisanship B) manufacture in large production batches C) manufacture components in-house D) customize products for each customer Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

4 .

16) Deciding the spatial arrangement of production processes within production units is called ________.

A) facilities layout planning B) capacity planning C) process planning D) location economies Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

17) Which of the following factors has the least effect on facilities layout planning?

A) supply of land in a nation B) cost of land in a nation C) a firm's production process D) age of the company Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

Scenario: Wilson Industries Inc. Wilson Industries Inc. is a multinational firm that designs and produces premium leather bags for major destinations worldwide. The company's board of directors is meeting to discuss changes that might be needed in the company's operations.

18) The board plans to examine Wilson's ability to produce enough bags to satisfy their customers' demands. This evaluation is known as ________.

A) capacity planning B) process planning C) lean production D) product structure modeling Answer: A AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

5 .

19) If Wilson Industries selects a new area for its production units, the company will be implementing ________.

A) capacity planning B) process planning C) facilities location planning D) product structure modeling Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

20) The board will also examine new production techniques the company could use to create its product. This examination is a part of ________.

A) capacity planning B) process planning C) facilities location planning D) centralized production Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

21) If the board discusses the spatial arrangement of production processes within Wilson's production facilities, they will be engaging in ________.

A) capacity planning B) facilities location planning C) process planning D) facilities layout planning Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

6 .

Scenario: Hafstrom Motors Based in Kentucky, Hafstrom Motors has always used spare parts made in America for its automobiles. However, sales and profits have slumped over the past three years. A senior manager at the company comes up with new strategies for improving the firm's production activities.

22) The senior manager recommends that Hafstrom obtain auto parts from a country where production activities would generate more value than it would generate elsewhere. He wants to take advantage of ________.

A) just-in-time manufacturing B) facilities layout planning C) process planning D) location economies Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

23) The process of assessing a company's ability to produce enough output to satisfy market demand is called capacity planning.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

24) Capacity planning applies only to manufacturing companies.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

25) Differentiation strategies demand that producers provide extra value by offering customers something unique, such as superior quality, added features, or special brand images.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

7 .

26) Worker productivity tends to be lower in most developing nations than in developed nations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

27) Supply issues (location and availability of vendors) are also important in location planning.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

28) Companies selling undifferentiated products find centralized production most effective.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

29) It is important for low-cost competitors to locate near their markets in order to keep track of buyer preferences.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

30) The particular process to be used to create products is typically determined by a firm's corporate-level strategy.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

31) Availability and cost of labor in the local market is crucial to capacity planning.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

8 .

32) The process by which a company extends its control over additional stages of production is called vertical integration.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.1: Describe the elements to consider when formulating production strategies.

33) Companies strive toward quality improvements for attaining economies of scale.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

34) Explain the process of facilities location planning. What issues must companies consider while selecting the location for their production facilities?

Answer: Selecting the location for production facilities is called facilities location planning.

Companies often have many potential locations around the world from which to choose a site for production, research and development, or some other activity. Aspects of the business environment that are important to facilities location planning include the cost and availability of labor and management, raw materials, component parts, and energy. Other key factors include political stability, the extent of regulation and bureaucracy, economic development, and the local culture, including beliefs about work and important traditions.

Reducing production costs by taking advantage of lower wages in another country is often essential to keeping a company's products competitively priced. This is especially important when the cost of labor contributes greatly to total production costs. But the lower wages of a nation's workforce must be balanced against its potentially lower productivity. Worker productivity tends to be lower in most developing nations and some emerging markets as compared with developed nations.

Although most service companies must locate near their customers, they must still consider a wide variety of customers' needs when locating facilities.

Supply issues are also important in location planning. For any one mode of transportation, the greater the distance between production facilities and target markets, the longer it takes for customers to receive shipments. In turn, companies must compensate for delays by maintaining larger inventories in target markets—adding to storage and insurance costs. Shipping costs are also greater when production occurs away from target markets. Transportation costs are one of the driving forces behind the globalization of the steel industry. By building steel mills in countries where their customers are located, steel producers significantly reduce their transportation costs.

AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.1: Describe the elements to consider when formulating production strategies.

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35) How is process planning affected by a company's business-level strategy? How can outsourcing lower risk for firms?

Answer: Deciding on the process that a company will use to create its product is called process planning. The particular process to be used is typically determined by a firm's business-level strategy. For example, low-cost strategies normally require large-scale production because producers want the cost savings generated by economies of scale. A company that massproduces snowboards for average skiers will typically use a highly automated production process that integrates advanced computer technology. Differentiation strategies, however, demand that producers provide extra value by offering customers something unique, such as superior quality, added features, or special brand images. Companies that handcraft snowboards for professionals will rely not on automated production but on skilled craftspeople. The company will design and produce each snowboard to suit the habits and special needs of each individual snowboarder. For such a company, service is a major component of the production process.

Availability and cost of labor in the local market is crucial to process planning. If labor in the host country is relatively cheap, an international company will likely opt for less technology and more labor-intensive methods in the production process—depending on its particular product and strategy. But again, the availability of labor and the level of wages in the local market must be balanced against the productivity of the local workforce.

The practice of buying from another company a good or service that is part of a company's value-added activities is called outsourcing. Outsourcing results from continuous specialization and technological advancement. For each successive specialization of its operations process, a manufacturer requires greater skill and knowledge than it did before. By outsourcing, a company can reduce the degree to which it is vertically integrated and the overall amount of specialized skills and knowledge that it must possess.

Many companies buy when buying is the lower-cost option. When a firm cannot integrate vertically by manufacturing a product for less than a supplier can, it will typically outsource.

One way a company can eliminate the exposure of assets to political risk in other countries is simply by refusing to invest in plants and equipment abroad. It can instead purchase products from international suppliers. This policy also eliminates the need to purchase expensive insurance coverage that is needed when a company undertakes production in an unstable country.

Yet this policy will not completely shield the buyer from all potential disruptions—political instability can cause delays in the timely receipt of needed parts. Indeed, even under normal circumstances, the longer delivery times involved in international outsourcing can increase the risk that the buyer will not meet its own production schedule.

AACSB: Analytical thinking; Application of knowledge Skill: Synthesis Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

10 .

36) Describe the production managers' decision regarding whether to centralize or decentralize production facilities, and explain the benefits of vertical integration.

Answer: An important consideration for production managers is whether to centralize or decentralize production facilities. Centralized production refers to the concentration of production facilities in one location. With decentralized production, facilities are spread over several locations and could even mean having one facility for each national business environment in which the company markets its products—a common policy for companies that follow a multinational strategy. Companies often centralize production facilities in pursuit of low-cost strategies and to take advantage of economies of scale—a typical policy for companies that follow a global strategy. By producing large quantities of identical products in one location, the companies cut costs by reducing the per-unit cost of production.

Transportation costs and the physical landscape also affect the centralization versus decentralization decision. Because they usually sell undifferentiated products in all their markets, low-cost competitors generally do not need to locate near their markets in order to stay on top of changes in buyer preferences. That is why low-cost producers often choose locations with the lowest combined production and transportation costs. But even these firms must balance the cost of getting inputs into the production process and the cost of getting products to markets. Key factors in the physical environment that affect the transport of goods are the availability of seaports, airports, or other transportation hubs.

Conversely, companies that sell differentiated products may find decentralized production the better option. By locating separate facilities near different markets, they remain in close contact with customers and can respond quickly to changing buyer preferences. Closer contact with customers also helps firms develop a deeper understanding of buyer behavior in local cultures.

When close cooperation between research and development and manufacturing is essential for effective differentiation, both activities are usually conducted in the same place. Yet new technologies are giving companies more freedom to separate these activities. The rapid speed of communications today allows a subsidiary and its home office to be large distances from each other.

Vertical integration is the process by which a company extends its control over additional stages of production—either inputs or outputs. When a company decides to make a product rather than buy it, it engages in "upstream" activities (production activities that come before a company's current business operations). For example, a carmaker that decides to manufacture its own window glass is engaging in a new upstream activity.

Lower Costs—Above all, companies make products rather than buy them in order to reduce total costs. Generally speaking, the manufacturer's profit is the difference between the product's selling price and its production cost. When a company buys a product, it rewards the manufacturer by contributing to the latter's profit margin. Yet a company often undertakes inhouse production when it can manufacture a product for less than it must pay another business to produce it. Thus in-house production allows a company to lower its own production costs. Small companies are less likely than large ones to make rather than buy, especially when a product requires a large financial investment in equipment and facilities. But this rule of thumb might not necessarily hold if the company possesses a proprietary technology or some other competitive advantage that is not easily copied.

11 .

Greater Control—Companies that depend on others for key ingredients or components give up a degree of control. Making rather than buying can give managers greater control over raw materials, product design, and the production process itself—all of which are important factors in product quality. In turn, quality control is especially important when customers are highly sensitive to even slight declines in quality or company reputation.

In addition, persuading an outside supplier to make significant modifications to quality or features can be difficult. This is especially true if modifications entail investment in costly equipment or if they promise to be time-consuming. If just one buyer requests costly product adaptations or if there is reason to suspect that a buyer will eventually take its business elsewhere, a supplier may be reluctant to undertake a costly investment. Unless that buyer purchases in large volumes, the cost of the modifications may be too great for the supplier to absorb. In such a case, the buyer simply may be unable to obtain the product it wants without manufacturing it in-house. Thus companies maintain greater control over product design and product features if they manufacture components themselves.

Finally, making a product can be a good idea when buying from a supplier means providing the supplier with a firm's key technology. Through licensing agreements companies often provide suppliers in low-wage countries with the technologies needed to make their products. But if a company's competitive advantage depends on that technology, the licensor could inadvertently be creating a future competitor. When controlling a key technology is paramount, it is often better to manufacture in-house.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

12 .

37) Discuss the standardization versus adaptation decision for managers when considering production facilities, and describe considerations for managers when acquiring fixed assets.

Answer: An important issue in production strategy is deciding whether the production process will be standardized for all markets or adapted to manufacture products modified for different markets. For example, low-cost leadership often dictates automated, standardized production in large batches. Large production batches reduce the cost of producing each unit, thus offsetting the higher initial investment in automation. And production costs are reduced further as employees improve performance by repeating their activities and learning new procedures that would, for example, help minimize errors and waste.

But differentiation often demands decentralized facilities designed to improve local responsiveness. Because decentralized production facilities produce for one national market or for a regional market, they tend to be smaller. This tends to eliminate the potential to take advantage of economies of scale and therefore increases per-unit production costs. Similarly, the smaller market share that a differentiation strategy targets normally requires relatively smallerscale production. Differentiating a product by incorporating certain features desired by customers requires more costly manufacturing processes. Research and development costs also tend to be higher for products with special product designs, styles, and features.

Most companies must acquire fixed (tangible) assets—such as production facilities, inventory warehouses, retail outlets, and production and office equipment—in the host country. Many companies have the option of either (1) acquiring or modifying existing factories or (2) building entirely new facilities—called a greenfield investment. Considering either option involves many individuals within the company. For example, production managers must verify that an existing facility (or an empty lot) is large enough and will suit the company's facility layout needs. Site acquisition experts and legal staff must guarantee that the proposed business activity abides by local laws. Public relations staff must work with community leaders to ensure that the company does not jeopardize the rights, values, and customs of the local population.

Finally, managers must make sure that the local infrastructure can support the firm's proposed on-site business operations. Also, factory and office equipment is likely to be available locally in most newly industrialized and developed markets, but not in developing markets. Thus managers must assess both the cost in tariffs that will be imposed on imported equipment and the cost in time and effort that will be required to import it.

AACSB: Application of knowledge Skill: Synthesis Difficulty: Hard LO: 15.1: Describe the elements to consider when formulating production strategies.

38) The process by which a company extends its control over additional stages of production is called ________.

A) a push strategy B) a pull strategy C) vertical integration D) horizontal integration Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

13 .

39) Which of the following reasons encourages companies to make a product rather than buy it?

A) Making a product gives managers greater control over the production process.

B) Making a product lowers the risk associated with the production process.

C) Making a product increases the company's flexibility to respond to market conditions.

D) Making a product gives companies a great deal of power in their relationships with suppliers.

Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

40) Which of the following reasons encourages companies to buy a product rather than make it?

A) Buying a product gives managers greater control over the production process.

B) Buying a product increases the company's total costs significantly compared to making the product in-house.

C) Buying a product ensures non-flexibility to local market conditions.

D) Buying a product enables a company to gain a great deal of power in their relationships with suppliers.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

41) Which of the following processes will a computer assembling firm engage in if it decides to manufacture its own monitors and printers?

A) outsourcing B) vertical integration C) niche marketing D) lean production Answer: B AACSB: Application of knowledge Skill: Application Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

14 .

42) A firm that buys from another company a good or service that is part of the firm's valueadded activities is practicing ________.

A) outsourcing B) vertical integration C) horizontal integration D) lean production Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

43) ________ will enable a company to reduce the degree to which it is vertically integrated and the overall amount of specialized skills and knowledge that it would have to possess.

A) Outsourcing B) Skimming C) Lean production D) Centralized production Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

44) Which of the following statements is true of outsourcing?

A) It reduces economic risk by facilitating the purchase of large insurance policies.

B) It reduces production risk by eliminating delays in the timely receipt of needed parts.

C) It reduces political risk by enabling the company to avoid investing in plants and equipment abroad.

D) It reduces currency risk by allowing the company to invest the home currency on in-house production facilities.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

15 .

45) Computer companies buying hardware components from component-makers, assembling them in their own facilities, and selling completed systems to consumers and businesses is an example of ________.

A) telecommuting B) franchising C) outsourcing D) licensing Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

46) ________ manufacturing is any manufacturing that takes place in a country different from the home country.

A) Offshore B) Multidomestic C) Cost-minimization D) Outsourcing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

47) ________ in the computer industry is the outsourcing of the actual assembly of computers plus the job of shipping them to distributors and other intermediaries.

A) Agile manufacturing B) Just in time manufacturing C) Lean manufacturing D) Stealth manufacturing Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

16 .

48) Storage facilities, retail outlets, and production equipment in the host country are examples of ________.

A) liquid assets B) current assets C) fixed assets D) intangible assets Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

49) A fixed asset can also be referred to as a ________ asset.

A) liquid B) current C) tangible D) trading account Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

50) Which of the following is a barrier to buying products from international suppliers?

A) extremely low tariffs B) additional transportation costs C) lower flexibility to respond to market conditions D) high political risk Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

51) Which of the following is established by a company that has the option of either (1) acquiring or modifying existing factories or (2) building entirely new facilities?

A) a divestiture B) a shadow economy C) a greenfield investment D) a shell corporation Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

17 .

Scenario: Hafstrom Motors Based in Kentucky, Hafstrom Motors has always used spare parts made in America for its automobiles. However, sales and profits have slumped over the past three years. A senior manager at the company comes up with new strategies for improving the firm's production activities.

52) The top management of the company contends that Hafstrom would benefit most from manufacturing its own parts, rather than sourcing it from elsewhere, even if they are made at another location overseas. Which of the following is being recommended in this approach?

A) just-in-time manufacturing B) location economies C) vertical integration D) outsourcing Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

53) The senior manager argues that Hafstrom could reduce its costs significantly by purchasing parts from companies located overseas rather than producing its own parts. Which of the following is the senior manager advocating?

A) outsourcing B) a greenfield investment C) lean production D) vertical integration Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

18 .

Scenario: Audio Component Outsourcing Echo Corporation 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 outsourcing. Echo managers are attempting to convince Nathan Douglas, the firm's founder and CEO, that outsourcing would enable the firm to be more competitive without sacrificing quality.

54) Which of the following most likely supports the argument of Echo managers to outsource some of the firm's manufacturing activities?

A) Echo managers could reduce the wages of U.S. based employees and sub-contractors.

B) Echo could save money by reducing the costs incurred in manufacturing the component parts.

C) Echo managers could implement a marketing campaign for foreign markets that is identical to the outsourced firm's marketing campaign.

D) Echo could merge with one of its U.S.-based competitors to gain a larger market share.

Answer: B AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

55) Which of the following should most likely be considered in making the decision to outsource some of Echo's manufacturing activities?

A) Do purchasing components present the lowest cost option for Echo?

B) Would Echo engineers be willing to relocate to a foreign nation?

C) Is Echo prepared to cover moving expenses for its managerial talent?

D) Can Echo find employees for a customer service center in the U.S.?

Answer: A AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 15.2: Outline the issues to consider when acquiring physical resources.

56) Companies make products rather than buy them in order to reduce total costs.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

57) A company often undertakes in-house production when it can manufacture a product for less than it must pay another business to produce it.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

19 .

58) Today, due to improved technology, it is fairly easy to persuade an outside supplier to make significant modifications to a component.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

59) Outsourcing refers to the practice of buying from another company a good or a service that is part of a company's value-added activities.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

60) One reason to buy a product instead of making it in-house is the greater flexibility to respond to market conditions.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

61) Total quality management reduces the responsibility on each individual in the production process.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.2: Outline the issues to consider when acquiring physical resources.

20 .

62) What role does flexibility play in the make-or-buy decision?

Answer: The typical manufacturing company requires a wide range of inputs into its production process. These inputs typically enter the production line either as raw materials that require processing or as components needing only assembly. A component may require minor adjustments or other minor processing before it goes into production. Deciding whether to make a component or to buy it from another company is called the make-or-buy decision.

Maintaining sufficient flexibility to respond to market conditions is increasingly important for companies everywhere. Making an in-house product that requires large investments in equipment and buildings often reduces flexibility. By contrast, companies that source products from one or more outside suppliers gain flexibility. In fact, added flexibility is the key factor in a fundamental change in attitude toward outsourcing, which many managers now regard as a fullfledged strategy for change rather than a limited tactical tool for solving immediate problems.

Maintaining flexibility is important when the national business environments of suppliers are volatile. Buying from several suppliers, or establishing production facilities in more than one country, allows a company to outsource products from one location if instability erupts in another. The same is true during periods of great volatility in exchange rates. Exchange-rate movements can increase or decrease the cost of importing a product from a given country. By buying from multiple suppliers located in several countries, a company can maintain the flexibility needed to change sources and reduce the risk associated with sudden swings in exchange rates.

Companies also maintain operational flexibility simply by not having to invest in production facilities. Unencumbered by investment in costly production equipment and facilities, a firm can alter its product line very quickly. This capability is especially important for products with small production runs or those with highly uncertain potential. Furthermore, a company can obtain financial flexibility if its capital is not locked up in plants and equipment. It can then use excess financial capital to pursue other domestic or international opportunities. Outsourcing can also free a company from having to invest in research and development, and then earn a return on that investment.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

21 .

63) Describe the issues involved in the decision of how a company acquires raw materials and fixed assets.

Answer: Raw Materials—Decisions about the selection and acquisition of raw materials are important to many different types of manufacturers. The twin issues of quantity and quality drive many of these decisions. First, some industries and companies rely almost exclusively on the quantity of locally available raw materials. This is most true for companies involved in mining, forestry, and fishing. There must be an adequate supply of iron ore, oil, lumber, or fish to justify the large financial investment required to build processing facilities.

Second, the quality of raw material has a huge influence on the quality of a company's end product. For instance, food-processing companies must examine the quality of the locally grown fruit, vegetables, grains, and any other ingredients. Beverage companies must assess the quality of the local water supply. Some markets may require large financial investments to build waterpurifying facilities. Elsewhere (such as much of the Middle East), the only local water source may be seawater that must be desalinized.

Fixed Assets—Most companies must acquire fixed (tangible) assets—such as production facilities, inventory warehouses, retail outlets, and production and office equipment—in the host country. Many companies have the option of either (1) acquiring or modifying existing factories or (2) building entirely new facilities—called a greenfield investment. Considering either option involves many individuals within the company. For example, production managers must verify that an existing facility (or an empty lot) is large enough and will suit the company's facility layout needs. Site-acquisition experts and legal staff must guarantee that the proposed business activity abides by local laws. Public relations staff must work with community leaders to ensure that the company does not jeopardize the rights, values, and customs of the local population.

Finally, managers must make sure that the local infrastructure can support the firm's proposed on-site business operations. Also, factory and office equipment is likely to be available locally in most newly industrialized and developed markets, but not in developing markets. Thus managers must assess both the cost in tariffs that will be imposed on imported equipment and the cost in time and effort that will be required to import it.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.2: Outline the issues to consider when acquiring physical resources.

64) What are the guidelines that provide the basis for quality certification called?

A) WTO standards B) ISO 1000 C) ISO 9000 D) TQM standards Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.3: Identify the key production matters that concern managers.

22 .

65) Which of the following statements is true regarding the ISO 9000 standards?

A) They specify details on how companies should develop its quality processes.

B) The standards are applicable to Asia exclusively.

C) ISO 9000 is a certification that companies get for their environment-friendly initiatives.

D) The standards require each company to define and document its own quality processes.

Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.3: Identify the key production matters that concern managers.

66) ________ is the term used to refer to a production technique in which inventory is kept to a minimum and inputs to the production process arrive exactly when they are needed.

A) Just-in-time manufacturing B) Lean manufacturing C) Continuous production D) Flow production Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.3: Identify the key production matters that concern managers.

67) The suppliers used by Thanos Industries deliver components directly to Thanos manufacturing center as the inputs are needed for production to minimize Thanos inventory costs. Thanos most likely uses ________.

A) one-stop shipping B) just-in-time systems C) materials management D) customized logistics processes Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.3: Identify the key production matters that concern managers.

68) Which of the following statements is true regarding total quality management (TQM)?

A) TQM emphasizes on a single effort at the start to improve the quality of its products.

B) TQM largely increases the responsibility on each individual to focus on quality.

C) TQM philosophy initially took hold in the U.S. D) TQM applies solely to an employee's activities based inside a factory.

Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.3: Identify the key production matters that concern managers.

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69) ________ is an integrated effort to systematically and continuously improve the quality of an organization's products and/or services.

A) Total quality management B) Quality-of-life index C) Integrated business planning D) Organizational restructuring Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.3: Identify the key production matters that concern managers.

70) A company using just-in-time (JIT) manufacturing involves ________.

A) increased availability of components in large inventories B) quicker detection of defective materials and components C) easier training of sales staff regarding product descriptions D) benefits stemming from combining several Japanese technologies Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.3: Identify the key production matters that concern managers.

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71) Discuss why companies strive toward quality improvement and the two methods of doing so.

Answer: Companies strive toward quality improvement for two reasons: costs and customer value. First, quality products help keep production costs low because they reduce waste in valuable inputs, reduce the cost of retrieving defective products from buyers, and reduce the disposal costs that result from defective products. Second, some minimum level of acceptable quality is an aspect of nearly every product today. Even companies that produce low-cost products try to maintain or improve quality, as long as it does not erode their position in what is typically a price-competitive market or market segment. A company that succeeds in combining a low-cost position with a high-quality product can gain a tremendous competitive advantage in its market.

Improving quality is also important for a company that provides services—whether as its only product or in conjunction with the goods it manufactures and markets. Managing quality in services is complicated by the fact that a service is created and consumed at the same time. For this reason, the human interaction between an employee who delivers a service and the buyer is important to service quality. Still, activities that must be conducted prior to the actual delivery of a service are also important. For example, it is important that a restaurant be clean and have on hand the ingredients it needs to prepare the meals on its menu. Likewise, a bank can provide high-quality service only if employees arrive for work on time and interact professionally with customers.

Two movements that inspire the drive toward quality are total quality management and International Standards Organization (ISO) 9000 certification.

Total Quality Management—Company-wide commitment to meet or exceed customer expectations through continuous quality improvement efforts and processes is called total quality management (TQM). It also places a great deal of responsibility on each individual to be focused on the quality of his or her own output—regardless of whether the employee's activities are based in the factory, in administration, or in management.

By continuously improving the quality of its products, a company can differentiate itself from rivals and attract loyal customers. The TQM philosophy initially took hold in Japan, where electronics and automobile firms applied TQM techniques to reduce costs and thereby gain significant market share around the world through price competitiveness and a reputation for quality. It was not until U.S. and European companies lost a great deal of market share to their Japanese rivals that they embraced TQM principles.

ISO 9000—The International Standards Organization (ISO) 9000 is an international certification that companies get when they meet the highest quality standards in their industries. Firms in the European Union are leading the way in quality certification. But both European and nonEuropean companies alike are working toward certification in order to ensure access to the European marketplace.

To become certified, companies must demonstrate the reliability and soundness of all business processes that affect the quality of their products. Many companies also seek ISO 9000 certification because of the message of quality that certification sends to prospective customers.

AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.3: Identify the key production matters that concern managers.

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72) Which of the following would companies do in markets that require long payback periods?

A) divest operations B) implement retrenchment strategies C) emphasize on decruitment D) reinvest profits Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

73) When a market is experiencing rapid growth, a company will ________.

A) emphasize on decruitment B) divest its operations C) reinvest in its operations D) implement retrenchment strategies Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

74) A loan in which a parent company deposits money with a host-country bank, which then lends the money to a subsidiary located in the host country is called a ________.

A) syndicated loan B) back-to-back loan C) mortgage loan D) title loan Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

75) American Depository Receipts (ADRs) are ________.

A) certificates that represent shares of stock in American companies B) dollar deposits made by foreign firms conducting business in the U.S. C) certificates that trade in the U.S. and represent shares of stock in a non-U.S. company D) currency deposits made in the U.S. by firms based in other countries Answer: C AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

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76) ________ are traded in Luxembourg and London and represent a specific number of shares in an outside company.

A) Common stock B) Bills of lading C) Revocable letters of credit D) Global Depository Receipts Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

77) Which of the following is true of American Depository Receipts (ADRs)?

A) Investors who buy ADRs have to pay a currency-conversion fee.

B) There is a minimum purchase requirement for ADRs. C) Companies offer ADRs in the U.S. to appeal to mutual funds.

D) ADRs are listed and traded in London and Luxembourg.

Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

78) ________ is the financing obtained from investors who believe the borrower will experience rapid growth and who receive equity in return for their investment.

A) Internal funding B) Venture capital C) Credit derivative D) Mortgage loan Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

79) Which of the following types of money adds to the volatility of emerging markets because it can be quickly withdrawn from its investment?

A) hot money B) patient money C) key money D) fiat money Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

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80) ________ refers to the foreign direct investment in factories, equipment, and land that cannot be pulled out of the market quickly.

A) Hot money B) Patient money C) Fiat money D) Key money Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

81) Money earned from the sale of goods and services is known as ________.

A) revenue B) dividend C) depreciation D) book value Answer: A AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

82) The ________ of a company is the mix of equity, debt, and internally generated funds that it uses to finance its activities.

A) enterprise value B) stock value C) capital structure D) corporate structure Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

83) ________ appeals to companies because it lowers the amount of taxes the companies must pay.

A) Debt B) Equity C) Stock value D) Enterprise value Answer: A AACSB: Analytical thinking Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

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Scenario: Audio Component Outsourcing Echo Corporation 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 outsourcing. Echo managers are attempting to convince Nathan Douglas, the firm's founder and CEO, that outsourcing would enable the firm to be more competitive without sacrificing quality.

84) Which of the following is most likely a potential benefit for Echo if it outsources some of its manufacturing activities?

A) heightened communications awareness B) increased activity in e-commerce sales C) strong intellectual property protection D) eliminating the exposure of assets to political risk Answer: D AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.4: Explain the potential ways to finance business operations.

Scenario: Verandas International Verandas International is expanding its operations in North America. The Dutch company supplies customized furniture to five-star hotels. Verandas International is a leader in this industry, but the company believes it must increase its geographic reach to maintain that position.

85) Economic forecasts reveal that the U.S. dollar is expected to decline relative to the Euro.

Which of the following is the most advantageous method of obtaining funding for Verandas under these conditions?

A) borrowing from U.S. banks B) issuing equity in Germany C) issuing equity in the U.S. D) borrowing from Dutch banks Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.4: Explain the potential ways to finance business operations.

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86) The Verandas U.S. subsidiary was turned down when it tried to borrow from a U.S. bank.

The bank manager suggested that the parent firm deposit money with the U.S. bank's Dutch branch, and then the U.S. bank's home office would lend the money to the U.S. subsidiary. This type of arrangement is known as a(n) ________.

A) mortgage loan B) title loan C) back-to-back loan D) syndicated loan Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 15.4: Explain the potential ways to finance business operations.

87) If Verandas International chooses to pursue equity financing, but wants to avoid the time and money required to comply with stock exchange regulations, the company would most likely issue ________.

A) American Depository Receipts B) bills of lading C) equity shares D) irrevocable letters of credit Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

88) The ISO 9000 is a production technique in which inputs to the production process arrive exactly when they are needed.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

89) Just-in-time manufacturing drastically increases the costs associated with large inventories in the production process.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

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90) Companies usually decide to reinvest when a market is experiencing rapid growth.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

91) A back-to-back loan is one in which a subsidiary acquires a loan from the same bank where its parent secured the first loan.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

92) A major disadvantage of American Depository Receipts (ADRs) is that investors who buy them must pay currency-conversion fees.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

93) Venture capital is a source of debt financing for successful multinational companies.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

94) Hot money is the cash that can be quickly withdrawn from a market in times of crisis.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 15.4: Explain the potential ways to finance business operations.

95) Debt appeals to companies because it lowers the amount of taxes the companies must pay.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

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96) Why might companies decide to reinvest, scale back, or divest local operations?

Answer: Companies maintain the current level of operations when no new opportunities are foreseen. Yet changing conditions in the competitive global marketplace often force managers to choose between reinvesting in operations and divesting them.

Companies often reinvest profits in markets that require long payback periods as long as the long-term outlook is good. This is often the case in developing countries and large emerging markets. For example, corruption, red tape, distribution problems, and a vague legal system present challenges for non-Chinese companies. But because long-term returns on their investments are expected, Western companies reinvest heavily in China despite what are sometimes uncertain short-term profits. Most of these companies invest in production facilities to take advantage of a low-cost labor pool and low-cost energy.

Companies scale back their international operations when it becomes apparent that making operations profitable will take longer than expected. Again, China serves as a good example.

Some companies were lured to China by the possibilities for growth offered by 1.2 billion consumers; however, some had to scale back ambitions based on overly optimistic marketing plans.

Companies usually decide to reinvest when a market is experiencing rapid growth. Reinvestment can mean either expanding in the market itself or expanding in a location that serves the growing market. Investing in expanding markets is often an attractive option because potential new customers usually have not yet become loyal to the products of any one company or brand. It can be easier and less costly to attract customers in such markets than it is to gain a share of markets that are stagnant or contracting.

Yet problems in the political, social, or economic sphere can force a company either to reduce or eliminate operations altogether. Such problems are usually intertwined with one another. For example, in recent years some Western companies pulled their personnel out of Indonesia because of intense social unrest stemming directly from a combination of political problems (discontent with the nation's political leadership), economic difficulties, and terrorist attacks.

Finally, companies invest in the operations that offer the best return on their investments. That policy often means reducing or divesting operations in some markets, even though they may be profitable, in order to invest in more profitable opportunities elsewhere.

AACSB: Analytical thinking; Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

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97) What are the options available to companies seeking financial resources?

Answer: Companies need financial resources to pay for a variety of operating expenses and new projects. They must buy raw materials and component products for manufacturing and assembly activities. At certain times, they need large sums of capital, whether for expanding production capacity or entering new geographic markets. But companies also need financing to pay for all sorts of activities in addition to those related to production. They must pay for training and development programs and compensate workers and managers. Businesses must pay advertising agencies for helping the company promote its goods and services. They must also make periodic interest payments to lenders and perhaps reward stockholders with dividends.

But all companies have a limited supply of resources at their disposal to invest in current operations or new endeavors. So where do companies obtain needed funds? Generally speaking, organizations obtain financial resources through one of three sources: 1. Borrowing (debt) 2. Issuing equity (stock ownership) 3. Internal funding AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

98) What are the advantages of American Depository Receipts (ADRs)?

Answer: Companies gain several important advantages through American Depository Receipts (ADRs). First, investors who buy ADRs pay no currency-conversion fees. By contrast, if a U.S. investor were to purchase the shares of a non-U.S. company on another country's stock exchange, he or she would incur the expense of converting currencies. Avoiding such expenses, plus the added convenience of paying in dollars, encourages U.S. investors to buy ADRs. Second, there are no minimum purchase requirements for ADRs, as there sometimes are for shares of a company's stock.

Third, companies offer ADRs in the United States to appeal to mutual funds. Investment laws in the United States limit the amount of money that a mutual fund can invest in the shares of companies not registered on U.S. exchanges. U.S. mutual fund managers were forced to sell shares of German software producer SAP when they appreciated in price. Listing ADRs in the United States also allowed the company to reward employees with discounted shares of company stock—something that it could not have done otherwise because companies are barred from awarding shares in unregistered companies to employees in the United States.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

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99) How can companies use internal funding to finance ongoing international business activities?

Answer: Ongoing international business activities and new investments can also be financed internally, whether with funds supplied by the parent company or by its international subsidiaries.

Internal Equity, Debt, and Fees—Spinoff companies and new subsidiaries typically require a period of time before they become financially independent. During this period, they often obtain internal financing from parent companies.

Many international subsidiaries obtain financial capital by issuing equity, which as a rule is not publicly traded. In fact, equity is often purchased solely by the parent company, which obviously enjoys great influence over the subsidiary's decisions. If the subsidiary performs well, the parent earns a return from the appreciating share price that reflects the increased valuation of the company. If the subsidiary decides to pay stock dividends, the parent company can also earn a return in this way. Parent companies commonly lend money to international subsidiaries during the startup phase and when subsidiaries undertake large new investments. Conversely, subsidiaries with excess cash often lend money to parent or sister companies that need capital.

Revenue from Operations—Money earned from the sale of goods and services is called revenue.

This source of capital is the lifeblood of international companies and their subsidiaries.

If a company is to succeed in the long term, it must at some point generate sufficient internal revenue to sustain day-to-day operations. At that point, outside financing is required only to expand operations or to survive lean periods—say, during seasonal sales fluctuations.

International companies and their subsidiaries also generate revenues internally through so-called transfer prices—prices charged for goods or services transferred among a company and its subsidiaries. Companies set subsidiaries' transfer prices high or low, according to their own goals. For instance, often they pursue transfer pricing aggressively when they wish to minimize taxes in a high-taxation country. Transfer pricing can be used if there are no national restrictions on the use of foreign exchange or on the repatriation of profits to home countries.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

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100) Explain the concept of capital structure as it applies to a company with international operations.

Answer: The capital structure of a company is the mix of equity, debt, and internally generated funds that it uses to finance its activities. Firms try to strike the right balance among financing methods to minimize risk and the cost of capital.

Debt requires periodic interest payments to creditors such as banks and bondholders. If the company defaults on interest payments, creditors can take the company to court to force it to pay—even forcing it into bankruptcy. On the other hand, in the case of equity, only holders of certain types of preferred stock (which companies issue sparingly) can force bankruptcy because of default. As a rule, then, companies do not want to carry too much debt in relation to equity that can increase their risk of insolvency. Debt still appeals to companies in many countries, however, because interest payments can be deducted from taxable earnings—thus lowering the amount of taxes the firm must pay.

The basic principles of capital structure do not vary from domestic to international companies.

But research indicates that multinational firms have lower ratios of debt to equity than domestic firms. Some observers cite increased political risk, exchange-rate risk, and the number of opportunities available to multinationals as possible explanations for the difference. Others suggest that the debt-versus-equity option depends on a company's national culture. But this suggestion has come under fire because companies from all cultures want to reduce their cost of capital. Moreover, many large international companies generate revenue from a large number of countries.

National restrictions can influence the choice of capital structure. These restrictions include limits on the international flows of capital, the cost of local financing versus the cost of international financing, access to international financial markets, and controls imposed on the exchange of currencies. The choice of capital structure for each of a company's international subsidiaries—and, therefore, its own capital structure—is a highly complex decision.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 15.4: Explain the potential ways to finance business operations.

35 .

International Business: The Challenges of Globalization, 9e (Wild) Chapter 16 Hiring and Managing Employees 1) The customary means by which a company fills up vacancies in its offices is called ________.

A) a staffing policy B) an employment policy C) onboarding D) outsourcing Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

2) Which of the following is an appropriate and widely-used method for staffing international business operations?

A) collective narcissism B) cronyism C) nepotism D) geocentric approach Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

3) 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 AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

1 .

4) Hyundai tends to follow an ethnocentric staffing model. From which group will it most likely hire for upper-level management positions?

A) parent country nationals B) host country nationals C) third country nationals D) primary country nationals Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

5) CADE International, a MNC, typically fills high-level foreign positions with host country nationals. Which staffing model is most likely used by CADE International?

A) ethnocentric staffing model B) polycentric staffing model C) geocentric staffing model D) monocentric staffing model Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

6) Which of the following statements regarding ethnocentric staffing is true?

A) It can facilitate the transfer of special know-how.

B) It is a relatively inexpensive policy to implement.

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

D) It is a good choice for companies operating in highly nationalistic markets.

Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

7) Which of the following is a major drawback of ethnocentric staffing?

A) high costs of relocating managers B) loss of control over host-country operations C) loss of control over home-country operations D) difficulty in the transfer of special know-how between branches Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

2 .

8) A(n) ________ manager champions the ways of foreign markets as comparable, if not more enlightened, than the practices of his or her parent company and home nation.

A) ethnocentric B) geocentric C) monocentric D) polycentric Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

9) A ________ policy would give the foreign units of a company a degree of autonomy in decision-making.

A) centralized production B) vertical integration C) mass customization D) polycentric staffing Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

10) An important advantage of polycentric staffing is that it ________.

A) re-creates local operations in the image of home-country operations B) eliminates the high cost of relocating expatriate managers and their families C) helps a company develop global managers who can adjust easily to any business environment D) employs managers from home who will look out for the company's interests Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

3 .

11) Which of the following is a drawback of the polycentric approach?

A) Host-country nationals become more committed to company headquarters than to their local colleagues.

B) Successful local units may increasingly function independently and pay less attention to headquarters.

C) Local units depend too much on headquarters for resources and innovations, with little incentive to develop their own.

D) Local managers study international business and cultural practices in other markets in preparation for international assignments at the expense of not fully investing in understanding the host country.

Answer: B AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

12) A company that hires the best-qualified individuals, regardless of nationality, to manage foreign operations is utilizing a(n) ________ approach.

A) horizontal integration B) geocentric staffing C) ethnocentric staffing D) vertical integration Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

13) Which of the following statements is true of geocentric staffing?

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

B) It employs managers exclusively from the home country to look out for the company's interests.

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

D) It emphasizes on re-creating local operations in the image of home-country operations.

Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

4 .

14) Firms using a geocentric staffing model are primarily concerned with ________.

A) ensuring that home office views and policies are maintained B) gaining support and assistance from local communities C) hiring the best person available regardless of nationality D) employing local managers with technical expertise Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

15) The major disadvantage of a geocentric staffing policy is its potential for ________.

A) creating barriers for the host-country office B) being costly due to high salaries and moving costs of managers C) creating legal problems for the home-country office D) losing control of host-country operations Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

Scenario: Swingset International Jerome Johnston, the human resource manager at the U.S.-based Swingset International, is developing an international staffing policy for the company. Jerome personally believes Swingset should send managers from the United States to manage each subsidiary. But the CEO of the company, Valerie Vermont, believes subsidiary operations ought to be managed by individuals from the host country.

16) The approach recommended by Jerome is called ________.

A) vertical integration B) ethnocentric staffing C) horizontal integration D) geocentric staffing Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 16.1: Explain the three types of staffing policies that companies use.

5 .

17) The approach recommended by Valerie is called ________.

A) polycentric staffing B) ethnocentric staffing C) vertical integration D) horizontal integration Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 16.1: Explain the three types of staffing policies that companies use.

18) Which staffing policy should Swingset consider if it wants its foreign operations to be managed by the best-qualified individuals regardless of nationality?

A) nepotism B) ethnocentric staffing C) geocentric staffing D) employee referrals Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 16.1: Explain the three types of staffing policies that companies use.

19) The process of staffing a company and ensuring employees are as productive as possible is called human resource management.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

20) Citizens who are working and living in their home country are called expatriates.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

21) Companies use ethnocentric staffing to re-create local operations in the image of homecountry operations.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

6 .

22) A polycentric staffing strategy can facilitate the transfer of special know-how to branch operations.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

23) In ethnocentric staffing, operations outside the home country are managed by individuals from the host country.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

24) Ethnocentric staffing places managerial responsibility in the hands of people intimately familiar with the local business environment.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

25) The major drawback of polycentric staffing is the potential for losing control of the hostcountry operation.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

26) In geocentric staffing, operations outside the home country are managed by the best-qualified individuals, regardless of their nationality.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

27) An ethnocentric policy can create barriers for the host-country office.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

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28) A major drawback of geocentric staffing is that it is expensive.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

29) The first phase of HR planning involves taking an inventory of a company's current human resources.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.1: Explain the three types of staffing policies that companies use.

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30) Differentiate between the three types of staffing policies used by international companies.

What are the advantages of each?

Answer: Ethnocentric staffing—In ethnocentric staffing, individuals from the home country manage operations abroad. This policy tends to appeal to companies that want to maintain tight control over decision making in branch offices abroad. Accordingly, those companies work to formulate policies designed to work in every country in which they operate. But firms generally pursue this policy in their international operations for top managerial posts—implementing it at lower levels is often impractical.

Advantages—Firms pursue this policy for several reasons. First, locally qualified people are not always available. In developing and newly industrialized countries, there is often a shortage of qualified personnel that creates a highly competitive local labor market. Second, companies use ethnocentric staffing to re-create local operations in the image of home-country operations.

Especially if they have climbed the corporate ladder in the home office, expatriate managers tend to infuse branch offices with the corporate culture. This policy is important for companies that need a strong set of shared values among the people in each international office—such as firms implementing global strategies. A system of shared values is important when a company's international units are highly interdependent. Finally, some companies feel that managers sent from the home country will look out for the company's interests more earnestly than will hostcountry natives.

Polycentric staffing—In polycentric staffing, individuals from the host country manage operations abroad. Companies can implement a polycentric approach for top and mid-level managers, for lower-level staff, or for non-managerial workers. It is well suited to companies who want to give national units a degree of autonomy in decision making. This policy does not mean that host-country managers are left to run operations in any way they see fit. Large international companies usually conduct extensive training programs in which host-country managers visit home offices for extended periods. This exposes them to the company's culture and specific business practices. Small and medium-sized companies can find this policy expensive, but being able to depend on local managers who fully understand what is expected of them can far outweigh any costs.

Advantages—Polycentric staffing places managerial responsibility in the hands of people intimately familiar with the local business environment. Managers with deep cultural understanding of the local market can be an enormous advantage. They are familiar with local business practices and can read the subtle cues of both verbal and nonverbal language. They need not overcome any cultural barriers created by an image of being an outsider, and they tend to have a better feel for the needs of employees, customers, and suppliers.

Another important advantage of polycentric staffing is elimination of the high cost of relocating expatriate managers and families. This benefit can be extremely helpful for small and mediumsized businesses that cannot afford the expenses associated with expatriate employees.

Geocentric Staffing—In geocentric staffing, the best-qualified individuals, regardless of nationality, manage operations abroad. The local operation may choose managers from the host country, from the home country, or from a third country. The choice depends on the operation's specific needs. This policy is typically reserved for top-level managers.

Advantages—Geocentric staffing helps a company develop global managers who can adjust easily to any business environment—particularly to cultural differences. This advantage is especially useful for global companies trying to break down nationalistic barriers, whether between managers in a single office or between different offices. One hope of companies using 9 .

this policy is that a global perspective among its managers will help them seize opportunities that may otherwise be overlooked.

AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.1: Explain the three types of staffing policies that companies use.

31) Discuss the disadvantages of an ethnocentric staffing policy. How do bonuses, tax incentives, and employee expectations contribute to high personnel costs?

Answer: Despite its advantages, ethnocentric staffing has its negative aspects. First, relocating managers from the home country is expensive. The bonuses that managers often receive for relocating plus relocation expenses for entire families can increase the cost of a manager several times over. Likewise, the pressure of cultural differences and long periods away from relatives and friends can contribute to the failure of managers on international assignments.

Second, an ethnocentric policy can create barriers for the host-country office. The presence of home-country managers in the host country might encourage a "foreign" image of the business.

Lower-level employees might feel that managers do not really understand their needs because they come from another culture. Occasionally they are right: Expatriate managers sometimes fail to integrate themselves into the local culture. And if they fail to overcome cultural barriers, they typically fail to understand the needs of their local employees and those of their local customers.

Bonuses, tax incentives and cultural and social expectations can contribute to high personnel costs. Companies commonly offer managers inducements to accept international postings. The most common is a financial bonus. This bonus can be in the form of a one-time payment or an add-on to regular pay—generally 15 to 20 percent. Bonuses for managers who are asked to go into a particularly unstable country or one with a very low standard of living often receive hardship pay.

Managers can also be attracted by another income-related factor. For example, the U.S. government permits citizens working abroad to exclude $82,000 of "foreign-earned income" from their taxable income in the United States—even if it was earned in a country with no income tax. But earnings over that amount are subject to income tax, as are employee benefits such as free housing.

Culture also plays an important role in the compensation of expatriate managers. Some nations offer more paid holidays than others. Many offer free medical care to everyone living and working there. Granted, the quality of locally available medical care is not always good. Many companies, therefore, have plans to take seriously ill expatriates and family members home or to nearby countries where medical care is equal to that available in the home country.

Companies that hire managers in the local market might encounter additional costs engendered by social attitudes. For instance, in some countries employers are expected to provide free or subsidized housing. In others the government obliges employers to provide paid maternity leaves of up to one and a half years. Government-mandated maternity leaves vary significantly across European countries. Although not all such costs need to be absorbed by companies, they do tend to raise a country's cost of doing business.

AACSB: Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 16.1: Explain the three types of staffing policies that companies use.

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32) Citizens of one country who are living and working in another are called ________.

A) local employees B) domicile residents C) repatriates D) expatriates Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

33) CADE International, an MNC, adheres to an ethnocentric staffing approach when filling senior-level positions for its foreign locations. As a result, CADE most likely devotes significant resources to ________.

A) distributing products B) building effective supply chains C) selecting and training expatriate managers D) determining compensation for local employees Answer: C AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.2: Describe the key human resource recruitment and selection issues.

34) The process of forecasting both a company's human resource needs and its supply is called ________.

A) human resource planning B) human resource accounting C) recruitment D) selection Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

35) Which of the following is the first phase of human resource planning?

A) developing a plan to recruit and select people to fill vacant and anticipated new positions B) estimating the company's future human resource needs C) taking an inventory of the company's current human resources D) promoting employees to positions of greater responsibility Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

11 .

36) Which of the following phases of human resource planning involves decruitment?

A) normally occurs when a company decides to discontinue manufacturing or selling in a market.

B) estimating the company's future human resource needs C) taking an inventory of the company's current human resources D) promoting employees to positions of greater responsibility Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

37) Planning for decruitment normally occurs when a company ________.

A) discontinues manufacturing or selling in a market B) finds that current HR levels are lesser than anticipated needs C) plans to establish multiple foreign subsidiaries D) hires new executive leadership to implement a growth strategy Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

38) Which of the following terms is defined as the process of identifying and attracting a qualified pool of applicants for vacant positions?

A) orientation B) outsourcing C) recruitment D) selection Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

39) To help speed up the process of getting approvals for local operations, a firm would most likely benefit from hiring ________.

A) home-country managers from the company's headquarters B) managerial talent from the host country C) recent college graduates trained in the home country D) third-country expatriates with extensive experience in the field Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.2: Describe the key human resource recruitment and selection issues.

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40) ________ would most likely be recruited for non-managerial positions at foreign subsidiaries that do not require specialized skills.

A) Recent graduates from colleges in the home country B) Home-country specialists C) Workers from the local host-country market D) Current employees from the company headquarters Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

41) Companies typically recruit ________ to train individuals placed in more demanding nonmanagerial positions at foreign branches.

A) workers from the local market B) recent college graduates from the host country C) qualified third-party nationals D) specialists from the home country Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

42) The process of screening and hiring the best-qualified applicants with the greatest performance potential is called ________.

A) performance appraisal B) orientation C) recruitment D) selection Answer: D AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

43) ________ is the early return of an expatriate manager to the home country because of an inability to perform in the overseas assignment.

A) Culture shock B) Expatriate return C) Expatriate failure D) Managerial incompetence Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

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44) The psychological process of readapting to one's home culture after working in a hostcountry culture is called ________.

A) social loafing B) assimilation effect C) reverse culture shock D) expatriate failure Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

45) An expatriate manager who returns after a few years from an overseas assignment to find that there is no position for him in his home country office experiences a(n) ________.

A) reverse culture shock B) expatriate failure C) cognitive dissonance D) assimilation effect Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 16.2: Describe the key human resource recruitment and selection issues.

46) ________ is a psychological phenomenon that may lead to feelings of fear, helplessness, irritability, and disorientation.

A) Expatriate failure B) Repatriation C) Culture shock D) Depression Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

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47) John has been transferred to an office in Japan for a year. In his first few weeks, he began to feel confused and rejected as well as a sort of mourning for home. John is experiencing ________.

A) expatriate failure B) repatriation C) acculturation D) culture shock Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

48) Which of the following is most likely to occur in the honeymoon stage of culture shock?

A) New arrivals are fascinated by aspects of the new culture.

B) Individuals become annoyed by unpredictable quirks of the new culture.

C) Emotions hit rock bottom for visitors.

D) Visitors better understand and appreciate local customs and behavior.

Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

Scenario: You're Hired!

Erica Els has just been promoted as vice president of human resources for Hudson Foods, a U.S.based international frozen food corporation. Erica's first task is to staff the company's European subsidiary.

49) One challenge facing Hudson Foods as it expands into Europe is getting through all the bureaucratic and legal regulations surrounding the food industry. Erica plans to hire a manager to ensure that this challenge is overcome. Who among the following will Erica most likely recruit for this position?

A) a local manager with strong government contacts B) an experienced manager from the Hudson Foods U.S. headquarters C) a native of the target market who is a recent U.S. college graduate D) a candidate from the U.S. with extensive management experience in the frozen food industry Answer: A AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

15 .

50) The new subsidiary's production facilities will employ approximately 100 full-time nonmanagerial workers. Who among the following will Erica most likely recruit to fill these positions?

A) highly productive workers relocated from developing nations B) bilingual U.S. citizens who speak the language of the host country C) qualified workers from the local market D) workers from the American headquarters who are interested in gaining international experience Answer: C AACSB: Analytical thinking Skill: Application Difficulty: Hard LO: 16.2: Describe the key human resource recruitment and selection issues.

51) Culture shock affects an expatriate's job satisfaction level but does not tend to affect his or her effectiveness and productivity at work.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

52) The process of reducing the size of an organization's workforce is called decruitment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

53) The process of recruitment involves screening and hiring the best-qualified applicants with the greatest performance potential.

Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

54) To speed up the process of getting government approval for local operations, companies must hire home country nationals.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.2: Describe the key human resource recruitment and selection issues.

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55) Companies typically recruit locally for non-managerial positions.

Answer: TRUE AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

56) The process of identifying and attracting a qualified pool of applicants for vacant positions is called recruiting.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

57) Reverse culture shock is the trouble expatriates face while adjusting to a new environment in which they find themselves.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

58) Having the freedom to choose whether to accept or reject an expatriate assignment increases the likelihood a manager will be successful at the assignment.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

59) Expatriate failure refers to an employee's early return from an international assignment because of inadequate job performance.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.2: Describe the key human resource recruitment and selection issues.

60) The psychological process of readapting to one's home culture is seldom difficult for expatriates who have successfully adapted to new cultures.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.2: Describe the key human resource recruitment and selection issues.

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61) Reverse culture shock is much milder than the initial culture shock an expatriate faces.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.2: Describe the key human resource recruitment and selection issues.

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62) Describe the differences between human resource management in a domestic setting and an international setting, and explain the three phases of human resources planning.

Answer: Human resource management (HRM) is the process of staffing a company and ensuring that employees are as productive as possible. It requires managers to be effective in recruiting, selecting, training, developing, evaluating, and compensating employees and in forming good relationships with them.

International HRM differs considerably from HRM in a domestic setting because of differences in national business environments. There are concerns over the employment of expatriates— citizens of one country who are living and working in another. Companies must deal with many issues when they have expatriate employees on job assignments that could last several years.

Some of these issues are related to the inconvenience and stress of living in an unfamiliar culture.

Training and development programs must often be tailored to local practices. Some countries, such as Germany and Japan, have extensive vocational-training schools that turn out graduates ready to perform their jobs proficiently. Finding well-qualified nonmanagerial workers in those markets is relatively easy. By contrast, developing a production facility in many emerging markets requires far more basic training of workers. For example, workers in China work hard and tend to be well educated. But because China lacks an advanced vocational training system like those in Germany and Japan, Chinese workers tend to require more intensive on-the-job training. Recruitment and selection practices must also be adapted to the host nation's hiring laws. Hiring practices regarding nondiscrimination among job candidates must be carefully monitored so that the company does not violate such laws. And companies that go abroad to lower labor expenses then adjust pay scales and advancement criteria to suit local customs.

Recruiting and selecting managers and workers requires human resource planning—the process of forecasting a company's human resource needs and its supply. The first phase of HR planning involves taking an inventory of a company's current human resources—that is, collecting data on every employee, including educational background, special job skills, previous jobs, language skills, and experience living abroad.

The second phase of HR planning is estimating the company's future HR needs. For example, consider a firm that plans to sell its products directly to buyers in a new market abroad.

Likewise, manufacturing or assembling products in an international market requires factory workers. A company must decide whether to hire these people itself or to subcontract production to other producers—thus eliminating the need for it to hire factory workers.

In the third phase of HR planning, managers develop a plan for recruiting and selecting people to fill vacant and anticipated new positions, both managerial and nonmanagerial. Sometimes, a firm must also make plans for reducing its workforce—a process called decruitment—when current HR levels are greater than anticipated needs. Planning for decruitment normally occurs when a company decides to discontinue manufacturing or selling in a market. Unfortunately, the decision by global companies to shift the location of manufacturing from one country to another can also result in lost jobs.

AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 16.2: Describe the key human resource recruitment and selection issues.

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63) Explain why a person's ability to bridge cultural differences must be considered during "selection" for international assignments. How can e-Training help in bridging cultural differences?

Answer: The process of screening and hiring the best-qualified applicants with the greatest performance potential is called selection. The process for international assignments includes measuring a person's ability to bridge cultural differences. Expatriate managers must be able to adapt to a new way of life in the host country. Conversely, native host-country managers must be able to work effectively with superiors who have different cultural backgrounds.

In the case of expatriate managers, cultural differences between home country and host country are important factors in their potential success. Culturally sensitive managers increase the likelihood that a company will achieve its international business goals. Recruiters can assess cultural sensitivity by asking candidates questions about their receptiveness to new ways of doing things and questions about racial and ethnic issues. They can also use global aptitude tests.

It is also important to examine the cultural sensitivity of each family member who will be going to the host country. The ability of a family member to adapt to a new culture can be a key factor in the success or failure of an expatriate manager.

Some of the many costs of relocating an employee for a long-term international assignment include moving expenses and ongoing costs for things such as housing, education, and cost-ofliving adjustments. That is why many companies realize the need for in-depth training and development programs if they are to get the maximum productivity from managers posted abroad.

As companies increasingly reach out to the world to obtain services, they are turning to online training (e-Training) programs that teach skills immediately relevant to employees' jobs. These include administrative training, human resources training, compliance training, and frontline issues such as the consumer benefits of a new product. The appeal of e-Training to international companies is its consistency: e-Training delivers a consistent message in the same way to an infinite number of employees. By contrast, employees receiving other types of training in diverse settings worldwide can go away with many different perceptions or biases. Workplace eTraining is not perfect: it can be difficult to engage people online and to teach soft skills, such as appropriate facial expressions and tone of voice. But its ability to flexibly train large groups costeffectively makes it a viable alternative to traditional training methods.

AACSB: Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 16.2: Describe the key human resource recruitment and selection issues.

64) Which of the following constitutes the most basic level of training to prepare managers for international assignments?

A) environmental briefings B) language training C) cultural assimilation D) field experience Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

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65) A manager could most likely gain information on a local area's housing, health care, transportation, schools, and climate by participating in ________.

A) language training B) environmental briefings C) field experience D) sensitivity training Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

66) Which of the following offers insight into a host country's political, legal, economic, and social institutions as a way of enhancing environmental briefings?

A) language training B) field experience C) sensitivity training D) cultural orientation Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

67) Which of the following is the correct order of the different methods of cultural training from the least advanced to the most advanced?

A) environmental briefings; language training; cultural orientations B) cultural orientations; field experience; language training C) cultural assimilation; language training; field experience D) sensitivity training; cultural orientations; field experience Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

68) ________ teaches an expatriate a culture's values, attitudes, manners, and customs.

A) Cultural assimilation B) Cultural orientation C) Language training D) Cultural environmentalism Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

21 .

69) Which of the following methods of cultural training involves the use of guerilla linguistics?

A) cultural orientation B) language training C) cultural assimilation D) cultural narcissism Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

70) Which of the following trains managers to be considerate and understanding of other people's feelings and emotions?

A) cultural orientation B) sensitivity training C) language training D) cultural narcissism Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

71) Which of the following training approaches involve employees visiting another culture, walking the streets of its cities and villages, and becoming absorbed by the culture for a short time?

A) language training B) field experience C) sensitivity training D) cultural orientation Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

22 .

72) Which of the following international assignment preparation methods involves a trainee feeling the stresses inherent in living in the culture?

A) language training B) field experience C) sensitivity training D) cultural orientation Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

Scenario: Gem Jewels Gem Jewels recently established a number of subsidiaries in various foreign countries aiming to build high levels of international business involvement in the coming years. Cultural training has to be given by the company to home-country managers assigned to work in the new subsidiaries.

73) The most basic level of training that can be given to the managers is ________.

A) language training B) field experience C) sensitivity training D) environmental briefings Answer: D AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

74) If Gem Jewels wants its employees to get "under the skin" of the local people, it should provide ________.

A) language training B) sensitivity training C) cultural orientations D) field experience Answer: B AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

23 .

75) If Gem Jewels wants its employees to get "into the minds" of the local people, it should provide ________.

A) language training B) sensitivity training C) cultural orientations D) environmental briefings Answer: A AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

76) To teach its employees the values, attitudes, manners, and customs of the host-country culture, Gem Jewels should offer ________.

A) language training B) environmental briefings C) cultural assimilation D) field experience Answer: C AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

Scenario: Mr. Yoshimura Goes to Tennessee Mr. Yoshimura, vice president of quality control at Oshimura Yarn, has recently been assigned to a three-year project at the company's Tennessee plant. Mr. Yoshimura has brought his wife and his three daughters with him from Yokohama to Tennessee.

77) Mr. Yoshimura and his family were initially very excited to see Tennessee but soon started missing their home, relatives and friends in Japan. They are facing ________.

A) culture shock B) reverse culture shock C) expatriate failure D) cultural cringe Answer: A AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.3: Summarize the main training and development programs that firms use.

24 .

78) Mr. Yoshimura's daughters are extremely unhappy and have been complaining every night about their lifestyle in the United States. They insist on returning to Japan. If Mr. Yoshimura gives in to his family members' pleas and decides to return home, which of the following will most likely be true about his experience?

A) He and his family will experience reverse culture shock.

B) He will leave his company within one year of returning home.

C) His case will represent an instance of expatriate failure.

D) He will be terminated from employment for failing to complete his assignment.

Answer: C AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.3: Summarize the main training and development programs that firms use.

79) If the family finds it difficult to adjust on returning to Japan after three years, they will experience ________.

A) social loafing B) reverse culture shock C) expatriate failure D) halo effect Answer: B AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.3: Summarize the main training and development programs that firms use.

Scenario: You're Hired!

Erica Els has just been promoted as vice president of human resources for Hudson Foods, a U.S.based international frozen food corporation. Erica's first task is to staff the company's European subsidiary.

80) One lower-level position Erica must fill requires the employee to be familiar with the new market and its customs, traditions, and language. Also, the new hire must be comfortable with Hudson Food's organizational culture and business traditions. Who among the following will Erica most likely recruit for this position?

A) a local fresher with strong government contacts B) an existing Hudson Foods employee from the United States C) a native of the target market who has completed a one-year internship at Hudson Foods D) an individual from the U.S. who has experience in the frozen food industry Answer: C AACSB: Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.3: Summarize the main training and development programs that firms use.

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81) Guerrilla linguistics is often used in the cultural assimilation stage.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

82) Sensitivity training constitutes the most basic level of cultural training for managers on international assignments.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.3: Summarize the main training and development programs that firms use.

83) Training local workers on how to work on an assembly line is an example of cultural assimilation.

Answer: FALSE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.3: Summarize the main training and development programs that firms use.

26 .

84) Explain the advantages and disadvantages of a geocentric staffing policy, and discuss the effects of culture shock when assigning an employee to work in another country.

Answer: In geocentric staffing, the best-qualified individuals, regardless of nationality, manage operations abroad. The local operation may choose managers from the host country, from the home country, or from a third country. The choice depends on the operation's specific needs.

This policy is typically reserved for top-level managers.

Geocentric staffing helps a company develop global managers who can adjust easily to any business environment—particularly to cultural differences. This advantage is especially useful for global companies trying to break down nationalistic barriers, whether between managers in a single office or between different offices. One hope of companies using this policy is that a global perspective among its managers will help them seize opportunities that may otherwise be overlooked.

The downside of geocentric staffing is the expense. Understandably, top managers who are capable both of fitting into different cultures and being effective at their jobs are highly prized among international companies. The combination of high demand for their skills and their short supply inflates their salaries. Moreover, there is the expense of relocating managers and their families—sometimes every year or two.

Living in another culture can be a stressful experience. Selecting managers comfortable traveling to and living in unfamiliar cultures, therefore, is an extremely important factor when recruiting for international posts. Set down in the midst of new cultures, many expatriates experience culture shock—a psychological process affecting people living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression. In other words, they have trouble adjusting to the new environment in which they find themselves. Expatriate failure—the early return by an employee from an international assignment because of inadequate job performance—often results from cultural stress. The higher cost of expatriate failure is convincing many companies to invest in cultural-training programs for employees sent abroad.

AACSB: Diverse and multicultural work environments Skill: Synthesis Difficulty: Hard LO: 16.3: Summarize the main training and development programs that firms use.

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85) Differentiate between culture shock and reverse culture shock. How can companies help employees deal with such issues?

Answer: Successful international managers typically do not mind, and often enjoy, living and working outside their native lands. In extreme cases, they might even be required to relocate every year or so. These individuals are capable of adapting quickly to local conditions and business practices. Such managers are becoming increasingly valuable with the emergence of markets in Asia, Central and Eastern Europe, and Latin America. They are also helping to create a global pool of managers who are ready and willing to go practically anywhere on short notice.

The size of this pool, however, remains limited because of the difficulties that many people experience in relocating to unfamiliar cultures.

Living in another culture can be a stressful experience. Selecting managers comfortable traveling to and living in unfamiliar cultures, therefore, is an extremely important factor when recruiting for international posts. Set down in the midst of new cultures, many expatriates experience culture shock—a psychological process affecting people living abroad that is characterized by homesickness, irritability, confusion, aggravation, and depression. In other words, they have trouble adjusting to the new environment in which they find themselves. Expatriate failure—the early return by an employee from an international assignment because of inadequate job performance—often results from cultural stress. The higher cost of expatriate failure is convincing many companies to invest in cultural-training programs for employees sent abroad.

Ironically, expatriates who successfully adapt to new cultures often undergo an experience called reverse culture shock—the psychological process of readapting to one's home culture. Because values and behavior that once seemed so natural now seem so strange, reverse culture shock may be even more disturbing than culture shock. Returning managers often find that either no position or merely a "standby" position awaits them in the home office. Companies often do not know how to take full advantage of the cross-cultural abilities developed by managers who have spent several potentially valuable years abroad. It is not uncommon for expatriates to leave their companies within a year of returning home because of difficulties blending back into the company culture. Moreover, spouses and children often have difficulty leaving the adopted culture and returning home.

The effects of reverse culture shock can be reduced. Home-culture reorientation programs and career-counseling sessions for returning managers and their families can be highly effective. For example, the employer might bring the entire family home for a short stay several weeks before the official return. This kind of trip allows returnees to prepare for at least some of the reverse culture shock that may await them.

Good career development programs can help companies retain valuable managers. Ideally, the career development plan was worked out before the employee went abroad and revised before his or her return. Some companies work with employees before they go abroad to plan career paths of up to 20 years within the company. Mentors who have previously gone abroad and had to adjust on returning home can also be assigned to returning managers. The mentor becomes a confidant with whom the expatriate manager can discuss particular problems related to work, family, and readjusting to the home culture.

AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.3: Summarize the main training and development programs that firms use.

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86) ________ is the process of staffing a company and ensuring that employees are as productive as possible.

A) Business process reengineering B) Human resource management C) Organizational diagnostics D) Industrial relations Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.4: Explain how companies compensate managers and workers.

87) The most common inducement that companies offer managers to accept international postings is ________.

A) fringe benefits B) a financial bonus C) a vacation D) free housing Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.4: Explain how companies compensate managers and workers.

88) Managers who are asked to go into a particularly unstable country or one with a very low standard of living often receive a bonus called ________.

A) hardship pay B) performance-related pay C) stock options D) fringe benefits Answer: A AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.4: Explain how companies compensate managers and workers.

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89) Which of the following is true of employee compensation in international companies?

A) The most common inducement that companies offer managers to accept international postings is free accommodation.

B) Companies need not cover the costs incurred by expatriate managers if the cost of living abroad is lower than that at home.

C) The greater mobility of labor affects the wages of non-managerial workers today.

D) Managers recruited from within the host country generally receive a much higher pay and lower perks than managers who work for local companies.

Answer: C AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

90) The compensation of non-managerial workers is strongly influenced by increased crossborder business investment.

Answer: TRUE AACSB: Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

91) Decentralizing the decisions that directly impact workers' lives contribute to better labor— management relations.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

92) Codetermination allows labor representatives to participate in high-level company meetings.

Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.4: Explain how companies compensate managers and workers.

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93) Compare and contrast the methods of cultural training. Is any single method better than all the others?

Answer: Environmental Briefings and Cultural Orientations—Environmental (area) briefings constitute the most basic level of training—often the starting point for studying other cultures.

Briefings include information on local housing, health care, transportation, schools, and climate.

Such knowledge is normally obtained from books, films, and lectures. Cultural orientations offer insight into social, political, legal, and economic institutions. Their purpose is to add depth and substance to environmental briefings.

Cultural Assimilation and Sensitivity Training—Cultural assimilation teaches the culture's values, attitudes, manners, and customs. So-called guerrilla linguistics, which involves learning some phrases in the local language, is often used at this stage. It also typically includes role-play exercises: the trainee responds to a specific situation to be evaluated by a team of judges. This method is often used when someone is given little notice of a short stay abroad and wishes to take a crash course in social and business etiquette and communication. Sensitivity training teaches people to be considerate and understanding of other people's feelings and emotions. It gets the trainee "under the skin" of the local people.

Language Training—The need for more thorough cultural preparedness leads to intensive language training. This level of training entails more than memorizing phrases for ordering dinner or asking directions. It gets a trainee "into the mind" of local people. The trainee learns more about why local people behave as they do. This is perhaps the most critical part of cultural training for long-term assignments.

Field Experience—Field experience means visiting the culture, walking the streets of its cities and villages, and becoming absorbed by it for a short time. The trainee gets to enjoy some of the unique cultural traits and feel some of the stresses inherent in living in the culture. An expatriate's spouse and children also need cultural training. Training for them is a good investment because the alternatives—an international "commuter marriage" or expatriate failure—are both psychologically and financially expensive options.

AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

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94) Briefly explain how companies compensate managers in international markets.

Answer: Compensation packages for managers differ from company to company and from country to country. Good packages are fairly complicated to design, for several reasons. If the effect of cost of living is considered, which includes factors such as the cost of groceries, dining out, clothing, housing, schooling, health care, transportation, and utilities, it can be assumed that it costs more to live in some countries than in others. Moreover, within a given country, the cost of living typically varies from large cities to rural towns and villages. Most companies add a certain amount to an expatriate manager's pay to cover greater cost-of-living expenses. On the other hand, managers who are relocating to lower cost-of-living countries are typically paid the same amount that they were receiving at the home office—otherwise, they would be financially penalized for accepting an international job assignment.

Companies must cover other costs incurred by expatriate managers even when the cost of living abroad is lower than at home. One important concern for relocating managers is the quality of local education. In many cases, children cannot immediately enter local classes because they do not speak the local language. In such instances, most companies pay for private-school education Bonus and Tax incentives: Companies commonly offer managers inducements to accept international postings. The most common is a financial bonus. This bonus can be in the form of a one-time payment or an add-on to regular pay—generally 15 to 20 percent. Bonuses for managers who are asked to go into a particularly unstable country or one with a very low standard of living often receive hardship pay.

Managers can also be attracted by another income-related factor. For example, the U.S. government permits citizens working abroad to exclude $82,000 of "foreign-earned income" from their taxable income in the United States—even if it was earned in a country with no income tax. But earnings over that amount are subject to income tax, as are employee benefits such as free housing.

Cultural and Social Contributions to Cost-Culture also plays an important role in the compensation of expatriate managers. Some nations offer more paid holidays than others. Many offer free medical care to everyone living and working there. Granted, the quality of locally available medical care is not always good. Many companies, therefore, have plans to take seriously ill expatriates and family members home or to nearby countries where medical care is equal to that available in the home country.

Companies that hire managers in the local market might encounter additional costs engendered by social attitudes. For instance, in some countries employers are expected to provide free or subsidized housing. In others the government obliges employers to provide paid maternity leaves of up to one and a half years. Government-mandated maternity leaves vary significantly across European countries. Although not all such costs need to be absorbed by companies, they do tend to raise a country's cost of doing business.

Managers recruited from within the host country generally receive the same pay as managers who work for local companies. Yet they often receive perks not offered by local firms. And some managers are required to visit the home office at least several times per year. If time allows, many managers will make these into short vacations by taking along their families and adding a few extra days onto the length of the trip.

AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

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95) What factors influence the wages of non-managerial workers?

Answer: Two main factors influence the wages of non-managerial workers. First, their compensation is strongly influenced by increased cross-border business investment. Employers can relocate fairly easily to nations where wages are lower. In the home country, meanwhile, workers must often accept lower wages when an employer gives them a choice of accepting the reduction or watching their jobs move abroad. This situation is causing a trend toward greater equality in workers' pay around the world. This equalizing effect encourages economic development and improvement in workers' lives in some nations at the expense of workers in other nations. The freedom with which an employer can relocate differs from country to country, however. Although firms in some countries are allowed to move with little notice, in others they are highly restricted. Some countries force companies to compensate workers who lose their jobs because of relocation. This policy is common in European countries that have erected extensive social safety nets for unemployed workers.

Second, the greater mobility of labor today affects wages. Although labor laws in Europe are still more stringent than in the United States, the countries of the European Union are abolishing the requirement that workers from one EU nation must obtain visas to work in another. If workers in Spain cannot find work at home or if they feel that their current pay is inadequate, they are free to move to another EU country where unemployment is lower (say, Britain). A problem that plagues some European countries today is that they seem to be creating a group of people who are permanently unemployed.

AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 16.4: Explain how companies compensate managers and workers.

96) The positive or negative condition of relations between employers and their workers is referred to as ________.

A) international relations B) labor-management relations C) corporatism D) organizational hierarchy Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 16.5: Describe the importance of labor-management relations.

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97) Large international companies tend to make high-level labor decisions at the home office because ________.

A) it creates a sense of unity and solidarity between the labor unions and management members B) managers in the home office are better equipped than managers in the host-country office, to handle matters that affect workers personally C) it places decisions that have a direct impact on host-country workers' lives in the hands of the home-country experts D) it gives them greater control over their network of operations around the world Answer: D AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.5: Describe the importance of labor-management relations.

98) ________ allows labor representatives in Germany to participate in high-level company meetings by actually voting on proposed actions.

A) Centralization B) Codetermination C) Individualism D) Authoritarianism Answer: B AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Easy LO: 16.5: Describe the importance of labor-management relations.

Scenario: Swingset International Jerome Johnston, the human resource manager at the U.S.-based Swingset International, is developing an international staffing policy for the company. Jerome personally believes Swingset should send managers from the United States to manage each subsidiary. But the CEO of the company, Valerie Vermont, believes subsidiary operations ought to be managed by individuals from the host country.

99) Which of the following is a drawback of Jerome's staffing approach?

A) expense to relocate managers B) potential for losing control of the host-country operations C) potential for losing control of the home-country operations D) inability to re-create local operations in the image of the home-country operations Answer: A AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.5: Describe the importance of labor-management relations.

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100) An important advantage of the staffing policy recommended by Valerie is that it ________.

A) re-creates local operations in the image of home-country operations B) eliminates the high cost of relocating expatriate managers and families C) helps the company develop global managers who can adjust easily to any business environment D) sends managers from home to look out for the company's interests Answer: B AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.5: Describe the importance of labor-management relations.

101) A major drawback of the staffing policy recommended by Valerie is ________.

A) the potential for losing control of the host-country operations B) the necessity of depending on managers who don't know the local culture C) the potential for creating legal barriers to host-country operations D) the high cost of training managers in the language of the host country Answer: A AACSB: Analytical thinking; Diverse and multicultural work environments Skill: Application Difficulty: Hard LO: 16.5: Describe the importance of labor-management relations.

102) What challenges do international labor unions face as they try to accomplish their objectives?

Answer: The global activities of unions are making progress in areas such as improving the treatment of workers and reducing incidents involving child labor. But the efforts of separate national unions to increase their cooperation are somewhat less successful. Although unions in one nation might want to support their counterparts in another country, generating grassroots support is difficult for two reasons. First, events taking place in another country are difficult for many people to comprehend. Distance and cultural difference make it hard for people to understand others who live and work elsewhere.

Second, whether they realize it or not, workers in different countries sometimes compete against one another. For example, today firms can relocate internationally rather easily. Thus, labor unions in one country might offer concessions to attract the jobs that will be created by a new production facility. In this way, unions in different nations can wind up competing against one another. Some observers argue that this phenomenon creates downward pressure on both wages and union power worldwide.

AACSB: Application of knowledge; Diverse and multicultural work environments Skill: Concept Difficulty: Moderate LO: 16.5: Describe the importance of labor-management relations.

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