Becoming Global

Question 1

Define a “greenfield venture”.

Answer 1

A Greenfield venture is a new, wholly-owned subsidiary established in a foreign country.

Question 2

Identify the 5 primary ways an entity may engage in international business activity.

Answer 2

The alternative ways of engaging in international business activity include:

1. Importing/Exporting;
2. Foreign licensing;
3. Foreign franchising;
4. Forming a foreign joint venture;
5. Creating or acquiring a foreign subsidiary.

Question 3

Identify the advantages of a wholly-owned (100%) foreign subsidiary.

Answer 3

Advantages: Gives the parent entity security of assets and proprietary information, and ability to control and coordinate activities of the subsidiary entity.

Question 4

Identify the disadvantages of a wholly-owned (100%) foreign subsidiary.

Answer 4

Disadvantages: A costly means of undertaking international business and parent has entire cost and risk of the undertaking.

Question 5

Define “exporting”.

Answer 5

The production of goods or services in a domestic economy (home country) and selling them in another country.

Question 6

Define “importing”.

Answer 6

The purchase of goods or services produced in another country (host country) for use in the domestic economy (home country).

Question 7

The most elementary form of international business involves selling abroad (___) and/or buying abroad (___).

Answer 7

exporting; importing

Question 8

Exporting can provide the following 3 benefits:

Answer 8

1. Help an entity increase sales and domestic output and, thereby, achieve economies of scale in its home country;
2. Avoid the substantial cost of establishing production facilities in a foreign country and the problems associated with such an operation, yet tap the sales potential in foreign markets;
3. Provide a means for an entity to achieve experience in engaging in international business, including an understanding of differences in culture and taste, legal and administrative procedures, operating methodologies, and the like.

Question 9

Importing can provide the following 3 benefits:

Answer 9

1. Provide goods not otherwise available, or only available in limited quantities, in the home country (e.g., oil, precious metals, etc.);
2. Provide goods comparable to those provided in the home country, but at a lower cost due to comparative advantages in the foreign country;
3. Provide goods of better quality than similar goods produced in the home country due to better technology or skills in the foreign country.

Question 10

Define “Foreign licensing”.

Answer 10

Foreign licensing grants a foreign entity (the licensee) the right to use intangible property (patents, copyrights, trademarks, formulas, etc.) in return for a royalty based on sales or other agreed measure.

Question 11

Licensing can provide the following benefits:

Answer 11

1. Increased revenue through receipt of royalties;
2. Avoid costs and risks associated with opening operations in a new foreign market;
3. Avoid trade barrier issues in the foreign country.

Question 12

Exporting and Importing can have the following disadvantages:

Answer 12

1. Cost of transportation may make the total cost of importing or exporting too burdensome to warrant its use;
2. Existence of trade barriers in the form of quotas or tariffs in the home country and/or the host country may constrain the extent to which importing and exporting are appropriate.

Question 13

Disadvantages of foreign licensing include ?

Answer 13

1. Foreign licensee may misuse access to the home entity’s patents, technological processes, or other proprietary information;
2. Licensor (home country entity) may not have control over the manufacturing, marketing, distribution and customer service consistent with its standards and as needed for maximum results;
3. Licensee may not have the management and technical capabilities to fully realize the benefits of the license.

Question 14

Define “foreign franchising”.

Answer 14

Foreign franchising is a special form of licensing in which the franchisor not only sells intangible property (e.g., a trademark) to a foreign franchisee, but also mandates strict operating requirements for the franchisee.

Question 15

___ ___ is used primarily in service and retail areas (e.g., hotels, restaurants, etc.).

Answer 15

Foreign franchising

Question 16

Define “joint venture”

Answer 16

A joint venture entity is established and jointly owned by two or more otherwise unrelated entities. In an international context, at least one of the owners is located in the foreign country in which the joint venture is established.

Question 17

What are the disadvantages of foreign franchising?

Answer 17

Franchising can have the following disadvantages:

1. Possibility of foreign franchisee misusing proprietary information;
2. Quality controls of franchisee may not meet the standards of the franchisor.

Question 18

What are the advantages of foreign franchising?

Answer 18

Franchising can provide the following benefits, which are similar to those of foreign licensing:

1. Provide increased revenue through receipt of royalties;
2. Avoid costs and risks of opening facilities in a foreign market.

Question 19

What are the advantages of joint ventures?

Answer 19

Joint ventures can have the following benefits:

1. Host country co-owner (partner) has knowledge of the local customs, language, political system, business environment and competitive conditions;
2. Costs and risk associated with entering the foreign market are shared with one or more other parties;
3. Resistance from the local political system, labor, and other business may be less likely when there is a local stakeholder.

Question 20

What are the disadvantages of joint ventures?

Answer 20

Joint ventures can have the following disadvantages:

1. Foreign (host country) co-owner may misuse access to another partner’s patents, technological processes, or other proprietorship information;
2. Domestic (home country) entity does not have absolute control over the joint venture entity, which may prevent the domestic entity from integrating the joint venture into its overall strategy;
3. Shared ownership arrangement can lead to differences over goals, objectives and strategy, and may result in conflicts and battles for control.

Question 21

As the title implies, the use of a ___ ___ ___ involves the home country entity owning 100% of a foreign entity over which it has complete control.

Answer 21

wholly-owned subsidiary

Question 22

As the title implies, the use of a wholly-owned subsidiary involves the home country entity owning 100% of a foreign entity over which it has complete control. This may be accomplished in two ways: ?

Answer 22

1. Acquiring an entity already established in the foreign country;
2. Establishing a new entity in the foreign country

Question 23

When the protection of patents, technological processes and other proprietary information is important, an entity should generally avoid the use of ___ and ___ ___.

Answer 23

licensing and joint ventures.

Question 24

When there is foreign opposition to the establishment of an operation in the country, use of a ___ ___ may avoid some of the resistance that a wholly-owned subsidiary may encounter.

Answer 24

joint venture

Question 25

When the home country entity is pursuing a global strategy, use of a ___ ___ ___ may provide the needed integration and operational control not available in other forms of entry into a foreign location.

Answer 25

wholly-owned subsidiary

Question 26

When there is a need to minimize cost or risk in establishing foreign operations, the use of ___ and/or ___ may be desirable.

Answer 26

licensing and/or franchising

Question 27

Formation of a ___ ___ ___ to conduct a business operation may mitigate foreign local opposition to the operation.

Answer 27

foreign joint venture

Question 28

Establishing a new entity in a foreign country is called a ___ ___.

Answer 28

“Greenfield” venture.

Question 29

Franchising is a form of ___.

Answer 29

licensing.

Question 30

Goods with a high value-to-weight ratio are ___ likely to be imported than goods with a low value-to-weight ratio.

Answer 30

less

Question 31

Cost of ___ can determine the economic feasibility of importing or exporting.

Answer 31

transportation

Question 32

___ ___ generally avoids trade barrier restrictions.

Answer 32

Foreign licensing

Question 33

Cultural differences should be a consideration in assessing the potential ___ of a foreign entity.

Answer 33

acquisition

Question 34

Exporting can help a domestic entity achieve ___ ___ ___.

Answer 34

economies of scale.

Question 35

___ to a foreign entity is a form of international business.

Answer 35

Licensing

Question 36

A foreign ___ is most likely to give an entity greatest control over an international business activity.

Answer 36

subsidiary