Chapter 12

Question 1

Entry Modes

Answer 1

• Exporting
• Licensing
• Turnkey Projects
• Franchising
• Joint Venture
• Wholly Owned Subsidiary

Question 2

Exporting Advantages

Answer 2

1. avoids costs of establishing operations in host country.
2. exporting may help a firm achieve experience curve and location economies.

Question 3

Exporting Disadvantages

Answer 3

1. not appropriate of there are lower-cost locations for manufacturing the product abroad.
2. transport costs
3. tariff barriers
4. foreign agents often carry the products of competing firms and so have divided loyalties.

Question 4

Turnkey Projects

Answer 4

Occur when a contractor handles all details of a project for a foreign client, including the train of operating personnel.

At the completion of the contract, the foreign client is handed the “key” to the plant that is ready for full operation.

Question 5

Turnkey Projects Advantages

Answer 5

great economic benefits from a technologically complex project where FDI is limited.

Question 6

Turnkey Projects Disadvantages

Answer 6

no long term interest in the foreign market and creating a competitor.

Question 7

Licensing Advantages

Answer 7

firm does not have to bear developmental costs and risks

appropriate for markets where it would be prohibited by barriers to investment.

Question 8

Licensing Disadvantages

Answer 8

no control and gives away corporate secrets

Question 9

Franchising Advantages

Answer 9

franchisee assumes all the costs and risks

Question 10

Franchising Disadvantages

Answer 10

• Franchisee-Franchisor conflicts
• Brand image risk
• market saturation
• renewal and exit restrictions
• loss of control

Question 11

Joint Venture Advantages

Answer 11

• benefits from local partner’s knowledge of host country’s competitive environment
• Shared costs and risks
• Sometimes is the only feasible entry mode

Question 12

Joint Venture Disadvantages

Answer 12

• firm risks giving control of its technology to its partner
• lack of control over subsidiary needed tp realize experience curve or location economies.
• shared ownership arrangements can lead to conflicts over control.

Question 13

Wholly Owned Subsidiary

Answer 13

Occurs when a firm owns 100% of its stock

1. Firm can either set up a new operation in the host country (greenfield venture) or;
2. Firm acquires or merges with established firm in the host nation and uses that firm to promote its products

Question 14

WOS Advantages

Answer 14

reduced risk of losing control over technological competence necessary for engaging in global experience curve economies.

Question 15

WOS Disadvantages

Answer 15

• most costly method of entry
• firms bear all costs and risks
• firms have to learn about new cultures or acquire enterprises in host country.

Question 16

Selecting an Entry Mode

Answer 16

1. Core Competencies and Entry Mode
   - Technological Know-How
   -Management Know-How
2. Pressures for Cost Reduction and Entry Mode
   - Greater the pressure for cost reduction, the more likely the firm will pursue a combination or exporting and wholly owned subsidiaries.
   - Firms strategy plays an important part when choosing an entry mode.

Question 17

Why do Acquisitions Fail?

Answer 17

1. Acquiring firms often overpay for the assets of purchased firm. Price of the target firm can get bid up if more than 1 firm is interested in its purchase, as is often the case.
2. Clash between cultures.