Chapter 14

International Business: The New Realities, 4e (Cavusgil)
Chapter 14 Foreign Direct Investment and Collaborative Ventures
1) Which of the following is a trend seen in the modern international economy?

A) Firms from both advanced and emerging economies employ FDI.
B) Emerging markets are the sole recipient countries for FDI.
C) Companies primarily use acquisitions to enter foreign markets.
D) Firms in the service sector use e-commerce exclusively to enter foreign markets.
Answer: A
Diff: 2: Moderate
Skill: Concept
Objective: 14-1: Understand international investment and collaboration
AACSB: Analytical Thinking
ABC Appliance (Scenario)

The ABC Appliance Corporation is a Florida-based manufacturer of refrigerators, dishwashers,
and other large household appliances. ABC takes advantage of NAFTA, and as a result, the firm
has loyal customers across North America. ABC managers would like to expand into the Asian
market, but are unsure of the best way to do so. ABC managers are meeting to discuss various
possibilities for entering the Asian market.
2) Which of the following questions would most likely be important for ABC managers to
evaluate as they consider expanding into the Asian market?
A) What U.S. firms have successfully partnered with Asian companies?
B) Where will ABC management locate the staff needed to oversee an Asian plant?
C) How much control does ABC management want to have over their Asian operations?
D) What are the pricing strategies followed by competitor firms in Asia?
Answer: C
Diff: 3: Hard
Skill: Critical Thinking
AACSB: Analytical Thinking; Environments and Reflective Thinking
1
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3) Which of the following most likely supports a decision to enter the Asian market by building a
factory near Tokyo?
A) Executives at ABC want the firm to have the flexibility to reconfigure operations at the
Japanese plant.
B) The Japanese yen has been fluctuating over the last year and analysts do not anticipate it
settling down.
C) ABC managers want to delegate responsibility of much of the Japanese plant to local
intermediaries.
D) The CEO of ABC is willing to invest a large amount of capital and other assets to ensure
success in Japan.
Answer: D
Diff: 3: Hard
4) Which of the following most likely supports a decision to enter the Asian market through a
project-based, non-equity collaborative venture with an Asian appliance manufacturer to create
an environmentally-friendly dishwasher?
A) Asian firms have offered to pool their resources with ABC to create a new legal entity.
B) Managers of both firms have decided not to seek ownership, rather they have decided to pool
resources.
C) ABC managers have the financial resources to quickly build a new Asian plant.
D) The Asian government has offered incentives to ABC if the firm builds a plant.
Answer: B
Diff: 3: Hard
5) FDI is the most advanced and complex foreign market entry strategy.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
6) A form of collaboration between two firms to form a new, jointly owned enterprise is defined
as a joint venture.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
2
7) Foreign direct investment is the least risky entry strategy.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
8) International portfolio investment refers to a firm's direct control of foreign operations and is
an equity-based method of foreign market entry.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
9) FDI is also known as international portfolio investment.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
10) International portfolio investment refers to passive ownership of foreign securities.

Answer: TRUE
Diff: 1: Easy
Skill: Concept
3
11) Explain why FDI is a particularly risky foreign entry strategy. How is FDI different from
international portfolio investment?
Answer: Foreign direct investment (FDI) is an internationalization strategy where the firm
establishes a physical presence abroad through direct ownership of productive assets such as
capital, technology, labor, land, plant, and equipment.
FDI is the most advanced and complex foreign market entry strategy. It entails establishing
manufacturing plants, marketing subsidiaries, or other facilities in target countries. Because this
involves investing substantial resources to establish a physical presence abroad, FDI is riskier
than other entry strategies.
International portfolio investment refers to passive ownership of foreign securities, such as
stocks and bonds, for the purpose of generating financial returns. International portfolio
investment is a form of international investment, but it is not FDI, which seeks ownership control
of a business abroad and represents a long-term commitment. The United Nations uses the
benchmark of at least 10 percent ownership in the enterprise to differentiate FDI from portfolio
investment. However, this percentage may be misleading, because control is not usually
achieved unless the investor owns at least 50 percent of a foreign venture.
Diff: 3: Hard
Skill: Concept
12) International portfolio investment is characterized by ________.

A) short-term foreign market speculation
B) long-term administration of MNE stocks
C) active control of a foreign business
D) passive ownership of foreign stocks and bonds
Answer: D
Diff: 1: Easy
Skill: Concept
Objective: 14-2: Describe the characteristics of foreign direct investment
13) Firms that anticipate close public scrutiny of their foreign operations often avoid potential
difficulties by ________.
A) locating in culturally similar countries
B) investing in international securities
C) hiring additional local personnel
D) diversifying their corporate activities
Answer: A
Diff: 2: Moderate
Skill: Concept
4
14) The rate of inflation is a(n) ________ factor to be considered while selecting the location for
FDI.
A) profit retention
B) market
C) infrastructural
D) human resource
Answer: A
Diff: 1: Easy
Skill: Concept
15) Which of the following must be considered in selecting foreign direct investment locations?
A) rate of inflation
B) tax rates for profit repatriation
C) stability of currency
D) all of the above
Answer: D
Diff: 1: Easy
Skill: Concept
16) Which of the following best explains why some service industry firms most likely enter
foreign markets through FDI?
A) The market abroad is saturated, therefore, the other entry strategies are most likely to fail.
B) The service of the firm requires tough intellectual property laws.
C) The service offered by the firm requires direct contact with customers.
D) The firm's service is not successful domestically, so globalization is required.
Answer: C
Diff: 2: Moderate
Skill: Concept
17) Which of the following best exemplifies corporate social responsibility?

A) a computer firm charging a high fee for recycling old computers
B) an automobile manufacturer selling low-fuel economy cars and trucks
C) a telecommunications firm charging high-rates to low-income customers
D) an automotive battery firm offering free technical training to students of a deprived
community
Answer: D
Diff: 2: Moderate
Skill: Application
5
18) Which of the following represents an infrastructural factor that firms must consider when
selecting an FDI location?
A) size and growth of national market
B) political stability
C) availability and quality of local manufacturing
D) stability of currency
Answer: C
Diff: 1: Easy
Skill: Concept
19) Which of the following represents a human resource factor that firms must consider when
selecting an FDI location?
A) intellectual property protection
B) transparency and corruption
C) extent of bureaucracy and red tape
D) involvement of labor unions
Answer: D
Diff: 1: Easy
Skill: Concept
20) The level of taxes in a country is a part of the ________ factor that is considered when
selecting an FDI location.
A) political
B) profit retention
C) market
D) infrastructural
Answer: B
Diff: 1: Easy
Skill: Concept
6
Ciao Manufacturing Location (Scenario)
An Italian car company, Ciao, has made plans to expand its operations by building a
manufacturing facility in a foreign market. Ciao has been very successful selling its small,
economical, and stylish cars in Italy and Spain, and firm managers believe that Ciao cars will be
equally profitable in other markets. Ciao managers are trying to determine whether Canada or
Russia would be the best location for a new automobile manufacturing facility.
21) Which of the following questions is most important for Ciao managers to evaluate in their
decision regarding the location of the new manufacturing facility?
A) What would be the costs and availability of skilled labor in Canada and Russia?
B) What other industries manufacture products in Canada and Russia?
C) How much time will it take to train managers in Canada and Russia?
D) How should the current marketing strategies be modified to serve markets in Canada and
Russia?
Answer: A
Diff: 3: Hard
Skill: Application
22) Which of the following most likely supports the decision by Ciao managers to build a plant
in Russia?
A) The Russian government is transparent and totally corruption-free.
B) Ciao would be able to take advantage of the North American Free Trade Agreement.
C) Intellectual property lawsuits are common in Russia.
D) Land and construction costs are relatively inexpensive in Russia.
Answer: D
Diff: 3: Hard
23) Which of the following should be considered in the decision regarding where to build a new
Ciao plant?
A) How many Ciao cars are sold in Italy and Spain each year?
B) What U.S. automakers are the biggest competitors of Ciao?
C) How politically stable are the governments of Russia and Canada?
D) How will Ciao managers handle the language barriers in foreign markets?
Answer: C
Diff: 3: Hard
7
24) FDI is the least taxing entry strategy that a firm can choose.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
25) The challenges faced due to FDI are the same all over the world.
Answer: FALSE
Diff: 2: Moderate
Skill: Application
26) The complexity of the tax system is one of the factors to be considered in selecting FDI
locations.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
27) Many international firms are investing in local communities and establishing global
standards of fair treatment for workers in an effort to be socially responsible.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
28) What makes China popular for FDI? What factors contribute to the long-term popularity of
FDI in advanced economies?
Answer: According to A. T. Kearney's FDI Confidence Index, China ranks among the top
destinations for foreign investment (www.atkearney.com). China is popular because of its size,
rapid growth rate, and low labor costs. It is an important platform where MNEs manufacture
products for export to key markets in Asia and elsewhere. China also holds strategic importance
for its long-term potential as a target market and source of competitive advantage.
Advanced economies such as Australia, Canada, Japan, Netherlands, the United Kingdom, and
the United States long have been popular destinations for FDI. These countries all share high
per-capita GDP, strong GDP growth, high density of knowledge workers, and superior business
infrastructure, such as telephone systems and energy sources destinations.
Diff: 2: Moderate
Skill: Concept
8
29) A firm most likely enters the home market of a foreign competitor in order to ________.
A) enter a collaborative venture with the competitor
B) gain access to the competitor's government contracts
C) force the competitor to expend resources to defend its market
D) interfere with the competitor's marketing campaign
Answer: C
Diff: 1: Easy
Skill: Concept
Objective: 14-3: Explain the motives for FDI and collaborative ventures
30) Which of the following is an example of a market-seeking motive for FDI?

A) a firm wishes to gain access to raw materials
B) a firm follows its key customers abroad
C) a company wishes to gain access to knowledge
D) a company intends to avoid trade barriers
Answer: B
Diff: 2: Moderate
Skill: Concept
31) Which of the following is the most likely motive behind firms in the mining industry wanting
to enter new foreign markets?
A) access to natural resources
B) availability of excessive non-skilled labor force
C) increase in refining capacity
D) payment of wages remain the same in both the new market as well as the existing market
Answer: A
Diff: 2: Moderate
Skill: Concept
32) A firm that pursues foreign direct investment to take advantage of government incentives is
demonstrating a(n) ________ motive.
A) efficiency-seeking
B) novelty-seeking
C) asset-seeking
D) market-seeking
Answer: A
Diff: 1: Easy
Skill: Concept
9
33) A firm that pursues a collaborative venture to access raw materials is demonstrating a(n)
________ motive.
A) efficiency-seeking
B) novelty-seeking
C) asset-seeking
D) market-seeking
Answer: C
Diff: 1: Easy
Skill: Concept
34) Which of the following industries considers proximity to customers especially important in
the decision to enter a foreign market?
A) fashion
B) automotive
C) biotechnology
D) mining
Answer: A
Diff: 1: Easy
Skill: Concept
ABC Appliance (Scenario)

The ABC Appliance Corporation is a Florida-based manufacturer of refrigerators, dishwashers,
and other large household appliances. ABC takes advantage of NAFTA, and as a result, the firm
has loyal customers across North America. ABC managers would like to expand into the Asian
market, but are unsure of the best way to do so. ABC managers are meeting to discuss various
possibilities for entering the Asian market.
35) Which of the following should most likely be considered in making the decision to expand
ABC operations into the Asian market?
A) How will domestic competitors of ABC react to an international expansion?
B) What technological and managerial know-how can ABC gain from an Asian expansion?
C) How many managers will need to relocate to Asia to oversee the Asian project?
D) How will ABC utilize the Internet to achieve success in the Asian market?
Answer: B
Diff: 3: Hard
10
36) New markets, new resources, and improved efficiency are the three main motives for firms
to enter foreign markets through FDI.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
37) Avoiding trade barriers is classified as a market-seeking motive for FDI.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
38) The existence of a substantial market motivates many firms to produce offerings at or near
customer locations.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
39) Firms often follow their key customers abroad to preempt other vendors from serving them.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
40) The strategic purpose behind firms competing with rivals in their own market is to force
them to expend resources and thus, defend the firm's own market.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
41) Companies opt for FDI to obtain advantages associated with locating at the hub of
knowledge development and innovation in a given industry.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
11
42) Economies of scale are decreases in per-unit cost of production resulting from decreasing
output.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
43) International expansion invariably results in a decrease in a firm's economies of scale.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
44) Compared to small firms, large companies usually can access capital at lower cost.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
45) In the context of attaining economies of scope, using individual managers in each European
country is more efficient that using the same base of managers all over Europe.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
46) In the fashion industry, customer needs change rapidly and managers often locate factories or
assembly operations near important customers.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
47) Governments encourage inward FDI because it transfers skill and technologies.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
12
48) Tariff and other trade barriers for exports and FDI are identical.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
49) By establishing a physical presence inside a country or an economic bloc, the foreign
company obtains the same advantages as local firms.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
50) Firms that engage in FDI avoid problematic trade barriers because the physical presence of a
foreign firm earns it the same privileges as a local firm.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
13
51) Discuss three reasons for firms seeking new market opportunities. Illustrate each with an
example of a firm that sought a new foreign market for that particular motive.
Answer:
∙ Gain access to new markets or opportunities. The existence of a substantial market motivates
many firms to produce offerings at or near customer locations. Local production improves
customer service and reduces the cost of transporting goods to buyer locations. Coca-Cola, IBM,
Samsung, and Siemens all generate more sales abroad than in their home markets. The opening
case highlights Huawei Technologies, a Chinese firm that has invested billions in Africa to gain
access to fast-growing mobile phone markets there.
∙ Follow key customers. Firms often follow their key customers abroad to preempt other vendors
from serving them. Establishing local operations also positions the firm to better serve customer
needs. Tradegar Industries supplies the plastic that its customer Procter & Gamble uses to
manufacture disposable diapers. When P&G built a plant in China, Tradegar followed P&G
there, establishing production in China as well.
∙ Compete with key rivals in their own markets. Some MNEs may choose to confront current or
potential competitors directly, in the competitors' home market. The strategic purpose is to
weaken the competitor by forcing it to expend resources to defend its market. In the earth-
moving equipment industry, Caterpillar entered a joint venture with Mitsubishi to put pressure on
the market share and profitability of their common rival, Japan's Komatsu. The need to spend
substantial resources to defend its home market reduced Komatsu's ability to expand abroad.
Diff: 2: Moderate
Skill: Concept
14
52) Discuss resource and asset-seeking motives for FDI. Why might a company favor acquisition
over greenfield investment as an FDI approach?
Answer: Firms frequently want to acquire production factors that are more abundant or less
costly in a foreign market. Or they may seek complementary resources and capabilities of partner
companies headquartered abroad. Specifically, FDI or collaborative ventures may be motivated
by the firm's desire to attain:
1. Raw materials needed in extractive and agricultural industries
Firms in the mining, oil, and crop-growing industries have little choice but to go where the raw
materials are located. In the wine industry, companies establish wineries in countries suited for
growing grapes, such as France and Chile. Oil companies establish refineries in countries with
abundant petroleum reserves such as Kuwait.
2. Knowledge or other assets
By establishing a local presence through FDI, the firm is better positioned to deepen its
understanding of target markets. FDI provides the foreign firm better access to market
knowledge, customers, distribution systems, and control over local operations. By collaborating
in R&D, manufacturing, and marketing, the focal firm can benefit from the partner's know-how.
3. Technological and managerial know-how
The firm may benefit by establishing a presence in a key industrial cluster, such as the robotics
industry in Japan, chemicals in Germany, fashion in Italy, or software in the United States.
Companies can obtain many advantages from locating at the hub of knowledge development and
innovation in a given industry. Denmark, Finland, Israel, New Zealand, Sweden, and the United
States are considered ideal for R&D in the biotechnology industry because they all have
abundant pools of biotech knowledge workers. Many firms enter a collaborative venture abroad
as a prelude to operating wholly owned FDI. Collaboration with a local partner reduces the risks
of entry while allowing the entrant to gain local expertise before launching operations of its own
in the market.
An international firm may favor acquisition over greenfield investment as an FDI approach.
Greenfield investment occurs when a firm invests to build a new manufacturing, marketing, or
administrative facility, as opposed to acquiring existing facilities. The investing firm typically
buys an empty plot of land and builds a production plant, marketing subsidiary, or other facility
there for its own use.
An acquisition is the purchase of an existing company or facility.
Multinational enterprises may favor acquisition over greenfield FDI because, by acquiring an
existing company, they gain ownership of existing assets such as plant, equipment, and human
resources, as well as access to existing suppliers and customers. Unlike greenfield FDI,
acquisition provides an immediate stream of revenue and accelerates the MNE's return on
investment. However, host-country governments often pressure MNEs to undertake greenfield
FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and know-
how transfer to locals, and improves linkages to the global marketplace. Many governments offer
incentives to encourage greenfield investments. They may be sufficient to offset the advantages
of acquisition-based entry.
Diff: 3: Hard
Skill: Concept
Objective: 14-3, 14-4: Explain the motives for FDI and collaborative ventures, Identify the types
of foreign direct investment
15
53) A firm that builds a new manufacturing facility in a foreign market is participating in a(n)
________.
A) acquisition
B) merger
C) greenfield investment
D) equity participation
Answer: C
Diff: 1: Easy
Skill: Concept
Objective: 14-4: Identify the types of foreign direct investment
54) The purchase of an existing company or facility is known as a(n) ________.

A) greenfield investment
B) licensing
C) acquisition
D) equity joint venture
Answer: C
Diff: 1: Easy
Skill: Concept
55) A(n) ________ is the purchase of an existing company or facility.

B) outsourcing arrangement
C) acquisition
D) offshoring arrangement
Answer: C
Diff: 1: Easy
Skill: Concept
56) An arrangement whereby the firm owns, or seeks to own, multiple stages of a value chain for
producing, selling, and delivering a product or service is termed as ________.
A) vertical integration
B) horizontal integration
C) decentralization
D) centralization
Answer: A
Diff: 1: Easy
Skill: Concept
16
57) How does the acquisition of a foreign company most likely benefit a focal firm in the foreign
market?
A) The focal firm can extend its market reach through readily available distribution networks.
B) The MNE avoids domestic and foreign taxation, which enables the firm to invest more
resources in the foreign market.
C) Firm managers can reduce their workload by ensuring that all decision-making
responsibilities are taken up by foreign managers.
D) The firm eliminates the need to train its own employees by utilizing the workers previously
hired by the foreign firm.
Answer: A
Diff: 2: Moderate
Skill: Concept
58) A(n)________ is a special type of acquisition in which two companies join to form a larger
firm.
A) merger
B) acquisition
C) wholly owned direct investment
D) greenfield investment
Answer: A
Diff: 1: Easy
Skill: Concept
59) Which of the following terms is used to refer to a focal firm's partial ownership of an
existing firm?
A) turnkey operation
B) greenfield investment
C) direct investment
D) equity participation
Answer: D
Diff: 1: Easy
Skill: Concept
17
60) Collaborative ventures benefit SMEs by providing them with ________.
A) better trained employees
B) increased amount of capital
C) larger and newer facilities
D) more advanced technology
Answer: B
Diff: 1: Easy
Skill: Concept
61) A firm that develops the capacity to sell its products by investing in marketing and selling
operations is ________.
A) acquiring downstream value-chain facilities
B) acquiring upstream value-chain facilities
C) engaging in centralization
D) engaging in decentralization
Answer: A
Diff: 1: Easy
Skill: Concept
62) A firm that owns the activities performed in a single stage of its value chain is demonstrating
________.
A) centralization
B) decentralization
C) horizontal integration
D) reverse integration
Answer: C
Diff: 1: Easy
Skill: Concept
18
International Business Class (Scenario)
Students in Professor Manning's international business class have been assigned the task of
explaining the different types of FDI. Professor Manning formed groups among students. The
groups are to research their assigned topic and present their information to the class using
examples of real-world firms for illustration. Jessica Hanson is the leader of Group A; Manu
Patel is the leader of Group B; and Mario Witherspoon is the leader of Group C.
63) During his presentation, Manu describes how a large U.S. retailer entered the Mexican
market by purchasing the stores and assets of a Mexican retailer. Which of the following topics
was most likely assigned to Group B?
A) merger
B) turnkey operation
C) acquisition
D) collaborative venture
Answer: C
Diff: 3: Hard
Skill: Application
64) Host-country governments often pressure MNEs to undertake acquisition over greenfield
investments.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
65) Home Depot made a greenfield investment when it entered the Mexican market by
purchasing Home Mart, a domestic store chain.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
66) A greenfield investment is a direct investment to purchase an existing company or facility.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
19
67) A merger is a special type of acquisition.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
68) Vertical integration is an arrangement in which the firm owns, or seeks to own, the activities
performed in a single stage of its value chain.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
69) Explain why MNEs prefer acquisition instead of greenfield FDI. Why do foreign
governments encourage greenfield FDI?
Answer: Multinational enterprises may favor acquisition over greenfield FDI because, by
acquiring an existing company, they gain ownership of existing assets such as plant, equipment,
and human resources, as well as access to existing suppliers and customers. Unlike greenfield
FDI, acquisition provides an immediate stream of revenue and accelerates the MNE's return on
investment. However, host-country governments often pressure MNEs to undertake greenfield
FDI. Greenfield FDI creates new jobs and production capacity, facilitates technology and know-
how transfer to locals, and improves linkages to the global marketplace. Many governments offer
incentives to encourage greenfield investments. They may be sufficient to offset the advantages
of acquisition-based entry.
Diff: 2: Moderate
Skill: Concept
20
70) Explain the difference between vertical FDI and horizontal FDI. Provide an example that
illustrates the difference between vertical and horizontal integration
Answer: Vertical integration is an arrangement whereby the firm owns, or seeks to own,
multiple stages of a value chain for producing, selling, and delivering a product or service. The
firm may acquire downstream value-chain facilities-that is, in marketing and selling operations.
Or the firm may acquire upstream facilities, such as factories or assembly plants.
Horizontal integration is an arrangement in which the firm owns, or seeks to own, the activities
performed in a single stage of its value chain. Microsoft's primary business is developing
computer software. In addition to producing word processing and spreadsheet software, it has
developed foreign subsidiaries that make other types of software, such as a Montreal-based firm
that produces software for creating movie animations. Horizontal integration implies the firm
invests in its own industry to expand its capacity and activities.
In 2014, Korean appliance manufacturer Samsung Electronics acquired Quietside Corporation, a
leading distributor of air conditioners in North America. Samsung bought Quietside to enhance
its ability to distribute its own air conditioners in a key foreign market. The acquisition
exemplifies downstream vertical integration because appliance distribution is outside Samsung's
normal sphere of operations. In 2012, by contrast, Samsung acquired the manufacturing plants of
Amica, a home appliance company in Poland. This acquisition represents horizontal integration
because Samsung Electronics' core business is manufacturing appliances and electronic products.
By buying Amica's manufacturing plants, Samsung invested in its own industry to expand its
production capacity.
Diff: 3: Hard
Skill: Concept
71) Which of the following is a characteristic of project-based, non-equity ventures?

A) a broad scope of product development
B) a specific agenda and timeframe
C) long-term sharing of resources
D) formation of a new legal entity
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 14-5: Understand international collaborative ventures
72) Which of the following is a disadvantage of equity joint ventures?

A) termination difficulties
B) lesser control over future directions
C) imbalanced relationship
D) vague contractual partnership
Answer: A
Diff: 2: Moderate
Skill: Concept
21
73) A consortium is defined as ________.
A) the purchase of an existing company or facility
B) two partners forming a new legal entity
C) an equity venture to consolidate the value chain
D) multiple partners participating on a large-scale project
Answer: D
Diff: 1: Easy
Skill: Concept
74) Which of the following is a characteristic of an equity joint venture?

A) simple management structure
B) facilitates knowledge transfer between partners
C) easy to terminate
D) lesser exposure to political risk
Answer: B
Diff: 1: Easy
Skill: Concept
75) A(n) ________ is a project-based, usually nonequity venture initiated by multiple partners to
fulfill a large-scale project.
B) acquisition
C) merger
D) consortium
Answer: D
Diff: 1: Easy
Skill: Concept
76) Which of the following is a key reason that a focal firm would most likely enter a
collaborative venture with a foreign firm?
A) the foreign firm can fill an important gap in the focal firm's value chain
B) the foreign firm requires the focal firm's financial resources to compete locally as well
C) the focal firm wants to duplicate a competitor's marketing strategies abroad
D) the market abroad is saturated; there is no scope for the focal firm's products or services
Answer: A
Diff: 2: Moderate
Skill: Concept
22
International Business Class (Scenario)
Students in Professor Manning's international business class have been assigned the task of
explaining the different types of FDI. Professor Manning formed groups among students. The
groups are to research their assigned topic and present their information to the class using
examples of real-world firms for illustration. Jessica Hanson is the leader of Group A; Manu
Patel is the leader of Group B; and Mario Witherspoon is the leader of Group C.
77) During her presentation, Jessica describes how two automakers joined forces and formed a
separate firm by pooling their assets. Which of the following topics was most likely assigned to
Group A?
A) equity joint venture
B) acquisition
D) vertical integration
Answer: A
Diff: 3: Hard
Skill: Application
78) During his presentation, Mario describes how a large Japanese automaker built a factory in
Kentucky. Which of the following topics was most likely assigned to Group C?
A) horizontal integration
B) equity joint venture
D) consortium
Answer: C
Diff: 3: Hard
Skill: Application
79) A new legal entity is created during the formation of a project-based, nonequity venture.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
80) One of the key advantages to an equity joint venture is that the management structure is very
simple which allows for easy adjustments and modifications.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
23
81) Cross-licensing agreements are a type of project-based, nonequity venture in which the
partners agree to allow access to licensed intellectual property developed by the other on
preferential terms.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
82) Equity joint ventures have the simplest management structure.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
83) Project-based, nonequity ventures are difficult to set up.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
84) The failure rate of collaborative ventures is higher in developing economies than in advanced
economies.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
24
85) Describe the advantages of international collaborative ventures, and describe the potential
risks of collaboration.
Answer: An international collaborative venture is a cross-border business partnership in which
collaborating firms pool their resources and share costs and risks of a new venture. Here the
focal firm partners with one or more companies to pursue a joint project or initiative.
International collaborative ventures are also sometimes called "international partnerships" or
"international strategic alliances." Collaborative ventures help companies overcome together the
often substantial risks and costs involved in achieving international projects that might exceed
the capabilities of any one firm operating alone. Groups of firms sometimes form partnerships to
accomplish large-scale goals such as developing new technologies or completing major projects
such as power plants. By collaborating, the focal firm can draw on a range of complementary
technologies, accessible only from other firms, to innovate and develop new products.
Collaboration is not without risks, however. The potential partner may be a current or potential
competitor, is likely to have its own agenda, and will likely gain important competitive
advantages from the relationship. Management must protect its hard-won capabilities and other
organizational assets to preserve its bargaining power and ability to compete. Harmony is not
necessarily the most important goal, and accepting some conflict and tension between the
partners may be preferable to surrendering core skills. The firm does not want to become too
dependent on its partner.
Diff: 3: Hard
Skill: Concept
86) Discuss the four key differences between project-based, nonequity ventures and equity
ventures.
Answer: Project-based collaborations differ from the traditional equity joint ventures in four
important ways:
1. No new legal entity is created. Partners carry on their activity within the guidelines of a
contract.
2. Parent companies do not necessarily seek ownership of an ongoing enterprise. Instead, they
contribute their knowledge, expertise, staff, and monetary resources to derive knowledge or other
benefits.
3. Collaboration tends to have a well-defined timetable and end date; partners go their separate
ways once they have accomplished their objectives or have no further reason for continuation.
4. Collaboration is narrower in scope than in equity joint venturing, typically emphasizing a
single project, such as development, manufacturing, marketing, or distribution of a new product.
Diff: 2: Moderate
Skill: Concept
25
87) Discuss four strategies that managers can employ in order to increase the chances of a
successful collaborative venture.
Answer:
1. Be cognizant of cultural differences. International collaborations require that both parties learn
and appreciate each other's corporate and national cultures. Cultural incompatibility can cause
anger, frustration, and inefficiency. The partners may never arrive at a common set of values and
organizational routines, especially if they are from very distinct cultures-say, Norway and
Nigeria. Establishing cultural compatibility is a must.
2. Pursue common goals. When partners have differing goals for the venture, or their goals
change over time, they can find themselves operating at cross-purposes. Japanese firms tend to
value market share over profitability, while U.S. firms value profitability over market share.
Because different strategies are required to maximize each of these performance goals, a joint
venture between Japanese and U.S. firms may fail. To overcome such challenges, partners need
to regularly interact and communicate at three levels of the organization: senior management,
operational management, and the workforce.
3. Give due attention to planning and management of the venture. Without agreement on
questions of management, decision making, and control, each partner may seek to control all the
venture's operations, which can strain the managerial, financial, and technological resources of
both. In some cases, equal governance and a sense of shared enterprise are best because they help
partners view themselves as equals and reach consensus. In other cases, having a dominant
partner in the relationship helps ensure success. When one of the partners is clearly the driver or
the leader in the relationship, there is less likelihood of a stalemate or prolonged negotiations.
4. Safeguard core competencies. Collaboration takes place between current or potential
competitors that must walk a fine line between cooperation and competition. Volkswagen and
General Motors succeeded in China by partnering with the Chinese firm, Shanghai Automotive
Industry Corporation (SAIC; www.saicmotor.com). The Western firms transferred much
technology and know-how to their Chinese partner. Having learned much from them, SAIC is
now becoming a significant player in the global automobile industry and even a competitor to its
earlier partners.
Diff: 2: Moderate
Skill: Concept
88) Which of the following is a characteristic of successful international retailers?

A) conservative managers and salespeople and a centralized organizational system
B) an entrepreneurial approach to foreign markets and an understanding of the target market
C) significant financial borrowings and high foreign and domestic operational costs
D) extreme competition and support from home-country governments exclusively
Answer: B
Diff: 2: Moderate
Skill: Concept
Objective: 14-6: Discuss the experience of retailers in foreign markets
26
89) While franchising facilitates rapid internationalization, compared to FDI, it affords the firm
less control over its foreign operations.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
90) Describe the four primary challenges faced by retailers when they expand overseas. Provide
examples of mistakes made by retailers in foreign markets.
Answer:
1. Culture and language are a significant obstacle. Compared to most businesses, retailers are
close to customers. They must respond to local market requirements by customizing their
product and service portfolio, adapting store hours, modifying store size and layout, training
local workers, and meeting labor union demands.
2. Consumers tend to develop strong loyalty to indigenous retailers. As Best Buy in Turkey,
Home Depot in China, and Walmart in Germany discovered, local firms usually enjoy great
allegiance from local consumers.
3. Managers must address legal and regulatory barriers that can be idiosyncratic. Germany limits
store hours, and most retailers are closed on Sundays. Japan's Large-Scale Store Law required
foreign warehouse and discount retailers to get permission from existing small retailers before
setting up shop. Although it has been relaxed in recent years, the law was a major obstacle to the
entry of stores like Toys "R" Us. IKEA has been wary of entering India, due to excessive
restrictions placed on foreign retailers.
4. When entering a new market, retailers must develop local sources for thousands of products,
including some that local suppliers may be unwilling or unable to provide. When Toys "R" Us
entered Japan, local toy manufacturers were reluctant to work with the U.S. firm. Some retailers
end up importing many of their offerings, which requires establishing complex and costly
international supply chains.
Many retailers have floundered in foreign markets. When the French department store Galleries
Lafayette opened in New York City, it could not compete with the city's numerous posh
competitors. In its home market in the United Kingdom, Marks & Spencer succeeds with store
layouts that blend food and clothing offerings in relatively small spaces, a formula that translated
poorly in Canada and the United States. IKEA experienced problems in Japan where consumers
value high-quality furnishings, not the low-cost products IKEA offers. Most recently, Home
Depot abandoned the Chinese market only after a few years there. As another example, Walmart
(www.walmart.com) is the world's largest retailer but failed in Germany because it could not
compete with local competitors and eventually exited the market. In Mexico, Walmart
constructed massive U.S.-style parking lots for its new super centers. But most Mexicans don't
have cars and city bus stops were too far away, so shoppers could not haul their goods home. In
Brazil, most families do their big shopping once a month on payday. Walmart built aisles too
narrow and crowded to accommodate the rush and stocked shelves in urban São Paulo with some
items that were not needed such as leaf blowers. Walmart's red, white, and blue banners,
reminiscent of the U.S. flag, offended local tastes in Argentina. Sam's Club, Walmart's food
discounting operation, failed in Latin America partly because its huge multipack items were too
big for local shoppers with low incomes and small apartments.
27
Today Walmart is one of Latin America's most successful retailers. It took Walmart many years
to learn to adapt to local market needs.
Diff: 2: Moderate
Skill: Concept
28

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International Business: The New Realities, 4e (Cavusgil)

Chapter 14 Foreign Direct Investment and Collaborative Ventures

1) Which of the following is a trend seen in the modern international economy?

ABC Appliance (Scenario)

9) FDI is also known as international portfolio investment.

10) International portfolio investment refers to passive ownership of foreign securities.

12) International portfolio investment is characterized by ________.

17) Which of the following best exemplifies corporate social responsibility?

30) Which of the following is an example of a market-seeking motive for FDI?

ABC Appliance (Scenario)

37) Avoiding trade barriers is classified as a market-seeking motive for FDI.

43) International expansion invariably results in a decrease in a firm's economies of scale.

54) The purchase of an existing company or facility is known as a(n) ________.

55) A(n) ________ is the purchase of an existing company or facility.

66) A greenfield investment is a direct investment to purchase an existing company or facility.

71) Which of the following is a characteristic of project-based, non-equity ventures?

72) Which of the following is a disadvantage of equity joint ventures?

74) Which of the following is a characteristic of an equity joint venture?

82) Equity joint ventures have the simplest management structure.

83) Project-based, nonequity ventures are difficult to set up.

88) Which of the following is a characteristic of successful international retailers?

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