Chapter 15

International Business: The New Realities, 4e (Cavusgil)
Chapter 15 Licensing, Franchising, and Other Contractual Strategies
1) ________ is a fee paid periodically to compensate a licensor for the temporary use of its
intellectual property, often based on a percentage of gross sales generated from the use of the
licensed asset.
A) Duty
B) Residual
C) Royalty
D) Tariff
Answer: C
Diff: 1: Easy
Skill: Concept
Objective: 15-1: Explain contractual entry strategies
AACSB: Analytical Thinking
2) When a firm allows others to use an entire business system in exchange for compensation, the
arrangement is known as ________.
A) industrial design rights
B) franchising
C) joint venture
D) equity venture
Answer: B
Diff: 1: Easy
Skill: Concept
3) A cross-border contractual relationship provides the focal firm with ________ over the
foreign partner.
A) a low level of control
B) a moderate level of control
C) a high level of control
D) seldom any control
Answer: B
Diff: 1: Easy
Skill: Concept
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4) Which of the following is characteristic of cross-border contractual relationships?
A) When compared to FDI, they are less susceptible to volatility and risk, and tend to bring both
parties a predictable stream of revenue.
B) The focal firm attains maximum control by establishing a physical presence, and ownership
of key assets, in the foreign market.
C) It attracts high attention and criticism for the focal firm because of the local perception of
foreign entities.
D) They are governed by a contract that provides the focal firm with no control over the foreign
partner.
Answer: A
Diff: 2: Moderate
Skill: Concept
5) Which of the following is true about cross-border contractual relationships?

A) It is a more visible strategy than FDI and draws a lot of criticism from the local market.
B) They are more susceptible to volatility and risk compared to FDI.
C) A local firm allows the focal firm to blend into the local market, attracting less attention.
D) Focal firms use contractual relationships as an advanced entry strategy in foreign markets.
Answer: C
Diff: 2: Moderate
Skill: Concept
6) Which of the following is an example of intellectual property?

A) systems of measurement
B) Volkswagen's logo
C) an unpublished book
D) a phone directory
Answer: B
Diff: 1: Easy
Skill: Application
7) An industrial design is intended to ________.

A) eliminate the possibility of the design being copied
B) improve a product's performance and marketability
C) protect firms from intellectual property theft
D) protect information of commercial value
Answer: B
Diff: 1: Easy
Skill: Concept
2
8) A collective mark ________.
A) is intended to improve the product's aesthetics and usability as well as increase its production
efficiency, performance, or marketability
B) protects original works of authorship, giving the creator the exclusive right to reproduce the
work, display and perform it publicly, and authorize others to perform these activities
C) is a distinctive design, symbol, logo, word, or series of words placed on a product label
D) is a logo belonging to an organization whose members use it to identify themselves and
associate their products with a level of quality or accuracy, geographical origin, or other positive
characteristic
Answer: D
Diff: 1: Easy
Skill: Concept
9) The purpose of intellectual property rights is to ________.

A) prevent excessive regulation and government bureaucracy
B) grant a firm permission to use another firm's proprietary names
C) allow inventors monopoly advantage for a specified period of time
D) allow a firm to use an entire business system in exchange for compensation
Answer: C
Diff: 1: Easy
Skill: Concept
10) Contractual entry strategies in international business are cross-border exchanges in which the
relationship between the focal firm and its foreign partner is governed by an explicit contract.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
11) Exporting and foreign direct investing are two common types of contractual entry strategies.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
3
12) Patents provide inventors the right to prevent another person or company from selling or
using an invention for up to twenty years.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
13) A patent exclusively refers to a distinctive design, symbol, logo, word, or series of words
placed on a product label.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
14) An industrial design is a logo belonging to an organization whose members use it to identify
themselves and associate their products with a level of quality.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
15) Describe six unique qualities shared by all cross-border contractual relationships.
Answer: Cross-border contractual relationships have six unique characteristics:
∙ First, they are governed by a contract that provides the focal firm a moderate level of control
over the foreign partner.
∙ Second, the relationships typically involve the exchange of intangibles (intellectual property)
and services.
∙ Third, contractual relationships can be pursued independently or in conjunction with other
foreign market entry strategies. Their use is context specific; that is, a focal firm may pursue a
contractual relationship with certain customers, countries, or products, but not others.
∙ Fourth, cross-border contractual relationships provide for a dynamic, flexible choice. Over
time, the focal firm may switch to another way of servicing foreign markets.
∙ Fifth, the relationships often reduce local perceptions of the focal firm as a foreign enterprise.
Since the focal firm partners with a local firm, it may be able to shield some of the criticism
directed towards MNEs.
∙ Finally, cross-border contractual relationships generate a predictable level of earnings from
foreign operations. In comparison to FDI, contractual relationships imply reduced volatility and
risk.
Diff: 2: Moderate
Skill: Concept
4
16) Explain the role of intellectual property rights in foreign market contractual strategies. What
constitutes the infringement of intellectual property?
Answer: Intellectual property rights (IPRs) are the legal claims that protect the proprietary assets
of firms and individuals from unauthorized use by other parties. They derive from patents,
trademarks, copyrights, and other protections associated with intellectual property. IPRs provide
inventors with a monopoly advantage for a specified period of time, so they can exploit their
inventions not only to recoup their investment costs and create commercial advantage, but also to
acquire power and market dominance free of direct competition. The availability and
enforcement of these rights vary from country to country. Without such legal protection and the
assurance of commercial rewards, most firms and individuals would have little incentive to
invent.
Infringement of intellectual property is the unauthorized use, publication, or reproduction of
products and services protected by a patent, copyright, trademark, or other intellectual property
right. Such a violation amounts to piracy and takes the form of production and distribution of
counterfeit goods. For example, annual piracy losses in CDs and music exceed $100 million in
Brazil, and losses in business software exceed $1 billion in Russia.
Counterfeiters may use a product name that differs only slightly from that of a well-known
brand; it is similar enough that buyers associate it with the genuine product but just different
enough so that prosecution is hampered. While firms such as Rolex and Tommy Hilfiger are
well-known victims, counterfeiting is also common in such industrial products as medical
devices and car parts. Counterfeiters even have faked entire motor vehicles. Authorities
uncovered 23 unauthorized Apple stores in southeast China, selling fake iPads and counterfeit
smartphones.
Diff: 2: Moderate
Skill: Concept
Objective: 15-1, 15-7: Explain contractual entry strategies, Understand infringement of
intellectual property, a global problem
17) Which of the following is an example of licensing?

A) An American electronics firm has given the right to a new process for manufacturing e-book
readers to an electronics manufacturer in Canada.
B) An Indian automobile manufacturing company buys engines from a Japanese manufacturer
for its environmentally-friendly cars.
C) A South-Korean consumer electronics manufacturer produces the screens for its brand of
television and sends orders to a factory in China to manufacture the casing for the television.
D) A U.K-based motorcycle manufacturer, produces limited-edition customizations of the
company's stock models and sells it to customers around the world.
Answer: A
Diff: 3: Hard
Skill: Application
Objective: 15-2: Understand licensing as an entry strategy
5
18) Which of the following is provided by the licensor in a licensing agreement?
A) a monetary down-payment plus royalties for all products sold locally
B) a combination of intellectual property and technical information and assistance
C) a storefront or facility and the necessary materials to make the product
D) a combination of a lump-sum payment and the intellectual know-how
Answer: B
Diff: 1: Easy
Skill: Concept
19) In a licensing agreement, the licensee provides ________.

A) the rights to use its industrial design
B) intellectual property, technical information and assistance
C) a combination of down-payment plus royalty
D) the know-how and supporting products such as, raw materials and components
Answer: C
Diff: 1: Easy
Skill: Concept
20) Which of the following is NOT provided by the licensor?

A) ongoing managerial guidance
B) technical information and assistance
C) an advisory role
D) trademark
Answer: A
Diff: 1: Easy
Skill: Concept
21) Which of the following is characteristic of exclusive licensing agreements?

A) The licensor is not allowed to interfere with the production or marketing of the licensed asset.
B) It ensures payment from the licensee to the licensor upon receipt of an export shipment.
C) The licensee cannot cancel the contract with the licensor even if sales of the licensed asset are
poor.
D) The licensee is prohibited from sharing the licensed asset with another company within a
specified region.
Answer: D
Diff: 2: Moderate
Skill: Concept
6
22) In a licensing agreement, ________ is responsible for local sales.
A) the licensee
B) patent owner
C) the licensor
D) copyright partner
Answer: A
Diff: 1: Easy
Skill: Concept
23) Which of the following is an example of trademark licensing agreement?

A) a China based consumer electronic company that has invented a flexible casing for its MP3
players
B) a Thailand-based pharmaceutical company that receives manufacturing knowledge from a
U.S-based pharmaceutical
C) a U.K.-based cosmetics manufacturer that is allowed to use an American cosmetics
manufacturing firm's logo for its new line of "Titanium" makeup products
D) a U.S.-based clothing company that opens a factory in Vietnam and Cambodia to utilize low-
labor costs
Answer: C
Diff: 3: Hard
Skill: Application
24) Which of the following is protected under copyright laws?

A) the Nike swoosh
B) the art of Jackson Pollack
C) McDonald's clown shaped man with puffed out costume legs
D) Winnie the Pooh image
Answer: B
Diff: 2: Moderate
Skill: Application
25) Which of the following is characteristic of a know-how agreement?

A) exclusive rights to reproduce original art work
B) permission to use manufacturing facilities for a fee
C) exchanging technological or management information for royalties
D) trading the use of a name brand for management advice
Answer: C
Diff: 1: Easy
Skill: Concept
7
26) Cross-licensing often occurs in the semiconductor and chemical industries in order to
________.
A) divide the costs of production and marketing between competing firms
B) avoid research duplication and building on each other's innovations
C) protect the inventions and designs of small firms from large MNEs
D) decrease the likelihood of industrial spying and theft among firms
Answer: B
Diff: 2: Moderate
Skill: Concept
27) ________ is the world's leading licensing firm?

A) Nickelodeon
B) The Walt Disney Company
C) Mattel
D) Major League Baseball
Answer: B
Diff: 1: Easy
Skill: Concept
28) The greatest amount of licensing occurs in the ________ industries.

A) pharmaceutical
B) music
C) toy
D) mining
Answer: C
Diff: 1: Easy
Skill: Concept
29) In a licensing agreement, the licensee is both the owner and user of intellectual property.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
8
30) In a typical licensing agreement, after the relationship is established, the licensor is required
to be directly involved in the market and provide ongoing managerial guidance.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
31) A know-how agreement grants a firm permission to use another firm's proprietary names,
characters, or logos for a specified period of time in exchange for a royalty.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
32) How are trademarks established in the United States and abroad? What are some of the
difficulties faced by firms regarding the protection of trademarks? Explain with an example.
Answer: In the United States and a number of other countries, firms acquire rights to trademarks
through first use and continuous usage. However, in others, rights to trademarks are acquired
through registration with government authorities, and many countries require local use of the
registered mark to maintain the registration. When a firm registers its trademark, it formally
notifies government authorities that it owns the trademark and is entitled to intellectual property
protections. The convention of gaining ownership to a trademark simply through registration has
caused concerns for many firms. For example, McDonald's was frustrated to learn, when it
wanted to enter South Africa in 1993, that a local trader had already applied both to register the
McDonald's trademark for his own use, and to have the company's rights to the trademark
withdrawn. The South African Supreme Court actually ruled in favor of the local entrepreneur.
McDonald's eventually won on appeal but only after spending a significant sum in legal fees.
Diff: 2: Moderate
Skill: Concept
9
33) What is cross-licensing? Why does the pharmaceutical industry tend to favor cross-licensing
arrangements? Explain your answer in a short essay.
Answer: In some industries, such as pharmaceuticals, chemicals, and semiconductors,
technology is acquired in reciprocal licensing arrangements among firms from the same or
similar industries. This is known as cross-licensing. In industries where the rate of technological
advances is rapid and where innovations often build on each other, technology licensing from
competitors provides key advantages. It reduces the costs of innovation by avoiding duplication
of research, while reducing the risk of excluding any one firm from access to new developments.
The pharmaceutical industry tends to use cross-licensing agreements because R&D to develop a
new drug can cost billions of dollars, and new drugs require long government approval
processes, pharmaceutical firms want to launch their discoveries as quickly as possible. To
reduce costs and increase the speed of new drug development, pharmaceutical firms license
inventions to each other.
Diff: 2: Moderate
Skill: Concept
10
34) Explain how licensing works as an entry strategy into foreign markets. Describe the risks
faced by technological firms that enter licensing agreements in foreign countries.
Answer: A licensing agreement specifies the nature of the relationship between the owner of
intellectual property, the licensor, and the user of the property, the licensee. High-technology
firms routinely license their patents and know-how to foreign companies. For example,
Germany's Cognitec licensed the use of its face recognition technology to U.S. chip
manufacturer Intel, which will use the technology to control access to laptops, tablets, and
similar devices.
Upon signing a licensing contract, the licensee pays the licensor a fixed amount up front and an
ongoing royalty of typically 2 to 5 percent of gross sales generated from using the licensed asset.
The fixed amount covers the licensor's initial costs of transferring the licensed asset to the
licensee, including consultation, training in how to deploy the asset, engineering, or adaptation.
Certain types of licensable assets, such as copyrights and trademarks, may have lower transfer
costs. The royalty percentage may escalate with increasing sales.
A typical licensing contract runs five to seven years and is renewable at the option of the parties.
Initially, the licensor provides technical information and assistance to the licensee. Once the
relationship has been established and the licensee fully understands its role, the licensor usually
plays an advisory role but has no direct involvement in the market and provides no ongoing
managerial guidance. Most firms enter into exclusive agreements, in which the licensee is not
permitted to share the licensed asset with any other company within a prescribed territory. In
addition to operating in its domestic market, the licensee may also be permitted to export to other
countries.
If the licensor is an MNE, it may enter a licensing arrangement with its own wholly or partly
owned foreign affiliate. In this case, licensing is an efficient way to compensate the foreign
affiliate, especially when it is a separate legal entity, and transfer intellectual property to it within
a formal legal framework. Licensing agreements can present risks to firms in foreign countries.
From the licensor's standpoint, licensing is a relatively passive entry strategy. Profits tend to be
lower than those from exporting or FDI, and licensing does not guarantee a basis for future
expansion. To earn royalties, the licensor must rely on the licensee's sales and marketing
prowess. A weak partner will provide only meager royalties. Also, licensing provides limited
control over how the licensor's asset is used. If the licensee produces a substandard product, the
licensor's reputation can be harmed. To avoid such problems, experienced firms require foreign
licensees to meet minimum quality and performance standards.
If the licensee is very successful, the licensor may regret not entering the market through a more
lucrative entry strategy. Because licensing requires sharing intellectual property with other firms,
the risk of creating a future competitor is substantial. The rival may exploit the licensor's
intellectual property by entering third countries or creating products based on knowledge gained
in the relationship. This scenario has played out in the auto, computer chip, and consumer
electronics industries in Asia as Western firms have transferred process technologies to firms in
China, Japan, and South Korea. Japan's Sony originally licensed transistor technology from U.S.
inventor Bell Laboratories to make hearing aids. But instead Sony used the technology to create
small, battery-powered transistor radios and soon grew to become a global leader in this product.
Diff: 3: Hard
Skill: Concept
Objective: 15-2, 15-3: Understand licensing as an entry strategy, Describe the advantages and
disadvantages of licensing
11
35) Compare and contrast licensing and franchising as foreign market entry strategies. Why is
franchising a more comprehensive strategy?
Answer: A licensing agreement specifies the nature of the relationship between the owner of
intellectual property, the licensor, and the user of the property, the licensee. High-technology
firms routinely license their patents and know-how to foreign companies. For example,
Germany's Cognitec licensed the use of its face recognition technology to U.S. chip
manufacturer Intel, which will use the technology to control access to laptops, tablets, and
similar devices.
Upon signing a licensing contract, the licensee pays the licensor a fixed amount up front and an
ongoing royalty of typically 2 to 5 percent of gross sales generated from using the licensed asset.
The fixed amount covers the licensor's initial costs of transferring the licensed asset to the
licensee, including consultation, training in how to deploy the asset, engineering, or adaptation.
Certain types of licensable assets, such as copyrights and trademarks, may have lower transfer
costs. The royalty percentage may escalate with increasing sales.
Franchising is an advanced form of licensing in which the focal firm, the franchisor, allows an
entrepreneur, the franchisee, the right to use an entire business system in exchange for
compensation. As with licensing, an explicit contract defines the terms of the relationship.
Franchising is more comprehensive than licensing because the franchisor prescribes virtually all
of the business activities of the franchisee. The franchisor tightly controls the business system to
ensure consistent standards. International franchisors employ globally recognized trademarks and
attempt to guarantee the customer a uniform retail experience and consistent product quality.
Completely standardized business activities, however, are difficult to replicate across diverse
markets. Differences in franchisee resources, key ingredients, worker qualifications, and physical
space may necessitate changes to the franchise formula.
Diff: 3: Hard
Skill: Concept
Objective: 15-2, 15-4: Understand licensing as an entry strategy, Understand franchising as an
entry strategy
36) Which of the following is an advantage of licensing?

A) It is ideal for products, services, or knowledge that is highly complex.
B) It is easy to maintain control over how the licensed asset is used.
C) It requires very little capital investment in the foreign market.
D) It guarantees a basis for future expansion in the market.
Answer: C
Diff: 2: Moderate
Skill: Concept
Objective: 15-3: Describe the advantages and disadvantages of licensing
12
37) An advantage of licensing is that firms are able to ________.
A) enter markets with extensive trade barriers
B) guarantee a basis for future expansion
C) control how the licensed asset is used
D) resolve disputes easily
Answer: A
Diff: 1: Easy
Skill: Concept
38) By establishing a brand name and market power through a licensing agreement, licensors are
able to ________.
A) establish a more durable presence in the local market
B) control the use of the licensed asset
C) control the dissipation of important intellectual property to competitors
D) avoid the risk of creating a future competitor
Answer: A
Diff: 1: Easy
Skill: Concept
39) The reputation of a licensor will be jeopardized by a licensing agreement if the licensee
________.
A) markets competing products for significantly lower prices
B) uses the licensing asset to create products of poor quality
C) refuses to pay the agreed upon royalties to the licensor
D) does not guarantee future expansion in the market
Answer: B
Diff: 1: Easy
Skill: Concept
40) Which of the following is a disadvantage of licensing for technological firms?

A) It is not appropriate for entering markets that pose substantial country risk.
B) It requires high capital investment and the presence of the technological firm in the foreign
market.
C) It restricts flexibility in the foreign market due to the technological firm's ownership of key
assets in the target market.
D) It increases the risk of creating a future competitor.
Answer: D
Diff: 2: Moderate
Skill: Concept
13
Wonder Cat Licensing (Scenario)
Wonder Cat is a popular, new cartoon series created by the U.S-based All Cartoon Channel
(ACC). Currently, the only Wonder Cat item available for sale are shirts that are sold exclusively
through the ACC Web site. The cartoon series is a big hit in China, and as a result ACC has been
approached by a Chinese firm about a licensing agreement. ACC executives are considering the
pros and cons of such an agreement before making any final decisions.
41) Which of the following questions would be more important to evaluate before ACC enters a
licensing agreement with the Chinese firm?
A) What other cartoon characters in the U.S. have been licensed to Chinese firms?
B) Should the Wonder Cat shirts that were available on the firm's Web site be removed from
sale?
C) Will the Wonder Cat products made by the Chinese firm be available for sale on the ACC
Web site?
D) How much control will ACC be able to maintain over the use of the Wonder Cat brand?
Answer: D
Diff: 3: Hard
Skill: Critical Thinking
AACSB: Analytical Thinking; Environments and Reflective Thinking
42) Which of the following statements most likely supports an ACC decision to enter into a
licensing agreement with the Chinese firm?
A) Royalties from toys and apparel would be initially minimal.
B) The Wonder Cat brand's products could be easily counterfeited in other markets except in the
Chinese markets.
C) The Chinese government restricts complete ownership of local operations by foreign firms.
D) China exclusively opts for high-control strategies such as FDI.
Answer: C
Diff: 3: Hard
43) Which of the following most likely supports an ACC decision to not enter a licensing
agreement with the Chinese firm?
A) ACC does not want to invest capital for FDI in the Chinese market.
B) ACC desires a low-risk, low-cost strategy to internationalize the Wonder Cat character.
C) The Chinese market restricts ownership of local operations by foreign firms.
D) ACC wants to maintain firm control of how the Wonder Cat character is used.
Answer: D
Diff: 3: Hard
14
44) Licensing agreements enable energy and defense firms to enter nations that restrict the
foreign ownership of businesses related to national security.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
45) One of the advantages of licensing is that the profits generated from such agreements are
typically higher than for FDI.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
46) One of the disadvantages of licensing is that it requires the licensor to make a high capital
investment in the foreign market.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
47) Describe five advantages of licensing agreements from the perspective of the licensor.
Answer: a. Licensing requires neither substantial capital investment nor direct involvement of
the licensor in the foreign market. Unlike other entry strategies, the licensor need not establish a
physical presence in the market or maintain inventory there.
b. Licensing makes entry possible in countries that restrict foreign ownership in security-
sensitive industries, such as defense and energy.
c. Licensing also facilitates entry in markets that are difficult to enter because of trade barriers,
tariffs, and bureaucratic requirements, which usually apply only to exporting or FDI.
d. Licensing can be used as a low-cost strategy to test the viability of foreign markets. By
establishing a relationship with a local licensee, the foreign firm can learn about the target
market and devise the best future strategy for establishing a more durable presence there. For
example, Swiss pharmaceutical manufacturer Roche entered a licensing agreement with Chugai
Pharmaceuticals in Japan, where success requires substantial knowledge of the local market and
the drug approval process. The relationship accelerated Roche's penetration of the huge Japanese
market.
e. Licensing can also help the firm develop its brand name in a target market and preempt the
later entry of competitors.
Diff: 2: Moderate
Skill: Concept
15
48) Which of the following is an example of franchising?
A) An Italian clothing company opens manufacturing factories in China and Bangladesh to
reduce manufacturing costs.
B) A U.S-based quick-service restaurant gives rights to another business to use its entire business
system in exchange for compensation and royalties.
C) A U.S.-based animation company allows factories in China to use their famous cartoon
character on mugs and stationery.
D) A Germany automobile manufacturer opens an office in Philippines for its customer care
operations.
Answer: B
Diff: 3: Hard
Skill: Application
Objective: 15-4: Understand franchising as an entry strategy
49) Which of the following is true about franchising as an entry strategy?

A) It provides firms with minimum control over foreign operations.
B) It is an ownership-based international business activity.
C) It restricts a firm's ability to expand more rapidly abroad.
D) It is typically characterized as an unstable, short-term entry strategy.
Answer: C
Diff: 2: Moderate
Skill: Concept
50) Which of the following countries is home to the largest number of franchisors?
A) United States
B) Britain
C) China
D) Canada
Answer: A
Diff: 1: Easy
Skill: Concept
51) In a system franchising agreement, the franchisor provides ________.

A) down-payment plus royalty
B) production and marketing methods
C) lump-sum payment
D) sale of related products
Answer: B
Diff: 1: Easy
Skill: Concept
16
52) In a system franchising agreement, the franchisee provides ________.
A) training and ongoing support
B) trademark-protected business concepts
C) down-payment plus royalty
D) usage rights for products and patents
Answer: C
Diff: 1: Easy
Skill: Concept
53) Which of the following is characteristic of master franchise arrangements?

A) subfranchises to other independent businesses and thus assumes the role of the local
franchisor
B) franchisee provides completely standardized business activities, replicated across diverse
markets
C) franchise networks where franchisor provides a lump-sum payment to get started in a foreign
market
D) franchise networks that pay fewer royalties to franchisors
Answer: A
Diff: 2: Moderate
Skill: Concept
54) Information technology has increased the success and growth of international franchising
operations by ________.
A) eliminating the need for corporate meetings to discuss quality control
B) improving communication between MNE managers and their franchisees
C) reducing Internet sales and the need for freight forwarding services
D) assigning franchisors maximum control to oversee franchisees activities
Answer: B
Diff: 2: Moderate
Skill: Concept
AACSB: Analytical Thinking; Information Technology
55) In typical licensing agreements, the licensee compensates the licensor with a down-payment
plus ongoing royalties based on sales.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
17
56) Franchising is an advanced form of licensing in which the franchisor allows the franchisee
the right to use an entire business system in exchange for compensation.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
57) In a franchising agreement, the franchisee provides training, ongoing support, and the right
to participate in cooperative marketing programs to the franchisor.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
58) When compared to licensing agreements, the relationships established in franchising

arrangements are typically volatile and short-term.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
59) In a master franchising agreement, the master franchisee has the right to subfranchise to
other independent businesses and thus assume the role of the local franchisor.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
18
60) Explain franchising as an entry strategy into foreign markets. Describe three advantages and
three disadvantages of franchising for the franchisee.
Answer: Franchising is an advanced form of licensing in which the focal firm, the franchisor,
allows an entrepreneur, the franchisee, the right to use an entire business system in exchange for
compensation. As with licensing, an explicit contract defines the terms of the relationship.
McDonald's, Subway, Hertz, and FedEx are well-established international franchisors. Others
that use franchising to expand abroad include Benetton, Body Shop, Yves Rocher, and Marks &
Spencer. Franchising is common in international retailing. However, some retailers such as
IKEA and Starbucks have a strong preference for internationalizing through company-owned
outlets. Ownership provides these firms with greater control over foreign operations but also
typically restricts their ability to expand more rapidly abroad.
Although there are various types of franchising, the most typical arrangement is business format
franchising (sometimes called system franchising). The franchisor transfers to the franchisee a
total business method, including production and marketing methods, sales systems, procedures,
and management know-how, as well as the use of its name and usage rights for products, patents,
and trademarks. The franchisor also provides the franchisee with training, ongoing support,
incentive programs, and the right to participate in cooperative marketing programs.
In return, the franchisee pays some type of compensation to the franchisor, usually a royalty
representing a percentage of the franchisee's revenues. The franchisee may be required to
purchase certain equipment and supplies from the franchisor to ensure standardized products and
consistent quality.
The advantages of franchising to the franchisee include:
1. Gain a well-known, recognizable brand name;
2. Acquire training and know-how; receive ongoing support from the franchisor;
3. Operate an independent business;
4. Increase likelihood of business success; and
5. Become part of an established international network.
However, franchisees face a number of disadvantages after establishing a business arrangement
with a franchisor:
1. Initial investment or royalty payments may be substantial;
2. Franchisees are required to purchase supplies, equipment, and products from the franchisor
only;
3. The franchisor holds much power, including superior bargaining power;
4. Franchisor's outlets may proliferate in the region, creating competition for the franchisee; and
5. Franchisor may impose inappropriate technical or managerial systems on the franchisee.
Diff: 3: Hard
Skill: Concept
Objective: 15-4, 15-5: Understand franchising as an entry strategy, Explain the advantages and
disadvantages of franchising
19
61) Which of the following is an advantage of franchising to the franchisor?
A) It is easier to maintain control over a franchisee.
B) It is a low-risk, low-cost entry strategy.
C) There is seldom any risk of franchisees becoming future competitors.
D) There is seldom a requirement for the franchisor to become familiar with foreign laws and
regulations.
Answer: B
Diff: 2: Moderate
Skill: Concept
Objective: 15-5: Explain the advantages and disadvantages of franchising
62) Which of the following statements is true about international franchisors?

A) Entry into numerous foreign markets is tough and costly.
B) Maintaining control over franchisees is seldom difficult.
C) Franchisors need to invest substantial capital.
D) Franchisees may use franchise knowledge to start a competing business.
Answer: D
Diff: 1: Easy
Skill: Concept
63) Which of the following is an advantage of franchising to the franchisee?

A) reduced expenses as the franchisor provides supplies, equipment, and products
B) minimum initial investments or royalty payments are applicable
C) use of a well-known, recognizable brand name
D) franchisee holds much power, including superior bargaining power
Answer: C
Diff: 2: Moderate
Skill: Concept
64) Which of the following challenges is applicable to the franchisee in a franchising agreement?
A) The franchisee must make their own arrangements to acquire initial training and know-how.
B) The franchisor holds much power, including superior bargaining power.
C) There is no scope to operate an independent business.
D) There is decreased likelihood of business success.
Answer: B
Diff: 2: Moderate
Skill: Concept
20
65) To minimize the complexity of franchising, focal firms must ________.
A) bribe government officials to reduce nontariff trade barriers
B) have a subjective view of moral and ethical standards
C) conduct advance research on the host country's laws on intellectual property
D) appoint managers from the home country to avoid legal disputes
Answer: C
Diff: 2: Moderate
Skill: Concept
66) Which of the following makes it difficult to completely duplicate a food franchise in every
global market?
A) different local ingredients
B) differences in language
C) low bargaining power
D) need to invest substantial capital
Answer: A
Diff: 2: Moderate
Skill: Application
67) Host-country governments often encourage franchising because most of the money generated
by the franchise remains in the local economy.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
68) One of the advantages for the franchisor is that is it easier to maintain control over the
franchisee.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
69) Key challenges faced by the franchisee is the decreased likelihood of operating an
independent business.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
21
70) Licensing and franchising are complex undertakings and require skillful research, planning,
and execution.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
71) ________ is an arrangement in which the focal firm or a consortium of firms plans, finances,
organizes, manages, and implements all phases of a project abroad and then hands it over to a
foreign customer after training local workers.
A) Home-replication strategy
B) Exporting
C) Turnkey contracting
D) Equity-based collaborative venture
Answer: C
Diff: 1: Easy
Skill: Concept
Objective: 15-6: Understand other contractual entry strategies
72) ________ is an arrangement in which a contractor supplies managerial know-how to operate

a hotel, hospital, airport, or other facility in exchange for compensation.
A) Build-operate-transfer
B) Management contract
C) Leasing
D) Exporting
Answer: B
Diff: 1: Easy
Skill: Concept
73) Which of the following statements is true of leasing?

A) It is an arrangement in which a contractor supplies managerial know-how to operate a hotel,
hospital, airport, or other facility in exchange for compensation.
B) The lessor transfers ownership of the property in exchange for a lump-sum payment.
C) It is a high-risk and high-cost method of entering a foreign market.
D) A major advantage for the focal firm is the ability to gain quick access to target markets,
while putting assets to use in earning profits.
Answer: D
Diff: 1: Easy
Skill: Concept
22
74) Leasing is especially beneficial to ________.
A) advanced economies
B) economies with high PPP
C) First World countries
D) developing economies
Answer: D
Diff: 1: Easy
Skill: Concept
75) Professional service firms, such as PriceWaterhouseCooper, often enter large international
markets through FDI but usually use ________ to enter small markets.
A) equity-based collaborative ventures
B) affiliates
C) BOT arrangement
D) turnkey contracting
Answer: B
Diff: 1: Easy
Skill: Concept
Azoo Government Projects (Scenario)

The nation of Azoo needs the assistance of a contractor to construct a new bridge and a subway
system. The nation lacks the skilled labor and technical know-how to handle such large-scale
projects. Representatives of the Azoo government are reviewing the project bids provided by two
different international contractors. Contractor A proposes a turnkey contract for Azoo.
Contractor B proposes a build-operate-transfer arrangement.
76) Contractor A would most likely oversee each of the following EXCEPT ________.
A) designing the bridge
B) operating the subway system continuously
C) engineering the bridge
D) constructing the subway system
Answer: B
Diff: 3: Hard
Skill: Application
23
77) The government of Azoo might select Contractor B in order to ________.
A) prevent the builder from operating in the country for even a short period of time
B) avoid rental fee, user fee, and tolls during the operational stage of the bridge and subway
system
C) build the projects cost-effectively
D) increase the number of visitors to Azoo
Answer: C
Diff: 3: Hard
78) Which of the following most likely supports Azoo government's decision to award the
project bid to Contractor A?
A) Azoo leaders want immediate ownership of the public projects.
B) Azoo leaders want long-term help with operation of the subway.
C) Azoo lacks qualified workers to maintain public works projects.
D) Azoo lacks the financial resources to purchase large machinery.
Answer: A
Diff: 3: Hard
79) Turnkey contracting is an arrangement in which the focal firm or a consortium of firms
plans, finances, organizes, manages, and implements all phases of a project abroad and then
hands it over to a foreign customer after training local workers.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
80) Under a build-operate-transfer (BOT) arrangement, a firm or consortium of firms contracts to

build a major facility abroad and then transfers ownership to the project sponsor, typically the
host-country government or public utility.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
24
81) An arrangement in which a contractor supplies managerial know-how to operate a hotel,
hospital, airport, or other facility in exchange for compensation is known as offshoring.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
82) In international leasing, a major advantage for the lessor is the ability to gain quick access to
target markets, while putting assets to use earning profits.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
83) Describe three challenges faced by professional service firms when they internationalize.
Answer: Professional service firms encounter three unique challenges in going international:
∙ First, professional qualifications that allow firms to practice law, dentistry, medicine, or
accounting in the home country are rarely recognized by other countries. For example, if an
individual is a licensed accountant in the U.S. and he would like to practice accounting in
Argentina, he must earn local certification in that country.
∙ Second, professionals who work abroad for long periods generally must obtain employment
visas in the countries where they are employed.
∙ Third, professional services often require intensive interaction with the local public, which
necessitates language and cultural skills.
Diff: 2: Moderate
Skill: Concept
84) Which of the following statements is true of infringement of intellectual property?

A) The most commonly counterfeited goods include heavy machinery and computer
manufacturing.
B) It amounts to piracy and takes the form of production and distribution of counterfeit goods.
C) It is the ability to control important intellectual property before it reaches competitors.
D) Counterfeiting and piracy can be particularly troublesome in advanced economies because of
subjective ethical standards.
Answer: B
Diff: 2: Moderate
Skill: Concept
Objective: 15-7: Understand infringement of intellectual property, a global problem
25
Big Boy Burgers (Scenario)
Big Boy Burgers (BBB) is an American fast food restaurant chain that has franchises around the
world. Recently, BBB managers have been concerned about protecting the firm's intellectual
property, which includes the recipes for its unique burger sauces and specialty burger buns.
Although BBB has never experienced a theft of intellectual property, the firm's managers feel
BBB should be more cautious. Managers are meeting with security and legal experts to discuss
the options available to the firm which would protect BBB from future international problems.
85) Which of the following questions would be more important for the experts to evaluate when
determining how to ensure intellectual property protection for Big Boy Burgers?
A) What should be the penalties for theft of the recipes for their unique burger sauces and
specialty burger buns?
B) Is BBB partnering with ethical franchisees that have no intention of becoming BBB
competitors in the future?
C) What are the commonly counterfeited goods in the market?
D) How are BBB franchisees modifying recipes and menus to meet the needs and desires of
customers in local markets?
Answer: B
Diff: 3: Hard
86) Which of the following statements most likely supports BBB legal experts fully investigating
the intellectual property laws of each nation in which BBB has franchises?
A) Intellectual property laws and its enforcement varies from country to country.
B) Patents and trademarks granted in one country will transfer to another country.
C) TRIPS protects the intellectual property of firms doing business in any nation.
D) Nations with numerous IPR violators are beginning to comply with the WTO.
Answer: A
Diff: 3: Hard
87) The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was
created by the ________.
A) IMF
B) United Nations
C) WTO
D) World Bank
Answer: C
Diff: 1: Easy
Skill: Concept
26
88) Before undertaking contractual entry strategies abroad, management ________.
A) should bribe government officials to ensure protection of intellectual property
B) should register patents and copyrights with local governments
C) should keep information about intellectual property confidential from all franchisees in
countries with weak anti-piracy laws
D) understand and follow subjective moral and ethical standards across markets
Answer: B
Diff: 1: Easy
Skill: Concept
89) Which of the following is an essential method used by a focal firm to protect its intellectual
property in a foreign country?
A) lobbying foreign governments for stronger intellectual property laws
B) avoiding trade in countries with weak intellectual property laws
C) bribing foreign government officials
D) password-based security systems
Answer: D
Diff: 1: Easy
Skill: Concept
90) Laws that govern contractual obligations are uniform across countries, therefore, it makes
contract enforcement abroad easier for firms.
Answer: FALSE
Diff: 2: Moderate
Skill: Concept
91) Infringement of intellectual property is the unauthorized use or reproduction of products and
services protected by a patent, copyright, trademark, or other intellectual property right.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
92) When consumers buy counterfeit goods, payments accrue to the firm that invented the
product and not to illicit enterprises.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
27
93) Where counterfeiting and piracy are commonplace, companies are reluctant to invent,
innovate, and market legitimate products, which reduces consumer choices and ultimately lowers
living standards.
Answer: TRUE
Diff: 2: Moderate
Skill: Concept
94) Treaties that support international protection of intellectual property harm developing
economies due to high capital investment.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
95) Excluding noncompete clauses in employee contracts helps prevent employees from serving
competitors for some years after leaving the firm.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
28
96) Describe the guidelines for protecting intellectual property.
Answer: In advanced economies, intellectual property is usually protected within established
legal systems and methods of recourse. A firm can initiate legal action against someone who
infringes on its intellectual assets and will usually achieve a satisfactory remedy. Experienced
firms devise sophisticated approaches to reduce the likelihood of intellectual property violations
and help avoid their adverse effects, especially in countries with weak property rights.
Before undertaking contractual entry strategies abroad, management needs to understand local
intellectual property laws and enforcement procedures, particularly when exposed assets are
valuable. The firm should register patents, trademarks, trade secrets, and copyrights with local
governments, especially in countries with weak anti-piracy laws. Some companies lobby national
governments and international organizations for stronger intellectual property laws and more
vigilant enforcement, albeit with limited success.
Management must ensure that licensing and franchising agreements provide for oversight to
ensure intellectual property is used as intended. Licensing contracts should include provisions
that require the licensee to share improvements or technological developments on the licensed
asset with the licensor. Noncompete clauses in employee contracts help prevent employees from
serving competitors for some years after leaving the firm.
Monitoring franchisee, distribution, and marketing channels for asset infringements helps avoid
problems. The firm should monitor the activities of local business partners for potential leaks of
vital information and assets. Trade secrets must be guarded closely. Using password based
security systems, surveillance, and firewalls limits access to intellectual property. Intel and
Microsoft release only limited information about key technologies to partner firms. The firm can
deter much potential piracy by aggressively pursuing criminal prosecution or litigation against
those who pilfer its logos, proprietary processes, and other key assets.
Diff: 2: Moderate
Skill: Concept
29

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

Chapter 15 Licensing, Franchising, and Other Contractual Strategies

5) Which of the following is true about cross-border contractual relationships?

6) Which of the following is an example of intellectual property?

7) An industrial design is intended to ________.

9) The purpose of intellectual property rights is to ________.

17) Which of the following is an example of licensing?

19) In a licensing agreement, the licensee provides ________.

20) Which of the following is NOT provided by the licensor?

21) Which of the following is characteristic of exclusive licensing agreements?

23) Which of the following is an example of trademark licensing agreement?

24) Which of the following is protected under copyright laws?

25) Which of the following is characteristic of a know-how agreement?

27) ________ is the world's leading licensing firm?

28) The greatest amount of licensing occurs in the ________ industries.

36) Which of the following is an advantage of licensing?

40) Which of the following is a disadvantage of licensing for technological firms?

49) Which of the following is true about franchising as an entry strategy?

51) In a system franchising agreement, the franchisor provides ________.

53) Which of the following is characteristic of master franchise arrangements?

58) When compared to licensing agreements, the relationships established in franchising

62) Which of the following statements is true about international franchisors?

63) Which of the following is an advantage of franchising to the franchisee?

72) ________ is an arrangement in which a contractor supplies managerial know-how to operate

73) Which of the following statements is true of leasing?

Azoo Government Projects (Scenario)

80) Under a build-operate-transfer (BOT) arrangement, a firm or consortium of firms contracts to

84) Which of the following statements is true of infringement of intellectual property?

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