Wild Ib9 Tif 13

International Business: The Challenges of Globalization, 9e, Global Edition (Wild)
Chapter 13 Selecting and Managing Entry Modes
1) ________ is the most common form of international business activity.

A) Exporting
B) Licensing
C) Countertrade
D) Joint Venture
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 13.1: Describe how companies use exporting, importing, and countertrade.
2) Which of the following steps of the strategy development process for exports involves
performing market research and interpreting results obtained from the research?
A) identification of a potential market
B) match needs of the market to the company's abilities
C) initiation of meetings
D) commitment of resources
Answer: A
Skill: Concept
Difficulty: Easy
3) Which of the following steps of the strategy development process for exports involves
establishing relationships with potential local distributors?
A) identification of a potential market
B) match market needs to the company's abilities
C) initiation of meetings
D) commitment of resources
Answer: C
Skill: Concept
Difficulty: Easy
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4) What is the first step in selecting a foreign market?
A) identification of potential market
B) monitoring major markets
C) evaluating host country's trade policies
D) assessing general legal and political environments
Answer: A
Skill: Concept
Difficulty: Easy
5) Which of the following is true of distributors?

A) The use of distributors increases the exporter's control over the price buyers are charged.
B) They are compensated with a fixed salary plus commissions based on the value of their sales.
C) They are seldom required to take ownership of the merchandise when it enters their country.
D) They can stunt the growth of the exporter's market share by charging very high prices.
Answer: D
Skill: Concept
Difficulty: Moderate
6) ________ occur(s) when a firm sells its products to a domestic customer, which in turn
exports the product, in either its original form or a modified form.
A) Indirect exporting
B) Direct exporting
C) Intercorporate transfers
D) Intracorporate transfers
Answer: A
Skill: Concept
Difficulty: Easy
7) Which of the following allows a country to earn back some of the currency it pays out for
imports?
A) switch trading
B) counterpurchase
C) buyback
D) barter
Answer: B
Skill: Concept
Difficulty: Easy
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8) ________ refers to any one of several different arrangements that business parties negotiate so
that they can trade goods for good, primarily with countries that have limited amounts of foreign
exchange.
A) Factoring
B) Offset
C) Countertrade
D) Barter
Answer: C
Skill: Concept
Difficulty: Easy
9) The sale of goods and services to a country by a company that promises to buy a specific
product from that country in the future is called a(n) ________.
A) counterpurchase
B) offset
C) joint venture
D) barter
Answer: A
Skill: Concept
Difficulty: Easy
10) A company proposes that in exchange for a hard-currency sale, it will make a hard-currency
purchase of an unspecified product from the buyer nation in the future. Which of the following is
the company proposing?
A) a counterpurchase
B) an offset
C) a buyback
D) a barter
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Concept
Difficulty: Easy
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11) An offset agreement differs from a counterpurchase agreement in that an offset agreement
________.
A) fails to specify the type of product that must be purchased
B) fails to specify the amount that will be spent on the purchase
C) fails to give a business greater freedom in fulfilling its end of a countertrade deal
D) fails to make a hard-currency purchase of any product from that nation in the future
Answer: A
Skill: Concept
12) ________ is a countertrade whereby one company sells to another its obligation to make a
purchase in a given country.
A) Franchising
B) Joint venture
C) Switch trading
D) Barter
Answer: C
Skill: Concept
Difficulty: Easy
13) Buyback is defined as ________.

A) the export of industrial equipment in return for products produced by that equipment
B) an agreement that a company will offset a hard-currency sale to a nation by making a hard-
currency purchase of an unspecified product from that nation in the future
C) the sale of goods or services to a country by a company that promises to make a future
purchase of a specific product from that country
D) the exchange of goods or services for a certain amount of money
Answer: A
Skill: Concept
Difficulty: Easy
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14) The export of industrial equipment in return for products produced by that equipment is
called ________.
A) barter
B) franchising
C) offset
D) buyback
Answer: D
Skill: Concept
Difficulty: Easy
15) Which of the following statements is true of countertrade?

A) Countertrade is practiced by countries when there is a lack of hard currency.
B) Countertrade involves products whose prices on world markets tend to remain steady.
C) Countertrade usually involves industrial products and computer softwares.
D) Hedging risk in countertrade is prohibited.
Answer: A
Skill: Concept
16) Which of the following is a strategic factor that influences a company's international entry
mode selection?
A) market consumption capacity
B) market receptivity
C) market size
D) market intensity
Answer: C
Skill: Concept
Difficulty: Easy
17) Which of the following is an advantage of exporting?

A) vulnerability to tariffs
B) logistical complexities
C) potential conflicts with distributors
D) access to new markets
Answer: D
Skill: Concept
Difficulty: Easy
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Scenario: Owen's HomeCare Products
Owen McCain, owner of Owen's HomeCare Products, is considering going international. He
feels that the products he manufactures will be well-received, especially in developing countries.
He wants to understand the exporting process and then scale his exporting activities accordingly.
18) Through his research, Owen learns that the first step in developing a successful export
strategy is ________.
A) initiation of meetings with intermediaries
B) identification of a potential market
C) commitment of resources
D) matching of market needs to company abilities
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Easy
19) Which of the following steps would Owen implement toward the end while developing a
successful export strategy?
A) initiation of meetings with intermediaries
B) identification of a potential market
C) commitment of resources
D) matching of market needs to company abilities
Answer: C
Skill: Application
Difficulty: Easy
20) If Owen's HomeCare Products decides to sell their products to intermediaries who then resell
them to buyers in target markets, the company would be engaging in ________ and use the
services of an Export Management Company (EMC).
A) indirect exporting
B) counterpurchase
C) an acquisition
D) a joint venture
Answer: A
Skill: Application
Difficulty: Easy
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Scenario: Wang's Techno Toys
Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the
domestic market. Continually increasing and stiff competition at home has now forced Wang's
Techno Toys to enter international markets through direct exports.
21) Which of the following will most likely help Techno Toys sell its toys directly to buyers in
the target market?
A) agents
B) sales representatives
C) export management companies
D) export trading companies
Answer: B
Skill: Application
Difficulty: Hard
22) Which of the following occurs when a company sells its products to buyers in a target market
without going through intermediary companies?
A) direct export
B) indirect export
C) contract manufacturing
D) licensing
Answer: A
Skill: Concept
Difficulty: Easy
23) ________ take ownership of the merchandise when it enters their country and accept all the
risks associated with generating local sales.
A) Agents
B) Distributors
C) Sales representatives
D) Freight forwarders
Answer: B
Skill: Concept
Difficulty: Easy
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24) A(n) ________ exports products on behalf of an indirect exporter.
A) local distributor
B) subsidiary
C) sales representative
D) export management company
Answer: D
Skill: Concept
Difficulty: Easy
25) The most common method used for buying and selling goods internationally is exporting.
Answer: TRUE
Skill: Concept
Difficulty: Easy
26) Most large companies use exporting to increase sales and open up new markets when the
domestic market has become saturated.
Answer: TRUE
Skill: Concept
27) Companies can achieve economies of scale in production by expanding into international
markets.
Answer: TRUE
Skill: Concept
28) Direct exporting is when a company sells its products directly to buyers in a target market.
Indirect exporting occurs when a company sells its products to intermediaries who then resell to
buyers in a target market.
Answer: TRUE
Skill: Concept
Difficulty: Easy
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29) Typically, indirect exporting relies on local sales representatives or distributors.
Answer: FALSE
Skill: Concept
Difficulty: Easy
30) Distributors are firms who take ownership of the merchandise when it enters their country.
Answer: TRUE
Skill: Concept
Difficulty: Easy
31) Agency relationships are popular among exporters because they are easy to terminate should
difficulties arise.
Answer: FALSE
Skill: Concept
32) Countertrade provides a way for firms to trade either by using a small amount of hard
currency or even none at all.
Answer: TRUE
Skill: Concept
33) Countertrade is not an option for smaller companies because of the cash outlays involved.
Answer: FALSE
Skill: Concept
34) Buyback is the export of industrial equipment in return for products produced by that
equipment.
Answer: TRUE
Skill: Concept
Difficulty: Easy
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35) A confirmed letter of credit is guaranteed by both the exporter's bank in the country of export
and the importer's bank in the country of import.
Answer: TRUE
Skill: Concept
Difficulty: Easy
36) Letters of credit are popular among traders because it reduces the risk of non-shipment.
Answer: TRUE
Skill: Concept
37) Commonly licensed intangible property includes patents, copyrights, special formulas and
designs, trademarks, and brand names.
Answer: TRUE
Skill: Concept
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38) Explain why companies consider exporting. Describe the four-step model of developing a
successful export strategy.
Answer: Companies generally begin exporting for three main reasons.
1. Expand sales-Most large companies use exporting as a means of expanding total sales when
the domestic market has become saturated. By going international, they tend to achieve
economies of scale.
2. Diversify sales-Companies can offset slow sales in one national market with increased sales in
another.
3. Gain experience-Companies often use exporting as a low-cost, low-risk way of getting started
in international business.
Companies are often drawn into exporting when customers in other countries solicit their goods.
In this way, companies become aware of their products' international potential and get their first
taste of international business. Yet a company should not fall into the habit of simply responding
to random international requests for its products. A more logical approach is to research and
analyze international opportunities and to develop a coherent export strategy. A business with
such a strategy actively pursues export markets rather than sitting back and waiting for
international orders to come in.
Step 1: Identify a potential market—To identify whether demand exists in a particular target
market, a company should perform market research and interpret the results. Novice exporters
should focus on one or only a few markets. For example, a first-time Brazilian exporter might
not want to export simultaneously to Argentina, Britain, and Greece. A better strategy would
likely be to focus on Argentina because of its cultural similarities with Brazil (despite having a
different, though related, language). The company could then expand into more diverse markets
after it gains initial international experience in a nearby country. The would-be exporter should
also seek expert advice on the regulations and general process of exporting and any special
issues related to a selected target market.
Step 2: Match needs to abilities—The next step is to determine whether the company is capable
of satisfying the needs of the market.
Step 3: Initiate Meetings—Holding meetings early with potential local distributors, buyers, and
others is a must. Initial contact should focus on building trust and developing a cooperative
climate among all parties. The cultural differences between the parties will come into play
already at this stage. Beyond building trust, successive meetings are designed to estimate the
potential success of any agreement if interest is shown on both sides. At the most advanced
stage, negotiations take place and details of agreements are finalized.
Step 4: Commit resources—After all the meetings, negotiations, and contract signings, it is time
to put the company's human, financial, and physical resources to work. First, the objectives of
the export program must be clearly stated and should extend out at least three to five years. For
small firms, it may be sufficient to assign one individual the responsibility for drawing up
objectives and estimating resources. Yet as companies expand their activities to include more
products and/or markets, many firms discover the need for an export department or division. The
head of this department usually has the responsibility (and authority) to formulate, implement,
and evaluate the company's export strategy.
Skill: Concept
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39) Why would an exporter use a sales representative or a distributor? Why would the exporter
be reluctant to offer an open account payment method?
Answer: Some companies become deeply involved in the export of their products. Direct
exporting occurs when a company sells its products directly to buyers in a target market. Direct
exporters operate in many industries, including aircraft, industrial equipment, apparel, and
bottled beverages. Direct exporters need not sell directly to end users. Rather, they take full
responsibility for getting their goods into the target market by selling directly to local buyers and
not going through intermediary companies. Typically, they rely on either local sales
representatives or distributors.
Sales Representatives—A sales representative (whether an individual or an organization)
represents only its own company's products, not those of other companies. Sales representatives
promote those products in many ways, such as by attending trade fairs and making personal
visits to local retailers and wholesalers. They do not take title to the merchandise. Rather, they
are hired by a company and normally are compensated with a fixed salary plus commissions
based on the value of their sales.
Distributors—Alternatively, a direct exporter can sell in the target market through distributors,
who take ownership of the merchandise when it enters their country. As owners of the products,
they accept all the risks associated with generating local sales. They sell either to retailers and
wholesalers or to end users through their own channels of distribution. Typically, they earn a
profit equal to the difference between the price they pay and the price they receive for the
exporter's goods. Although using a distributor reduces an exporter's risk, it also weakens an
exporter's control over the price buyers are charged. A distributor who charges very high prices
can stunt the growth of an exporter's market share. Exporters should choose, if possible,
distributors who are willing to invest in the promotion of their products and who do not sell
directly competing products.
Export/import financing in which an exporter ships merchandise and later bills the importer for
its value is called open account. Because some receivables may not be collected, exporters
should reserve shipping on open account only for their most trusted customers. This payment
method is often used when the parties are very familiar with each other or for sales between two
subsidiaries within an international company. The exporter simply invoices the importer (as in
many domestic transactions), stating the amount and date due. This method reduces the risk of
nonshipment faced by the importer under the advance payment method. By the same token, the
open account method increases the risk of nonpayment for the exporter. Thus, open account is
the least favorable for exporters but the most favorable for importers.
Skill: Synthesis
Difficulty: Hard
12
40) What is countertrade? Explain the concept of buyback as a type of countertrade, and discuss
buyback as a joint venture configuration.
Answer: Companies are sometimes unable to import merchandise in exchange for financial
payment. The reason is either that the government of the importer's nation lacks the hard
currency to pay for imports or that it intentionally restricts the convertibility of its currency.
Fortunately, there is a way for firms to trade by using either a small amount of hard currency or
even none at all. Selling goods or services that are paid for, in whole or in part, with other goods
or services is called countertrade. Although countertrade often requires an extensive network of
international contacts, even smaller companies can take advantage of its benefits.
Nations that have long used countertrade are found mostly in Africa, Asia, Eastern Europe, and
the Middle East. A lack of adequate hard currency often forced those nations to use countertrade
to exchange oil for passenger aircraft and military equipment. Today, because of insufficient
hard currency, developing and emerging markets frequently rely on countertrade to import
goods. The greater involvement of firms from industrialized nations in those markets is
expanding the use of countertrade.
Buyback is the export of industrial equipment in return for products produced by that equipment.
This practice usually typifies long-term relationships between the companies involved.
A buyback joint venture is formed when each partner requires the same component in its
production process. It might be formed when a production facility of a certain minimum size is
needed to achieve economies of scale but neither partner alone enjoys enough demand to warrant
building it. However, by combining resources, the partners can construct a facility that serves
their needs while achieving savings from economies of scale production. For instance, this was
one reason behind the $500 million joint venture between Chrysler and BMW to build small-car
engines in Latin America. Each party benefited from the economies of scale offered by the
plant's annual production capacity of 400,000 engines—a volume that neither company could
absorb alone.
Skill: Synthesis
Difficulty: Hard
41) Companies involved in direct exporting typically rely on ________.

A) distributors
B) agents
C) export management companies
D) All of the above
Answer: D
Skill: Concept
Difficulty: Easy
LO: 13.2: Explain the various methods of export/import financing.
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42) Which of the following is a method of export/import financing?
A) offset
B) buyback
C) switch trading
D) documentary collection
Answer: D
Skill: Concept
Difficulty: Easy
43) Which of the following normally takes the form of a wire transfer of money from the bank
account of the importer directly to that of the exporter prior to shipment of merchandise?
A) documentary collection
B) letter of credit
C) advance payment
D) open account
Answer: C
Skill: Concept
Difficulty: Easy
44) Advance payment is commonly used for export/import financing when ________.
A) two parties are unfamiliar with each other
B) the buyer has obtained credit for the transaction
C) the transaction is for a relatively high amount
D) the buyer has good credit rating at banks
Answer: A
Skill: Concept
Difficulty: Easy
45) Export/import financing in which a bank acts as an intermediary without accepting financial
risk is called ________.
B) counterpurchase
C) buyback
D) open account
Answer: A
Skill: Concept
Difficulty: Easy
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46) Which of the following financing methods entails the greatest risk for importers?
B) advance payment
C) confirmed letter of credit
D) open account
Answer: B
Skill: Concept
Difficulty: Easy
47) Which of the following financing methods entails the lowest risk for exporters?
A) supersedeas bond
B) advance payment
C) letter of credit
D) open account
Answer: B
Skill: Concept
Difficulty: Easy
48) What is the primary risk an exporter faces with documentary collection?
A) bank changing terms
B) importer defaulting
C) issuing bank defaulting
D) importer failing to pay account balance
Answer: B
Skill: Concept
Difficulty: Easy
49) A document ordering the importer to pay the exporter a specified sum of money at a
specified time is called a ________.
A) bill of lading
B) letter of credit
C) bill of exchange
D) management contract
Answer: C
Skill: Concept
Difficulty: Easy
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50) Which of the following requires an importer to pay for the imported goods when they are
delivered?
A) sight draft
B) onboard bill of lading
C) air way bill of lading
D) time draft
Answer: A
Skill: Concept
Difficulty: Easy
51) A ________ extends credit to the importer by requiring payment at some specified time after
the importer receives the goods.
A) sight draft
B) time draft
C) bill of lading
D) bill of exchange
Answer: B
Skill: Concept
Difficulty: Easy
52) What document serves as a title to the goods in question under the document collection
payment method?
A) sight draft
B) bill of lading
C) bill of exchange
D) trade acceptance
Answer: B
Skill: Concept
Difficulty: Easy
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53) Which of the following is a method of export/import financing in which the importer's bank
issues a document stating that the bank will pay the exporter when the exporter fulfills the terms
of the document?
A) sight draft
B) bill of lading
C) letter of credit
D) bill of exchange
Answer: C
Skill: Concept
Difficulty: Easy
54) Martin Exporting requests ABC Bank to add its own guarantee of payment to a letter of
credit, which creates a(n) ________.
A) advised letter of credit
B) confirmed letter of credit
C) irrevocable letter of credit
D) unconfirmed letter of credit
Answer: B
Skill: Concept
Difficulty: Easy
55) Which of the following letters of credit can be modified without obtaining approval from
either the exporter or the importer, by the bank issuing the letter of credit?
A) revocable letter of credit
B) confirmed letter of credit
C) at sight letter of credit
D) irrevocable letter of credit
Answer: A
Skill: Concept
Difficulty: Easy
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56) A(n) ________ is guaranteed by both the exporter's bank in the country of export and the
importer's bank in the country of import.
A) confirmed letter of credit
B) transferrable letter of credit
C) revocable letter of credit
D) irrevocable letter of credit
Answer: A
Skill: Concept
Difficulty: Easy
57) Letters of credit are popular among traders because the risk of non shipment are assumed by
________.
A) distributors
B) importers
C) exporters
D) banks
Answer: D
Skill: Concept
Difficulty: Easy
58) Export/import financing in which an exporter ships merchandise and later bills the importer
for its value is called ________.
A) advance payment
B) open account
C) a letter of credit
D) documentary collection
Answer: B
Skill: Concept
Difficulty: Easy
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Scenario: Wang's Techno Toys
Ann Wang has been successfully running Wang's Techno Toys that sells high-tech toys in the
domestic market. Continually increasing and stiff competition at home has now forced Wang's
Techno Toys to enter international markets through direct exports.
59) In some countries, people exchange electronic goods for Techno Toys instead of paying
money for them. This practice is known as ________.
A) offset
B) counterpurchase
C) switch trading
D) barter
Answer: D
Skill: Application
Difficulty: Hard
60) Which of the following methods of export/import financing is Techno Toys' bank using if it
acts as an intermediary without accepting financial risk?
B) buyback
C) letter of credit
D) advance payment
Answer: A
Skill: Application
Difficulty: Hard
19
Scenario: Gro-Tru Grows To Europe
Gro-Tru, a maker of chemical fertilizers and pesticides, sees enormous growth potential in
Central Europe. The company has received several inquiries from potential importers in the
region, but in most cases, the potential importers have expressed difficulty in obtaining the hard
currency to pay for Gro-Tru's products. Alistair Green, vice-president for business development,
is exploring how Gro-Tru can meet the needs of the potential market.
61) Alistair has identified an option that might help the firm deal with the importer's inability to
pay with hard currency. The option involves selling goods or services that are paid for in whole
or part with other goods or services. Which of the following methods is Alistair considering?
A) auction
B) bidding
C) countertrade
D) tendering
Answer: C
Skill: Concept
Difficulty: Easy
62) Which of the following methods would Gro-Tru be implementing if it exchanges its products
directly for other goods or services without the use of money?
A) barter
B) offset
C) switch trading
D) buyback
Answer: A
Skill: Concept
Difficulty: Easy
63) Gro-Tru would be engaging in ________, if it decides that in exchange for a hard-currency
sale it would make a hard-currency purchase of an unspecified product from the importing nation
in the future.
A) barter
B) offset
C) switch trading
D) buyback
Answer: B
Skill: Concept
Difficulty: Easy
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64) One option that intrigues Alistair is the process in which one company sells to another its
obligation to make a purchase in a given country. This arrangement is known as ________.
A) barter
B) offset
C) switch trading
D) buyback
Answer: C
Skill: Concept
Difficulty: Easy
65) In his research, Alistair discovers a type of arrangement in which industrial equipment is
exported in return for products produced by that equipment. This arrangement is known as
________.
A) barter
B) offset
C) switch trading
D) buyback
Answer: D
Skill: Concept
Difficulty: Easy
Scenario: Sports Stuff Inc.

Herb Graham is vice president of Sports Stuff Inc., a business that develops, manufactures, and
markets sports products. The company is looking to expand its operations into the European
market. Herb believes that if the company expands its product line to include products reflecting
sports that are popular in Europe, the company will achieve success there.
66) Herb knows that much of the success his company enjoys is due to the patents and
copyrights that protect the company's products. If Sports Stuff chooses an entry mode in which it
grants another firm the right to use its intangible property for a specified period of time, it would
be engaging in ________.
A) a turnkey project
B) franchising
C) licensing
D) a joint venture
Answer: C
AACSB: Analytical thinking; Written and oral communication
Skill: Concept
Difficulty: Easy
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67) Herb has been exploring another type of entry mode that requires ongoing assistance on the
part of one firm, often in the form of start-up capital, management training, or location advice.
Herb is most likely considering ________.
A) a strategic alliance
B) franchising
C) licensing
D) a joint venture
Answer: B
Skill: Concept
Difficulty: Easy
68) Matching market needs to the company's abilities is the first step in developing a successful
export strategy.
Answer: FALSE
Skill: Concept
Difficulty: Easy
69) Advance payment is the most favorable method of payment collection for exporters.
Answer: TRUE
Skill: Concept
Difficulty: Easy
70) Advance payment made by an importer to an exporter normally takes the form of a sight
draft.
Answer: FALSE
Skill: Concept
71) A time draft extends the period of time following delivery by which the importer must pay
for goods.
Answer: TRUE
Skill: Concept
Difficulty: Easy
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72) The open account method of export/import financing is used when the two parties are
unfamiliar with each other.
Answer: FALSE
Skill: Concept
73) Cross licensing occurs when companies use licensing agreements to swap intangible property
with one another.
Answer: TRUE
Skill: Concept
Difficulty: Easy
74) Discuss the steps companies should take to avoid export and import blunders. How can an
advance payment method help exporters reduce financial risk?
Answer: There are several errors common to companies new to exporting. First, many
businesses fail to conduct adequate market research before exporting. In fact, many companies
begin exporting by responding to unsolicited requests for their products. If a company enters a
market in this manner, it should quickly devise an export strategy to manage its export activities
effectively and not strain its resources.
Second, many companies fail to obtain adequate export advice. National and regional
governments are often willing and able to help managers and small-business owners understand
and cope with the vast amounts of paperwork required by each country's export and import laws.
Naturally, more experienced exporters can be extremely helpful as well. They can help novice
exporters avoid embarrassing mistakes by guiding them through unfamiliar cultural, political,
and economic environments.
To better ensure that it will not make embarrassing blunders, an inexperienced exporter might
also want to engage the services of a freight forwarder—a specialist in export-related activities
such as customs clearing, tariff schedules, and shipping and insurance fees. Freight forwarders
also can pack shipments for export and take responsibility for getting a shipment from the port of
export to the port of import.
The advance payment method can help exporters reduce financial risk. Advance payment refers
to export/import financing in which an importer pays an exporter for merchandise before it is
shipped. This method of payment is common when two parties are unfamiliar with each other,
the transaction is relatively small, or the buyer is unable to obtain credit because of a poor credit
rating at banks. Payment normally takes the form of a wire transfer of money from the bank
account of the importer directly to that of the exporter. Although prior payment eliminates the
risk of nonpayment for exporters, it creates the complementary risk of nonshipment for
importers—importers might pay for goods but never receive them. Thus advance payment is the
most favorable method for exporters but the least favorable for importers.
Skill: Synthesis
Difficulty: Hard
23
75) What are the different financing methods available to exporters and importers?
Answer: Export/import financing methods designed to reduce risks include advance payment,
documentary collection, letter of credit, and open account.
Advance Payment—Export/import financing in which an importer pays an exporter for
merchandise before it is shipped is called advance payment. This method of payment is common
when two parties are unfamiliar with each other, the transaction is relatively small, or the buyer
is unable to obtain credit because of a poor credit rating at banks. Payment normally takes the
form of a wire transfer of money from the bank account of the importer directly to that of the
exporter. Although prior payment eliminates the risk of nonpayment for exporters, it creates the
complementary risk of nonshipment for importers—importers might pay for goods but never
receive them. Thus advance payment is the most favorable method for exporters but the least
favorable for importers.
Documentary Collection—Export/import financing in which a bank acts as an intermediary
without accepting financial risk is called documentary collection. This payment method is
commonly used when there is an ongoing business relationship between two parties.
Letter of Credit—Export/import financing in which the importer's bank issues a document
stating that the bank will pay the exporter when the exporter fulfills the terms of the document is
called letter of credit. A letter of credit is typically used when an importer's credit rating is
questionable, when the exporter needs a letter of credit to obtain financing, and when a market's
regulations require it.
Open Account—Export/import financing in which an exporter ships merchandise and later bills
the importer for its value is called open account. Because some receivables may not be collected,
exporters should reserve shipping on open account only for their most trusted customers. This
payment method is often used when the parties are very familiar with each other or for sales
between two subsidiaries within an international company. The exporter simply invoices the
importer (as in many domestic transactions), stating the amount and date due. This method
reduces the risk of non-shipment faced by the importer under the advance payment method.
Skill: Concept
24
76) Describe the process of how the documentary collection procedure works using an example.
Answer: Export/import financing in which a bank acts as an intermediary without accepting
financial risk is called documentary collection. This payment method is commonly used when
there is an ongoing business relationship between two parties. The documentary collection
process can be broken into three main stages and nine smaller steps.
1. Before shipping merchandise, the exporter (with its banker's assistance) draws up a draft (bill
of exchange)—a document ordering the importer to pay the exporter a specified sum of money at
a specified time. A sight draft requires the importer to pay when goods are delivered. A time
draft extends the period of time (typically 30, 60, or 90 days) following delivery by which the
importer must pay for the goods.
2. Following creation of the draft, the exporter delivers the merchandise to a transportation
company for shipment to the importer. The exporter then delivers to its banker a set of
documents that includes the draft, a packing list of items shipped, and a bill of lading—a contract
between the exporter and shipper that specifies merchandise destination and shipping costs. The
bill of lading is proof that the exporter has shipped the merchandise. An international ocean
shipment requires an inland bill of lading to get the shipment to the exporter's border and an
ocean bill of lading for water transport to the importer nation. An international air shipment
requires an air way bill that covers the entire international journey.
3. After receiving appropriate documents from the exporter, the exporter's bank sends the
documents to the importer's bank. After the importer fulfills the terms stated on the draft and
pays its own bank, the bank issues the bill of lading (which becomes title to the merchandise) to
the importer.
Documentary collection reduces the importer's risk of nonshipment because the packing list
details the contents of the shipment and the bill of lading is proof that the merchandise was
shipped. The exporter's risk of nonpayment is increased because, although the exporter retains
title to the goods until the merchandise is accepted, the importer does not pay until all necessary
documents have been received. Although importers have the option of refusing the draft (and,
therefore, the merchandise), this action is unlikely. Refusing the draft—despite all terms of the
agreement being fulfilled—would make the importer's bank unlikely to do business with the
importer in the future.
Skill: Concept
77) The biggest advantage of an export management company is usually its ________.
A) knowledge of the target market's cultural, political, legal, and economic conditions
B) well-developed and extensive distribution channels and storage facilities
C) well-rounded experience in countertrade-related activities
D) financial understanding of investment projects and its manufacturing expertise
Answer: A
Skill: Concept
LO: 13.3: Describe the different types of contractual entry modes.
25
78) A way for firms to trade by using either a small amount of hard currency, or even none at all,
is called ________.
A) indirect exporting
B) countertrade
C) licensing
D) a joint venture
Answer: B
Skill: Concept
Difficulty: Easy
79) Which of the following refers to the exchange of goods or services directly for other goods
or services without the use of money?
A) offset
B) barter
C) counterpurchase
D) switch trading
Answer: B
Skill: Concept
Difficulty: Easy
80) Which of the following is a contractual entry mode?

A) wholly owned subsidiaries
B) licensing
C) joint ventures
D) exporting
Answer: B
Skill: Concept
Difficulty: Easy
81) Which of the following is a contractual entry mode in which a company owning intangible
property grants another firm the right to use that property for a specified period of time?
A) franchising
B) licensing
C) management contract
D) strategic alliance
Answer: B
Skill: Concept
Difficulty: Easy
26
82) Which of the following entry modes would Sports Stuff be implementing if it hires a
company to design, construct, and test a production facility on its behalf?
A) joint venture
B) turnkey project
C) wholly owned subsidiary
D) franchising
Answer: B
Skill: Concept
Difficulty: Easy
83) In a backward integration joint venture, the parties choose to invest together in downstream
business activities.
Answer: FALSE
Skill: Concept
Difficulty: Easy
84) The most important disadvantage of a strategic alliance is that it can create a future local or
even global competitor.
Answer: TRUE
Skill: Concept
85) Low tariffs and high quota limits encourage market entry by means of investment.
Answer: FALSE
Skill: Concept
27
86) Explain franchising with examples. Mention the advantages and disadvantages associated
with franchising. How is franchising different from licensing?
Answer: Franchising is a contractual entry mode in which one company (the franchiser) supplies
another (the franchisee) with intangible property and other assistance over an extended period.
Franchisers typically receive compensation as flat fees, royalty payments, or both. The most
popular franchises are those with widely recognized brand names, such as Mercedes,
McDonald's, and Starbucks. In fact, the brand name or trademark of a company is normally the
single most important item desired by the franchisee. This is why smaller companies with lesser
known brand names and trademarks have greater difficulty locating interested franchisees.
Franchising differs from licensing in several ways. First, franchising gives a company greater
control over the sale of its product in a target market. Franchisees must often meet strict
guidelines on product quality, day-to-day management duties, and marketing promotions.
Second, although licensing is fairly common in manufacturing industries, franchising is
primarily used in service industries such as auto dealerships, entertainment, lodging, restaurants,
and business services. Third, although licensing normally involves a one-time transfer of
property, franchising requires ongoing assistance from the franchiser. In addition to the initial
transfer of property, franchisers typically offer startup capital, management training, location
advice, and advertising assistance to their franchisees.
Some examples of the kinds of companies involved in international franchising include:
• Ozemail (Australia) awarded Magictel (Hong Kong) a franchise to operate its Internet phone
and fax service in Hong Kong.
• Jean-Louis David (France) awarded franchises to more than 200 hairdressing salons in Italy.
• Brooks Brothers (United States) awarded Dickson Concepts (Hong Kong) a franchise to
operate Brooks Brothers stores across Southeast Asia.
Advantages of franchising—There are several important advantages of franchising. First,
franchisers can use franchising as a low-cost, low-risk entry mode into new markets. Companies
following global strategies rely on consistent products and common themes in worldwide
markets. Franchising allows them to maintain consistency by replicating the processes for
standardized products in each target market. Many franchisers, however, will make small
modifications in products and promotional messages when marketing specifically to local
buyers.
Second, franchising is an entry mode that allows for rapid geographic expansion. Firms often
gain a competitive advantage by being first in seizing a market opportunity. For example,
Microtel Inns & Suites of Atlanta, Georgia, is using franchising to fuel its international
expansion. Microtel is boldly entering Argentina and Uruguay and eyeing opportunities in Brazil
and Western Europe. Rooms cost around $75 per night and target business travelers who cannot
afford $200 per night.
Finally, franchisers can benefit from the cultural knowledge and know-how of local managers.
This helps lower the risk of business failure in unfamiliar markets and can create a competitive
advantage.
Disadvantages of franchising—Franchising can also pose problems for both franchisers and
franchisees. First, franchisers may find it cumbersome to manage a large number of franchisees
in a variety of national markets. A major concern is that product quality and promotional
messages among franchisees will not be consistent from one market to another. One way to
ensure greater control is by establishing in each market a so-called master franchisee, which is
responsible for monitoring the operations of individual franchisees.
28
Second, franchisees can experience a loss of organizational flexibility in franchising agreements.
Franchise contracts can restrict their strategic and tactical options, and they may even be forced
to promote products owned by the franchiser's other divisions. For years PepsiCo owned the
well-known restaurant chains Pizza Hut, Taco Bell, and KFC. As part of their franchise
agreements with PepsiCo, restaurant owners were required to sell only PepsiCo beverages to
their customers. Many franchisees worldwide were displeased with such restrictions on their
product offerings and were relieved when PepsiCo spun off the restaurant chains.
Skill: Concept
Difficulty: Hard
29
87) Discuss the advantages of licensing, low-cost production, and low-cost shipping for
international companies.
Answer: There are several advantages to using licensing as an entry mode into new markets.
First, licensors can use licensing to finance their international expansion. Most licensing
agreements require licensees to contribute equipment and investment financing, whether by
building special production facilities or by using existing excess capacity. Access to such
resources can be a great advantage to a licensor who wants to expand but lacks the capital and
managerial resources to do so. And because it need not spend time constructing and starting up
its own new facilities, the licensor earns revenues sooner than it would otherwise.
Second, licensing can be a less risky method of international expansion for a licensor than other
entry modes. Whereas some markets are risky because of social or political unrest, others defy
accurate market research for a variety of reasons. Licensing helps shield the licensor from the
increased risk of operating its own local production facilities in markets that are unstable or hard
to assess accurately.
Third, licensing can help reduce the likelihood that a licensor's product will appear on the black
market. The side streets of large cities in many emerging markets are dotted with tabletop
vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of
internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing
local companies to market their products at locally competitive prices. Royalties will be lower
than the profits generated by sales at higher international prices, but lower profits are better than
no profits at all—which is what owners get from bootleg versions of their products.
Finally, licensees can benefit by using licensing as a method of upgrading existing production
technologies.
In addition to licensing, low-cost production and shipping can give a company an advantage by
helping to control total costs. Accordingly, setting up production in a market is desirable when
the total cost of production there is lower than in the home market. Low-cost local production
might also encourage contractual entry through licensing or franchising. If production costs are
sufficiently low, the international production site might even begin supplying other markets,
including the home country. An additional potential benefit of local production might be that
managers could observe buyer behavior and modify products to better suit the needs of the local
market. Lower production costs at home make it more appealing to export to international
markets.
Companies that produce goods with high shipping costs naturally prefer local production.
Contractual and investment entry modes are viable options in this case. Alternatively, exporting
is feasible when products have relatively lower shipping costs. Finally, because they are subject
to less price competition, products for which there are fewer substitutes or those that are
discretionary items can more easily absorb higher shipping and production costs. In this case,
exporting is a likely selection.
Skill: Synthesis
Difficulty: Hard
30
88) Which of the following statements is true of licensing?
A) Licensing restricts finances needed for international expansion.
B) Cross licensing grants a company the right to use a property but does not grant it sole access
to a market.
C) A major advantage of licensing is that it is the least risky method of international expansion.
D) Licensing increases the likelihood that a licensor's product will appear on the black market.
Answer: C
Skill: Concept
LO: 13.4: Describe the various kinds of investment entry modes.
89) Which of the following is a contractual entry mode in which one company supplies another
with intangible property and other assistance over an extended period?
A) franchising
B) management contract
C) licensing
Answer: A
Skill: Concept
Difficulty: Easy
90) When one company is hired to design, construct, and test a production facility for a client,
the arrangement is called ________.
A) a turnkey project
B) licensing
C) a joint venture
D) franchising
Answer: A
Skill: Concept
Difficulty: Easy
91) Which of the following is an investment entry mode?

A) licensing
B) franchising
C) joint venture
D) turnkey project
Answer: C
Skill: Concept
Difficulty: Easy
31
92) Which of the following is an advantage of wholly owned subsidiaries?
A) The parent company receives all profits generated by the subsidiary.
B) They are the least expensive investment entry modes.
C) They help in the sharing of the cost of an international investment project.
D) They are the least risky when compared to other investment entry modes.
Answer: A
Skill: Concept
93) A ________ is a separate company created and owned by two or more independent entities
to achieve a common business objective.
A) wholly owned subsidiary
B) joint venture
C) strategic alliance
D) turnkey project
Answer: B
Skill: Concept
Difficulty: Easy
94) Which of the following types of joint ventures involve parties investing together in
downstream business activities?
A) backward integration
B) forward integration
C) multistage
D) buyback
Answer: B
Skill: Concept
Difficulty: Easy
95) A ________ joint venture is formed when each partner requires the same component in its
production process.
A) backward
B) multistage
C) forward
D) buyback
Answer: D
Skill: Concept
Difficulty: Easy
32
96) Which of the following is a disadvantage of strategic alliances?
A) They are the most expensive among the investment entry modes.
B) They increase the likelihood that one partner will try to take advantage of the other.
C) They create future competitors.
D) They fail to tap into their competitors' specific strengths.
Answer: C
Skill: Concept

97) The CEO of Sports Stuff has decided that the company needs to retain complete control over
its operations in Europe. To achieve this objective, Herb would most likely recommend that the
firm establish a ________.
A) joint venture
B) cross licensing agreement
Answer: C
Skill: Application
Difficulty: Hard
98) The board of directors of Sports Stuff is concerned with the firm's lack of experience in
foreign markets. To minimize this problem, Herb recommends that the firm create a ________
with a local partner.
A) joint venture
B) turnkey project
D) franchise
Answer: A
Skill: Application
Difficulty: Hard
33
99) Franchising is primarily used in service industries.
Answer: TRUE
Skill: Concept
100) The primary advantage of franchising is that franchisees have a great degree of
organizational flexibility.
Answer: FALSE
Skill: Concept
101) Under a turnkey project, one company supplies another with managerial expertise for a
specific period of time.
Answer: FALSE
Skill: Concept
Difficulty: Easy
34
102) What are the advantages of pursuing a wholly owned subsidiary as an entry strategy?
Answer: A wholly owned subsidiary is a facility entirely owned and controlled by a single
parent company. Companies can establish a wholly owned subsidiary either by forming a new
company and constructing entirely new facilities (such as factories, offices, and equipment) or by
purchasing an existing company and internalizing its facilities. Whether an international
subsidiary is purchased or newly created depends to a large extent on its proposed operations.
When a parent company designs a subsidiary to manufacture the latest high-tech products, it
typically must build new facilities. The major drawback of creation from the ground up is the
time it takes to construct new facilities, hire and train employees, and launch production.
Conversely, finding an existing local company capable of performing marketing and sales will be
easier because special technologies are typically not needed. By purchasing the existing
marketing and sales operations of an existing firm in the target market, the parent can have the
subsidiary operating relatively quickly. Buying an existing company's operations in the target
market is a particularly good strategy when the company to be acquired has a valuable
trademark, brand name, or process technology.
There are two main advantages to entering a market using a wholly owned subsidiary. First,
managers have complete control over day-to-day operations in the target market and access to
valuable technologies, processes, and other intangible properties within the subsidiary. Complete
control also decreases the chance that competitors will gain access to a company's competitive
advantage, which is particularly important if it is technology-based. Managers also retain
complete control over the subsidiary's output and prices. Unlike licensors and franchisers, the
parent company also receives all profits generated by the subsidiary.
Second, a wholly owned subsidiary is a good mode of entry when a company wants to
coordinate the activities of all its national subsidiaries. Companies using global strategies view
each of their national markets as one part of an interconnected global market. Thus the ability to
exercise complete control over a wholly owned subsidiary makes this entry mode attractive to
companies that are pursuing global strategies.
Skill: Concept
35
103) What are the differences between a turnkey project and a strategic alliance?
Answer: When one company designs, constructs, and tests a production facility for a client, the
agreement is called a turnkey (build–operate–transfer) project. The term turnkey project is
derived from the understanding that the client, who normally pays a flat fee for the project, is
expected to do nothing more than simply 'turn a key' to get the facility operating. The company
awarded a turnkey project completely prepares the facility for its client.
Similar to management contracts, turnkey projects tend to be large-scale and often involve
government agencies. But unlike management contracts, turnkey projects transfer special process
technologies or production-facility designs to the client. They typically involve the construction
of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that
are then turned over to the client. Under a management contract, the supplier of a service retains
the asset—the managerial expertise.
With turnkey projects, one company hires another to complete a specified scope of work.
Strategic alliances, on the other hand, involve a level of cooperation between companies that
choose to partner to achieve joint objectives.
A relationship whereby two or more entities cooperate (but do not form a separate company) to
achieve the strategic goals of each is called a strategic alliance. Similar to joint ventures,
strategic alliances can be formed for relatively short periods or for many years, depending on the
goals of the participants. Strategic alliances can be established between a company and its
suppliers, its buyers, and even its competitors. In forming such alliances, sometimes each partner
purchases a portion of the other's stock. In this way, each company has a direct stake in its
partner's future performance. This decreases the likelihood that one partner will try to take
advantage of the other.
Skill: Synthesis
Difficulty: Hard
104) Which of the following statements best differentiates between franchising and licensing?
A) Licensing gives a company greater control than franchising over the sale of its product in a
target market.
B) Franchising is common in manufacturing industries while licensing is primarily used in
service industries.
C) Franchising requires ongoing assistance from the franchiser while licensing normally involves
a one-time transfer of property.
D) Licensees must often meet strict guidelines on product quality, day-to-day management
duties, and marketing promotions unlike franchisees.
Answer: C
Skill: Concept
LO: 13.5: Outline key strategic factors in selecting an entry mode.
36
105) Products for which there are fewer substitutes can more easily absorb higher shipping and
production costs.
Answer: TRUE
Skill: Concept
106) Identify the strategic factors that influence a company's international entry mode selection.
Explain any three of them.
Answer: The choice of entry mode has many important strategic implications for a company's
future operations. Because enormous investments in time and money can go into determining an
entry mode, the choice must be made carefully. Several key factors that influence a company's
international entry mode selection are the cultural environment, political and legal environments,
market size, production and shipping costs, and international experience.
Cultural Environment—The dimensions of culture—values, beliefs, customs, languages,
religions—can differ greatly from one nation to another. In such cases, managers can be less
confident in their ability to manage operations in the host country. They can be concerned about
the potential not only for communication problems but also for interpersonal difficulties. As a
result, managers may avoid investment entry modes in favor of exporting or a contractual mode.
On the other hand, cultural similarity encourages confidence and thus the likelihood of
investment. Likewise, the importance of cultural differences diminishes when managers are
knowledgeable about the culture of the target market.
Political and Legal Environments—Political instability in a target market increases the risk
exposure of investments. Significant political differences and levels of instability cause
companies to avoid large investments and to favor entry modes that shelter assets.
A target market's legal system also influences the choice of entry mode. Certain import
regulations, such as high tariffs or low quota limits, can encourage investment. A company that
produces locally avoids tariffs that increase product cost; it also doesn't have to worry about
making it into the market below the quota (if there is one). But low tariffs and high quota limits
discourage market entry by means of investment. Also, governments may enact laws that ban
certain types of investment outright.
Market Size—The size of a potential market also influences the choice of entry mode. For
example, rising incomes in a market encourage investment entry modes because investment
allows a firm to prepare for expanding market demand and to increase its understanding of the
target market. High domestic demand in China is attracting investment in joint ventures, strategic
alliances, and wholly owned subsidiaries. On the other hand, if investors believe that a market is
likely to remain relatively small, better options might include exporting or contractual entry.
Production and Shipping Costs—By helping to control total costs, low-cost production and
shipping can give a company an advantage. Accordingly, setting up production in a market is
desirable when the total cost of production there is lower than in the home market. Low-cost
local production might also encourage contractual entry through licensing or franchising. If
production costs are sufficiently low, the international production site might even begin
supplying other markets, including the home country. An additional potential benefit of local
production might be that managers could observe buyer behavior and modify products to better
suit the needs of the local market. Lower production costs at home make it more appealing to
export to international markets.
37
Companies that produce goods with high shipping costs naturally prefer local production.
Contractual and investment entry modes are viable options in this case. Alternatively, exporting
is feasible when products have relatively lower shipping costs. Finally, because they are subject
to less price competition, products for which there are fewer substitutes or those that are
discretionary items can more easily absorb higher shipping and production costs. In this case,
exporting is a likely selection.
International Experience—Most companies enter the international marketplace through
exporting. As companies gain international experience, they tend to select entry modes that
require deeper involvement. But this means businesses must accept greater risk in return for
greater control over operations and strategy. Eventually, they may explore the advantages of
licensing, franchising, management contracts, and turnkey projects. After businesses become
comfortable in a particular market, joint ventures, strategic alliances, and wholly owned
subsidiaries become viable options.
Skill: Concept
38

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International Business: The Challenges of Globalization, 9e, Global Edition (Wild)

Chapter 13 Selecting and Managing Entry Modes

1) ________ is the most common form of international business activity.

5) Which of the following is true of distributors?

13) Buyback is defined as ________.

15) Which of the following statements is true of countertrade?

17) Which of the following is an advantage of exporting?

41) Companies involved in direct exporting typically rely on ________.

Scenario: Sports Stuff Inc.

80) Which of the following is a contractual entry mode?

91) Which of the following is an investment entry mode?

Scenario: Sports Stuff Inc.

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