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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
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
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
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
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
66) Herb knows that much of the success his company enjoys is due to the patents and
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
68) Matching market needs to the company’s abilities is the first step in developing a successful
export strategy.
69) Advance payment is the most favorable method of payment collection for exporters.
70) Advance payment made by an importer to an exporter normally takes the form of a sight
draft.
71) A time draft extends the period of time following delivery by which the importer must pay
for goods.
72) The open account method of export/import financing is used when the two parties are
unfamiliar with each other.
73) Cross licensing occurs when companies use licensing agreements to swap intangible property
with one another.
74) Discuss the steps companies should take to avoid export and import blunders. How can an
advance payment method help exporters reduce financial risk?
75) What are the different financing methods available to exporters and importers?
76) Describe the process of how the documentary collection procedure works using an example.
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
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
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
80) Which of the following is a contractual entry mode?
A) wholly owned subsidiaries
B) licensing
C) joint ventures
D) exporting
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
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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.
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
83) In a backward integration joint venture, the parties choose to invest together in downstream
business activities.
84) The most important disadvantage of a strategic alliance is that it can create a future local or
even global competitor.
85) Low tariffs and high quota limits encourage market entry by means of investment.
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86) Explain franchising with examples. Mention the advantages and disadvantages associated
with franchising. How is franchising different from licensing?
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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.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Hard
LO: 13.3: Describe the different types of contractual entry modes.
87) Discuss the advantages of licensing, low-cost production, and low-cost shipping for
international companies.
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.
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
D) strategic alliance
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
91) Which of the following is an investment entry mode?
A) licensing
B) franchising
C) joint venture
D) turnkey project
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.
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
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
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
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.
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
C) wholly owned subsidiary
D) strategic alliance
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
C) wholly owned subsidiary
D) franchise
99) Franchising is primarily used in service industries.
100) The primary advantage of franchising is that franchisees have a great degree of
organizational flexibility.
101) Under a turnkey project, one company supplies another with managerial expertise for a
specific period of time.
102) What are the advantages of pursuing a wholly owned subsidiary as an entry strategy?
103) What are the differences between a turnkey project and a strategic alliance?
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.
105) Products for which there are fewer substitutes can more easily absorb higher shipping and
production costs.
106) Identify the strategic factors that influence a company’s international entry mode selection.
Explain any three of them.
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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.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 13.5: Outline key strategic factors in selecting an entry mode.