CHP 3 Mcqs

International Business: The New Realities
Chapter 3 Organizational Participants that Make International Business Happen

1) The majority of focal firms are privately owned multinational enterprises.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-1
AACSB: Dynamics of the global economy
2) The activities of firms, intermediaries, and facilitators in international business are thoroughly
distinct and rarely overlap.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-1
3) Some focal firms are manufacturing businesses, while others are in the service sector.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-1
4) Focal firms and intermediaries represent the demand side of international business
transactions.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-1
5) The value chain is not the complete business system of the focal firm.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-2
6) Retailers play critical roles in the initial stages of the international value chain.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-2
7) Sales representatives act as distribution channel intermediaries.
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Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-2
8) In an international value chain, sourcing occurs before research and development.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-2
9) Market research is a downstream value-chain activity.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-2
10) Distribution is an upstream value-chain activity.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-2
11) All focal firms are private businesses.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-3
12) In the years following World War II, most multinationals, typically from the United States
and the United Kingdom, went abroad seeking raw materials, production efficiencies, and
foreign-based customers.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-3
13) Due to their size, MNEs account for the majority of firms active in international business.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-3
14) Compared to large multinationals, SMEs can be more flexible and quicker to respond to
global business opportunities.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-3
15) The emergence of born global firms is associated with international entrepreneurship.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-3
16) Focal firms can be analyzed in terms of the entry strategies they use to expand abroad.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-4
17) A firm that grants another the right to use an entire business system in exchange for fees,
royalties, or other forms of compensation is known as a licensor.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-4
18) Joint ventures are less formal than project-based partnerships.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-4
19) A firm that enters into a contractual agreement with a foreign partner to allow the partner the
right to use certain intellectual property for a specified period of time in exchange for royalties or
other compensation is known as a franchisor.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-4
20) For most exporters, relying on an independent foreign distributor is a low-cost way to enter
foreign markets.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-5
21) Foreign distributors are often called merchant distributors.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-5
22) Selling products on the Internet has triggered the reduction of traditional intermediaries, such
as wholesalers.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-5
AACSB: Dynamics of the global economy; Use of information technology
23) A manufacturer's representative is an intermediary contracted by the exporter.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-5
24) A retailer represents the first link between distributors and end users.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-5
25) The number and role of facilitators have declined due to the complexity of international
business operations, intense competition, and technological advances.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-6
26) Many commercial banks are reluctant to extend credit to SMEs.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-6
27) International manufacturers rarely use common carriers.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-6
28) Governments often nationalize important companies facing financial ruin.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-7
29) Commercial banks are the monetary authorities in each country that issue currency and
regulate national money supplies.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 3-7
30) Sovereign wealth funds are state-owned investment funds that undertake systematic, global
investment activities.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 3-7
31) A ________ is the initiator of an international business transaction.

A) facilitator
B) focal firm
C) distribution channel intermediary
D) freight forwarder
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-1
32) Which of the following refers to the participant responsible for conceiving and designing a
product for consumption by customers worldwide?
A) government
B) facilitator
C) focal firm
D) intermediary
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-1
33) A ________ is a specialist firm that provides various logistics and marketing services for
focal firms as part of international supply chains, both in the focal firm's home country and
abroad.
A) facilitator
B) not-for-profit corporation
D) retailer
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-1
34) A ________ is a firm or an individual with special expertise in banking, legal advice,
customs clearance, or related support services that helps focal firms perform international
business transactions.
A) facilitator
B) born global firm
D) turnkey contractor
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-1
35) Which of the following refers to a specialized logistics service provider that arranges
international shipping for exporting firms?
A) freight forwarder
B) wholesaler
C) distributor
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-1
36) Which of the following represent the demand side of international business transactions?
A) focal firms
B) facilitators
C) intermediaries
D) retailers
Answer: D
Difficulty: Moderate
Skill: Application
Objective: 3-1
37) Logistics service providers, freight forwarders, and banks are examples of ________.
A) retailers
B) distribution channel intermediaries
C) focal firms
D) facilitators
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-1
38) ________ are businesses, institutions, and governments that purchase goods and services as
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inputs to a production process, or as supplies needed to run a business or organization.

A) Organizational buyers
B) Freight forwarders
C) Retailers
D) Licensors
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-1
39) Which of the following stages of the international value chain immediately precedes the
marketing stage?
A) sourcing
B) production
C) distribution
D) market research
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-2
40) A tax accountant would most likely be involved as a facilitator in which of the following
stages of the international value chain?
A) distribution
B) sourcing
C) production
D) after-sales service
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-2
41) Within the international value chain, which of the following would operate as a facilitator?
A) importer
B) lawyer
C) retailer
D) distributor
Answer: B
Skill: Application
Objective: 3-2
42) Which of the following stages of the international value chain immediately follows the
research and development stage?
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A) distribution
B) market research
C) production
D) sourcing
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-2
43) In the research and development stage of the international value chain, ________ act as
distribution channel intermediaries.
A) universities
B) research labs
C) innovation fairs
D) consolidators
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-2
44) Peter, a graduate student from Michigan, ordered a notebook from Opus Inc., an American
MNC manufacturing and selling computers and related products. The notebook that Peter
ordered from Michigan was assembled in Opus' factory in Taipei. This exemplifies the ________
stage in the international value chain.
A) research and development
B) sourcing
C) production
Answer: C
Skill: Application
Objective: 3-2
45) Which of the following is an upstream value-chain activity?

A) marketing
B) sourcing
C) distribution
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-2
46) Which of the following is a downstream value-chain activity?
A) marketing
B) sourcing
C) market research
D) research and development
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-2
47) Which of the following is true with regard to MNEs?
A) MNEs are constrained by limited human resource.
B) Due to their smaller size, MNEs often target specialized products.
C) MNEs are more flexible than SMEs.
D) MNEs perform various business activities through a network of subsidiaries.
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-3
48) MNEs are best known for their ________.
A) reluctance to explore emerging markets
B) foreign direct investment activities
C) high rates of employee attrition
D) preference for exporting as the main strategy for entering foreign markets
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-3
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49) As defined in Canada and the United States, small and medium-sized enterprises (SMEs) are
manufacturers or service providers with ________ or fewer employees.
A) 500
B) 5000
C) 1000
D) 250
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-3
50) As defined in the European Union, small and medium-sized enterprises (SMEs) are
manufacturers or service providers with ________ or fewer employees.
A) 500
B) 5000
C) 1000
D) 250
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-3
51) Which of the following is true about SMEs?
A) They are more bureaucratic than are most MNEs.
B) They are characterized by low adaptability.
C) They often sustain entrepreneurship and innovation in national economies.
D) They rarely target specialized products.
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-3
52) The rise of Eastern European SMEs has resulted largely from two trends: the access these
firms have gained in recent years to the massive European Union and ________.
A) direct investment by foreign investors in emerging markets
B) an increased emphasis on niche marketing
C) widespread outsourcing
D) regular tax breaks from national governments
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-3
53) In ________, some focal firms are partly or wholly owned by the government.
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A) free market economies

B) highly developed countries
C) market economies
D) centrally planned economies
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-3
54) SMEs usually choose ________ as their main strategy for entering foreign markets.
A) exporting
B) importing
C) divesting
D) investing
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-3
55) A born global firm is defined as ________.
A) a consortium of firms that plan, finance, organize, manage, and implement all phases of a
project and then hand it over to a foreign customer after training local personnel
B) a large global company that sells diverse and unrelated products
C) an intermediary that engages in import and export of a variety of commodities, products, and
services
D) a young entrepreneurial company that initiates international business activity early in its
evolution, moving rapidly into foreign markets
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-3
56) A young entrepreneurial company that initiates international business activity early in its
evolution, moving rapidly into foreign markets is called a(n) ________.
A) born global firm
B) MNE
C) not-for-profit company
D) conglomerate
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-3
57) Which of the following best describes a firm that allows a partner the right to use certain
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intellectual property for a specified period of time in exchange for royalties or other
compensation?
A) franchisor
B) licensor
C) manufacturer
D) trading company
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-4
58) A firm that grants another the right to use an entire business system in exchange for fees,
royalties, or other forms of compensation is known as a(n) ________.
A) franchisor
B) licensor
C) export management company
D) broker
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-4
59) Delegating certain noncore functions to outside vendors is a strategy known as ________.
A) franchising
B) licensing
C) outsourcing
D) diversifying
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-4
60) Licensing allows companies to ________.
A) internationalize rapidly while remaining in their home market
B) monitor and control employee behavior
C) eliminate the costs of advertising and branding
D) invest in emerging markets abroad
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-4
61) ________ specialize in international construction, engineering, design, and architectural
projects, usually for airports, hospitals, factories, power plants, oil refineries, campuses, and
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upgrades to public transportation such as bridges, roadways, and rail systems.

A) Freight forwarders
B) Turnkey contractors
C) Export management companies
D) Retailers
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-4
62) An increasingly popular type of turnkey contract in the developing economies is the
________, in which the contractors acquire an ownership stake in the facility for a period of time
until it is turned over to the client.
A) international collaborative venture
B) build-own-transfer venture
C) joint venture
D) project-based, nonequity venture
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-4
63) A(n) ________ is a crossborder business alliance in which partnering firms pool their
resources to create a new venture, sharing the associated costs and risks.
A) SME
B) build-own-transfer venture
C) MNE
D) international collaborative venture
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-4
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64) Collaborative arrangements help focal firms to ________.

A) create and sustain market monopolies
B) connect with domestic customers
C) configure value chains more effectively
D) monitor and control employee behavior
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-4
65) Project-based partnerships ________.
A) are extremely formal ventures
B) undertake projects with a relatively broad scope
C) involve equity investment in the parent companies
D) are short-term, nonequity ventures
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-4
66) A focal firm that creates and owns a new legal entity through equity investment or pooling of
assets is called a(n) ________.
A) project-based partner
B) joint venture partner
C) build-own-transfer venture
D) nonequity venture partner
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-4
67) Distribution channel intermediaries perform all of the following functions for focal firms
EXCEPT ________.
A) production
B) advertising
C) customer service
D) warehousing
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-5
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68) Foreign distributors that purchase products from exporters for resale at a profit are known as
________.
A) brokers
B) merchant distributors
C) domestic intermediaries
D) sales representatives
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-5
69) Distribution channel intermediaries ________.
A) deliver products and services in the home country and abroad
B) provide financial support to SMEs
C) facilitate customs clearance for MNEs
D) assist focal firms with legal issues
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-5
70) A(n) ________ is an intermediary (often an individual or a small firm) that handles orders to
buy and sell commodities, products, and services in international business transactions for a
commission.
A) agent
B) licensor
C) franchisor
D) foreign distributor
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-5
71) A(n) ________ is an intermediary contracted by the exporter to represent and sell its
merchandise or services in a designated country or territory.
A) licensor
B) retailer
C) franchisor
D) agent
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-5
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72) In a market consisting of many small, widely dispersed buyers and sellers, the function of
which of the following is especially important?
A) foreign distributors
B) licensors
C) agents
D) retailers
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-5
73) Dealing directly with foreign-based retailers is efficient because ________.
A) it shortens the distribution channel
B) it enhances the brand image of products
C) it helps create market monopolies
D) it eliminates competition
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-5
74) ________ assume the international marketing function on behalf of producers, especially
those with limited international business experience.
A) Export management companies
B) Manufacturer's representatives
C) Customs brokers
D) Trading companies
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-5
75) Trading companies play an important role in Japan's external trade because Japan ________.
A) manufactures technological devices
B) has few natural resources
C) has a steadily rising population
D) has a high average per-capita income
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-5
76) Which of the following is true with regard to online intermediaries?
A) They discourage customers to visit physical outlets.
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B) They consolidate wholesale channels.

C) They broker transactions between buyers and sellers worldwide.
D) They complement traditional intermediaries.
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-5
77) The increase in the number of international business facilitators has been driven by all of the
following EXCEPT ________.
A) technological advances
B) complexity of international business operations
C) intense competition
D) declining trade in international services
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 3-6
78) Common carriers are firms that ________.
A) plan, manage, and implement all phases of a project on behalf of foreign governments
B) assist retailers in developing e-commerce based marketing systems
C) own the ships, trucks, and airplanes used to transport goods around the world
D) provide expert counsel to MNEs on the legal aspects of international business
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-5
79) Which of the following assist focal firms in resolving disputes with foreign business
partners?
A) insurance companies
B) trade lawyers
C) consultants
D) market research firms
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 3-6
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80) Commercial banks facilitate the operations of international businesses by doing all of the
following EXCEPT ________.
A) regulating national money supplies
B) transferring funds to individuals and foreign banks
C) supplying credit information on foreign buyers
D) providing credit to buyers and sellers
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 3-6
81) Sovereign wealth funds are owned by ________.
A) MNEs
B) private investors
C) national governments
D) publicly traded corporations
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 3-7
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Shareholders Meeting (Scenario)

A senior manager at Hudson Motors Inc. presented the top management of his firm with a
strategy aimed at improving sales and profits. Based in Kentucky, Hudson Motors has always
used American-made parts for its automobiles. However, sales and profits have slumped
miserably over the past three years. In his plan, the senior manager proposes to delegate certain
noncore operations to external vendors besides setting up manufacturing units in Asia, where the
cost of labor is significantly low.
82) By proposing to set up manufacturing units in Asia, the senior manager of Hudson Motors is
proposing the top management of his firm to adopt which of the following strategies?
A) product differentiation
B) diversification
C) outsourcing
D) crowdsourcing
Answer: C
Skill: Application
Objective: 3-4
83) If Hudson Motors grants the right to Mercury Motors Inc., an Asian automobile firm, the
right to use its business system in exchange for compensation, Hudson Motors would play the
role of a ________.
A) franchisor
B) licensor
C) agent
Answer: A
Skill: Application
Objective: 3-4
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Nanocell (Scenario)
Two years ago, Nanocell, a small Canadian company, began manufacturing a solar cell that holds
a charge for 24 hours, many times longer than any competing solar cell. International sales of the
palm-sized solar cell occurred quickly, and soon Nanocell was exporting to Australia, China, and
Africa. Today, Nanocell is a growing multinational enterprise with sales expected to soar even
higher.
84) Which of the following statements is best supported by the story of Nanocell?
A) Born globals enjoy fleeting success before succumbing to the pressures of intense
competition.
B) The stock value of born global firms fluctuates due to the high risk factors.
C) Flexibility offsets poor strategic decisions and short-term market growth.
D) Size and experience do not predetermine the success or failure of a firm in international
markets.
Answer: D
Difficulty: Hard
Skill: Critical Thinking
Objective: 3-3
AACSB: Dynamics of the global economy; Reflective thinking skills
85) Nanocell's management team is considering entering into other foreign markets using a
strategy of foreign direct investment (FDI). Which of the following, if true, would most support
the claim that expansion through FDI would benefit Nanocell?
A) Most small companies enter foreign markets by exporting, as Nanocell did two years ago.
B) SMEs prefer FDI as a foreign market entry strategy even though it is expensive.
C) Nanocell plans to cut advertising costs in the long run.
D) FDI is a common and successful foreign market entry strategy for multinational enterprises.
Answer: D
Difficulty: Hard
Objective: 3-4
86) Nanocell is considering partnering with either an agent or a foreign distributor to expand its
overseas sales. Which of the following, if true, would most support Nanocell's decision to partner
with an agent instead of a foreign distributor for the purpose of expanding sales?
A) Nanocell has more widespread connections with foreign partners in Asia than in Europe.
B) Nanocell's executives are opposed to having a foreign partner take title to their product.
C) The major foreign distributors of solar power technology have strong track records of success.
D) The market price of Nanocell's products is too low to support payment of commissions.
Answer: B
Difficulty: Hard
Objective: 3-5
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87) Which of the following questions is most relevant for evaluating whether Nanocell should
partner with an agent or a foreign distributor to expand its overseas sales?
A) Has FDI been successfully used by solar technology companies expanding abroad?
B) What would be the cost of capital required to finance additional expansion?
C) Who do Nanocell's competitors typically collaborate with when expanding operations?
D) Does Nanocell have an appropriate legal team in place to handle the requirements of
expansion?
Answer: C
Difficulty: Hard
Objective: 3-5
Super Cola (Scenario)
U.S.-based Super Cola, one of the top five cola manufacturers, has previously attempted to enter
the Asian beverage market with little success. Lacking the name recognition of its competitors,
Super Cola was unable to gain market share and ceased shipping its products overseas after six
months. Super Cola realizes that the large Asian market would be extremely profitable, but the
company requires a new strategy. Consultants hired by Super Cola propose two different
methods for entering the market: licensing and franchising.
88) Which of the following would occur if Super Cola entered into a licensing agreement with
the Asian beverage manufacturer, Tsang Cola?
A) Super Cola would distribute the product manufactured by Tsang Cola.
B) Super Cola would produce and Tsang Cola would distribute the product.
C) Tsang Cola would produce and distribute Super Cola's product for a specified period of time.
D) Super Cola would both produce as well as distribute its product in Asia.
Answer: C
Skill: Application
Objective: 3-4
89) Which of the following, if true, would render franchising unattractive for Super Cola?
A) Franchisors have limited control over branches abroad.
B) Studies indicate that American franchisees are less relationship-oriented than are Asian
franchisees.
C) Studies indicate that franchisees are more aware of and responsive to the needs of local
markets than are salaried employees.
D) Franchised businesses are more likely than not to benefit from existing business models.
Answer: A
Difficulty: Hard
Objective: 3-4
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90) Which of the following primary benefits is Super Cola most likely to accrue by virtue of
entering into a licensing agreement with Tsang Cola?
A) Super Cola would learn the marketing techniques used by cola manufacturers in Asia and
would simulate them after the expiry of the licensing agreement with Tsang Cola.
B) Super Cola would be represented on the Tsang board of directors and would oversee Tsang
operations in Asia and the U.S.
C) Super Cola would learn the manufacturing techniques used by Tsang Cola and use the same
methods in the U.S.
D) Super Cola would receive royalties from beverage sales and an entry into the Asian market.
Answer: D
Skill: Application
Objective: 3-4
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91) In a short essay, describe the four major participants in international business. Explain how
they work together in international business activities.
Answer:
a. A focal firm is the initiator of an international business transaction that conceives, designs, and
produces the offerings intended for consumption by customers worldwide. Focal firms take the
center stage in international business. They include large multinational enterprises (MNEs; also
known as Multinational Corporations or MNCs) and small and medium-sized enterprises
(SMEs). Some are privately owned companies, others are public, stock-held firms, and still
others are state enterprises owned by governments. Some focal firms are manufacturing
businesses, while others are in the service sector.
b. A distribution channel intermediary is a specialist firm that provides a variety of logistics and
marketing services for focal firms as part of the international supply chain, both in the focal
firm's home country and abroad. Typical intermediaries include independent distributors and
sales representatives, usually located in foreign markets where they provide distribution and
marketing services to focal firms on a contractual basis.
c. A facilitator is a firm or an individual, with special expertise in legal advice, banking, customs
clearance, or related support services. Facilitators assist focal firms with international business
transactions. They include logistics service providers, freight forwarders, banks, and other
support firms that assist focal firms in performing specific functions.
d. Governments or the public sector are also active in international business as suppliers, buyers,
and regulators. State-owned enterprises account for a substantial portion of economic value
added in many countries, even rapidly liberalizing emerging markets such as Russia, China, and
Brazil. Governments in advanced economies like France, Australia, and Sweden have significant
ownership of companies in telecommunications, banking, and natural resources.
International business transactions require numerous organizations, with varying motives, to
work together as a coordinated team, contributing different types of expertise and inputs. The
focal firm performs certain activities internally and delegates other functions to intermediaries
and facilitators where their special expertise is needed. In other words, the focal firm becomes a
client of intermediaries and facilitators who provide services on a contractual basis. The recent
global financial crisis led governments to step up their involvement in business, especially as
regulators.
Skill: Concept
Objective: 3-1
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92) In a short essay, describe the three key types of focal firms, and explain how their value
chain enables international business.
Answer: Focal firms are the most prominent international players. They include well-known
multinational enterprises (MNEs) and small and medium-sized (SMEs) exporting firms, as well
as contemporary organizations such as the born globals.
1. An MNE is a large company with substantial resources that performs various business
activities through a network of subsidiaries and affiliates located in multiple countries. Leading
MNEs are listed on the Fortune Global 500. Examples include well-known companies like
Nestl, Sony, Unilever, Nokia, Ford, Barclays, ABB, and Shell Oil. Although such firms employ
a range of foreign market entry strategies, MNEs are best known for their foreign direct
investment (FDI) activities. They operate in multiple countries, especially in Asia, Europe, and
North America, by setting up production plants, marketing subsidiaries, and regional
headquarters. MNEs such as Exxon, Honda, and Coca-Cola derive much of their total sales and
profits, often more than half, from cross-border operations.
2. Another type of focal firm that initiates cross-border business transactions is the SME. As
defined in Canada and the United States, SMEs are manufacturers or service providers with
fewer than 500 employees (in the European Union and numerous other countries, they are
defined as having fewer than 250 employees). SMEs now make up the majority of companies
active in international business. Nearly all firms, including large MNEs, started out small.
Compared to the large multinationals, SMEs can be more flexible and quicker to respond to
global business opportunities. They are usually less bureaucratic, more adaptable, and more
entrepreneurial, and are often the basis for entrepreneurship and innovation in national
economies. Being smaller organizations, SMEs are constrained by limited financial and human
resources. This explains why they usually choose exporting as their main strategy for entering
foreign markets.
3. Born global firms represent a relatively new breed of international SMEthose that undertake
early and substantial internationalization. Despite the scarce resources typical of most small
businesses, born globals usually internationalize within three years of their founding and may
export to twenty or more countries, generating more than 25 percent of their sales from abroad.
The value chain is the complete business system of the focal firm, comprising all the activities
the focal firm performs. In international business, the focal firm may retain core activities such
as production and marketing within its own organization and delegate distribution and customer
service responsibilities to independent contractors, such as foreign-based distributors. In this
way, the resulting business system is subject to internationalization; that is, individual valueadding activities can be configured in multiple countries.
Difficulty: Hard
Skill: Synthesis
Objective: 3-2, 3-3
25
93) In a short essay, explain why SMEs now comprise the majority of firms active in
international business. How have logistics specialists facilitated the success of SMEs attempting
to become internationally active?
Answer: SMEs are gaining equal footing with large multinationals in marketing sophisticated
products around the world. This is due to a number of reasons. First, SMEs can be flexible and
quick to respond to global business opportunities. Second, they are usually less bureaucratic,
more adaptable, and more entrepreneurial, and often sustain entrepreneurship and innovation in
national economies.
Being smaller organizations, SMEs are constrained by limited financial and human resources. To
compensate for their limited resources, SMEs leverage the services of intermediaries and
facilitators to succeed abroad. As their operations grow, some gradually establish companyowned sales offices or subsidiaries in their key target markets. Moreover, because of their size
and relative inexperience, SMEs often target specialized products to market niches that MNEs
consider too small to service. SMEs also use information and communications technology to
their advantage by serving the specialized needs of customers around the world.
SMEs owe much of their international success to support provided by intermediaries and
facilitators in foreign markets, and to globe-spanning logistics specialists such as FedEx and
DHL. Smaller firms also rely on information and communications technologies that allow them
to identify global market niches and efficiently serve specialized buyer needs.
Skill: Concept
Objective: 3-3
26
94) In a short essay, explain the differences between franchisors, licensors, and turnkey
contractors. What are the factors that determine the type of entry strategies used by focal firms to
expand abroad?
Answer:
a. A licensor is a firm that enters a contractual agreement with a foreign partner that allows the
latter the right to use certain intellectual property for a specified period of time in exchange for
royalties or other compensation.
b. A franchisor is a firm that grants another the right to use an entire business system in exchange
for fees, royalties, or other forms of compensation. Franchisors are sophisticated licensors that
provide an entire business system to a foreign franchisee, such as McDonald's and Hertz Car
Rental. In addition, many firms in the construction, engineering, design, or architectural
industries provide their offerings via turnkey contracting.
c. Turnkey contractors are focal firms or a consortium of firms that plan, finance, organize,
manage, and implement all phases of a project and then hand it over to a foreign customer after
training local personnel.
Focal firms must consider a number of different factors before determining the most beneficial
strategy. The type of entry mode depends on the nature of the business as well as the nature of
the focal firm, its products, and goals. When the nature of business is dealing in intangibles, such
as professional services, the focal firm may enter into agency relationships with a foreign partner.
This is common among banks, advertising agencies, and market research firms. Franchising is
popular among many types of service industry firms, such as Subway and KFC. Licensing and
franchising are both commonly used in the international transfer of intangibles. Turnkey
contractors are utilized when major construction projects, such as bridges, roadways, or rail
systems, are needed in developing economies.
Skill: Concept
Objective: 3-4
27
95) In a short essay, explain the two most common international entry strategies for MNEs and
SMEs, and describe how franchising and licensing can contribute to those strategies.
Answer: An MNE is a large company with substantial resources that performs various business
activities through a network of subsidiaries and affiliates located in multiple countries. Although
such firms employ a range of foreign market entry strategies, MNEs are best known for their
foreign direct investment (FDI) activities. They operate in multiple countries, especially in Asia,
Europe, and North America, by setting up production plants, marketing subsidiaries, and regional
headquarters.
Another type of focal firm that initiates cross-border business transactions is the SME. As
defined in Canada and the United States, SMEs are manufacturers or service providers with
fewer than 500 employees (in the European Union and numerous other countries, they are
defined as having fewer than 250 employees). Being smaller organizations, SMEs are
constrained by limited financial and human resources. This explains why they usually choose
exporting as their main strategy for entering foreign markets. Their limited resources prevent
them from undertaking FDI, an expensive entry mode.
Both MNEs and SMEs often rely on contractual relationships such as franchising and licensing.
A licensor is a firm that enters into a contractual agreement with a foreign partner to allow the
partner the right to use certain intellectual property for a specified period of time in exchange for
royalties or other compensation. A franchisor, on the other hand, is a firm that grants another the
right to use an entire business system in exchange for fees, royalties, or other forms of
compensation. A foreign market entry strategy refers to the manner in which the focal firm
internationalizes, whether through exporting, importing, licensing, or FDI. The type of entry
mode depends on the nature of the business as well as the nature of the focal firm, its products,
and goals. When the nature of business is dealing in intangibles, such as professional services,
the focal firm may enter into agency relationships with a foreign partner. This is common among
banks, advertising agencies, and market research firms. Licensing and franchising are common
in the international transfer of intangibles. A franchisor makes a contract with a foreign
franchisee; a supplier of expertise makes a contract with a foreign client, and so forth.
Difficulty: Hard
Skill: Synthesis
Objective: 3-3, 3-4
28
96) In a short essay, identify the services provided by distribution channel intermediaries for
focal firms. Why do exporters rely on intermediaries?
Answer: Distribution channel intermediaries are physical distribution and marketing service
providers in the value chain for focal firms. They move products and services in the home
country and abroad, and perform key downstream functions in the target market on behalf of
focal firms, including promotion, sales, and customer service. They may organize transportation
of goods and offer various logistics services such as warehousing and customer support.
Intermediaries are of many different types, ranging from large international companies to highly
specialized, small operations.
The intermediary's intimate knowledge, contacts, and services in the local market can provide a
strong support system for exporters that are inexperienced in international business or too small
to undertake market-based activities themselves. Most intermediaries are based in the exporter's
target market. They provide a multitude of services, including market research, appointing local
agents or commission representatives, exhibiting products at trade shows, arranging local
transportation for cargo, and clearing products through customs. Intermediaries also orchestrate
local marketing activities, including product adaptation, advertising, selling, and after-sales
service. Many intermediaries finance sales and extend credit, facilitating prompter payment to
the exporter. In short, intermediaries based in the foreign market can function like the exporter's
local partner, handling all needed local business functions.
Skill: Concept
Objective: 3-5
97) In a short essay, describe the intermediary functions of agents and manufacturer's
representatives. How are the two intermediaries similar?
Answer: An agent is an intermediary (often an individual or a small firm) that handles orders to
buy and sell commodities, products, and services in international business transactions for a
commission. Also known as a broker, an agent may act for either buyer or seller but does not
assume title or ownership of the goods. The agent brings buyers and sellers together. Agents are
common in the international trade of commodities, especially agricultural goods and base
minerals. In the services sector, agents often transact sales of insurance and securities.
A manufacturer's representative is an intermediary contracted by the exporter to represent and
sell its merchandise or services in a designated country or territory. In essence, they act as
contracted sales personnel in a designated target market on behalf of the exporter, but usually
with broad powers and autonomy. Manufacturer's representatives may handle various
noncompetitive, complementary lines of products or services.
Neither agents nor manufacturer's representatives take title to the goods they represent, and they
are both usually compensated with a commission.
Skill: Concept
Objective: 3-5
98) In a short essay, discuss the impact of the Internet on traditional intermediaries and on retail
29
businesses. Provide examples of retailers who have embraced the new technology and discuss
how the Internet has affected their business.
Answer: The Internet has triggered much disintermediation, the elimination of traditional
intermediaries. Some focal firms now use the Internet to sell products directly to customers
rather than going through traditional wholesale and retail channels. By eliminating traditional
intermediaries, companies can sell their products cheaper and faster. This benefits SMEs in
particular because they typically have limited resources for international operations.
Many traditional retailers established s or link with online service providers to create an
electronic presence. The electronic sites of stores like Tesco and Walmart complement existing
physical distribution infrastructure and bring more customers into retail outlets. Walmart and
Tesco use the web to test the market for new products before offering them in their stores.
Difficulty: Easy
Skill: Concept
Objective: 3-5
99) In a short essay, describe the role of a logistics service provider, and explain how it
contributes to the distribution and facilitation of international trade.
Answer: One category of participant in international business is facilitators, independent
individuals or firms that assist the internationalization and foreign operations of focal firms and
make it possible for transactions to occur efficiently, smoothly, and in a timely manner.
An important facilitator of international trade is the logistics service provider, a transportation
specialist that arranges for physical distribution and storage of products on behalf of focal firms,
also controlling information between the point of origin and the point of consumption.
Companies such as DHL, FedEx, UPS, and TNT provide cost effective means for delivering
cargo anywhere in the world. They also offer traditional distributor functions such as
warehousing, inventory management, and order tracking.
In addition to being an important facilitator, logistics service providers are a part of the
distribution chain. Distribution channel intermediaries are physical distribution and marketing
service providers in the value chain for focal firms. They move products and services in the
home country and abroad and perform key downstream functions in the target market on behalf
of focal firms, including advertising, sales, and customer service. They may organize
transportation of goods and offer various logistics services such as warehousing and customer
support.
Difficulty: Hard
Skill: Synthesis
Objective: 3-5, 3-6
30
100) In a short essay, discuss how both commercial banks and central banks participate in
international business. What are sovereign wealth funds?
Answer: Various players facilitate the financial operations of international business. Commercial
banks make possible the exchange of foreign currencies and provide financing to buyers and
sellers who usually require credit to finance transactions. The process of getting paid often takes
longer in international than in domestic transactions, so a focal firm may need a loan from a
commercial bank. Commercial banks can also transfer funds to individuals or banks abroad;
provide introduction letters and letters of credit to travelers; supply credit information on
potential representatives or foreign buyers; and collect foreign invoices, drafts, and other foreign
receivables. Within each country, large banks in major cities maintain correspondent
relationships with smaller banks spread around the nation or the world or operate their own
foreign branches, thus providing a direct channel to foreign customers.
Central banks are the monetary authorities in each country that issue currency and regulate
national money supplies. Australia, Canada, China, Indonesia, the United States, and numerous
European countries cut bank interest rates and injected billions into national money supplies. The
European Central Bank devised new banking regulations with the goal of averting future crises.
At the G-20 Summit in London in 2009, heads of state announced a range of synchronized policy
initiatives intended to revive the global economy, stimulate employment, reform national
financial systems, and improve global institutions like the International Monetary Fund. At the
G-20 Summit in 2011, officials announced a new round of regulations on certain categories of
international portfolio investments. Officials from various countries coordinated efforts to restore
international growth by providing more credit and liquidity in world banking systems. Several
governments advocated creating a new, global currency to replace the U.S. dollar as the favored
currency in international business.
Governments participate in international business by investing in other economies. The trend is
best exemplified by the sovereign wealth funds (SWFs), state-owned investment funds that
undertake systematic, global investment activities to generate income or to achieve policy
objectives, such as reviving a collapsed economy.
Difficulty: Hard
Skill: Synthesis
Objective: 3-6, 3-7
31

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International Business: The New Realities

Chapter 3 Organizational Participants that Make International Business Happen

31) A ________ is the initiator of an international business transaction.

inputs to a production process, or as supplies needed to run a business or organization.

45) Which of the following is an upstream value-chain activity?

A) free market economies

upgrades to public transportation such as bridges, roadways, and rail systems.

64) Collaborative arrangements help focal firms to ________.

B) They consolidate wholesale channels.

Shareholders Meeting (Scenario)

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