MGM5966 W10 Lecture 9 Recap

High investment risk due to large capital commitment & long pay-back periods, yet no co-owner & integration risks, is...

• Greenfield

• Joint venture

• Full acquisition

• Partial acquisition

Answer explanation

High investment risk due to large capital commitment & long pay-back periods, yet no co-owner & integration risks, indicates Greenfield investment. A joint venture has co-owner risks and an acquisition (full or partial) has integration risks.

Non-equity mode is a mode of entry that involves investing in a local firm.

• True

• False

Answer explanation

Non-equity modes (e.g., contractual modes such as licensing, R&D contracts, turnkey projects and other alliances) require lower levels of control since these forms of entry are much less investment intensive. Non-equity mode of entry does not involve investing in a local firm, so the statement is False.

Which of the following is an advantage shared by both greenfield operations and acquisitions?

• Protection of know-how

• Add new capacity to industry

• Fast entry speed

• Low development costs

Answer explanation

Both greenfield operations and acquisitions offer protection of know-how, safeguarding valuable intellectual property as firms have complete equity and operational control.

An advantage of joint ventures is _____.

• the protection of know-how

• the access to partners’ assets

• the ease of global coordination

• the complete equity and operational control

Answer explanation

The advantage of joint ventures is the access to partners’ assets. Other advantages include sharing costs, risks and profits, and politically acceptable.

Equity modes do not require the establishment of independent organizations overseas.

• True

• False

Answer explanation

Equity modes (e.g., joint ventures and wholly owned ventures such as greenfields, brownfields through acquisitions) require the exercise of higher levels of control from firm headquarters, due to their involving a relatively large commitment to investment. Equity modes do require the establishment of independent organizations overseas, making the statement false.

What is a disadvantage of exporting as a foreign market entry mode?

• High level of control over operations

• Limited market presence and local responsiveness

• Higher investment requirement

• Lower exposure to exchange rate fluctuations

Answer explanation

Exporting often provides limited market presence and local responsiveness compared to other entry modes like direct investment. While it may have lower investment requirements and allow the company to maintain control over operations, it can also expose the company to exchange rate fluctuations and may not allow for adapting to local market needs as effectively.

What are the disadvantages of acquisitions as a foreign market entry mode?

• Higher integration challenges

• Fast entry speed

• Immediate access to an established customer base and distribution network

• Higher level of flexibility in operations

Answer explanation

Acquisitions provide fast entry speed, and immediate access to an established customer base and distribution network in the target market, allowing the acquiring company to bypass the challenges of building these assets from scratch. However, acquisitions may come with integration and operation challenges.

Turnkey contracts imply that the client firm...

• do everything itself

• try find a long term partner

• don't want to get involved with the start-up burden

• know the foreign culture's laws and culture

Answer explanation

Turnkey contracts imply that the client firm doesn't want to get involved with the start-up burden, Turnkey contracts involve a contractor being responsible for the design, construction, and sometimes operation of a project, and upon completion, they hand it over to the client fully operational, as if they could "turn the key" and start using it immediately. In the context of foreign market entry, turnkey projects allow the client firm to avoid the burdens and risks associated with starting up operations in a new market. The client essentially outsources the entire process to the contractor, who manages everything from planning to execution, thereby relieving the client firm of the start-up burden.

What is the main characteristic of a merger as a mode of entry?

• An agreement between two parties to cooperate in a certain way for a certain time

• A more-than-friendly acquisition between roughly equal companies

• A financial transaction to gain control of the target's operations

• The formal establishment of business operations on foreign soi

Answer explanation

The main characteristic of a merger as a mode of entry is a more-than-friendly acquisition between roughly equal companies. The companies believe they have the resources and capabilities that together may create a stronger competitive advantage.

What is the main characteristic of licensing as a mode of entry?

• The company establishes business operations on foreign soil

• The licensee acquires the right to use products and goods, while the ownership remains with the licensor

• 
  The licensor and licensee merge into a new legal entity

• The licensor permits the franchisee to use its brand name for a fee

Answer explanation

The main characteristic of licensing as a mode of entry is that the licensee acquires the right to use products and goods, while the ownership remains with the licensor. It is an arrangement whereby a licensor grants the rights to intangible property to the licensee for a specified time period, and in return the licensor receives a royalty fee from the licensee.