Country Evaluation and Selection

CHAPTER 12Country Evaluation and Selection

Multiple Choice Questions

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Chapter 12Country Evaluation and Selection

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STUDY QUESTION 1: Why do international managers need to understand how to evaluate countries and select among them for operations? What are the major considerations in developing an overall location strategy?

1. International managers need to understand how to evaluate international geographic alternatives because _____.a. they usually have a surplus of resources and need to take advantage of all opportunitiesb. many regional trading groups prohibit companies from manufacturing in more than one

of the member countriesc. the commitment of resources to one locale often means forgoing projects in other

locales (interpretation, page 415)d. decreased worldwide transportation costs and increased trade liberalization have caused

rising protectionism that firms need to circumvent through production facilities behind the tariff walls

2. When choosing geographic sites for international expansion, the two basic questions firms must answer are, _____?a. Which markets should we serve and where should production be located to serve

those markets (interpretation, page 415)b. What are the short-term competitive advantages of the project and what is the return on

investmentc. What is the total investment required and what are the managerial resources needed to

supervise the investmentd. What is the availability of land and what is the cost of labor

3. A company's overall geographic strategy should be flexible enough to _____. a. implement concentration strategies instead of diversification strategiesb. respond to new opportunities and withdraw from those with poorer performance

outlooks (interpretation, page 415)c. switch from market-seeking to resource-seeking activities d. export anywhere in the world from a single production location

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4. Each company is unique because of its product line, competitive position, resources, and strategy, _____.a. nevertheless, there is a comprehensive theory on choosing the best location that applies to

all companiesb. nevertheless, there is a general consensus among them on what constitutes dangerous

political instabilityc. therefore, we seldom find international competitors operating in close proximity of each

other in foreign marketsd. nevertheless, there is no "one-size-fits-all" theory for picking international

operating locations (interpretation, page 415)

STUDY QUESTION 2: When deciding where to locate production and sales efforts, how and why might companies use scanning techniques? How do these techniques differ from the making of final country selections?

5. When planning international geographic expansion, scanning is used to _____. a. help decisionmakers reduce the number of options available to a manageable

number for further detailed analysis (interpretation, page 416)b. assure the compatibility between the mode of operation and the country for international

expansionc. assure that all countries within a region have similar investment climatesd. help decide whether to use a concentration or a diversification strategy

6. All of the following are reasons why management risks overlooking some countries with good opportunities except _____.a. managers simply may not think of some localesb. managers use scanning techniques, which cannot compare large groups of countries

(interpretation, page 416)c. managers erroneously think that all countries in a region are very similar to each otherd. managers may eliminate consideration of some countries because of false perceptions

7. Escalation of commitment is _____.a. a situation in which a company first enters a country on a small scale, and then expands

later onb. the process of entering a country because "everyone else is going there"c. expectation of a higher return in risky environmentsd. the increased likelihood of making an investment in a country because of having

spent considerable time and money in examining it as an alternative (definition, page 416)

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8. After deciding through scanning techniques on a few countries to consider more closely for either market or production expansion, managers almost always need to _____.a. rely more on the Internet b. add some more countries for closer considerationc. go on-location to analyze and collect more specific information (interpretation, page

416)d. make final decisions by going where their competitors are going

STUDY QUESTION 3: What are the major indicators/variables that are important in comparing countries for market potential?

9. Sales potential is probably the most important variable in determining international location decisions. This statement is based on the assumption that _____.a. consumer demand exceeds supplyb. sales will occur at a price above cost (interpretation, page 418)c. the company will have a first mover advantaged. raw materials are available in the country targeted for sales

10. When a company cannot obtain country-by-country sales figures on the type of product it wishes to sell, it may estimate sales potential of countries by _____.a. comparing the percentage of workers who are unionizedb. calculating future inflation ratesc. comparing countries' dependence on imports d. examining the sales history of a similar type of product for which sales figures are

available (interpretation, page 418)

11. Assume you want to sell a luxury product and want to compare countries for the market potential of the product, _____ is the best indicator to use.a. per capita income b. population size c. the number of people within different income levels (interpretation, page 419)d. GDP

12. International managers may project country sales for a product based on different countries' consumption in relation to GDP per capita. All of the following are such variables that may distort findings from this method except _____.a. raw materials are more available in some countries than in others (interpretation,

page 419)b. countries with similar per capita incomes may have different preferences for products

because of cultural differencesc. product or service substitution is easier in some countries than in othersd. consumers in emerging economies may skip product generations

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STUDY QUESTION 4: Explain why/how the ease and compatibility of operations is important in choosing where to operate.

13. U.S. companies generally put earlier and more emphasis on countries _____.a. with the largest economiesb. with high tariff ratesc. where governments give operating incentivesd. where they perceive it's easier to operate (interpretation, page 420)

14. Why do U.S. companies typically put earlier and more emphasis on operating in Canada, Mexico, and the United Kingdom?a. The countries all have special trading arrangements with the United States.b. Economic indicators show more market potential there.c. A combination of locational proximity and cultural and economic similarity make

these countries easier to tap successfully. (interpretation, page 420)d. The governments of these countries offer more investment incentives.

15. When choosing countries for operations, companies should _____.a. assure that countries' policies and norms allow them to use their competitive

advantages effectively (interpretation, page 420)b. find locations with the lowest labor ratesc. go where governmental operating incentives are the highestd. avoid locations where laws are not fully transparent

16. International managers often prefer to expand into a foreign country that shares the same language and has a similar culture as in their home countries. Which of the following is the reason for this preference?a. This allows them to minimize product alterations. b. This helps enable them to better understand employees and customers.

(interpretation, page 420)c. This allows them to operate with plant sizes with which they are familiar.d. This assures they can use of their competitive advantages effectively.

STUDY QUESTION 5: When using scanning techniques, what variables are important in indicating where to go to secure resources?

17. Companies go abroad to secure resources that are either unavailable or expensive in their home countries. Which of the following is true about this?a. Cheap labor is the most sought after resource.b. Because of industry differences, companies differ in the kind of resource they seek

most abroad. (interpretation, page 420)c. Raw materials are the most sought after resource.d. Risks are higher for resource-seeking foreign operations than for market-seeking foreign

operations.

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18. The ability to compare production costs among countries in an effort to determine where to locate production is hampered by _____.a. the number of ways the same product can be made (interpretation, page 422)b. restrictions on the international flow of datac. different tax ratesd. restrictions on the remission of earnings

19. Although labor compensation is an important factor when choosing where to operate abroad, international managers should consider all the following factors concerning labor except _____.a. so-called cheap labor may be expensive if the company must make adjustments because

of low education levelsb. average labor rates for a country may disguise big labor rate differences by industry and

geographic region c. transport costs generally cancel out any cost savings from using low-cost labor

(interpretation, page 421)d. labor cost and availability may change rapidly

20. Labor cost advantages by moving into a country with low wages may be short-lived because _____.a. transport costs go up to cancel-out the cost savings.b. tax increases generally cancel-out labor cost differentialsc. competitors adopt capital-intensive production methods that reduce costs even more by

using less labor d. competitors follow leaders into low-wage areas (interpretation, page 421)

STUDY QUESTION 6: Why is the existence of red tape and corruption important in choosing where to operate?

21. When deciding in which country to operate, companies should analyze the extent of corruption in countries because _____.a. corruption may add significantly to the cost of operating (interpretation, page 423)b. they may be able to circumvent regulations against foreign firms by paying a bribec. bribe payments decrease operating costs by enabling companies to bypass layers of

bureaucracyd. corruption causes product sales to be lower than one would expect from income data

22. World Bank studies show that countries differ in terms of the ease or difficulty of starting a business, hiring and firing workers, getting credit, and closing a business. Such differences are due primarily to countries' _____.a. legal transparencyb. corruptionc. red tape or bureaucracy (interpretation, page 422)d. economic system

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23. In countries with low legal transparency and high corruption, foreign companies are prone to _____. a. do more research before entering b. enter with concentration strategiesc. enter only if competitors are going there as welld. commit fewer resources (interpretation, page 423)

24. In countries where there is considerable red tape, companies' costs increase because of _____.a. having to make payments to government officialsb. spending excessive time in satisfying authorities on many aspects of their operations

(interpretation, page 423)c. legal expenses from not knowing how laws will be enforcedd. restrictions on transferring dividends abroad

STUDY QUESTION 7: What is meant by liability of foreignness, and how does it influence companies' international location decisions?

25. Foreign companies' lower survival rate than local firms for many years after they begin operations is known as_____.a. ethnocentric reactionb. polycentric reactionc. liability of foreignness (definition, page 424)d. most-favored-nation behavior

26. Companies may reduce operating risks by first _____ and later _____.a. handling foreign operations themselves; having other firms handle foreign operations for

themb. entering dissimilar countries; entering similar countriesc. taking a mode of operations that require them to perform multiple foreign functions;

taking a mode of operations that requires them to perform limited foreign functionsd. entering foreign countries one at a time; entering multiple foreign countries

simultaneously (interpretation, pages 424–425)

27. Companies may reduce operating risks by first _____and later _____.a. entering many countries simultaneously; continuing to expand to other countriesb. entering countries similar to the home country; entering countries dissimilar to the

home country (interpretation, pages 424–425)c. handling foreign operations themselves; having other firms handle foreign operations for

themd. starting out with foreign direct investment abroad; simply exporting

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28. Liability of foreignness refers to _____.a. foreign companies' lower survival rate than local firms for many years after they

begin operations (definition, page 424)b. the more stringent operating restrictions on foreign than on domestic companiesc. payments made to foreign investors to compensate them for expropriationd. protectionist import restrictions on dangerous foreign products

STUDY QUESTION 8: Compare the advantages of locating foreign operations to avoid where competitors have gone versus locating where competitors are.

29. An example of a first mover advantage in international operations is _____.a. a move down the experience curve faster than competitorsb. an increasing sales response functionc. the use of a small country for market tests prior to entering a large countryd. lining up the best suppliers and distributors before competitors enter the market

(interpretation, page 426)

30. When a company sequences its order of entering foreign countries by going first to those countries most likely to adapt and catch up to its innovative advantage, it is using the _____. a. lead country strategyb. imitation lag strategy (definition, page 426)c. oligopolistic reaction strategyd. liability of foreignness strategy

31. Although companies may reduce risk by avoiding overcrowded markets, they nevertheless enter them to _____. a. prevent competitors from gaining advantages therein (interpretation, page 426)b. take advantage of the imitation lagc. convince shareholders that they are keeping up with competitorsd. diversify their operations

32. Companies may gain advantages by locating near competitors for all the following reasons except to _____.a. take advantage competitors' research to pick an ideal locationb. attract multiple suppliers and personnel with specialized skills by clustering with

competitorsc. agree with competitors on production limitations that prevent oversupplies

(interpretation, page 427)d. attract buyers who want to compare among suppliers

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STUDY QUESTION 9: How may political risk occur? How can companies respond to it?

33. All of the following are approaches companies use to predict political risk except to _____.a. analyze past patternsb. obtain opinions of expertsc. examine social and economic conditions that might lead to risk d. engage in regular public opinion polls (interpretation, page 428)

34. To predict political risk, companies sometimes examine the level of a country's frustration. In this case frustration refers to _____. a. the general public's growing dissatisfaction with the difference between its level of

aspirations and its level of welfare and expectations (interpretation, 429)b. partisan politics that inhibit the enactment of legislative reforms c. investors' inability to extract profits from the country because of currency inconvertibilityd. home country constituents' concern about the loss of jobs resulting from offshoring

35. A company's operations are most likely to be nationalized or expropriated when _____.a. the operations are relatively small and the takeover is unlikely to incur the wrath of the

company's home governmentb. the operations are substantial and have a visible widespread effect on the country

because of their size or monopoly positions (interpretation, page 428)c. the host country goes to ward. it produces discretionary products

36. In terms of political risk, we can say that _____.a. it affects all geographic areas of a country about equallyb. it affects all foreign companies about equallyc. most takeovers have been preceded by formal declarations that follow with a legal

process to determine the investors' compensation (interpretation, page 428)d. it is less when government leadership changes

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STUDY QUESTION 10: What risks other than political risks should companies consider when making international location decisions?

37. The concept of liquidity preference in international operations refers to _____.a. companies' willingness to accept a lower rate of return on their investments in

countries where they can more easily sell them and convert the proceeds at a favorable rate (definition, 427)

b. companies' willingness to accept lower rates of return in poor countries that really need the investments

c. management's need to maintain sufficient funds, preferably in local currency, in each country of operation to ensure meeting daily cash needs

d. investors' preference for foreign stocks over foreign bonds because of the larger market for them

38. Some business executives say that companies should forego sending personnel to violent areas because of the danger to them. One of their arguments is that _____.a. the companies can use local personnel because they are not in dangerb. many of the people who take such assignments are at additional risk because they go

for the wrong reasons (interpretation, 429)c. the inability of getting people to go to these areas has made operations unprofitabled. the ability to evacuate people has been falling

39. Executives who contend that companies should operate in violent areas base their arguments on all of the following except _____.a. companies have always taken risks and people have always migrated, so today's situation

is nothing newb. where there are risks, rewards are higherc. the violence is aimed at local companies, thus making foreign operations generally

immune from negative consequences (interpretation, page 429) d. in some industries, decisionmakers lack the luxury of being able to avoid operating in

violent areas

40. Risks to companies from natural disasters and communicable diseases are _____.a. less than risks from terrorismb. more prevalent today because of the slowness of evacuating people at airport security

pointsc. of little consequence to international operations because of insuring against themd. are most prevalent in the poorest countries of the world (interpretation, page 429)

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STUDY QUESTION 11: Compare the major types of data/information managers can use to compare countries. What are the problems in relying on these data?

41. Which of the following should companies do about research to help them decide where to locate international operations?a. Companies should conduct extensive research, regardless of the cost, in order to avoid

costly mistakes.b. Companies should limit research by comparing the costs of data collection with the

probable return from the data. (interpretation, page 430)c. Because international business decisions are unconstrained by time, firms should

continue gathering information until management has all the information managers would like.

d. Companies should limit research because the international environment changes so rapidly that information is obsolete by the time it is used.

42. For the most part, incomplete or inaccurate published governmental data are the result of the inability of the collecting organization to assemble and analyze the information and/or _____.a. translation errors from the host country languageb. typing errors when entering datac. the reporting of misleading information (interpretation, page 431)d. government regulations that encourage companies and individuals to over-report income

and sales figures.

43. All of the following are reasons for comparability problems in countries' published data except _____.a. differences in activities taking place outside the market economyb. the lack of consistent definitionsc. the overstatement of national income figures because of the receipt of foreign aid

(interpretation, page 431)d. distortions caused by currency translation

44. Which of the following is generally the most costly source for companies of research information?a. individualized reports (interpretation, page 432)b. reports from international organizations and agenciesc. reports from government agenciesd. published reports by service companies, such as banks and accounting firms

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STUDY QUESTION 12: Explain how grids and matrices can be used as tools to compare countries.

45. Grids are a useful method of comparing countries for international business expansion because _____.a. they generally show how countries will perform in the futureb. they show risk on one axis and opportunity on anotherc. they can highlight unacceptable conditions and set minimum scores for proceeding

further (interpretation, page 435)d. they highlight the interrelationship of operations in different countries

46. When preparing either grids or matrices to compare countries for location of international operations, it is most useful to _____. a. develop an inhouse specialist to decide on weights and scores to give each countryb. have people within each country supply the data on the countriesc. outsource the preparationd. use a team made up of people from different functions (interpretation, page 434)

47. Which of the following definitions is correct for the international location tool described?a. An opportunity—risk matrix depicts the comparison of countries in terms of their

risk and opportunity. (definition, page 436)b. An opportunity—risk matrix highlights the comparison of a company's specific product

advantages.c. A grid evaluates each country by plotting data to show countries' relative placements and

expected movements.d. An opportunity-risk matrix scores acceptable and unacceptable conditions, thus

indicating a minimum score for conducting more detailed research.

48. The major use of the matrix as a tool in international expansion strategy is to _____.a. pinpoint acceptable and unacceptable characteristics of countriesb. show the relative placement of countries in terms of the attributes shown on two

axes (interpretation, page 436)c. rank countries on the basis of expected investment returnd. show the degree of certainty for different projected returns on investment

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STUDY QUESTION 13: How should reinvestment and harvesting be treated in companies' location decisions?

49. The decision-making process for a company's reinvestment decisions is often different from those for new investment decisions because _____.a. internal rate of return and other financial measurement criteria are more difficult to

compile and analyze on existing operations because of currency translation distortionsb. failure to support an existing investment may jeopardize the firm's operations and

competitiveness in that country (interpretation, page 437)c. most of the net value of foreign investment comes from new international capital

transfers rather than from reinvestment of earnings abroadd. corporate management feels more confident in making decisions about existing foreign

operations

50. The decision-making process for a company's reinvestment decisions is often different from those for new investment decisions because _____.a. internal rate of return and other financial measurement criteria are more difficult to

compile and analyze on existing operations because of currency translation distortionsb. once into a market, a company need not reinvest much to maintain a competitive positionc. most of the net value of foreign investment comes from new international capital

transfers rather than from reinvestment of earnings abroadd. headquarters management often feels that people within an established operation

are the best judges of investment needs (interpretation, page 437)

51. Why are foreign subsidiary managers often reluctant to propose divestments in the countries where they are working? a. They are afraid of proposing the elimination of their jobs. (interpretation, page 438)b. They fear being evaluated negatively by corporate management.c. They lack sufficient information to make recommendations to corporate managers.d. Many are in countries where the cultural attribute of power-distance is high.

52. The origin of investment proposals differs from the origin of divestment proposals in that the divestment proposals are more apt to come from _____.a. subsidiary managementb. outside the organizationc. higher up in the organization (interpretation, page 438)d. line personnel as opposed to staff personnel

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STUDY QUESTION 14: What are meant by a diversification strategy and a concentration strategy for international location decisions? Under what circumstances would one strategy be preferable to the other?

53. In a concentration strategy of foreign expansion, a company would go to _____. a. many countries very rapidly, and then build up slowly in eachb. a foreign country with one product and not sell other products in that country until a

target market-share is reached c. a reporting system that measures performance on a regional rather than a county-by-

country basisd. one or a few foreign countries and build up fast there before going to other

countries (definition, page 438)

54. In a diversification strategy for international expansion, a company would move _____.a. rapidly into many foreign countries, and then gradually increase its presence in

those countries (definition, page 438)b. rapidly into a few foreign countries with many of its products c. into one foreign country and fully expand its product lines in that country before moving

to another countryd. move quickly into a regional foreign market but build up its resources in only a few of

the countries in the region

55. A company should use a concentration strategy for international expansion when there is _____.a. a high need for product adaptation, low growth and sales stability in each market, and

high economies of scale in distributionb. low economies of scale in distribution, increasing sales response function, and low

spillover effectsc. high growth and sales stability in each market, long competitive lead time, and low

spillover effects (interpretation, page 439)d. low need for product and communications adaptation, short competitive lead time, and

low program control requirements

56. One would expect a diversification strategy for international expansion to be preferable to a concentration strategy when _____.a. there is high sales stability in each market and a long competitive lead timeb. spillover effects are high and the need for product adaptation is low (interpretation,

page 439)c. the growth rate of each market is high and there is high sales stability in each marketd. there is an increasing sales response function and spillover effects are low

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STUDY QUESTION 15: Why do most companies examine expansion proposals one at a time rather than comparing various expansion proposals?

57. A go-no-go decision means _____.a. an individual project decision is based on whether the project meets minimum

threshold criteria (definition, page 440)b. projects are ranked in comparison to each other, and projects are approved from the top

of the list until available resources are exhaustedc. management reviews existing information and decides whether additional individualized

feasibility studies are warrantedd. projects are approved or disapproved based on the potential ease of divestment

58. Instead of comparing different proposals involving foreign operations, companies often make decisions by looking at proposals one at a time. All of the following are reasons for this behavior except _____.a. companies need to respond rapidly to opportunities presented to themb. defensive decisions need to be made rapidlyc. lack of comparable data on different countries renders comparison impossible

(interpretation, pages 440–441)d. conclusion of different proposals or studies does not happen simultaneously

59. Why do companies often make location decisions on one international opportunity at a time rather than comparing among more than one?a. The lack of comparability in data among countries renders comparison unfeasible.b. Unplanned opportunities may emerge to which companies need to decide quickly.

(interpretation, page 440)c. The information on some countries is so unreliable that companies must deal with these

countries separately.d. Decisions are made by teams, and it is usually not feasible to give so many people time

away from their usual duties to examine multiple proposals.

60. Why do companies often make location decisions on one international opportunity at a time rather than comparing among more than one?a. The lack of comparability in data among countries renders comparison unfeasible.b. The information on some countries is so unreliable that companies must deal with these

countries separately.c. Decisions are made by teams, and it is usually not feasible to give so many people time

away from their usual duties to examine multiple proposals.d. If an important customer develops opportunities in a foreign county, a company

may have little alternative except to follow that customer's lead. (interpretation, page 440)

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STUDY QUESTION 16: How might demographic and technical factors influence future changes in prime locations for production and sales?

61. Which of the following is true about projected demographic changes to the year 2050 that could affect future production and sales locations?a. The share of the population that is of working age should rise in high-income countries

and fall in low-income countries.b. The percentage of people living in high-income countries is expected to increase.c. Some high-income countries should have a declining population. (interpretation,

page 441)d. The percentage growth in per capita GDP should be higher in today's high-income

countries than in other countries.

62. Which of the following is true about projected demographic changes to the year 2050 that could affect future production and sales locations?a. The share of the working population should rise in high-income countries and fall in low-

income countries.b. The growth in per capita GDP should be higher in today's emerging economies than

in today's high-income countries. (interpretation, page 441)c. The percentage of people living in high-income countries is expected to increase.d. The population should fall in sub-Saharan Africa.

63. We now have technology to allow people to communicate globally without traveling as much. Leading researchers on urbanization and planning say the likely consequence of this is _____.a. a decrease in international airline travelb. less stringent immigration restrictions will be needed to curb international movements of

people c. less attraction of self-motivated highly innovative people to centers of innovationd. the brightest minds will be working more at home but still needing face-to-face

interaction with their colleagues (interpretation, pages 441–442)

64. All of the following have been suggested to result in the future because of advances in global communications except _____.

a. in spite of being able to work anywhere, people will choose to live primarily where their employers are headquartered (interpretation, page 442)

b. the brightest minds will work more at home but will still need face-to-face interaction with their colleagues

c. people will be drawn more to live in the same places that attract people as touristsd. people who are both highly motivated and highly creative will continue to be attracted to

be in contact with people like themselves

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True/False Questions

STUDY QUESTION 1: Why do international managers need to understand how to evaluate countries and select among them for operations? What are the major considerations in developing an overall location strategy?

65. Because many regional trading groups prohibit companies from producing in more than one member country, companies need to understand how to evaluate international geographic alternatives. False (interpretation, page 415)

66. A company's overall geographic strategy should be flexible enough to respond to new opportunities and withdraw from those with poorer performance outlooks. True (interpretation, page 415)

STUDY QUESTION 2: When deciding where to locate production and sales efforts, how and why might companies use scanning techniques? How do these techniques differ from the making of final country selections?

67. When planning international geographic expansion, scanning is used to help decisionmakers reduce the number of options available to a manageable number for further detailed analysis. True (interpretation, page 416)

68. "Escalation of commitment" is a situation in which a company first enters a country on a small scale and then expands later on. False (interpretation, page 417)

STUDY QUESTION 3: What are the major indicators/variables that are important in comparing countries for market potential?

69. Sales potential is probably the most important variable in determining international location decisions because consumer demand exceeds supply. False (interpretation, page 418)

70. When attempting to choose in which country to sell a luxury product, a useful variable to consider is the number of people within different income levels. True (interpretation, page 419)

STUDY QUESTION 4: Explain why/how the ease and compatibility of operations is important in choosing where to operate.

71. U.S. companies generally put earlier and more emphasis on countries where they perceive it's easier to operate. True (interpretation, page 420)

72. When choosing where to operate, it is most important that companies find locations with low labor costs. False (interpretation, page 420)

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STUDY QUESTION 5: When using scanning techniques, what variables are important in indicating where to go to secure resources?

73. Labor cost advantages by moving into a country with low wages may be short-lived because tax increases cancel out the low-wage advantages. False (interpretation, page 421)

74. Because of industry differences, companies differ in the kind of resource they seek abroad. True (interpretation, page 420)

STUDY QUESTION 6: Why is the existence of red tape and corruption important in choosing where to operate?

75. Companies should analyze the extent of corruption in countries because paying bribes enables companies to bypass layers of bureaucracy. False (interpretation, pages 422–423)

76. Companies' costs increase in countries where there is considerable red tape because they have to make payments to government officials. False (interpretation, page 423)

STUDY QUESTION 7: What is meant by liability of foreignness, and how does it influence companies' international location decisions?

77. Foreign companies' lower survival rate than local firms for many years after they begin operations is known as ethnocentric reaction. False (interpretation, page 424)

78. Liability of foreignness refers to foreign companies' lower survival rate than local firms for many years after they begin operations. True (definition, page 424)

STUDY QUESTION 8: Compare the advantages of locating foreign operations to avoid where competitors have gone versus locating where competitors are.

79. An example of a first mover advantage in international operations is the use of a small country for market tests prior to entering a large country. False (interpretation, page 426)

80. Although companies may reduce risk by avoiding overcrowded markets, they nevertheless enter them to prevent competitors from gaining advantages. True (interpretation, pages 426–427)

STUDY QUESTION 9: How might political risk occur? How can companies respond to it?

81. An approach companies use to predict political risk is to conduct public opinion polls. False (interpretation, pages 428–429)

82. Most takeovers of foreign investments have been preceded by formal declarations followed by a legal process to determine the investors' compensation. True (interpretation, page 428)

STUDY QUESTION 10: What risks other than political risks should companies consider when making international location decisions?

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83. Companies are usually willing to accept a lower rate of return on their investments in countries where they can more easily sell them and convert the proceeds at a favorable rate. True (interpretation, page 427)

84. Risks to companies from natural disasters are more prevalent today because of the slowness of evacuating people at airport security points. False (interpretation, page 429)

STUDY QUESTION 11: Compare the major types of published data/information managers can use to compare countries. What are the problems in relying on these data?

85. Published government data is often inaccurate because of translation from countries' languages. False (interpretation, pages 430-431)

86. Comparability among countries' economic data is hampered by differences in activities taking place outside the market economy. True (interpretation, page 431)

STUDY QUESTION 12: Explain how grids and matrices can be used as tools to compare countries.

87. When choosing international operating locations, companies should outsource the preparation of grids or matrices rather than preparing them with their own personnel. False (interpretation, page 434)

88. The main use of a matrix as a tool in international expansion strategy is to show the degree of certainty for different projected returns on investment. False (interpretation, page 436)

STUDY QUESTION 13: How should reinvestment and harvesting be treated in companies' location decisions?

89. Headquarters management often feels that people within an established operation are the best judge of the operation's investment needs. True (interpretation, page 437)

90. Local managers seldom propose divestments because divestments may eliminate their jobs. True (interpretation, pages 437–438)

STUDY QUESTION 14: What are meant by a diversification strategy and a concentration strategy for international location decisions? Under what circumstances would one strategy be preferable to the other?

91. In a concentration strategy for international expansion, a company goes first to one or a few countries and builds up fast there before going to other countries. True (definition, page 438)

92. A diversification strategy for international expansion is preferable when a company has a long competitive lead time. False (interpretation, page 438)

STUDY QUESTION 15: Why do most companies examine expansion proposals one at a time rather than comparing various expansion proposals?

93. A go-no-go decision for foreign expansion means that management reviews existing information and decides whether more information is needed. False (definition, page 440)

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94. Companies do not necessarily compare among different foreign investment alternatives because unplanned opportunities emerge to which they must respond quickly. True (interpretation, page 440)

STUDY QUESTION 16: How might demographic and technical factors influence changes in the future prime locations for production and sales?

95. It is generally agreed that because of technical advancements, managers will not need face-to-face communication in the future. False (interpretation, pages 441–442)

96. A projected demographic change to the year 2050 is that population in sub-Saharan Africa will fall. False (interpretation, pages 441–442)

Essay Questions

97. What is the relationship between companies' international market and production location decisions?

AnswerIf a company develops a product that consumers find attractive, it must still find production and transportation cost advantages so that it can price the product favorably enough to sell it. These production cost advantages may come from abroad allowing the company to sustain a long-term competitive advantage.(interpretation, page 415)

98. When deciding where to locate production and sales efforts, how and why might companies use scanning techniques?

AnswerTo compare countries, managers use scanning techniques based on broad variables that indicate opportunities and risk. That way, decisionmakers can perform a detailed analysis of a manageable number of geographic locations. Scanning is useful in that a company might otherwise consider too few or too many possibilities. When scanning, managers will take the environmental climate into consideration. The environmental climate is the external conditions in a host country that could significantly affect the success or failure of a foreign enterprise. It can determine whether a company will make a detailed study, as well as the terms under which it will initiate a project. The environmental climate reveals both opportunities and risks.(interpretation, pages 416–418)

99. What are the major indicators/variables that most companies consider when deciding where to operate abroad?

Answera. Opportunities—Revenues less costs determine opportunities. From a broad scanning

perspective, there are variables that indicate the amount of revenue, cost factors, and risk that

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might be forthcoming from one country to another. The factors that have the most influence on the placement of marketing and production emphasis are market size, ease and compatibility of operations, costs, and resource availability. Sales potential is probably the most important variable managers use in determining where and whether to make an investment.

b. Risks—Companies use a variety of financial techniques to compare potential projects, including discounted cash flow, economic value added, payback period, net present value, return on sales, return on assets employed, internal rate of return, accounting rate of return, and return on equity. Given the same expected return, most decisionmakers prefer a more certain outcome to a less certain one. Often, companies may reduce risk or uncertainty by insuring. However, insuring against nonconvertibility of funds or expropriation is apt to be costly. In the initial process of scanning to develop a manageable number of alternatives, the company should give some weight to the elements of risk and uncertainty. At a later and more detailed state of the feasibility study, management should determine whether the degree of risk is acceptable without incurring additional costs.

(interpretation, pages 418–429)

100.In a short essay, discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand.

Answera. Obsolescence and leap-frogging of products—Consumers in emerging economies do

not necessarily follow the same patterns as those in higher-income countries. In many emerging economies, consumers have leap-frogged the use of traditional telephones by jumping from having no telephones to using cellular phones exclusively.

b. Costs—If costs of essential products are high, consumers may spend more than what one would expect based on per capita GNP. The expenditures on food in Japan are higher than would be predicted by either population or income level because food is expensive and work habits promote eating out. However, if costs are high for a nonnecessity, expenditures will likely be lower.

c. Income elasticity—A common tool to predict total market potential is to divide the percentage of change in product demand by the percentage of change in income in a given country. The more that demand increases, the more elastic is the demand in response to income change. Income elasticity varies by product and by income level.

d. Substitution—Consumers in a given country may have products or services that substitute more conveniently in some countries than in others for the products that companies would like to sell. For example, there are fewer automobiles in Hong Kong than one would expect based on income and population because the crowded conditions make the efficient mass transit system a desirable alternative to automobiles.

e. Income inequality—Where income inequality is high, the per capita GNP figures are usually low because many people have little income. This masks the fact that there are middle- and upper-income people who have substantial income to spend.

f. Cultural factors and taste—Countries with similar per capita GNPs may have different preferences for products and services because of values or tastes. (interpretation, pages 419–421)

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101.How do companies' international involvements (commitments) typically evolve over time?

AnswerMost new companies are established in response to domestic needs and frequently think of only domestic opportunities until a foreign opportunity presents itself to them. Companies commonly receive unsolicited export requests because someone has seen or heard of their products. Often these companies have no idea of how their products became known abroad, but at this juncture, they must make a decision to export or not. Many decide not to export because they fear they will not be paid or they know too little about the mechanics of foreign trade. Those they do export fulfill the unsolicited export orders and then see that opportunities available to them abroad are later apt to seek out other markets to sell their goods. Even large companies may move from passive to active expansion with aspects of their business.(interpretation, pages 424–425)

102.What is meant by liability of foreignness? How might this influence location decisions for foreign operations?

AnswerLiability of foreignness describes the situation in which foreign companies have a lower survival rate than local companies for many years after they begin operations. When a company operates abroad, it usually has higher uncertainty than at home because the foreign operations are in environments with which it is less familiar. As a company gains experience in operating in a particular country or in similar countries, it improves its assessments of consumer, competitor, and government actions—thereby reducing its uncertainty. The learning process helps explain why companies often evaluate reinvestments or expanded investments within a country very differently than investments in a country where they lack experience.(definition, pages 424–425)

103.Compare the advantages of locating foreign operations to avoid where competitors have gone versus locating where competitors are.

AnswerBy being the first major competitor in a market, a company can gain the best partners, locations, and suppliers. Companies may gain advantages in locating where competitors are. To begin with, the competitors may have performed the costly task of evaluating locations, so a follower may get a "free ride." Moreover, there are clusters of competitors in various locations. (interpretation, pages 425–427)

104.In a short essay, discuss liquidity preference as it relates to monetary risk.

Answer

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If a company's expansion occurs through direct investment abroad, exchange rates on and access to the invested capital and earnings are key considerations. The concept of liquidity preference is a common theory that helps explain companies' capital budgeting decisions in general and can be applied to their international expansion decisions. Liquidity preference is the theory that investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return. Liquidity is needed in part to make near-term payments, such as paying out dividends; in part to cover unexpected contingencies, such as stockpiling materials if a strike threatens supply; and in part to be able to shift funds to even more profitable opportunities, such as purchasing materials at a discount during a temporary price depression.(definition, page 427)

105.What problems might managers encounter when examining and comparing published data on different countries?

AnswerFor the most part, incomplete or inaccurate published data result from the inability of many governments to collect the needed information. Poor countries may have such limited resources that other projects necessarily receive priority in the national budget. Education affects the competence of government officials to maintain and analyze accurate records. Economic factors also hamper record retrieval and analysis, as hand calculations may be used instead of costly electronic data processing systems. The result may be information that is years old before it is made public. Finally, cultural factors affect responses. Mistrust of how the data will be used may lead respondents to answer incorrectly, particularly if questions probe financial results. However, not all inaccuracies are due to governmental collection and dissemination procedures. A large proportion of the studies by academicians describing international business practices are based on broad generalizations that may be drawn from too few observations, on representative samples, and from poorly designed questionnaires. People's desire and ability to cover up data on themselves—such as unrecorded criminal activity—may distort published figures substantially.(interpretation, pages 430–431)

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106.What are the major types of published data that managers can use to compare countries, and how do they differ in terms of cost and specificity?

Answera. Individualized reports—Market research and business consulting companies conduct studies

for a fee in most countries. However, the quality and cost of these studies vary widely. This type of data is generally the most costly information source because the individualized nature restricts proration among the number of companies. However, the fact that a company can specify what information it wants often makes the expense worthwhile.

b. Specialized studies—Some research organizations prepare fairly specific studies that they sell to any interested company at costs much lower than for individualized studies. These specialized studies sometimes are printed as directories of companies that operate in a given locale, perhaps with financial or other information about the companies.

c. Service companies—Most companies that provide services to international clients publish reports. These reports usually are geared toward either the conduct of business in a given area or some specific subject of general interest, such as tax or trademark legislation.

d. Government agencies—Governments and their agencies are another source of information. Different countries' statistical reports vary in subject matter, quantity, and quality. When a government or governmental agency wants to stimulate foreign business activity, the amount and type of information it makes available may be substantial.

e. International organizations and agencies—Numerous organizations and agencies are supported by more than one country. These include the United Nations, the World Trade Organization, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Union. All of these organizations have large research staffs that compile basic statistics as well as prepare reports and recommendations concerning common trends and problems.

f. Trade associations—Trade associations connected to various product lines collect, evaluate, and disseminate a wide variety of data dealing with technical and competitive factors in their industries. Many of these data are available in the trade journals published by such associations.

g. Information service companies—A number of companies have information-retrieval services that maintain databases from hundreds of different sources. For a fee, or sometimes for free at public libraries, a company can obtain access to such computerized data and arrange for an immediate printout of studies of interest.

h. The Internet—Printed publications are quickly becoming archives that are older than information one may find on the Internet. This is because the Internet changes can appear immediately and be "up-to-the-minute"; it is a "live medium," whereas changes for periodicals must be printed, disseminated, catalogued, and shelved before they are available. As with other sources, one must be concerned about the reliability of information from Internet sources.(interpretation, page 432)

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107.In a short essay, discuss how grids and matrices are used as country comparison tools.

AnswerOnce companies collect information on possible locations through scanning, they need to analyze the information. Two common tools for analysis are grids and matrices. However, once companies commit to locations, they need continual updates, which they commonly make through environmental scanning. A company may use a grid to compare countries on whatever factors it deems important. The grid technique is useful even when a company does not compare countries because it can set a minimum score necessary for either investing additional resources or committing further funds to a more detailed feasibility study. Grids do tend to get cumbersome as the number of variables increases. And although they are useful in ranking countries, they often obscure interrelationships among countries.

Generally, managers use two matrices when comparing countries: opportunity-risk matrices and country attractiveness–country strength matrices. The matrix is important as a reflection of the placement of a country in comparison to other countries. The companies must determine which factors are good indicators of its risk and opportunity and weigh them to reflect their importance. Another matrix highlights a company's specific product advantage on a country-by-country basis. Although this type of matrix may serve to guide decision-making, managers must use it with caution. First, it is often difficult to separate the attractiveness of a country from a company's position. Second, some of the recommended actions take a defeatist attitude to a company's competitive position. Third, a company may choose to stay in a market to prevent competitors from using their dominance there to fund expansion elsewhere.(interpretation, pages 434–437)

108.Why do companies often treat foreign reinvestment decisions differently than new foreign investment decisions?

AnswerCompanies treat decisions to replace depreciated assets or add to the existing stock of capital from retained earnings in a foreign country somewhat differently from original investment decisions. Once committed to a given locale, a company may find it doesn't have the option of moving a substantial portion of the earnings elsewhere—to do so would endanger the continued success of an operation in a given foreign facility. Aside from competitive factors, a company may need several years of almost total reinvestment and allocation of new funds to one area in order to meet its objectives. Another reason a company treats reinvestment decisions differently is that once it has experienced personnel within a given country; it may believe they are the best judges of what is needed for that country, so headquarters managers may delegate certain investment decisions to them. (interpretation, page 437)

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109.How does the interdependence of operations in different countries complicate managers' comparative evaluation of countries?

AnswerThe derivation of meaningful financial figures is not easy where foreign operations are concerned. Profit figures from individual operations may obscure the real impact those operations have on overall company activities. Much of the sales and purchases of a foreign subsidiary may be made from and to units of the same parent company. The prices the company charges on these transactions will affect the relative profitability of one unit compared to another. Furthermore, a company may not set the net value of a foreign investment realistically, particularly if it bases part of the net value on exported capital equipment that is obsolete at home and useless except in the country where it is being shipped. By stating a high value, a government may permit the company to repatriate a larger portion of its earnings.(interpretation, page 438)

110.Why do companies engage in international harvesting or divestment?

AnswerCompanies commonly reduce commitments in some countries because those countries have poorer performance prospects than do others, a process known as harvesting or divesting. Companies may divest by selling or closing facilities. They usually prefer selling because they receive some compensation. A company that considers divesting because of a country's political or economic situation may find few potential buyers except at very low prices. In such situations, the company may try to delay divestment, hoping the situation will improve. If it does, the firm that "waits out" the situation generally is in a better position to regain markets and profits than one that forsakes its operations.(interpretation, pages 437–438)

111.In a short essay, compare the differences between diversification versus concentration and provide examples of situations in which each would be used.

AnswerUltimately, a company may gain a sizable presence and commitment in most countries; however, there are different paths to that position. Although any move abroad means some geographic diversification, the term diversification is when the company moves rapidly into many foreign markets, gradually increasing its commitments within each. At the other extreme, with a concentration strategy, the company will move to only one or a few foreign countries until it develops a very strong involvement and competitive position there. When the growth rate in each market is high, a company usually should concentrate on a few markets because it will cost a great deal to expand output sufficiently in each market. The more stable that sales and profits are within a single market, the less advantage there is from a diversification strategy. Similarly, the more interrelated markets are, the less smoothing is achieved by selling in each. If a company determines that it has a long lead time before competitors are likely to be able to copy or supersede its advantages, then it may be able to follow a concentration strategy and still beat competitors into other markets. When

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marketing programs reach many countries, such as by cable television or the Internet, a diversification strategy has advantages. Companies may have to alter products and their marketing to sell in foreign markets, a process that, because of cost, favors a concentration strategy. The more a company needs to control its operations in a foreign country, the more it should develop a concentration strategy. If a company is constrained by the resources it needs to expand internationally compared to the resources it can muster, it will likely follow a concentration strategy.(interpretation, pages 438–440)

112.Why do most companies examine expansion proposals one at a time rather than comparing various expansions proposals?

AnswerOne factor is that an overriding consideration may cause one location to be considered above all others. When a company does not compare among locations, a positive decision usually means the project meets some minimum-threshold criteria. Two major factors restricting companies from comparing investment opportunities are cost and time. Clearly, some companies cannot afford to conduct many investigations simultaneously. If they are conducted simultaneously, they are apt to be in various stages of completion at a given time.(interpretation, pages 440–441)

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Country Evaluation and Selection

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