INTERNATIONAL SRI VENKATESWARA

BUSINESS
COLLEGE
(UNIVERSITY OF DELHI)

CHAPTER 3
MODES OF ENTRY INTO INTERNATIONAL BUSINESS
Structure
3.1 Nature or Modes of International Business Expansion
3.2 Trade-related Modes
3.2.1 Exports
3.2.2 Indirect, Direct Exports and Intra-corporate Transfers
3.2.3 Piggybacking – Complementary Exports
3.2.4 Counter-trade
3.2.5 E-Commerce
3.3 Contractual Modes
3.3.1 International Strategic Alliance
3.3.2 International Contract Manufacturing
3.3.3 International Management Contracts
3.3.4 Turnkey Projects
3.3.5 International Leasing
3.3.6 International Licensing
3.3.7 International Franchising
3.4 Investment Modes
3.4.1 Overseas Assembly or Mixing
3.4.2 Joint Ventures
3.4.3 Wholly Owned Subsidiaries
Multiple Choice Questions
Answer Key
References

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3.1 NATURE OR MODES OF INTERNATIONAL BUSINESS EXPANSION

Simply speaking, the term ‗mode‘ means the manner or way. The phrase ‗modes of entry into
international business‘, therefore, means various ways in which a company can enter into international
business. The choice of entry mode is also significant in view of the fact that different firms prefer
different levels of involvement in international business. If a firm is in favour of least involvement, only
trade mode i.e. exports and imports may be suitable. If a firm is in favour of maximum involvement in
international business, the investment mode will be most suitable.
3.2 TRADE-RELATED MODES
Expansion modes that employ some form of trade to expand business in foreign countries are known as
trade-related modes. As financial needs and resource commitments are less, low-risk expansion modes,
highly suitable for simultaneous expansion in geographically diverse countries, trade-related modes are
adopted in the initial phases of internationalization. Moreover, the low exit-cost adds flexibility of
winding up business operations in one country and switching over to another expansion mode. However,
a firm has to substantially depend upon external agencies for its international expansion. Trade mode is
the first step in international business. It includes export and import. Export may be direct or indirect.
Major forms of trade-related modes are:
3.2.1 EXPORTS
Exports may be defined as manufacturing the goods in the home country or a third country and
shipping them for sales to a country other than the country of production. Exports are used as
strategic options to dispose of surplus production.
Advantages of Exporting
 It is the easiest way of gaining entry into international markets.
 Less investment of time and money.
 Lower risk.
 Motivation (proactive and reactive) for exporting: proactive motivations are opportunities present in
the host country. Reactive motivations are available due to the decline in demand in the home
country.
Limitations of Exporting

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 Since goods physically move from one country to another, it involves additional packaging,
transportation and insurance costs. In importing countries, exports products are subject to custom
duty or other levies and charges. All such costs together increase product costs and make them less
competitive.
 It is not feasible option when import restrictions exist in foreign country.
 Because goods produced in home country and shipped to foreign markets, therefore, poor
understanding and familiarity of foreign markets and customers than domestic producers.
3.2.2 INDIRECT, DIRECT EXPORTS AND INTRA-CORPORATE TRANSFERS
Indirect Exports: When a firm sells its products through an export intermediary (i.e. exports
house, trading house) based in its home country and does not take care of export activity, known
as indirect exports. Indirect export takes place when the exporting company sells its products to
intermediaries, who in turn sell the same products to the end users in the target market.
Direct Exports: When a company makes its domestically produced products available in foreign
markets without employing any market intermediary in the home country, known as direct
exports. In direct export, a company takes full responsibility for making its goods available in the target
market by selling directly to the final consumers.
Intra-corporate Transfers: It involves the selling of products by a company to its affiliated company in
the host country.
3.2.3 PIGGYBACKING – COMPLEMENTARY EXPORTS
Piggybacking – Complementary Exports: A firm may expand its business in a foreign country by
using the distribution channel or network of another company, known as piggybacking or
complementary exporting. The exporting firm is termed ‗rider‘ and other firm with established
distribution channel in the foreign country or target country is termed as ‗carrier‘. For example, Fiat
decided to use the extensive nationwide network of Tata Motors to market and service its passenger
cars.

3.2.4 COUNTERTRADE
Countertrade refers to various forms of trade arrangements wherein the payment is in form of reciprocal
commitments for other goods or services rather than an exclusive cash transaction. It is an alternative
means of structuring an international sale when conventional means of payment are difficult, costly or

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nonexistent. It denotes a whole range of barter like agreements; its principle is to trade goods and
services for other goods and services when they cannot be traded for money. For example, Saudi Arabia
agreed to buy ten (747) jets from Boeing with payment in crude oil, discounted at 10 per cent below
posted world oil prices.
Types of Countertrade
1. Barter: It is the direct exchange of goods and/or services between two parties without a cash
transaction.
2. Counter-purchase: It is a reciprocal buying agreement. It occurs when a firm agrees to purchase a
certain amount of materials back from a country to which a sale is made.
3. Offset: An offset is similar to a counter-purchase insofar as one party agrees to purchase goods and
services with a specified percentage of the proceeds from the original sale.
4. Switch Trading: It refers to the use of a specialized third-party trading house in a countertrade
arrangement.
5. Compensation or Buybacks: It occurs when a firm builds a plant in a country – or supplies
technology, equipment, training or other services to the country – and agrees to take a certain percentage
of the plant‘s output as partial payment for the contract.
Thus, counter-trade is a sort of bilateral trade where one set of goods is exchanged for another set of
goods. It is classified broadly as: (A) Commercial counter-trade such as classical barter, counter-
purchase and pre-compensation. Classical barter involves a once-only exchange of goods on the terms
agreed upon between the buyer and seller. The quantum, quality and value of goods to be exchanged are
well defined. In case of counter-purchase, the exporter of goods agrees to accept, in return, a wide range
of goods from the importer. In case of pre-compensation, the value of exports is entered into an evidence
account and imports are made on that basis. It means that payments for imports are not made
immediately. (B) Industrial counter-trade such as buy-back agreements, development for import
arrangements and framework agreements.
3.2.5 E-COMMERCE
It refers to selling goods and services on-line. For example, Amazon is selling goods worldwide.
3.3 CONTRACTUAL MODES
Contractual modes are employed to make use of strategic strengths and resources of a foreign-based
partner company for international business expansion. The partner firms complement each other with

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one or more of their strategic strengths, such as superior technology, strong brand equity, production
facility, well-established distribution network etc. These are found in case of intangible products such as
technology, patents, and so on. When a company develops a particular technology through its own
research and development programme, it likes to recover the cost of research and development. To this
end, it sells the technology either to a domestic firm or to a foreign firm. The contractual entry modes,
often known as technical collaboration or technical joint-venture. Technical collaboration normally takes
four forms. They are: licensing, franchising, management contracts and turnkey projects. The major
forms of contractual expansion modes are:
3.3.1 INTERNATIONAL STRATEGIC ALLIANCE
When a firm agrees to cooperate with one or more than one firm overseas, to carry out a business
activity wherein each one contributes its different capabilities and strengths to the alliance, termed as
international strategic alliance. Such strategic alliances are long-term formal relationships for mutual
benefit. For example, Star Alliance launched on 14 May, 1997, a strategic alliance in the airlines
industry is the largest in the world. Today, Star Alliance has 28 member airlines, each with its own
distinctive culture and style of service. Alliance members come together to offer smooth connections
across a vast global network.
3.3.2 INTERNATIONAL CONTRACT MANUFACTURING
It refers to a type of international business where a firm enters into a contract with one or a few local
manufacturers in foreign countries to get certain components or goods produced as per its specifications.
Contract manufacturing, also known as outsourcing, can take three major forms: (i) Production of
certain components such as automobile components or shoe uppers to be used later for producing final
products such as cars and shoes; (ii) Assembly of components into final products such as assembly of
hard disk, mother board, floppy disk drive and modem chip into computers; and (iii) Complete
manufacture of the products such as garments.
The goods are produced or assembled by the local manufacturers as per the technology and management
guidance provided to them by the foreign company. The goods so manufactured or assembled by the
local producers are delivered to the international firm for use in its final products or out rightly sold as
finished products by the international firm under its brand names in various countries including the
home, host and other countries. All the major international companies such as Nike, Reebok, Levis and
Wrangler today get their products or components produced in the developing countries under contract

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manufacturing. In order to take advantage of lower costs of production, a firm may sub-contract
manufacturing in a foreign country. International sub-contracting arrangements may involve supply of
inputs such as raw materials, semi-finished goods, components and technical know-how to a local
manufacturer in a foreign country. Contract manufacturing has also been used as a strategic tool for
economic development in a number of countries such as Korea, Mexico, Thailand and China. For
example, Taiwan is a world leader in semi-conductor manufacturing. China produces 30 per cent of air
conditioners, 24 per cent of washing machines and 16 per cent of refrigerators sold in the US. Nike, the
leading international shoe brand, does not own a single production facility and gets its manufacturing
done through contract manufacturing.
Advantages
 It permits the international firms to get the goods produced on a large scale without requiring
investment in setting up production facilities. These firms make use of the production facilities
already existing in the foreign countries.
 No or little investment risk in foreign countries.
 Lower cost of manufacturing or assembling the products.
 Local producers in foreign countries also gain from contract manufacturing. If they have any idle
production capacities, manufacturing jobs obtained from contract basis ensure greater utilisation of
their production capacities.
Limitations
 Local firms might not adhere to production design and quality standards, thus causing serious
product quality problems to the international firm.
 Local manufacturer in the foreign country loses his control over the manufacturing process because
goods are produced strictly as per the terms and specifications of the contract.
 The local firm producing under contract manufacturing is not free to sell the contracted output as per
its will. It has to sell the goods to the international company at predetermined prices. This results in
lower profits for the local firm if the open market prices for such goods happen to be higher than the
prices agreed upon under the contract.
3.3.3 INTERNATIONAL MANAGEMENT CONTRACTS
A management contract is a legal agreement that grants operational control of a business initiative to a
separate group. A firm that possesses technical skills or management know-how can expand overseas by

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providing its managerial and technical expertise on contractual basis. Under a management contract, a
firm offers a variety of management or technical services such as technical support to run a production
facility, training and management. For example, India‘s Taj Hotels have employed management
contracts for international expansion. Engineers India Ltd. (EIL) got a project management contract for
providing project consultancy for the revamp and up-gradation of the Skikda Refinery in Algeria in
February 2005. Put differently, in a management contract, one company supplies the other with
managerial expertise. Such agreements are normally signed in case of turnkey projects where the host
country firm is not able to manage day to day affairs of the project or in other cases where the desired
managerial capabilities are not available in the host country. The transfer includes both technical
expertise and managerial expertise. Therefore, a management contract is an agreement between two
companies whereby one company provides managerial assistance, expertise and specialised services to
the second company – for a certain agreed period – in return for monetary compensation. The monetary
compensation may be in the form of (a) a flat fee; (b) percentage over sales; and (c) performance bonus
based on profitability, sales growth, production or quality measures.
Advantages
 Foreign company gets additional income without any additional investment, risks and obligations.
 This arrangement and additional income allows the company to enhance its image with the investors
and mobilise the funds for expansion.
 It helps the company to enter other business areas in the host country.
Limitations
 The host country‘s companies may leak the secrets of technology.
3.3.4 TURNKEY PROJECTS
A company may expand internationally by making use of its core competencies in designing and
executing infrastructure, plants or manufacturing facilities overseas. Conceptually, ‗turnkey‘ means
handing over a project to the client, when it is complete in all respect and are ‗ready to use‘ on ‗turning
the key‘. International turnkey projects include conceptualizing, designing, constructing, installing and
carrying out preliminary testing of manufacturing facilities or engineering projects at overseas locations
for a client organization. It often includes providing training to the client‘s personnel to operate the
plant. The major types of turnkey project include the following: (a) Build and Transfer (BT); (b)
Build, Operate and Transfer (BOT) and (c) Build, Operate and Own (BOO). For example, Larsen &

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Toubro (L&T) has carried out many overseas projects on turnkey basis. Turnkey Project: In this
agreement, a firm agrees to construct an entire plant in a foreign country and make it fully operational. It
is known as turnkey because the licensor starts the operation and hands over the key of the operating
plant to the licensee.
3.3.5 INTERNATIONAL LEASING
A firm can expand, it business by leasing out new and used equipment to a manufacturing firm in
overseas countries. The ownership of the property retains with the leasing firm (i.e. lessor) throughout
the lease period during which the foreign-based user (i.e. lessee) pays leasing fee. For example,
International Lease Finance Corporation (ILFC), headquartered in Los Angles, is the largest aircraft
lessor by value that had an inventory of about 1000 aircrafts by 2008.
3.3.6 INTERNATIONAL LICENSING
In licensing, a firm makes its intangible assets, such as patents, trademarks and copyrights, technical
know-how and skills (technical guidance, feasibility and product studies, manuals, engineering, designs
etc.) available to a foreign company for a fee termed as royalty. The home-based firm transferring the
intellectual property is known as the licensor whereas the foreign based firm is known as licensee.
Licensing may involve either process or trade-mark licensing agreement. In the process licensing: the
licensee gets the right to manufacture and market the product in the defined market area. In the trade-
mark licensing, the licensee also gets the rights to use trade-marks/trade names besides using the
process know-how. For example, Asian Paints adopted technology and brand licensing for its
international expansion. In cross-licensing is the mutual sharing of patents between two companies
without exchange of licensing fee.
Licensing: Licensing is an arrangement by which a firm transfers its intangible property such as
expertise, know-how, blueprints, technology and manufacturing design to its own unit, or to a firm,
located abroad. It is also known as technical collaboration. The firm transferring technology is the
licensor and the firm receiving technology is the licensee. The arrangement is meant for a specific
period. The licensor gets technical service fee from the licensee. A license can be exclusive, non-
exclusive or cross. In an exclusive license, the arrangement provides exclusive rights to produce and
market an intangible property in a specific geographic region. A non-exclusive license does not grant a
firm sole access to the market. The licensor can grant even more companies the right to use the property
in the same region. Cross licensing is reciprocal where intangible property is transferred between two

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firms, both of them being the licensor and licensee at the same time. Cross-licensing is mutual exchange
of knowledge, technology and/or patents between the firms. Therefore, licensing is a contractual
arrangement in which one firm grants access to its patents, trade secrets or technology to another firm in
a foreign country for a fee called royalty. The firm that grants such permission to the other firm is
known as licensor and the other firm in the foreign country that acquires such rights to use technology
or patents is called the licensee. Licensing is used in connection with production and marketing of
goods.
Factors which affect International Licenses
 Specifying the agreement‘s boundaries.
 Determination of fair royalty.
 Determining rights, privileges and constraints.
 Dispute settlement mechanism.
 Agreement duration.
Advantages
 Licensing mode carries relatively low investment on the part of the licensor.
 Licensing mode carries low financial risk to licensor.
 Licensor can investigate the foreign market without much efforts on his part.
 Licensee gets the benefits with less investment on research and development.
 Licensee saves himself from the risk of product failure.
Limitations
 Licensing agreements reduce the market opportunities for both the licensor and licensee.
 Both the parties have the responsibilities to maintain the product quality and promoting the product.
 Costly and tedious litigation may arise and loss both the parties and market.
 Scope for misunderstanding between the parties despite the effectiveness of the agreement.
 Problem of leakage of the trade secrets of the licensor.
 Licensee may develop his reputation.
 Licensee may sell the product outside the agreed area and after the end of the contract.

3.3.7 INTERNATIONAL FRANCHISING

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Franchising is a special form of licensing in which an internationalizing firm (known as franchisor)

provides intangible assets, such as trademarks, process know-how etc. and methods of doing business in
a prescribed manner in return for a franchising fee. In franchising, the franchisor grants the franchisee
the right to carry out business in a prescribed manner in a specified place for a pre-decided period of
time. For example, McDonald, KFC use this mode of expansion of trade in overseas countries.
In the words of Charles W. L. Hill, ―Franchising is basically a specialised form of licensing in which
the franchisor not only sells intangible property (normally a trademark) to the franchisee, but also
insists that the franchisee agrees to abide by strict rules as to how it does business.‖
In the words of Donald W. Hackett, ―Franchising is a “form of licensing in which a parent company
(the franchisor) grants another independent entity (the franchisee) the right to do business in a
prescribed manner. This right can take the form of selling the franchisers products, ‘using its name,
production and marketing technique, or general business approach.‖
Franchising: It is a form of technical collaboration in which the franchisee makes use of intellectual
property rights, like trademarks, copyrights, business know-how, managerial assistance, geographic
exclusivity or of a specific set of procedures of the franchiser for creating the product in question. A few
experts have established similarities between licensing and franchising. Oman (1984) suggests that
―franchising may be regarded as a particular type of licensing‖. On the contrary, there are views to
suggest that these two are different. Perkins (1987) is of the view that while franchising encompasses
transfer of the total business function, licensing concerns just one part of business, including transfer of
right to manufacture or distribute a single product or process. Again, franchising differs from licensing
in that the former gives a company greater control over the sale of the product in the target market.
Licensing is common in manufacturing industries, whereas franchising is more common in service
industries. Franchising may take different forms. In direct franchising, the franchiser frames policy and
monitors and directs the activities in each host country from its home-country base. In case of indirect
franchising, there are sub-franchisers between the original franchiser and the host country units. The
sub-franchiser possesses the exclusive right to exploit the original franchiser‘s business package within a
defined geographic area.
Advantages

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 Under the franchising system, it is the franchiser who sets up the business unit and invests his/her
own money in the business. As such, the franchiser has to virtually make no investments abroad.
Franchising is, therefore, considered a less expensive mode of entering into international business.
 Since no or very little foreign investment is involved, franchiser is not a party to the losses, if any,
that occur to foreign business. Franchiser is paid by the franchisee by way of fees fixed in advance
as a percentage of production or sales turnover. This royalty or fee keeps accruing to the franchiser
so long as the production and sales keep on taking place in the franchisee‘s business unit.
 Since the business in the foreign country is managed by the franchisee who is a local person, there
are lower risks of business takeovers or government interventions.
 Franchisee being a local person has greater market knowledge and contacts which can prove quite
helpful to the franchiser in successfully conducting its marketing operations.
 As per the terms of the franchising agreement, only the parties to the franchising agreement are
legally entitled to make use of the franchiser‘s copyrights, patents and brand names in foreign
countries. As a result, other firms in the foreign market cannot make use of such trademarks and
patents.
Limitations
 When a franchisee becomes skilled in the manufacture and marketing of the franchised products,
there is a danger that the franchisee can start marketing an identical product under a slightly different
brand name. This can cause severe competition to the franchiser.
 If not maintained properly, trade secrets can get disclosed to others in the foreign markets. Such
lapses on the part of the franchisee can cause severe losses to the franchiser.
 Over time, conflicts often develop between the franchiser and franchisee over issues such as
maintenance of accounts, payment of royalty and non-adherence to norms relating to production of
quality products. These differences often result in costly litigations, causing harm to both the parties.
3.4 INVESTMENT MODES
If a country is found to be attractive enough to justify a firm‘s long-term commitment, investment
modes of expansion are employed. Major forms of investment modes are:
3.4.1 OVERSEAS ASSEMBLY OR MIXING
In order to respond to import restrictions, high tariffs and freight charges, assembling operations
overseas is adopted to expand business. In international assembly, a manufacturer exports components,

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parts or machinery in Completely Knocked Down (CKD) conditions and assembles these parts at a site
in a foreign country. Assembling is often used to overcome the import restrictions in target countries.
Japanese automobile manufacturers had to begin assembling in Europe mainly to deal with import
barriers. As the local content in these assembly operations was negligible, these were also termed as
‗screw driving operations‘.
3.4.2 JOINT VENTURES
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and
control over property rights and operation". International joint ventures offer equity investment
opportunities in foreign countries with sharing resources and risks with partner firms. A firm shares
equity and other resources with other partner firms to form a new company in the target country. In
addition to capital, joint ventures give access to other resources and strengths of the partner, such as
market know-how, technology, skills, and local operating knowledge. Based on the equity stake, joint
ventures may be of the following three types: (a) majority with more than 50 per cent ownership; (b) a
50:50 equity with equal ownership and (c) minority with less than 50 per cent ownership.
A joint ownership venture may be brought about in three major ways: (i) foreign investor buying an
interest in a local company; (ii) local firm acquiring an interest in an existing foreign firm (iii) both the
foreign and local entrepreneurs jointly forming a new enterprise.
Advantages
 Since the local partner also contributes to the equity capital of such a venture, the international firm
finds it financially less burdensome to expand globally.
 Joint ventures make it possible to execute large projects requiring huge capital outlays and
manpower.
 The foreign business firm benefits from a local partner‘s knowledge of the host countries regarding
the competitive conditions, culture, language, political systems and business systems.
 In many cases entering into a foreign market is very costly and risky. This can be avoided by sharing
costs and/or risks with a local partner under joint venture agreements.
Limitations
 Foreign firms entering into joint ventures share the technology and trade secrets with local firms in
foreign countries, thus always running the risks of such a technology and secrets being disclosed to
others.

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 The dual ownership arrangement may lead to conflicts, resulting in battle for control between the
investing firms.
3.4.3 WHOLLY OWNED SUBSIDIARIES
Wholly Owned Subsidiaries: A firm expands internationally to have complete control over its overseas
operations by way of 100 per cent ownership in the new entity, known as wholly owned subsidiaries.
This entry mode of international business is preferred by companies which want to exercise full control
over their overseas operations. The parent company acquires full control over the foreign company by
making 100 per cent investment in its equity capital. A wholly owned subsidiary in a foreign market can
be established in either of the two ways: (i) setting up a new firm altogether to start operations in a
foreign country —also referred to as a green field venture, or (ii) acquiring an established firm in the
foreign country and using that firm to manufacture and/or promote its products in the host nation. Firms
invest overseas either by way of greenfield operations or mergers and acquisitions (M&As).
Greenfield Operations: creating production and marketing facilities on a firm‘s own from scratch is
termed as greenfield operations. When a fresh investment is made in productive activities of home
counties on a long-term basis called greenfield investment. Mergers and Acquisitions: Transfer of
existing assets of a domestic firm to a foreign firm lead to mergers and acquisitions. In cross-border
mergers, a new legal entity emerges by way of merging assets and operations of firm more than one
country. Cross-border acquisitions involve transferring management control of assets and operations of a
domestic company to a foreign firm. Generally, mergers occur in friendly settings wherein two firms
come together to build a synergy. Acquisitions can be hostile takeovers by purchasing the majority of
shares of a firm from the open market . Acquisitions can be of the following three types: (a) minority:
when a foreign firm acquires 10 per cent to 49 per cent interest in a firm‘s voting stock; (b) majority:
when a foreign firm acquires 50 per cent to 99 per cent voting stock and (c) full outright stake: when a
foreign firm acquires 100 per cent of voting stock. Brownfield Investment: M&As + Greenfield
Investment; Expansion or re-investment in existing foreign affiliates or sites is termed as brownfield
investments. Foreign Direct investment (FDI) is found in form of either green-field investment or
mergers and acquisitions (M&As) or brown-field investment.
Advantages
 The parent firm is able to exercise full control over its operations in foreign countries.

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 Since the parent company on its own looks after the entire operations of foreign subsidiary, it is not
required to disclose its technology or trade secrets to others.
Limitations
 The parent company has to make 100 per cent equity investments in the foreign subsidiaries. This
form of international business is, therefore, not suitable for small and medium size firms which do
not have enough funds with them to invest abroad.
 Since the parent company owns 100 per cent equity in the foreign company, it alone has to bear the
entire losses resulting from failure of its foreign operations.
 Some countries are averse to setting up of 100 per cent wholly owned subsidiaries by foreigners in
their countries. This form of international business operations, therefore, becomes subject to higher
political risks.

MULTIPLE CHOICE QUESTIONS

1. In which of the following modes of entry does the domestic manufacturer give the right to use
intellectual property such as patent and trademark to a manufacturer in a foreign country for a fee
(1) Licensing (2) Contract manufacturing
(3) Joint venture (4) None of these

2. Outsourcing a part of or entire production and concentrating on marketing operations in

international business is known as:
(1) Licensing (2) Franchising
(3) Contract manufacturing (4) Joint venture

3. When two or more firms come together to create a new business entity that is legally separate
and distinct from its parents it is known as:
(1) Contract manufacturing (2) Franchising
(3) Joint ventures (4) Licensing

4. Which of the following is not an advantage of exporting?

(1) Easier way to enter into international markets.
(2) Comparatively lower risks.
(3) Limited presence in foreign market.
(4) Less investment requirements.

5. Which one of the following modes of entry requires higher level of risks?
(1) Licensing (2) Franchising
(3) Contract manufacturing (4) Joint venture

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6. Which one of the following modes of entry permits greatest degree of control over overseas
operations?
(1) Licensing/franchising (2) Wholly owned subsidiary
(3) Contract manufacturing (4) Joint venture

7. Which one of the following modes of entry brings the firm closer to international markets?
(1) Licensing (2) Franchising
(3) Contract manufacturing (4) Joint venture

8. Allowing another party in a foreign country to produce and sell goods under trademarks, patents
or copyrights of home country‘s party in lieu of some fee is one way of entering into
international business and called:
(1) Franchising (2) Licensing
(3) Joint Venture (4) Leasing

9. Franchising is similar to licensing but it is used in relation with:

(1) Provision of goods (2) Provision of services
(3) Provision of capital (4) Provision of technology

10. McDonalds operates fast food restaurants the world over through which mode of international
business?
(1) Licensing (2) Franchising
(3) Trademarks (4) Joint Venture

11. Statement (I): Direct investment takes place when a company directly invests in properties such
as plant and machinery in foreign countries with a view to undertaking production and marketing
of goods and services in those countries.
Statement (II): Direct investment provides the investor a controlling interest in a foreign
company.
(1) Statement (I) is true but Statement (II) is false
(2) Statement (II) is true but Statement (I) is false
(3) Both statements are false
(4) Both statements are true

12. When investments in production and marketing facilities are made jointly with one or more
foreign parties, such an operation is called:
(1) FDI (2) Joint Venture
(3) Wholly owned subsidiary (4) Portfolio Investment

13. __________ is an investment that a company makes into another company by the way of
acquiring shares or providing loans to the latter and earns income by way of dividends or interest
on loans.
(1) FDI (2) Portfolio Investment
(3) ADR (4) GDR

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14. Statement (I): Unlike FDI, the investor under portfolio investment does not get directly involved
into production and marketing operations.
Statement (II): It simply earns an income by investing in shares, bonds, bills or notes in a
foreign country or providing loans to foreign business firms.
(1) Statement (I) is true but Statement (II) is false
(2) Statement (II) is true but Statement (I) is false
(3) Both statements are false
(4) Both statements are true

15. The payment for the use of the trademark is in the form of:
(1) Royalty (2) Technical service fees
(3) Dividend (4) Interest

16. Which of the following is not a type of countertrade?

(1) Barter (2) Counter purchase
(3) Switch Trading (4) Factoring

17. Match the items of List-I with items in List-II and select a correct code:
List-I List-II
a. Greenfield Investments i. Unique product or service sold in domestic market
targeting international markets through its
customers.
b. Turnkey Projects ii. Typical North-American-process for rapid market
expansion.
c. Piggy Backing iii. It is the most costly investments and holds the
highest risk.
d. Franchising iv. A project where the facility is built from the ground
and turned over to the client ready to go.
Codes:
a b c d
(1) i ii iii iv
(2) iv iii i ii
(3) iii iv i ii
(4) iii i iv ii

18. Which one among the following is not a correct statement?

(1) ANZ Grindlays merged with American Express Bank to emerge competitively.
(2) Apple computer uses differentiation competitive strategy to emphasize innovative
product.
(3) Operating strategies are implemented at departmental level.
(4) Corporate strategy describes a company‘s overall direction towards growth by managing
business and product line.

19. Statement (I): Counter-trade is a sort of bilateral trade where one set of goods is exchanged for
another set of goods.

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Statement (II): Classical barter, counter-purchase and pre-compensation are types of

commercial counter-trade.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

20. Statement (I): A particular mode of international business depends on the extent of involvement
of the firm.
Statement (II): Host country environment does not at all influence the mode of international
business.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

21. Statement (I): Both direct and indirect trade involve intermediaries.
Statement (II): Counter-trade and bilateral trade are synonyms.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

22. Statement (I): Contractual entry mode is found normally in the case of intangible products, such
as technology.
Statement (II): While franchising involves transfer of total business function, licensing is
concerned with a single product or process.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

23. Which one is not the overseas market entry strategy followed by Multinational Corporations?
(1) Franchise (2) Collaborations
(3) Joint venture (4) Strategic planning
24. Match the following in the context of International Market Entry and indicate the correct code :
List – I List – II
a. Assembly i. Exports
b. Acquisition ii. Indirect Exports
c. Export House iii. Contractual Entry
d. Commission Agent iv. Direct Investment
Codes:
a b c d
(1) iii iv i ii
(2) iv iii ii i

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(3) i ii iii iv
(4) iv ii iii i
25. Financial conglomerates are those where:
(1) A financial company manages the financial functions of all the companies in the group.
(2) The different companies of the group are financially independent.
(3) The different companies of the group have their own geographic area.
(4) None of these.
26. Amalgamation is a form of M&As where:
(1) The acquiring and the acquired firms cease to exist and a new firm comes up in their
place.
(2) The acquiring firm ceases to exist, but the acquired firm continues to operate.
(3) The acquired firm loses its existence and the acquiring firm continues to operate.
(4) None of these.

27. The impact of greenfield investment and M&As differs in case of developing country insofar as:
(1) Asset market is well developed.
(2) The level of technology is not so well developed.
(3) The government adopts liberal economic policies.
(4) None of these.

28. In strategic asset seeking M&As, employment in an acquired firm is expected to increase
because:
(1) Employees possess valuable skills and capabilities.
(2) Excess capacity exists.
(3) Restructuring and asset-stripping tend to occur.
(4) None of these.

29. Turnkey projects are found in cases where:

(1) The initial construction of the plant is complex and its operation is simple.
(2) The initial construction of the plant is simpler than its operation.
(3) The initial construction and the operation are both simple.
(4) None of these.

30. Buy-back agreements are a form of:

(1) Commercial counter-trade.
(2) Industrial counter-trade.
(3) Both industrial and commercial counter-trade.
(4) None of these.

31. Statement (I): In a turnkey job, the host-country constructs the entire plant.
Statement (II): Foreign portfolio investment is concerned with the operation and ownership of
the host country firm.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.

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(4) Both statements are false.

32. Statement (I): Sub-franchisers exist in case of direct franchising.

Statement (II): Vertical M&As occur among firms involved in different stages of the production
of a single product.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

33. Statement (I): Consortia are developed as an extended form of joint venture with more
members.
Statement (II): Financial and managerial resources are pooled in to reduce risks in contractual
agreements.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

34. Statement (I): In Consortia mode of global market entry, transfer of trademarks or human skills
is involved.
Statement (II): The contractual forms of market entry include licensing and franchising.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

35. Statement (I): Subsidiaries could be Greenfield investments or Acquisitions.

Statement (II): Contractual agreements as global market entry involve transfer of trademarks or
human skills.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (I) is false.
(3) Both statements are true.
(4) Both statements are false.

36. Statement (I): When one company acquires another, the acquired company becomes a
subsidiary of the acquiring company.
Statement (II): Contractual agreements are long-term, non-equity associations between a
company and another in a foreign market.
Statement (III): In joint venture, equity positions are held by each of the partners.
(1) Statement (I) is true but Statement (II) is false.
(2) Statement (II) is true but Statement (III) is false.
(3) All statements are true.
(4) All statements are false.

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37. The main reason for the companies to move to global market is to:
(1) Yield potential new opportunities and extend product life cycle.
(2) Take advantage of the economies of scale.
(3) Take advantage of the factors of production.
(4) All of the above

38. Which of the following is not a characteristic of joint venture?

(1) Equity positions held by each of the partners.
(2) Possible only with legally incorporated entities.
(3) One of the partners acquires complete stock of the other.
(4) Intent by partners to share in the management.

39. The advantage of exporting as an alternative market entry is that it:

(1) Can earn a return on knowledge asset.
(2) Can avoid tariff barriers.
(3) Provides immediate access to market.
(4) Reduces the bargaining power of customer.

40. Which is not an example of entry mode strategy to foreign market?

(1) Consortia
(2) Turnkey projects
(3) Contractual agreements
(4) Import

41. Which of the following is a form of contractual agreements?

(1) Licensing
(2) Franchising
(3) Both (a) and (b)
(4) International joint ventures

42. In 90‘s, the global management perception was based on

(1) Standardization vs. adaptation
(2) Globalization vs. localization
(3) Global integration vs. local responsiveness
(4) Local responsiveness
43. Which of the following is an advantage of turnkey projects?
(1) Can earn a return on knowledge asset
(2) Will not create a competitor
(3) Tight control of business operations
(4) All the above

44. Which of the following is NOT a disadvantage of the exporting business?

(1) High transportation cost
(2) Lack of control over marketing representatives

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(3) Tariff barriers

(4) Avoid cost of establishing manufacturing operations
45. The main disadvantage of franchising is:
(1) Loss of control
(2) Loss of trademark
(3) Loss of identity
(4) Loss of market
46. The principle of ‗Build, Operate and Transfer‘ is known as
(1) Consortia
(2) Subsidiary
(3) Turnkey projects
(4) Strategic International Alliance
47. Which of the following is not an advantage of subsidiaries?
(1) No risk of losing technical competence to a competitor
(2) Tight control of operations
(3) Can earn a return on knowledge asset
(4) Realize learning curve and location economies

48. The agreement signed by Ranbaxy Laboratory and Bayer AG of Germany in the year 1999 is an
example of:
(1) Subsidiary
(2) Joint venture
(3) Strategic international alliance
(4) License agreement

Answer Key
Qus. Ans. Qus. Ans. Qus. Ans. Qus. Ans. Qus. Ans. Qus. Ans.
1 1 9 2 17 3 25 1 33 1 41 3
2 3 10 2 18 1 26 1 34 2 42 3
3 3 11 4 19 3 27 2 35 3 43 1
4 3 12 2 20 1 28 1 36 3 44 4
5 4 13 2 21 2 29 1 37 4 45 1
6 2 14 4 22 3 30 2 38 3 46 3
7 4 15 1 23 4 31 4 39 3 47 3
8 2 16 4 24 1 32 2 40 4 48 3

REFERENCES
Aswathappa, K. (2015), International Business, New Delhi: Tata McGraw Hill.
Charles, W. L. Hill, Arun, K Jain, (2009), International Business, Competing in the Global Marketplace,
New Delhi: Tata McGraw Hill.
Cherunilam, F., International Business – Text and Cases, Prentice-Hall of India, New Delhi, 2011.
James H. Taggart and Michael C. Modermott, (1995), The Essence of International Business, New
Delhi: Prentice-Hall of p.54.
Ibid., pp.54, 102.

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Ibid., pp.55.
Joshi, R. M., (2009), International Business, New Delhi: Oxford University Press.
Justin P. (2014), International Business, PHI Learning Private Limited, Delhi.
Rao, P. S, (2009), International Business, Mumbai: Himalaya Publishing House.
Sharan, V. (2007), International Business, Concept, Environment and Strategy, New Delhi: Pearson
Education.
Yoram Wind, Susane P. Douglas, and Howard V. Perlmutter, (1973), ‗Guidelines for Developing
International Marketing Strategies‘, Journal of Marketing, Vol.32, pp.14-33.

Dr. Vinod Kumar, Assistant Professor, Sri Venkateswara College, University of Delhi Page 22
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