International Business The New Realities 4th Edition By Cavusgil - Test Bank

International Business The New Realities 4th Edition By Cavusgil – Test Bank

 

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International Business: The New Realities, 4e (Cavusgil)

Chapter 5   Theories of International Trade and Investment

 

1) ________ refers to the superior features of a country that provide unique benefits in global competition, typically derived from either natural endowments or deliberate national policies.

1. A) Comparative advantage
2. B) Competitive advantage
3. C) Absolute advantage
4. D) Industrial cluster

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

2) Competitive advantage refers to the ________.

1. A) belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports
2. B) superior features of a country that provide unique benefits in global competition, typically derived from either natural endowments or deliberate national policies
3. C) distinctive assets or competencies of a firm that are difficult for competitors to imitate and are typically derived from specific knowledge, capabilities, skills, or superior strategies
4. D) relative absence of restrictions to the flow of goods and services between nations

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

3) Which of the following comparative advantages is acquired over time?

1. A) labor
2. B) innovative capacity
3. C) arable land
4. D) petroleum reserves

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

4) Which of the following is a comparative advantage?

1. A) close relationships with suppliers
2. B) superior strategies of an organization
3. C) entrepreneurial orientation
4. D) the distinct capabilities of an organization

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

5) Which of the following is true with regard to competitive advantage?

1. A) Competitive advantages are typically derived from deliberate national policies.
2. B) A competitive advantage is difficult for competitors to imitate.
3. C) A competitive advantage is also known as a country-specific advantage.
4. D) Competitive advantage includes inherited resources, such as arable land.

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

6) The Gulf nations benefit economically from rich petroleum reserves in the region. This is an example of ________.

1. A) comparative advantage
2. B) competitive advantage
3. C) ownership-specific advantage
4. D) cost advantage

Answer:  A

Diff:  1: Easy

Skill:  Application

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

7) In recent years, business executives and scholars have used ________ to refer to the advantages possessed by nations and individual firms in international trade and investment.

1. A) comparative advantage
2. B) country-specific advantage
3. C) competitive advantage
4. D) cost advantage

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

8) Which of the following is true with regard to firm-level theories?

1. A) Firm-level theories are classical theories, widely accepted since the sixteenth century.
2. B) Firm-level explanations address the question: “How can internationalizing firms gain and sustain competitive advantage?”
3. C) Firm-level explanations address the question: “Why do nations trade?”
4. D) Firm-level theories do not address the issue of organizational performance.

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

9) ________ is the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

1. A) Positivism
2. B) Imperialism
3. C) Communism
4. D) Mercantilism

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

10) Which of the following is true with regard to mercantilism?

1. A) Mercantilism does not harm consumers.
2. B) Mercantilism helps curb inflation.
3. C) Mercantilism is superior to free trade.
4. D) Mercantilism tends to harm firms that import.

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

11) Nations running a trade surplus ________.

1. A) rely solely on imports
2. B) openly discourage export
3. C) export more goods than they import
4. D) import more goods than they export

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

12) Which of the following is a typical outcome of free trade?

1. A) Unrestricted international trade generally increases the overall prosperity of poor countries.
2. B) Free trade sustains inflation in developing economies.
3. C) Domestically produced products tend to be cheaper than imported products.
4. D) Lower-cost imports cause living standards to deteriorate.

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

Mercantilism Assignment (Scenario)

The final assignment for Daniel Parilla’s international business class involves taking an in-depth look at one of the six classical perspectives that explain the rationale for international trade. Daniel plans to present an argument in favor of mercantilism. Daniel will be attempting to convince his classmates that mercantilism leads to national prosperity. Daniel’s peers will be given the opportunity to counter his argument.

 

13) Which of the following, if true, weakens Daniel’s proposition?

1. A) Mercantilism helps curb inflation.
2. B) Running a trade surplus is beneficial for nations.
3. C) Restricting imports reduces the choice of products consumers can buy.
4. D) Mercantilism tends to benefit firms that import.

Answer:  C

Diff:  2: Moderate

Skill:  Critical Thinking

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

14) Which of the following statements strengthens the proposition that free trade is beneficial to nations?

1. A) Free trade increases the standard of living by reducing consumer expenses.
2. B) Imported products tend to be more expensive than domestically produced products.
3. C) Unrestricted international trade generally lowers the overall prosperity of poor countries.
4. D) Unrestricted international trade generally boosts inflation in developed economies.

Answer:  A

Diff:  2: Moderate

Skill:  Critical Thinking

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

 

15) According to the ________, a country benefits by producing only those products in which it has complete advantage or that it can produce using fewer resources than another country.

1. A) absolute advantage principle
2. B) comparative advantage principle
3. C) factor proportions theory
4. D) international product cycle theory

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

16) Which of the following is true about absolute advantage principle?

1. A) According to this approach, enhanced product specialization adversely affects communal welfare.
2. B) This approach allows the nation to consume more than it otherwise could, generally at lower cost.
3. C) This is the only approach that can be used to explain why nations attempt to run a trade surplus.
4. D) This approach explains the process by which firms acquire and retain one or more value-chain activities inside the firm.

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

17) The ________ states that it can be beneficial for two countries to trade without barriers as long as one is relatively more efficient at producing goods or services needed by the other.

1. A) monopolistic advantage theory
2. B) internalization theory
3. C) absolute advantage principle
4. D) comparative advantage principle

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

18) Which of the following is an element of the comparative advantage principle?

1. A) per unit cost advantage
2. B) relative efficiency of production
3. C) absolute cost of production
4. D) negative balance of trade

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

19) The ________ rests on the premise that countries differ in the type and quantity of production factors they possess.

1. A) cost-advantage theory
2. B) competitive advantage theory
3. C) factor proportions theory
4. D) comparative advantage theory

Answer:  C

Diff:  2: Moderate

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

20) Which of the following was the analysis revealed by the “Leontief paradox”?

1. A) that despite having an abundant pool of labor, the U.S. was exporting capital-intensive goods
2. B) that the U.S. often exported labor-intensive goods and imported more capital-intensive goods
3. C) that international trade was simpler than perceived
4. D) that contrary to the popular belief, new products are more likely to originate in developing economies

Answer:  B

Diff:  2: Moderate

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

21) In his International Product Life Cycle (IPLC) Theory, Raymond Vernon observed that each product and its manufacturing technologies go through three stages of evolution: introduction, maturity, and ________.

1. A) decline
2. B) standardization
3. C) growth
4. D) diversification

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

22) Which of the following is true about the first stage of evolution in the international product life cycle theory?

1. A) The product enjoys a temporary monopoly at this stage.
2. B) The product’s inventors mass-produce it and seek to export it.
3. C) The knowledge about how to produce the product is widespread.
4. D) The competition intensifies at this stage and export orders begin to come from lower-income countries.

Answer:  A

Diff:  2: Moderate

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

23) Which of the following is the last stage of evolution in the international product life cycle theory?

1. A) temporary monopoly
2. B) standardization
3. C) decline
4. D) diversification

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

24) In the ________ phase of international product life cycle theory, knowledge about how to produce the product is widespread and manufacturing becomes straightforward.

1. A) temporary monopoly
2. B) introduction
3. C) standardization
4. D) maturity

Answer:  C

Diff:  2: Moderate

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

25) ________ argues that increasing returns to scale, especially economies of scale, are important for superior international performance in industries that succeed best as their production volume increases.

1. A) Comparative theory
2. B) Competitive theory
3. C) Cost-advantage theory
4. D) New trade theory

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

26) Which of the following is true with regard to new trade theory?

1. A) According to new trade theory, achieving economies of scale is not necessary for superior international performance.
2. B) According to new trade theory, trade is beneficial even for countries that produce only a limited variety of products.
3. C) New trade theory suggests that export is less beneficial to firms than commonly believed.
4. D) New trade theory rests solely on the premise that countries differ in the type and quantity of production factors they possess.

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

27) Comparative advantage includes inherited resources, such as labor, climate, arable land, and petroleum reserves.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

28) Modern business executives use the term comparative advantage when referring to the assets of individual firms.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

 

29) Mercantilism benefits consumers because restricting imports increases the choice of domestic products they can buy.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

30) Adam Smith attacked the mercantilist view by suggesting that nations benefit most from free trade.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

31) Free trade produces lower-cost imports that help consumers save money, thereby increasing their living standards.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

32) According to the absolute advantage principle, national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

33) David Ricardo advanced the absolute advantage theory.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

34) According to the comparative advantage principle, what matters most is the absolute cost of production of the product and not the relative efficiency with which a country can produce the product.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

35) Countries cannot create or acquire comparative advantage.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

36) Early trade theories failed to consider the fact that the primary participants in international trade are individual firms that differ in significant ways from each other.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

37) According to the factor proportions theory, differences in the quantity of factors of production held by countries do not determine international trade patterns.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

38) Distinguish between comparative and competitive advantages. Provide examples.

Answer:  Comparative advantage describes superior features of a nation that provide unique benefits in global competition. The features typically are derived from either natural endowments or deliberate national policies. Also known as country-specific advantage, comparative advantage includes inherited resources, such as labor, climate, arable land, and petroleum reserves, such as those enjoyed by countries in the Middle East. Other types of comparative advantages are acquired over time, such as entrepreneurial orientation, availability of venture capital, and innovative capacity.

Competitive advantage refers to assets and capabilities of a company that are difficult for competitors to imitate. Such advantages help the firm enter and succeed in foreign markets. These capabilities take various forms, such as specific knowledge, competencies, innovativeness, superior strategies, or close relationships with suppliers. Competitive advantage is also known as firm-specific advantage.

Diff:  3: Hard

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking; Information Technology

 

39) Why do nations trade? What would the world be like without international trade?

Answer:  Trade enables countries to use their national resources more efficiently through specialization. Trade allows industries and workers to be more productive. These outcomes help keep the cost of many everyday products low, which translates into higher living standards. Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Even resource-rich countries like the United States would suffer greatly without trade. Some types of food would become unavailable or very expensive. Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, freight would go undelivered, and people would not be able to heat their homes in winter. In short, not only do nations, companies, and citizens benefit from international trade, modern life would be nearly impossible without it.

Diff:  1: Easy

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

40) In a short essay, explain the absolute advantage principle. Provide an example of the principle at work.

Answer:  Smith’s absolute advantage principle states that a country benefits by producing primarily those products in which it has an absolute advantage-those that it can produce using fewer resources than any other country. Each country can increase its wealth by specializing in the production of goods in which it has unique advantages, exporting those goods, and then importing other goods in which it has no particular advantage. If every nation follows this practice, each can consume more than it otherwise could, generally at lower cost.

A modern example of the principle at work involves the nations of Japan and Saudi Arabia. Japan has no natural holdings of oil, but it manufactures some of the best automobiles in the world. On the other hand, Saudi Arabia produces much oil, but it lacks a substantial car industry. Given the state of their resources, it would be wasteful for each of these countries to attempt to produce both oil and cars. By trading with each other, Japan and Saudi Arabia each employs its respective resources efficiently in a mutually beneficial relationship. Japan gets oil that it refines to power its cars, and Saudi Arabia gets the cars needed by its citizens. Because each country uses its own resources with optimum efficiency and engages in trade, living standards for its citizens are higher than they would be if they had not engaged in trade.

Diff:  2: Moderate

Skill:  Application

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

41) In a short essay, explain the factor proportions theory. How does the theory differ from other theories?

Answer:  The factor proportions theory suggests that each country should export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production. For example, the United States produces and exports capital-intensive products, such as pharmaceuticals and commercial aircraft. Argentina produces land-intensive products, such as wine and sunflower seeds.

This view rests on two premises:

• Products differ in the types and quantities of factors (labor, natural resources, and capital) required for their production; and
• Countries differ in the type and quantity of production factors that they possess.

Factor proportions theory differs somewhat from earlier theories by emphasizing the importance of each nation’s factors of production. The theory states that, in addition to differences in the efficiency of production, differences in the quantity of production factors held by countries also determine international trade patterns. In this way, a country that possesses an abundance of a given production factor (e.g., labor, land) obtains a per-unit-cost advantage in the production of goods that intensively use that factor.

Diff:  2: Moderate

Skill:  Concept

Objective:  5-1: Appreciate why nations trade

AACSB:  Analytical Thinking

 

42) The ________ is one of the three key modern perspectives that helps explain the development of national competitive advantage.

1. A) factor proportions theory
2. B) absolute advantage principle
3. C) national industrial policy
4. D) comparative advantage of nations

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

43) Which of the following statements would be supported by Michael Porter?

1. A) Economic prosperity depends primarily on inherited national advantages.
2. B) The presence of strong competitors in a nation hinders national competitive advantage.
3. C) The presence of highly demanding customers discourages innovation.
4. D) Rivalry among industry competitors spurs innovation.

Answer:  D

Diff:  2: Moderate

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

44) According to Porter’s competitive advantage of nations, ________ refer to the nature of home-market demand for specific products and services.

1. A) firm strategy, structure, and rivalry
2. B) factor conditions
3. C) demand conditions
4. D) demand liabilities

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

45) Which of the following is true about the determinants of national competitive advantage?

1. A) The presence of strong competitors in a nation adversely affects national competitive advantage.
2. B) The presence of demanding customers pressures firms to innovate faster and produce better products.
3. C) Demand conditions describe the nation’s position in factors of production, such as labor, natural resources, capital, technology, entrepreneurship, and know-how.
4. D) Vigorous competitive rivalry among firms lowers national innovativeness.

Answer:  B

Diff:  2: Moderate

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

46) According to Michael Porter, a nation’s factor endowments help determine its ________.

1. A) national competitive advantage
2. B) demand conditions
3. C) negative balance of trade
4. D) comparative advantage

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

47) Which of the following is an example of an industrial cluster?

1. A) the proliferation of counterfeit goods in the global marketspace
2. B) the elite community of industrialists in the United States
3. C) high productivity of workers in South Korea
4. D) the consumer electronics industry in Japan

Answer:  D

Diff:  2: Moderate

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

48) A proactive economic development plan initiated by the government, often in collaboration with the private sector, that aims to develop or support particular industries within the country is referred to as ________.

1. A) national endowment policy
2. B) national fiscal policy
3. C) national industrial policy
4. D) policy on national industrial relations

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

49) Which of the following is true about national industrial policy?

1. A) It is designed to create monetary and fiscal policies, such as low-interest loans, that provide a stable supply of capital for company investment needs.
2. B) It explains why nations attempt to run a trade surplus.
3. C) It demonstrates that what matters is not the absolute cost of production, but rather the relative efficiency with which two countries can produce the products.
4. D) It underlines the demerits of rigorous educational systems at the precollege level.

Answer:  A

Diff:  2: Moderate

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

Kazmia Revitalization (Scenario)

The leaders of Kazmia, a small nation in the southern hemisphere, have called a meeting to discuss ways to encourage foreign firms to invest in Kazmia. The country was once a leader in diamond mining and exports; however, the diamond mines have been depleted. Meanwhile, the standard of living in Kazmia has plummeted to its lowest levels, and young people are fleeing the country. Government leaders must devise a plan to reinvigorate the once prosperous nation.

 

50) According to Porter, Kazmia can attain economic prosperity by systematically cultivating new and superior factor endowments through ________.

1. A) devaluation of the national currency
2. B) redevelopment of the country’s depleted diamond mines
3. C) proactive national industrial policy
4. D) the consolidation of national human rights institutions

Answer:  C

Diff:  1: Easy

Skill:  Critical Thinking

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

51) In the context of national industrial policy, which of the following actions by the government of Kazmia would be the most beneficial for the long-term economic security of the country?

1. A) increasing the rate of taxation
2. B) devoting resources to improve national infrastructure
3. C) discouraging foreign trade
4. D) discouraging entrepreneurial ventures undertaken by small firms

Answer:  B

Diff:  2: Moderate

Skill:  Critical Thinking

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

52) Entrepreneurial orientation and availability of venture capital are examples of country-specific advantages .

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

53) According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation’s firms.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

54) Developing new product designs and new ways of organizing or training are some of the ways in which companies innovate.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

55) The innovativeness of a nation’s firms has no significant impact on the national competitive advantage.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

 

56) Firm strategy, structure, and rivalry of Michael Porter’s diamond model refer to the presence of clusters of suppliers, competitors, and complementary firms that excel in particular industries.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

57) Industrial cluster refers to a concentration of businesses, suppliers, and supporting firms in the same industry at a particular geographic location, characterized by a critical mass of human talent, capital, or other factor endowments.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

58) In today’s world, the most important source of national advantage is a country’s natural resources.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

59) National industrial policies designed to build new capabilities and encourage the emergence of new industries typically exclude superior educational systems.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

 

60) What is the connection between the competitive advantage of a firm and the competitive advantage of a nation? In a short essay, explain the nature of the relationship between firms and nations.

Answer:  According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation’s firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages. For example, Britain achieved a substantial national competitive advantage in the prescription drug industry due to its first-rate pharmaceutical firms, such as GlaxoSmithKline and AstraZeneca. The United States has a national competitive advantage in professional services because of such leading firms as Goldman Sachs (investment banking), Marsh & McLennan (insurance), and McKinsey (consulting). The presence of these and numerous other strong services firms, in turn, has provided the United States with overall national competencies in the global services sector.

At both the firm and national levels, competitive advantage and technological advances grow out of innovation. Innovation also promotes productivity. Productivity is measured as output per unit of labor or capital. The more productive a firm is, the more efficiently it uses its resources. The more productive the firms in a nation are, the more efficiently the nation uses its resources. At the national level, productivity is a key determinant of the nation’s long-run standard of living and a basic source of national per-capita income growth.

Diff:  1: Easy

Skill:  Concept

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

61) In a short essay, explain why the comparative advantage principle is the foundation and overriding justification for international trade. How does this principle support the competitive advantage of nations theory?

Answer:  British political economist David Ricardo explained why it is beneficial for two countries to trade even though one of them may have absolute advantage in the production of all products. Ricardo demonstrated that what matters is not the absolute cost of production, but rather the “relative efficiency” with which the two countries can produce the products. Hence, the comparative advantage principle states that it can be beneficial for two countries to trade without barriers as long as one is “relatively” more efficient at producing goods or services needed by the other. The principle of comparative advantage is the foundation and overriding justification for international trade.

This principle supports the competitive advantage of nations theory. Just as scholars recognized that international business is good for individual nations, they increasingly sought to explain how nations can position themselves for international business success. An important contribution came from Professor Michael Porter in his 1990 book, “The Competitive Advantage of Nations.” According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation’s firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages.

Diff:  1: Easy

Skill:  Synthesis

Objective:  5-2: Learn about how can nations enhance their competitive advantage

AACSB:  Analytical Thinking

 

62) In which of the following stages of the internationalization process is a firm preoccupied with business in its home market?

1. A) domestic focus
2. B) experimental involvement
3. C) active involvement
4. D) pre-export

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

63) According to the internationalization process model, a firm advances to the ________ stage by initiating limited international activity, typically in the form of basic exporting.

1. A) active involvement
2. B) experimental involvement
3. C) pre-export
4. D) domestic focus

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

64) Azure Inc. has established a domestic market in clothing and apparel in Thailand and has received orders from abroad. Currently, the firm is investigating the feasibility of undertaking international business. Azure is in the ________ stage of the internationalization process.

1. A) active involvement
2. B) experimental involvement
3. C) pre-export
4. D) committed involvement

Answer:  C

Diff:  2: Moderate

Skill:  Application

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

 

65) In the ________ stage of the internationalization process, a firm targets numerous foreign markets via various entry modes, especially FDI.

1. A) pre-export
2. B) domestic focus
3. C) experimental involvement
4. D) committed involvement

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

66) Born global firms are ________.

1. A) companies that forgo the domestic focus stage of the internationalization process
2. B) companies that focus mainly on running a trade surplus
3. C) young companies that internationalize early in their evolution
4. D) young companies that focus on the ratio of production costs rather than the absolute cost of production

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

67) Which of the following explains the expansion of born global firms despite the scarcity of financial, human, and tangible resources?

1. A) globalization has made doing international business easier than ever before
2. B) a concerted effort by developing nations for running a trade surplus
3. C) product shortages and supply crunch resulting from import restrictions
4. D) rising inflation in developing economies

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

68) Current trends suggest that early internationalizing firms will ________.

1. A) eliminate MNEs worldwide
2. B) be unable to sustain the rigors of international trade
3. C) become even more common in international business
4. D) significantly dampen entrepreneurial efforts of smaller firms

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

69) International entrepreneurship is a new field of scholarly inquiry that is a result of the

________ phenomenon.

1. A) standardization
2. B) industrial cluster
3. C) localization
4. D) born global

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

70) According to the internationalization process model, internationalization takes place in incremental stages over a long time.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

71) In the internationalization process of a firm, the active involvement stage follows the committed involvement stage.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

72) According to the internationalization process model, a firm is unlikely to receive unsolicited product orders from abroad before advancing to the pre-export stage.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

73) According to the internationalization process model, a firm starts out in a pre-export phase and is preoccupied with business in its home market.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

 

74) Born global firms are young companies that internationalize early in their evolution.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

75) Born globals have emerged in large numbers for two main reasons: globalization and advances in communication and transportation technologies .

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

76) Explain the limitations of early trade theories. Discuss born global firms.

Answer:  While the concepts of absolute advantage and comparative advantage provide the rationale for international trade, they overlook factors that make contemporary trade complex, including:

∙ Government restrictions such as tariffs (taxes on imports), import barriers, and regulations can hamper international trade.

∙ Just as Japan did after World War II, governments may target and invest in certain industries, build infrastructure, or provide subsidies, all to boost the competitive advantages of home-country firms.

∙ Large-scale production in certain industries may provide economies of scale, and therefore lower prices. Economies of scale tend to compensate for weak national comparative advantages. Similarly, modern communications and the Internet tend to reduce the cost and complexity of cross-border trade.

∙ The main participants in international trade are individual firms that differ in significant ways. Far from being homogenous enterprises, many are highly entrepreneurial and innovative or have access to exceptional human talent, all of which support international business success.

∙ International shipping and insurance, critical for cross-border trade to take place, are relatively costly and make imported goods more expensive.

∙ Traded products are not just commodities anymore, such as milk and beef. Today, most traded goods are relatively complex. They are characterized by strong branding and differentiated features.

 

∙ Any services, such as banking and retailing, cannot be exported in the usual sense and must be internationalized via foreign direct investment.

What we see today is an increasing number of young, entrepreneurial firms that intently pursue customers in foreign markets from an early age. Scholars and management consultants alike referred to this relatively novel breed of companies as born global firms.”Born globals” are innovative start-ups that initiate international business soon after their founding. For example, Instagram is a born global. Founded in 2010, the firm soon found a ready market for its photo-sharing services in markets scattered around the world. Today, only about 12 percent of Instagram’s customers are located in North America, where the company is based. Born global firms are now found in virtually all economies. This has developed despite the scarcity of financial, human, and tangible resources that characterize most new businesses. Born globals have emerged in large numbers for two main reasons:

∙ Globalization has made doing international business easier than ever before, and

∙ Advances in communication and transportation technologies have reduced the costs of operating internationally

The born global phenomenon has given rise to a new academic field: international entrepreneurship. Current trends suggest that early internationalizing firms will become even more common in international business.

Diff:  3: Hard

Skill:  Synthesis

Objective:  5-3: Understand why and how firms internationalize

AACSB:  Analytical Thinking

 

77) ________ describes the total value of assets that MNEs own abroad via their investment activities.

1. A) Monopolistic advantage
2. B) FDI stock
3. C) Absolute advantage
4. D) Variable capital

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

 

78) Which of the following explains how firms can use FDI to gain and sustain competitive advantage?

1. A) monopolistic advantage theory
2. B) new trade theory
3. C) Leontief paradox
4. D) factor proportions theory

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

79) A ________ is one or more resources or capabilities a company possesses that few other firms have.

1. A) factor endowment
2. B) country-specific advantage
3. C) comparative advantage
4. D) monopolistic advantage

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

80) ________ theory suggests that firms using FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors.

1. A) Factor proportions
2. B) Monopolistic advantage
3. C) Internalization
4. D) Absolute advantage

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

 

81) Which of the following refers to an important monopolistic advantage for firms?

1. A) imitable skills
2. B) unskilled labor
3. C) favorable climate
4. D) proprietary technology

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

82) ________ is an explanation of the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations.

1. A) Internalization theory
2. B) Monopolistic advantage theory
3. C) Absolute advantage theory
4. D) Dunning’s eclectic paradigm

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

83) Which of the following is a benefit of internalizing foreign-based value-chain activities?

1. A) The MNE maintains a monopolistic presence in foreign countries.
2. B) The MNE eliminates employee turnover.
3. C) The MNE oversees control of foreign operations and ensures product quality.
4. D) The MNE learns new manufacturing methods from foreign partners.

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

 

84) The eclectic paradigm specifies three conditions that determine whether a company will internationalize via FDI. Which of the following refer(s) to one of those conditions?

1. A) entrepreneurial orientation of national enterprises
2. B) FDI stock
3. C) availability of variable capital in the home country
4. D) location-specific advantages

Answer:  D

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

85) Which of the following is an example of an ownership-specific advantage?

1. A) the physical assets owned by a firm
2. B) natural resources of the region where the firm operates
3. C) low-cost labor
4. D) inexpensive capital

Answer:  A

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

86) Which of the following is an example of a location-specific advantage?

1. A) managerial skills
2. B) skilled labor
3. C) proprietary knowledge
4. D) the ability to reduce buyer uncertainty

Answer:  B

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

87) Which of the following refers to a collaborative venture which results in a new legal entity?

1. A) non-equity-based strategic alliances
2. B) sole proprietorships
3. C) equity-based joint ventures
4. D) not-for-profit organizations

Answer:  C

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

88) Maxdime Inc. is an international automobile manufacturer that has decided to work on low-cost fuel efficient motorbikes. Foray Inc., a domestic automobile company based in China, is willing to partner temporarily with the R&D team of Maxdime to design and launch motorbikes specially for the Chinese market. This is an example of ________.

1. A) product differentiation
2. B) non-equity-based strategic alliance
3. C) sole proprietorship
4. D) entrepreneurial orientation

Answer:  B

Diff:  2: Moderate

Skill:  Application

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

89) Which of the following is true about networks?

1. A) Networks are neither formal organizations with clearly defined hierarchical structures nor impersonal, decentralized markets.
2. B) In networks, buyers and sellers share no linkages and rarely interact with each other.
3. C) In a network, continued interaction among partners leads to competition and rivalry that bring down productivity.
4. D) Networks represent the economically beneficial short-term relationships the firm undertakes with other business entities.

Answer:  A

Diff:  2: Moderate

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

Earth-Rite Organic Foods (Scenario)

Earth-Rite Organic Foods Inc. is an MNE based in Sweden with subsidiaries located in numerous countries around the world. Earth-Rite has annual sales of $10 billion and employs more than 90,000 individuals worldwide. Earth-Rite currently dominates the organic food industry, but competitors are beginning to catch up because of a growing demand for organic produce. Earth-Rite is considering a collaborative venture with a small chain of organic grocery stores located in Brazil, a country where Earth-Rite has no stores.

 

90) Which of the following would be the most important for Earth-Rite executives to determine when deciding whether to collaborate with the Brazilian grocery store chain?

1. A) Did employee empowerment lead to increased efficiencies across Earth-Rite’s subsidiaries?
2. B) Would a collaborative venture allow Earth-Rite to internationalize rapidly?
3. C) What is the density of venture capitalists in Brazil?
4. D) Is employee empowerment culturally favored in Brazil?

Answer:  B

Diff:  3: Hard

Skill:  Critical Thinking

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

91) Which of the following benefits would Earth-Rite most likely accrue if it entered into a joint venture with the Brazilian grocery store chain?

1. A) Earth Rite would experience high employee turnover in the home country.
2. B) Earth Rite would be able to eliminate competition in the foreign markets.
3. C) Earth Rite would be able to completely eliminate the risk of proprietary knowledge infringement abroad.
4. D) Earth Rite would have access to the foreign partners’ know-how.

Answer:  D

Diff:  2: Moderate

Skill:  Critical Thinking

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

 

92) Earth-Rite executives are considering internalizing operations in Brazil. Which of the following, if true, best supports this plan?

1. A) The management of Earth-Rite wants to maximize dissemination of proprietary knowledge.
2. B) Intermediaries and collaborators ensure greater control over domestic operations.
3. C) By internalizing operations, Earth-Rite will retain control of product quality.
4. D) Internalizing value-chain activities increases employee turnover.

Answer:  C

Diff:  3: Hard

Skill:  Critical Thinking

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking; Environments and Reflective Thinking

93) Relative efficiency of production refers to the total value of assets that MNEs own abroad via their investment activities.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

94) A benefit of the monopolistic advantage theory is that firms can operate foreign subsidiaries more profitably than the local firms that compete in their own markets.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

95) Monopolistic advantage theory is a framework for determining the extent and pattern of foreign-based value-chain operations.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

96) According to the internalization theory, firms must reduce control over foreign operations in order to enhance overall effectiveness.

Answer:  FALSE

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

97) According to Dunning’s eclectic paradigm, proprietary technology, managerial skills, trademarks or brand names, and economies of scale are examples of ownership-specific advantages.

Answer:  TRUE

Diff:  1: Easy

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

98) In a short essay, discuss the internalization theory. Provide examples.

Answer:  Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm. Internalizing value-chain activities (instead of outsourcing them to external suppliers) reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. Internalization also gives the firm greater control over its foreign operations.

For example, the MNE might internalize manufacturing by acquiring or establishing its own plant in the foreign market. This enables the firm to produce needed inputs itself rather than sourcing from independent suppliers. Alternatively, it might internalize the marketing function by establishing its own distribution subsidiary abroad, instead of contracting with an independent foreign distributor to handle its marketing in the foreign market. The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself.

Procter & Gamble initially considered exporting when it entered Japan. With exporting, P&G would have had to contract with an independent Japanese distributor to handle warehousing and marketing of its soap, diapers, and other products. Instead, P&G chose to enter Japan via FDI for three reasons: (1) trade barriers imposed by the Japanese government, (2) the strong market power of local Japanese firms, and (3) the risk of losing control over its proprietary knowledge. It established its own marketing subsidiary and national headquarters in Tokyo.

Diff:  2: Moderate

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

99) In a short essay, explain mercantilism and the monopolistic advantage theory.

Answer:  Mercantilism refers to the belief that national prosperity is the result of a positive balance of trade, achieved by maximizing exports and minimizing imports.

Mercantilism explains why nations attempt to run a trade surplus-that is, to export more goods than they import. Many people believe that running a trade surplus is beneficial. They subscribe to a view known as neo-mercantilism. Labor unions (which seek to protect home-country jobs), farmers (who want to keep crop prices high), and certain manufacturers (those that rely heavily on exports) all tend to support neo-mercantilism.

However, mercantilism tends to harm firms that import, especially those that import raw materials and parts used in the manufacture of finished products. Mercantilism also harms consumers because restricting imports reduces the choice of products they can buy. Product shortages that result from import restrictions may lead to higher prices-that is, inflation. When taken to an extreme, mercantilism may invite “beggar thy neighbor” policies, promoting the benefits of one country at the expense of others. By contrast, free trade is a generally superior approach.

 

Monopolistic advantage refers to resources or capabilities a company holds that few other firms have. Monopolistic advantage theory suggests that firms which use FDI as an internationalization strategy must own or control certain resources and capabilities not easily available to competitors. This gives them a degree of monopoly power over local firms in foreign markets. This monopolistic advantage should be specific to the MNE itself, such as a proprietary technology or a brand name, rather than to the locations where it does business. Monopolistic advantage theory argues that at least two conditions should be present for a firm to target a foreign market over its home market. First, returns accessible in the foreign market should be superior to those available in the home market. This would provide the firm with incentives to expand abroad to take advantage of its monopoly power. Second, returns achievable in the foreign market should be superior to those earned by existing domestic competitors in the foreign market. This would give the firm an opportunity to earn monopoly profits that domestic firms in the foreign market cannot imitate.

Diff:  3: Hard

Skill:  Synthesis

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking

 

100) What is a collaborative venture? In a short essay, describe the two major types of international collaborative ventures.

Answer:  A collaborative venture is a form of cooperation between two or more firms. There are two major types: Equity-based joint ventures that result in a new legal entity; and non-equity-based (project-based) strategic alliances in which firms’ partner, for a finite duration, to collaborate on projects related to R&D, design, manufacturing, or any other value-adding activity. In both cases, collaborating firms pool resources and capabilities and generate synergy. In other words, collaboration allows the partners to carry out activities that each might be unable to perform on its own. Collaborating firms share the risk of their joint efforts, which reduces vulnerability for any one partner.

Diff:  2: Moderate

Skill:  Concept

Objective:  5-4: Explain the strategies used by internationalizing firms to gain and sustain competitive advantage

AACSB:  Analytical Thinking