Chapter 14 – Collaborative Strategies

 

 

Multiple Choice Questions

 

WHAT ARE THE MOTIVES/ADVANTAGES FOR COMPANIES TO ENTER INTO INTERNATIONAL COLLABORATIVE ARRANGEMENTS?

 

1.      Companies sometimes enter collaborative arrangements to gain complementary resources from other companies because each company has a unique combination of competencies.  That each company has a unique combination of resources is known as the _______________ of the firm.

a.      resource-based view (moderate, page 416)

b.      cultural-diverse view

c.       competition-dominant view

d.      technological view

 

2.      Which of the following best describes a motive for collaborative arrangements that would usually apply only to international operations?

a.       Secure horizontal linkages.

b.      Conform with laws requiring ownership sharing. (difficult, page 417)

c.       Specialize in one's own competencies.

d.      Secure vertical linkages.

 

3.      All of the following are reasons that companies collaborate with other companies in either domestic or foreign operations EXCEPT:

a.       to spread and reduce costs

b.      to allow them to specialize in their competencies

c.       to diversify the corporate culture (moderate, page 417)

d.      to secure vertical and horizontal linkages

 

4.      A motive for international collaboration is to protect intellectual property rights (IPRs).  This is because some countries have _______________ of IPRs and will provide protection only when a firm _______________ in the country within a specified period.

a.       little de facto protection, registers the asset

b.      much de facto protection, exploits a registered asset

c.       much de facto protection, registers the asset

d.      little de facto protection, exploits a registered asset (difficult, page 418)

 

HOW DO DIFFERENT COLLABORATIVE ARRANGEMENTS AFFECT COMPANIES’ RESOURCE COMMITMENTS, ESPECIALLY COMMITMENTS AT HOME VERSUS ABROAD?

 

5.      Different types of collaborative arrangements may entail different levels of resource commitments and different degrees of trade-offs among company objectives.  Nevertheless, when a company has a desired, unique, difficult-to-duplicate resource, its choice of international operating forms:

a.      increases because competitive pressure is less. (difficult, page 418)

b.      decreases because competitors may preempt the market.

c.       should be based on an objective of maximizing geographic diversity.

d.      should prioritize the securement of vertical linkages.

 

6.       A company may minimize its resource commitments while still expanding abroad by engaging in:

a.       internalization.

b.      collaborative arrangements.  (moderate, page 418)

c.       multidomestic practices.

d.      foreign direct investments.

 

 

7.      For companies that are short on resources for expansion, international collaborative arrangements may:

a.      free-up domestic resources that can then be shifted abroad.

b.     enable companies to produce with fewer resources because of hiring more efficient managers.

c.      allow a company to expand internationally while using most of its scarce resources domestically.  (difficult, page 418)

d.     Allow a company to expand domestically while using most of its scarce resources internationally.

 

HOW/WHY MIGHT COMPANIES HAVE TO ACCEPT A TRADE-OFF AMONG THEIR OBJECTIVES WHEN CHOOSING THEIR FORM OF OPERATIONS ABROAD, ESPECIALLY WHEN TRANSFERRING TECHNOLOGY ABROAD?

 

8.      When choosing a form of operations abroad, companies may have to trade-off between:

a.       product quality and sales maximization.

b.      receipt of payment in dividends versus interest.

c.       ethnocentric and geocentric strategies.

d.      reduction of political risk and increasing control of decision making. (difficult, page 418)

 

9.      Which of the following statements is FALSE regarding a company’s possible international transfer of technology through collaborative agreements?

a.      Usually, it is cheaper to transfer to an unrelated company than it is to transfer within the existing corporate family, such as from parent to subsidiary.  (difficult, page 418)

b.      Finding a local company familiar enough with the technology so as to transfer it efficiently may be impossible.

c.       When the technology is complex, a company’s own subsidiary’s personnel are more likely to be familiar with approaches the parent uses.

d.      Finding a local company with sufficiently similar values and priorities as the company transferring the technology may be impossible.

 

10.    The transfer of technology is usually cheaper when transferred:

a.       to an unrelated company.

b.      within the existing corporate family.  (moderate, page 419)

c.       from parent company to parent company.

d.      to a government entity.

 

HOW DO COMPANIES’ DESIRE FOR CONTROL AND THEIR INTERNATIONAL EXPERIENCE INFLUENCE THEIR CHOICE OF OPERATING FROM ABROAD?

 

11.    The more a company depends on international collaborative arrangements,:

a.       the less likely it is to lose control over operations.

b.      the less likely it is to operate abroad.

c.       the more likely it is to lose control over operations.   (moderate, page 420)

d.      the more likely it is to use its headquarters personnel to manage operations abroad.

 

12.    Which of the following statements is FALSE regarding the use of collaborative arrangements in international expansion?

a.       External arrangements imply the sharing of revenues, a serious consideration for undertakings with high potential profits because a company may want to keep them all for itself.

b.      The loss of control over flexibility, revenues, and competition is an important variable guiding a company’s selection of forms of foreign operations.

c.       Collaborative arrangements risk allowing information to pass more rapidly to potential competitors.

d.      The more a company depends on collaborative arrangements, the less likely it is to lose control over decisions. (difficult, page 420)

 

13.    When a company already has its own operations in a given foreign country and wishes to introduce a new product or service to that country, which of these statements is TRUE?

a.      If the company has existing foreign operations in a line of business closely related to the new product, service, or activity being initiated abroad, it is likely that the new production will be handled internally.  (difficult, page 420)

b.      Some advantages of contracting with another company to handle production or sales are more prevalent.

c.       Even if the company is highly diversified, the existing foreign facility is likely handling goods or functions so similar to what is being planned that there is little incentive to introduce the new product or service via a collaborative agreement.

d.      It will use a collaborative agreement even if it has an existing foreign production facility with excess capacity.

 

DEFINE LICENSING, CROSS-LICENSING, EXCLUSIVE LICENSING, & NONEXCLUSIVE LICENSING.

 

14.    A licensing agreement is a contract between the licensor and the licensee, where the licensee pays a royalty to the licensor in exchange for the granting of the:

a.       rights to sell intangible property in the licensor’s home country.

b.      rights on intangible property for a specified period. (moderate, page 420)

c.      rights on tangible property for a specified period.

d.     rights on tangible property for an indefinite period.

 

15.    Which of the following is an example of an exclusive licensing arrangement?

a.       The licensee has the sole worldwide license to sell the product, but the licensor has reserved the right to add additional licensees.

b.      The licensee, one of 16, may sell the product in any country provided no more than two licensees are in any one market.

c.       The licensee gets the north half of the Japanese market in which to sell the product, another firm gets the south half, and the licensor agrees to add no Japanese licensees for five years. (difficult, page 420)

d.      The licensee, one of only three, may sell the product worldwide for seven years, and the licensor will add no new licensees during that period.

 

16.    All of the following are examples of intangible property that is commonly licensed EXCEPT:

a.       patents, inventions, and formulas

b.      trademarks, trade names, and brand names

c.       copyrights and literary and artistic compositions

d.      management contracts, turnkey operations, and swap contracts (moderate, page 420)

 

17.    An example of cross-licensing is:

a.      the exchange of technology. (difficult, page 420)

b.      the legal transfer of intellectual property rights to one's own subsidiary.

c.       the use of an intangible in exchange for the payment of a royalty.

d.      reciprocal handling of sales in each other's markets, thus allowing each to have a much larger market in which to sell their products.

 

WHY ARE MOST INTERNATIONAL LICENSING AGREEMENTS BETWEEN A PARENT COMPANY AND A COMPANY ABROAD WHICH IT OWNS, EITHER IN WHOLE OR IN PART?

 

18.    When a company owns 100% of a foreign subsidiary, it will nevertheless often license to that subsidiary. A common reason is to _______________:

a.       reduce the amount of capital it needs to transfer abroad.

b.      gain income beyond the proportional capital contribution in case of future shared ownership. (difficult, page 422)

c.       enable it to enter a cross-licensing agreement with the subsidiary.

d.      gain income from managing the facility.

 

19.    Which of the following is FALSE regarding the ownership of companies in an international licensing agreement?

a.       Many licenses are given to companies owned in whole or part by the licensor.

b.      A license may be necessary to transfer technology abroad because operations in a foreign country usually are subsidiaries.

c.       There is no need to license to subsidiaries because they are not legally separate from their parents. (difficult, page 422)

d.      When a company owns less than 100%, a separate licensing arrangement may be a means for compensating the licensor for contributions beyond the mere investment in capital and managerial resources.

 

20.    A license may be necessary to transfer technology abroad because operations in a foreign country, even if 100% owned by the parent, usually are:

a.       Equity alliances.

b.      turn-key operations.

c.       branches.

d.      subsidiaries. (moderate, page 422)

 

WHAT IS FRANCHISING AND MASTER FRANCHISING?  EXPLAIN HOW FRANCHISING AGREEMENTS DIFFER FROM LICENSING AGREEMENTS.

 

21.    Franchising can be defined as:

a.      an agreement for the use of a trademark and assistance with business operations. (moderate, page 422)

b.      a company owned by two other companies.

c.       an agreement to manage a business for a fee.

d.      a contract for the construction of operating facilities for a fee.

 

22.     Franchising differs from licensing in that the former:

a.       involves only services, such as fast food.

b.      offers operating assistance on a continuing basis.  (moderate, page 422)

c.       receives payment on the basis of sales, rather than a fixed-fee amount.

d.      requires less product and marketing standardization.

 

23.    A master franchisee is:

a.       the franchisee with the highest revenue for a region.

b.      the original agreement signed between the franchiser and the franchisee.

c.       the granting of franchise rights to an organization to open outlets on its own or develop subfranchisees. (difficult, page 422)

d.      the set of standard terms that forms a part of any subsequent agreement between the franchisor and franchisee.

 

WHAT MAJOR DILEMMA DO FRANCHISORS FACE IN THEIR INTERNATIONAL OPEARTIONS?

 

24.    All of the following are mentioned in the text as factors that successful franchisors depend on EXCEPT:

a.           product and service standardization

b.           high identification through promotion

c.           effective cost controls

d.           cross-licensing provisions (moderate, page 423)


 

25.    International operational changes are a problem for franchises because:

a.       they cannot easily find the different supplies.

b.      too many changes eliminate the need for the franchisor. (difficult, page 423)

c.       people will not accept the changes from the original concept.

d.      change gives some franchisees an unfair advantage.

 

26.    Food franchisors have sometimes made operating adjustments abroad to improve their foreign sales. Which of the following is NOT one of the changes they have made?

a.       changing some names because of pronunciation difficulty in some languages

b.      altering menus because of religious prohibitions against certain foods

c.       setting less stringent cleanliness standards to conform with local customs (difficult, page 423)

d.      adding some locally popular foods to their menus

 

WHAT IS A MANAGEMENT CONTRACT, AND WHAT ARE THE POSSIBLE ADVANTAGES TO BOTH PARTIES IN THE CONTRACTS?

 

27.    An international management contract is:

a.       the granting of rights on intangible property in return for royalties.

b.      an agreement for the use of a trademark and assistance with business operations.

c.       a contract for the construction of operating facilities for a fee.

d.      an agreement to manage a business for a fee. (easy, page 423)

 

28.    _______________ are the means by which a company may transfer talent by using part of its management personnel to assist a foreign company for a specified period for a fee.

a.      Management contracts (moderate, page 423)

b.      Turnkey operations

c.       Joint ventures

d.      Equity alliances

 

29.    A company usually pursues _______________ when it believes that a foreign company can manage its existing or new operation more efficiently than it can.

a.       turnkey operations

b.      management contracts (moderate, page 424)

c.       joint ventures

d.      equity alliances

 

30.    Which of the following is a possible advantage for a company performing an international management contract?

a.       avoiding competition

b.      protecting against unauthorized use of trademarks

c.       getting additional resources from a country beyond those negotiated in the divestment agreement (difficult, page 424)

d.      gaining access to proprietary technical information

 

WHAT IS A TURNKEY OPERATION?  WHAT FEATURES GENERALLY MAKE TURNKEY OPERATIONS DIFFERENT FROM OTHER COLLABORATIVE ARRANGEMENTS?

 

31.    A turnkey operation is:

a.       the granting of rights on intangible property in return for royalties.

b.      an agreement to manage a business for a fee.

c.       an agreement for the use of a trademark and assistance with business operations.

d.      a contract for the construction of operating facilities for a fee. (difficult, page 424)


 

32.    Internationally, the turnkey operation is most common in:

a.      construction. (moderate, page 424)

b.      industrial equipment manufacture.

c.       airline manufacture.

d.      security systems.

 

33.    One characteristic that sets the turnkey business apart from most other international business operations is:

a.       the cultural diversity of employees.

b.      the size of the contracts. (moderate, page 425)

c.       the location of the headquarters office.

d.      the demographics of management personnel involved.

 

34.    Turnkey projects generally differ from other collaborative forms of international business operations in that:

a.       the customers are more likely to be private agencies.

b.      they tend to be smaller.

c.       they are often located in remote areas. (moderate, page 425)

d.      they may create future competitors.

 

WHAT TYPES OF OWNERSHIP SHARING CAN EXIST IN JOINT VENTURES AND CONSORTIA? WHAT TYPES OF COMPANIES PREFER JOINT VENTURES?

 

35.    Joint ventures are:

a.       construction of prisons abroad for a fee.

b.      may be owned by more than two partners, but only if each holds the same amount of equity.

c.       only those operations owned 50/50.

d.      a shared ownership among companies that may be 50/50 or some other combination of ownership. (moderate, page 425)

 

36.    An international joint venture may be owned by two companies,:

a.      All of the below choices are correct.  (moderate, page 425)

b.      each from a different country in a country where neither is headquartered.

c.       each from the same country in a foreign market.

d.      one from a foreign country and one from the country where the joint venture is located.

 

37.    Companies most likely to favor using joint ventures for expansion abroad are those that:

a.        depend on high technology for a competitive advantage.

b.       have decentralized decision making domestically. (difficult, page 425)

c.        depend on product differentiation as a competitive advantage.

d.       are experienced at foreign operations.

 

38.    A consortium is:

a.        the ownership of a company by a private company and a local government.

b.       an agreement between two or more firms to manage a business for a fee.

c.        the ownership of a company by more than two firms. (moderate, page 425)

d.       an agreement between two or more firms for the use of a trademark and assistance with business operations.


 

WHAT ARE EQUITY ALLIANCES, AND WHY WOULD COMPANIES FORM THEM?

 

39.    A(n) _______________ is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position in the other(s).

a.       management contract

b.      turnkey operation

c.       joint venture

d.      equity alliance (moderate, page 426)

 

40.    An equity alliance is:

a.       a situation in which a company takes partial ownership  in another with whom it has a collaborative arrangement. (difficult, page 426)

b.       a joint venture with three or more partners.

c.        a joint venture between stock markets in two different countries.

d.       a licensing agreement between a parent and its foreign subsidiary.

 

41.    The main purpose of an equity alliance is to:

a.        receive income beyond what one would receive based on the capital contribution.

b.       solidify a collaborative arrangement. (difficult, page 426)

c.        reduce political risk.

d.       set a means of terminating a collaboration after an agreed-upon time period.

 

42.    Which of the following industries has epitomized the use of equity alliances in recent years?

a.       the Internet industry

b.      the auto industry

c.       the airline industry (moderate, page 426)

d.      the banking industry

 

WHAT ARE THE ALTERNATE WAYS THAT JOINT VENTURES DISSOLVE?

 

43.    The most common reason joint ventures dissolve is because:

a.       a partner is dissatisfied with the venture. (difficult, page 427)

b.       of government expropriation.

c.        they become too big to manage.

d.       partners replace them with management agreements.

 

44.    The break-up of joint ventures may be:

a.        friendly versus unfriendly.

b.       agreed-upon versus not agreed-upon by both partners.

c.        planned versus unplanned.

d.       All of the choices are correct. (moderate, page 427)

 

45.    When joint ventures break up, the most likely scenario is:

a.        the partners reorganize the joint venture and start it over again.

b.       one partner buys the other's interest and the operations continue. (moderate, page 427)

c.        both partners sell out to another company.

d.       the operation is dissolved.


 

WHAT ARE MAJOR PROBLEMS THAT CAN OCCUR IN COLLABORATIVE ARRANGEMENTS?

 

46.    All of the following are factors that place a strain on collaborative arrangements EXCEPT:

a.       unequal access to natural resources (moderate, page 428)

b.       differing objectives

c.        control problems

d.       differences in culture

 

47.    Which of the following is most apt to cause a strain on a joint venture?

a.        The partners have similar corporate cultures.

b.       The partners' contributions differ in relation to the benefits they receive from the venture. (difficult, page 428)

c.        The partners have either complementary or the same objectives for the joint venture.

d.       Both partners agree that day-to-day operating control will be ceded to one of them.

 

48.    Which of the following statements is FALSE regarding the problems that can occur in collaborative arrangements?

a.      Companies often differ by nationality in how they evaluate the success of their operations.

b.     Differences in corporate cultures may create problems in collaborative arrangements.

c.      The failure rate among joint ventures from culturally distant countries is much higher than those between partners from similar cultures. (difficult, page 429)

d.     Many companies will develop joint ventures only after they have had long-term positive experiences with each other as a result of distributorship, licensing, or other contractual arrangements.

 

EXPLAIN HOW COMPANIES CAN MANAGE INTERNATIONAL COLLABORATIVE ARRANGEMENTS EFFECTIVELY.

 

49.    When a company has contracted another firm to conduct part or all of its foreign business functions, its management:

a.        should set up a separate operating unit to manage contractors.

b.       is relieved of responsibility for these functions.

c.        should take on the duties itself as soon as it has the funds to do so.

d.       must monitor whether contractors are performing their jobs adequately. (moderate, page 429)

 

50.    All of the following are common mechanisms to find compatible partners for collaborative arrangements EXCEPT:

a.       targeting companies whose joint ventures have recently broken up (difficult, page 429)

b.       development of formal links with foreign academic organizations

c.        participation in trade shows

d.       publicity to make itself better known

 

51.    All of the following are provisions that should be outlined in an original agreement to avoid potential problems in a collaborative agreement  EXCEPT:

a.       geographical limitations on the operations

b.      the management style  for the  executives (moderate, page 430)

c.       what each company’s future commitments will be

d.      the  quality of the output

 

52.    Contract disputes in collaborative arrangements are a problem because if contracts are:

a.       detailed, partners use the courts to settle disputes.

b.      not detailed, partners must use mediators to settle disputes.

c.       detailed or not, both partners are apt to lose something in court settlements. (difficult, page 430)

d.      not detailed, partners use courts to settle disputes.


 

Essay Questions

 

53.    In a short essay, describe the general motives for collaborative arrangements.

 

         Answer

General motives for collaborative arrangements include all of the following:

a.       Spread and reduce costs—To produce or sell abroad, a company must incur certain fixed costs. A company may have excess production or sales capacity that it can use to produce or sell for another company. The company handling the production or sales may lower its average costs by covering its fixed costs more fully. Likewise, the company contracting out its production or sales will not have to incur fixed costs that may have to be charged to a small amount of production or sales.

b.      Specialize in competencies—A company may seek to improve its performance by concentrating on those activities that best fit its competencies, depending on other firms to supply it with products, services, or support activities for which it has lesser competency. Large, diversified companies are constantly realigning their product lines to focus on their major strengths. This realigning may leave them with products, assets, or technologies that they do not wish to exploit themselves, but that may be profitably transferred to other companies.

c.       Avoid competition—Companies may band together so as not to compete. Companies also may combine certain resources to combat larger and more powerful competitors.

d.      Secure vertical and horizontal links—There are potential cost savings and supply assurances from vertical integration. Horizontal links may provide finished products or components. For finished products, there may be economies of scope in distribution, such as by having a full line of products to sell, thereby increasing the sales per fixed cost of a visit to potential customers.

e.       Gain knowledge—Many companies pursue collaborative arrangements to learn about a partner’s technology, operating methods, or home market so that their own competencies will broaden or deepen, making them more competitive in the future.

(difficult, page 415)

 

54.    In a short essay, describe the international motives for collaborative arrangements.

 

         Answer

International motives for collaborative arrangements include all of the following:

a.       Gain location-specific assets—Cultural, political, competitive, and economic differences among countries create barriers for companies that want to operate abroad. When they feel ill-equipped to handle these differences, they may seek collaboration with local companies who will help local operations. In other countries, foreign companies may team with local companies to gain operational assets.

b.      Overcome legal constraints—Collaboration can be a means of protecting an asset. Many countries provide little de facto protection for foreign property rights such as trademarks, patents, and copyrights unless authorities are prodded consistently. To prevent pirating of these proprietary assets, companies have sometimes made collaborative agreements with local companies, which then monitor that no one else uses the asset locally.

c.       Diversify geographically—By operating in a variety of countries, a company can smooth its sales and earnings because business cycles occur at different times within the different countries. Collaborative arrangements offer a faster initial means of entering multiple markets. Moreover, if product conditions favor a diversification rather than a concentration strategy, there are more compelling reasons to establish foreign collaborative arrangement.

d.      Minimize exposure in risky environments—One way to minimize loss from foreign political occurrences is to minimize the base of assets located abroad—or share them. A government may be less willing to move against a shared operation for fear of encountering opposition from more than one company, especially if they are from different countries and can potentially elicit support from their home governments. Another way to spread risk is to place operations in a number of different countries.

(difficult, page 417)

 

55.    How do different collaborative arrangements affect companies’ resource commitments, especially commitments at home versus abroad?

 

Answer

The forms of foreign operations differ in the amount of resources a company commits to foreign operations and the proportion of the resources located at home rather than abroad.  Licensing, for example, may result in a lower additional capital commitment than a foreign joint venture will.

         (easy, page 418)

 

56.    How/why might companies have to accept a trade-off among their objectives when choosing their form of operations abroad?

 

Answer

A decision to take no ownership in foreign production, such as through licensing it to a foreign company, may reduce exposure to political risk.  However, learning about that environment will be slow, delaying reaping the full profits from producing the product abroad.  When a company has a desired, unique, difficult-to-duplicate resource, it is in a good position to choose the operating form it would most like to use.  The preferred form may be exporting, selling from a wholly owned direct investment, or participating in a collaborative arrangement.  However, when it lacks this bargaining strength, it faces the possibility of competition.  It may have to settle on a form that is lower on its priority list; otherwise, a competitor may preempt the market.

         (moderate, page 418)

 

57.    How do companies’ desire for control and their international experience influence their choice of operating from abroad?

 

Answer

         The more a company depends on collaborative arrangements, the more likely it is to lose control over decisions, including those regarding quality, new product directions, and where to expand output.  This is because each collaborative partner has a say in these decisions, and the global performance of each may be improved differently.  External arrangements also imply the sharing of revenues, a serious consideration for undertakings with high potential profits because a company may want to keep them all for itself.  When a company already has operations in place in a foreign country, some of the advantages of contracting with another company to handle production or sales are no longer as prevalent.  The company knows how to operate within the foreign country and may have excess capacity it can use for new production or sales.

         (moderate, page 420)

 

58.    Define licensing, cross-licensing, exclusive licensing, and nonexclusive licensing.

 

         Answer

Under a licensing agreement, a company (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period. In exchange, the licensee ordinarily pays a royalty to the licensor. The rights may be exclusive (the licensor can give rights to no other company) or nonexclusive (it can give away rights). For industries in which technological changes are frequent and affect many products, companies in various countries often exchange technology rather than compete with each other on every product in every market.  Such n arrangement is known as cross-licensing.

         (moderate, page 420)


 

59.    Why are most international licensing agreements between a parent company and a company abroad in which it owns in whole or in part?

 

Answer

Many licenses are given to companies owned in whole or part by the licensor.  A license may be necessary to transfer technology abroad because operations in a foreign country, even in 100-percent owned by the parent, usually are subsidiaries, which are separate companies from a legal standpoint.  When a company owns less than 100 percent, a separate licensing arrangement may be a means of compensating the licensor for contributions beyond the mere investment in capital and managerial resources.

(easy, page 422)

 

60.    Explain how franchising agreements differ from licensing agreements?

 

         Answer

Franchising is a specialized form of licensing in which the franchisor not only sells an independent franchisee the use of the intangible property (usually a trademark) essential to the franchisee’s business, but also operationally assists the business on a continuing basis, such as through sales promotion and training. In a sense, a franchisor and a franchisee act almost like a vertically integrated company because the parties are interdependent and each produces part of the product or service that ultimately reaches the consumer. 

 (moderate, page 422)

 

61.    What is the major dilemma that franchisors face in their international operations?

 

Answer

A dilemma for successful domestic franchisors is that their success comes from three factors: product and service standardization, high identification through promotion, and effective cost controls.  When entering many foreign countries, franchisors may encounter difficulties in transferring these success factors.  At the same time, the more adjustments made to the host country’s different conditions, the less a franchisor has to offer a potential franchisee.

         (moderate, page 423)

 

62.    What is a management contract, and what are the possible advantages to both parties in the contract?

 

         Answer

One of the most important assets a company may have at its disposal is management talent, which it can transfer internationally, primarily to its own foreign investments. Management contracts are means by which a company may transfer such talent—by using part of its management personnel to assist a foreign company for a specified period for a fee. The company may gain income with little capital outlay. Contracts usually cover three to five years, and fixed fees or fees based on volume rather than profits are most common. A company usually pursues management contracts when it believes that a foreign company can manage its existing or new operation more efficiently than it can. With management contracts, the host country gets the assistance it wants without needing direct investment. In turn, the management company receives income without having to make a capital outlay. A management contract may also allow the supplier to gain foreign experience, increasing its capacity to internationalize.

(moderate, page 423)

        


 

63.    What is a turnkey operation?  What features generally make turnkey operations different from other collaborative arrangements?

 

         Answer

Turnkey operations are a type of collaborative arrangement in which one company contracts another to build complete, ready-to-operate facilities. Companies building turnkey operations are frequently industrial-equipment manufacturers and construction companies. The customer for a turnkey operation is often a governmental agency. One characteristic that sets the turnkey business apart from most other international business operations is the size of the contracts. Most contracts are for hundreds of millions of dollars, and many are for billions. Smaller firms often serve as subcontractors for primary turnkey suppliers. However, large companies are vulnerable to economic downturns when governments cancel big contracts. Payment for a turnkey operation usually occurs in stages, as a project develops. Because of the long time frame between conception and completion, the company performing turnkey operations can encounter currency fluctuations and should cover itself through escalation clauses or cost-plus contracts.

(moderate, page 424)

 

64.    What type of ownership sharing can exist in joint ventures?

 

         Answer

A type of ownership sharing popular among international companies is the joint venture, in which more than one organization owns a company. Joint ventures are sometimes thought of as 50/50 companies, but often more than two organizations participate in the ownership. Further, one organization frequently controls more than 50% of the venture. The type of legal organization may be a partnership, corporation, or some other form permitted in the country of operation. When more than two organizations participate, the joint venture is sometimes called a consortium. The more companies in the joint venture, the more complex the management of the arrangement will be. Certain types of companies favor joint ventures more than other do.

(moderate, page 425)

 

65.    What are equity alliances, and why would companies form them?

 

         Answer

An equity alliance is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position in the other. In some cases, each party takes an ownership, such as buying part of each other’s shares or by swapping shares with each other. The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break—particularly if the ownership is large enough to secure a board membership for the investing company. The airline industry epitomizes the use of equity alliances.

         (easy, page 426)

 

66.    What are the alternative ways that joint ventures dissolve?

 

Answer

         Joint venture divorce and divorce from other collaborative arrangements can be planned or unplanned, friendly or unfriendly, mutual or non-mutual.  The major strains on collaborative arrangements are due to five factors: the importance to the partners, differing objectives, control problems, comparative contributions and appropriations, and differences in culture.

         (easy, page 426)


 

67.    In a short essay, discuss the various problems of collaborative arrangements.

 

         Answer

The major strains on collaborative arrangements are due to five factors:

a.       Collaboration’s importance to partners—One partner may give more management attention to a collaborative arrangement than the other does. If things go wrong, the active partner blames the less-active partner for its lack of attention, and the less-active partner blames the more active partner for making poor decisions. The difference in attention may be due to the different sizes of partners.

b.      Differing objectives—Although companies enter into collaborative arrangements because they have complementary capabilities, their objectives may evolve differently over time. For instance, one partner may want to reinvest earnings for growth and the other may want to receive dividends. One partner may want to expand the product line and sales territory, and the other may see this as competition with its wholly owned operations. A partner may wish to sell or buy from the venture, and the other partner may disagree with the prices.

c.       Control problems—By sharing the assets with another company, one company may lose some control of the extent or quality of the assets’ use. When no single company has control of a collaborative arrangement, the operation may lack direction. Studies show that when two or more partners attempt to share in an operation’s management, failure is much more likely than when one partner dominates. However, the dominating partner must consider the other company’s interests. For this reason, studies also show that joint ventures with an even split in ownership are likely to succeed because the financial ownership ensures that management will consider both partners’ interests.

d.      Partners’ contributions and appropriations—One partner’s capability of contributing technology, capital, or some other asset may diminish compared to its partner’s capability over time. In almost all collaborative arrangements, there is a danger that one partner will use the other partner’s contributed assets, enabling it to become a competitor.

e.       Differences in culture—Companies with different cultures differ in how they evaluate the success of their operations. In addition to national culture, differences in corporate cultures may also create problems within joint ventures. For example, one company may be accustomed to promoting managers from within the organization, whereas the other opens its search to outsiders. One may use a participatory management style, and the other an authoritarian style. For this reason, many companies will develop joint ventures only after they have had long-term positive experiences with the other company through distributorship, licensing, or other contractual arrangements.

(difficult, page 427)

 

68.    Explain how companies can manage international collaborative arrangements effectively.

 

         Answer

As companies enter into more collaborative arrangements, they enjoy better performance.  In essence, they may choose partners more wisely and learn how better to have synergy between their partners and their own operations.  A company can seek out a partner for its foreign operations or it can react to a proposal from another company to collaborate with it.  In either case, it is necessary to evaluate the potential partner not only for the resources it can supply but also for its motivation and willingness to work with the other company. Contracts should be spelled out in detail, but if courts must rule on disagreements both parties may lose something in the settlement.  Management also should estimate potential sales, determine whether the arrangement is meeting quality standards, and assess servicing requirements to check whether the other company is doing an adequate job.  Mutual goals should be set so that both parties understand what is expected, and the expectations should be spelled out in the contract.

(moderate, page 429)