Kerala Plus One Business Studies Chapter Wise Questions and Answers Chapter 11 International Business – I
1 Mark Questions and Answers
Question 1.
In which of the following modes of entry, does the domestic manufacturer give the right to use intellectual property such as patent and trademark to a manufacturer in a foreign country for a fee.
a) Licensing
b) Contract manufacturing
c) Joint venture
d) None of these
Answer:
a) Licensing
Question 2.
Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as
a) Licensing
b) Franchising
c) Contract manufacturing
d) Joint venture
Answer:
c) Contract manufacturing
Question 3.
When two or more firms come together to create a new business entity that is legally separate and distinct from its parents. It is known as
Answer:
Joint venture
Question 4.
Which one of the following modes of entry requires a higher level of risks?
Answer:
Joint venture
Question 5.
Which one of the following modes of entry permits the greatest degree of control over overseas operations?
Answer:
Wholly owned subsidiary
Question 6.
Which one of the following modes of entry brings the firm closer to international market.
Answer:
Licensing/Franchising
Question 7.
Buying and selling of goods and services between the two countries are called……….
Answer:
Foreign trade
2 Mark Questions and Answers
Question 8.
Differentiate between international trade and international business.
Answer:
International trade consists of imports and exports of goods. But international business is a much broader term and is comprised of both the trade and production of goods and services across the countries.
Question 9.
Distinguish between licensing and franchising.
Answer:
Licensing is used in connection with the production and distribution of goods. But the term franchising is used in connection with service business. Franchising is relatively more stringent than licensing.
4 Mark Questions and Answers
Question 10.
Enumerate limitations of contract manufacturing.
Answer:
Mode of Entry into International Business
1. Exporting and Importing:
When goods are sold to a foreign country, it is called export trade. When goods are purchasing from a foreign country, it is called import trade.
Advantages
- It is the easiest way of gaining entry into international markets.
- Business firms are not required to invest that much time and money in host countries.
- It is less risky as compared to other modes of. entry into international business
Limitations
- It involves additional packaging, transportation, and insurance costs.
- Exporting is not possible in case the foreign country restricts imports.
- The export firms do not have much contact with the foreign markets.
2. Contract Manufacturing (Outsourcing):
When a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain goods produced as per its specifications it is called contract manufacturing. It is also known as outsourcing and it can take place in the following forms.
- Production of certain components
- Assembly of components into final products
- Complete manufacture of the products
Advantages
- It Permits international firms to get the goods produced on a large scale without requiring investment in setting up production facilities.
- There is no investment risk involved in foreign countries.
- It helps to get the products at lower cost
- Local producers in foreign countries can ensure greater utilization of their idle production capacities.
Limitations
- It may affect the quality of the products.
- Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.
- The local firm cannot sell the contracted output as per their will.
3. Licensing and Franchising:
Licensing is a contractual arrangement in which one firm grant access to its patents, trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm that grants permission is known as licensor and the firm that receives the right to use technology or patents is called the licensee.
Franchising is similar to licensing. But it is used in connection with the provision of services. The parent company is called the franchiser and the other party to the agreement is called franchisee.
Advantages
- It is a less expensive mode of entering into international business.
- There is no investment risk
- Since the business in a foreign country is managed by the licensee/franchisee who is a local person, there are lower risks of business takeovers or government interventions.
- Since licensee/franchisee is a local person, he has greater market knowledge and customer contacts. It helps the licensor/franchiser in successfully conducting its marketing operations.
Limitations
- The licensee can start marketing an identical product under a slightly different brand name.
- Trade secrets may lose in foreign markets.
- Conflicts often develop between the licensor/ franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty, etc.
4. Joint Ventures:
Joint venture means establishing a firm that is jointly owned by two or more independent firms. It can be brought into existence in three major ways.
- Foreign investors buying an interest in a local firm.
- Local firms acquiring an interest in an existing foreign firm.
- Both the foreign and local entrepreneurs jointly forming a new enterprise.
Advantages
- Since the local partner also contributes to the equity capital, the international firm has less financial burden to expand the business globally.
- It helps to execute large projects requiring huge capital outlays and manpower.
- The foreign business firm benefits from local partner’s knowledge of the host countries.
- The foreign business firm shares costs and risks with local partners. So they can enter into the foreign markets very easily and without high risk.
Limitations
- Foreign firms entering into joint ventures share the technology and trade secrets with local firms. It leads to leakage of technology and secrets to others.
- The dual ownership arrangement may lead to conflicts
5. Wholly Owned Subsidiaries:
The parent company (holding company) acquires full control over the foreign company by making 100% investment in its equity capital. It is called wholly-owned subsidiaries. It can be established in either of the two ways. i.e.
- Setting up a new firm altogether to start operations in a foreign country.
- Acquiring an existing firm in the foreign country.
Advantages
- The parent firm is able to exercise full control over its operations in foreign countries.
- It is not required to disclose its technology or trade secrets to others.
Limitations
- It is not suitable for small and medium-size firms which do not have enough funds to invest abroad.
- The parent company alone has to bear the entire losses.
- It is subject to higher political risk.
5 Mark Questions and Answers
Question 11.
Sri. Swamynathan, a pure Gandhian, is of the view that India should never go for international trade for it results in draining out of scarce resources, dampen the domestic trade and this will lead to the complete destruction of our nation. How do you evaluate Mr. Swamynathan’s statement?
Answer:
Benefits of International Business:
The benefits of international business to the nations and business firms are:
Benefits to Nations
1. Earning of foreign exchange:
It helps a country to earn foreign exchange which can be used for importing capital goods, technology, petroleum products, and fertilisers, pharmaceutical products, etc.
2. More efficient use of resources:
External trade enables a country to utilize the available resources in the best possible manner.
3. Improving growth prospects and employment potentials:
External trade helps to accelerate the economic growth and employment opportunities of a country.
4. Increased standard of living:
Foreign trade helps in raising the standard of living of a country.
5. International relation:
External trade helps to promote harmonious and cordial relationship among the nations.
Benefits to Firms
1. Prospects for higher profits:
When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.
2. Increased capacity utilisation:
It helps firms in using their surplus production capacities and improving the profitability of their operations. Large scale production helps to reduce the cost of production.
3. Prospects for growth:
It helps firms in improving their growth prospects by creating demands for their products in foreign countries.
4. Enhances competition:
External trade enhances competition, which compels the domestic firms to improve the technology of production, production process and quality of the products.
5. Improved business vision:
It improves business vision as it makes firms to grow, more competitive and diversified.
6 Mark Questions and Answers
Question 12.
Discuss briefly the factors that govern the choice of mode of entry into international business.
Answer:
Mode of Entry into International Business
1. Exporting and Importing:
When goods are sold to a foreign country, it is called export trade. When goods are purchasing from a foreign country, it is called import trade.
Advantages
- It is the easiest way of gaining entry into international markets.
- Business firms are not required to invest that much time and money in host countries.
- It is less risky as compared to other modes of. entry into international business
Limitations
- It involves additional packaging, transportation, and insurance costs.
- Exporting is not possible in case the foreign country restricts imports.
- The export firms do not have much contact with the foreign markets.
2. Contract Manufacturing (Outsourcing):
When a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain goods produced as per its specifications it is called contract manufacturing. It is also known as outsourcing and it can take place in the following forms.
- Production of certain components
- Assembly of components into final products
- Complete manufacture of the products
Advantages
- It Permits international firms to get the goods produced on a large scale without requiring investment in setting up production facilities.
- There is no investment risk involved in foreign countries.
- It helps to get the products at a lower cost
- Local producers in foreign countries can ensure greater utilization of their idle production capacities.
Limitations
- It may affect the quality of the products.
- Local manufacturer in the foreign country loses his control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract.
- The local firm cannot sell the contracted output as per their will.
3. Licensing and Franchising:
Licensing is a contractual arrangement in which one firm grant access to its patents, trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm that grants permission is known as licensor and the firm that receives the right to use technology or patents is called the licensee.
Franchising is similar to licensing. But it is used in connection with the provision of services. The parent company is called the franchiser and the other party to the agreement is called franchisee.
Advantages
- It is a less expensive mode of entering into international business.
- There is no investment risk
- Since the business in a foreign country is managed by the licensee/franchisee who is a local person, there are lower risks of business takeovers or government interventions.
- Since licensee/franchisee is a local person, he has greater market knowledge and customer contacts. It helps the licensor/franchiser in successfully conducting its marketing operations.
Limitations
- The licensee can start marketing an identical product under a slightly different brand name.
- Trade secrets may lose in foreign markets.
- Conflicts often develop between the licensor/ franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty, etc.
4. Joint Ventures:
Joint venture means establishing a firm that is jointly owned by two or more independent firms. It can be brought into existence in three major ways.
- Foreign investors buying an interest in a local firm.
- Local firms acquiring an interest in an existing foreign firm.
- Both the foreign and local entrepreneurs jointly forming a new enterprise.
Advantages
- Since the local partner also contributes to the equity capital, the international firm has less financial burden to expand the business globally.
- It helps to execute large projects requiring huge capital outlays and manpower.
- The foreign business firm benefits from local partner’s knowledge of the host countries.
- The foreign business firm shares costs and risks with a local partner. So they can enter into the foreign markets very easily and without high risk.
Limitations
- Foreign firms entering into joint ventures share the technology and trade secrets with local firms. It leads to leakage of technology and secrets to others.
- The dual ownership arrangement may lead to conflicts.
5. Wholly Owned Subsidiaries:
The parent company (holding company) acquires full control over the foreign company by making 100% investment in its equity capital. It is called wholly-owned subsidiaries. It can be established in either of the two ways. i.e.
- Setting up a new firm altogether to start operations in a foreign country.
- Acquiring an existing firm in the foreign country.
Advantages
- The parent firm is able to exercise full control over its operations in foreign countries.
- It is not required to disclose its technology or trade secrets to others.
Limitations
- It is not suitable for small and medium-sized firms that do not have enough funds to invest abroad.
- The parent company alone has to bear the entire losses.
- It is subject to higher political risk.
8 Mark Questions and Answers
Question 13.
What is an international business? How is it different from domestic business.
Answer:
Differences between International Business and Domestic Business
