Test: Modes of International Business - UGC NET MCQ

Management Contracting

• Management Contracting is a low-risk method of getting into a foreign market and it starts yielding income right from the beginning.
• The arrangement is especially attractive if the contracting firm is given the option to purchase some shares in the managed company within a stated period. 
• It may obtain the business of exporting or selling otherwise of the product of the managed company or supply the inputs required by the managed company.
• A management contract can involve a wide range of functions, such as the technical operation of a production facility, management of personnel, accounting, marketing services, and training.

Contract Manufacturing is a mode of entry into international business where a firm outsources its exhibit process to foreign contractors while retaining control over marketing, sales, and branding. It is suitable for firms looking to leverage lower costs of exhibit and skilled labor available in foreign countries while focusing on product development, branding, and distribution.

Key Points
Exporting

• Exporting is the promotion and direct sale of products made domestically in another nation.
• A tried-and-true strategy for reaching overseas markets is exporting.
• Since it does not require that the items be produced in the target country, no investment in foreign production facilities is required.
• The majority of exporting's expenses are in the form of marketing charges.

Important Points

• The method of entering a foreign market is one of the crucial choices in international marketing.
• At the other end of the spectrum, a business may choose to manufacture the item domestically and export it to a foreign market.
• The business is not required to make any foreign investments in this situation.
• On the other extreme, the business can create production facilities through joint ventures, alliances, or acquisitions in another nation in order to market its goods there.
• The corporation must make direct investments abroad to implement this approach.
• Exporting is therefore the most affordable option among the others and is preferred by a company with limited knowledge of global markets.
• According to this strategy, the business exports its goods from its home office without conducting any marketing, production, or organization efforts abroad.
• A very popular entry method that many businesses use for at least some of their markets is exporting to a foreign market.
• Hence, it can be concluded that the correct answer is exporting. 

Direct Exporting as a mode of entry into international business limits a firm's ability to provide after-sales service to foreign clients due to challenges such as cultural and language differences. This method is best suited for firms with established products and brand reputations seeking initial global exposure.

• The assertion that limited control is a drawback of modes like exporting, licensing, and franchising in international business is correct.
• The reason provided, stating that firms engaging in these modes have restricted authority over foreign operations handled by partners, is also accurate.
• While both statements are true, the reason does not directly explain why limited control is a disadvantage in these modes. The reason is a statement of fact rather than a direct explanation of the assertion.
• Therefore, the correct answer is Option B: "If both Assertion and Reason are true but Reason is not the correct explanation of Assertion."

• Assertion (A) states that global tenders provide a strategic advantage for firms entering foreign markets. This assertion is true because participating in global tenders allows firms to have a "trial run" in foreign markets before making larger investments, which can be advantageous in understanding market dynamics and gaining experience.
• Reason (R) states that winning a global tender guarantees long-term profitability for the firm. This reason is false because while winning a global tender can be lucrative and beneficial, it does not automatically guarantee long-term profitability. Factors such as market conditions, competition, and operational efficiency play crucial roles in determining long-term profitability.
• Since the Assertion is true (global tenders providing a strategic advantage) but the Reason is false (winning a global tender guarantees long-term profitability), the correct option is C: If Assertion is true but Reason is false.

This question aims to test the understanding of the strategic benefits of global tenders and the distinction between short-term gains and long-term profitability in international business operations.

In franchising, franchisees bear most of the investment and operational costs for running the franchised firm locally, while the franchisor earns income from franchise fees, royalties, and supply contracts. This model allows for global expansion with low upfront investment for the franchisor.

Joint ventures might be chosen not only for risk-sharing but also for accessing local expertise, leveraging partner strengths, or overcoming specific market entry barriers that make a wholly owned subsidiary impractical.
This creates a scenario where the Assertion is true, but the Reason is false, making Option C the correct answer.

The sequence of modes of entry in foreign markets starting with the mode of entry having the least commitment, risk, control and profit potential:
(B) Company starts exports working through domestic export agents and export management companies.
(D) Company starts exporting using the domestic export department and overseas sales branch.
(E) Company offers a complete brand concept and operating system to an investor in return of a certain fee.
(A) Company hires a local manufacturer to produce the product.
(C) Company joins hands with a local investor and forms a company in which both share ownership and control.

Hence, the correct answer is (B), (D), (A), (E), (C). 

Licensing is a mode of entry into international business where a firm grants rights to a foreign entity to use its intellectual property, such as brand name or technology, in exchange for license fees or royalties. This approach allows the licensor to retain ownership of its property while expanding into international markets through the licensee.