Chapter 13 Exporting and Global Sourcing: International Business: The New Realities, 4e (Cavusgil)

International Business: The New Realities, 4e (Cavusgil)
Chapter 13 Exporting and Global Sourcing
1) Focal firms that internationalize through exporting will most likely perform ________ in the
home market.
A) sales
B) distribution
C) marketing
D) manufacturing
Answer: D
Diff: 1: Easy
Skill: Concept
Objective: 13-1: Understand exporting as a foreign market entry strategy
AACSB: Analytical Thinking
2) Which of the following services cannot be exported?

A) insurance services
B) education
C) pure services
D) construction
Answer: C
Diff: 1: Easy
Skill: Concept
3) ________ will internationalize via FDI because they require direct contact with customers.
A) Insurance firms
B) Accountants
C) Construction firms
D) Retailing firms
Answer: D
Diff: 1: Easy
Skill: Concept
4) The Internet facilitates international trade in the service sector by ________.

A) providing the means to export some types of services to foreign markets
B) providing the means to avoid taxes in the foreign market
C) allowing firms to attain maximum control by establishing ownership of key assets
D) eliminating the need to deal with foreign currency exchange rates
Answer: A
Diff: 1: Easy
Skill: Concept
AACSB: Analytical Thinking; Information Technology
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5) Which of the following is an advantage of exporting?
A) It allows focal firms to attain maximum control by establishing ownership of key assets in the
foreign market.
B) It is a high-control strategy that requires substantial resource commitment when compared to
equity joint ventures.
C) It minimizes exposure to tariffs and other trade barriers, as well as fluctuations in exchange
rates.
D) It increases overall sales volume, improves market share, and reduces per-unit costs of
manufacturing.
Answer: D
Diff: 2: Moderate
Skill: Concept
6) Which of the following is most likely a disadvantage to firms who use exporting as an entry
strategy?
A) high cost of foreign market entry
B) difficulties withdrawing from foreign markets
C) high risk of low sales due to fluctuations in exchange rates
D) high risk due to uncertainty in the political environment of the foreign market
Answer: C
Diff: 2: Moderate
Skill: Concept
7) After managers have chosen an appropriate market for exporting, the next step is to ________.
A) decide about the resources to be committed
B) acquire the skills and competencies to handle export operations
C) engage appropriate international trade attorneys
D) modify advertising and promotional activities to suit individual markets
Answer: A
Diff: 1: Easy
Skill: Concept
2
8) Which of the following is a characteristic of direct exporting?
A) exporter uses few corporate resources and personnel
B) exporter develops a closer relationship with foreign buyers
C) exporter contracts with domestic intermediaries
D) exporter delegates responsibility of finding buyers
Answer: B
Diff: 1: Easy
Skill: Concept
9) Company-owned subsidiary is ________.

A) accomplished by contracting with intermediaries located in the firm's home market
B) typically achieved by contracting with intermediaries located in the foreign market
C) a foreign intermediary that serves as an extension of the exporter, negotiating on behalf of the
exporter and assuming such responsibilities as local supply-chain management, pricing, and
customer service
D) a representative office of the focal firm that handles marketing, physical distribution,
promotion, and customer service activities in the foreign market
Answer: D
Diff: 1: Easy
Skill: Concept
10) Which of the following activities is applicable to the final stage of exporting?
A) The firm engages appropriate bankers and international trade attorneys.
B) The firm screens the most attractive export markets.
C) The firm modifies advertising and public relations to suit individual markets.
D) The firm acquires product development and foreign language skills.
Answer: C
Diff: 1: Easy
Skill: Concept
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Organic Towel Exports (Scenario)
The Organic Towel Company (OTC) employs 400 workers at its facility in Liverpool, England,
where the firm has been manufacturing 100% organic cotton towels for five years. OTC sells
towels in the United Kingdom primarily to boutique hotels and specialty retail stores, as well as
to individual consumers through the company's. Recently, OTC managers attended a trade show
in London where they made contact with numerous foreign market managers. OTC received a
request from Earth Waves, an organic clothing store in Toronto, Canada, for a large order of
towels. OTC had not been looking into expanding, but firm managers are seriously considering
the opportunity to reach a global niche market with their towels.
11) Which of the following questions must be evaluated by OTC managers as a first step to
exporting?
A) What are the risks involved in exporting OTC towels to Earth Waves?
B) Do Canadian towel companies have a high success rate when they export?
C) Will OTC save money on domestic marketing by exporting?
D) How can OTC adapt its distribution strategy in Canada?
Answer: A
Diff: 2: Moderate
Skill: Critical Thinking
AACSB: Analytical Thinking; Environments and Reflective Thinking
12) Which of the following most likely supports OTC exporting their towels to Earth Waves?
A) Domestic sales of OTC towels have dwindled, and a new market is needed.
B) Earth Waves is located in an excellent location in central Toronto.
C) OTC is an SME that can readily adapt to the demands of the Canadian market.
D) The founder of OTC has numerous contacts in Canada.
Answer: C
Diff: 2: Moderate
13) Which of the following most strongly suggests OTC should not export its towels to Earth
Waves?
A) OTC managers are risk-takers with the determination to expand OTC.
B) OTC's towel manufacturing at the Liverpool facility is nearing maximum capacity.
C) Earth Waves has a large client base and publishes a semi-annual catalog.
D) Earth Waves has offered to guide OTC through Canadian regulations.
Answer: B
Diff: 2: Moderate
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14) Which of the following should be considered first in making the decision to export OTC
towels to Canada?
A) What is the probability of OTC and Earth Waves entering into a joint venture?
B) How much fluctuation occurs in the exchange rate between the Canadian dollar and the
British pound?
C) What is the likelihood of Earth Waves opening a subsidiary in Canada?
D) What documentation would be required for OTC to export towels to Asia?
Answer: B
Diff: 2: Moderate
15) The Internet provides the means to export pure services.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
16) Compared to other entry strategies, exporting minimizes risk and maximizes flexibility.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
17) Indirect exporting is exporting that is accomplished by contracting with intermediaries

located in the foreign market.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
18) Exporting and importing collectively refers to international trade.

Answer: TRUE
Diff: 1: Easy
Skill: Concept
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19) Describe the four-step process many managers use to achieve successful exporting.
Answer:
a. Assess Global Market Opportunity-As a first step, management assesses the various global
market opportunities available to the firm. Managers analyze the readiness of the firm to carry
out exporting. They screen for the most attractive export markets. They identify qualified
intermediaries and other foreign business partners. They estimate industry market potential and
company sales potential. Participating in foreign trade shows is useful for identifying market
potential and foreign intermediaries.
b. Organize for Exporting-Managers determine what types of managerial, financial, and
productive resources the firm should commit to exporting. Managers also try to establish a
timetable for the firm to follow in order to achieve export goals and objectives. Managers also
investigate how to implement exporting, either through indirect exporting, direct exporting, or a
company-owned subsidiary.
c. Acquire Needed Skills and Competencies-Export transactions require specialized skills and
competencies in areas such as product development, distribution, logistics, finance, contract law,
and currency management. Also useful are foreign language skills and the ability to interact well
in foreign cultures. Fortunately, facilitators are available to assist firms that lack specific
competencies. They include companies like banks, freight forwarders, and international trade
consultants.
d. Export Management-In the final stage, the firm implements and manages its exporting
strategy, often requiring management to refine approaches to suit market conditions. Product
adaptation means modifying a product to make it fit the needs and tastes of the buyers in the
target market. When Microsoft markets computer software in Japan, the software must be written
in Japanese. In export markets with many competitors, the exporter needs to adapt its products to
gain competitive advantage. In addition to adapting products, the firm also may adapt it pricing
and distribution approaches.
Diff: 3: Hard
Skill: Concept
20) In a short essay, explain the factors involved in a firm's decision to use indirect exporting or
direct exporting.
Answer: Direct and indirect exporting are not mutually exclusive, and many firms use both, but
for different markets. Key considerations for choosing between direct or indirect exporting are:
∙ The time, capital, and expertise that management is willing to commit;
∙ Strategic importance of the foreign market;
∙ Nature of the firm's products, including the need for after-sales support; and
∙ Availability of capable foreign intermediaries in the target market.
Diff: 2: Moderate
Skill: Concept
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21) In a short essay, explain why most firms use exporting as part of their internationalization
portfolio, and discuss how Incoterms have mitigated problems with logistics.
Answer: Beyond initial entry, most firms, large and small, use exporting as part of their
internationalization portfolio. Large manufacturing firms typically account for the largest overall
value of exports and make up about three-quarters of the total value of exports from the United
States. However, the vast majority of exporting firms-more than 90 percent in most countries-are
SMEs with fewer than 500 employees.
As an entry strategy, exporting is very flexible. The exporter can both enter and withdraw from
markets fairly easily, with minimal risk and expense. Exporting may be employed repeatedly
during the firm's internationalization process, generally at the early stages and again from
production facilities that the firm eventually establishes at various foreign locations, destined for
markets in other countries. Experienced international firms usually export in combination with
other strategies, such as joint ventures and FDI. Toyota has used FDI to build factories in key
locations in Asia, Europe, and North America from which it exports cars to neighboring
countries and regions.
Incoterms have mitigated problems with logistics for international firms. In the past, disputes
sometimes arose over who should pay the cost of freight and insurance in international
transactions: the seller (that is, the exporter) or the foreign buyer. To eliminate such disputes, a
system of universal, standard terms of sale and delivery, known as Incoterms (short for
"International Commerce Terms"), was developed by the International Chamber of Commerce.
Commonly used in international sales contracts, Incoterms specify how the buyer and the seller
share the cost of freight and insurance, and at which point the buyer takes title to the goods.
Diff: 3: Hard
Skill: Synthesis
Objective: 13-1, 13-2: Understand exporting as a foreign market entry strategy, Describe how to
manage export-import transactions
22) Which of the following documents is the contract between the shipping company and the
exporter?
A) pro forma invoice
B) bill of lading
C) export declaration
D) commercial invoice
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 13-2: Describe how to manage export-import transactions
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23) Prox Inc. is a U.S.-based manufacturer of consumer electronics. It decides to export to
Mexico and wants to protect its goods against damage, loss, and pilferage. Which of the
following documents is applicable here?
A) insurance certificate
B) bill of lading
C) pro forma invoice
D) license
Answer: A
Diff: 2: Moderate
Skill: Application
24) Incoterms were developed by the International Chamber of Commerce in order to ________.
A) provide permission to export
B) standardize the cost of shipping and insuring exported items
C) define how the buyer and seller share freight and insurance costs
D) reduce the costs of shipping and insuring exported products
Answer: C
Diff: 1: Easy
Skill: Concept
25) The exporter usually first issues a quotation or pro forma invoice upon request by potential
customers.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
26) The bill of lading is the "birth certificate" of the goods being shipped and indicates the
country where they originate.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
27) National governments require exporters to obtain a license to protect the exported goods
against damage, loss, pilferage, and delay.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
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28) Incoterms are universally accepted terms of sale that specify how the buyer and the seller
share the cost of freight and insurance in an international transaction and at which point the
buyer takes title to the goods.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
29) Trade fairs are not only excellent sites to meet potential intermediaries, they also provide the
means to become familiar with key players in the local industry and to generally learn about the
target market.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
Objective: 13-3: Explain identifying and working with foreign intermediaries
30) The procurement of selected value-adding activities, including production of intermediate

goods or finished products, from independent suppliers is known as ________.
A) outsourcing
B) franchising
C) offshoring
D) licensing
Answer: A
Diff: 1: Easy
Skill: Concept
Objective: 13-4: Understand outsourcing, global sourcing, and offshoring
31) Which of the following is the best example of a back-office BPO activity?
A) customer service
B) billing
C) marketing
D) technical support
Answer: B
Diff: 1: Easy
Skill: Concept
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32) Focal firms typically source from external suppliers for all of the following reasons EXCEPT
________.
A) the product or service obtained is non-core
B) the product can be purchased inexpensively
C) the supplier specializes in providing the product or service
D) the supplier offers the same product to competing firms
Answer: D
Diff: 1: Easy
Skill: Concept
Fun Play Global Sourcing (Scenario)

Fun Play Inc., a company manufacturing toys for children, has decided to outsource some of its
value-chain activities. However, the firm has no experience with global sourcing and has hired a
consulting firm to assist its managers. The consulting firm has been assigned the task of
determining which activities should be outsourced and where the outsourced activities should be
located.
33) Which of the following is most likely to be the consultants' utmost concern while deciding if
clothing for Fun Play dolls needs to be outsourced?
A) Is doll clothing part of Fun Play's core competencies?
B) What kind of fabric is used for clothing Fun Play dolls?
C) Do the competitors of Fun Play outsource accounting activities abroad?
D) Does Fun Play intend to follow a strategy of product diversification in the near future?
Answer: A
Diff: 3: Hard
34) Which of the following would most likely be considered by the consultants while deciding
whether to keep each value-adding activity in the home country or locate it in a foreign country?
A) Who will be responsible for training suppliers in foreign locations?
B) Can different value-adding activities be effectively configured across the world?
C) Would the HR department of Fun Play be able to ensure smooth repatriation for managers
after they complete their assignments abroad?
D) What are the odds in favor of Fun Play's dominating the children's toy segment in its home
country?
Answer: B
Diff: 3: Hard
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35) If Fun Play decides to source from its own wholly owned subsidiary, it would be engaging in
________.
A) offshoring
B) contract manufacturing
C) cause marketing
D) captive sourcing
Answer: D
Diff: 2: Moderate
Skill: Application
36) If a computer contains a microprocessor from Costa Rica and a hard disk drive from the
Philippines, the computer manufacturer, who is based in Texas and operates across Europe and
West Asia, most likely uses ________ as an entry strategy.
A) exporting
B) franchising
C) global sourcing
D) licensing
Answer: C
Diff: 2: Moderate
Skill: Application
37) Which of the following is true with regard to global sourcing?

A) Global sourcing has declined significantly in the current phase of globalization.
B) Global sourcing is a low-control strategy in which the focal firm sources from independent
suppliers through contractual agreements.
C) Global sourcing refers to the relocation of a business process or entire manufacturing facility
to a foreign country.
D) Global sourcing does not represent the firm's initial involvement in international business.
Answer: B
Diff: 1: Easy
Skill: Concept
11
38) The growth of global sourcing has been driven by ________.
A) the declining demand for highly skilled workers
B) the rapidly aging population in advanced economies
C) technological advances in communications
D) the rising costs of international business
Answer: C
Diff: 1: Easy
Skill: Concept
39) ________ refers to sourcing from the firm's own production facilities.
A) Captive sourcing
B) Crowdsourcing
C) Business process outsourcing
D) Externalization
Answer: A
Diff: 1: Easy
Skill: Concept
40) Contract manufacturing can best be defined as ________.

A) the outsourcing to independent suppliers of business service functions such as accounting,
payroll, human resource functions, travel services, IT services, customer service, or technical
support
B) the relocation of a business process or entire manufacturing facility to a foreign country
C) sourcing from the firm's own production facilities
D) an arrangement in which the focal firm contracts with an independent supplier to manufacture
products according to well-defined specifications
Answer: D
Diff: 1: Easy
Skill: Concept
41) The pattern or geographic arrangement of locations where the firm carries out value-chain
activities is known as ________.
A) configuration of value-adding activity
B) internalization
C) visual merchandising
D) disintermediation
Answer: A
Diff: 1: Easy
Skill: Concept
12
42) The relocation of a business process or entire manufacturing facility to a foreign country is
known as ________.
A) offshoring
B) captive sourcing
C) outsourcing
D) subsidizing
Answer: A
Diff: 1: Easy
Skill: Concept
43) Business activities that would most likely be offshored are characterized by ________.
A) high-value-adding activities that contribute more productively to increasing company
performance
B) services related to critical, long-term research projects and product development
C) routine tasks that do not relate to the firm's primary service or product
D) functions related to the firm's core competencies and strategic assets
Answer: C
Diff: 1: Easy
Skill: Concept
44) Which of the following is true with regard to offshoring?

A) Offshoring is common in the service sector, including banking, software code writing, legal
services, and customer-service activities.
B) Russia is the current leader in the processing of advanced economies' relocated business
services.
C) Offshoring substantially reduces the overall efficiency of MNEs.
D) With rapid globalization and internationalization of businesses, offshoring is a visibly
declining trend.
Answer: A
Diff: 1: Easy
Skill: Concept
13
45) Which of the following statements is true with regard to the R&D activities of a firm?
A) As a strategic asset, R&D activities are of moderate importance to the firm.
B) R&D activities are usually concentrated at home.
C) R&D activities have a low likelihood of being internalized.
D) R&D activities have a high likelihood of being outsourced.
Answer: B
Diff: 1: Easy
Skill: Concept
46) As a strategic asset, ________ is of the lowest importance to a firm.

A) customer service
B) R&D, design
C) manufacturing of parts
D) marketing and branding
Answer: C
Diff: 1: Easy
Skill: Concept
47) The likelihood of internalizing ________ rather than outsourcing it is considerably high.
A) R&D
B) manufacturing of parts
C) sales and distribution
D) customer service
Answer: A
Diff: 1: Easy
Skill: Concept
48) Which of the following activities is highly important to firms as a strategic asset?
A) manufacturing of parts
B) customer service
C) sales and distribution
D) marketing and branding
Answer: D
Diff: 1: Easy
Skill: Concept
14
49) Global sourcing has gained momentum in the current phase of globalization.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
50) In advanced economies, firms generally do not outsource value-chain activities because they
fear the loss of proprietary knowledge and trade secrets.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
51) Front-office activities cannot be classified under BPO.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
52) Back-office activities consist of downstream, customer-related services.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
53) Front-office activities typically include internal, upstream business functions.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
54) Firms usually internalize those value-chain activities they consider part of their core
competencies.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
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55) Captive sourcing is an arrangement in which the focal firm contracts with an independent
supplier to manufacture products according to well-defined specifications.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
56) Given the complexities of international business, manufacturing is generally the only value-
chain activity that firms outsource abroad.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
57) Offshoring is common in the service sector, including banking, software code writing, legal
services, and customer-service activities.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
58) The recent economic turndown is expected to pressure advanced-economy firms to seek
further ways to reduce costs.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
59) All business activities and processes lend themselves to global sourcing.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
60) In the decision about whether to outsource, manufacturing of products is considered of high
importance to a firm.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
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61) In the decision about whether to outsource, research and development is considered of low
importance to a firm.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
62) The likelihood of a firm internalizing marketing and branding instead of outsourcing it is
high.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
63) The likelihood of a firm internalizing research and development instead of outsourcing it is
low.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
64) Typically, firms tend to concentrate research and development activities abroad rather than in
their home countries.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
65) Industries that benefit the most from global sourcing are characterized by low labor intensity
in product and service production.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
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66) How do firms decide whether or not to outsource? In a short essay, describe the factors that
contribute to the decision to internalize or externalize business activities.
Answer: Managers must decide between internalization and externalization-whether each value-
adding activity should be conducted in-house or by an external, independent supplier. Firms
usually internalize those value-chain activities that they consider part of their core competencies,
or which require the use of proprietary knowledge and trade secrets that they want to control. By
contrast, firms will usually source from external suppliers when they can obtain non-core
products, components, or services at lower cost or from suppliers specialized in providing them.
Diff: 2: Moderate
Skill: Concept
67) In a short essay, describe three key drivers responsible for the recent growth of global
sourcing.
Answer: The growth of global sourcing has been driven by three key factors:
1. Technological advances in communications, especially the Internet and international
telecommunications. Access to vast online information means focal firms can quickly find
suppliers that meet specific needs, anywhere in the world. Firms can communicate continuously
with foreign suppliers at very low cost.
2. Falling costs of international business. Tariffs and other trade barriers have declined
substantially. Efficient communication and transportation systems have made international
procurement cost effective and accessible to any firm.
3. Entrepreneurship and rapid economic transformation in emerging markets. China, India, and
other emerging markets have quickly developed as important suppliers of various products and
services. Entrepreneurial suppliers aggressively pursue sourcing partnerships with foreign
buyers.
Diff: 2: Moderate
Skill: Concept
68) What is offshoring? Describe the types of industries that tend to offshore.
Answer: Offshoring is the relocation of a business process or entire manufacturing facility to a
foreign country. It is common in the service sector, including banking, software code writing,
legal services, and customer-service activities. Large legal hubs have emerged in India that
provide services such as drafting contracts and patent applications, conducting research and
negotiations, and performing paralegal work, all on behalf of Western clients.
Diff: 2: Moderate
Skill: Concept
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69) Distinguish between captive sourcing and contract manufacturing.
Answer: Captive sourcing refers to sourcing from the firm's own production facilities.
On the other hand, contract manufacturing refers to an arrangement in which the focal firm
contracts with an independent supplier to manufacture products according to well-defined
specifications. Contract manufacturing accounts for more than half of all manufacturing in the
toy, sporting goods, consumer electronics, and automotive industries. It is also common in the
pharmaceuticals, furniture, semiconductor, apparel, and footwear industries.
Diff: 3: Hard
Skill: Concept
70) ________ is the primary rationale for sourcing abroad.

A) Superior quality control
B) Centralized management of work teams
C) Cost efficiency
D) Uninterrupted innovation
Answer: C
Diff: 1: Easy
Skill: Concept
Objective: 13-5: Describe the benefits and risks of global sourcing
Audio Component Outsourcing (Scenario)

Echo Corp., a company based in Boston, manufactures high-quality audio components, such as
speakers, amplifiers, and receivers for home entertainment systems. Echo has been losing market
share in recent years due to the competitive pricing of other audio component manufacturers that
engage in global sourcing. Echo managers are attempting to convince Nathan Douglas, the firm's
founder and CEO, that global sourcing would enable the firm to be more competitive without
sacrificing quality.
71) Which of the following, if true, most supports the argument in favor of global sourcing?
A) There is no scarcity of qualified personnel in and around Boston.
B) Studies show that by reconfiguring their value-chain systems or reengineering their business
processes, companies can substantially improve their production efficiency and resource
utilization.
C) Camden Audio, Echo's most formidable rival, follows a strategy of product diversification.
D) The rate of employee turnover at Echo has stabilized over the last decade.
Answer: B
Diff: 3: Hard
19
72) Which of the following would be most important to determine in deciding whether to
outsource some of Echo's value-chain activities?
A) What are the long-term strategic goals and objectives of Echo?
B) Do engineers working in Echo have the ability to speak one or more European languages?
C) Are Echo employees generally afforded a high degree of workplace freedom?
D) Does Echo intend to increase its annual budget for innovation?
Answer: A
Diff: 3: Hard
73) Which of the following is a potential benefit that Echo can derive from global sourcing?
A) cheap R&D
B) access to qualified personnel in the home country
C) strong intellectual property protection
D) improved productivity and service
Answer: D
Diff: 3: Hard
Skill: Application
74) Which of the following is a benefit of global sourcing?

A) bridging of the rich-poor divide
B) minimal reliance on suppliers
C) access to qualified personnel abroad
D) elimination of competitors
Answer: C
Diff: 1: Easy
Skill: Concept
20
75) The strategic view of global sourcing suggests that ________.
A) just as firms achieve gains in efficiency, productivity, quality, and revenues by leveraging
offshore talent, they also obtain the means to turn around failing businesses, speed up innovation,
restructure operations, and fund otherwise-unaffordable development projects
B) firms that procure supplies from foreign subsidiaries are more likely than not to lose ground
to competitors who primarily bank on their own resources
C) a strong legal environment is not the prerequisite for increasing efficiencies by relocating
strategic operations abroad
D) the firms' innovative activities tend to make mature products obsolete over time
Answer: A
Diff: 2: Moderate
Skill: Concept
76) Global sourcing becomes a catalyst to overhaul organizational processes and company
operations and increases the firm's overall competitive advantages by ________.
A) encouraging firms to train unskilled labor through extensive training programs
B) allowing firms to free expensive analysts, engineers, and managers from routine tasks to
spend more time on high-value-adding activities
C) relaxing quality standards
D) installing a system of rewards to motivate employees
Answer: B
Diff: 2: Moderate
Skill: Concept
77) Which of the following is true with regard to the risks of global sourcing?
A) Inadequate legal systems, red tape, convoluted tax systems, and complex business regulations
complicate local operations in many countries.
B) Firms that source from countries whose currencies are strengthening experience lower costs.
C) Global sourcing weakens competition leading to a considerably risk-free international
business environment.
D) Environmental challenges exclude currency fluctuations, tariffs and other trade barriers, high
energy and transportation costs.
Answer: A
Diff: 1: Easy
Skill: Concept
21
78) Which of the following is a major challenge often faced by focal firms that engage in global
sourcing?
A) no control over the quality of outputs
B) domestic management of local distribution
C) increased costs of business travel
D) lower-than-expected cost savings
Answer: D
Diff: 1: Easy
Skill: Concept
79) Which of the following is most likely to occur if a U.S. firm outsources some of its business
operations to a Japanese company, and the Japanese yen strengthens against the dollar?
A) The probability of intellectual property laws being enforced would significantly decrease in
Japan.
B) The U.S. company will experience additional cost savings in using the services of the
Japanese company.
C) Outsourcing business operations to Japan would become less expensive.
D) The U.S. company will experience higher costs in using the services of the Japanese
company.
Answer: D
Diff: 2: Moderate
Skill: Concept
80) Which of the following refers to a risk, stemming from environmental factors, that is closely
associated with global sourcing?
A) weak intellectual property laws
B) overreliance on suppliers
C) high energy costs
D) rapid turnover of skilled employees
Answer: C
Diff: 1: Easy
Skill: Concept
22
81) A focal firm's overreliance on suppliers can potentially lead to ________.
A) reduced control over important value-chain tasks
B) added competitive advantage for the focal firm
C) an excessive burden on home-country suppliers
D) consolidation of the focal firm's network of intermediaries
Answer: A
Diff: 1: Easy
Skill: Concept
82) Transformational outsourcing suggests that just as the firm achieves gains in efficiency,
productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn
around failing businesses, speed up innovation, restructure operations, and fund otherwise-
unaffordable development projects.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
83) Global sourcing hinders firms from freeing expensive analysts, engineers, and managers
from routine tasks.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
84) Environmental challenges of global sourcing include currency fluctuations, tariffs and other
trade barriers, and adverse macroeconomic events.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
AACSB: Analytical Thinking; Diverse and Multicultural Work
85) Global sourcing eliminates the possibility of new rivals being created in a country.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
23
86) Countries with weak legal environments can erode key strategic assets of firms.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
87) What are the benefits of global sourcing?

Answer: The twin objectives of cost efficiency and achieving strategic goals are often both
present in a particular global sourcing activity. Global sourcing can provide other benefits as
well, including:
1. faster corporate growth,
2. access to qualified personnel abroad,
3. improved productivity and service,
4. business process redesign,
5. increased speed to market,
6. access to new markets,
7. technological flexibility, and
Diff: 2: Moderate
Skill: Concept
24
88) Discuss the major risks associated with global sourcing.
Answer: In addition to potential benefits, global sourcing also brings unexpected complications:
1. Lower-than-expected cost savings. International transactions are often more complex and
costly than expected. Conflicts and misunderstandings may arise from differences in the national
and organizational cultures between the focal firm and foreign supplier. Initial or ongoing costs
can be substantial.
2. Environmental factors. Environmental challenges include currency fluctuations, tariffs and
other trade barriers, high energy and transportation costs, adverse macroeconomic events, labor
strikes, and natural disasters. Firms that source from countries whose currencies are
strengthening experience higher costs. Many countries suffer from poor public infrastructure, as
exemplified by power outages and poor road and rail networks.
3. Weak legal environment. Many popular locations for global sourcing (for example, China,
India, and Russia) have weak intellectual property laws and poor enforcement, which can erode
key strategic assets. Inadequate legal systems, red tape, convoluted tax systems, and complex
business regulations complicate local operations in many countries.
4. Inadequate or low-skilled workers. Some foreign suppliers may be staffed by employees who
lack appropriate knowledge about the tasks with which they are charged. Other suppliers suffer
rapid turnover of skilled employees.
5. Overreliance on suppliers. Unreliable suppliers may put earlier work aside when they gain a
more important client. Suppliers occasionally encounter financial difficulties or are acquired by
other firms with different priorities and procedures.
6. Risk of creating competitors. As the focal firm shares its intellectual property and business-
process knowledge with foreign suppliers, it also runs the risk of creating future rivals.
7. Erosion of morale and commitment among home-country employees. Global sourcing can
leave employees caught in the middle between their employer and their employer's clients.
Diff: 1: Easy
Skill: Concept
89) In a short essay, explain how global sourcing can affect home-country employees.
Answer: Global sourcing can leave employees caught in the middle between their employer and
their employer's clients. When outsourcing forces retained and outsourced staff to work side by
side, tensions and uncertainty may diminish employee commitment and enthusiasm.
Diff: 1: Easy
Skill: Concept
25
90) In a short essay, explain how global sourcing can contribute significantly to a firm's ability to
achieve its strategic goals. Why is "achievement of strategic goals" actually the best rationale for
global sourcing?
Answer: The strategic view of global sourcing-called transformational outsourcing-suggests that
just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging
offshore talent, it also obtains the means to turn around failing businesses, speed up innovation,
restructure operations, and fund otherwise-unaffordable development projects. Global sourcing
allows the firm to free expensive analysts, engineers, and managers from routine tasks to spend
more time researching, innovating, managing, and generally undertaking high-value-adding
activities that contribute more productively to increasing company performance. In this way,
global sourcing becomes a catalyst to overhaul organizational processes and company operations
and increase the firm's overall competitive advantages. It allows the firm to achieve large,
longer-term strategic goals.
The best rationale for global sourcing is strategic. The vast majority of companies cite cost
cutting as the main reason for global sourcing. After the first year, however, most firms
encounter diminishing returns in the amount of money saved. Cost cutting is often a distraction
from more beneficial, long-term goals such as enhancing the quality of offerings, improving
overall productivity, and freeing up knowledge workers and other core resources that can be
redeployed to improve long-term performance. To maximize returns, management should
examine tasks and activities in each of the firm's value chains and outsource those in which the
firm is relatively weak, that offer relatively little value to the bottom line, or that can be
performed more effectively by others, yet are not critical to the firm's core competencies.
Diff: 3: Hard
Skill: Synthesis
Objective: 13-5, 13-6: Describe the benefits and risks of global sourcing, Understand global
sourcing strategies and supply-chain management
26
91) In a short essay, describe how cost efficiencies are a benefit to sourcing abroad, and explain
how information and communications technology can help reduce costs for an international firm.
Answer: The primary rationale for global sourcing is to reduce the firm's costs of inputs and
operations. Labor costs in the emerging markets, such as Indonesia and Mexico, are far less
expensive than in the advanced economies. A worker in Indonesia earns only about one dollar
per hour. The rate in Mexico is around two dollars per hour. In India, the rate approaches $2.50
per hour. This wage discrepancy explains why MNEs source inputs from emerging markets.
Note, however, that wages have been rising rapidly in China. This is helping raise living
standards in China, but also makes the country less attractive as a sourcing destination.
Costs of physically delivering a product to an export market may account for as much as 40
percent of the good's total cost. Skillful supply-chain management reduces this cost while
increasing customer satisfaction. Firms use information and communications technologies (ICTs)
to streamline supply chains, reducing costs and increasing distribution efficiency. For example,
electronic data interchange (EDI) automatically passes orders directly from customers to
suppliers through a sophisticated ICT platform. ICTs enhance information sharing and improve
efficiency by allowing the firm to track international shipments and clear customs. In efficient
systems, suppliers are connected through automated, real-time communications. The focal firm
and its supply-chain partners continuously share information to constantly meet marketplace
demands.
Diff: 3: Hard
Skill: Synthesis
Objective: 13-5, 13-6: Describe the benefits and risks of global sourcing, Understand global
sourcing strategies and supply-chain management
AACSB: Analytical Thinking; Information Technology
92) To maximize returns, management should outsource those activities ________.

A) that offer great value to the bottom line
B) in which it is relatively weak
C) that are critical to the firm's core competencies
D) in which it has the greatest expertise and knowledge
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 13-6: Understand global sourcing strategies and supply-chain management
27
93) Which of the following is true with regard to strategies for minimizing the risks of global
sourcing?
A) To ensure the success of sourcing ventures, the focal firm must exercise great care to identify
and screen potential suppliers and then monitor the activities of those suppliers from which it
sources.
B) To maximize returns and minimize risks, management should outsource core business
operations.
C) Because production quality in an emerging market rarely varies over time, managers at the
focal firm are not obliged to closely monitor manufacturing processes.
D) Firms must refrain from maintaining their own sourcing operations abroad in order to trim
costs and minimize risks stemming from frequent currency fluctuations.
Answer: A
Diff: 1: Easy
Skill: Concept
94) When outsourcing, managers can minimize the risk of creating employee tension by
________.
A) increasing the number of junior managers for foreign assignments
B) increasing the annual training budget
C) sending domestic managers to foreign countries for training
D) reaching a consensus of managers and labor
Answer: D
Diff: 1: Easy
Skill: Concept
95) A ________ is the firm's integrated network of sourcing, production, and distribution,
organized on a worldwide scale and located in countries where competitive advantage can be
maximized.
A) demand chain
B) buying center
C) global supply chain
D) decision making unit
Answer: C
Diff: 1: Easy
Skill: Concept
28
96) Critics of global sourcing maintain that it ________.
A) leads to reduced national competitiveness
B) results in job losses in host countries
C) enhances standards of living
D) causes production to drop drastically
Answer: A
Diff: 1: Easy
Skill: Concept
Global Sourcing Debate (Scenario)

Prof. Sean Peterson's class of international business has been studying the controversies
surrounding global sourcing. Prof. Peterson divided the class into two groups, A and B. Group A
was assigned the task of defending global sourcing, whereas Group B was assigned the task of
arguing against global sourcing.
97) Which of the following propositions would most likely be presented by Group B?
A) Global sourcing adversely affects national competitiveness.
B) Global sourcing improves the efficiency of manufacturing firms.
C) Global sourcing empowers workers in general.
D) Global sourcing is usually undertaken by focal firms to increase efficiency.
Answer: A
Diff: 2: Moderate
Skill: Application
98) The concept of creative destruction can be reasonably used by Group A to support the view
that ________.
A) firms that engage in offshoring are more likely than not to fail in the long run
B) offshoring forces unskilled workers to seek additional education
C) global sourcing creates opportunities and stimulates innovation
D) outsourcing technical jobs leads to brain drain
Answer: C
Diff: 2: Moderate
99) Firms often establish their own sourcing operations abroad to maintain control of outsourced
activities and technologies.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
29
100) Most companies cite cost cutting as the main reason for global sourcing.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
101) Value chain is the collection of logistics specialists and activities that provides inputs to
manufacturers or retailers.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
102) A global supply chain is the compilation of business activities intended to create, produce,
advertise, deliver, and support a focal firm's product or service.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
103) The more diverse the firm's global supply chain, the lesser the cost of logistics.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
104) International logistics usually make use of a single transportation mode.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
105) Offshoring is a process of creative destruction; according to this view, firms' innovative
activities tend to make mature products obsolete over time.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
30
106) What role do logistics play in global sourcing? In a short essay, discuss how logistics
relates to cost. Provide an example of a firm that lost money as a result of inadequate logistics.
Answer: Logistics physically moves goods through the supply chain. It incorporates
information, transportation, inventory, warehousing, materials handling, and similar activities
associated with the delivery of raw materials, parts, components, and finished products.
Managers seek to reduce moving and storage costs by using just-in-time inventory systems.
Internationally, logistics are complex due to wide geographic distances, multiple legal
environments, and the often inadequate and costly nature of distribution infrastructure in
individual countries. The more diverse the firm's global supply chain, the greater the cost of
logistics.
Competent logistics management is critical, especially for just-in-time inventory systems. The
California ports of Los Angeles (www.portoflosangeles.org) and Long Beach (www.polb.com)
handle more than 40 percent of imports into the United States, processing over 24,000 shipping
containers per day. Infrastructure deficiencies and increasing demand can result in long delays,
which translate into longer transit times and higher costs for U.S. importers. Because of delays,
Toys "R" Us had to build 10 extra days into its supply chain. As a result of poor supply-chain
planning, Microsoft's Xbox 360 games console sold out soon after launch. Scarcity led to high
prices in unofficial channels. On eBay, Xbox consoles sold for as much as $1,000, compared
with the official price of about $400.
Diff: 1: Easy
Skill: Concept
31
107) What are the potential problems that critics point to with regard to global sourcing? Why is
offshoring often referred to as a process of "creative destruction"?
Answer: Critics of global sourcing point to three potential problems. Global sourcing can result
in (1) job losses in the home country, (2) reduced national competitiveness, and (3) declining
standards of living. Regarding the last two concerns, critics worry that, as more tasks are
performed at lower cost with comparable quality in other countries, high-wage countries will
lose their national competitiveness. Long-held knowledge and skills will eventually drain away
to other countries, they fear, and the lower wages paid abroad will eventually pull down wages in
the home country, leading to lower living standards. A major concern is job losses. The advanced
economies have outsourced millions of jobs to emerging markets in the past decade. Job losses
rise when companies increase their sourcing of input and finished goods from abroad. Walmart
sources as much as 70 percent of its finished merchandise from abroad. This has led citizens to
form a protest group called Walmart-watch.com, which claims millions of U.S. jobs have been
lost due to Walmart's global sourcing. Job losses are occurring in developing economies as well.
For example, in the textile industry, Honduras, Indonesia, and Turkey have seen jobs gradually
transferred to India and Pakistan.
Offshoring is a process of creative destruction, a concept first proposed by the Austrian
economist Joseph Schumpeter. According to this view, firms' innovative activities tend to make
mature products obsolete over time: the introduction of personal computers essentially
eliminated the typewriter industry, the DVD player eliminated the VCR, and so on. Just as
offshoring results in job losses and adverse effects for particular groups and economic sectors, it
also creates new advantages and opportunities for firms and consumers alike. Sourcing usually
enhances company sustainability for the long term. New industries created through creative
destruction will create new jobs and innovative products.
Diff: 3: Hard
Skill: Concept
32

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

Chapter 13 Exporting and Global Sourcing

2) Which of the following services cannot be exported?

4) The Internet facilitates international trade in the service sector by ________.

9) Company-owned subsidiary is ________.

15) The Internet provides the means to export pure services.

17) Indirect exporting is exporting that is accomplished by contracting with intermediaries

18) Exporting and importing collectively refers to international trade.

30) The procurement of selected value-adding activities, including production of intermediate

Fun Play Global Sourcing (Scenario)

37) Which of the following is true with regard to global sourcing?

40) Contract manufacturing can best be defined as ________.

44) Which of the following is true with regard to offshoring?

46) As a strategic asset, ________ is of the lowest importance to a firm.

51) Front-office activities cannot be classified under BPO.

52) Back-office activities consist of downstream, customer-related services.

53) Front-office activities typically include internal, upstream business functions.

70) ________ is the primary rationale for sourcing abroad.

Audio Component Outsourcing (Scenario)

74) Which of the following is a benefit of global sourcing?

87) What are the benefits of global sourcing?

92) To maximize returns, management should outsource those activities ________.

Global Sourcing Debate (Scenario)

104) International logistics usually make use of a single transportation mode.

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