Question

Which of the following modes of foreign market entry requires the most amount of equity and therefore, creates the greatest risk?

1) Exporting
2) Joint venture
3) Contractual agreement
4) Strategic alliance
5) Direct foreign investment

Answer 1

Direct Foreign Investment requires the most equity and creates the greatest risk in foreign market entry, involving a long-term commitment and significant capital to manage operations in a foreign country. Option 5 is correct.

Step-by-step explanation:

The mode of foreign market entry that requires the most amount of equity and therefore, creates the greatest risk is Direct Foreign Investment. When a company engages in direct foreign investment, it purchases more than ten percent of a company and typically assumes managerial responsibility. This type of investment is made with a long-run focus and is not easily liquidated, unlike portfolio investments where an investor may buy or sell with a phone call or a few computer clicks.

Direct foreign investment demands substantial capital and a commitment to operating in a foreign country, often including setting up production facilities or a physical presence, which involves significant risk due to the large amounts of money involved and the complex nature of managing business operations abroad.

Answer 2

Modes of foreign market entry requires the most amount of equity and creates greatest risk 5) Direct foreign investment

Step-by-step explanation:

Direct foreign investment involves substantial financial commitment and control, as a company directly invests in a foreign market by establishing its own operations. This mode requires significant equity to set up facilities, infrastructure, and operations in the foreign market. The inherent risk is high due to the substantial financial investment, and the company assumes full responsibility for the success or failure of the venture.

In contrast, exporting involves lower equity and risk, as goods are sold to a foreign market without establishing a physical presence. Joint ventures and strategic alliances may share risks and resources but often involve less equity than direct foreign investment. Contractual agreements typically have lower equity requirements as they involve partnerships without significant financial investment.

Direct foreign investment is characterized by a higher level of control over operations and decision-making, but this control comes with increased financial exposure and risk. Companies engaging in direct foreign investment must navigate unfamiliar markets, adhere to different regulations, and contend with potential political and economic uncertainties.

In summary, the mode of foreign market entry that requires the most amount of equity and creates the greatest risk is 5) direct foreign investment. This approach involves a substantial financial commitment and places the company at a higher level of risk in the foreign market.