Export, Licensing & Fdi

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EXPORT, LICENSING & FDI a)Export: Exporting involves producing goods at home and then shipping them to the receiving country for sale. Pros: 1) It is a relatively low-cost activity to get involved in international business and expand profit. 2) A firm can further create economies of scale which should lead to lower cost and hence expansion of profit Cons: 1) In relation to location economies, a firm may not always be located in the best region for that specific area and is therefore restricted to the cost disadvantages of the current location (if present). 2) The firm is further depended on the fluctuation of transportation costs.

High transportation costs can make it uneconomical to get involved in the import or export of a certain good. 3) Related to point B is the fact that exposure to a foreign market will likely involve government regulations. One of these can be the availability of trade barriers such as tariffs and quotas or other hidden barriers. 4) Lastly, an exporting firm will have to work with an agent which is not necessarily loyal to one brand (product). This limited control over the marketing activities or other value added activities will unlikely expose the full potential of a certain market. )Licensing: Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm’s product in return for a royalty fee on every unit sold. Pros: 1)Issuing a license can provide instant and guaranteed revenue for the licensing company. The license agreement can require several types of payments, including a guaranteed license payment or variable payments based on the profits of the licensee business. Either way, the licensee pays for the right to hold the license, which produces revenues to the licensing company. )A more subtle advantage of licensing a business process is the promotion of brand recognition. The licensing company should consider retaining the right to market the fact that the licensee has obtained a license from the licensing company. This can provide brand credibility and recognition benefits for the licensing company, as more people become aware that the licensing company is responsible for the production of the licensee business. Cons: 1)One of the major disadvantages to issuing a license is that it creates competition.

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In fact, the license places your competition on a level playing field because the competitor now has the right to use the same production processes you use. A licensing company may attempt to limit competition by limiting the scope of the license as much as possible. For example, the license may contain geographic, time or quantity restrictions that protect the market of the licensing company. 2)If another business is willing to pay you for a license on your production process, your production process is a valuable property right. The risk with a license is that it increases exposure of your confidential, proprietary production process.

The more people who know your process, the higher the risk that somebody will breach confidentiality. This is especially true where the licensing company has no direct control over the employees and contractors who work with the licensee business. c)Foreign Direct Investment (FDI): FDI, occurs when a firm invests directly in facilities to produce or market a product in a foreign country and becomes a multinational enterprise. FDI takes on two main forms. First, is a Greenfield investment, which involves establishing a new operation in a foreign country.

Second, involves acquiring or merging with an existing firm in the foreign country. Acquisitions can involves acquiring minority stake, majority stake or full outright stake. Pros: 1)Reduced cost through the realization of scale economies. 2)Coordination advantages, especially for integrated supply chains. 3)Strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house. Cons: 1)Risk of expropriation, war and inability to transfer profits back home. 2)Risk of unstable Political & economic. 3)Double taxation of foreign income.


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