EXPORT, LICENSING & FDI
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 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.
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. 2)
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...
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