Question

The management of Sweet Soft Drinks Corporation, a U.S. firm, wants to expand into foreign investment and employment markets. They are considering either opening their own production facility in a foreign country or entering into a licensing agreement with a foreign firm. What are the advantages and disadvantages of each of these courses of action?

Answer 1

One of the advantages of opening a wholly-owned production facility, in the United States or in a foreign nation, is that all of the profits accrue to the owner. The disadvantages include the risk involved in opening aproduction facility in a foreign country. There is a possibility of the foreign government's expropriation of the facility. Expropriation is the taking of privateproperty for a public purpose and the paying of just compensation. Foreigngovernments have also sometimes confiscated the property of foreign companies. Confiscation is the taking of private property for a public purposewithout just compensation. Under the act of state doctrine, U.S. courts wouldbe reluctant to intervene, either by ordering the property returned or orderingthe payment of a fair price. Thus, there could be a considerable sum of moneyat risk in a foreign production facility.

A licensing agreement, by contrast, involves relatively little capitalinvestment and represents less risk of loss from a confiscation or an ex-propriation. By entering into a licensing agreement with a foreign firm for therights to manufacture Sweet Soft Drinks products, or to sell products under theSweet Soft Drinks trademark, the company eliminates the chance that itsassets would be lost if they were confiscated. Of course, there will also befewer profits and those will likely be in the form of royalties.