According to your slides, you can do international trade using one of the following options: Licensing,...

According to your slides, you can do international trade using one of the following options: Licensing, Franchising, Joint Venture, Acquisition of Existing Operation, Establishing New Foreign Subsidiaries. How are these different methods of doing international trade effect your company's cash flows? Your company's discount rate? Which methods are relatively more risky? Why?

Expert Solution

Licensing is when the brand name is licensed to a local firm in another country. The local firm carries out the business operations under the brand name, and pays a licensee fee or royalty fee to the brand owner. This option required low initial investment because most of the investment is done by the local firm. The license fee or royalty fee is usually a flat yearly fee, or a percentage of revenues. Thus, the initial cash outflow is low. The risk is also low because most of the operational risk is borne by the local firm. A lower risk entails a lower discount rate because risk and discount rate are directly related. Higher the risk, higher the required return and discount rate.

Franchising is similar to licensing, except that the franchise is given to several local firms instead of only one firm. The franchisees pay a franchise fee similar to a license fee - as a flat annual fee or as a percentage of revenue. The initial investment required is similar to the licensing option. The initial cash outflow is low. The risk is also low as most of the operational risk is borne by the local firm. A lower risk entails a lower discount rate because risk and discount rate are directly related. Higher the risk, higher the required return and discount rate.

Acquisition of existing operation and establishing new foreign subsidiaries involves higher initial investment as the business operation has to be built from scratch. Thus, the initial cash outflow is high. The risk involved is also high as the company bears the entire business risk itself. Due to higher risk, the discount rate is also high.

Joint Venture is when a business operation is set up jointly with another company. The other company shares the initial investment and the risk. Therefore, the initial cash outflow is neither low nor high. The risk is also neither low nor high, as is the discount rate

jeff jeffy answered 6 months ago

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