Question

The ABC company is considering the establishment of production and distribution facilities abroad. The vice-president for corporate development asserts that because the production technology of their product is easily imitated, the investment should be undertaken based on grounds of appropriability. The vice president for marketing, objects, argues that because markets for information on the production of their product are perfect, the firm should consider a licensing or franchising arrangement on grounds of internalization. Can you help these people?

Answer 1

The company is considering establishment of its production and distribution facilities on a global scale. The decision of entering the foreign market must be based, purely on business objective and product characteristic. If the product is quite standard and can have substitutes, then the company can opt for licensing or franchising. However if the product is innovative and steps need to be taken that its concept is not imitated, then the company can opt for appropriability investment and can open a office in the host country. If the product can be customized based on the local needs of the customers in the host market, then the company can enter into a partnership or joint venture with a local established company of the host country. The decision of entering the new market must be based on the product characteristics as well as the business strategy of the company, to be pursued in the host market.