Question

Suppose a firm wants to expand sales of its product into a foreign country. Should the firm license local firms in the foreign country to use its technologies to produce the product or should it set up a foreign operation that it owns and controls? What factors should the firm consider in taking the decision? When identifying these factors, clearly explain how and why they push the decision toward one or the other of the two available choices

Answer 1

The firm should license vthe the local firms to expand its sales by allowing them to use its technology to produce the product. The factors that the firm must consider are the type of market that exist for the firms product, the consumption patterns in the foreign country, the income -expenditure patterns, the factor cost, the tax structure in the foreign country. The local firms are aware of these factors and know how to deal with these issues in land. The consumption patterns in the foreign country will impact the decision of how much should the firm invest in the foreign country since the consumption patterns will determine vthe potential demand for the product and the pricing strategy. If the demand is high for the firms product then charging a high price is optimal while if the demand is low the pricing strategy should be such that the price is competitive enough to compete with the substitutes available for the product. The income expenditure patterns again impact the demand and pricing decision of the firm. The cost structure, the tax structure adversely affect the investment decisions. A country with high labor cost and a troublesome tax structure will not attract much investment.