Question

Essay Questions

1. Licensing and Management Contracts Versus Producing Abroad. What are the advantages and disadvantages of licensing and management contracts compared to producing​ abroad?

2. Common Forms. Define the following types of political​ risk:

a. Adverse regulatory change

b. Breach of contract

c. Expropriation

3. Expropriation Distinctions. Answer the​ following:

a. What is the difference between expropriation and creeping​ expropriation?

b. What is the difference between direct and indirect​ expropriation?

Answer 1

1) Licensing is a form in which companies provide license to a manufacturer in other country to produce the goods. It helps to diversify the presence geographically and increase revenue. Management contracts is an agreement under which enterprise performs the functions on behalf of the other company and charges the fee in return. It is usually for a specified period or specific product. Both Licensing and Management contracts are helpful to reduce the political risk. Usually, Engineering and consulting firms opt for management contracts

Advantages of Licensing and Management contracts:

· It minimizes the political risk for a company as ownership lies with domestic company

· It helps to use the expertise of domestic company in the market

· It helps to expand to new geographies quickly in comparison to producing abroad

Disadvantages of Licensing and Management contracts:

· The management contract fees are high which leads to lower profitability

· The licensing fee collected by an enterprise is lower than the profit from producing abroad

· Lack of control on quality of product

· Risk of technology transfer which can give rise of potential competitor in future

· May lead to negative brand image in case of any safety issue, regulatory issue etc. by local manufacturer

Advantages of producing abroad:

· High profit potential as all the operations are owned by enterprise

· Full control on quality of the product

· No risk of technology transfer to other country

· Low risk of new competitor in the market

· Better control on brand image by taking of Operations

Disadvantages of producing abroad:

· High risk of political issue, regulatory issue in domestic country

· High capital investment is required which can risk cash flow of the company

· It takes time for expansion in the new geographies and may lead to delay