Question

Exporting, Licensing, or FDIA firm has three basic choices if it wants to sell its products in a foreign market—exporting, licensing, and foreign direct investment. The choice of the best option depends on characteristics of the product, the processes used to make these products, the control a firm needs to exercise over operations, and how the know-how of the firm might be protected. The best option is a strategic choice the international business manager must make, considering the interplay among these factors.

Internalization theories explore the limitations of exporting and licensing from both explanatory and business perspectives. These theories identify with some precision how the relative profitability of foreign direct investment, exporting, and licensing vary with circumstances. Other theories help explain the direction of FDI. The internalization theories help explain why firms prefer FDI to licensing or exporting.

Read the case below and answer the questions that follow.

Your firm manufactures a range of household goods and appliances. Over the years, your firm has developed proprietary processes, using environmentally-friendly chemicals that have given your firm a leadership position for "green" customers. Part of your competitive advantage is that your products are competitively priced, which comes from your years of leadership in this industry. The appliances and products you manufacture tend to be bulky and a bit heavy for their size.

As the domestic market seems to be flat, you have become increasingly interested in exploring international business options. You have learned that the environmentally-friendly products would be attractive in several foreign markets. You have also identified manufacturers who might be able to adapt their own processes to your proprietary one, but you are concerned that even with adequate protection of intellectual property, you could be creating your next generation of competitors if you do so. Competition is already tough, and there may be further intense cost pressures.

You need to decide whether exporting, licensing, or foreign direct investment strategies would be the most appropriate for your firm. You want to maintain your competitive advantages, and international business seems to present the best opportunity for market expansion. What would be the best strategic option?

You know that your decision can be informed by theories of foreign direct investment and related areas. How you apply the theories in the context of a strategic direction is the challenge immediately before you.

1.) If a product is bulky or heavy, transportation costs increase, and unless the product has an extremely high value-to-weight ratio, the least effective strategy would be

Multiple Choice

• exporting.

• foreign direct investment.

• licensing.

2) For a number of different reasons, a government may impose tariffs. When these add significantly to the cost of the goods, consumers might not want or be able to purchase a firm's products. Under these conditions, the least effective strategy would be

Multiple Choice

• exporting.

• foreign direct investment.

• licensing.

3. ) If a firm has valuable know-how that cannot be adequately protected by contracts, and there is reason to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

Multiple Choice

• exporting.

• licensing.

• foreign direct investment.

4.) If a firm needs to maintain tight control over a foreign operation, and there is reason to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

Multiple Choice

• exporting.

• foreign direct investment.

• licensing.

5.) If a firm's competitive advantage comes from skills and capacities that may be difficult to transfer or protect, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

Multiple Choice

• foreign direct investment.

• licensing.

• exporting.

Answer 1

1. Exporting would be the strategy that would be least effective if a product is bulky or heavy, transportation costs increase, and unless the product has an extremely high value-to-weight ratio.

2. Exporting would be the least effective strategy in the conditions where a number of different reasons, a government may impose tariffs. When these add significantly to the cost of the goods consumers might not want or be able to purchase a firm's products. Whereas the remaining ones would be better and more effective strategies.

3. Foreign direct investment would be the most effective approach in a scenario when a firm has valuable know-how that cannot be adequately protected by contracts, and there is reason to believe that additional costs through transportation or tariffs would be high. Whereas the remaining ones would not that effective.

4. Foreign direct investment would be the most effective approach if a firm needs to maintain tight control over a foreign operation, and there is reason to believe that additional costs through transportation or tariffs would be high. Whereas none of the other strategies would give better results in this circumstance.

5. Foreign direct investment would be the most effective approach if a firm's competitive advantage comes from skills and capacities that may be difficult to transfer or protect, and there are reasons to believe that additional costs through transportation or tariffs would be high. Whereas the remaining strategies would not be as effective as the foreign direct investment.