Question

Do you think that either the acquisition of a foreign firm or licensing will result in greater growth for an MNC? Which alternative is likely to have more risk? In what instance can licensing be of higher profitability?

Answer 1

Acquisition and licensing are two ways in which a business structures growth.

Acquisition means buying most of another firm's ownership stakes to assume control of it.

Licensing is a business arrangement in which one company gives another company, permission to manufacture its product for a specified payment.

Benefits of acquisition :

1. It helps in obtaining good quality and better skilled staff

2. Helps in obtaining different and more advanced business skills for future enhancement and growth of the existing business.

3. Production and distribution facilities happens to be less expensive to buy than to build, in larger targeted businesses.

4. It increases customer base and market share of existing business.

5. Helps diversify products, to make business prospects brighter.

6. Control and flexibility on the timing.

Disadvantages of acquisitions :

1. High cost at a premium price

2. Legal and accounting expenses in the process of merger

3. Potential liabilities of the acquired company

4. Affects on customer and market

Benefits of licensing :

1. Opportunity for a licensor to receive income without significant investment or risk

2. Substantial goodwill

Disadvantages of licensing :

1. Not a major growth prospect

2. Growth only under an umbrella of a big business house

3. Complex procedure and limitations

4. Lack of control

Acquistion happens on a much larger scale as compared to licensing. It involves major risks, in regard to invested, market reaction, liabilities, etc. However, opens the growth prospect to a larger scale without a doubt.

Licensing can be of higher profitability as it is faster process, less complex, less risky in terms of investment, etc.