Question

You are the international manager of a US business that has just invented a revolutionary new personal computer that can perform the same functions as existing PCs but costs only half as much to manufacture. Several patents protect the unique design of this computer. Your CEO has asked you to formulate a recommendation for how to expand into Western Europe. Your options are (a) to export from the US, (b) to license a European firm to manufacture and market the computer in Europe, and (c) to set up a wholly owned subsidiary in Europe. Suggest a course of action to your CEO.

Answer 1

Let us evaluate the pros and cons associated with each option available to us:

Option 1: Export from USA (export)

· Pros:

• The company will have full control over business
• Initial investment will be quite low

· Cons:

• Distribution cost can be quite high
• Dependency on local partners for distribution in EU
• The company may have to meet tariff regulations of EU

Option 2: License a local EU firm to manufacture and market the computers in Europe (license)

· Pros:

• Development cost quite low
• Market entry will get facilitated
• The company can level local firm’s knowledge about local market

· Cons:

• The company may not be able to directly control operations in EU market
• There is high dependency on the local EU company
• The local company may steal knowledge and capabilities from the company and may set its independent unit in the market

Option 3: Set up a wholly owned subsidiary in Europe (Foreign Direct Investment)

· Pros:

• Will facilitate expansion of company in new market
• Applying for patents in new market will get facilitates
• The company will get a chance to understand the specific needs of the local customers and modify product accordingly
• Knowledge and competencies are protected

· Cons:

• The initial investment will be quite high
• It is a time taking process

The company has invented a new personal computer which has similar functionalities as existing PCs but cost is just half of the existing ones. We know that the market of PCs and laptops is huge and customers keep looking for affordable products. As the business proposition is quite lucrative and there is surety of demand for it, the company can opt for Option 3 i.e. setting up a wholly owned subsidiary in Europe.