Question Tag: Foreign Expansion

i) Comparison of Joint Ventures and Licensing

Joint Ventures
There are two distinct types of joint ventures: industrial co-operation (contractual) and joint-equity. A contractual joint venture is for a fixed period, and the duties and responsibilities of the parties are contractually defined. A joint-equity venture involves investment, is of no fixed duration, and continually evolves. Depending on government regulations, joint ventures may be the only means of access to a particular market.
(0.5 mark)

Licensing
Licensing is an alternative to FDI. It involves conferring rights to make use of the licensor company’s production process to producers located in the overseas market in return for royalty payments.
(0.5 mark)

Advantages of Joint Ventures

• Relatively low-cost access to new markets
• Easier access to local capital markets, possibly with accompanying tax incentives or grants
• Use of the joint venture partner’s existing management expertise, local knowledge, distribution network, technology, brands, patents, and marketing or other skills
• Sharing of risks
• Sharing of costs, providing economies of scale

(2 points @ 0.5 marks = 1 mark)

Disadvantages of Joint Ventures

• Managerial freedom may be restricted by the need to take account of the views of all the joint venture partners
• There may be problems in agreeing on partners’ percentage ownership, transfer prices, reinvestment decisions, nationality of key personnel, remuneration, and sourcing of raw materials and components
• Finding a reliable joint venture partner may take a long time
• Joint ventures are difficult to value, particularly where one or more partners have made intangible contributions

(2 points @ 0.5 marks = 1 mark)

Advantages of Licensing

• It can allow fairly rapid penetration of overseas markets
• It does not require substantial financial resources
• Political risks are reduced since the licensee is likely to be a local company
• Licensing may be a possibility where direct investment is restricted or prevented by a country
• For a multinational company, licensing agreements provide a way for funds to be remitted to the parent company in the form of license fees

(2 points @ 0.5 marks = 1 mark)

Disadvantages of Licensing

• The arrangement may give the licensee know-how and technology, which it can use in competing with the licensor after the license agreement has expired
• It may be more difficult to maintain quality standards, and lower quality might affect the standing of a brand name in international markets

(2 points @ 0.5 marks = 1 mark)

ii) Strategic Reasons for Foreign Direct Investment (FDI)

1. Market Seeking
   Firms engage in FDI to meet local demand or as a way of exporting to other markets. For example, the manufacturing operations of US and Japanese car producers in Europe.
   (1 mark)
2. Raw Material Seeking
   Firms in industries such as oil, mining, plantation, and forestry extract raw materials in locations where they are found, whether for export or further processing and sale in the host country.
   (1 mark)
3. Production Efficiency Seeking
   Companies engage in FDI to take advantage of production efficiencies, such as cheap labor or other factors of production, like in Taiwan and Malaysia’s electronics industries.
   (1 mark)
4. Knowledge Seeking
   Some firms seek FDI to gain access to technology or management expertise, as seen in the acquisition of US-based electronics companies by German, Japanese, and Dutch companies.
   (1 mark)
5. Political Safety Seeking
   Firms may invest in countries perceived to offer political stability and protection from expropriation or interference with private enterprise.
   (1 mark)