The management of Sport Shoes Corporation, a U.S. firm, wants to expand into foreign investment and employment markets. They are considering either opening their own production facility in a foreign country or entering into a licensing agreement with a foreign firm. What are the advantages and disadvantages of each of these courses of action?

Answer 1

One of the advantages of opening a wholly owned production facility, in the United States or in a foreign nation, is that all of the profits accrue to the owner. The disadvantages include the risk involved in opening a production facility in a foreign country. There is a possibility of the foreign government's expropriation of the facility. Expropriation is the taking of private property for a public purpose and the paying of just compensation. Foreign governments have also sometimes confiscated the property of foreign companies. Confiscation is the taking of private property for a public purpose without just compensation. Under the act of state doctrine, U.S. courts would be reluctant to intervene, either by ordering the property returned or ordering the payment of a fair price. Thus, there could be a considerable sum of money at risk in a foreign production facility. A licensing agreement, by contrast, involves relatively little capital investment and represents less risk of loss from a confiscation or an expropriation. By entering into a licensing agreement with a foreign firm for the rights to manufacture Sport products, or to sell products under the Sport trade-mark, Sport eliminates the chance that its assets would be lost if they were confiscated. Of course, there will also be fewer profits and those will likely be in the form of royalties.