The management of Sweet Soft Drinks Corporation, a U.S. firm, wants to expand into foreign investment and employment markets. They are considering ei¬ther opening their own production facility in a foreign country or enter¬ing into a licensing agreement with a foreign firm. What are the advan-tages 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 open¬ing a production facility in a foreign country. There is a possibility of the foreign government's expropriation of the facility. Expropriation is the tak¬ing of private property for a public purpose and the paying of just com¬pen¬sation. Foreign governments have also sometimes confiscated the property of foreign companies. Confiscation is the taking of private prop¬erty 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 facil¬ity.
A licens¬ing agreement, by contrast, involves relatively little capital investment and represents less risk of loss from a confiscation or an ex-propriation. By en¬tering into a licensing agreement with a foreign firm for the rights to manufacture Sweet Soft Drinks products, or to sell products under the Sweet Soft Drinks trade¬mark, the company 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.