Suppose a firm wants to expand sales of its product into a foreign country. Should the firm license local firms in the foreign country to use its technologies to produce the product or should it set up a foreign operation that it owns and controls? What factors should the firm consider in making the decision? When identifying these factors, clearly explain how and why they push the decision toward one or the other of the two available choices.
What will be an ideal response?
POSSIBLE RESPONSE: The firm could license one or more foreign firms to use its technologies. By licensing, the firm avoids the inherent disadvantages of establishing and managing its foreign operations. However, there are also disadvantages to licensing independent foreign firms. For instance, the licensee may apply the technology to other activities not covered by the license, or the technology may be leaked out to other competitors if the licensee is not careful. So, there are internalization advantages-advantages for using the technologies only within the firm. To maintain internal use in the foreign location, the firm should consider setting up a foreign operation that it owns and controls.
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