What is a nonequity arrangement? Define the two major types of nonequity arrangements: licensing and turn-key projects, and give at least one advantage and disadvantage for each.

Question

What will be an ideal response?

Answer 1

Nonequity arrangement-a method by which an entrepreneur can enter a market and obtain sales and profits without direct equity investment in the foreign market. 

A. Licensing-Involves an entrepreneur who is a manufacturer (licensee) giving a foreign manufacturer (licensor) the right to use a patent, trademark, technology, production process, or product in return for the payment of a royalty.

Benefits: Low development costs and risks.

Disadvantages: Lack of control over technology, inability to realize location and experience curve economies, inability to engage in global strategic coordination.

B. Turn-key projects-A method of doing international business whereby a foreign entrepreneur supplies the manufacturing technology or infrastructure for a business and then turns it over to local owners.

Benefits: Relatively low risk, ability to earn returns from process technology skills in countries where FDI is restricted.

Disadvantages: Creation of efficient competitors, lack of long-term market presence.