Question

Which of the following reflects internalization theory?

A)Licensing gives a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

B)Licensing has no major drawbacks as a strategy for exploiting foreign market opportunities.

C)Licensing is more profitable than FDI.

D)A problem with licensing arises when the firm's competitive advantage is based much on its products rather than on the management, marketing, and manufacturing capabilities that produce those products.

E)Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

Answer 1

Answer is Option E)

Internalization theory explains why firms often prefer FDI over licensing as a strategy for entering foreign markets.

According to internalization theory, licensing has major drawbacks :

( Hence option B & C are wrong )

1)licensing may result in a firm's giving away valuable technological know how to a potential foreign competitor .

Option E is right only.

2)licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability, option A is wrong .