Question

FDI, Export or Licensing?

You are the international manager of a US business that has just developed a revolutionary new personal computer that can perform the same functions as existing PCs but costs only half as much to manufacture. Several patents protect the unique design of this computer. Your CEO has asked you to formulate a recommendation for how to expand into western Europe. Your options are (a) to export from the US, (b) to license a European firm to manufacture and market the computer in Europe, and (c) to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your CEO.

Answer 1

SOLUTION:-

(a) Export for the US.

Pros: Can be cheaper to produce PCs locally due to availability of cheaper labor and production facilities in US.

Cons: The European Union may want the company to produce in Europe rather than having to import from US. In the wake of the recent trade tensions between the US and European Union, this may be a possibility.

(b) License a European firm to manufacture and market the computer in the US.

Pros: This will be easier than option (a) since your products will not be subject to trade tariffs in the European Union. It will also result in a stream of royalties from the license holder to your business.

Cons: Loss of technology and patented processes to produce this computer. The transfer of technology to an unknown business in Europe may give away your trade secrets and result in your business model being copied around the world.

(c) Set up a wholly owned subsidiary.

Pros: This will also eliminate the trade barriers that could be put on you as with option (a). Since its your own company's subsidiary, there will be no loss of the patented technology to others as in (b).

Cons: Since you are transferring profits from Europe to US there can be a currency risk that you can face when and if the euro depreciates rapidly.

Advise: I would suggest the CEO to do with option c)Set up a wholly owned subsidiary in Europe because there would be no hindrance to business by trade tariffs and also there will no loss of patented technology to someone else. The currency risk can be hedged by taking position in currency futures and options.

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