Question

You are the international manager of a U.S. 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 U.S., (b) to license a European firm to manufacture and market the computer in Europe, or (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

a) Exporting: Pros include the ability to use existing manufacturing facilities and jobs for the
native country. Cons include reduction of profit margins due transportation costs and the cost of
trade barrier

b) Licensing: Pros include not having to spend time, effort, and money creating a subsidiary and
not having to pay for transportation. In addition trade barriers are bypassed. Cons include the
loss of the technological advantage after the patents expire and not having direct control over the
licensees actions.

c) Setting up subsidiary: Pros include not having to pay for transportation, overcoming trade
barriers, having direct control, and not having to fear the diffusion of competitive advantages to
possible future competitors. Cons include having to spend the time, money, and effort of setting
up the subsidiary.