Licensing agreement vs Acquisition
Associated Risks and Returns
What are Potential risk and return associated with a licensing agreement with a foreign firm, and the acquisition of a foreign firm?
A licensing agreement has restricted potential for return, as the foreign firm gets more benefits due to the licensing agreement. However, the MNC has restricted risk, since it need not invest substantial funds in that particular foreign country.
An acquirement by the MNC needs a substantial investment. In case this investment has failed, the MNC may face trouble in selling the firm it purchased for an affordable price. Hence, there is more risk. On the other hand, if this investment is doing well, then all of the benefits accumulate to the MNC.
Here you can find major advantages and the reasons to use an international licensing to expand globally.
- Get additional income for technical know-how and the services
- Reach latest markets not reachable by export from the current facilities
- Rapidly expand without more risk and huge capital investment
- Pave the path for future investments in market
- Maintain established markets blocked by trade restrictions
- Political risk is lessened as the licensee is normally 100% locally owned
- Is very attractive for companies which are new to the international business.
In contrast, international licensing is foreign market entry mode that brings some disadvantages and also reasons why companies mustn’t use it as:
- Less income when compared to other entry modes
- Loss of control of licensee manufacture and marketing operations and other practices resulting in the loss of quality.
- Incompetent partner may ruin the reputation and trademark
- The foreign partner can even become a challenger by selling its creation in locations where the parental company is existing
Acquisition is more famous mode of entering foreign markets chiefly due to its quick access. Acquisition strategy presents the fastest and also the largest, initial international expansion of the alternative.
Acquisition is increasing as it is a way to accomplish greater market power. The market share generally is influenced by market power. Hence, several multinational firms apply acquisitions to attain their greater market power need buying a a supplier, competitor, a distributor, or a business in extremely related industry to let exercise of a capture competitive and core competency advantage in present market.
Acquisition is lesser risky when compared to Greenfield investment as the result of an acquisition can be approximated very accurately and easily. On the whole, acquisition is striking if there are well recognized firms previously in operations or the competitors wish to enter the region.
In contrast, there are several disadvantages and difficulties in getting the acquisition success.
Associating two organizations is highly difficult as a result of distinct organization cultures, relationships and control system. Integration is a difficult problem and is considered as the important things for the firms.
Over diversification can cause problems. Still when a firm is not over diversified, a high level of diversification leads to negative effect on firm in long term performance as a result of lack of management of diversification.