Answer to Question 1
There are several advantages to using licensing as an entry mode into new markets. First, licensors can use licensing to finance their international expansion. Most licensing agreements require licensees to contribute equipment and investment financing, whether by building special production facilities or by using existing excess capacity. Access to such resources can be a great advantage to a licensor who wants to expand but lacks the capital and managerial resources to do so. And because it need not spend time constructing and starting up its own new facilities, the licensor earns revenues sooner than it would otherwise.
Second, licensing can be a less risky method of international expansion for a licensor than other entry modes. Whereas some markets are risky because of social or political unrest, others defy accurate market research for a variety of reasons. Licensing helps shield the licensor from the increased risk of operating its own local production facilities in markets that are unstable or hard to assess accurately.
Third, licensing can help reduce the likelihood that a licensor's product will appear on the black market. The side streets of large cities in many emerging markets are dotted with tabletop vendors eager to sell bootleg versions of computer software, Hollywood films, and recordings of internationally popular musicians. Producers can, to some extent, foil bootleggers by licensing local companies to market their products at locally competitive prices. Royalties will be lower than the profits generated by sales at higher international prices, but lower profits are better than no profits at allwhich is what owners get from bootleg versions of their products.
Finally, licensees can benefit by using licensing as a method of upgrading existing production technologies.
In addition to licensing, low-cost production and shipping can give a company an advantage by helping to control total costs. Accordingly, setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low-cost local production might also encourage contractual entry through licensing or franchising. If production costs are sufficiently low, the international production site might even begin supplying other markets, including the home country. An additional potential benefit of local production might be that managers could observe buyer behavior and modify products to better suit the needs of the local market. Lower production costs at home make it more appealing to export to international markets.
Companies that produce goods with high shipping costs naturally prefer local production. Contractual and investment entry modes are viable options in this case. Alternatively, exporting is feasible when products have relatively lower shipping costs. Finally, because they are subject to less price competition, products for which there are fewer substitutes or those that are discretionary items can more easily absorb higher shipping and production costs. In this case, exporting is a likely selection.
Answer to Question 2
International joint venture control refers to the processes that management puts in place so as to direct the success of the firm's goals. Most of a firm's objectives can be achieved by careful attention to control features at the outset of the joint venture, such as the choice of a partner, the establishment of a strategic fit, and the design of the IJV organization. IJV control is an important issue because at least one parent is headquartered outside the venture's country of operations thus requiring unique measures of control. Lack of attention to specific control requisites of IJVs can limit the parent company's ability to utilize its resources efficiently, coordinate its activities, and implement its strategy.
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