If a company were contemplating establishing a manufacturing facility in a foreign market, why might it decide to wholly own the facility rather than partially own it? Similarly, why might it prefer partial ownership?
‘Licensing seems to be a fairly safe way for a manufacturer to produce in a foreign market for the first time.’ Comment.
The Correct Answer and Explanation is :
When a company considers establishing a manufacturing facility in a foreign market, its decision to wholly own the facility versus partially owning it hinges on several strategic, financial, and operational factors.
Wholly Owned Facility:
A company might prefer to wholly own a manufacturing facility for the following reasons:
- Complete Control: Owning the facility provides the company with full control over operations, production processes, quality standards, and intellectual property protection. This is especially important if the company has proprietary technologies or processes it wishes to safeguard.
- Profit Retention: The company can retain all the profits generated by the facility, without sharing them with a local partner.
- Strategic Market Positioning: Full ownership allows the company to establish a strong brand presence and market position without the potential influence or competition from a local partner.
- Long-Term Focus: Wholly owned subsidiaries can operate with a long-term vision, aligning with the parent company’s corporate strategy without external pressure from a partner.
However, this comes with higher financial risk and resource commitment, including the need for significant capital investment, local legal compliance, and management of a foreign workforce.
Partial Ownership:
On the other hand, a company might opt for partial ownership (joint ventures or partnerships) due to:
- Risk Sharing: By sharing ownership, the company can mitigate the financial and operational risks associated with entering a foreign market. This is particularly beneficial in uncertain or volatile markets.
- Local Expertise and Market Access: A local partner brings valuable market knowledge, government relations, and access to distribution networks. This can accelerate market entry and reduce operational challenges.
- Lower Initial Investment: Joint ventures allow the company to lower its initial investment and capital requirements. This is an attractive option when resources are limited or when the market conditions are unpredictable.
- Regulatory Requirements: In some countries, foreign ownership restrictions may necessitate partial ownership, making partnerships the only viable option for market entry.
Licensing:
Licensing is often considered a safer method for a manufacturer to enter a foreign market for the first time because it involves less risk and investment. In a licensing agreement, the company grants the foreign partner the right to produce and sell its products under specified conditions. The key benefits include:
- Low Capital Investment: The company does not need to establish a facility or make significant investments, as the licensee manages production and distribution.
- Risk Mitigation: Since the foreign partner assumes much of the operational risk, the licensing company is less exposed to political, economic, and currency risks in the foreign market.
- Market Entry Speed: Licensing allows for rapid market penetration without the complexity of establishing a new production facility or navigating local operational challenges.
However, the company gives up some control over the product and may not benefit fully from the market’s potential profits. Additionally, the licensor risks the licensee potentially becoming a competitor over time.
In conclusion, licensing offers a low-risk entry strategy, but wholly or partially owning a facility allows for greater control, profit retention, and strategic alignment, albeit with higher risks and costs. The decision ultimately depends on the company’s risk appetite, financial capacity, and long-term strategic goals in the foreign market.