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ACCA Applied Knowledge · Business and Technology · Competitive factors

A multinational company is considering entering a new country by establishing a wholly owned manufacturing plant rather than exporting or licensing. Compared with licensing, which statement about this choice is correct?

A wholly owned plant gives the company greater control over operations and quality and retains all profit, but it needs heavy investment and exposes it to more political, currency and operating risk. Licensing is cheaper and less risky but gives less control.

  1. AIt gives greater control over operations and quality but needs higher investment and exposes the company to more riskCorrect
  2. BIt requires less capital and carries lower political risk because the local partner bears the exposure
  3. CIt avoids tariffs and trade barriers but gives the company little control over production
  4. DIt transfers all quality control to a local licensee while keeping all profits

Explanation

Direct investment in a wholly owned plant gives full control and retains all profits but demands large capital and exposes the company to political, currency and operational risk. Licensing is low-cost and low-risk but gives less control. The other options describe licensing features or are contradictory.

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