Page 16 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 1: Financial Management in Global Context

In practice, however, the corporate analyst will realise the problems associated with calculating Notes
some costs and benefits due to some hard to quantify factors that may affect the decision. The
relative merits of the different arrangements depends on the answer to two questions:
What is the size of the difference when one arrangement outweighs another in some
element of cost or benefit.

If one arrangement is ranked high in one area and low in another, can some common
measure be applied so that a final decision can be reached by the manager.
The challenge for multinational managers is to find that form of international business activity
that is most consistent with his or her strategy. For example, licensing arrangements generally
involve less political risk than ownership arrangements. Also the stability associated with
expected income flows is generally higher for licensing arrangements as they are fixed in
amount or are a function of production volumes. However, in terms of flexibility, the licensing
agreement generally imposes a heavier cost on the foreign licensor than do most ownership
arrangements. For instance, the foreign licensor may be irrevocably tied during the life of the
license to use the licensee as its instrumentality for serving some given market. In some cases of
licensing there is often a risk that the licensee will breach some of the provisions of the agreement,
such as provisions that impose geographical limitation on sales that require quality control or
that require the licensee to purchase intermediate products from the licensor.

Firms having long overseas experience are generally found to prefer wholly owned subsidiaries
than joint ventures and any kind of subsidiary over a license. This is so because firms with
overseas experience have ready access to the information skills and capital needed to launch a
foreign subsidiary. Also, in cases where control is a important and significant factor in decision
making, a wholly owned subsidiary may be preferred.

!
Caution From the viewpoint of the multinational firm, the optimum ownership
arrangement may vary over time and also from one foreign affiliate to the other. In some
cases, the choice is likely to be determined by the kind of resources already available with
the firm and the kind of strategy the firm is pursuing.
Self Assessment

State whether the following statements are true or false:
11. In Licensing firm in one country authorising a firm in another country to utilise its brand
names, logos etc. in return for royalty payment.

12. Licensing arrangements generally involve more political risk than ownership
arrangements.
13. Firms having long overseas experience are generally found to prefer wholly owned
subsidiaries than joint ventures and any kind of subsidiary over a license.

Task Collect a few recent annual reports of MNCs of your choice. Can you comment on
the impact of the MNCs foreign business and how the MNC has benefited from its
international operations? You could also perform the above analysis industry-wise.

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