We're talking about internationalization strategy. And once you've decided what foreign market it is that you want to enter and compete in, we now have to decide how is it that we're gonna enter that market. So we can enter it via just an exporting strategy, we can enter it by licensing or forming some strategic alliance with a local partner. Or we can go all in and establish our own operations through Foreign Direct Investment. So I'm going to talk a moment about the approach of licensing or pursuing a strategic alliance approach. So what does this mean? This is where an organization authorizes a host-country firm to make and sell its products in exchange for a royalty or some other form of profit sharing, right? So why would a firm wanna do this? I think that there are lots of advantages, right? There is a potential advantage of, you can gain some local cost or production advantages that that local partner is already realizing. And we just want to utilize some of those, and we just say hey, why don't you sell some of our stuff as well? And we can split the profits in some way. So it might be a way to avoid transportation costs or tariffs and that sort of thing. It also turns out that the local partner might provide some political influence over those very things like taxes and tariffs. Maybe because they're locally established, they don't have to pay those same types of regulatory fees or taxes. And so by partnering with them, we can avoid that sort of thing. It also may turn out that the local partner has some knowledge of local preferences and what that local product or service market is like, what local customers in that foreign location are looking for. They might understand that better than us. So if we can partner with them, they understand how to work with the distribution channels, and what the best ways to market products are in that foreign location. And again, it may translate into lower transaction costs, transportation costs, tariffs, that sort of thing. And I think again, a licensing approach, for example, will allow you to realize some advantages sometimes in an industry you don't even compete in currently. So take the example of say, a theme park. So if you're an owner of some intellectual property, think about like the Harry Potter movies, right? You can partner with Universal Studios to create a bunch of theme park rides that capitalize on your characters. And there's some sort of a profit-sharing agreement. But if you're the movie studio that owns the rights to those characters, you haven't had to get into the business of building and running roller coasters. You've just licensed out your intellectual property, and allows you to collect some extra potential revenue that you wouldn't collect otherwise. So lots of potential advantages with the licensing or a strategic alliance approach. What are the potential downsides? Cuz there are some. Potential downsides are, of course, right off the bat, your profitability potential is reduced. So, again, by its very nature, a licensing, or a strategic alliance arrangement is one where you agree to partner with this local player in that foreign market. And, in doing so, you agree to split the profit. So, just by definition, your margins are gonna be lower, because you have to give some of them to this local partner. Firm specific assets may be difficult to transfer. Maybe a licensing or a strategic alliance approach isn't even a good fit for you, if you're in the kind of business that you can't just license your brand or easily transfer some of what you do to that local player. Another potential disadvantage is you lose some control over things like product quality. So, you've partnered with this foreign local organization to assist you with manufacturing or distribution or whatever, and you now all of sudden don't have as much control over those things as if you were doing them yourself. The other thing that you don't have necessarily, is you don't have a lot of customization potential. So, while on one hand, you're trying to capitalize on that local partner's knowledge of the local market and customers, etc. They might not be willing to make all the changes you'd like to make to your product or your service. And you've got to partner with them. There's a contractual agreement. We split the profits. And it may be sorta rigid in that way. Another potential problem is that you and your local partner in that foreign market might diverge in terms of goals, right? This is what economists would refer to as an agency problem. So you've got this strategic partner now. They're helping you in manufacturing or selling or marketing, distributing your product or service. But it may just turn out that you don't have the same objectives in mind for increasing sales or what should the price point be, and these sorts of things. So, there can be these sort of agency conflicts that can arise between strategic partners. And finally, one potential disadvantage is, you're taking a risk that this host-country partner might actually learn how to compete with you directly. They'll learn something about your business. They'll learn something about selling your products or services to those local customers. And they might see an opportunity to do it even more cheaply and keep all the profits for themselves and not split them with you. So with licensing or strategic alliances, there are some potential advantages, there are some potential disadvantages in an internationalization strategy that pursues that mode.
