Get premium membership and access questions with answers, video lessons as well as revision papers.
(i) Exporting Firms facing highly uncertain demand abroad typically will begin by exporting to
a foreign market. The advantages of exporting are significant: Capital requirements and startup costs are minimal, risk is low, and profits are immediate. Furthermore, this initial step
provides the opportunity to learn about present and future supply and demand conditions,
competition, channels of distribution, payment conventions, financial institutions, and
financial techniques.
As increased communication with customers reduces uncertainty, the firm might set up its own sales subsidiary and new service facilities,such as a warehouse, with these marketing activities culminating in the control of its own distribution system. (for example, Multichoice for DSTV ).
(ii) Overseas Production.
A major drawback to exporting is the inability to realize the full sales
potential of a product. By manufacturing abroad, a company can more easily keep abreast of
market developments, adapt its products and production schedules to changing local tastes
and conditions, fill orders faster, and provide more comprehensive after-sales service. Many
companies also set up research and development facilities along with their foreign operations;
they aim to pick the best brains, wherever they are.
(iii) Licensing An alternative, and at times a precursor, to setting up production facilities abroad
is to license a local firm to manufacture the company’s products in return for royalties and
other forms of payment. The principal advantages of licensing are the minimal investment
required, faster market-entry time, and fewer financial and legal risks. But the corresponding
cash flow is also relatively low, and there may be problems in maintaining product quality standards.
maurice.mutuku answered the question on April 25, 2019 at 05:47