⚖️ FDI vs Licensing

✅ When is a firm more likely to prefer FDI?

A firm is more likely to prefer Foreign Direct Investment (FDI) when it has advantages that are difficult for others to replicate, especially when:

🔐 It has proprietary technology or know-how
📉 Companies lack domestic capacity
🎛️ It needs tight control over operations
🧠 It wants to avoid leakage of intellectual property
🌐 It faces high trade barriers (governments inhibiting the import of foreign products) or transportation costs

⚠️ Exception: When Licensing May Be Preferred

If a firm’s skills and capabilities are difficult to replicate, then licensing is not a threat — the licensee will not be able to copy or misuse them effectively.
👉 Hence, the firm might prefer licensing, not FDI.

📄 What is International Licensing?

International licensing is a contractual arrangement where a firm (licensor) allows a foreign company (licensee) to produce and sell its product in exchange for royalties or fees.

✅ Advantages
✔️ Low investment
✔️ Low risk

❌ Disadvantages

1. ⚔️ Inviting a potential competitor in third country markets
   → A licensee may become a competitor once it learns the technology or processes.

2. ⚙️ Possible loss of quality control
   → Since the licensee controls local production, the licensor may not maintain consistent product or service quality.

3. 🙈 No detailed involvement with foreign customers
   → Licensing limits direct interaction with end users, making it difficult to adapt or innovate based on customer feedback.