Problem:
Describe the following components of international Trade, Licensing agreement, Foreign direct investment, and managing risk
Licensing agreement:
International trade is very important for any country in the world for economic development expansion of the local as well as global trade. Since one country is exporting or importing from other countries entering into business agreements with unknown buyers or sellers they must be fortified with strong legal protection under license of the respective countries. The licensing agreements fill this void and give protection to exporters/importers.
The American businesses employ several methods to enter this kind of business. They either
1) Export directly to the foreign buyers, after
2) Entering into licensed agreements,
3) Establishing either a partnership or joint venture company with those buyers or setting up a wholly owned subsidiary.
Risks involved:
There are two" risk" oriented bottlenecks that at the expiration of the agreement the licensee himself may become a competitor of the licensor notwithstanding any non-compete clause has been included in the original agreement.
Secondly, forming a partnership firm with a new or existing one or a wholly owned private limited company will require hefty investment. A venture in another country is always exposed to the risks of a partnership with an existing or newly formed company, or establishing a wholly owned subsidiary, requiring a substantial investment and (Risks) - is ever exposed to the risk of expropriation, nationalization or confiscation.
A licensing agreement is always required irrespective of the mode of selling abroad, save in case of direct export.
Rise and decline in the values of currencies of countries involved in trade badly affect the traders. It creates trade imbalances which have to be settled by the respective governments of both countries. Movement of foreign exchange rate greatly affects the production of goods in the exporting country and price level in the importing country.
There always chances of damages to goods in transit. The risk of non-payment or delayed payment directly affects the businesses involved. Many a time governments of either country interfere in the free trade due to economic or political compulsions of safety concerns. Then there are taxation systems â?" incidence of double taxation etc.
In an extreme case, where a foreign government is overthrown and the new regime does not respect any existing treaties, losses can be severe. This risk must be fully taken into account before any decision is taken to establish a presence in a foreign country. Nothing can take the place of acquiring all relevant information and advice before deciding to do business in a particular country.