In which one of the following modes of entry into foreign market are risk and profit potential the highest?

Question

Question

This question was previously asked in

UGC Paper 2: Commerce 22nd Dec 2018

Answer 1

Direct investment-Foreign Direct Investment (FDI's) risk and profit potential are the highest in the foreign markets.

Explanation:

International-Expansion Entry Modes

Type of Entry	Advantages	Disadvantages
Exporting	Fast-entry, low risk	Low control, low local knowledge, the potential negative environmental impact of transportation
Licensing and Franchising	Fast-entry, low cost, low risk	Less control, the licensee may become a competitor, legal and regulatory environment (IP and contract law) must be sound
Partnering and Strategic Alliance	Shared costs reduce investment needed, reduced risk, seen as a local entity	Higher cost than exporting, licensing, or franchising; integration problems between two corporate cultures
Acquisition	Fast-entry; known, established operations	High cost, integration issues with home office
Joint Venture (Launch of a new, wholly-owned subsidiary)	Gain local market knowledge; can be seen as an insider who employs locals; share the cost	High cost, moderate risk due to unknowns, slow entry due to setup time
Foreign direct investment	Directly invest in facilities in a foreign market. It requires a lot of capital to cover costs such as premises, technology, and staff.	High cost, high risk due to unknowns, slow entry due to setup time