International agribusiness - Agribusiness Management - page 116

experienced. As a result, agribusinesses wanting more control and lower costs may decide
to look at licensing or direct investment as a means of entering a country's market.
Licensing
Licensing involves contracting with a fi rm (licensee) in the target market to produce and
distribute the fi rm's (licensor) product. In return, the licensor receives a fee or royalty,
one that can be profi table given that little capital is required by the licensor. Licensing can
be especially attractive with agricultural products that are perishable and bulky or where the
receiving country has restrictions on imports.
There are also disadvantages to licensing. The license may entail giving secret product
formulas or processing technologies to the licensee, a key source of competitive advantage
for the fi rm, and the licensee, may also become a competitor selling products where they are
currently being sold. Also, if sales take off, the licensee could decide to establish and sell
competing products, depending on the nature of the agreement that was signed. Finally, the
licensor could fi nd its brand image hurt if the licensee has not maintained suffi cient control
over product quality or promotion.
Direct investment
Agribusinesses use a variety of investment means to enter and serve a foreign market. These
can fall broadly into three areas: greenfi eld investments, joint ventures, and acquisitions.
Greenfi eld investments are direct investments by a fi rm into a particular country
(so called because they are a project that lacks any constraints imposed by prior work—the
analogy being that of construction on a “green fi eld” where there is no need to remodel or
demolish an existing structure). An example would be a new plant built by a multinational
fi rm or foreign subsidiary. Greenfi eld investments are often the only method of investing in
a developing country where no other plants exist. High costs and risks are the drawbacks of
these types of investments because unexpected market deterioration may prevent the fi rm
from achieving a return on its investment. Another concern of greenfi eld investments may
be the lack of understanding of the regulations and rules in the existing markets as well as
the distribution channels that must be established. In fact, the distribution channel may be
“closed” in the sense that other fi rms may have contractual distribution arrangements that
prevent the new fi rm from selling its products through the existing system.
To counter the diffi culties, risk, and costs associated with greenfi eld investments, an agri-
business may choose to establish a joint venture. A joint venture is a form of a strategic
alliance (discussed in Chapter 4 ) that involves two or more fi rms that share resources in
research, production, marketing, or fi nancing, as well as costs and risks. Problems may arise
with joint ventures in deciding which fi rm will have controlling interest; in establishing and
maintaining working relationships; and in determining how critical decisions will be made.
It also must be noted that joint ventures are not permanent partnerships—they do have an
end point. In fact, across all industries, the average life of joint ventures has been estimated
to be about three and a half years.
Purchasing a fi rm or a controlling interest in the fi rm, known as an acquisition , is the
third method of direct investment. There are several advantages of an acquisition, but the
fi rst step requires fi nding a suitable company that is available (not likely in less-developed
countries) at a reasonable price. Compared to greenfi eld investments, an acquisition may
result in a lower investment to gain control of a production facility. Perhaps importantly,