A Swiss pharmaceutical company decides to set up a foreign affiliate in the US to develop and market new drug.
It will incur capital costs in setting up a foreign affiliate and coordinating its operations with those of other parts of its network of activities. At the same time, by internalising the market for the drug formula, not only may the Swiss firm be able to control its use better that if its licensed the production rights to a foreign firm, but it also lessens the likelihood of any infringement or dissipation of its property rights.
Furthermore, by locating an affiliate in the US, the Swiss company hopes that it will be able to access the local networks of innovation connecting pharmaceutical firms to research institutes and smaller biotechnology firms.
A US auto firm which, up to now, has licensed five manufacturing companies in Europe to produce a range of auto components to its specifications, decides to acquires the full ownership of each of these affiliates. It does so in order to promote better rationalisation of its motor vehicle production thereby lowering its production and transaction costs. Without such control there might be resistance from the individual licensees as their goals may not coincide with that of the licensor.
The capital costs and extra common governance costs incurred are among the additional resource costs which may require to be committed.
A Singaporean-owned hotel chain wishes to extend its sphere of operations into the Japanese market. It has a choice of entering this market by setting up a joint equity venture or concluding a franchising agreement with a Japanese hotelier. In the former case, it may ‘buy the right’ to exert a critical influence over the design and building of the hotel and over its day-to-day management.
In the latter case, though committing fewer resources, it is reliant on the terms of the franchise agreement to gain the maximum economic rent on its O-advantages.