What Is a Nonequity Arrangement? Define the Two Major Types

question 32

Essay

What is a nonequity arrangement? Define the two major types of nonequity arrangements: licensing and turn-key projects,and give at least one advantage and disadvantage for each.
Nonequity arrangement - a method by which an entrepreneur can enter a market and obtain sales and profits without direct equity investment in the foreign market.
A.Licensing - involves an entrepreneur who is a manufacturer (licensee)giving a foreign manufacturer (licensor)the right to use a patent,trademark,technology,production process,or product in return for the payment of a royalty.
Benefit: Low development costs and risks.
Disadvantages: Lack of control over technology,inability to realize location and experience curve economies,inability to engage in global strategic coordination.
B.Turn-key projects - A method of doing international business whereby a foreign entrepreneur supplies the manufacturing technology or infrastructure for a business and then turns it over to local owners.
Benefits: relatively low risk,ability to earn returns from process technology skills in countries where FDI is restricted.
Disadvantages: Creation of efficient competitors,lack of long-term market presence.

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Definitions:

Physical Inventory

The process of counting by hand the actual inventory of a business at a specific point in time.

Net Income

The net income of a business following the deduction of all costs, taxes, and expenses from its total earnings.

Gross Profit Rate

The gross profit rate is a financial metric indicating the percentage of revenue that exceeds the cost of goods sold, showcasing the efficiency of a company in managing its production costs.

Merchandise Inventory

Goods a company intends to sell in the normal course of business, tracked in an account for accounting and management purposes.