5. Foreign direct investment versus licensingGiocattolo is a profit-maximizing firm producing toy cars-a capital-intensive good-which are sold in its home country, Italy, and abroad in Spain.Giocattolo chose foreign production as a method of penetrating the Spanish market and has to decide whether it is more efficient to directly invest inSpain to establish a production subsidiary or to license the technology to a Spanish firm to produce its goods.On the following graph, AVC Spain is the average variable cost curve of a Spanish firm producing toy cars. (This curve represents costs such as laborand materials.) The curve ATC subsidiary represents the total unit costs Giocattolo will face if it establishes a subsidiary in Spain.PER-UNIT COST (Dollars)1098210015ATC Subsidiary+10530 45 60 75 90PRODUCT (Thousands)120AVCSpain+135 150? Suppose Giocattolo estimates the demand for toy cars in Spain as 45,000 toys per year.Based on the curves AVC Spain and ATC Subsidiary, what is Giocattolo's best strategy?Establish a subsidiary factory in Spain.Invest in a country risk analysis.O License production technology to a Spanish firm.Suppose that Giocattolo's fixed cost of managing foreign operations increased.Which of the following best describes how Giocattolo's decision making may change?The subsidiary becomes completely inefficient at higher levels of output.The subsidiary remains more efficient than licensing at output levels of above 60,000 toy cars.Licensing remains more efficient than the subsidiary at a higher level of output.The decision to license instead of forming a subsidiary will occur at a lower level of output.

This question asked us to determine Giocattolo's best strategy (establish a subsidiary factory,…

Suppose Giocattolo estimates the demand for toy cars in Spain as 45,000 toys per year. Based on the curves AVC Spain and ATC Subsidiary, what is Giocattolo's best strategy? Establish a subsidiary factory in Spain. Invest in a country risk analysis. License production technology to a Spanish firm. Suppose that Giocattolo's fixed cost of managing foreign operations increased. Which of the following best describes how Giocattolo's decision making may change? The subsidiary becomes completely inefficient at higher levels of output. The subsidiary remains more efficient than licensing at output levels of above 60,000 toy cars. O Licensing remains more efficient than the subsidiary at a higher level of output. O The decision to license instead of forming a subsidiary will occur at a lower level of output.

Suppose Giocattolo estimates the demand for toy cars in Spain as 45,000 toys per year. Based on the curves AVC Spain and ATC Subsidiary, what is Giocattolo's best strategy? Establish a subsidiary factory in Spain. Invest in a country risk analysis. License production technology to a Spanish firm. Suppose that Giocattolo's fixed cost of managing foreign operations increased. Which of the following best describes how Giocattolo's decision making may change? The subsidiary becomes completely inefficient at higher levels of output. The subsidiary remains more efficient than licensing at output levels of above 60,000 toy cars. O Licensing remains more efficient than the subsidiary at a higher level of output. O The decision to license instead of forming a subsidiary will occur at a lower level of output.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter2: Fundamental Economic Concepts

Section: Chapter Questions

Problem 4E

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