Business Degree Certification Practice Test

What do we call the process when a domestic firm allows a foreign company to manufacture and sell its product in exchange for a fee or royalty?

1. Importing

2. Exporting

3. Licensing

4. Countertrading

The correct answer is: Licensing

The process described in the question is known as licensing. This arrangement enables a domestic firm to grant permission to a foreign company to produce and sell its products while receiving compensation in the form of fees or royalties. Licensing can be an effective strategy for companies looking to expand their market presence internationally without the need for establishing a physical presence in another country. In licensing, the domestic company benefits by tapping into new markets and revenue streams while leveraging the foreign company's local market knowledge and distribution networks. This collaborative arrangement minimizes risk and investment compared to other forms of international business operations, such as exporting or creating joint ventures. While importing refers to bringing goods into one country from another, and exporting involves sending goods from one country to another, neither captures the essence of allowing another company to produce and sell a product under a fee arrangement. Countertrading, on the other hand, involves a reciprocal exchange of goods or services rather than a fee-based arrangement for manufacturing rights.