How does licensing compare to building plants in terms of capital risk?

• A. Increased capital risk due to building plants.
• B. Licensing reduces capital risk compared to building plants.
• C. No change to capital risk.
• D. Licensing eliminates profits.

Answer: (B)

Licensing lowers capital risk because it lets you enter a market without committing large sums to build and equip facilities. Building plants requires substantial upfront investment in land, factories, machinery, and working capital, and you face risks if demand is weaker than expected, costs overrun, or political and currency conditions change. With licensing, you provide the rights to use your technology or brand to another firm in exchange for royalties, so the financial exposure is much smaller and the capital you need to risk is greatly reduced. You can still earn revenue through royalties without tying up money in physical assets. The other options don’t fit: increasing capital risk would be true only if you were investing in plants, no change would ignore the clear difference, and licensing does not eliminate profits—royalties can still be lucrative, just with less capital at stake.