It is oblivious that exporting and foreign direct investment are different from licensing, since production is internalized in the case of the exporting and foreign direct investments and externalized in the case of licensing. In the case of licensing and other contractual arrangements production and possibly the other complementary functions are externalized and are carried out by a third party. In reality the externalization is limited to the production process and not functions such as sales and marketing and distribution. It can be said that various forms of exporting via intermediaries include elements of externalization and licensing which involves supply of critical components to the licensee firm also has a degree of internalization.

What matters at the end is the understanding of the challenge of balancing advantages from internalization and externalization. Internalization of activities can mean full control over business functions, which is believed to be a source of advantage, since it gives managers free choice over strategies an operational decision making which is hard to achieve with a third party. The down side is the additional costs incurred in gaining control in terms of ownership of business facilities and the continuous cost associated with the day-to-day management of a full range of business functions. In reality control does not guarantee success.

Successful Japanese car firms opt for cooperation rather than control, in that instead of integrating backwards or ‘internalizing’ component manufacturing, they instead create a close working relationship with suppliers. Western car manufacturers have followed suit, extending their power through close business linkage rather than ownership of diverse business functions. This has lead to leading car manufacturers actually being car assemblers.

On the other hand Japanese firms focus on foreign direct investment in the USA through setting up or acquiring distribution companies which underlines the internalization of information and more direct lines of communication between the market and the decision making locus. In this aspect the intermediaries can be seen as facilitators or bottlenecks. If working relation is good the third party organization is more likely to collect and pass on critical information, though there is a limit to the amount of time and attention it is able to dedicate to such a function for just one manufacturer out of its many business portfolio. This has led to many firms establishing sales and marketing office in foreign markets, not only to handle contracts, but also as a means to monitor change on the ground in terms of market conditions and demand pattern.

This has led to the splitting up in terms of location of various business functions in the value chain.