5. Foreign direct investment versus licensing Giocattolo 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 in Spain 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 labor and materials.) The curve ATC Subsidiary represents the total unit costs Giocattolo will face if it establishes a subsidiary in Spain. (?) 10 AT Subsidiary AV Spain PER-UNIT COST (Dollars) N 0 10 20 30 40 50 60 70 100 PRODUCT (Thousands)PRODUCT (Thousands) 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? O Reassess the market potential in Spain. O License production technology to a Spanish firm. O Establish a subsidiary factory in Spain. Suppose that Giocattolo found a way to lower its fixed costs. Which of the following best describes how Giocattolo's decision making may change? O The decision to license instead of forming a subsidiary will occur at a lower level of output. O The subsidiary becomes inefficient at a lower level of output. O The decision to form a subsidiary instead of licensing will occur at a lower level of output. The decision to license instead of forming a subsidiary will occur at a higher level of output