13.6: Reading- Licensing
Licensing gives a licensee certain rights or resources to manufacture and/or market a certain product in a host country.
KEY Points
- Licensing is a business agreement involving two companies: one gives the other special permissions, such as using patents or copyrights, in exchange for payment.
- An international business licensing agreement involves two firms from different countries, with the licensee receiving the rights or resources to manufacture in the foreign country.
- Rights or resources may include patents, copyrights, technology, managerial skills, or other factors necessary to manufacture the good.
- Advantages of expanding internationally using international licensing include: the ability to reach new markets that may be closed by trade restrictions and the ability to expand without too much risk or capital investment.
- Disadvantages include the risk of an incompetent foreign partner firm and lower income compared to other modes of international expansion.
Terms
- Licensing : A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
- License : The legal terms under which a person is allowed to use a product.
Examples
- Suppose Company A, a manufacturer and seller of Baubles, was based in the US and wanted to expand to the Chinese market with an international business license. They can enter the agreement with a Chinese firm, allowing them to use their product patent and giving other resources, in return for a payment. The Chinese firm can then manufacture and sell Baubles in China.
Licensing
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual in exchange for a percentage of revenue or a fee. It’s a fast way to generate income and grow a business, as there is no manufacturing or sales involved. Instead, licensing usually means taking advantage of an existing company’s pipeline and infrastructure in exchange for a small percentage of revenue.
An international licensing agreement allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor’s product for a fixed term in a specific market.
To summarize, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor’s earnings usually take the form of one-time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.
As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government shows for intellectual property and on the ability of the licensor to choose the right partners and avoid having them compete in each other’s market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both licensor and licensee. The following are the main advantages and reasons to use an international licensing for expanding internationally:
- Obtain extra income for technical know-how and services.
- Reach new markets not accessible by export from existing facilities.
- Quickly expand without much risk and large capital investment.
- Pave the way for future investments in the market.
- Retain established markets closed by trade restrictions.
- Political risk is minimized as the licensee is usually 100% locally owned.
This is highly attractive for companies that are new in international business. On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it, because there is:
- Lower income than in other entry modes
- Loss of control of the licensee manufacture and marketing operations and practices leading to loss of quality
- Risk of having the trademark and reputation ruined by a incompetent partner
- The foreign partner also can become a competitor by selling its production in places where the parental company has a presence
GLOSSARY
Interest The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. A great attention and concern from someone or something; intellectual curiosity.
Market A group of potential customers for one’s product. One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.
Trademark A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products. A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities. A word, symbol, or phrase used to identify a particular company’s product and to differentiate it from other companies’ products.
Capital Money and wealth. The means to acquire goods and services, especially in a non-barter system.The uppermost part of a column. Money and wealth; the means to acquire goods and services, especially in a non-barter system. Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).
Export This term export is derived from the conceptual meaning to ship the goods and services out of the port of a country. to sell (goods) to a foreign country Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.
Facility The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.
Good An object produced for market.
Intellectual property Any product of someone’s intellect that has commercial value: copyrights, patents, trademarks, and trade secrets. Intellectual property (IP) is a juridical concept that refers to creations of the mind for which exclusive rights are recognized. Any product of someone’s knowledge that has commercial value: copyrights, patents, trademarks and trade secrets.
Investment A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use. Leading To conduct or direct with authority the management function of determining what must be done in a situation and getting others to do it.
Loss The negative difference between revenue and expense.
Manufacture The action or process of making goods systematically or on a large scale.
Marketing The process of communicating the value of a product or service to customers. Marketing is the process of communicating the value of a product or service to customers. The promotion, distribution and selling of a product or service; includes market research and advertising.
Operation The method or practice by which actions are done. A procedure for generating a value from one or more other values.
Patent A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention for a limited time; a letter patent.
Product Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user. A chemical substance formed as a result of a chemical reaction. Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the requirements of the various governing offices or society.
Resource Something that one uses to achieve an objective. An example of a resource could be a raw material or an employee. Something that one uses to achieve an objective, e.g. raw materials or personnel.
Revenue Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The total income received from a given source.
Right A legal or moral entitlement.
Risk The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). To incur risk [of something].
Royalty Regular payment made from the franchisee to the franchisor for the right to be a franchisee.
Services That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.
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