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International Licensing

The essence of an international licensing agreement is the transfer of industrial property rights (partners, trademarks, and/or propriety know-how) from a licensor in one country to licensee in a second country. The usual proactive is for the licensee to allow for the licensee to use the rights for a specified period of time in return for royalty compensation.

Licensing may be viewed as simply a way of obtaining incremental income on “shelf” technology that has already been written of f against domestic sales. Or a manufacturer may agree to exchange technology with a foreign counterpart, a practice known as cross-licensing. Again manufacturers may license abroad to get legal protection for their patents and trademarks in countries where they must be “worked” to remain valid or to guard against infringement.

Advantages and disadvantages of licensing as a primary entry mode

Licensing offers the manufacturer both advantages and disadvantages as a primary entry mode. Compared to export entry, the most evident advantage of licensing is the circumvention of import restrictions and transportation cost in penetrating foreign markets. Instead of transferring physical products to a target country, the manufacturer transfers intangible property rights and technology. In contrast to investment entry, the outstanding advantages of  licensing are low entry cost and low direct risk. Although licensing incurs transfer cost, it requires no fixed investment by manufacturer. For the same reason, licensing arrangements are exposed to for less political risk than foreign investments.

The most critical disadvantage of licensing as an entry mode is the licenser’s lack of control over the licensee’s marketing program. Although the licensor ordinarily maintains quality control over the licensed product, he does not control the licensee’s volume of production or marketing strategy. The market performance of the licensed product therefore, depends on the motivation and the ability of the licensee.

A second disadvantage is the lower absolute size f returns from licensing compared to return from export or investments. Licensing revenues take the form of running royalties over the life of the agreement. Today, royalty rates seldom exceed 5% of the licensee’s sales, and agreements seldom runs beyond 5 to 10 years.

Another disadvantage of licensing is its exclusivity. Ordinarily a licensing agreement agnates to the licensee exclusive rights to use the technology or trademark in the manufacture and sale of specified products in the licensee’s country. Fore the duration of the agreement therefore, the licensor is prevented from marketing those products in the licensee’s country by using another entry mode, such as export or investment. These opportunity cost is particularity irksome when the licensee fails to exploit market opportunity.

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