WHAT IS INTERNATIONAL BUSINESS? – ENTERING OVERSEAS MARKETS, part 3

this continues the article on entering overseas markets, part 3

3. LICENSING: a contractual arrangement whereby a company transfers via a license, the right to distribute or manufacture a product or service to a foreign country or to use any type of expertise which may include some or all of the following: patents, trademarks, company name, technology/technological know-how, design, and/or business methods. The licensee pays a fee and/or percentage of sales in exchange for the rights.

ADVANTAGEOUS WHEN: import and investment barriers exist, when legal protection is possible in the target environment, when there is otherwise, a low sales potential in target country or a large cultural distance is present.

PROS:
1) Quick and easy entry into foreign markets: allows a company to ‘jump’ border and tariff barriers.
2) With lower capital requirements.
3) Potential for a large ROI; returns are realized fairly quickly.
4) Risks are very low with this mode of market entry: avoid most “uncontrollable” risks, and have fewer financial and legal risks.

CONS:
1) Control by the licensee is low,
2) The licensee may become a competitor,
3) Intellectual property may be lost,
4) License period is usually limited;
5) Poor management of quality, for example, can damage brand reputation in other license territories.

A. Technology Licensing: patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property may be sold or made available to a licensee for compensation that is negotiated in advance between the parties.

PROS:
1) Can provide ‘reverse flow’ of technology in which the original licensor shares in technical improvements developed by the licensee;
2) Licensee is able to use the intangible property and receive technical assistance.

CONS:
1) Can yield loss of control over technology and
2) Loss of intellectual property;
3) Control over the technology is weakened because it has been transferred to an unaffiliated firm.

B. Franchising: a very efficient model for distributing goods and services. In this type of licensing agreement, control over the operations is granted to the franchisee in exchange for some type of payment and for the promise to abide by the terms of the contract.

PROS:
1) Market entry with less financial, legal, and political risks; working with proven product
2) Economies of scale by ordering with owner and other franchisees.
3) Partners can come to the new market and see the business up close, first hand.

CONS:
1) The licensor has little direct control;
2) Licensee has lower profits than if owned business or exported own goods.

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