In this mode of entry, the domestic manufacturers leases the right to use its intellectual property, i.e., technology, work methods, patents, copy rights, band names, trade marks etc. to a manufacturer in a foreign country for a fee. Here the manufacturer in the domestic country is called ‘Licensor” and the manufacturer in the foreign country is called “Licensee’. The process of the licensing is as shown in the figure.

What is International Licensing?

Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly.   The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earns revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry.

The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership, managerial, investment, etc.

Basic issues in International Licensing

Companies should consider various factors in deciding negations.   Each international licensing is unique and has to be decided separately.   However, there are certain common factors, which affect most of the international licenses. They are: specifying the agreement’s boundaries, determining the royalty, determining rights, privileges and constraints, defining resolution methods, specifying the duration of the contract.

Boundariesof the agreements: The companies should clearly define the boundaries of  They determine which rights and privileges are being conveyed in the agreement.

Determination of royalty: The most important factor in deciding the licence is the amount of It is needless to mention that the licensor expects high rate of royalty while the licensee would be unwilling to pay much royalty. However, both the parties negotiate for a fair royalty for both the sides in order to implement the contract more successfully.

Determining right, privileges and constraints: Another important factor in granting license is determining clearly and specifically the rights, privilege and constraints. For example, if the Indian licensee of Aiwa TV uses interior inputs in order to reduce price, boost up sales and profits, the image of the Japanese licensor would be damaged.

Dispute settlement mechanism: The licensee and licensor should clearly mention the mechanism to settle he disputes as disputes are bound to crop up. This is because, settlement of disputes in courts is costly, time consuming and hinders business interests.

Agreement duration: The two parties of the agreement specify the duration of the agreement. Licensing cannot be a short-term strategy. Hence, the duration of the licensing should not be of the short-term. It would always be appropriate to have long duration of the licensing. Tokyo Disneyland demanded on a 100 year licensing agreement with the Walt Disney company.

Advantages of International Licensing

  • Licensing mode carries relatively low investment on the part of licensor.
  • Licensing mode carries low financial risk o the licensor.
  • Licensor can investigate the foreign market without much efforts on his part.
  • Licensee gets benefits with less investment on research and development.
  • Licensee escapes himself from the risk of product failure.

Disadvantages of International Licensing

  • Licensing agreements reduce the market opportunities for both the licensor and  Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.
  • Both the parties have responsibilities to maintain the product quality and promoting the  Therefore, one part can affect the other through their improper acts.
  • Costly and tedious litigation may crop up and hurt both the parties and the market.
  • There is scope for misunderstanding between the parties despite the effectiveness of the  The best example is Oleg Cassini and Jovan.
  • There is a problem of leakage of the trade secrets of the licensor.
  • The licensee may develop0 his reputation.
  • The licensee may sell the product outside the agreed territory and after the expiry of the contract.