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MODES OF ENTRY INTO INTERNATIONAL MARKETS
Licensing
Licensing:
Is a contractual arrangement in which a firm (the licensor)
sells the right to use its intellectual property
(technology, patents, work methods, brand names, trade marks,
copyrights, and company name) to a
firm (the licensee) in return for fees
Roles of licensing in internationalization:
• helping firms
survive and compete within a rapidly changing international industrial
environment
• factors
contributing to rapid growth of licensing
– protectionism and
regulation of FDI
– licensing of
universities research results
– emergence of
small, high-technology firms
– rising R&D costs
– shortening
product life cycles
– cross-licensing
Licensing contract:
I licensing contract defines the terms of agreement between a
licensor and a licensee. It is important that
the contract adequately covers all the important aspects of the
relationship. I licensing contract normally
includes the following;
• boundaries of the
agreement
– The first step in
negotiating a licensing contract is to specify the boundaries of the agreement,
that is which rights and privileges to be included in the
agreement and the issues which are not to
be included.
• compensation
– compensation
under a licensing agreement is called a royalty - can be a flat fee, a fixed
amount
per unit sold, or a percentage of sales of the licensed product
or service.
• rights,
privileges, constraints of the licensee and the licensor
• dispute
resolution mechanism in case any dispute arises
• contract duration
for the licensing agreement
Licensing risks:
It is important that both the licensee and the licensor
understand the risks involved in any such
agreement so that steps are taken to avoid any issue that might
arise in future. Key issues that a licensing
association may face are in the following
• limiting market
opportunities for the licensor and the licensee if they both agree to work with
each
others and not with any other firm in similar business
• the licensor may
be creating a future competitor in form of the licensee
• loss of control
of technology by the licensor as information and rights of use are allowed to
the
licensee
• minimum
performance by licensee may be agreed in the contract, but in reality the
potential for the
business may be much larger in the market – licensee may opt to
just achieve the minimum
performance to fulfill the contractual obligations
• misuse of
trademarks by the licensee
Critical success factors of licensing:
In the following are the critical success factors of a licensing
agreement;
• avoiding
licensing arrangements with any firm that could become future competitor
• trade protection
• specifying
compensation practices for breaching agreement
• setting standards
for performance, quality
• careful selection
and evaluation of prospective licensee
• maintain long
term relationship with licensee
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