MODES OF ENTRY INTO INTERNATIONAL MARKETS:Licensing contract, Licensing risks

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International Marketing MKT630

Lesson # 23

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

International Marketing MKT630

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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