Advantages and Disadvantages of Licensing as a Mode of Entry Into Foreign Markets
“Assess the merits and demerits of international licensing as a mode of entry into new markets”
Disney does not have to produce t-shirts, USB sticks and even waffles with Mickey Mouse’s happy face on it. Instead, it can license the right to use its famous character to different companies around the globe and enjoy the hefty royalties, which in 2010 totaled 28.6 billion dollars (Rorie, 2011). Does it then mean that licensing as a mode of entry into foreign markets is the best option available? Not necessarily so. Given a multitude of foreign market entry methods, all of them being used in practice in some contexts, it is crucial to determine under which circumstances licensing will pay off. The decision factors include the specifics of the foreign market; ownership, location and internalization advantages; resources and capabilities; and the general global strategy of a company. This essay will attempt to analyse what kind of environment would be favourable for the introduction of licensing and use this analysis as a context to assess the pros and cons of this mode of foreign market entry.
It is useful to start with the detailed definition of the subject matter. According to Daniels, 2003, “under a licensing agreement, a company (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period in exchange for a fee” (called royalty). The “intangible property” might encompass patents, designs, trademarks, methods and the like; we therefore see that licensing does not refer to actual physical objects or services. Hill, 2009 and Daniels, 2003 suggest a number of situations which might inspire executives to consider licensing. For example, the company’s new product or process might be potentially profitable, but too limited in scale or in duration to justify establishing production facilities abroad. However, even if the project is very promising, insufficient capital might be the
Disney does not have to produce t-shirts, USB sticks and even waffles with Mickey Mouse’s happy face on it. Instead, it can license the right to use its famous character to different companies around the globe and enjoy the hefty royalties, which in 2010 totaled 28.6 billion dollars (Rorie, 2011). Does it then mean that licensing as a mode of entry into foreign markets is the best option available? Not necessarily so. Given a multitude of foreign market entry methods, all of them being used in practice in some contexts, it is crucial to determine under which circumstances licensing will pay off. The decision factors include the specifics of the foreign market; ownership, location and internalization advantages; resources and capabilities; and the general global strategy of a company. This essay will attempt to analyse what kind of environment would be favourable for the introduction of licensing and use this analysis as a context to assess the pros and cons of this mode of foreign market entry.
It is useful to start with the detailed definition of the subject matter. According to Daniels, 2003, “under a licensing agreement, a company (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period in exchange for a fee” (called royalty). The “intangible property” might encompass patents, designs, trademarks, methods and the like; we therefore see that licensing does not refer to actual physical objects or services. Hill, 2009 and Daniels, 2003 suggest a number of situations which might inspire executives to consider licensing. For example, the company’s new product or process might be potentially profitable, but too limited in scale or in duration to justify establishing production facilities abroad. However, even if the project is very promising, insufficient capital might be the
Bibliography: Daniels, John D., Radebaugh, Lee H., Sullivan, Daniel P., 2003. International business: environments and operations, 10th ed. Upper Saddle River, New Jersey; London: Prentice Hall Griffin, Ricky W., Pustay, Michael W. International business: a managerial perspective, 5th ed. Upper Saddle River, NJ: Pearson/Prentice Hall Hill, Charles W. L., 2009. International business: competing in the global marketplace, 7th ed. New York; London: McGraw-Hill/Irwin Rorie, Matt, 2011. Disney Rakes In $28.6 Billion In Licensing Sales In 2010. [online] Screened.com, available at http://www.screened.com/news/disney-rakes-in-286-billion-in-licensing-sales-in-2010/2254/ [Accessed 26 November 2011] Wehner, Mike, 2011. Apple approves its 500,000th app, but do you care? [online] Yahoo News, available at http://news.yahoo.com/blogs/technology-blog/apple-approves-500-000th-app-care-160140999.html [Accessed 26 November 2011]