It must be noted here that people assume that International Business is International Trade. You can police how your IP is being used to some extent, but you cant see everything that is being done. Licensing offers a number of advantages to both the international and local entities, however there are some drawbacks that should be considered before entering into an agreement. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. Is there a guaranteed renewal rate for the license, especially if the expiration date is fewer than 5 years? - Definition & Examples, What Is Foreign Direct Investment? Another advantage of exporting is profitability. Embraer is the largest aircraft maker in Brazil and one of the largest in the world. 10 Licensing Advantages and Disadvantages - Wise Business Plans There is a lower threshold for capital requirements. The more control a company wants, the better off it is establishing or buying a wholly owned subsidiary or, at least, entering via a joint venture with carefully delineated responsibilities and accountabilities between the partner companies. From Disabled and $500k in Debt to a Pro Blogger with 5 Million Monthly Visitors, 14 Licensing Advantages and Disadvantages, 50 Best Passive Income Ideas that Deliver, Spotify SWOT Analysis for 2021: 26 Strengths and Weaknesses, 50 Most Profitable Recession Proof Businesses, Netflix SWOT Analysis (2021): 23 Biggest Strengths, "From Disabled and $500k in Debt to a Pro Blogger with 5 Million Monthly Visitors. The disadvantages of partnering, on the other hand, are lack of direct control and the possibility that the partners goals differ from the firms goals. However, Russia also has a reputation for corruption and red tape that even its highest-ranking officials admit. Shaker A. Zahra, R. Duane Ireland, and Michael A. Hitt, International Expansion by New Venture Firms: International Diversity, Mode of Market Entry, Technological Learning, and Performance,. Embraer chose to enter China as its first foreign market, using the joint-venture entry mode. 6 What are the disadvantages to a firm of using licensing as a method of entry in global markets? May 5, 2022 Give it 1/5 Give it 2/5 Give it 3/5 Give it 4/5 Give it 5/5 Over the last few decades, franchising and licensing have become common expansion strategies for many business owners. 1. Who better to understand how business works in another country than a company that is actually located there? Finding a reputable company can be tricky if you are not familiar with the country, business procedures, or the individuals that run the companies there. It can also be detrimental if a license is over-extended or one of the parties acts in bad faith. (PDF) Licensing as an International Expansion Entry Mode: Its Anacquisitionis a transaction in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. Let's review what we've learned! Playing on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home,. They allow companies to share the risks and resources required to enter international markets. Table 7.1International-Expansion Entry Modes. If multiple licenses are offered, then the reputation may suffer globally, affecting multiple businesses who are not involved in the situation. The primary reason most entrepreneurs turn to franchising is that it allows them to expand without the risk of debt or the cost of equity. Access to Local Markets: Licensing agreements can be the fastest way to enter new markets by allowing international companies to partner with . China has many restrictions on foreign ownership, for example, but even a developed-world country like the United States has laws addressing acquisitions. There is no guarantee that a licensing agreement will generate cash. Just sell licenses after developing the IP and youre good to go. 1. All rights reserved. 2. You cant make the popcorn here and ship it to Japan because it would get stale. The franchisers success depends on the success of the franchisees. The Truth About Franchising vs. Licensing in 3 Minutes | SCORE Olam has lowered its processing and shipping costs by 25 percent while greatly reducing carbon emissions.3, Likewise, when Walmart enters a new market, it seeks to source produce for its food sections from local farms that are near its warehouses. Advantages and Disadvantages of Licensing 15.3 Describe the advantages and disadvantages of licensing. Just sell licenses after developing the IP and you're good to go. What is the Census? To unlock this lesson you must be a Study.com Member. They get to experience all of the advantages of self-employment, such as setting their own hours, while you get the benefits of having someone invested into your IP. Technology: How Organizations Turn Inputs to Outputs, Political Risk in International Business | Analysis, Facts & Examples, The Relationship Between International Trade Systems & Marketing, Foreign Direct Investment | Definition, Advantages & Disadvantages. Disadvantages of contract manufacturing. 1. Licensing is governed by a licensing agreement, which involves a one-time transfer of property or rights for a fee. 5 What are the drawbacks of licensing or authorizing foreign distribution? 7.1 International Entry Modes by BABU JOHN MARIADOSS is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. After reading this section, students should be able to , The Five Common International-Expansion Entry Modes. A company that wants to get into an international market quickly while taking only limited financial and legal risks might consider licensing agreements with foreign companies. [11]McDonalds India, Respect for Local Culture,http://www.mcdonaldsindia.com/loccul.htm(Links to an external site. Why is franchising the best entry mode? (2023) - Investguiding Developing a good relationship with regulators in target countries helps with the long-term entry strategy. With a large, well-educated population with English language skills, India has become a center for software development and customer-call centers for American companies. The advantages and disadvantages of licensing can be managed when due diligence by both parties is performed before agreeing to anything. So what are the advantages of using a foreign licensing agreement? In aBusinessWeekarticle, presidential economic advisor Arkady Dvorkovich (whose office in the Kremlin was once occupied by Soviet leader Leonid Brezhnev), for example, advises, Investors should choose wisely which regions of Russia they locate their business in, warning that some areas are more corrupt than others. They can purchase a license instead of outright ownership, then begin to make profits right away. [2]H. Frederick Gale, Chinas Growing Affluence: How Food Markets Are Responding (U.S. Department of Agriculture, June 2003),http://www.ers.usda.gov/Amberwaves/June03/Features/ChinasGrowingAffluence.htm(Links to an external site. Thanks to twenty-first-century information technology, nonmanufacturing functions can also be outsourced to nations with lower labor costs. A strategic alliance involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose. Illy is sold in over 140 countries around the world and is available in more than 50,000 of the best restaurants and coffee bars. Easiest and Simplest: Exporting and Importing is the easiest way to enter into the international market as compared to any other modes of entry. When deciding to license abroad, careful due diligence should be done to ensure that the licensee is a strong investment for the licensor and vice versa. The advantages of partnering with a local firm are that the local firm likely understands the local culture, market, and ways of doing business better than an outside firm. Playing on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home, Knowledge@Wharton, April 28, 2010, accessed January 15, 2011. The annual disposable income in Russia, for example, exceeds that of all the other BRIC countries (i.e., Brazil, India, and China). 2 What are the disadvantage of licensing? Licensing mode carries low financial risk o the licensor. 6. This does allow you as the licensor to take legal action, but that tends to get very expensive, very quickly. Foreign Licensing: Process & Importance - Study.com A licensing agreement gives a licensee rights to use a product that the licensor already owns. She will include what limitations the company will have and a termination date when the agreement will end. Theyre also able to have a dedicated team assigned to the foreign country that can travel the country frequently for the later-stage entry strategies that involve investment. A licensee can benefit from this type of arrangement because it requires less money from the start to pursue the business opportunity. ASAP Releases Winners of 2010 Alliance Excellence Awards, Association for Strategic Alliance Professionals, September 2, 2010, accessed February 12, 2011. (accessed May 25, 2006). This can be an automatic process, withdrawn directly from a bank account or the batch sales created. 17 chapters | Each embassy has its own trade and commercial desk. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found. 2. Source: Suzanne Kapner, Making Dough, Fortune, August 17, 2009, 14. Once Megan has fully committed to taking her business to another country, she will first find a company that can be trusted. Updated December 5, 2022 What is a Licensing Agreement? 10. China is a relationship-based society. , April 28, 2010, accessed January 15, 2011. , March 22, 2010, accessed January 23, 2011. Wholly Owned Subsidiary | Definition & Examples, Contract Manufacturing | Overview, Advantages & Disadvantages, Market Entry Strategy | Definition & Examples, What is an Export? When making an acquisition, due diligence is importantnot only on the financial side but also on the side of the countrys culture and business practices. (Cambridge, MA: Harvard Business School Press, 2008), 113. Capital and Knowledge For ease of understanding, the word "goods" in this article will include all of the items mentioned above. As markets expand, however, a firm might decide to enhance its competitive advantage by making a direct investment in operations conducted in another country. Licensing Agreement - Definition, Example, Pros and Cons Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. KEY POINTS Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute the supplier's goods. As Edward Tse, author ofThe China Strategy: Harnessing the Power of the Worlds Fastest-Growing Economy, explains, this means that in all corners of China, there will be people asking, If Li Ka-shing [the chairman of Cheung Kong Holdings] can be so wealthy, if Bill Gates or Warren Buffett can be so successful, why not me? This cuts across Chinas demographic profiles: from people in big cities to people in smaller cities or rural areas, from older to younger people. 3. The result? So, young women in Israel can readCosmo Israelin Hebrew, and Russian women can pick up a Russian-language version ofCosmothat meets their needs. Acquisition is also a good strategy when an industry is consolidating. Some foreign companies believe that owning their own operations in China is an easier option than having to deal with a Chinese partner. In return, the franchisee gets access to all of McDonalds products, systems, services, and management expertise. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance as well. The first bit of information she runs across while conducting her research is that of foreign licensing. Now let's take a look at some of the disadvantages Megan needs to consider before entering into any agreement. For many major companies, Russia is too big and too rich to ignore as a market. The Advantages and Disadvantages of International Licensing - LinkedIn We cant invest in companies that have even a slight shadow, said Intels Moscow-based regional director Dmitry Konash about the complex structure predicament. For example, the US Embassy has a foreign commercial desk with officers who assist US companies on how best to enter the local market. 7.4 Franchising - Core Principles of International Marketing 7.4 Franchising by BABU JOHN MARIADOSS is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. For example, in Saudi Arabia, non-Saudi companies looking to do business in the country are required by law to have a Saudi partner. If the acquiring firm is in a country with a strong currency, the acquisition is comparatively cheaper to make. After reading this section, students should be able to . 1 Each mode of market entry has advantages and disadvantages. copyright 2003-2023 Study.com. In terms of marketing and promotion, the firm will need to let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales force. To achieve this, the company can establish a new, wholly owned subsidiary (i.e., a greenfield venture) from scratch, or it can purchase an existing company in that country. Former Chicago Alderman Convicted in Tax Case Loses Law License Easy entry in markets. IBM and Coca-Cola, for example, have both had success in the Japanese market through their foreign subsidiaries (IBM-Japan and Coca-ColaJapan). Firms may want to have a direct operating presence in the foreign country, completely under their control. Should a company first establish an export base or license its products to gain experience in a newly targeted country or region? In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. ASAP Releases Winners of 2010 Alliance Excellence Awards, Association for Strategic Alliance Professionals, September 2, 2010, accessed September 20, 2010, http://newslife.us/technology/mobile/ASAP-Releases-Winners-of-2010-Alliance-Excellence-Awards. For many licensing agreements, however, the royalty payments are offered just once per quarter. Transnational Strategy Methods & Use| What Is Transnational Strategy? How much of our resources are we willing to commit? A common form of FDI is theforeignsubsidiary: an independent company owned by a foreign firm (called theparent). (accessed May 25, 2006). 12. Businesses registered in these offshore tax havens to avoid certain Russian taxes. This approach allows Hearst to sell the magazine in more than fifty countries.[6]. There will be more opportunities for theft, piracy, and misuse because you dont have full control over how the licensee conducts operations. Or what if the target nations government doesnt allow foreign companies to operate within its borders unless it has a local partner? The contract manufacturer will quote the parts . Licensing vs. Franchising: Understanding the Differences