A company that owns intellectual property rights such as patents, technical know-how, or other intellectual assets but cannot or does not want to undertake the production of a product can benefit from licensing those intellectual assets by relying on another company’s (the licensee) better production capabilities, broader distribution network, local expertise, and superior management skills. In addition:
- Licensing allows companies to share technology and intellectual assets related to product development and distribution, creating value-added products and services.
- For smaller organizations lacking financial resources and/or specialized management skills, licensing can be an effective means to acquire the necessary capital when entering new markets. This is especially true in attractive markets where local partners, distribution channels, and political requirements can make licensing a preferred or even legally required option.
- Licensing can be used to reduce political risk and improve the local/national acceptability of the company.
- Licensing can provide expertise in local markets, access to necessary distribution channels, and procurement of raw materials, government contracts, and local production facilities.
- In an increasing number of countries, joint ventures with local partners are becoming increasingly important to the host country’s government. Joint ventures can be established either directly with state-owned enterprises or targeted towards the country’s strongest enterprises.
- International conglomerates or temporary alliances are being established more frequently to carry out special projects deemed too large for individual companies (e.g., critical defense projects, civilian projects, massive global technology investment).
- Control over transactions can hinder a company’s capital export and thus make it more difficult for the new foreign branches. Therefore, the provision of technical secrets may be used to help the company acquire certain shares in the joint venture, while the local partner can access the necessary capital.
Disadvantages of Licensing:
- The critical issue is that it is very difficult for a joint venture to integrate into a global strategy that is essentially cross-border commerce. In such cases, there may be inevitable issues related to transfer pricing and imports and exports, especially in support of the branches that the company owns worldwide.
- The trend toward a global currency management system through a central fund can lead to conflicts between partners when parent companies attempt to impose limits or even direct the use of cash and working capital, manage foreign exchange, quantities, and means of payment profit.
- Another important issue is when the objectives of the partners become contradictory. For example, multinational companies may have completely different attitudes towards risks than local companies and may be prepared to accept short-term losses to gain market share, accept higher debt, or higher advertising costs. Similarly, the objectives of the partners may change over time, especially when the establishment of wholly-owned branches to replace joint ventures occurs, which is typical for multinational companies.
- Issues related to the management and personnel structure of joint ventures.
- Many joint ventures fail due to disputes over profit taxes between the parties.
Advantages of Licensing for the Licensee:
There are various ways in which a licensing agreement can help the licensee increase revenue and profit as well as expand market share:
- Often, new products need to be brought to market quickly. Licensing allows access to technology that has already been developed or is ready for application, potentially enabling businesses to reach the market faster.
- Smaller companies may lack the resources to conduct the necessary research and development to deliver new and higher-quality products. Licensing offers access to technological advancements that can be difficult to achieve through other means.
- Licensing can be necessary to maintain and develop a market position already established but threatened by new designs or production methods. Costs for ongoing activities and future trends may be a challenge, and accessing new technology through licensing can be the best way to overcome this challenge.
- There can be many opportunities when receiving a license when combined with the existing technology of the company can create new products, services, and market opportunities.
Disadvantages of Licensing for the Licensee:
- The licensee may have to make financial commitments for technology that is “not ready” for commercial exploitation or may need to modify the technology to meet its business needs.
- Intellectual property licensing can add costs to a product that the market does not accept. The addition of new technology can create a product with a high-tech content but is too expensive when introduced to the market. Many technologies integrated into a product can create a high-tech product but it can be costly when entering the market.
- Licensing can create technology dependence on the licensor, which may not extend or negotiate license agreements with competing partners, limiting the markets in which the licensee can use the licensed technology or restricting the permitted operating activities under the license agreement.
- Intellectual property licensing may create legal issues for both the licensor and the licensee if state regulators view it as anti-competitive or collusive in nature. Clearly, intellectual property licensing is complex, and without careful legal review and consideration, it can be detrimental to both parties.
