What is Licensing? Advantages, Disadvantages

What is Licensing?

In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e., technology, work methods, patents, copyrights, brand names, trademarks, etc., to a manufacturer in a foreign country for a fee. The manufacturer in the domestic country is called licensor and the manufacturer in a foreign country is called licensee.

The domestic company can select any international location and enjoy the benefits without overburdening its financial, managerial and ownership responsibilities.

For example, in order to gain access to US market, Asahi Breweries Ltd. of Japan established a licensing agreement with the Canadian Molson Brewery in 1994. The deal required Molson to manufacture Asahi Super Dry for distribution in all of North America (New York Times 1998.)

Advantages of Licensing

Licensing affords new international entrants with a number of advantages:

• Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners lined up.
  
  
• Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of the infrastructure in most situations.
  
  
• Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry.
  
  
• Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides critical resources in this regard, as the licensee has local contacts, mastery of local language, and a deep understanding of the local market.

Disadvantages of Licensing

• Loss of control is a serious disadvantage in a licensing situation in regards to quality control. Particularly relevant is the licensing of a brand name, as any quality control issue on behalf of the licensee will impact the licensor’s parent brand.
  
  
• Depending on an international partner also creates inherent risks regarding the success of that firm. Just like investing in an organization in the stock market, licensing requires due diligence regarding which organization to partner with.
  
  
• Lower revenues due to relying on an external party are also a key disadvantage to this model. (Lower risk, lower returns.)