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Introduction to International Licensing

Explore the concept of international licensing, its benefits, risks, and costs. Understand the elements of licensing agreements and when to employ this strategy. Presented by Dr. Satyendra Singh, Professor of Marketing and International Business at the University of Winnipeg.

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Introduction to International Licensing

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  1. Welcome to class ofInternational LicensingDr. Satyendra SinghProfessor, Marketing and International BusinessUniversity of WinnipegCanadas.singh@uwinnipeg.cahttps://abem.uwinnipeg.cahttps://www.abem.ca/conference

  2. Outline • What is International licensing • When is it employed • Risks of licensing • Costs of licensing • Elements of licensing agreements

  3. What is International Licensing? • It is an internationalization strategy • Quick and relatively low commitment compare to FDI/IJV/Export • Contractual arrangement • Licensor allows licensee to use for a fee • Technology, Patents, Brands, Design, Process • Intellectual property • More complex/technical is licensing of • Foreign banks, insurance companies

  4. When is it Employed? • If licensor has strategic advantage • Host country restricts import or FDI or both • Additional $ with minimum effort • Test through licensing then  FDI • Does not relate to core competency • Peripheral technology should be licensed • Licensee is unlikely to become competitor • Tech. change is fast, and licensor is ahead of licensee • Prospects of technology feedback is high

  5. When is it Employed? • If licensee has strategic advantage, too • Licensee gets existing technology • Cheaply • Faster • Less risky than their own R&D • Product design for diversification • To complement production or marketing capability

  6. Risks of Licensing… • Licensee may be future competitor • Or may act opportunistically • That’s why firms do it internationally to avoid future competitor in domestic markets • So limit the licensee’s market • Introduce clauses… • Licensor loses reputation if licensees’ quality ↓ • Usually licensor knows about it after the fact • So spend time to understand licensee before negotiations

  7. Risks of Licensing… • Licensors’ Profit may not be maximized because • Licensor has indirect access to market • Exchange rate change • Repatriation restrictions by foreign governments • So, ensure • Guaranteed feedback of actual product improvement • Sublicensing, if applicable • Quality control • Contracts are honored

  8. Risks of Licensing • Intellectual Property (IP) Rights • Some countries do not have IP legislations or do not enforce it. • Infringement of IP is common problem. • So lose $ (eg. CD, music, software…) • So it’s necessary to license to offset IP piracy • If licensed, licensee will take action to stop unlicensed domestic competitor from using the IP • So licensing can be a defensive solution rather than an opportunity for internalization (ie. Reluctant Licensing)

  9. Costs of Licensing • Costly for licensor; not one-time transaction • Protection of Industrial/intellectual Property • May defend IP in the court of law • Establishing the license agreement (could be complex eg. food vs. medicine) • Searching for suitable licensee • Communications, Training, Equipment testing • Maintaining the license agreement • Back up services for licensee • Auditing  visiting monthly each store of Starbucks from Seattle • Ongoing marketing research • Opportunity costs? (eg. $ lost if exported…?)

  10. Unattractive Markets for Licensing • In some countries • licensing must be approved by governments • France, Ireland, Spain…or until regn is complete • If govt limits duration of agreement • Govt does not allow exclusive licensing of a product or in a certain region • It limits competition • Double taxation could be high • In EU, withholding tax + VAT = 50% • Govt. may limits on royalty fee (3-10%) • Governments can change it anytime

  11. Elements of Licensing… • No standard form for licensing agreement • It is based on licensor’s experience • Reasons for licensing, and respective roles • No ambiguity  market, profit, product… • Write in Appendix or exhibits or Schedules • We can license on promotion methods, trade secrets, drawing, photos, R&D/lab report… • Geographical limitations • Right to sublicense (yes or no or with some clause) • Flow back clause

  12. Elements of Licensing • Usually licensor aim for 25% of licensees’ profit  convert this level to a certain royalty rate/structure • Minimum performance requirement • Minimum royalty • Minimum promotion expenditure • Sales • Number of personnel • Royalty and periodic payment, down payment • Currency of payment • Royalty escalation clause

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