Is licensing a business option to enter a foreign market?

There are many ways for businesses to get into the international market. Some are riskier than others, and some require businesses to give up some control. Read about the different kinds of international business and rate them based on risk and control.

Licensing

When thinking about how to enter a foreign market strategically, licensing is a low-risk and relatively quick way to do so.

LEARNING OBJECTIVES

Describe the pros and cons of licensing as a way to get into a foreign market.

KEY TAKEAWAYS

Key Points

Foreign market entry options include exporting, joint ventures, foreign direct investment, franchising, licensing, and various other forms of strategic alliance.
Of these potential entry models, licensing is relatively low risk in terms of time, resources, and capital requirements.
Advantages of licensing include localization through a foreign partner, adherence to strict international business regulations, lower costs, and the ability to move quickly.
Disadvantages to this entry mode include loss of control, potential quality assurance issues in the foreign market, and lower returns due to lower risk.
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.

Key Terms

licensor: In a licensing relationship, the owner of the product, service, brand, or technology is licensed.
licensee: In a licensing relationship, the buyer of the produce, service, brand, or technology is being licensed.

When thinking about going into international markets, you have to make some important strategic and tactical decisions. As ways to get into a market, you could use exporting, joint ventures, direct investment, franchising, licensing, and other types of strategic alliances. Each way to get into the market has its own pros and cons and a different way of dealing with issues like cost, control, speed to market, legal barriers, and cultural barriers.

**Licensing**: The 1933 Fiat 508 was manufactured under a license in Poland by Polski Fiat.

What are licenses?

A licensee can get the products, services, brand, and/or technology from a licensor, which is the company that owns the technology or brand. This is done through an agreement. This agreement will spell out the terms of the strategic alliance. It will let the licensor get into a foreign market at a low cost and with little risk, while the licensee gets access to the competitive advantages and unique assets of another company. This could be a good deal for both parties, and it is a fairly common way to do business internationally.

Let’s consider an example. The company that owns the license makes and sells energy drinks. Due to rules about bringing food into Japan, the product can’t be sold at wholesalers or retailers in the country. To get around this strategic barrier, the person who owns the recipe finds a local company that makes sports drinks and licenses their recipe to them. In exchange, the licensee sells the product in its own country under a local brand name and gives the licensor 15% of the total sales.

The Positive and Negative

Before deciding to use licensing as a way to get into a market, it’s important to know when licensing works best.

Advantages

Licensing affords new international entrants 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 entry. Licensing provides critical resources in this regard, as the licensee has local contacts, mastery of the local language, and a deep understanding of the local market.

Disadvantages

While the low-cost entry and natural localization are definite advantages, licensing also comes with some opportunity costs:

Loss of control is a serious disadvantage in a licensing situation in regard 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 is also a key disadvantage to this model. (Lower risk, lower returns.)

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