- Definition & Examples, What Is Foreign Direct Investment? You don't need to do anything to generate those revenues either. However, this is incorrect. 3. In addition, some countries impose tariffs on incoming goods, which will impact the firms profits. Acquisitions are appealing because they give the company quick, established access to a new market. [9]James C. Morgan and J. Jeffrey Morgan. An alliance can serve a number of purposes: Alliances range in scope from informal cooperative agreements tojointventuresalliances in which the partners fund a separate entity (perhaps a partnership or a corporation) to manage their joint operation. 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. Although that time period may be 5-10 years, there is an expiration date which must be considered by the licensee. There are advantages and disadvantages to licensing for both parties to consider before finalizing their agreement. 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. There is no guarantee that a licensing agreement will generate cash. )Links to an external site. Atax havenis a country that has very advantageous (low) corporate income taxes. The licensee is able to keep the profits earn by their use of the licensed items. On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it because there is: Lower income than in other entry modes Loss of control of the licensee manufacture and marketing operations and practices leading to loss of quality 7.3 Licensing - Core Principles of International Marketing For example, McDonalds expands overseas through franchises. Source: United Press International, Brazils Embraer Expands Aircraft Business into China, July 7, 2010, accessed August 27, 2010, http://www.upi.com/Business_News/2010/07/07/Brazils-Embraer-expands-aircraft-business-into-China/UPI-10511278532701. Megan owns a company called Computers and More. There is a huge dynamism among them.19 Tse sees entrepreneurial China as entrepreneurial people at the grassroots level who are very independent-minded. Licensing is governed by a licensing agreement, which involves a one-time transfer of property or rights for a fee. But success in international business involves more than merely finding the best way to reach international markets. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. 14 Licensing Advantages and Disadvantages. At its worst, it can encourage bribery and corruption. 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. 10 Licensing Advantages and Disadvantages - Wise Business Plans A licensing agreement is a contract between two parties (the licensor and licensee) in which the licensor grants the licensee the right to use the brand name, trademark, patented technology, or ability to produce and sell goods owned by the licensor. That means tariff barriers to entry can be avoided because a domestic company is using the IP, just as the licensor might be using the IP domestically. ", 20 Cell Phone Repair Industry Statistics and Trends, 11 Best Dynamic Pricing Strategies with Examples, 100 Best Side Hustles for Teens to Make Money, 10 Proven Psychological Pricing Strategies with Examples. 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. Disadvantages of contract manufacturing. Research the foreign market thoroughly and learn about the country and its culture. Its like a teacher waved a magic wand and did the work for me. Psychological Research & Experimental Design, All Teacher Certification Test Prep Courses, Communication & Decision-Making in Global Business, International Trade Management & Regulation, Breaking Into Foreign Markets: International Marketing Strategies, What Is Contract Manufacturing? In exchange, the Japanese licensee would pay you a royalty fee. 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, 14. While this may seem to be a simple task, its often a source of embarrassment for the company and humor for competitors. Foreign licensing allows companies to buy and sell internationally but comes with certain risks and liabilities. Because of high domestic labor costs, many U.S. companies manufacture their products in countries where labor costs are lower. 1. Licensing Agreement - Definition, Example, Pros and Cons Developing a good relationship with regulators in target countries helps with the long-term entry strategy. Thus, franchisees are not in full control of the business, as they would be in retailing. understand the dynamics among the choice of different entry modes. Such property is usually intangible, such as trademarks, patents, and production techniques. Michael E. Porter and Mark R. Kramer, The Big Idea: Creating Shared Value,. 2. Advantages and Disadvantages of International Business Exporting is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. An error occurred trying to load this video. Neither party is required to throw their own money in these areas to earn profits, which creates a win/win situation for everyone involved. Source: Data obtained from Huge Wage Gaps for the Same Work Between Countries June 2011, WageIndicator.com,http://www.wageindicator.org/main/WageIndicatorgazette/wageindicator-news/huge-wage-gaps-for-the-same-work-between-countries-June-2011(Links to an external site. Walmart has learned that the savings it gets from lower transportation costs and the benefit of being able to restock in smaller quantities more than offset the lower prices it was getting from industrial farms located farther away. The agreement needs to grant another company rights to the products utilizing any patents and designs of Megan's company so that the products resemble the U.S. products as closely as possible. Source: Suzanne Kapner, Making Dough, Fortune, August 17, 2009, 14. Figure 7.3 Where FDI Goes provides an overview of amounts, destinations (developed or developing countries), and trends. Firms need to evaluate their options to choose the entry mode that best suits their strategy and goals. The parent company has tight control over the operations of a subsidiary, but while senior managers from the parent company often oversee operations, many managers and employees are citizens of the host country. Under aninternationalfranchiseagreement, a company (thefranchiser) grants a foreign company (thefranchisee) the right to use its brand name and to sell its products or services. Once Megan has fully committed to taking her business to another country, she will first find a company that can be trusted. Even applying for export and import licenses is becoming easier as more governments use the Internet to facilitate these processes. )Links to an external site. Advantages and Disadvantages of Licensing 15.3 Describe the advantages and disadvantages of licensing. It's also possible they'll lower standards, churn out poor quality goods and tarnish the reputation of your process. When a licensing arrangement is in place, then the licensor is able to get their product into new markets much easier than if they were doing the work on their own. The Trieste-based company fosters long-term collaborations with the worlds best coffee growersin Brazil, Central America, India, and Africaproviding know-how and technology and offering above-market prices. )Links to an external site. Disadvantages include the risk of an incompetent foreign partner firm and lower income compared to other modes of international expansion. 9. Even with exporting, firms still face the challenges of currency exchange rates. As markets expand, however, a firm might decide to enhance its competitive advantage by making a direct investment in operations conducted in another country. 4 What are the advantages of international licensing? 14. The culture of corruption is even embedded into some Russian company structures. The place of service has to bear the franchisers signs, logos, and trademark in a prominent place. As a rule, licensing strategies inhibit control and produce only moderate returns. Therefore, he advises US firms to enter China sooner rather than later so that they can take advantage of the opportunities there. A U.S. company might contract with a local company in a foreign country to manufacture one of its products. Lacks control. What if a company wants to do business in a foreign country but lacks the expertise or resources? 1. With internet access growing around the world, however, an e-commerce platform makes it easy to be competitive without intending to be. Andrew J. Cassey, Analyzing the Export Flow from Texas to Mexico,StaffPAPERS: Federal Reserve Bank of Dallas, No. However, it requires a high level of resources and a high degree of commitment. Disadvantages of Licensing From the licensor's standpoint, licensing is a relatively passive entry strategy. 19. Economies of Scale. With Wise Business, you can receive in up to 10 different currencies and take advantage of local account details, making for quick and convenient transactions. Here, there is no need to set up and manage any business unit abroad, which makes the process easier. Firms may want to have a direct operating presence in the foreign country, completely under their control. After the project is completed by the firm, it is handed to the foreign client .With the use of Turnkey Strategy, the firm transfers' process technology to the foreign countries.Turnkey projects are those that are . Foreign Licensing: Process & Importance - Study.com Potential problems include (a) conflict over asymmetric new investments, (b) mistrust over proprietary knowledge, (c) performance ambiguity, that is, how to split the pie, (d) lack of parent firm support, (e) cultural clashes, and (f) if, how, and when to terminate the relationship. To date, the partnership, called the Novartis Malaria Initiative, has saved an estimated 750,000 lives through the delivery of 300 million doses of the medication.11. Thanks to twenty-first-century information technology, nonmanufacturing functions can also be outsourced to nations with lower labor costs. Retrieved 30 December 2019, from https . International Licensing: Concept, issues, Advantages and Disadvantages The franchisee is said to have a greaterincentivethan a direct employee because he or she has a direct stake in the business. It can also be detrimental if a license is over-extended or one of the parties acts in bad faith. Patrick Daley Thompson, a former Chicago alderman who is also the nephew of the former Mayor Richard M. Daley, was convicted by a federal jury in February 2022 of making false statements and filing false federal tax returns. The service has to be in accordance with the pattern followed by the franchiser in the successful franchise operations. This does allow you as the licensor to take legal action, but that tends to get very expensive, very quickly. A licensee knows their market much better than the average licensor. 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. The company can purchase a license instead of outright ownership and start to make profit faster. Embraer chose to enter China as its first foreign market, using the joint-venture entry mode. So you enter into a licensing agreement with a Japanese company that allows your licensee to manufacture coffee-flavored popcorn using your special process and to sell it in Japan under your brand name. It takes less upfront cash to pay for a license. If they do a great job and earn plenty of cash, the licensor might ask for a renewal that costs more than the initial license. Gaille, B. 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,Academy of Management Journal43, no. Global Competition, Principles of Business Ethics: Certificate Program, International Retailing Strategy & Operations, GED Social Studies: Civics & Government, US History, Economics, Geography & World, Introduction to Management: Help and Review, Human Resource Management: Help and Review, College Macroeconomics: Homework Help Resource, Introduction to Macroeconomics: Help and Review, UExcel Business Ethics: Study Guide & Test Prep, DSST Computing and Information Technology Prep, Introduction to Computing: Certificate Program, Introduction to Business: Homework Help Resource, Create an account to start this course today. These modes of entering international markets and their characteristics are shown inTable 7.1 International-Expansion Entry Modes.1 Each mode of market entry has advantages and disadvantages. )Links to an external site. Terrible Example Of Licensing A Product Internationally - Burnsideusa.com Saving cost. As a member, you'll also get unlimited access to over 88,000 The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. 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, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2473. 12. Doing global business is a complex, risky endeavor. They allow companies to share the risks and resources required to enter international markets. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large return on investment. Table 7.1Selected Hourly Wages, United States and India. 20. 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. PDF ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL LICENSlNG What differences make global business so tricky? These locations are close to where the nuts are grown. 6. What is the Census? 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. What has changed over the years is the strength of different currencies. The difference is that the franchiser provides a bundle of services and products to the franchisee. On this page: Advantages of Licensing Access to Local Markets: Licensing agreements can be the fastest way to enter new markets by allowing international companies to partner with . Try refreshing the page, or contact customer support. )Links to an external site. Not surprisingly, most very large firms have foreign subsidiaries. You can police how your IP is being used to some extent, but you cant see everything that is being done. In return, the operator pays the supplier a fee. Create your account. Disadvantages of Foreign Licensing. 5. Larger companies, with more money and resources, usually hire top consultants to do this for them. Most of the costs associated with exporting take the form of marketing expenses. In addition, even wholly owned subsidiaries cant be totally independent of Chinese firms, on whom they might have to rely for raw materials and shipping as well as maintenance of government contracts and distribution channels. Because Megan feels that she can grow both physically and financially if she expands to other countries, she started doing some research on how to do so safely. Trying to expedite governmental approval of these items, the US firm agreed to accept a lower royalty fee than originally stipulated. Nonetheless, acquisitions are risky. In fact, it can be considered one of the quickest ways to become a millionaire. [4]Gary Gereffi and Stacey Frederick, The Global Apparel Value Chain, Trade and the Crisis: Challenges and Opportunities for Developing Countries, The World Bank, Development Research Group, Trade and Integration Team, April 2010,http://www.iadb.org/intal/intalcdi/PE/2010/05413.pdf(Links to an external site. Another advantage of exporting is profitability. 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. 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. It creates an opportunity for passive income. So what are the advantages of using a foreign licensing agreement? 11, October 2010, accessed February 14, 2011,http://www.dallasfed.org/research/staff/2010/staff1003.pdf. 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. Advantages and Disadvantages of Licensing - International Business: The It helped me pass my exam and the test questions are very similar to the practice quizzes on Study.com. International sales has accounted for as much as 60 percent of McDonalds annual revenue.15, Cautions When Purchasing an Existing Foreign Enterprise. The company has been wildly successful in the U.S. and interest in her products from other countries has started to grow. Some foreign companies believe that owning their own operations in China is an easier option than having to deal with a Chinese partner.
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