Advantages and Disadvantages of Licensing as a Mode of Entry Into Foreign Markets Essay

Words: 1903
Pages: 8

“Assess the merits and demerits of international licensing as a mode of entry into new markets”

Disney does not have to produce t-shirts, USB sticks and even waffles with Mickey Mouse’s happy face on it. Instead, it can license the right to use its famous character to different companies around the globe and enjoy the hefty royalties, which in 2010 totaled 28.6 billion dollars (Rorie, 2011). Does it then mean that licensing as a mode of entry into foreign markets is the best option available? Not necessarily so. Given a multitude of foreign market entry methods, all of them being used in practice in some contexts, it is crucial to determine under which circumstances licensing will pay off. The decision factors include the specifics of
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Moreover, when a company licenses a product abroad, it potentially misses lucrative opportunities for economies of scope: clients purchasing the licensed product might be willing to obtain supportive services or supplementary products, but the licensor is not in position to sell those.

The second major drawback of licensing is the huge counterparty risk, which is a problem even when the most detailed agreements are used. A licensor selling a brand or a trademark put this asset at risk: when a reputation of a brand is damaged abroad, it will also suffer in the home country. Licensing also creates considerable dependence of the licensor on the licensee. The example here is the agreement between Laura Ashley and L’Oreal, whereby the right to manufacture and distribute perfume branded “Laura Ashley” was granted to the French cosmetics producer, who downplayed the importance of the development of this product. This dispute resulted in a trial and lost revenue (Griffin, 2007). Another potential problem with the counterparty is that it may become a future competitor for the company. This is what happened when RCA licensed its TV-making technologies to Sony and Matsushita. The latter two companies soon entered the US market, stealing a significant share from RCA (Hill, 2009). The expertise, know-how and tacit knowledge obtained by using the intangible asset stay with the licensee even after the