Welcome to class of International Licensing Dr Welcome to class of International Licensing Dr. Satyendra Singh Professor, Marketing and International Business University of Winnipeg Canada s.singh@uwinnipeg.ca https://abem.uwinnipeg.ca https://www.abem.ca/conference

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

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

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

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

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

Risks of Licensing… So, ensure 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

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)

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…?)

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

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

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