Welcome to class of Licensing by Dr. Satyendra Singh

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

What is Licensing? It is a strategy Contractual arrangement –Licensor allows licensee to use for fee Technology Patents Brands Design Process Intellectual property …

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 –Licensee is unlikely to become competitor –Tech. change is fast, so 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 quality ↓ –Usually after the fact –So spend time to understand licensee before negotiations dfr –Research and Development (R&D) Configured and Coordinated –Sustainable Competitive Advantage (SCA) across countries

Risks of Licensing… Profit may not be maximized –Licensor has indirect access to market –Exchange rate change –Repatriation restrictions So, ensure –Guaranteed feedback of actual improvement –Sublicensing, if applicable –Quality control –Contracts are honored

Risks of Licensing Intellectual Property (IP) rights –Some countries do not have IP legislations –Infringement of IP is common So lose $ –So necessary to license to offset IP piracy I.e., if licensed, licensee will take action to stop this It is also called “Reluctant Licensing” Quick internationalization is another reason for licensing

Costs of Licensing It is costly for licensor –Protection of Industrial/intellectual Property May defend IP in the court of law –Establishing the license agreement Searching for suitable licensee Communications Training Equipment testing –Maintaining the license agreement Back up services for licensee Auditing Ongoing marketing research Opportunity costs?

Unattractive Markets for Licensing In some countries –licensing must be approved by governments France, Ireland, Spain… –Limit duration of agreement –Exclusive licensing is not permitted It limits competition –Foreign exchange controls –Restriction on royalty payment (withholding tax) In EU, withholding tax + VAT = 50% –Limits on royalty fee (3-10%) Governments can change it anytime

Elements of Licensing… No standard form It is based on licensor’s experience –Reasons for licensing –No ambiguity  market, profit, product… – Schedules –Promotion methods, trade secrets, drawing, photos… –Geographical limitations –Right to sublicence –Flow back clause  improvements made by licensee is communicated to licensor

Elements of Licensing –Usually licensor aim for 25% of profit  convert this level to a certain royalty rate –Royalty and periodic payment –Royalty escalation clause –Currency of payment –Minimum performance requirement Minimum royalty Minimum promotion expenditure Sales Number of personnel