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LICENSING

30 October, 2015 - 09:16

Broadly defined, international licensing encompasses a variety of contractual arrangements whereby domestic companies (licensors) make their intangible assets (patents, trade secrets, know-how, trademarks, and company name) available to foreign companies (licensees) in return for royalties and/ or other forms of payments. Fees usually range from 2 to 5% of sales. Depending on the nature of the agreement, some technical assistance and training may be needed before and during the transfer, or even for the entire licensing period. In these cases the fees vary accordingly.

The most obvious advantage of licensing is the circumvention of trade barriers such as tariffs, quotas, and other restrictions. The exporting company is replacing the exportation of finished products with the exportation of components and/ or semifinished products, which are then assembled into final products by the licensee. In cases where the product requires extensive adaptation before it can be sold to the local market or extensive servicing once it has been sold, another advantage of licensing is that these functions can be performed by the licensee. Finally, by entering into a licensing agreement, a small firm that is relatively new to international business can acquire some knowledge of the international market with a relatively small investment. 1

The most important disadvantage of licensing is that the licensing firm retains little or no control. No legal construct can prevent the licensee from making product and process modifications and then patenting the adapted product or process under a new name. In this case, the licensing firm has for all practical purposes helped create a new competitor for its own products. Some firms protect themselves against intrusions on the part of the licensee by reserving the right to export one major component or ingredient from their headquarters. Examples of this practice are numerous in the pharmaceutical and soft drink industries. Another significant disadvantage of licensing is that it generates less revenue than does production.