Licensing is an arrangement by which a foreign licensee buys the rights to produce a company’s product in the licensee’s country for a negotiated fee. The licensee then invests major share of the capital required to commence the operations. The advantage of this arrangement is that the company need not bear the development costs and risks associated with launching foreign operations. Hence, licensing is a very attractive choice for companies that can not invest capital to develop overseas operations or for companies unwilling to take the risk of committing substantial financial resources in unfamiliar or politically volatile foreign environment. In high technology areas it is quite common for companies to provide know-how through licensing arrangements. For instance, Ranbaxy Laboratories Ltd. is seeking partners for out-licensing its urology, respiratory and anti-infectives technologies.
Licensing as a mode of entry into global arena has three serious drawbacks. First, companies do not reap the benefits of cost economies and location economies since licensees typically set up their own manufacturing facilities. And in cases where these economies are important, licensing may is not the best mode to go overseas.
Second, in a global marketplace it is necessary to coordinate all the operations across all the countries in order to use the profits earned in one country to support competitive attack in another. Licensing severely restricts a company’s ability to do this. A licensee will not let a multinational company to take its profits to support competitive moves of the company in other countries.
A third and a very major problem with licensing is the risk associated with licensing and sharing technological know-how with foreign companies. Technological know-how provides a formidable competitive advantage for many technology based companies and licensing its technology can quickly erode its competitive advantage.