Welcome to class of

Licensing

byDr. Satyendra Singh

www.uwinnipeg.ca/~ssingh5

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