In today’s global economy, businesses seek to expand from their respective countries. A common strategy applied in international business is licensing. Licensing is where a company permits another company operating in a foreign country to utilize its brand, products, technology, or processes for a specific fee or royalty. This strategy helps companies grow globally without setting up new offices or factories abroad.
Licensing in international business is a form of legal arrangement where the product, brand, or technology owner is the licensor and allows another party (licensee) to use it under certain conditions. This method is less risky and costly and helps a business enter new markets quicker.
Licensing In International Business
Licensing in international business is granting intellectual property by a company called the licensor to another called the licensee for its use. Intellectual property is anything that one company owns; it can be a brand name, logo, trademark, patent, technology, or business process. In return for using the product, the licensor receives remuneration, usually in terms of sales or profits, called royalty.
This arrangement allows companies to expand into new international markets without significant investments. The licensor does not have to build factories, open new offices, or manage operations in foreign countries. Instead, the licensee handles local production, distribution, and marketing.
Licensing in international business suits companies that aim to expand globally but would avoid the risks and costs of setting up new operations in countries. It helps businesses develop faster while still being on top of their brand or technology.
Examples of Licensing in International Business
Licensing in international business is quite common, especially in technology, fashion, entertainment, and manufacturing countries. Let me give you a few instances to help you understand how it works:
Disney
Disney licenses its characters, such as Mickey Mouse, Frozen, and Marvel superheroes to companies worldwide. For example, a toy company in China may get a license to produce Mickey Mouse toys. The toy company pays Disney a royalty, and Disney’s brand is exported in new markets without opening new stores.
Microsoft
It has licensed its software, Windows and Office, to computer manufacturers in every corner of the globe. HP and Dell install Microsoft software on their hardware and pay the licensing fees back to Microsoft, thus enabling millions of users globally.
Coca-Cola
Coca-Cola licenses its brand and secret formula to bottling companies in different countries. These companies produce, bottle, and distribute Coca-Cola products locally while paying royalties to Coca-Cola. This strategy helps Coca-Cola maintain its global presence.
Nike
Nike grants licenses to manufacturers in different countries. For instance, a Vietnamese company may be licensed to produce Nike shoes. Nike controls the design and quality, while the licensee handles manufacturing and local distribution.
Types of licensing in international business
Different licensing forms exist based on what is being licensed in international business. Each type has its specified objectives. There are the following types:
Product Licensing
Product licensing allows a company to let another company produce and sell its products in another country. The licensor gives the design, formula, or specifications, and the licensee is responsible for the local production and sales.
Trademark Licensing
Trademark licensing is where a company allows another business to use its brand name, logo, or trademark. This aids the brand in expanding globally while retaining its identity.
Example: A fashion brand like Gucci licenses its trademark to companies that produce watches or perfumes under the Gucci name.
Technology Licensing
Technology licensing is transferring technical knowledge, patents, or processes from one company to another. This is commonly practiced in software, electronics, and pharmaceutical industries.
Example: A German car manufacturer licenses its engine technology to an Indian car company. The Indian company uses the technology to build cars locally.
Copyright Licensing
This type of licensing mainly occurs in creative industries such as music, film, and publishing. A copyright owner permits other people to use his work for some purposes.
Example: A Hollywood studio licenses a popular movie to Asian streaming platforms. The platforms pay royalties to show the film to their audience.
Trade Secret Licensing
Trade secrets are confidential business information, like formulas or processes, that give a company an edge over competitors. Companies can license trade secrets under strict agreements.
Example: A beverage company licenses its secret drink formula to a bottling company in another country, keeping the recipe confidential.
Advantages and Disadvantages of Licensing in International Business
International business through licensing provides many advantages and disadvantages. Let us first explore the pros and cons of how licensing will help or impede the expansion of a business. Licensing enables organizations to venture into new markets in a relatively lesser risk and investing scenario. Licensing also means losing control of your brand or technology to others. There will be pros and cons to arrive at such a licensing decision. Licensing,
Advantages In International Business
Companies can enter international markets without spending heavily on new offices, factories, or staff. The licensee handles local operations, reducing financial risks. Licensing helps companies expand quickly into new countries because the licensee knows the local market. This saves time compared to setting up a new business from scratch.
Steady Income Through Royalties
The licensor earns a steady income from licensing fees or royalties, often based on sales or profits. This provides a steady income stream without managing day-to-day operations. Licensing allows companies to focus on their core activities, such as research, product development, or brand building, while licensees handle local marketing and sales.
Local Expertise
Licensees know the local culture, customer preferences, and business environment. This enables the licensed product or brand to flourish in foreign markets. Licensing facilitates brand expansion across the globe. Disney and Nike have become international brands due to licensing agreements with partners worldwide.
Disadvantages of Licensing in International Business
The licensor has little control over the licensee’s brand, product, or technology management. Poor performance by the licensee can damage the reputation of the brand.
Risk of Intellectual Property Theft
Sharing technology, formulas, or business secrets increases the risk of intellectual property theft. Some licensees might copy the product and become competitors. While licensing generates steady income through royalties, the profits are often lower than owning and managing the business directly in a foreign market.
Dependency on Licensee
The licensor depends on the licensee’s success. If the licensee fails to market the product effectively, it affects the licensor’s income and brand reputation. Contract terms, royalty payments, or intellectual property rights can cause legal disputes in countries with varying legal systems.
Termination Difficulty
Termination of a licensing agreement is complicated if the contract has strict terms. It leads to legal complications and affects future business relationships.
What is the Difference Between Licensing and Franchising in International Business?
Licensing and franchising are two forms of international expansion for a business. However, they differ in how they operate. Licensing and franchising involve giving rights to another company; however, they differ in how they work. Licensing usually centers on products, brands, or technology, whereas franchising encompasses a complete business model, which includes brand, operations, and support systems.
| Aspect | Licensing | Franchising |
| Definition | Granting rights to use intellectual property | Granting rights to operate a complete business |
| Control | Limited control over the licensee’s operations | High control over franchisee’s business operations |
| Business Model | Focus on products, brands, or technology | Includes brand, business model, and operations |
| Support Provided | Minimal support after licensing agreement | Continuous support, training, and guidelines |
| Legal Relationship | Contract-based legal relationship | Strong legal and operational relationship |
| Examples | Microsoft licensing software | McDonald’s franchising restaurants |
Licensing In International Business FAQs
What is licensing in international business?
Licensing in international business is an agreement in which one firm licenses its brand, technology, or products to another firm in exchange for a fee or royalty.
What are some examples of licensing in international business?
Examples include Disney licensing characters for toys, Microsoft licensing software to device makers, and Coca-Cola licensing its brand to bottling companies.
What are the types of licensing in international business?
The main types are product licensing, trademark licensing, technology licensing, copyright licensing, and trade secret licensing.
What are the advantages of licensing in international business?
Licensing offers low investment risks, faster market entry, steady royalty income, global brand growth, and access to local market expertise.
What is the difference between licensing and franchising in international business?
Licensing focuses on products, brands, or technology with limited control, while franchising
