LICENSING AS A MARKET ENTRY TOOL

Licensing As a Market Entry Tool: Two Case Studies



Licensing As a Market Entry Tool: Two Case Studies

Introduction

Firms that are beginning to internationalize and multinational companies that are expanding in nations outside their home base are both faced with the challenge of choosing the best structural arrangement. Four major alternatives are exporting, licensing, joint ventures, and wholly-owned subsidiaries.

Fitfield and Lewis (2007) mention exporting differs from the other modes in that a company's final or intermediate product is manufactured outside the target country and subsequently transferred to it. Indirect exporting uses intermediaries who are located in the company's home country and who take responsibility to ship and market the products (Fitfield and Lewis, 2007). With direct exporting the producer firm does not use home country middlemen, although it may utilize target country intermediaries. Boeing is one of the largest direct exporters in the world, manufacturing most of its aircraft within the USA, but selling the majority of its planes in other nations. This paper critically analyses the advantages and disadvantages of using licensing as a market entry tool by giving example of Starbuck (UK) and IBM (USA).

Discussion

Licensing is a non-equity, contractual mode with one or more local partner firms. Using Licensing, International Business Machines (IBM) transfers to a foreign organization the right to use some or all of the following property: patents, trademarks, company name, technology, and/or business methods. For IBM and Starbuck, the licensee pays an initial fee and/or percentage of sales to the licensor. For example, Borden set up a licensing agreement with Meiji Milk to produce and market dairy products in Japan (Fitfield and Lewis, 2007).

Joint ventures and wholly-owned subsidiaries entail direct investment in business sites in the target country. Joint ventures involve two or more organizations that share the ownership, management, risks, and rewards of the newly formed entity. Each partner contributes equity that may take the form of money, plant and equipment, and/or technology. For example, Matsushita established a joint venture with Philips in Belgium to produce batteries (Atuahene & Patterson, 2002). Wholly-owned operations are subsidiaries in another nation in which the parent company has full ownership and sole responsibility for the management of the operation. Japanese automobile manufacturers are well known for their use of wholly-owned subsidiaries in the USA in the late 1980s and 1990s. Toyota is establishing a site in Indiana to manufacture and market four-wheel drive vehicles in the USA. Although Toyota's new Indiana plant is a greenfield investment (Atuahene & Patterson, 2002), international firms may also acquire and utilize existing manufacturing sites as a mode of entry or expansion.

These four entry modes may be differentiated according to three characteristics of the modes that have been identified in previous research:

1. Quantity of resource commitment required;

2. Amount of control;

3. Level of technology risk.

Figure 1 illustrates the relationships between these elements and the entry modes.

Resource commitments are the dedicated assets that cannot be employed for other uses without incurring costs. Resources may be intangible, such as managerial skills, or ...