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Advantages and Disadvantages of Globalization through Licensing License It is a contract that legalizes authority to one entity (licensee) of using confidential business practices of another entity (licensor). Providing licenses abroad can give a particular company exposure and revenue. However, at the same time, this practice has side effects as well.
Advantages: Revenue When a person or group receives a particular license, it has to then compensate for the license with multiple payments to the original business owners. The licensee also has to come to an agreement on profit sharing with the owner. In addition to that, in the case of any losses, the licensor stays unaffected, as the licensee is responsible for all the losses. The licensor also evades all the costs and taxes, which would have otherwise been borne if the licensor had brought the brand to the host country.
Brand Recognition The brand receives global recognition and exposure as people on the brand’s behalf would be operating in the host country.
License Term The licensee may not extend or end the lease of the property without the consent of the licensor. However, the licensor has the right to end the license with the current licensee and sub-lease it to another licensee.
Risk Aversion for the Licensee The licensee does not have to set up a new product, but instead, can invest into an already established foreign product that has brand value in the market. Moreover, the licensee evades the risk and cost associated with establishing the new product.
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Disadvantages Competition The licensees may involuntarily spark some sort of competition among themselves considering that each of them use the same processes. The owners often therefore limit the scope of the licenses through geographic, time or quantity bounds.
Exposure of resources to the Licensee Another major disadvantage to providing licenses is the exposure of all or part of important confidential information. The licensee gets the access to information such as the production process. The licensee might even exploit the resources provided by the licensor. The licensee soon learns about much of the operations of the brand and therefore becomes a potential competitor. Moreover, due to lack of control, the licensee can use the business for a number of fraudulent activities.
Lack of Control The licensee has very little control over what could or could not be done to improve the business process. In most cases, the licensor devises the standard operating procedures for the franchises and the licensee has to go through a certain procedure to make any changes.
Follow-up with the Licensor The licensee has to follow up with the licensor to make sure that the code of conduct and the operating procedures are up to mark and in accordance to the actual business.
Source: http://www.researchomatic.com/advantagesdisadvantages-of-licensing-as-a-mode-of-entry-intoforeign-markets-155871.html
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