Successful International Expansion Through Licensing
Licenses Can Reduce Risk—Capital Investment Is Low
Successful international expansion offers promising opportunities but requires preparation and planning. How to enter those markets is key to your success.
There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages: ecommerce, distributors, strategic alliances, licensing, new foreign office, joint venture, and acquisition.
In this article, we look at licensing.
What Is Licensing?
A license is a contractual agreement to allow another company to use your intellectual property (IP), such as patents, brands, designs, or know-how, in exchange for a payment. Licenses may be exclusive, exclusive for certain territories or uses, or non-exclusive.
Done wisely, the licensee reduces risk—they’ve assessed the market and believe they can sell your products. You leverage that experience, giving you product and brand exposure that could be slow, expensive, and risky on your own. Capital investment for the licensor is low: typically no new manufacturing plant or sales force is needed. And you receive upfront cash and/or ongoing license payments that increase the return on your IP investment.
While licensing can take many forms, two common models include 1) private label manufacturing and 2) franchising.
In this model, you might: a) share your technology (including molds, source code, etc.) with a local company to manufacture your product, either with their branding or yours, or b) provide your products or product components to a local company for them to market, again either with your branding or theirs.
This arrangement could be with a local partner that has sufficient brand recognition of its own. Or it could be with a larger, multinational company that wants your products or components as part of their portfolio in certain foreign markets.
With either model, your products are reaching more new markets with little direct capital investment and marketing/sales risk, but with substantial risks to the value of your IP unless planned carefully with highly-reputable licenses.
Franchising is highly detailed form of licensing. Franchisees use your business model and name to operate under tight guidelines as your alter ego.
Many McDonalds are franchises owned by local businesses. They pay McDonalds franchise fees, and in turn receive how-to operating templates and use of the McDonalds brand. Operating standards are carefully monitored, and there is limited ability to modify the franchise.
Franchising laws are particularly complicated, and require your processes to be carefully detailed and organized into a blueprint others can easily follow, and you need to be prepared to provide ongoing marketing support.
Crossborder licensing agreements have many complicated legal and tax issues. There are the IP laws to consider in every country where you license. You will need pricey IP lawyers with crossborder licensing experience to help organize your IP and processes, file for foreign protection where appropriate, and negotiate complex agreements. Don’t skimp on good advice –your company’s intellectual property is valuable, and it’s not worth risking it to save a few dollars in legal fees.
Your license agreement should specify how your IP can be used, but ultimately, you have limited control over your licensee’s local business operations. You’ll need to spell out in detail how and where it’s produced, and the consequences for no or low production so you can assess other options. Poor quality or service can degrade your brand unless you choose licensees carefully and invest resources in “policing” the license, and build in auditing rights to verify payment accuracy.
Licensing increases the chances of your IP being shared with others, and theft of your IP could be very damaging. Certainly, any legal disputes will be expensive and difficult.
Does Licensing Make Sense For You?
You should consider licensing as a mode of international expansion if you (a) have IP that is valuable and can be protected; (b) are willing to invest in good legal counsel; (c) choose your licensees carefully, and (d) are willing to invest in ongoing oversight.
When done thoughtfully licensing can provide opportunities for substantial long-term growth. The initial investment can be large, but once made, can often be replicated in other markets.
Next, we’ll look at setting up a foreign office to reach new international customers.
Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series.