Licensing

Definition :

Rent the rights to something (e.g. patent, brand name) to another firm in exchange for some form of payment.

Forms of payment :

• Royalty e.g. € / unit, % of sales, etc)
• Fixed fees (e.g. per year, etc.)
• Rights (to technology, product, etc.)

Advantages & Disadvantages of licensing :

Advantages	Disadvantages
Eliminates entry costs	Low profits
Low downside risk	Incentive problems
Low uncertainty	Contracting costs & monitoring
Modest return obtained via pricing	Does not establish your firm in the market
Modest return obtained in small markets	Learning device for licence
Fast, and low uncertainty
Less agressive mode, less agressive response
Preempt imitative behaviour
Get around trade barriers
No organizational change is requiered

 

Sources :

Strategic Management Course, Sciences PO Paris, Professor Raphael Amit, Faculty of Commerce and Business Administration, University of British Columbia, Vancouver, B.C., Canada

A Transaction Cost Theory of Equity Joint Venture, F.J. Hennart, SMJ, 1988