Understanding International Licensing

Global Business Key Terms

• International Business involves business activities that exchange across national borders.
• Globalization means increasing interdependence and integration of economies, industries, markets, cultures, and policy-making around the world and increases cross-border trade, investment, migration, production, and the spread of technology.
• Globalization of Markets refers to merging historically distinct national markets into one global marketplace.
• Globalization of Production refers to multinational corporations locating factories and facilities around the world, optimizing operations and minimizing costs
• Globalization's economic impact increases free trade and expands consumer markets but can also lead to outsourcing and offshoring, resulting in domestic job losses.
• Socially, globalization improves quality of life and access to products/services, but can increase inequality, urbanization, and loss of cultural diversity.
• Politically, globalization enhances relations and cooperation between interdependent economies but increases vulnerability to global crises.
• Anti-globalization movements argue it undermines domestic industries, jobs, and cultures, while supporters say it promotes innovation, efficiency, growth, and prosperity.
• Foreign Direct Investment (FDI) is an investment made by a company/entity from one country into another, usually involving establishing operations or acquiring assets.
• Multinational Corporations are companies that control production, distribution, or service facilities in one or more countries outside their home country; examples include Sony, Toyota, Nestle.
• Offshoring is transferring business operations like manufacturing or services to overseas locations to leverage lower costs and operating expenses.
• Onshoring involves bringing manufacturing or services back to the company’s original country that had been previously offshored or outsourced.
• Nearshoring is relocating operations to a nearby foreign country to improve service to a particular region or benefit from cultural and time zone similarities
• Outsourcing is contracting out business functions like IT, customer support, or manufacturing to third-party service providers in another country.

Understanding Absolute and Comparative Advantage

• Absolute Advantage is the ability to produce a good/service more efficiently than competitors, using the same amount of resources.
• Comparative Advantage leads to trade benefit, even if one country has an absolute advantage in all products.

Example: Malaysia vs. Thailand

• Malaysia leads in producing palm oil and natural rubber.
• Thailand is a major natural rubber producer.
• Malaysia can produce 60 tons of palm oil or 40 tons of natural rubber.
• Thailand can produce 30 tons of palm oil or 50 tons of natural rubber.
• Malaysia has an absolute advantage in producing both palm oil and natural rubber.
• Malaysia has a comparative advantage in palm oil production with lower opportunity cost.
• Thailand has a comparative advantage in natural rubber production.
• Malaysia: 1 ton palm oil = 2/3 ton rubber
• Thailand: 1 ton palm oil = 5/3 tons rubber

Mode of Entry

• Steps in Entering International Markets
  • Identify exportable product(s)
  • Identify key foreign markets
  • Analyze methods to sell incorporating product characteristics, and unique location features.
  • Set export prices, payment terms, methods, and techniques.
  • Estimate resource requirements and returns.
  • Establish overseas distribution networks.
  • Determine shipping, traffic, and documentation requirements.
  • Promote, sell, and get paid.
  • Continuously analyze current marketing, economic, and political situations

Main Modes of Entry

• Exporting
• Licensing (and Franchising)
• Joint Venture
• Totally (Wholly) Owned Facilities (FDI)
• Strategic Alliance
• Management Contract
• Contract Manufacturing
• Turnkey Project

Exporting

• Exporting refers to selling goods and services, which are produced in one country to another (World Trade Organization, 2023).
• It involves physically moving goods across borders with necessary customs documentation and logistical arrangements.

Direct Exporting:

• Selling directly to the customer in the foreign market without intermediaries.
• Companies handle every aspect of exporting, from market research to after-sales service.
• This offers more control but requires more resources and expertise.

Indirect Exporting:

• Selling products to a third party, like an export trading company, which then exports to foreign markets.
• This method is less resource-intensive, as the intermediary manages market research, compliance, and logistics.

Advantages of Exporting:

• Extending to a Global Scale/Increasing Profits allows businesses to expand their market and access new revenue streams.
• Economies of Scale occur when the cost per unit decreases as production scale increases by spreading fixed costs.
• Risk Mitigation via Market Diversification is exporting that helps diversify market risk, so a downturn in one market is offset by others.
• Government Support is local businesses receive support for including financial incentives, information resources, and legal assistance to encourage international trade.

Disadvantages of Exporting:

• Complex Logistics and Regulations involves navigating complex logistics and adhering to regulatory requirements of different countries.
• Currency Fluctuations means dealing with multiple currencies, currency value fluctuations can affect pricing and profitability.
• Cultural and Language Barriers involve dealing with different languages/cultural practices, which can hinder business dealings.
• Product Adaptation may requires products need adaptations to meet regulations, cultural preferences, or consumer tastes, incurring extra costs.

Licensing

• Licensing is generally defined as a legal agreement where one party, the licensor, grants permission to another party, the licensee, to use their intellectual property (IP) in exchange for a fee/royalty (Investopedia, 2023).
• intellectual property consists of:
  • Trademarks that consist of logos, brand names, and symbols unique to a company
  • Patents that give exclusive rights to inventions and processes
  • Copyrights that safeguard for creative copy like music, literature, and software.

Product Licensing:

• Involves granting permission to manufacture, sell, or distribute an already existing product under the licensor's brand name and specifications.
• Coca-Cola licensing bottlers produce and distribute beverages in specific regions, and Disney licenses manufacturers to produce toys based on its characters.

Service Licensing (Franchise):

• Grants permission to operate a business based on the licensor’s brand, system, and know-how.
• Franchisees usually an pay initial franchise fees and ongoing royalties in exchange for training, operating manuals, marketing support, and brand recognition. -McDonald's and KFC, for example, allows franchisees to own and operate restaurants under the licensor’s brand and guidelines.

Advantages of Licensing:

-Faster Market Entry allows a company to enter foreign markets faster through the licensee’s existing distribution networks and market knowledge. -Reduced Cost and Risks involves the licensee bear the primary costs and risks. -Shared Expertise and Resources allows collaborative enhances product/service adaptation. -Focus on Core Business allows licensor to concentrate core competencies, such as research and development or brand building, rather than operations in a foreign market.

Disadvantages of Licensing:

-Less Control as the licensor has limited control over how products/services are marketed. -Limited Earnings are usually confined to royalties or fees that can be significantly less than direct operation profits. -Potential Competition creates a risk that the licensee may become a competitor. -Dependence on Licensee's Performance is such that success depends on licensee’s abilities.

Joint Venture (JV)

• A Joint Venture (JV) is recognized as a strategic alliance where two or more parties, typically organizations, form a partnership to share markets, intellectual property, assets, knowledge and profits.

Home Country-Based Joint Venture

• Companies from the same country partner to leverage resources and expertise for project development, like two U.S. companies entering an Asian market.

Host Country-Based Joint Venture

• A company partners with a local firm which is common when local market knowledge and regulatory compliance are important; an example is a German company partnering to operate in China which utilizes the local insight.

Third Country National Joint Venture

• Companies from two different countries create a joint venture in a third, this is typical in energy/infrastructure industries.

Advantages of Joint Venture:

• Access to New Markets, specifically when its imperative
• Shared Resources and Expertise is where partners can share costs, risks, expertise, and technology when entering new markets, to make large project undertaking easier to commence.
• Risk Sharing assists risk reduction by distributing business ventures among the partnering shareholders
• Increased Capacity can expand project reach and make independent ventures without feasibility, viable

Disadvantages of Joint Venture:

• Cultural and Management Differences may create misunderstandings and conflicts within
• Profit Sharing is mandated among joint ventures.
• Management Complexity: Coordinating decision-making and resolving conflicts in cross-cultural contexts can be complex
• Limited Duration and Dependence such joint operations often require strong dependency of partners.

Totally Owned Facilities

• Totally (Wholly)-Owned Facilities (FDI): Wholly-owned facilities (WOFs), in the context of foreign direct investment (FDI) and involve a company establishing and completely owning production or service facilities in a foreign country

Greenfield Investment

• Greenfield an investment when a company develops operations from scratch in a foreign countries by hiring new staff, purchasing land and establishing infrastructure in these countries and results in greater control for facilities.

Brownfield Investment

• Brownfield Investment allows companies to invest in facilities via foreign purchase or leasing and previously redeveloped structures to expedite local enterprise set up.

Advantages of Totally Owned Facilities:

• Complete Control; All operations under your managerial authority and aligned with the corporate goals.
• Profit Retention; All profits generated go to the parent company without local or joint shareholders
• Market Knowledge benefits; In-depth market insights and improved and refined understanding of both client preference and customer service improvement.
• Intellectual Property Protection provides greater security to proprietary intellectual property and avoids sharing of resources that are normally distributed among partnerships.
• Long-Term Presence can establish a positive market presence and local brand loyalty

Disadvantages of Totally Owned Facilities:

• High Risk and Investment, it involves ventures with significant capital and potentially high risks when doing business in foreign countries.
• Regulatory Challenges: Managing regulatory environments and foreign compliance.
• Cultural and Market Adaptation; Cultural integration hurdles and local preferences.
• Resource Intensive; Heavy capital investment and constant management as required
• Political and Economic Changes; These types if long term investment in another country is heavily impacted by political factors.

Other Forms of Entry

• Strategic Alliance is a cooperative arrangement to share resources for mutual goals, without forming a separate legal entity, and often involves sharing technology, resources, or market access. -Management Contract involves managing day-to-day operations of a separate company to provide expertise and efficiencies.
• Contract Manufacturing occurs when another company is contracted to complete products parts to focus on product design and sales/outsourcing labor.
• Turnkey Project; Where complete construction occurs to setup facilities and transfer contractor responsibilities to the new owner.
• Trading Companies that specialize in exports and imports that provide expertise in prices and other relevant factors.
• Countertrade offers an exchange of international commerce and good and various hard currencies.

Trade Restriction - Protectionism

• Tariffs (Import Duty) Taxes imposed by a government goods on goods that are imported.
• Revenue Tariffs are most primarily designed to generate income for government.
• Protective Tariffs: are intended to shield domestic industries from foreign competition.

Trade regulations - Dumping

• Dumping is an action when exporting products, at a price, is lower than domestic.

Nontariff Barriers: Trade Restriction that is not tariffs

• Nontariff Barriers Trade Restriction that involves the process that Country applies.
• Import Quota restricts the quality of the goods on import.
• Embargo totally bans trade via different political reasons.
• Standards are regulations a product must meet per country.
• Cultural Barriers, impedes language for the consumer.

Reasons for imposing Trade Restrictions include:

• To Equalize the balance of payment where more exports are occurring than imports impacting potential negative currency issues.
• To Protect New Industries where business sectors struggle from external competition to grow.
• To Protect National Security of the country from military and tech risks
• To Protect Public Health from unsafe or uncontained imports/outbreak preventative measures.
• To Retaliate against a Trade Restriction on other parties from each other, and negatively impacting both sides of consumer and production
• To Protect Domestic Jobs to ensure there are viable roles available in the sectors that they can be most effective.

Reasons against Trade Restrictions include:

• Higher Prices for Consumers that are imposed tariffs.
• Restriction of Consumer Choice, that will limits product base for the consumers.
• Misallocation of International Resources which encourages protection for inefficient domestic policies.
• Loss of Jobs in external sectors via tariffs.

Regional Economic Integration

European Union (EU):

 - Integration as a single market, currency (Euro) and co-ordinated regulatory policies
 -27 countries (as of January 2024)
 -Benefits are trade improvement product management, services and capital resources   
 -Challenges: Maintaining coherences & migration and sovereign risks.

North American Free Trade Agreement (NAFTA):

 -Free Trade Agreement (FTA) via the US, Canada, and Mexico with elimination of tariffs/quotas across trade investments.
 -Challenges include income inequality and dispute resolution mechanisms.  

Association of Southeast Asian Nations (ASEAN):

• Benefits are reducing the trade barriers to raise domestic and foreign investments along with collaborative initiatives. -Challenges: Implementing trade agreements across politics and diversity.
• African Union (AU): A continental economy that involves members from the East, West, and Southern regions.
• East African Community (EAC): Creates a single market for its members with currency goals for the future.
• Mercosur: a South American trade and economic hub and an integrated member between Argentina, Brazil and Venezuela
• Pacific Alliance: Trade agreements with Chile, Mexico, and Peru focusing on free trade to improve investments.

Levels of Economic Integration include:

:

• Reduce/eliminate trade barriers, while maintaining policy, in countries with non-member states. Well-known example = the North American Free Trade Agreement . (NAFTA)
• Customs Union: member counties utilize CET with the Southern African Customs Union as the the example (CET). Imports use non members. The
• In Common Market trade barriers are reduced, while countries align capital and labor.
• Economic Unions; These types of Unions align countries, factors, production and practices and monetary integration.
• Political unions where governance, regulatory alignment occurs such as unified economy and policies.

General Agreement on Tariffs and Trade (GATT):

• Formed in 1947 among 23 founding member countries
• Aims to promote international trade -Reduce trade barriers , quotas, subsidies Create rules-based trading system
• Established regulations to treat trading partners equally -Regardless of national ideologies
• Impact :Promoted freer, more transparent trade. Increased prosperity for cooperating nations post-WW2

World Trade Organization (WTO)

• Formed in 1995 as successor to GATT and expanded scope and institutions for global trade governance and has over 164 representing 95% global trade.
• Oversees complex trade agreements
• Administer and enforce agreed trade rules Settlement of trade disputes Trade negotiations forum Review national trade policies
• Build trade capacity in developing countries Roles:
• Uphold open, free and non-discriminatory trade
• Vital for economic growth and prosperity
• More comprehensive than GATT
• WTO build on GATT's mission while strengthening institutions and mechanisms to promote global trade as complexity increased in the modern area.

Explore the mechanics of international licensing, its advantages for market entry, and cost reduction. Understand franchisee payments, licensor risks, IP usage, and the role of organizations like the GATT and WTO in global trade.