Is a form of foreign market entry based on a contractual relationship, where a company (the licensor) grants rights to intangible property to another company (the licensee) to use in aspecified geographic area for a specific period time and the licensee ordinarily pays a royalty to the licensor.
Elements of definition:
Contractual relationship: Is the relationship that existsbetween parts to sign a contract, establishing rights and obligations
Licensor: Is obliged to furnish technical information and assistance, agrees to make available to another company abroad, use of itspatents and trademarks, its manufacturing processes, its trade secrets, and its managerial and technical services
Licensee: Is obliged to exploit the rights effectively and to pay compensation to thelicensor, agrees to pay the licensor a royalty or other form of payment according to a schedule agreed upon by the two parties
Rights: May be exclusive (the licensor can give rights to no othercompany) or nonexclusive (it can give away right)
Intangible property: Include any item of worth that is not physical in nature.
* Patents, inventions, formulas, processes, designs, patterns
*Copyrights for literary, musical, or artistic compositions
* Trademarks, trade names, brand names
* Methods, programs, procedures, systems
* Manufacturing techniques
Payment (Royalty): Theamount and type of payment for licensing arrangements vary. Each contract tends to be negotiated on its own merits. For example, the value will be greater if potential sales are high.
The licensingagreement could be between the parent company of the international enterprise and one or more of its foreign affiliates, or it could be between the international enterprise and an independent foreign,private, or government enterprise.
Example: Beer manufacturers have used the licensing of their brand names and trade secrets to foreign companies as an alternative to exporting.