Definition: Licensing is defined as a business arrangement, wherein a company authorizes another company by issuing a license to temporarily access its intellectual property rights, i.e. manufacturing process, brand name, copyright, trademark, patent, technology, trade secret, etc. for adequate consideration and under specified conditions.
The firm that permits another firm to use its intangible assets is the licensor and the firm to whom the license is issued is the licensee. A fee or royalty is charged by the licensor to the licensee for the use of intellectual property right.
For example: Under licensing system, Coca-Cola and Pepsi are globally produced and sold, by local bottlers in different countries.
In finer terms, it is the simplest form of business alliance, wherein a company rents out its product based knowledge in exchange for entry to the market.
The overseas company enters into a licensing agreement with another company based in the domestic country, for a specified period of time. The two primary reasons for entering in the licensing agreement are:
- International expansion of a brand franchise.
- Need for commercialisation of new technology.
Generally, a firm opts for license its products, when the firm holds that the consumer’s acceptance of the product is high. It helps the licensee to differentiate the product from other products offered by the competitors in the market. Further, it also assists the licensing company in reaching new customers at a low price.
Benefits and Limitations
In licensing, the licensor gets the advantage of entering the international market at little risk. However, the licensor has little to no control over the licensee, in terms of production, distribution and sales of the product. In addition to this, if the licensee gets success, the firm has given up profits, and whenever the licensing agreement expires, the firm might find that it has given birth to a competitor.
As a prevention measure, there are certain proprietary product components supplied by the licensor itself. Although, innovation is considered as the appropriate strategy so that the licensee will have to depend on the licensor.
On the other hand, the licensee acquires expertise in production or a renowned brand name. It expects that the arrangement will increase the overall sales, which might open the doors to the new market and help in achieving the business objectives. However, it requires a considerable capital investment, to start the operations, as well as the developmental cost is also borne by the licensee.