International Licensing May Be Best Bet for Companies Seeking Foreign Markets

The present international climate is not conducive to equity investments. US companies thinking of entering foreign markets should consider licensing as an alternative. International licensing includes a variety of contractual agreements whereby domestic firms make available intangible assets, such as patents, trade secrets, and trademarks, to foreign companies in return for royalties or other kinds of payments. International licensing resulted in revenues of $2 billion for US companies in 1976, and revenues may have quadrupled since that time. Advantages to the licensor include: 1. Little capital is needed. 2. Licensing is a quick and easy entry into foreign markets; in many of the developed Communist countries, licensing is the only way into the market. 3. Licensing royalties are guaranteed and periodic. Some disadvantages include: 1. A company must have a distinctiveness in technology, trademark and company/brand name in order to attract licensees. 2. The licensor has no control over production and marketing conducted by the licensee. 3. Because of host government restrictions, licensing royalties rarely exceed 5% of gross sales, very small when compared with equity investment potential.