Advantages and Disadvantages of Licensing and Exporting

Modes of entry to a foreign market are referred to as the channels which companies employ to penetrate a new international market. The modes differ according to the degree of risk which they have, return on investment as they assure and the number of resources which they require. There are several alternatives which are available when it comes to consideration of modes of entry; these include international agents, strategic alliances, licensing, exporting, joint ventures and the internet. This paper shall mainly explore the licensing and exporting, their merits as well as demerits and how they have been applied in businesses.

Theoretical background

Exporting is defined as the act of marketing products and services in the global market, and these products originate from the home country. For the process of exporting to be smooth, four players must coordinate, and they include the exporter, importer, transport provider and the government. Exporting is a good marketing strategy for small and medium-sized businesses as they do not have to make the huge financial investment. There are two approaches which can be used in exporting goods and services to other states; it may be either direct or indirect. Direct exporting implies that it is straightforward and the organization shall carry on its businesses overseas. Direct exporting is a good marketing strategy for small and medium-sized businesses as they do not have to make a huge financial investment in the global market. Therefore, the firm shall have greater control as well as its brand as compared to indirect exporting (Cullen, Praveen & John, 2011). Indirect exporting refers to the use of intermediaries such distributors in the host countries to sell products and services on their behalf.

            On the other hand licensing is a sophisticated arrangement where an organization can charge a fee or a royalty due to the use of its intellectual property rights, brand, trademarks, patents, technology or expertise by another company (Rugman, Collinson & Narula, 2017). Companies are using the licensing enter into a contractual agreement by signing an international licensing contract which enables a foreign company to create a proprietors invention for a permanent condition within a particular market. Example of licensing is turnkey contracts, franchising and contract manufacturing.

How to enter foreign markets

Businesses seeking to enter international markets should conduct extensive research on the targeted host countries. As it ensures that companies understand their culture, customs, and business etiquettes, the dynamism of their currency, needs and unspoken regulations (Mailian, 2018). With this information at hand, companies are assured of successful entry and prosperity of their businesses. However, lack of knowledge on these major factors could have them facing major setbacks and legal issues which lead to loss of investments.

Comparison between exporting and licensing

Through licensing, companies enter into a contract law with the licensor to permit them to sell their product under their brand name.  While exporting requires for companies to engage distributors or sell directly to the consumers (Gupta, 2014). Unlike exporting, companies using licensing can circumvent trade barriers and tariffs. It is also important to note that companies using licensing are needed little adaptation since they are using known and trusted brands in the host country (Rugman, Collinson & Narula, 2017). However, exporting companies face resistance from the host country residents as they are viewed as outsiders. Unlike indirect exporting, licensing offers companies better control of their products.

Advantages

                                                               Exporting            

Through direct exporting, companies eliminate the use of middlemen and give them easy market access. This guarantees an increase in profits that the exporting firm gets and instant feedback on the market climate, competition and its performance in the global market (Gupta, 2014). As the business develops in the international market, the company marketing team is in a position to improve as well as redirect their marketing efforts for expansion. Through indirect exporting, an increase in sales in the host countries is realized since the distributors are knowledgeable of their countries market conditions (Delaney, 2018). The last advantage is that companies are provided with better protection of their goodwill, trademarks, and patents.

Licensing

Licensing allows companies to avoid trade barriers and tariffs since the licensor has already established his business. Licensing is low-risk and also speeds up the entry process since the companies do need to make any investments prior (Gupta, 2014). The licensee is assured of high Return on Investment (ROI) and also minimizes risk occurrence and the number of resources to invest in the business on the licensee. The licensee transfers all the financial risks to the licensor, thus better utilization of the provided resources.

Disadvantages

Licensing

 There is a high probability of Potential conflict with licensor whereby the licensee becomes more familiar with the licensor technology and becomes a competitor. Since the licensee is solely dependent on the licensor, it limits the chances of them competing. The brand reputation of the licensor is harmed if the licensee provides customers with products and services that are low in quality.

Exporting

Companies using exporting mode of entry are faced by high start-up cost which only serves to add costs such as that of transportation as well as a negative impact on the environment due to carbon emissions. Due to lack of knowledge of the host country language and geographical outlay, companies are faced with logistical complexities when it comes to distributing their products (Delaney, 2018). Indirect exporting limits control over the company’s foreign sales, in addition to fears of not getting paid by the distributors, they must pay them a percentage of their sales for the services rendered (Gupta, 2014). Some host counties impose tariffs on incoming products, and this affects the companies profits.

Give two practical examples of how the two entry modes have been applied in practice by businesses

Exporting and licensing are the most preferred modes of entry into the international market. Olam international used to ship cashew nuts from Africa to their manufacturing plant in Asia for processing. This impacted negatively on their profits. Therefore, the company opened manufacturing plants in African countries such as Tanzania, Mozambique, and Nigeria where the nuts are grown (International Business, 2018). This resulted positively for the company as it was able to reduce its shipping cost and carbon emission as well as provide employment for the citizens.

Microsoft uses licensing to sell products to its users. In 2008, Microsoft and Nikon signed an agreement on a patent covering digital cameras and other consumer products (Global Market Entry Strategies, 2012). This agreement allows both parties to use each other technology innovatively.

Conclusion

To conclude, it is evident from the entry modes explored above why business engages in the global market. It is also clear that each mode has varying levels of risk, control, resource investment and returns. Thus, it is imperative for every business to evaluate where they are positioned when deciding on which entry mode will give higher chances of succeeding in the foreign market.

References

Cullen, K. Praveen P., John B. (2011). Strategic international management (5th ed.).             Australia: South-Western Cengage Learning.

Delaney, L. (2018). Should My Company Export Products Directly to Its Customers?. Retrieved from https://www.thebalancesmb.com/direct-exporting-advantages-and-disadvantages-1953310

Gupta, S. (2014). INTERNATIONAL BUSINESS. (pp. 9-13). S CHAND & CO LTD, 2014.

Global Market Entry Strategy. (2012). [Ebook]. Retrieved from https://nscpolteksby.ac.id/ebook/files/Ebook/Business%20Administration/Global%20Marketing%20Management%20 (2010)/Chapter%209.pdf

International Business. (2018). Retrieved from https://saylordotorg.github.io/text_international-business/index.html

Rugman, M., Collinson, S. & Narula, R. (2017). International business.  New York: Pearson.

Maillian, l. (2018). Effective Strategies for International Market Entry Strategies | Definition | Concepts | Meaning. Retrieved from https://www.educba.com/international-market-entry-strategies/