Page 101 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes Disadvantages of licensing

Licensing has the following disadvantages:
1. The big disadvantage of licensing is the risk of providing valuable technological know-how
to foreign companies and thereby loosing some degree of control over its use; monitoring
licenses and safeguarding the company’s proprietary know-how can prove quite difficult
in some cases.
2. Competing in a global market may require a firm to coordinate strategic moves across
countries by using profits earned in one country to support competitive attacks in another.
By its very nature, licensing limits a firm’s ability to do this. A licensee is unlikely to allow
a multinational firm to use its profits (beyond those due in the form of royalty payments)
to support a different licensee operating in another country.
3. Technological know-how constitutes the basis of many multinational firms’ competitive
advantage. Most firms wish to maintain control over how their know-how is used, a firm
can quickly lose control over its technology by licensing it.

Example: Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of
producing and selling Pepsi-Cola in Netherlands.
Under this agreement the boundaries are:
1. Heineken should not export Pepsi-Cola to any other country.
2. Pepsi supplies concentrated coal syrup and Heineken adds carbonated water to produce
beverage.
3. Pepsi can grant license to other companies in Netherlands to produce other products of
Pepsi.

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Caselet mauritius seZ success story

ince its inception over 400 firms have established themselves in sectors as diverse as
textiles, food, watches and plastics. In job employment the results have been startling,
Sas at 1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981
to 1986 and the added value has been significant. The roots of success can be seen on the
supply, demand and institutional sides. On the supply side the most critical factor has been
the generous financial and other incentives, on the demand side, access to the EU, France,
India and Hong Kong was very tempting to investors. On the institutional side positive
schemes were put in place, including finance from the Development Bank and the cutting
of red tape. In setting up the export processing zone the Mauritian government displayed
a number of characteristics which in hindsight, were crucial to its success.
1. The government intelligently sought a development strategy in an apolitical
manner.
2. It stuck to its strategy in the long run rather than reverse course at the first sign of
trouble.

3. It encouraged market incentives rather than undermined them.
4. It showed a good deal of adaptability, meeting each challenge with creative solutions
rather than maintaining the status quo.
Contd...

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