An international licensing agreement grants the rights to a firm in the host country to either produce or sell a product, or both. This agreement involves the transfer of rights to patents, trademarks, or technology for a specified period of time in return for a fee paid by the licensee. Anheuser-Busch, for instance, has granted licenses to produce and market Budweiser beer in England, Japan, Australia, and Israel, among other countries. Many food manufacturing MNCs license their products overseas, often under the names of local firms, and products like those of Nike and Disney can be seen around the world under various licensing agreements. Like exporting, licensing is also a relatively low-risk strategy because it requires little investment, and it can be a very useful option in countries where market entry by other means is constrained by regulations or profit-repatriation restrictions.
Licensing is especially suitable for the mature phase of a product's life cycle, when competition is intense, margins decline, and production is relatively standardized.52 It is also useful for firms with rapidly changing technologies, for those with many diverse product lines, and for small firms with few financial and managerial resources for direct investment abroad. A clear advantage of licensing is that it avoids the tariffs and quotas usually imposed on exports. The most common disadvantage is the licensor's lack of control over the licensee's activities and performance.
Critical environmental factors to consider in licensing are whether sufficient patent and trademark protection is available in the host country, the track record and quality of the licensee, the risk that the licensee may develop its competence to become a direct competitor, the licensee's market territory and legal limits on the royalty rate structure in the host country.
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