Full text of DOI:10.1016/S1090-9516(00)00031-6

Motivations and Risks In
International Licensing: A
Review and Implications for
Licensing to Transitional and
Emerging Economies
Sandra Mottner
James P. Johnson
In the light of changes in technology and today’s global business environment, recent contributions in
the literature regarding international licensing, particularly the reasons, risks, and management of
licensing are reviewed. The main reasons that firms choose licensing over other methods of interna-
tional market entry are examined, and the risks associated with licensing are synthesized and updated,
along with perspectives on managing those risks. Finally, areas are suggested for further inquiry that
may help to enrich this field of study. Throughout, particular attention is paid to the issues of
international licensing that affect emerging and transitional economies, particularly from the perspec-
tive of small firms.
oday’s global market reflects the
dynamic changes brought about
by advances in technology, particularly
information technology and transporta-
tion, making the environment in which
international business decisions are
made radically different from what it
has been in the past (Lowendahl & Re-
vang, 1998; Glazer, 1991). For exam-
ple, developments in information tech-
nology have dramatically increased the
speed of global communication, so that
information and ideas are transmitted at
several times the speed of 20, 15, or
even 10 years ago. This change in the
speed of information exchange means
that firms may use new and different
criteria when making operational deci-
sions. A firm may also take into account
the speed of communication and the
greater ease of intellectual property
T
Sandra Mottner, Department of Business Admin-
istration, College of Business & Public Adminis-
tration, Old Dominion University, Norfolk, VA
3529, USA; Tel.: ϩ1-757-566-1539; Fax: ϩ1-
57-683-5639 ϽSMottner@aol.comϾ. James P.
Johnson, Department of Business Administration,
College of Business & Public Administration, Old
Dominion University, Norfolk, VA 23529, USA;
Tel.: ϩ1-757-683-5426; Fax: ϩ1-757-683-5639
Ͻjpjohnso@odu.eduϾ.
2
7
Motivations and Risks in International Licensing 171

transfer when making strategic compet-
itive decisions, such as method of mar-
ket entry. Additionally, developments
in information technology may make
global operations more viable for small
firms today than in the past (Liesch &
Knight, 1999). Because licensing is one
of the means of market entry, these
technological changes have an impact
on the role of licensing in international
business, and present changes in the
potential challenges and opportunities
to those firms that engage in licensing.
Licensing has been a growing
method of international trade. U.S. in-
come from international licensing had
an average annual increase of 12% in
the 1990s (U.S. Department of Com-
merce, 1998) and U.S. government data
shows that U.S. firms license out to
foreigners four times as much technol-
ogy as they license in (Degnan, 1999).
Although this growth has slowed re-
cently as international markets have
dealt with the Asian financial crisis, it
has not declined (U.S. Department of
Commerce, 1998). This overall growth
in licensing over the past decade indi-
cates that it is an attractive option for
many firms in the international business
arena. The growth in total licensing
supports the view that changes are oc-
curring that are causing the growth to
occur. The sources of change may have
to do with the characteristics of firms,
the technology that is being transferred,
the means and methods of transfer, the
environment in which firms find them-
selves, or other factors.
issues regarding international licensing
is timely. Changes wrought by succes-
sive rounds of the General Agreement
on Tariffs and Trade (GATT), the de-
mise of communism, and financial, eco-
nomic and market reforms instituted by
governments around the globe have
opened up new possibilities for licens-
ing in transitional and emerging mar-
kets. International licensing provides a
door to global opportunities for a firm
that is unwilling or unable to leave its
own shores because it allows the firm to
benefit from the overseas exploitation
of its mobile assets while avoiding the
greater risks inherent in foreign direct
investment. Therefore, international li-
censing is an attractive option to be
employed for a firm seeking to expand
into emerging and transitional econo-
mies where there may be a higher per-
ception of risk. The purposes of this
paper, then, are to: 1) examine the main
reasons firms choose licensing over
other methods of international market
entry; 2) review the risks involved with
licensing and synthesize and update
views of how to manage those risks,
particularly in emerging and transitional
economies; and 3) suggest a number of
potential areas of inquiry that may help
to enrich this field of study. To achieve
these objectives, we begin by providing
a review of the evolution of the defini-
tion of licensing, followed by a discus-
sion of the decision to license, particu-
larly looking at the antecedents to
licensing. The various risks inherent in
licensing are outlined and illustrated by
the use of specific industry examples.
After the discussion of the risks of li-
censing, we propose a framework for
managing the licensing function, and
Given the trend in the volume of in-
ternational licensing, and the changing
environment of today’s global market
place, a reassessment of some of the
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72 Journal of World Business / 35(2) / 2000

then suggest avenues for further re-
search.
technology. IBM’s portfolio of pat-
ents, for example, generated over one
billion dollars in licensing revenues in
1
999 (Foremski, 2000). Conse-
quently, the discussion of interna-
tional licensing has focused increas-
ingly on issues of intellectual property
rights. Intellectual property rights are
a major concern for licensors, as they
deal not only with more traditional
forms of trademarks and patented
know-how, but also with the increased
availability of copyrighted material,
including emerging computer technol-
ogy. The central issue is: what exactly
is being licensed? According to
Glazer (1991), firms are licensing as-
sets that are in the form of
information/ideas or knowledge, and
that have some characteristics of a
commodity. Today these assets may
include research and development
ideas, inventions, formulas, techno-
logical know-how, services, brands,
art, music, designs, and trademarks. In
the U.S. domestic market, 6% of all
retail sales in 1997 were based on
licensed corporate trademarks and
brands such as Coca-Cola, Ralph Lau-
ren, and New York’s Metropolitan
Museum of Art (Werner, 1997). Co-
lonial Williamsburg in Virginia, for
example, has 44 licensed Williams-
burg௡ manufacturers, involved with
products as diverse as furniture, brass
home accessories, linens, food, china,
and paper products (Colonial Wil-
liamsburg, 2000). Consequently, al-
though the broader definition of li-
censing as “technology transfer” is
still valid, it has taken on a broader
scope in terms of what technologies
are being transferred.
LICENSING AND TECHNOLOGY
TRANSFER
The literature on the subject of licens-
ing, particularly international licensing,
has identified licensing as almost syn-
onymous with the term “technology
transfer” (Contractor, 1985; Telesio,
1
979). Telesio (1979) discussed a rela-
tively narrow definition of licensing as
manufacturing technology transfer” (p.
), whereas Cho (1988) defined interna-
“
2
tional technology licensing as, “the sale
of a firm’s technology and/or manage-
rial skills in return for payments from
the foreign party” (p. 70). Another nar-
row definition of licensing was “permis-
sion given to another firm to engage in
an activity otherwise legally forbidden
to it” (Contractor, 1985, p. 6), a defini-
tion that focused primarily on the trans-
fer of patent rights and trademarks.
However, a broader definition of the
term licensing can be synthesized from
several sources, including Contractor,
as the transfer of patented information
and trademarks, information and know-
how, including specifications, written
documents, computer programs, and so
forth, as well as information needed to
sell a product or service, with respect to
a physical territory (Kotabe et al., 1996;
Capon, 1987; Contractor, 1985).
Although much of the discussion
regarding licensing remains based on
the transfer of manufacturing technol-
ogy, the nature of technology in gen-
eral has changed, particularly with the
recent advances made in information
Motivations and Risks in International Licensing 173

THE DECISION TO LICENSE
simply posing licensing as one of the
choices (such as FDI, export, strategic
alliance), they demonstrate how the
model changes with a wider variety of
market factors. This complex model not
only encompasses the major interna-
tional market entry strategies, but
makes a distinction between production
strategies and distribution strategies and
Historically, a significant portion of re-
search has focused on the role of inter-
national licensing as an entry strategy
into overseas markets, particularly as
contrasted with other modes of entry,
such as exporting or FDI (Porter, 1986;
Calvet, 1981; Telesio, 1979). However,
there is some discussion that the term
“
takes account of the strategic interac-
“
mode of entry” may be excluding the
tion between the foreign entrant and its
leading host-country rival” (Buckley &
Casson, 1998, p. 540). The model al-
lows for flexibility of comparison be-
tween any of the modes of entry, and
takes into account “location costs, inter-
nalization factors, financial variables,
cultural factors, market structure and
competitive strategy, adaptation costs,
and the cost of doing business abroad”
role that licensing plays in strategic
product planning (Kotabe et al., 1996).
More recently, the role of licensing in
international business has been consid-
ered part of a firm’s overall interna-
tional strategy (Aulakh et al., 1998).
Phoenix AG, a German manufacturing
concern, agreed in 1997 to license the
production of its automotive and rail-
way components in India to Sigma
Corp. of Delhi. Both firms viewed this
licensing agreement as a step towards
establishing a joint venture, which
would integrate Sigma’s manufacturing
capability into Phoenix’s global strat-
egy (European Rubber Journal, 1997).
This example reflects a shift from view-
ing licensing as just one of the choices
for an entry strategy to a broader con-
cept involving the interconnectedness
of a firm’s marketing, management, and
financial strategies, which may be seen
as a reflection of the change in a firm’s
overall, more integrated approach to in-
ternational business. In part, this shift
may also be driven by market changes
as well as firm strategy (Buckley &
Casson, 1998).
(Buckley & Casson 1998, p. 543).
The Buckley and Casson model is
compatible with the market-driven,
global product strategy ideas espoused
by Kotabe et al. (1996), who argue that
licensing should no longer be viewed
solely as a mode of entry. Their model
shows the “influences of various param-
eters on the incidence and timing of
technology licensing” (Buckley & Cas-
son, 1998, p. 76), and includes industry
level variables, resource-based factors,
and end-product market penetration (es-
pecially speed to market concerns).
Kotabe et al. (1996) link licensing to
product strategy by integrating the tim-
ing and incidence of licensing with:
market-specialization versus multimar-
ket strategy, product overlap (the rapid
introduction of new product whereas
the existing product is still viable),
modular up-gradabilty (licensing of part
of a product or process), end product
Buckley and Casson (1998) provide a
good description of this integrated ap-
proach in their model for analyzing in-
ternational market entry. Rather than
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74 Journal of World Business / 35(2) / 2000

standardization, component standard-
ization, and network externality and
compatibility requirements. Kotabe et
al. (1996) see licensing, “as a tool for
proactive market penetration in existing
markets” (p. 85).
censing process, including the decision
to license.
The integration of market strategy,
technological and information parame-
ters, financial issues and other issues
help to explain why (and in some cases
when) licensing will occur. By thinking
of the decision to license as a complex
decision with multiple facets, we see
that a firm’s decision to license is based
on many different factors. These factors
may be viewed as assets (or lack of
assets), and the resulting asymmetries
that exist between the assets of domes-
tic firms and the assets of foreign firms
or markets aid in explaining why licens-
ing occurs. Asset asymmetries as an
explanation for licensing reflect the
concept of competitive advantage (Por-
ter, 1986). Porter describes the various
competitive advantages that a firm may
have in the global market, and argues
that the exploitation of the firm’s com-
petitive advantage has strong implica-
tions for its competitive strategy. Kogut
and Zander (1993), in a compatible
view regarding technology transfer,
show empirically that the decision to
transfer technology “can be explained
by the attributes of knowledge that con-
stitute the ownership advantage of the
firm” (p. 626). The framework of asset
asymmetries, as a tool to aid in under-
standing when firms license, is intended
to move beyond the ideas of market
imperfections (Kindleberger, 1969).
Kotabe et al. (1996) assert that the
model of technological asymmetry has
been negated, however, by the experi-
ence of the technological parity now in
the Triad regions (Ohmae, 1990). If the
model being viewed is one of national
technical asymmetry, this may be be-
The complexity of the integrated
point of view can be exemplified by
looking at marketing opportunities from
different perspectives. A firm entering a
transitional economy or emerging mar-
ket may use licensing as a means of
gaining a first mover advantage, mini-
mizing risk whereas gaining access to a
growth market. For example, Warner
Music International has entered into li-
censing agreements with firms in Ro-
mania, Croatia, Serbia, Slovenia, and
other Eastern European countries as
part of its marketing strategy (Clark–
Meads, 1997). Other entry methods,
such as manufacturing and/or distribu-
tion, were options but would have taken
longer to implement. A small firm, on
the other hand, may view licensing as a
competitive strategy for market penetra-
tion when direct investment is a finan-
cially unviable option for international
expansion.
Aulakh et al. (1998), in the course of
detailing the research on compensation
considerations in international licensing
agreements, also use a more integrated
approach to the licensing choice. Argu-
ments about different compensation
schemes and licensee control are inte-
grated with such strategic issues as
product life cycle, host-country envi-
ronment, licensor involvement, and in-
tellectual property protection. This rein-
forces the idea of a strong link between
the firm’s overall strategy and the li-
Motivations and Risks in International Licensing 175

coming more true; however, market-
place asymmetries and firm asymme-
tries still persist.
kets. Biagotti had several “false starts”
with other Chinese licensees before
turning to YZIT, whose expertise is in
spinning, knitting and weaving cash-
mere on Italian-made textile machines.
The combination of Biagotti’s designs
and YZIT’s low cost, high quality man-
ufacturing is expected to provide a
high-quality product at a competitive
price (Conti, 1997). In contrast, Royal
Doulton, a U.K. manufacturer with a
core competency in design and the man-
ufacturing and marketing of fine china
has chosen to expand internationally
through licensing its designs in arrange-
ments in areas outside its core compe-
tency in manufacturing, that is, in glass-
ware, textiles, wall hangings, cutlery
and kitchen products (Royal Doulton,
The following section examines asset
asymmetries and is divided into three
main areas that are viewed as the pri-
mary antecedents to the decision to li-
cense: (1) information asymmetry; (2)
resource asymmetry; and (3) market
asymmetry. It is followed by a discus-
sion of additional antecedents to licens-
ing. The intent is to provide a means of
viewing how different assets may pro-
vide an advantage, constrain decision-
making, or otherwise play a role in a
firm’s strategic planning with regard to
licensing.
Information Asymmetry
2
000).
In this discussion of licensing, the
term “information” reflects primarily
technological know-how, or the intel-
lectual property that is under consider-
ation for licensing. It has been hypoth-
esized that technology transfer occurs
when there is an asymmetry of informa-
tion (Caves, 1982; Contractor, 1985).
This asymmetry of information may be
a result of the differing core competen-
cies of firms (Hamel & Prahalad, 1989).
By creating a synergy between firms
through the process of licensing infor-
mation, the core competency of each
firm may be better utilized, thereby re-
sulting in economies of scale if the firm
match is optimal. This is what Italian
fashion designer Laura Biagiotti did in
establishing a 3-year licensing agree-
ment in China with YZIT, a Chinese-
Italian joint venture, to manufacture her
new “Laura by Laura” cashmere
sweater line for Asian and U.S. mar-
Resource Asymmetry
Asymmetry may also play a role in
the entry decision when the capital re-
source assets—or lack thereof—are
considered. Although large firms (both
potential licensors and potential licens-
ees) may have the luxury of weighing
the economic variables and deciding
whether to license or build, smaller
companies that have a global expansion
strategy may be constrained by lack of
available capital (Contractor, 1985;
Telesio, 1979). Thus a small firm whose
core competency is in research and de-
velopment or in some other transferable
technology/information, such as a de-
sign or trademark, may be limited to
options that include licensing to a do-
mestic firm with international distribu-
tion, or licensing to a portfolio of inter-
national licensees. The capital resource
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76 Journal of World Business / 35(2) / 2000

asset constraint makes licensing one of
the few, if not the only option for some
firms. This means that licensing is not a
next best choice to FDI, which has tra-
ditionally been seen as the optimal
means of international entry (Caves,
that licensing may be viewed as “a
means of rapid market penetration” (p.
74). The use of licensing for rapid mar-
ket entry supports the idea that market
asymmetries in terms of new product
introduction may play a role in the
choice of licensing over other means of
product market entry.
1
982), because for some firms FDI is
not even an option.
In addition to the capital resource as-
set constraint for some firms, cash flow
issues may affect a firm’s decision re-
garding licensing. Licensing is attrac-
tive because it can provide a relatively
steady stream of income, assuming that
the firm negotiates a royalty payment
agreement instead of, or in addition to, a
lump sum payment. Alternatively, inter-
national licensing can be a lucrative
source of funds for an entrepreneur or a
start-up firm. Unable to attract venture
capital to finance the production of his
innovative vacuum cleaners, British in-
ventor James Dyson licensed the design
overseas and used the proceeds to man-
ufacture and launch his Dual Cyclone
vacuum cleaners in the U.K. market
Licensing may be used at the intro-
duction phase of a product’s life cycle
because it is often the fastest way to get
the product to the most markets. Licens-
ing is generally faster to implement than
FDI and in some cases equals or ex-
ceeds the speed of exporting. Given in-
formation technology and the pace of
global information dissemination, speed
to market can provide competitive ad-
vantage for some firms and their prod-
ucts (Kerin, Varadarajan, & Peterson,
1992; Porter, 1986). This is in contrast
to past firm behavior, where licensing
was used “as a means of extracting re-
maining value from a mature technol-
ogy” (Telesio, 1979, p. 14). Today, with
the quicker and more efficient flow of
information globally, it is becoming
less likely that a firm will allow its
technology to mature before it thinks
about the competitive global environ-
ment. Therefore, market asymmetries in
the introduction of new products may
have an effect on the choice of licensing
versus other means of market entry. Be-
cause it is often the fastest way to get a
product to market, licensing may be the
optimal choice for a firm.
(Rawsthorn, 1995). In transitional and
emerging markets there are opportuni-
ties for domestic firms to follow Dys-
on’s example and to license their know-
how overseas to provide funds for
domestic expansion.
Market Asymmetry
Kotabe et al. (1996) state that, “re-
cent trends in technology licensing in-
dicate that technology licensing is used
increasingly as a conscious, proactive
component of a technology-based
firm’s global product strategy” (p. 73).
As an example of licensing as a global
strategy, Kotabe et al. (1996) point out
Because of its speed in market entry,
licensing can also be used as a compet-
itive tool to create an entry barrier in a
market and to create and protect an in-
cumbent’s first mover advantage (Es-
waran, 1994a). Using licensing as an
Motivations and Risks in International Licensing 177

entry barrier to others is accomplished
by licensing technology to firms that
would normally have remained outside
of the area. The strategy is to deter other
firms’ entry into the market. Because
first mover advantage has been shown
to result in better performance in
emerging markets (Marinov & Mari-
nova, 1999; Luo & Peng, 1998), a firm
may chose licensing as an expeditious
entry strategy to gain the first mover
advantage and create barriers for subse-
quent entrants.
Other market asymmetries that can
affect a firm’s decision of mode of mar-
ket entry include the existence of well-
established distribution channels on the
part of the licensee. The existence of
compatible distribution channels might
be particularly important to a smaller
firm with a limited or nonexistent global
distribution network. Distribution, as
well as production, has been shown to
be an important criterion when a firm is
making market entry decisions (Buck-
ley & Casson, 1998).
●
●
Operational concerns, especially rel-
ative transportation costs of licens-
ing versus other means of market
entry (Carstairs & Welch, 1982).
Tariff and nontariff barriers (Buck-
ley & Casson, 1998; Song, 1996;
Feenstra & Judd, 1982).
High domestic production costs
(Carstairs & Welch, 1982).
High cost of learning about the for-
eign market (Buckley & Casson,
1998)
●
●
●
Using licensing as a hedge against a
country’s protectionism (Contractor,
1985).
These additional factors form part of
a comprehensive picture of the anteced-
ents to licensing. Information, resource,
and market issues appear most often in
the literature. It is probable that the ad-
ditional factors listed above would com-
bine with one or more of the asymme-
tries to form a total picture of the
antecedents to a firm’s licensing.
Other Antecedents to Licensing
INTERNATIONAL LICENSING RISKS
A variety of other factors seem either
to affect the decision to license or to be
additional antecedents to licensing.
These include:
Beyond the normal risks of business in
general, and of international business in
particular, there are particular risks as-
sociated with international licensing.
Aulakh et al. (1998) discuss three kinds
of uncertainties that impact on a licen-
sor’s perception of risk: (1) host country
economic and legal factors; (2) the po-
tential of opportunistic behavior; and
(3) uncertainty in valuing the licensed
technology and/or know-how. How-
ever, it is evident from a review of the
various streams of research in interna-
tional licensing that the perceptions of
●
The propensity of management to
license, based on its experience or
knowledge of marketing (Aulakh et
al., 1998).
●
Product related factors and industry
level variables, such as industry
structure and technology intensity,
and resource-based factors (Kotabe,
1
996).
1
78 Journal of World Business / 35(2) / 2000

risks that Aulakh et al. (1998) document
are only a part of the identification of
licensing risk. Seven risk factors have
been identified in the literature: (1) sub-
optimal choice; (2) risk of opportunism;
human nature” (p. 253). Beamish and
Banks (1987) defined the risk of oppor-
tunism as the chance that a licensee will
appropriate the technology that has
been licensed to it, and internalize it.
Based on the fact that opportunism con-
tinues to be referred to in the licensing
literature (e.g., Aulakh et al., 1998;
Beamish & Banks, 1987, Kotabe et al.,
1996), and particularly in the light of
intellectual property rights arguments,
the risk of opportunism remains an is-
sue for licensors, and in some cases
licensees as well. An opportunistic lic-
ensee could be called a “learning lic-
ensee” who takes the technology and
makes it its own. Protection of techno-
logical know-how, patents, trademarks,
copyrights, and so forth is a serious
issue but although more enforcement
avenues are becoming available (e.g.,
World Trade Organization), the protec-
tion of firm-specific formulas, brands,
trademarks and expertise in general,
and indeed the enforcement of licensing
contracts, is generally easier for large
firms than small ones. Small firms often
lack the information networks that can
expose opportunism, as well as the fi-
nancial assets to pursue contract en-
forcement.
(
(
3) quality risks; (4) production risks;
5) payment risks, (6) contract enforce-
ment risks, and (7) marketing control
risks. Each kind of risk, whether real or
perceived, may be also viewed in the
context of market-based and firm-based
risks (Buckley & Casson, 1998).
Sub-Optimal Choice
Every firm faces the risk of the op-
portunity cost of not making the best
strategic choice. The value of “subopti-
mal choice risk” is either the opportu-
nity cost of not making the best choice
overall. Suboptimal choice also applies
to the choice of licensee such that a firm
selects the wrong licensing partner and
therefore does not realize the full bene-
fits of the relationship. DuPont chose to
license its Teflon௡ brand name and
technology to six Chinese manufactur-
ers of cookware. However, after six
years of investment, DuPont’s market-
ing cost in China had outweighed its
revenues from product sales and by
1
995, DuPont was reassessing the wis-
dom of its entry strategy (Neupert,
999). When a firm is considering entry
In the music industry, the risk of pi-
racy has been a major obstacle to inter-
national licensing. In China, for exam-
ple, western companies have been
disinclined to license western pop mu-
sic to local manufacturers because of
the prevalence of pirate CD plants in the
southern provinces (Burpee, 1996).
EMI and other western recording com-
panies were reluctant to enter eastern
European markets in the 1990s until
new laws had been passed to protect
1
into an emerging or transitional econ-
omy, the choice of licensing or FDI
may also lead to a suboptimal choice
due to lack of ability to accurately pre-
dict the economy’s future performance.
Risk of Opportunism
Williamson (1975) described oppor-
tunism as, “a rudimentary attribute of
Motivations and Risks in International Licensing 179

producers’ rights. In Poland, where at
one time pirates were estimated to have
captured 95% of the markets for inter-
national music (Pride, 1993), foreign
firms were even able to persuade former
pirate companies of value of selling le-
gitimate products.
Another area of opportunism is that
of the licensee developing enhance-
ments to the technology that has been
licensed, as part of the process of pro-
duction. The issue of ownership of
these enhancements is usually covered
under “grant-back” clauses in licensing
contracts (Cho, 1988); however, the
burden is on the licensee to inform the
licensor of such improvements, which
does not always occur.
Production Risks
There is a risk that the licensee will
not produce in a timely manner, or will
not produce the volume needed, or will
overproduce. With “arm’s-length” li-
censing agreements and relationships,
the licensee might not produce what is
needed to take advantage of a market
opportunity. In the case of a trademark,
artwork and design, there is also a risk
of producing the design on inappropri-
ate or poorly assorted products. Produc-
tion (or nonproduction) risks also arise
when a licensee acquires a license to
prevent the technology from coming to
market (Eswaran, 1994a).
Payment Risks
What if a licensee does not pay the
licensor, or pays in an untimely fashion,
or under-reports earnings? What cur-
rency and what means of payment are
being used? Payment risk is probably
greater in a royalty compensation agree-
ment than in a lump sum payment ar-
rangement, as the number of times that
a firm is subject to risk increases in the
royalty payment model. Despite the ap-
parent logic that small firms would re-
duce risk by the use of the lump sum
payment, this has not been confirmed
by research (Aulakh et al., 1998). In-
deed, potential licensees in emerging
and transition economies are more
likely to prefer a royalty compensation
agreement, thus increasing the licen-
sor’s risk of nonpayment, because from
the licensee’s perspective this avoids
having to pay up-front costs in convert-
ible currency for technology that might
not yield the expected benefits.
Quality Risks
Quality risk is the concern that the
licensee will not produce or distribute
goods in a manner that meet the licen-
sor’s standards. With the increasing
ability to move information, samples,
and people around the globe at a much
faster rate, and with other contractual
stipulations, quality risk should be less
of a problem now than in the past. How-
ever, there is probably a greater risk for
a small firm than for a large one with
more resources. As with the risk of op-
portunism, the small firm may be ham-
pered in addressing quality issues be-
cause of limitations both in information
and in resources to pursue contract en-
forcement. Additionally, transitional
and emerging economies frequently ex-
perience quality problems due to the
lack of a trained work force or the lack
of quality assurance programs, or both.
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80 Journal of World Business / 35(2) / 2000

Contract Enforcement Risk
product themselves, or turn to other
firms for distribution. As the complex-
ities of production and distribution
grow, the marketing control risks also
grow.
The enforcement of a contract, if
properly specified, is going to be much
more problematic for a small firm than a
large firm, because the small firm is less
likely to discover that the contract has
been violated, or to have the financial
assets or expertise to ensure that the
contract is enforced. The risk of being
unable to enforce the contract applies to
the risks of opportunism, quality, pro-
duction, payment, and marketing con-
trol. In emerging markets or transitional
economies, infrastructure issues, espe-
cially if they affect communication, can
delay or hamper contract enforcement.
Additionally, some transitional econo-
mies are still in the process of building
new codes of law, and therefore do not
have the legal infrastructure to enforce
and interpret contracts effectively. In
Ukraine, for example, the law and the
rules regarding patents and copyrights
do not specifically address the issues of
translation between the Cyrillic and Ro-
man scripts. Thus, trademarks in Ro-
man characters do not extend automat-
ically to trademarks in Cyrillic
The different types of risks that have
been discussed will vary in intensity in
different economic environments and
for different types of firms. Emerging
economies may be an attractive market
for licensing firms to gain a first mover
advantage, although risks of contract
enforcement then arise. Smaller firms,
in particular, face different risks than
larger firms; for example, small firms
find it very costly to monitor the activ-
ities of licensees and to enforce contract
infringements, and may be subject to
longer delays than large firms in receiv-
ing royalty and other payments. Mini-
mization of the risks in international
licensing begins with the management
of the licensing process on the part of
the firm. The following section ad-
dresses the means a firm may use to
minimize the risks of licensing that
have been discussed.
(Pakharenko, 1999).
MANAGING THE LICENSING PROCESS
Marketing Control Risks
There are various management options,
or processes, available to a firm to man-
age its licensing activities, and thereby
minimize its risks and increase its prof-
its. Figure 1 displays management op-
tions that address each type of risk pre-
viously mentioned.
Six management options for mini-
mizing risk are discussed here: (1) Plan-
ning, (2) Licensee selection, (3) Com-
pensation choices, (4) On-going
relationships, (5) Contract specification,
In an “arm’s-length” licensing ar-
rangement, the licensor loses control of
the licensee’s marketing of a product.
The risk to the licensor is that the prod-
uct will be undermarketed or otherwise
not marketed optimally. Traditionally,
licensors have tended to grant licenses
on a country-or region-specific basis. In
a more global environment, the licensor
could be licensing globally to more than
one firm. These firms might market the
Motivations and Risks in International Licensing 181

Figure 1
Management options for reducing
licensing risks.
for the best. A plan provides an overall
road map for getting where the firm
wants to go using licensing. Licensing,
in turn, is a tool the firm uses as part of
an overall business plan, integrating is-
sues of finance, the market (including
the global market), and the organiza-
tion, and it also allows for continuous
updates as changes occur in relevant
variables. The plan guides strategic
choices and critical decisions, and pro-
vides criteria for the choice of licensing
versus other forms of market entry.
and (6) Organization of the licensing
function. This is not an exhaustive list,
but it represents the major streams of
current research regarding risk manage-
ment. As shown in Figure 1, and in the
ensuing discussion, each of the six man-
agement options can be used in varying
degrees by the licensing firm to mini-
mize the seven major identified risks of
international licensing.
Licensee Selection
Selection of a licensee takes on many
of the features of partner selection for
an international joint venture (IJV)
(Beamish & Banks, 1987), where the
choice of partner is highly correlated
with performance. Intuitively, this rea-
soning can be transferred to licensing.
Many of the risks mentioned in this
paper and shown in Figure 1, such as
opportunism, quality, and production
may be reduced with the proper selec-
tion of a licensee. A critical part of the
selection process is determining if there
is goal congruence between the firms.
Also, just as with the IJV, one of the
issues in partner selection is finding po-
tential licensees and researching them.
Careful licensee selection includes a
search for potential licensees with qual-
ity assurance ratings to minimize qual-
ity risk. A licensing broker may be of
assistance, particularly to smaller firms,
as the licensing broker can play a key
part in negotiating contracts, finding
suitable partners, and in some cases,
managing the licensing process entirely
for some firms. The Licensing Execu-
Planning
The process of licensing can begin as
a well-developed strategic plan on the
part of the licensor, or as a serendipi-
tous encounter between a potential lic-
ensee and licensor. Many licensing
agreements fall between these two ex-
tremes. However, licensing is best car-
ried out as part of a strategic plan (Con-
tractor, 1985). If a firm is interested in
maximizing profit and minimizing risk,
then an overall long-term plan should
significantly increase its chances of be-
ing successful in managing its licenses,
and therefore meeting or exceeding firm
expectations, as opposed to waiting for
a lucky connection to occur and hoping
1
82 Journal of World Business / 35(2) / 2000

tives Society of Europe lists links to
licensing brokers, as well as patent and
trademark offices and patent and trade-
mark attorneys in a number of European
countries, including Croatia, Hungary,
Poland, and Romania (Licensing Exec-
utives Society, 2000). However, the cri-
teria for selecting a licensing broker,
and the broker’s role, seem to be an area
that is relatively unexplored in the li-
censing literature.
(1988), who tied compensation to a
model of agreement-specific factors,
environment-specific factors, licen-
sor’s offer price, licensee’s bid price,
and a bargaining range. This is par-
tially because Cho’s (1988) model is
designed from the point of view of
determining the fair price range for a
licensing agreement, as contrasted
with Aulakh et al. (1998), who fo-
cused on the monitoring and influence
of the licensor and the licensee based
on compensation planning. Both mod-
els indicate the complexity of manag-
ing the compensation portion of the
licensing process. Firms, regardless of
size, will maximize profit and reduce
risk by paying careful attention to all
the details of compensation.
Compensation Choices
Compensation choices can minimize
a number of the risks of licensing. Com-
pensation choices are also linked to the
risk-minimizing behavior of building an
on-going relationship between the li-
censor and licensee. Aulakh et al.’s
(1998) research on licensing compensa-
On-Going Relationship
tion found that “licensor involvement in
a foreign market will be higher under a
royalties-based than under a lump-sum
fee compensation structure” (p. 411).
Aulakh et al. (1998) maintain that it is
better to be paid lump-sum compensa-
tion in the case of a high risk of intel-
lectual property violation, or not to li-
cense at all in that environment.
Additionally, the host country’s eco-
nomic environment is positively related
to the use of a royalties-based compen-
sation structure. Aulakh et al. (1998)
also found that the stage in the techno-
logical life cycle influences licensee and
licensor payment preference, and that
the international experience of the li-
censor firm is positively related to the
use of a royalties-based compensation
structure.
Aulakh et al. (1998) state that an active
interest in licensee performance on the
part of the licensor is highly related to the
compensation choice that is made. This
active interest, or on-going relationship, is
seen as a means of ensuring that oppor-
tunistic behavior does not occur (or is
minimized), that quality and production
expectations are realized, and that appro-
priate marketing of finished products
takes place (Aulakh et al., 1998). This
requires that the licensor closely monitor
the licensee’s performance. However, in
many transitional/emerging economies
there is a lack of readily available market
information, which can be a significant
problem for the licensor. Lack of access
to data on product quality, marketing ef-
forts, market share and competitors’ prod-
ucts create obstacles to the effective mon-
itoring of licensee performance.
Aulakh et al.’s (1998) conclusions
differ from the findings of Cho
Motivations and Risks in International Licensing 183

Contract Specification
licensor should mutually benefit from
any technological improvements that
might occur during the course of their
agreement, the ownership and manage-
ment of these improvements can aid
technological advances and innovations
on one hand, and minimize the risks of
opportunism on the other.
Contract enforcement is commonly
addressed in licensing agreements.
Specification of the country whose laws
are being used to enforce the contract is
especially important when it comes to
an intellectual property right dispute, as
the laws and the cultural views of many
countries differ markedly on this issue.
Generally, a licensing agreement is
contractual in nature, outlining the
transfer of the technology for remuner-
ation. Although contracts are more im-
portant in some cultures than in others
(e.g., U.S.A.), as long as they are un-
derstood by both parties they retain
some value. The contract may formalize
the agreement between the parties, de-
fining its terms and conditions, and
serve as a deterrent to noncontractual
behavior. The negotiation of the con-
tract may initiate important dialogue
and relationship-building behaviors be-
tween the licensor and licensee.
Contract requirements regarding
quality, periodic sampling for quality,
or evidence of quality assurance from
the licensee can help reduce the quality
risk issue. Contract specification of
products and markets can reduce pro-
duction and marketing control risks. In
some cases, a licensor might contract to
Organization of the Licensing
Function
Within the firm, licensing is some-
times viewed as “found money” on the
income statement (Contractor, 1985).
Some firms see licensing as an extra
profit builder—others as a core busi-
ness strategy. Organizing how the firm
manages licensing will have a signifi-
cant impact on the amount of profit the
firm makes, as the firm can be making
proactive management decisions on
when, how, and whether to use licens-
ing as part of its business strategy. The
organization of the licensing function
differs by firm, just as the international
dimensions of a firm differ from one
another. The firm that organizes its li-
censing as an integral part of its busi-
ness structure, and bases that structure
on its strategic planning, will not only
minimize the risks of licensing but
should also maximize firm performance
(Porter, 1986).
“
buy-back” production from the lic-
ensee as part of an overall firm strategy
for distribution and marketing to help
ensure that production occurs as part of
the compensation agreement. Compen-
sation is a form of countertrade
whereby the goods produced from the
transfer of technology are used as pay-
ment for the technology.
A key issue in the writing of licens-
ing contracts, and in the negotiations
leading up to the agreement, is the own-
ership of and licensing rights to future
technology that is developed by either
the licensee or the licensor, including
enhancements that either one might
make to the existing technology (grant-
backs). Although the licensee and the
1
84 Journal of World Business / 35(2) / 2000

CONCLUSIONS AND FUTURE RESEARCH
scape” of licensing in transitional and
emerging economies; (3) differences
between large and small firms in their
propensity to license; (4) whether
changes in the enforcement of intellec-
tual property rights have affected per-
ceptions of licensing risk; and (5) how
successful licensors manage the licens-
ing function within their organization.
As was discussed in the first part of
this paper, changes in the environment
of international business, due primarily
to advances in communications technol-
ogy, are having an effect on licensing.
Changes in technology may be affecting
the nature of what type of information/
technology is being transferred by li-
censing. Future research is required to
determine if there has been a change in
the mix of technologies, information,
trademarks, brands and other assets that
are being licensed. In the study of in-
ternational licensing, should the tradi-
tional manufacturing technologies be
studied separately from the more
information-based assets (such as copy-
right, trademark, and brand)? Is the mix
between these types of licensable assets
changing?
Throughout this paper, various issues
related to licensing in the emerging or
transitional economies have been men-
tioned. Research into the changing na-
ture of what is licensed, the volume of
licensing, the relationship of licensing
to perceived risks, and the possibility of
licensing as a risk hedging strategy need
further investigation. This research
needs to be viewed from two vantage
points: from the point of view of the
licensing firm and from the point of
view of the emerging or transitional
economy.
In the process of examining the role of
international licensing in the context of
today’s global market place, an updated
and more integrated view of motiva-
tions for licensing has been discussed.
Three types of asymmetries (informa-
tion, resource, and market) were used as
tools to aid in the discussion of reasons
for licensing. Additionally, some of the
risks (suboptimal choice, opportunism,
quality, production, payment, contract
enforcement, and marketing control)
were presented. Ways to minimize or
manage those risks through planning,
licensee
selection,
compensation
choices, the on-going relationship, con-
tract specification, and organization of
the licensing function have been ad-
dressed. However, this review of recent
developments in international licensing
has left a number of unanswered ques-
tions that may provide fruitful topics for
future research.
The pace of technological change in
the past twenty years has been such that
a strategy that seemed to be beyond the
capabilities of a firm in the past might
now be within its reach. Specifically,
this paper has examined the increased
use of licensing as a global business
strategy and has suggested that licens-
ing risk can be mitigated by adopting an
integrated strategic perspective of inter-
national licensing. However, as often
happens, international business practice
seems to have outpaced international
business research, leaving a number of
research areas relatively unexplored.
Some of these areas include: (1) the
impact of changing technology on what
is licensed; (2) the changing “land-
Motivations and Risks in International Licensing 185

The majority of research into interna-
tional licensing has focused on large
firms. However, the revolutionary
changes brought about by information
technology and a more global market
may have implications for smaller
firms. Smaller firms may be more in-
clined to choose the licensing option as
part of a global strategy because of cap-
ital resource constraints. Also, because
of the difficulties of monitoring licensee
behavior and of contract enforcement,
the risks involved with international li-
censing for small firms may be greater
than the risks for large firms. Empirical
comparative examination of the rewards
and risks of international licensing for
small firms as opposed to large firms
may provide further insight in this area
and lead to the development of optimal
strategies for small firms taking advan-
tage of increasing global opportunities
while managing risk.
The issue of how to protect licensors
from opportunism, particularly in the
form of intellectual property rights, is a
recurring theme in the current literature.
Will new mechanisms for enforcing in-
tellectual property protection, such as
those offered through the WTO, lead to
a higher level of technology transfer?
How the licensing function is orga-
nized in a firm has been linked to how
successful the firm may be in managing
its licensing. Has the organizational
structure of the licensor and/or licensee
changed as the business of licensing has
increased? Do successful licensors ex-
hibit similarities in the way in which
they manage international licensing?
Has management of licensing within
firms changed over time?
In addition to these areas of inquiry,
there are related areas that warrant dis-
cussion and review. Kotabe (1996)
pointed out that most of the research
and thought on licensing has been con-
ducted from the licensor’s point of
view. What insights might be gained
from an analysis from the licensee’s
perspective? To what extent does
licensing-in technology improve a
firm’s competitiveness and its perfor-
mance? What actions can governments
take to encourage licensing from over-
seas? Also, in most research the subject
of franchising is dealt with separately
from licensing. The parallels and con-
trasts of studying franchising and li-
censing may also yield additional in-
sights into these related areas of
business.
The field of international licensing
is changing as the benefits of informa-
tion technology begin to be realized.
It seems that the importance of licens-
ing as a global strategy is growing. It
also seems that the motivations for
licensing and the management of the
licensing arena are changing. Despite
periodic review by the academic com-
munity, there is a need to continue to
examine this field of inquiry. As ex-
ternal changes in technology continue
to occur, and in the light of global
business trends, there continues to be
a need for reassessment and expansion
of knowledge. The varied streams of
research about international licensing
that have been touched on in this pa-
per indicate that changes are occur-
ring, but we do not yet fully under-
stand all aspects of the international
licensing process.
1
86 Journal of World Business / 35(2) / 2000

Acknowledgment: The authors would
like to thank the anonymous reviewers for
their helpful suggestions during the devel-
opment of this paper.
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