Licensing Proprietary Technology to Foreign Competitors
In today’s competitive and knowledge-based economy, many organizations are looking to capture additional value from their intellectual property by licensing to other companies including foreign competitors. Intellectual property, which comprises of patents, trademarks, maskworks, copyrights, and trade secrets, are important assets to any organization (Fernandez and Neuenschwander n.p.). The need for open innovation by corporations has recently increased the importance of intellectual property transfer (Lichtenthaler et al. n.p.). Organizations license their proprietary technology to gain sufficient returns on R&D. Some companies license technology primarily to achieve additional revenues. For instance, Dow Chemical and Hewlett-Packard generate huge profits from annual royalties (Lichtenthaler et al. n.p.). Other companies use this technique to achieve strategic benefits Licensing proprietary technology brings up a major issue: competitive advantage. Does a company lose its competitive advantage through licensing proprietary technology? This article comprehensively responds to this question.
The Pros of Licensing Proprietary Technology to Foreign Competitors
- Firms that license their technology benefit from low-risk of capitalizing intellectual property assets. With a small investment, the high cost of manufacturing and the involved risks are transferred to the licensee.
- By licensing out their technology, organizations get a chance to generate profits from unused portions of their intellectual property. Fernandez and Neuenschwander equate this concept to the process of converting potential energy to kinetic energy (n.p.).
- Licensing proprietary technology allows a firm to penetrate new markets. The production and distribution of the technology to other population increases the company’s potential on foreign markets and helps to generate more profits.
- Depending on the terms of the agreement, the licensee has the liberty to make improvements on the technology to enhance its position on the market. This improvement makes the license technology more desirable.
- An organization can achieve access to external knowledge through cross-licensing. Cross-licensing is a low-risk way of transferring intellectual property. It involves the transfer of rights of the property with no royalty payments required, and instead, both parties work out a balancing payment.
- Today’s environment has favored the advancement of intellectual property rights. Companies now actively follow their patented technology in the marketplace to determine any activity associated with the technology. In the event of an infringement, the organization can either license the infringer or file a lawsuit right away.
(Fernandez and Neuenschwander n.p.).
The Cons of Licensing Proprietary Technology to Foreign Competitors
Despite the above potential benefits, there are substantial risks also involved in licensing technology.
- When a company transfers its most valuable technology, its strategic position may be weakened by empowering potential competitors (Letto-Gillies 265).
- By licensing its technology, an organization may lose direct control over its intellectual property, its quality, and its manufacture.
- Lastly, the firm’s worldwide reputation could be harmed in the event of poorly manufactured goods in one or two countries (Lett-Gillies 265).
How to Minimize Risks in Licensing
Before deciding to license technology, it is important for a company to establish whether it can develop the invention in-house. Subsequently, the firm should determine whether the time and cost of the invention are worth the anticipated returns (Fernandez and Neuenschwander n.p.). There are other alternatives a company can consider to profitably mobilize its intellectual property before settling for the architecture of licensing. They include strategic alliance, acquisition, new venture, and joint venture. The following are questions to consider when licensing in order to minimize risks.
Does the licensing strategy fit? – An organization should carefully evaluate the licensing program to determine if it fits the entire business plan. Fernandez and Neuenschwander note that an efficient licensing program not only compliments but also enhances an organization’s product line and even strengthens its position in the market. They advise that when licensing a standardized proprietary technology, an organization should stop the manufacture and commercialization of the product in order to avoid competing with its licensed partners.
Can cross-licensing be used?–Cross-licensing will allow transfer of intellectual property without involving royalty payments. However, terms involving the ownership of the invention of the licensed technology should be clearly stated in the agreement.
Does the licensee have the required resources?–The licensor should first ensure that the licensee has the appropriate resources to advance the program since returns are expected from the investment (Fernandez and Neuenschwander n.p.).
The changing economy has motivated organizations to generate more value from their intellectual property through licensing proprietary technology to foreign competitors. However, through licensing, a company stands to either gain or lose its competitive advantage. By licensing technology, an organization benefits by transferring the costs and risks of manufacturing and sale of the product.The companypenetrates new markets on the international scale and gains more profits from further production and distribution of its product to new populations. However, licensing technology can easily weaken a company’s competitive advantage by strengthening a potential competitor. To avoid such an occurrence, the licensor can first determine whether the licensing program fits the overall business plan, whether the licensee has appropriate resources to carry on the technology, and lastly, whether the program allows cross-licensing. From the above discussion, benefits of licensing proprietary technology to a foreign competitor outweigh the risks. Therefore, licensing technology does not give up a company’s competitive advantage. However, it is advisable to keenly observe the nature and terms of the program in order to minimize risks.
Letto-Gillies, Grazia. “Global Business Strategy”. Business & Economics. Cengage Learning EMEA, 1996. pp. 265 https://books.google.co.ke/books?id=BLaRk8iF9d4C&pg=PA265&lpg=PA265&dq=advantages+and+disadvantages+of+licensing+proprietary+technology+to+foreign+competitors&source=bl&ots=xw0DkUDvPH&sig=D6Zq3dT7Qev8UcLPCbmXaPivBbo&hl=en&sa=X&ved=0ahUKEwiX5_3eyOHbAhVKRY8KHWNfCAYQ6AEIZTAF#v=onepage&q=advantages%20and%20disadvantages%20of%20licensing%20proprietary%20technology%20to%20foreign%20competitors&f=false
Fernandez, Dennis and Neuenschwander, Charles, R. Strategic Licensing in the New Economy. n.p. n.d.www.iploft.com/Strategic(Tx).pdf
Lichtenthaler, Ulrich, Ernst, Holger and Conley, James. “How to Develop a Successful Technology Licensing Program”. Winter 2011. n.p. 14 Dec, 2010.