- Methods of obtaining foreign trade income - Advantages and disadvantages of technology licensing and joint ventures
Two additional ways to earn international sales income are through technology licensing and through joint ventures. These are not the most profitable forms of exporting, but they do offer certain advantages, especially for small- and medium-sized businesses. They also have some disadvantages and risks.
Technology licensing means selling or making available to licensees your intellectual property, including patents, trademarks, service marks, copyrights, and trade secrets. Compensation, which is negotiated in advance, can take the form of lump-sum royalties, running royalties based on production volume, or some combination of the two. U.S. companies often license their technology to foreign companies, who use it to manufacture and sell products in one or more countries.
Advantages of Technology Licensing
Technology licensing lets you enter a foreign market quickly and poses fewer financial and legal risks than manufacturing overseas or participating in an overseas joint venture. It also makes overcoming tariff and nontariff barriers easier. This makes it attractive for smaller companies or those with little international experience. It can also be used to acquire foreign technology through cross licenses or through grant-back clauses that award rights to use improved technology developed by a licensee. It’s also not limited to manufacturing—franchising is also a form of technology licensing. Scores of franchising concepts are converted into profitable businesses each year, most of them created in the United States.
There are also several drawbacks to technology licensing. One is weakened control over your technology. Your profits are lower, and it can be difficult to protect your intellectual property from unauthorized use. Even your licensees may try to use your technology to manufacture products that compete with yours or those of other licensees. You thus need to take steps to protect yourself. One is to register your patents and trademarks in each country. Copyrights are globally recognized, but patents and trademarks are territorial. You should also retain qualified legal help in the host country.
Advantages of Joint Ventures
Joint ventures may in many cases be the best approach. They are used in a wide variety of manufacturing, mining, and service industries, and they frequently involve technology licensing by the U.S. company to the joint venture. A potential downside is that host-country laws may require 51 percent ownership by nationals of the country. The upside is that joint ventures can help spread the risk and cost associated with foreign operations. In addition, the local partner will likely bring its knowledge of local consumers’ customs and tastes, an established distribution network, and valuable business and political contacts.
One of the biggest possible disadvantages of joint ventures is the potential loss of management control. This may result in reduced profits, increased operating costs, inferior product quality, exposure to product liability, and environmental litigation and fines.
All these complexities and risks mean you should seek qualified U.S. legal counsel before starting to negotiate a joint venture. Many of the sources in Chapter 4 can help you find such representation. You should also consider retaining legal counsel in the host country because your potential joint venture partner’s interests may not coincide with yours. Thus, relying on them to get government approvals and give legal advice could be disadvantageous.
This chapter’s Success Story is Spancrete Machinery Corporation, which sells precast concrete extruding equipment worldwide under license agreements and direct sales. In the last five years it has entered India, the Middle East, Kazakhstan, and most recently the Russian Far East.
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