1. Low cost entry alternative
2. Allows licensor to circumvent tariffs, quotas, or similar export barriers
3. Limits political risk and risk of expropriation
1. A limited form of participation; licensor generally has no control on marketing program
associated with product produced under license.
2. Financial upside limited by royalty rate.
3. Licensees can become competitors.
Possibly entry into the Japanese market could be expedited by following this approach, especially if distribution would be a problem.
However, XYZ must carefully study the geographic scope of the agreement. Should licensed product be marketed only in Japan? Another concern for XYZ is that the licensee will become a stronger competitor once it has absorbed XYZ’s know-how.
XYZ may wish to investigate other potential licensees before making a final decision. XYZ must also ensure that its patents are protected in Japan.
Overall, as Root (1994, 119) notes, “managers can rationally choose licensing as a primary entry mode only when they compare the expected profitability of a proposed licensing venture with the expected profitability of alternative entry modes.” Root suggests profit contribution analysis based on projections of incremental revenues and incremental costs associated with the licensing agreement.
Incremental revenues (excluding royalty revenues) for life of agreement:
· Lump-sum royalties
· Technical-assistance fees
(a) Allows for sharing of risk and combining complementary strengths, especially local market knowledge of target market partner.
(b) May be the entry mode most strongly supported by target market government.
(a) Corporate cultures and other interests of foreign partner and local partner may clash.
(b) Lack of mutual understanding frequently leads to “divorce.”
(c) Sharing means less control than in 100 percent ownership.
2. Direct Investment/Acquisition/Ownership:
(a) Acquisition can profit instant market…
Japanese Keiretsu consists of a group of large companies with ties to a powerful bank, such as Mitsubishi Group.
In Japan’s automobile industry, keiretsu take the form of vertical hierarchical relationships between the automakers and various component-manufacturing groups. Toyota is cited as an example in the chapter; other keiretsu include Nissan and Honda. In the consumer electronics industry, keiretsu alliances are forged between manufacturers and retailers. Matsushita is a case in point; other keiretsu in the electronics industry are the Hitachi Group, the Toshiba Group, and the Sony Group.
The presence of keiretsu can make it difficult for foreign companies to gain access to the Japanese market.