Why High-Tech Firms Should Avoid Licensing as a Mode of Entry

Licensing can be an attractive mode of entry for high-tech firms looking to enter new markets. However, there are a number of potential pitfalls that firms should be aware of before entering into any licensing agreement.

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Introduction

Licensing is an attractive mode of entry for many high-tech firms because it offers a number of potential advantages. First, licensing allows firms to enter foreign markets quickly and with relatively little investment. Second, licensing gives firms a way to generate revenue from their intellectual property without incurring the costs of manufacturing and marketing themselves. Finally, licensing allows firms to gain a foothold in a foreign market without giving up equity or control of their technology.

However, despite these potential advantages, there are a number of reasons why high-tech firms should avoid licensing as a mode of entry into foreign markets. First, licensing can be expensive and time-consuming, as it requires the firm to negotiate contracts with potential licensees. Second, licensed technologies may be less successful in foreign markets than in the home market, due to cultural differences or the presence of competing technologies. Third, licensed technologies may be subject to reverse engineering or imitation by local companies. Finally, once a technology has been licensed in one market, it may be difficult to prevent its diffusion into other markets.

In light of these disadvantages, high-tech firms should generally avoid licensing as a mode of entry into foreign markets and instead focus on other entry strategies such as joint ventures or wholly owned subsidiaries.

The Risks of Licensing

Licensing can be a risky strategy for high-tech firms looking to enter new markets. When you license your technology to another firm, you are essentially giving away your competitive advantage. Not only that, but you are also giving up control of how your technology is used and how it is integrated into the other firm’s products.

Dependence on the Licensor

When a high-tech firm licenses technology from another firm, it is deliberately giving up some measure of control over its destiny. In effect, the licensee is placing a bet that the licensor will continue to innovate and improve the licensed technology. This bet may not always pay off. For example, in 1995 Digital Equipment Corporation (DEC) was forced to declare bankruptcy after its mainframe business was eclipsed by lower-priced offerings from IBM. Although Digital was once the second largest computer company in the world, it had failed to keep up with changing technology and market demand. As a result, the company ceased to exist as an independent entity.

When a firm licenses technology, it is also giving up some control over how that technology will be used. In many cases, the licensor will stipulate how the technology can and cannot be used in order to protect its own interests. For example, a licensor may allow a firm to use its patent only for a specific product or market segment. Or, the licensor may forbid the licensee from making any changes to the licensed technology. These restrictions can limit a firm’s ability to respond quickly to changes in market demand or technological advances.

Loss of Control

Licensing is the granting of a license by one party to another that allows the licensee to use certain intellectual property owned by the licensor. When a company licenses its technology, it essentially hands over part of its competitive advantage to another firm. In many cases, this can be a risky move that can lead to the loss of control over how the technology is used, how it is integrated into the licensee’s products, and how it is marketed.

There are a number of reasons why high-tech firms should avoid licensing as a mode of entry. First, when a company licenses its technology, it gives up control over how the technology is used. The licensee may use the technology in ways that the licensor never intended or may never have even thought of. This can lead to the technology being used in unintended ways or in ways that are not optimal for the licensor.

Second, when a company licenses its technology, it also gives up control over how the technology is integrated into the licensee’s products. The licensee may integrate the technology in such a way that it becomes difficult or impossible for the licensor to improve upon or even fix bugs in the technology. This can lead to frustration for both parties and can damage the relationship between them.

Third, when a company licenses its technology, it gives up control over how the technology is marketed. The licensee may use marketing practices that are less than desirable or that do not reflect well on the licensor. This can damage the reputation of both parties and may make it difficult for either party to find new customers or partners.

Fourth, when a company licenses its technology, it may find itself at a disadvantageous bargaining position if it ever wants to license the same technology to another party. The original licensee may demand exclusive rights to the technology ormay be unwilling to license it to another party on terms that are favorable tothe original licensor.

Licensing can be a risky proposition for high-tech firms because they give up control over how their technologies are used, integrated into products, and marketed. In many cases, it may be better for high-tech firms to avoid licensing altogether and instead focus on alternative modes of entry such as joint ventures or acquisitions.

Limited Opportunities for Learning

In many ways, licensing represents a lost opportunity for the firm. By licensing technology to a foreign manufacturer, the firm forgoes the opportunity to learn about the market and local preferences. In addition, it does not have the opportunity to learn about manufacturing processes and how to adapt them to local conditions. As a result, the firm may be less effective at competing in that market when it eventually decides to enter directly.

The Benefits of Licensing

Licensing can be a great way for high-tech firms to quickly enter into a new market. It can help firms to avoid the costs associated with developing their own product, and it can provide access to a ready-made customer base. However, there are also some potential downside to licensing. In this article, we’ll take a look at the pros and cons of licensing as a mode of entry for high-tech firms.

Reduced Costs

One advantage to licensing is that it reduces the costs of entry into a market. Because the licensor has already incurred much of the development costs, the licensee need only pay a fee to enter the market. This can be a significant advantage when entering a market that requires expensive research and development, such as the pharmaceutical or semiconductor industries. In addition, because the licensee does not have to incur these development costs, it may be able to enter the market sooner than if it were developing the product itself.

Reduced Risks

Most firms face the same basic risks when they enter a new market: the risk of developing a product that no one wants to buy, the risk that entry will be too late and the market will be saturated, or the risk that customers will not be willing to pay enough to cover costs. Firms can reduce these risks by licensing their technology to a firm already operating in the market. This allows the firm to learn about customer preferences and get its product into the market quickly, without having to make a significant investment in R&D or marketing. In addition, licensing can help firms avoid feeling pressure to undercut rivals on price in order to gain market share quickly.

Access to Expertise

When a company licenses technology, it gains access to the licensor’s technical expertise. The licensor can provide valuable assistance in the form of training, support, and consultation services. These services can help the licensee get the most out of the licensed technology and can make it easier for the licensee to achieve its desired results.

Conclusion

Licensing should be avoided as a mode of entry into foreign markets for high-tech firms. The main reason for this is that it can lead to a loss of control over key technology. When firms license their technology, they are basically giving another firm the right to use their technology. This can lead to the other firm becoming better at using the technology than the original firm. In addition, licensing can also lead to the original firm losing valuable know-how and expertise.

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