Advantages and Disadvantages of Licensing as a Mode of Entry Into Foreign Markets

1895 WordsOct 19, 20128 Pages
“Assess the merits and demerits of international licensing as a mode of entry into new markets” Disney does not have to produce t-shirts, USB sticks and even waffles with Mickey Mouse’s happy face on it. Instead, it can license the right to use its famous character to different companies around the globe and enjoy the hefty royalties, which in 2010 totaled 28.6 billion dollars (Rorie, 2011). Does it then mean that licensing as a mode of entry into foreign markets is the best option available? Not necessarily so. Given a multitude of foreign market entry methods, all of them being used in practice in some contexts, it is crucial to determine under which circumstances licensing will pay off. The decision factors include the specifics of…show more content…
One of the best examples illustrating the above statement is Nintendo’s practice of licensing the right to design and manufacture games for its consoles. This arrangement has several advantages. The most obvious one is the additional stream of revenues resulting from the royalties. Moreover, the more video games are produced, the more attractive is the choice that consumers face, which in turn affects the demand for consoles (Griffin, 2007). This impact can actually be tremendous when creative licensees explore new uses of the console and cater to a wide range of gamers’ tastes. This business model, in a modified version, was applied more than a decade later by Apple, which allowed developers from around the world to design applications for the iPhone. At the moment, the App Store with its 500,000 useful, funny, innovative or amusing applications (Wehner, 2011) is a major competitive advantage for Apple. Another example illustrating this point is the aforementioned Mickey Mouse-shaped waffle: by unleashing the creative potential of a licensee, Disney can reap rewards from an innovative product it would not come up with by itself. Even though Disney does not have clothing and toy factories, it can still license its merchandise and capture the maximum of the consumer surplus. Despite the multitude of its benefits, licensing also has a number of serious shortcomings. First of all, it often does not fulfill the major purpose of expansion, namely the maximization of

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