Joint Venture vs Licensing
In this age of globalization, it has become commonplace to see companies breaking geographical barriers and trying to capture overseas markets once they feel better opportunities exist in foreign countries. Saturation in the home market and ambitions to grow globally make companies foray into foreign markets. There are many ways to exploit foreign markets such as exporting, licensing, joint venture, and wholly owned subsidiaries. In this article we shall look at licensing and joint venture both of which offer exciting opportunities to a company to derive benefits of large consumer markets in foreign countries.
What is Licensing?
This is a clever way to utilize the resources and property of the licensee in a foreign country and derive monetary benefits. In such an agreement, a company, called a licensor, grants rights to use the name and logo of the company, and in some cases technical assistance also, to the licensee in a foreign country. The licensee in return pays a royalty for the rights to use the intangible property of the licensor. This arrangement is highly beneficial to the licensor as he needs to make very little investment and he can expect a very high ROA. But production and marketing is left entirely to the licensee which means that potential earnings from these activities may be lost for the licensor. However, in modern times, it has been seen that the licensor makes licensee pay a commission of earnings from advertisements as well. One classic example of licensing in publishing houses is that of the magazine Playboy that grants licenses in foreign countries and we see at least 10 foreign editions of the magazine.
What is Joint Venture?
Joint venture is another arrangement that allows a company to foray into foreign markets. As the name implies, the company enters into an agreement with a foreign company and contributes to raise the equity for the project. Both the companies are then equal partners in the venture and also assume equal liabilities. Besides cash, local partner may bring in team of professionals and his expertise to market the product whereas the foreign partner may offer its technical know how in such a joint venture.
Thus a joint venture is all about sharing capital, rewards, liabilities, technology etc. These business entities are successful when the goals of the two companies converge as when the local partner has the desire to learn from the working style of the foreign company or when both have a desire to exploit the market and derive monetary benefits. Joint venture’s success often depends upon entrepreneurial skills of the local partner and technological up gradation offered by the foreign partner.
What is the difference between Joint Venture and Licensing?
• Licensing is easier of the two and it offers higher rewards with minimum of investment.
• Joint venture provides ownership and control of business and also mitigates cultural differences
• One can gain faster entry into foreign markets through licensing but it deprives foreign party all the benefits that accrue to the licensee through marketing of the product.
• Joint venture combines the resources of the two companies and last longer than a licensing arrangement as local company often becomes a competitor in a licensing agreement