Intellectual property internationalization comparison with foreign investment

Licensing is one of the fastest and cheapest ways of doing business internationally. In essence, it is a lease of certain property rights, so the licensor incurs essentially no additional costs when granting those rights abroad. For instance, licensing is often applied in the soft drink industry, where the beverage formula is the subject of the license. The soft drink itself is a product that weighs a lot and takes up a lot of space to compare with price, so it is not rational to produce it locally and export it abroad. Transportation costs ration to the price of product is high in such case. A much simpler option is to produce soft drinks as close as possible to the consumer market and shorten transportation, since the component that makes up most of the weight and volume in this product is just a water. Thus, in the soft drinks industry, it makes more sense to lease the right to use a certain recipe or formula to a foreign producer which will use local water resources, and the formula of ingredients obtained from the licensor. Sometimes the licensee will export certain ingredients without a providing formula, but anyway ingredients take up much less space and are lighter, so this form of export is more efficient than exporting a ready-made drink.

Licensing can also turn into foreign investments, for example, an organization that has leased the right to produce a certain soft drink may decide to build a beverage bottling plant in a foreign country, especially if product succeeds in the market of that country. However, license sellers focus often on higher added value businesses, and instead of taking on production, they focus more on finding new formulas or promoting their international brand of drink. A similar practice can be found in the pharmaceutical business. Instead of building tablet and pill production lines in other countries, pharmaceutical companies focus on scientific research and experimental development, as well as testing new product but entrust the mass manufacturing to licensees. In this case, the level of legal protection of intellectual property in the country is very important. For example, if a license is granted to produce medicines in a country where the intellectual property law and its enforcement are not at a sufficient level, there may be a risk of industrial espionage and attempts to copy the product. In the field of licensing, an illegal or so-called pirated product can become both a competitor to the manufacturer of the original product and can damage the image and credibility of the original product, if the copy of product has the same or similar name and ordinary user cannot differentiate original product and illegal copy. A license usually is granted for a limited period, so there is a risk that the licensee, having the complete formula and process for manufacturing the product, can continue to develop its product and bring it to the market with minor changes after license expires. Although this is usually strongly limited in license agreements, the threat of raising a competitor in this way is still considerable, especially since many such stories have happened in the world. If a competitor copies the product formula and does not modify it much, but offers customers a much lower price, then a frequent consumer chooses a cheaper product. In some industries, government regulation limits license closures and monopolies. For example, in the pharmaceutical industry, having a monopoly on the license of an invented drug is only granted for a certain period – from a few to a dozen years, depending on the state. Such a first drug is called a generic drug, and analogues of that drug produced later are called secondary drugs. Governments use such regulation to make medicines affordable and widely accessible to as many people in the world as possible, so the licensing monopoly is limited. Secondary drugs are usually not inferior in their parameters to generic drugs, because the core ingredient has the same chemical formula. Many have probably used a painkiller drug, whose active ingredient is ibuprofen, but in the pharmacy, a buyer can probably find a dozen or a few dozen products with different names produced by different manufacturers, but all of them will contain ibuprofen as the active core ingredient. However, in pharmaceuticals, the right to have exclusive monopolistic rights is granted for a certain period. This is done so that drug inventors will be interested in developing new drugs and expect to earn huge profits that will return in short term the large investments and R&D costs to develop this drug. However, the period when that profit can be earned is limited. Often, during this period, the price of the drug is quite high and only a limited number of users can afford it, but after the protection period ends and copies of this drug formula appear in the market, i.e. for analogous drugs with the same active ingredient, the price of such a drug drops several or even a dozen, and sometimes several dozen times.

The main advantages of licensing to compare with investing into manufacturing abroad as well as to compare with export of invented product are:

• Low capital costs.
• Remaining full control of the product formula.
• The licensee usually knows his local market well.
• The risk of income and costs is limited for licensor as it is transferred to the licensee.

Main disadvantages and problems for licensor:

• Distance to a consumer.
• Lack of full operational control and quality assurance.
• Profit is usually limited, because the licensee which takes the most risk wants a significant share of the profit in return.
• License buyers will appear only if the product has a strong brand or is innovative and has a high functional demand in the market.

International patent selling is most used in business where key product is based on innovation. Patent rights are protected against copying, but once a patent is acquired and access to a technology is obtained, a business partner can become a competitor very quickly. This is especially risky in countries where intellectual property is poorly protected and respected. In the case of licensing, the license agreement is bilateral, and the licensor can very carefully select with whom to sign this agreement and grant permission to. However, in the case of patent selling, the risk of illegal copying is greater, because the inventor, who protects his invention with a patent, basically makes it available to everyone, who is ready to pay for the patent. This method is designed to generate more passive income than licensing, as the patent owner receives income based on the extent of use of his invention. Patenting is special in that it is often taken up by companies applying other methods of international business as an additional method. Often, a manufacturer, exporter, or FDI investor patents one of their products, components, or processes, if there are reasons for this. Some purely intellectual research and development organizations, research institutes, universities, even individual scientists who do not engage in manufacturing or other commercial activities, still patent their inventions and thus they can be engaged in international business.

International franchisors very often provide comprehensive support to their franchisee in exchange for a fee, including the provision of standardized equipment, standardized raw materials. For example, the franchisor of an American burger restaurant has alliance-type contracts with potato farmers and supplies frozen potato sticks to franchisees of its restaurant chain located around the world. In this scenario, the primary focus is on the international franchise business, the export and alliancing as methods are used for significant support to the franchise business. Some international franchisors at the beginning expand business by investing abroad, but due to need to accelerate internationalization and when financial resources run out, often decision is to convert further development to a franchising model instead for continuing to invest abroad. For example, the business of an automatic car wash initially developed own network of car washes, decides to transform it to franchising business model. In such case franchising is based of proven business concept and it has higher chance to attract franchisees.

The main advantages for franchisor are:

• Fast and less resources demanding international development model compared to investing abroad.
• The risk of income and costs are limited and transferred to the franchisee.
• A franchisee is usually better aware of local market.
• A franchisee is motivated usually more because of risk and reward taken to compare with hired officers of foreign branch offices in case of FDI.

The main disadvantages for franchisor are:

• The model is only possible if the brand awareness is high, otherwise there is hard to attract a franchisee abroad and make international expansion.
• A control is much lower to compare with FDI, and although a mistake made by one franchisee causes a reputational risk for the entire network.
• A franchisee may one day become a competitor if customer loyalty to the brand is less than the need for functionality (Fraser, 2001). As opposite, investing abroad and keep the control is the way to avoid it.

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