1. A licensor allows licensees to share its intangible property rights which include patents, copyrights, trademarks, or manufacturing processes in exchange of royalties from licensees. For example, McDonald’s allows its foreign licensees to use its trademark and manufacturing process in exchange of extremely tremendous royalties in hundreds of foreign cities. Specifically, McDonald helps licensees with decorations of restaurants and shares food formula as well as processing process.
However, sharing intangible property rights with others puts licensors at the risk of leaking their confidential information to the third parties. For example, it is well-known that people are able to buy knockoffs of foreign brands in China at a much lower price, probably at a tenth of the normal price for a genuine product. The licensor must focus on restricting the use of the product or technology to agreed-upon geographic areas and must take necessary measures to protect the confidential information that is licensed to the foreign firm so that third parties cannot exploit it. (Pagnattaro, Cahoy, Magid, Reed, & Shedd, 2019, p.366)”
Although licensing and franchise agreements must follow the local laws, but licensing and franchises is less risky than direct foreign investment. Direct foreign investment forms include creating a foreign subsidiary in the host country or engaging in a joint venture. When creating a foreign subsidiary will subject the domestic parent compay to foreign laws and the jurisdiction of foreign courts, engaging in a joint venture may need the domestic parent company to give local partner majority equity control of the venture and to accept government participation. In short, domestic parent company is liable for foreign subsidiary’s illegal activities and at the risk of losing majority equity control when direct foreign investment is made.
2. a-A licensor should protect their investment in a foreign country by employing some of the following approaches:
-Understanding the laws of that countries
-Requiring the licensee to sign non-disclosure agreements of patents and trade secret shared with them.
-Requiring the Licensee to limit the access to employees who have permission to sensitive information and requiring extensive vetting procedures to employees with access to it.
– “The Licensor must take care to restrict the use of the product or technology to agreed-upon geographic areas and must take adequate steps to protect the confidential information that is licensed to the foreign firm so that third parties cannot exploit it.” (by Pagnattaro, Cahoy, Magid, Reed and Shedd The Legal and Regulatory Environment of Business.P369).
-Offer (require) proper training to the licensee staff to communicate and handle sensitive information’s from the licensor staff.
-Regular and unannounced visits to the licensee facilities from the licensor inspector to asses the way they handle trade secret entrusted to them.
b-Yes, its is less risky than direct foreign investment. Because direct foreign investment involves the creating of foreign subsidiary in that country they want to operate in, high capital investment and more financial risks. Licensing will help the organization expands to foreign markets without the added cost of direct foreign investment or havening high stakes of its own resources to be put down. Keep in mind that the company reputation might be in stake if the licensee is authorized to use the brand name and end up miss using it.