Joint Venture over Licensing as a Foreign Market Entry Mode - Essay Example

The advantages and disadvantages of the joint venture over licensing as a foreign market entry mode Grade (February 12th, 2014) Table of Contents The advantages and disadvantages of the joint venture over licensing as a foreign market entry mode Introduction Globalization has changed the way businesses operate by making the market very dynamic. Consequently, businesses are required to adapt to the market dynamism through applying different strategies. Internationalization of businesses has become a common phenomenon of the modern world, and there are different strategies that can be applied by a business to enter into a foreign market. Thus, this discussion seeks to analyze licensing and joint venture as modes of entry into foreign markets, though assessing the merits and limitations associated with each mode. Licensing Licensing refers to a method of foreign market entry strategy, where an organization in one country offers rights to another company in a host country to undertake operations under its brand name through, an international licensing agreement (Hitt, 2009:27). Under this mode of entry into foreign market, a company offers the other company in the host country some limited rights, while also offering its resources such as manufacturing, processing, human capital and the necessary skills, to enable the licensed company undertake the operations of the licensor company (Zimmerer, 2008:61). Thus, licensing as a mode of foreign market entry is an easy and less costly method, only that it entails lengthy, bureaucratic and tedious licensing policy formulation and signing process. The strengths and weaknesses of this mode of foreign market entry include: Advantages of Licensing The firs advantage associated with licensing as a mode of foreign market entry is that it is a simple method of gaining entry into a foreign market, while ensuring to keep the operational risks associated with the market low (Yip 2002:33). This is because, since licensing entails the execution of the operations of a licensor company by the licensee company, the only risks associated with this method is the risk of losing the invested resources in the licensee company, but no additional economic, social, cultural or political costs are involved (Bartett, 2009:45). Secondly, licensing as a method of foreign market entry serves to create a strong partnership between the two companies involved, considering that one company (the licensor), becomes the facilitator, while the other (the licensee) becomes the executor of the operations (Campbell & Reuer, 2001:12). This way, the two companies establish a symbiotic partnership that is based on preserving the mutual interests of both companies. Thus, the companies are assured of a long-term business relationship, for as long as the business they are undertaking remains profitable. Another advantage associated with this mode of foreign market entry is that the investing company does not tie capital unnecessarily in the foreign market, considering that it only plays a facilitative role, through investing on the areas of the business that the licensee company has not adequately provided (Hoy & Stanworth, 2003:54). Finally, licensing provides an advantage to the company seeking to join the foreign market, through providing the potential for the company to buy the shares of the licensee company and eventually become an active operator in the foreign market (Yip, 1982:87). Disadvantages of Licensing The major disadvantage associated with licensing as a method of foreign market entry is that the method limits the level of participation of the investing company in the processes, products and operations of the licensor company, thus lacking the essential control of the business (Yadong, 1999:102). Secondly, licensing is disadvantageous since there is a potential that the resources invested in the foreign market may be lost, on the event that the partnership between the two companies does no run into profits, or in case of any other occurrences that may terminate their engagement (Buckley & Casson, 1998:547). Lastly, the licensee company may eventually become a competitor in the foreign market and other regions in its close proximity. This can occur through the licensee company applying the resources invested by the licensor company to advance its own agendas, as opposed to fulfilling the business mandate for which the businesses have reached an agreement (Kale & Singh, 2009:144). Example of a company that has engaged in licensing The example of a company that has engaged in licensing as a method of foreign market entry is Coca Cola Company, which has licensed the Zimbabwe United Bottlers to manufacture Coke soft drink (FAO, 1997:n.p.). Another example of a company that entered a foreign market through the licensing mode is Disney, which ventured in Japan market through licensing (FAO, 1997:n.p.). This mode of entry into foreign market is desirable where there are import and investment barriers, under market conditions where legal protection is strong, where there is a large cultural difference between the countries and also where the licensee does not have higher chances of becoming competitive in the market, due to operational and socio-political difficulties (FAO, 1997:n.p.). Joint venture Joint venture as a mode of foreign market entry is the opposite of licensing, where the host company and the foreign company enters into a partnership that involves both companies sharing the ownership, the control of the operations and the resources of a business investment (Jaffee, 1993:91). Under joint venture, the foreign company plays a more participatory role in the foreign market, through being involved in both the control of the operations and control of the resources of the investment. Advantages of Joint venture First, the major advantage associated with joint venture as a method of foreign market entry is risk sharing potential, where the two companies involved in the investment can share the risks that may arise out of the operations of the business (Foley, 1999:139). Further, there is the advantage of combination of skills, knowledge and experiences by the two companies, borrowed from the local and the foreign markets, to improve on the operations and marketing activities of the business (Korey, 1986:37). The other advantage associated with joint venture is that it affords the investing company take advantage of the financial strength offered by the combination of resources by the two companies, while at the same time having the control of the investment (Sherman, 2004:50). Disadvantages of Joint venture One of the disadvantages associated with joint venture as a foreign market entry mode is the fact that the investing company does not have full control of the investment (Reynolds, 2003:156). The other problem associated with this method is that it could be difficult for the investing company to recover capital from the foreign market, under circumstances where the need to recover the capital arises (Root, 1994:63). Finally, the problem associated with this mode of foreign market entry is that, since the control and running of the company is done by two different entities, there might be a conflict of interests in prioritizing or different views on the expected benefits (Foley, 1999:41). Example of a company that has applied in Joint venture The example of a company that has applied the joint venture method to enter a foreign market is HJ Heinz, which is a food manufacturing company that has established a joint venture with Olivine industries in Zimbabwe (FAO, 1997:n.p.). Further, Sony is a global company that has succeeded worldwide, due to entering into joint ventures with different companies from different parts of the world (FAO, 1997:n.p.). The joint venture mode of entry into foreign market is desirable where the two markets share similarity in cultural and socio-political environments (Sherman, 2004:22). Further, the method is most desirable where the two companies involved share similar technological, managerial and priority visions (Bartett, 2009:86). Conclusion Licensing and joint venture are two different modes of entry into a foreign market. While licensing entails a company offering a license agreement to another company in the host country to perform its operations in that market, joint venture entails the partnership of a company with another in a host country, where they share resources and conduct operations jointly. The advantages of licensing include the fact that it is a simple mode of entry into foreign markets, helps a company avoid tying its resources in a foreign market and establishes strong partnership between the two companies. However, the disadvantages include lack of business control by the investing company and potential of losing the capital invested. On the other hand, the advantages associated with joint venture include mutual interest between the companies, the investing company gains control of the operations and there is potential of sharing risks between the companies. Nevertheless, the limitations of this method include the investing company tying its capital in a foreign market, and the fact that the company does not have full control of the business. References Bartett, C.A. (2009) Transnational Management: Text, Cases and Readings in Cross Border Management. 5th Ed., New York: McGraw-Hill Higher Education. Buckley, P.J. & Casson, M.C. (1998) ‘Analyzing Foreign Market Entry Strategies: Extending the Internationalization Approach’, Journal of International Business Studies 2, 1, pp. 539-561. Campbell E. & Reuer J.J. (2001) International Alliance Negotiations: Legal Issues for General Managers, USA: Indiana University. FAO Corporate Document Repository. (1997) Global agricultural marketing management. (Marketing and Agribusiness Texts – 3), Agriculture and Consumer Protection. Retrieved March 8, 2014 from http://www.fao.org/docrep/w5973e/w5973e0b.htm Foley, J. 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