The costs and benefits of licensing activity : an empirical investigation of UK companies involved in such operations
This study is about determining the circumstances which make, the inter-
national sales of technology and know-how-through licensing arrangements
a viable alternative to FDI and foreign trade for manufacturing firms.
It identifies basic motivations for licensing, and examines company
characteristics of British'companies in relation to observed licensing
strategy overseas. In addition, it examines the effect on licensing of
competition in the-sales of technology.
A conceptual model of foreign licensing is tested on cross-sectional data
gathered from 202 UK-based. and non-UK based companies. Data for 50 of
these firms which were not engaged in any licensing activity, were obtained
through direct phone calls and from their annual reports for 1980. Data
for the remaining-152 companies, -which were involved in licensing arrangements,
were obtained through mailed questionnaires and from published sources.
In addition, 33 of these company's managers in charge of licensing were
interviewed. The data was analysed by a battery of univariate and
With regard to the costs and benefits of licensing, company executive
responses show explicitly two common directions for their evaluation and
concern. A company whose foreign licensing consists predominantly of
granting licence rights for the use of its patents, trademarks and know-how
in industries other than those in which it is itself active, or in the
manufacture of products it does not choose to make or market overseas, is
generally satisfied to assess the success of its activity by the volume of
royalty receipts minus such easily determined direct costs as are incurred
in negotiating, obtaining, and maintaining the licence contracts.
Companies which are licensing proprietary rights and know-how relating
to its own particular products and activities in contrast are much
more involved with the licensee, have higher profit opportunity but
greater loss exposure, and have much more opportunity to influence
the indirect costs and indirect benefits generated by the licensing
Other findings related to cost-benefit of licensing are that companies
(1) which spend a relatively
larger percentage of value-added on R&D,
(2) which are relatively large in their industry, (3) which are more
highly diversified, or (4) which have less experience in foreign
manufacturing operations are more likely to license in order to supplement
their FDI. Also, if there is competition in the sale of technology,
managers are more willing-to-licence than to invest, providing the company
does not try to preserve its market position in older products facing
The results of the study also show that companies which are involved
in licensing are indeed distinguishable from those that do not have
any licensing engagement, by a number of discriminatory characteristics. The
research also shows that these companies do evaluate licensing as an
alternative to FDI when they consider manufacturing in host-market.
Finally, there is evidence that the firms which are enjoying-relative
scale in their industry,. are highly diversified and have high R&D intensity
are likely to adoptapolicy involving reciprocal exchange of technology licence
with other innovative firms in their industry.